As filed with the Securities and Exchange Commission on March 29, 1996
Registration No. 33-48014
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. 5 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 6 [X]
(Check appropriate box or boxes)
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
(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
(212) 856-6858
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on April 1, 1996 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 declares that an indefinite number of its shares of beneficial
interest is being registered by this Registration Statement 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
ended November 30, 1995 on January 30, 1996.
<PAGE>
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
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. . . Selected Financial Information
4. General Description of Registrant. . General Information; Investment
Objectives, Policies and Risks
5. Management of the Fund . . . . . . . Management of the Fund; Custodian and
Transfer Agent; Distribution and
Service Plan
5a. Management Discussion of
Fund Performance . . . . . . . . . .Not Applicable
6. Capital Stock and Other Description of Common Stock;
Securities . . . . . . . . . . . . . How to Purchase and Redeem Shares;
General Information; Dividends and
Distributions; Federal Income Taxes
7. Purchase of Securities How to Purchase and Redeem Shares; Net
Being Offered. . . . . . . . . . . . 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; Distribution and
Other Services . . . . . . . . . . Service Plan; Custodian and Transfer
Agent; Expense Limitation
17. Brokerage Allocation . . . . . . . Investment Objectives, Policies and
Risks
18. Capital Stock and
Other Securities . . . . . . . . . Description of Common Stock
19. Purchase, Redemption and How to Purchase and Redeem
Pricing of Securities Being Offered Shares; Net Asset Value
20. Tax Status . . . . . . . . . . . . Federal Income Taxes; Pennsylvania
Income Taxes
21. Underwriters . . . . . . . . . . . Distribution and Service Plan
22. Calculations of Yield Quotations
of Money Market Funds. . . . . . . Yield Quotations
23. Financial Statement. . . . . . . Independent Auditor's Report; Statement
of Net Assets (audited), dated December
26, 1995; Statement of Operations
(audited), dated December 26, 1995;
Statement of Changes in Net Assets
(audited) as of December 26, 1995;
Notes to Financial Statements
<PAGE>
- --------------------------------------------------------------------------------
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 Fee 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
Short Term Income Fund, Inc.
(collectively the "Funds" and individually the "Fund")
600 Fifth Avenue, New York, NY 10020
(212) 830-5200
================================================================================
SUPPLEMENT DATED OCTOBER 12, 1995
Reich & Tang Asset Management L.P., the Fund's investment advisor, is a
wholly-owned subsidiary of New England Investment Companies, L.P. ("NEIC"). New
England Mutual Life Insurance Company ("The New England") owns NEIC's sole
general partner and a majority of the limited partnership interest in NEIC. The
New England and Metropolitan Life Insurance Company ("MetLife") have entered
into an agreement to merge, with MetLife to be the survivor of the merger. The
merger is conditioned upon, among other things, approval by the policyholders of
The New England and MetLife and receipt of certain regulatory approvals. The
merger is not expected to occur until after December 31, 1995.
The merger of The New England into MetLife will constitute an "assignment" of
the existing investment advisory agreement relating to the Fund. Under the
Investment Company Act of 1940, such an "assignment" will result in the
automatic termination of the investment advisory agreement, effective at the
time of the merger. Prior to the merger, shareholders of the Fund will be asked
to approve a new investment advisory agreement, intended to take effect at the
time of the merger. The new agreement will be substantially similar to the
existing agreement. A proxy statement describing the new agreement will be sent
to shareholders of the Fund prior to their being asked to vote on the new
agreement.
<PAGE>
- --------------------------------------------------------------------------------
PENNSYLVANIA 600 FIFTH AVENUE
DAILY MUNICIPAL NEW YORK, N.Y. 10020
INCOME FUND (212) 830-5220
================================================================================
PROSPECTUS
April 1, 1996
Pennsylvania Daily Municipal Income Fund (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
Pennsylvania income taxes, as is believed to be consistent with preservation of
capital, maintenance of liquidity and stability of principal. No assurance can
be given that those objectives will be achieved. 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 the
Distributor. In all other respects, the Class A and Class B shares represent the
same interest in the income and assets of the Fund.
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 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>
<CAPTION>
TABLE OF FEES AND EXPENSES
Annual Fund Operating Expenses
(as a percentage of average net assets)
Class A shares Class B shares
<S> <C> <C> <C> <C>
Management Fees (After Fee Waiver) 0.24% 0.24%
12b-1 Fees (After Fee Waiver) 0.00% 0.00%
Other Expenses 0.35% 0.35%
Administration Fees (After Fee Waiver) 0.00% ________ 0.00% ________
Total Fund Operating Expenses 0.59% 0.59%
<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 $6 $19 $33 $74
Class B $6 $19 $33 $74
</TABLE>
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The outstanding shares of the Fund
were reclassified into Class A shares on January 26, 1995. The expenses shown
for the Class B shares are at levels anticipated for the current fiscal year.
The Manager has voluntarily waived a portion of the Management Fees and all the
Administration Fees with respect to both Class A and Class B shares. The
Distributor has voluntarily waived all the 12b-1 Fees. Absent the fee waivers,
the Management Fees and the Administration Fees, would have been .40% and .21%
for both the Class A and Class B shares, respectively, and the Distribution Fees
would have been .25% for Class A only. Absent the fee waivers, Total Fund
Operating Expenses for the Class A and Class B shares would have been 1.20% and
.95%, respectively.
THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN ABOVE.
2
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
(for a share outstanding throughout the period)
The following financial information of Pennsylvania Daily Municipal Income Fund
has been examined 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.
December 16, 1992
(Commencement of
Year Ended November 30, Operations) to
1995 1994 November 30, 1993
------------- ------------- -----------------
Per Share Operating Performance:
(for a share outstanding throughout the period)
<S> <C> <C> <C>
Net asset value, beginning of period..... $ 1.000 $ 1.000 $ 1.000
------------- ------------- ------------
Income from investment operations:
Net investment income................. .034 0.024 0.022
Less distributions:
Dividends from net investment income.. ( .034) ( 0.024) ( 0.022)
------------ ------------ ------------
Net asset value, end of period........... $ 1.000 $ 1.000 $ 1.000
============= ============= =============
Total Return............................. 3.50% 2.44% 2.28%*
Ratios/Supplemental Data
Net assets, end of period (000).......... $ 40,980 $ 43,559 $ 38,817
Ratios to average net assets:
Expenses.............................. .59%+ 0.49%+ 0.22%*+
Net investment income................. 3.44%+ 2.44%+ 2.26%*+
* Annualized
+ Net of management, administration fees and shareholder servicing fees waived
equivalent to .61%, .68%, and .85% of average net assets, plus expenses
reimbursed equivalent to .33% of average net assets for the period December
16, 1992 (Commencement of Operations) to November 30, 1993.
</TABLE>
3
<PAGE>
INTRODUCTION
Pennsylvania Daily Municipal Income Fund (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 regular Federal income tax and, to the extent
possible, from Pennsylvania 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
Commonwealth of Pennsylvania, Puerto Rico and other U.S. territories, and their
political subdivisions as described under "Investment Objectives, Policies and
Risks" herein. The Fund also may invest in municipal securities of issuers
located in states other than Pennsylvania, the interest income on 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 Pennsylvania income
taxes for Pennsylvania 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 the value of its net 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 eighteen 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) pursuant to the Fund's plan adopted under Rule 12b-1 under
the Investment Company Act of 1940, as amended (the " 1940 Act"). (See
"Distribution and Service Plan".)
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 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
Pennsylvania Municipal Obligations as defined herein and bank participation
certificates therein. Prospective investors should consider the financial
difficulties and pressures which the Commonwealth of
4
<PAGE>
Pennsylvania and certain of its municipal subdivisions have undergone. Both the
Commonwealth and the City of Philadelphia have historically experienced
significant revenue shortfalls. There can be no assurance that the Commonwealth
will not experience further declines in economic conditions or that portions of
the municipal obligations purchased by the Fund will not be affected by such
declines. (See "Pennsylvania Risk Factors" in the Statement of Additional
Information.) There are certain risks inherent in the Fund's policies of
nondiversification and of concentration in the banking industry through its
investments in bank participation certificates. (See "Investment Objectives,
Policies and Risks" herein.)
The Fund's Board of Trustees is authorized to divide the unissued shares into
separate series of beneficial interest, 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 regular Federal income tax and, to
the extent possible, from Pennsylvania 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% of its net
assets) in high quality debt obligations issued by or on behalf of the
Commonwealth of Pennsylvania, 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) in Municipal
Obligations purchased from banks, insurance companies or other financial
institutions. Dividends paid by the Fund which are "exempt-interest dividends"
by virtue of being properly designated by the Fund as derived from Municipal
Obligations and participation certificates in Municipal Obligations will be
exempt from regular Federal income tax provided the Fund complies with Section
852(b)(5) of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code").
Although the Supreme Court has determined that Congress has the authority to
subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. However, "exempt-interest dividends" may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), 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 net 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 Commonwealth of Pennsylvania or any Pennsylvania local
governments, or their instrumentalities, authorities or districts ("Pennsylvania
Municipal Obligations") will be exempt from the Pennsylvania 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 Pennsylvania is prohibited from taxing under the Constitution
or the laws of the United States of America or the constitution or laws of
Pennsylvania ("Territorial Municipal Obligations") should be exempt from the
Pennsylvania Income Taxation provided the Fund complies with Pennsylvania law.
(See "Pennsylvania Income Taxes" herein.) To the extent suitable Pennsylvania
Municipal
5
<PAGE>
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 Pennsylvania 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
Pennsylvania Municipal Obligations, although the exact amount of the Fund's
assets invested in such securities will vary from time to time.
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 net assets in
securities, the interest income on which is subject to 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
Pennsylvania Municipal Obligations. 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's investments may include "when-issued" Municipal Obligations, stand-by
commitments, taxable repurchase agreements and municipal leases. When a new
issue of Municipal Obligations is 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. 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. (See "Description of
Municipal Obligations: When-Issued Securities" in the Statement of Additional
Information.)
Under a stand-by commitment, a bank or broker-dealer agrees to purchase at the
Fund's option a specified Municipal Obligation at a specified price with same
day settlement. A stand-by commitment is the equivalent of a "put" option
acquired by the Fund with respect to a particular Municipal Obligation held in
its portfolio. The 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 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 Trustees. 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. See "Description of Municipal
Obligations: Stand-by Commitments" in the Statement of Additional Information.
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
6
<PAGE>
to the certain risks including that the seller may fail to repurchase the
security. See "Taxable Securities: Repurchase Agreements" in the Statement of
Additional Information.
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.
Leases and installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass eventually to the governmental
issuer) have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt-issuance limitations of many state constitutions and
statutes are deemed to be inapplicable because of the inclusion in many leases
or contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. To reduce this risk, the Fund will
only purchase Municipal Leases subject to a non-appropriation clause where the
payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit, a guarantee, insurance or other comparable
undertaking of an approved financial institution. These types of municipal
leases may be considered illiquid and subject to the 10% limitation of
investments in illiquid securities set forth under "Investment Restrictions"
contained herein. The Board of Trustees 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, 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.
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Trustees 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 Trustees); (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 Trustees 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
Trustees is made on the basis of its credit evaluation of the issuer, which may
include an evaluation of a letter of credit, guarantee, insurance or other
credit facility issued in support of the Municipal Obligations or participation
certificates. (See "Variable Rate Demand Instruments and Participation
Certificates" in the Statement of Additional Information.) While there are
several organizations that currently qualify as NRSROs, two examples of NRSROs
are Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc.
("Moody's"). The two highest ratings by S&P and Moody's are "AAA" and "AA" by
S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by Moody's
7
<PAGE>
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. Such instruments may produce
a lower yield than would be available from less highly rated instruments. The
Fund's Board of Trustees 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 Trustees 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 Trustees determines is in the best
interest of the Fund and its shareholders. However, reassessment is not required
if the security is disposed of or matures within five business days of the
Manager becoming aware of the new rating and provided further that the Board of
Trustees 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 Trustees 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.
In view of the "concentration" of the Fund in bank participation certificates in
Pennsylvania Municipal Obligations, which may be secured by bank letters of
credit or guarantees, an investment in the Fund should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail which include extensive governmental regulation,
changes in the availability and cost of capital funds and general economic
condition. (See "Variable Rate Demand Instruments and Participation
Certificates" in the Statement of Additional Information.) Banks are subject to
extensive governmental regulations which may limit both the amounts and 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 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
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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
exercisable in seven days or less. 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 15%
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 the banking industry through 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 (i) 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, (ii) as they may be acquired as part of a merger, consolidation or
acquisition of assets or (iii) as allowed by 12(d) of the 1940 Act
(investments by the Fund in other investment companies subjects that
portion of a shareholder's investment to additional fees resulting in a
duplication of such fees).
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.
Notwithstanding the foregoing, the Fund, as a fundamental policy, will comply
with any restrictions on portfolio management imposed from time to time by
Pennsylvania income tax law in order for dividends on the Fund's shares to be
exempt from Pennsylvania income tax. Under current Pennsylvania tax law, the
Fund may not trade its portfolio securities for the purpose of seeking profits,
but only for the purpose of generating income earnings. Accordingly, in order to
comply with current Pennsylvania tax law, the Fund will not vary its investments
except to: (i) eliminate unsafe investments and investments not consistent with
the preservation of the Fund's capital or the tax status of the Fund's
investments,
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(ii) reinvest the earnings from securities in like securities or (iii) defray
administrative expenses. In complying with the foregoing restrictions, the Fund
may vary its portfolio securities if: (i) there has been an adverse change in a
security's credit rating or in that of its issuer or in the Manager's credit
analysis of the security or its issuer; (ii) there has been, in the opinion of
the Manager, a deterioration or anticipated deterioration in general economic or
market conditions affecting issuers of Pennsylvania Municipal Obligations, or a
change or anticipated change in interest rates; or (iii) adverse changes or
anticipated changes in market conditions or economic or other factors
temporarily affecting the issuers of one or more portfolio securities make
necessary or desirable, in the opinion of the Manager, the sale of such security
or securities in anticipation of the Fund's repurchase of the same or comparable
securities at a later date.
RISK FACTORS
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. However, the Fund intends to
qualify as a "regulated investment company" under Subchapter M of the Code. The
Fund will be restricted in that at the close of each quarter of the taxable
year, at least 50% of the value of its total assets must be represented by cash,
government securities, investment company securities and other securities
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. In addition, at the close of each quarter of its taxable year,
not more than 25% in value of the Fund's total assets may be invested in
securities of one issuer other than government securities. The limitations
described in this paragraph regarding qualification as a "regulated investment
company" are not fundamental policies and may be revised to the extent
applicable Federal income tax requirements are revised. (See "Federal Income
Taxes" herein.)
The primary purpose of investing in a portfolio of Pennsylvania Municipal
Obligations is the special tax treatment accorded Pennsylvania resident
individual investors. However, payment of interest and preservation of principal
are dependent upon the continuing ability of the Pennsylvania 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 Pennsylvania
issues with those of more diversified portfolios including out-of-state issues
before making an investment decision. The Fund's management believes that by
maintaining the Fund's investment portfolio in liquid, short-term, high quality
investments, including the participation certificates and other variable rate
demand instruments that have high quality credit support from banks, insurance
companies or other financial institutions, the Fund is largely insulated from
the credit risks that may exist on long-term Pennsylvania Municipal Obligations.
For additional information, please refer to the Statement of Additional
Information.
Prospective investors should consider the financial difficulties and pressures
which the Commonwealth of Pennsylvania and certain of its municipal subdivisions
have undergone. Both the Commonwealth and the City of Philadelphia have
experienced significant revenue shortfalls. There can be no assurance that the
Commonwealth will not experience a further decline in economic conditions or
that portions of the Municipal Obligations purchased by the Fund will not be
affected by such a decline. The Commonwealth is a party to numerous lawsuits, in
which an adverse final decision could materially affect the Commonwealth's
governmental operations and consequently its ability to pay debt service on its
obligations. (See "Pennsylvania Risk Factors" in the Statement of Additional
Information.)
MANAGEMENT OF THE FUND
The Fund's Board of Trustees, which is responsible for the overall management
and supervision of the
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Fund, has employed Reich & Tang Asset Management L.P. (the "Manager") to serve
as investment manager of the Fund. The Manager provides persons satisfactory to
the Fund's Board of Trustees to serve as officers of the Fund. Such officers, as
well as certain other employees and trustees of the Fund, may be directors or
officers of Reich & Tang Asset Management, Inc., the sole general partner of the
Manager, or employees of the Manager or its affiliates. Due to the services
performed by the Manager, the Fund currently has no employees and its officers
are not required to devote full-time to the affairs of the Fund. The Statement
of Additional Information contains general background information regarding each
Trustee and principal officers of the Fund.
The Manager is a Delaware limited partnership with its principal office at 600
Fifth Avenue, New York, New York 10020. The Manager was at February 29, 1996
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $8.9 billion. The Manager acts as manager or administrator 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 Reich & Tang Asset Management L.P., the Manager.
Reich & Tang Asset Management, Inc. (a wholly-owned subsidiary of NEICLP) is the
general partner and owner of the remaining .5% interest of the Manager.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 68.1% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc., owns
approximately 22.8% of the outstanding partnership units of NEICLP.
In addition, NEIC is a wholly-owned subsidiary of The New England which may be
deemed a "controlling person" of the Manager. NEIC is a holding company offering
a broad array of investment styles across a wide range of asset categories
through ten investment advisory/ management affiliates and two distribution
subsidiaries. These include Loomis, Sayles & Company, L.P., Copley Real Estate
Advisors, Inc., Back Bay Advisors, L.P., Marlborough Capital Advisors, L.P.,
Westpeak Investment Advisors, L.P., Draycott Partners, Ltd., TNE Investment
Services, L.P., New England Investment Associates, Inc., Harris Associates, and
an affiliate, Capital Growth Management Limited Partnership. These affiliates in
the aggregate are investment advisors or managers to 42 other registered
investment companies.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Trustees 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. The Manager, at its
discretion, may voluntarily waive all or a portion of the management fee.
Pursuant to an Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with personnel to (i) supervise the performance of
bookkeeping and related services by Investors Fiduciary Trust Company, the
Fund's bookkeeping agent; (ii) prepare reports to and filings with regulatory
authorities; and (iii) perform such other services as the Fund may from time to
time request of the Manager. The personnel rendering such services may be
employees of the Manager or its affiliates. The Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Contract, the Manager receives a fee
of .21% of the Fund's average daily net assets not in excess of $1.25 billion,
plus .20% of such assets in excess of $1.25 billion but not in excess of $1.5
billion, plus
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<PAGE>
.19% of such assets in excess of $1.5 billion. Any portion of the total fees
received by the Manager and its past profits 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 fee
equal to .25% per annum of the Fund's 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 the Fund, will be allocated
daily to each Class share based on the percentage of outstanding shares at the
end of the day.
DESCRIPTION OF SHARES
The Fund was established as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust dated July 30, 1992. The
Fund has an unlimited authorized number of shares of beneficial interest. The
Fund currently has only one portfolio and effective January 26, 1995, a majority
of the Fund's Board of Trustees, including independent Trustees, approved the
creation of a second class of shares of the Fund's common stock. In furtherance
of this action, the Board of Trustees has reclassified the existing 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. Generally, all shares will be voted in the
aggregate, except of voting by Class as required by law or the matter involved
affects only one Class, in which case, shares will be voted separately by Class.
These shares are entitled to one vote per share with proportional voting for
fractional shares. There are no conversion or preemptive rights in connection
with any shares of the Trust. All shares when issued in accordance with the
terms of the offering will be fully paid and non-assessable. Shares of the Fund
are redeemable at net asset value, at the option of the shareholders. As of
February 29, 1996 the amount of shares owned by all officers and trustees 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 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 Fund's 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 shareholders to exchange their
shares only for shares of the same class of an Exchange Fund. 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.
As a Massachusetts business trust, the Fund is not required to hold annual
shareholder meetings. Procedures for calling a shareholder's meeting for the
purpose of voting on the question of removal of a Trustee or Trustees of the
Fund, similar to those set forth in Section 16(c) of the 1940 Act, are available
to shareholders of the Fund. A meeting for such purpose can be called by the
holders of at least 10% of the Fund's outstanding shares of beneficial interest.
The Fund will aid shareholder communication with other shareholders as required
under Section 16(c) of the 1940 Act.
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
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generally pays dividends monthly. There is no fixed dividend rate. In computing
these dividends, interest earned and expenses are accrued daily.
Net realized capital gains, if any, are distributed at least annually and in no
event later than 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested in
additional Fund shares of the same Class of shares 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 "Investment Through Participating Organizations" herein.) (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
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<PAGE>
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 per share 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 subscription for its
shares. Certificates for Fund shares will not be issued to an investor.
Shares are issued as of 12 noon, New York City time, on any Fund Business Day,
as defined herein, on which an order for the shares and accompanying Federal
Funds are received by the Fund's transfer agent before 12 noon. Orders
accompanied by Federal Funds and received after 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. Unless
other instructions are given in proper form to the Fund's transfer agent, a
check for the proceeds of a redemption will be sent to the shareholder's address
of record. If a shareholder elects to redeem all the shares of the Fund he owns,
all dividends accrued to the date of such redemption will be paid to the
shareholder along with the proceeds of the redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the 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 the total net
asset value to at least 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.
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Investments Through Participating Organizations
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Manager with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such confirmations and statements will receive them from the Fund
directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Organizations offering purchase and redemption procedures similar to those
offered to shareholders who invest in the Fund directly may impose charges,
limitations, minimums and restrictions in addition to or different from those
applicable to shareholders who invest in the Fund directly. Accordingly, the net
yield to investors who invest through Participating Organizations may be less
than by investing in the Fund directly. A Participant Investor should read this
Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. However, it is the Fund
management's position that banks are not prohibited from acting in other
capacities for investment companies, such as providing administrative and
shareholder account maintenance services and receiving compensation from the
Manager for providing such services. However, this is an unsettled area of the
law and if a determination contrary to the Fund management's position is made by
a bank regulatory agency or court concerning shareholder servicing and
administration payments to banks from the Manager, any such payments will be
terminated and any shares registered in the banks' names, for their underlying
customers, will be reregistered in the name of the customers at no cost to the
Fund or its shareholders. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
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<PAGE>
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 State 212-830-5280
Outside New York State (toll free) 800-433-1918
All shareholders, other than certain Participant Investors, will receive from
the Fund individual confirmations of each purchase and redemption of Fund shares
and a monthly statement listing the total number of Fund shares owned as of the
statement closing date, purchase and redemptions of Fund shares during the month
covered by the statement and the dividends paid on Fund shares of each
shareholder during the statement period (including dividends paid in cash or
reinvested in additional Fund shares).
Initial Purchases of Shares
Mail
Investors may send a check made payable to "Pennsylvania Daily Municipal Income
Fund" along with a completed subscription order form to:
Pennsylvania Daily Municipal Income Fund
c/o Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's subscription will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, investors should first obtain a new account number by telephoning
the Fund at either 212-830-5280 (within New York State) or at 800-433-1918
(outside New York State). The investors should then instruct a member commercial
bank to wire money immediately to:
Investors Fiduciary Trust Company
Reich & Tang Mutual Funds
ABA # 101003621
DDA # 890752-954-6
For Pennsylvania Daily Municipal Income Fund
Account of (Investor's Name)________________
Fund Account # 0215_________________________
SS#/Tax I.D.#_______________________________
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on
that same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.
Personal Delivery
Deliver a check made payable to "Pennsylvania Daily Municipal Income Fund" 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,
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<PAGE>
automatically deposited into your Fund account. You can also have money debited
from your checking account. To enroll in any one of these programs, you must
file with the Fund a completed EFT Application, Pre-authorized Credit
Application, or a Direct Deposit Sign-Up Form for each type of payment that you
desire to include in the Privilege. The appropriate form may be obtained from
your broker or the Fund. Death or legal incapacity will automatically terminate
your participation in the Privilege. You may elect at any time to terminate your
participation by notifying in writing the appropriate depositing entity and/or
federal agency. Further, the Fund may terminate your participation upon 30 days'
notice to you.
Subsequent Purchases of Shares
Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above, or by mailing a check to:
Pennsylvania Daily Municipal Income Fund
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-6815
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 of each
Class 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 and converted into Federal Funds. A bank
check will be considered by the Fund to have cleared 15 days after it is
deposited by the Fund.
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, 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:
Pennsylvania Daily Municipal Income Fund
c/o Reich & Tang Mutual Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
Normally the redemption proceeds are paid by check mailed to the shareholder of
record.
Checks
By making the appropriate election on their subscription form, shareholders may
request a supply of checks which may be used to effect redemptions from any one
or more of the Classes
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<PAGE>
of shares in the Fund in which they invest. 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 for payment, it instructs the
Fund's transfer agent to redeem a sufficient number of full and fractional
shares in the shareholder's account to cover the amount of the check. The use of
a check to make a withdrawal enables a shareholder in the Fund to receive
dividends on the shares to be redeemed up to the Fund Business Day on which the
check clears. Checks provided by the Fund may not be certified. Fund shares
purchased by check may not be redeemed by check which could take up to 15 days
following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Trustees determines that doing so is in the best
interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank. Checks drawn on a jointly owned
account may, at the shareholder's election, require only one signature. The
Fund's agent bank will not honor checks which are in amounts exceeding the value
of the shareholder's account at the time the check is presented for payment.
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 and will notify the
shareholders accordingly.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option. The proceeds of a telephone redemption may be sent to the
shareholders at their addresses or, if in excess of $1,000, to their bank
accounts, both as set forth in the subscription order form or in a subsequent
written authorization. The Fund may accept telephone redemption instructions
from any person with respect to accounts of shareholders who elect this service
and thus such shareholders risk possible loss of principal and interest in the
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
212-830-5280; outside New York State at 800-433-1918 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
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<PAGE>
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 the
shareholders accordingly.
Exchange Privilege
Shareholders of the Fund are entitled to exchange some or all of a Class of
their shares in the Fund for shares of certain other investment companies which
retain Reich & Tang Asset Management L.P. as investment adviser and which
participate in the exchange privilege program with the Fund. If only one Class
of shares is available in a particular Fund, the shareholder of the Fund is
entitled to exchange his or her shares for shares available in that Fund.
Currently the exchange privilege program has been established between the Fund
and California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal
Income Fund, 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., Reich & Tang Equity Fund, Inc.,
Reich & Tang Government Securities Trust and Short Term Income Fund, Inc. In the
future, the exchange privilege program may be extended to other investment
companies which retain Reich & Tang Asset Management L.P. as investment adviser,
manager or administrator.
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 the
same Class of 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:
Pennsylvania Daily Municipal Income Fund
c/o Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
or, for shareholders who have elected that option, by telephone. The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time and will notify the shareholders accordingly.
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 basis in an amount
approved and confirmed by the Manager. A specified amount plan payment is made
by the Fund on the 23rd day of each month. Whenever such 23rd day of a month is
not a Fund Business Day, the payment date is the Fund Business Day preceding the
23rd day of the month. In order to make a payment, a number of
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<PAGE>
shares equal in aggregate net asset value to the payment amount are redeemed at
their net asset value on the Fund Business Day immediately preceding the date of
payment. To the extent that the redemptions to make plan payments exceed the
number of shares purchased through reinvestment of dividends and distributions,
the redemptions reduce the number of shares purchased on original investment,
and may ultimately liquidate a shareholder's investment.
The election to receive automatic withdrawal payments may be made at the time of
the original subscription by so indicating on the subscription order form. The
election may also be made, changed or terminated at any later time by the
participant. Because the withdrawal plan involves the redemption of Fund shares,
such withdrawals may constitute taxable events to the shareholder, but the Fund
does not expect that there will be any realizable capital gains.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Trustees 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) 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.
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.
Under the Shareholder Servicing Agreement, the Distributor receives (with
respect to the Class A shares) from the Fund a service fee equal to .25 of 1%
per annum of the Fund's average daily net assets (the "Service Fee") for
providing personal shareholder services and/or for the maintenance of
shareholder accounts. This 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 Rule
12b-1 fee.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Service Fee, the Fund will pay for (i) telecommunications expenses including
the cost of dedicated lines and CRT terminals, incurred by the Distributor and
Manager in carrying out their obligations under the Shareholder Servicing
Agreement and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee, and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; 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
20
<PAGE>
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 purposes
enumerated in (i) above. The Manager and the Distributor may make payments to
Participating Organizations for providing certain of such services up to a
maximum of (on an annualized basis) .40% of the average daily net asset value of
the Class A shares serviced through the Participating Organizations. However,
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 the Distributor for any fiscal year under
either the Investment Management Contract in effect for that year or the
Shareholder Servicing Agreement in effect for that year. For the fiscal year
ended November 30, 1995, the total amount spent pursuant to the Plan was .34% of
the average daily net assets of the Fund. Of such amount, none was paid directly
by the Fund and .34% was paid by the Manager (which may be deemed an indirect
payment by the Fund).
FEDERAL INCOME TAXES
The Fund intends to elect to qualify under the Code as a regulated investment
company that distributes "exempt-interest dividends" as defined in the Code. The
Fund's policy is to distribute as dividends each year 100% (and in no event less
than 90%) of its tax-exempt interest income, net of certain deductions, and its
investment company taxable income (if any). If distributions are made in this
manner, dividends designated as derived from the interest earned on Municipal
Obligations are "exempt-interest dividends" and are not subject to regular
Federal income tax, although such "exempt-interest dividends" may be subject to
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 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.
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 that it will not
ordinarily issue advance rulings on the question of the ownership of securities
or participation interests therein subject to a put and could reach a conclusion
different from that reached by counsel. (See "Federal Income Taxes" in the
Statement of Additional Information.)
In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and the
Court further held that there is no constitutional prohibition against the
Federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Municipal Obligations and
to tax such bonds in the future. The decision does not, however, affect the
current exemption from taxation of the interest earned on
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the Municipal Obligations in accordance with Section 103 of the Code.
PENNSYLVANIA INCOME TAXES
The following is based upon the advice of Dechert Price & Rhoads, special
Pennsylvania counsel to the Fund.
Shares of the Fund are not subject to any of the personal property taxes
presently in effect in Pennsylvania to the extent of that proportion of the Fund
represented by Pennsylvania Municipal Obligations. The taxes referred to above
include the County Personal Property Tax, the additional personal property taxes
imposed on Pittsburgh residents by the School District of Pittsburgh and by the
City of Pittsburgh. Shares of the Fund may be taxable under the Pennsylvania
inheritance and estate taxes.
The proportion of interest income representing interest income from Pennsylvania
Municipal Obligations distributed to shareholders of the Fund is not taxable
under the Pennsylvania Personal Income Tax or under the Corporate Net Income
Tax, nor will such interest be taxable under the Philadelphia School District
Investment Income Tax imposed on Philadelphia resident individuals.
The disposition by the Fund of a Pennsylvania Municipal Obligation (whether by
sale, exchange, redemption or payment at maturity) will not constitute a taxable
event to a shareholder under the Pennsylvania Personal Income Tax if the
Pennsylvania Municipal Obligation was issued prior to February 1, 1994. Further,
although there is no published authority on the subject, counsel is of the
opinion that (i) a shareholder of the Fund will not have a taxable event under
the Pennsylvania state and local income taxes referred to in the preceding
paragraph (other than the Corporate Net Income Tax) upon the redemption or sale
of his shares to the extent that the Fund is then comprised of Pennsylvania
Municipal Obligations issued prior to February 1, 1994 and (ii) the disposition
by the Fund of a Pennsylvania Municipal Obligation (whether by sale, exchange,
redemption or payment at maturity) will not constitute a taxable event to a
shareholder under the Corporation Income Tax or the Philadelphia School District
Investment Income Tax if the Pennsylvania Municipal Obligation was issued prior
to February 1, 1994. The School District tax has no application to gain on the
disposition of property held by the taxpayer for more than six months. Gains on
the sale, exchange, redemption, or payment at maturity of a Pennsylvania
Municipal Obligation issued on or after February 1, 1994, will be taxable under
all of these taxes, as will gains on the redemption or sale of a unit to the
extent that the Fund is comprised of Pennsylvania Municipal Obligations issued
on or after February 1, 1994.
The foregoing is a general, abbreviated summary of certain provisions of
Pennsylvania statutes and administrative interpretations presently in effect
governing the taxation of shareholders of the Fund. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Shareholders are advised to
consult with their own tax advisers for more detailed information concerning
Pennsylvania tax matters.
GENERAL INFORMATION
The Fund was established as a Massachusetts business trust under the laws of
Massachusetts on July 30, 1992 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 Trustees, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the the written
request of holders or shares entitled to cast not less than
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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
Trustee(s) and communication among shareholders, any registration of the Fund
with the Securities and Exchange Commission or any state, or as the Trustees may
consider necessary or desirable. Each Trustee serves until the next meeting of
the shareholders called for the purpose of considering the election or
reelection of such Trustee or of a successor to such Trustee, and until the
election and qualification of his or her successor, elected at such a meeting,
or until such Trustee 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. It is computed by dividing the value of the Fund's net assets (i.e., the
value of its securities and other assets less its liabilities, including
expenses payable or accrued but excluding capital stock and surplus) by the
total number of shares outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Trustees 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, and is the transfer agent
and dividend agent for the shares of the Fund. The Fund's transfer agent and
custodian does not assist in, and is not responsible for, investment decisions
involving assets of the Fund.
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TABLE OF CONTENTS
- -----------------------------------------------------
Table of Fees and Expenses......................2
Selected Financial Information..................3
Introduction....................................4
Investment Objectives,
Policies and Risks............................5
Risk Factors....................................10
Management of the Fund..........................10
Description of Shares...........................12
Dividends and Distributions.....................12 PENNSYLVANIA
How to Purchase and Redeem Shares...............13 DAILY
Investments Through MUNICIPAL
Participating Organizations.................15 INCOME
Direct Purchase and FUND
Redemption Procedures .....................16
Initial Purchases of Shares...................16
Electronic Funds Transfer (EFT), PROSPECTUS
Preauthorized Credit and
Direct Deposit Privilege...................16 April 1, 1996
Subsequent Purchases of Shares................17
Redemption of Shares..........................17
Exchange Privilege............................19
Specific Amount Automatic
Withdrawal Plan............................19
Distribution and Service Plan...................20
Federal Income Taxes............................21
Pennsylvania Income Taxes.......................22
General Information ............................22
Net Asset Value.................................23
Custodian and Transfer Agent....................23
<PAGE>
- --------------------------------------------------------------------------------
PENNSYLVANIA 600 Fifth Avenue, New York, NY 10020
DAILY MUNICIPAL (212) 830-5220
INCOME FUND
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1996
This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of Pennsylvania Daily Municipal Income Fund (the "Fund"), dated April 1, 1996
and should be read in conjunction with the Prospectus. The Fund's Prospectus may
be obtained from any Participating Organization or by writing or calling the
Fund. This Statement of Additional Information is incorporated by reference into
the Prospectus in its entirety.
<TABLE>
<CAPTION>
Table of Contents
<S> <C> <C> <C>
Investment Objectives, Yield Quotations.......................................17
Policies and Risks.......................................2 Manager................................................17
Description of Municipal Obligations.........................3 Expense Limitation...................................19
Variable Rate Demand Instruments Management of the Fund.................................19
and Participation Certificates.........................5 Compensation Table.................................21
When-Issued Securities...................................7 Counsel and Auditors...............................21
Stand-by Commitments.....................................7 Distribution and Service Plan..........................21
Taxable Securities...........................................8 Description of Shares..................................22
Repurchase Agreements....................................9 Federal Income Taxes...................................24
Pennsylvania Risk Factors....................................9 Pennsylvania Income Taxes..............................25
Investment Restrictions.....................................14 Custodian and Transfer Agent...........................26
Portfolio Transactions......................................15 Description of Ratings.................................27
How to Purchas Taxable Equivalent Yield Tables........................28
and Redeem Shares.......................................16 Independent Auditor's Report...........................30
Net Asset Value.............................................16 Financial Statements...................................31
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is a non-diversified, open-end management
investment company that is a short-term, tax-exempt money market fund. The
Fund's investment objectives are to seek as high a level of current income,
exempt from regular Federal tax and, to the extent possible, Pennsylvania income
taxes (the "Pennsylvania 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,
policies and risks in the Prospectus.
The Fund's assets will be invested primarily (i.e., at least 80% of net assets)
in high quality debt obligations issued by or on behalf of the Commonwealth of
Pennsylvania, 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) 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 net 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 Commonwealth of Pennsylvania or any Pennsylvania local
governments, or their instrumentalities, authorities or districts ("Pennsylvania
Municipal Obligations") will be exempt from the Pennsylvania 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 Pennsylvania is prohibited from taxing under the Constitution,
the laws of the United States of America or the Pennsylvania Constitution
("Territorial Municipal Obligations"), also should be exempt from Pennsylvania
Income Tax provided the Fund complies with Pennsylvania laws. (See "Pennsylvania
Income Taxes" herein.) To the extent that suitable Pennsylvania 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 Pennsylvania 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 total assets in Pennsylvania
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 of 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 net 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 Pennsylvania Municipal Obligations.
In view of this "concentration" in bank participation certificates in
Pennsylvania 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.)
2
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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 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 Municipal Obligations that have been determined by
the Fund's Board of Trustees 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 Trustees); (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 Trustees 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
Trustees is made on the basis of its credit evaluation of the issuer, which may
include an evaluation of a letter of credit, guarantee, insurance or other
credit facility issued in support of the Municipal Obligations or participation
certificates. (See "Variable Rate Demand Instruments and Participation
Certificates" herein.) While there are several organizations that currently
qualify as NRSROs, two examples of NRSROs are Standard & Poor's Corporation
("S&P") and Moody's Investors Service, Inc. ("Moody's"). The two highest ratings
by S&P and Moody's are "AAA" and "AA" by S&P in the case of long-term bonds and
"Aaa" and "Aa" by Moody's in the case of bonds; "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. Such instruments may produce
a lower yield than would be available from less highly rated instruments. The
Fund's Board of Trustees has determined that Municipal Obligations which are
backed by the credit of the Federal Government will be considered to have a
rating equivalent to Moody's "Aaa". (See "Description of Ratings" herein.)
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the Investment Company Act of 1940 (the "1940 Act")
with respect to investing its assets in one or relatively few issuers. This
non-diversification may present greater risks than in the case of a diversified
company. However, the Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. The Fund will be
restricted in that at the close of each quarter of the taxable year, at least
50% of the value of its total assets must be represented by cash, government
securities, investment company securities and other securities limited in
respect of any one issuer to not more than 5% in value of the total assets of
the Fund and to not more than 10% of the outstanding voting securities of such
issuer. In addition, at the close of each quarter of its taxable year, not more
than 25% in value of the Fund's total assets may be invested in securities of
one issuer other than Government securities. The limitations described in this
paragraph regarding qualification as a "regulated investment company" are not
fundamental policies and may be revised to the extent applicable Federal income
tax requirements are revised. (See "Federal Income Taxes" herein.)
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used in the Prospectus, "Municipal Obligations" include the following as well
as "Variable Rate Demand Instruments and Participation Certificates" as
discussed herein.
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition.
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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 15% 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 Pennsylvania 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,
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the Fund will only purchase Municipal Leases subject to a non-appropriation
clause where the payment of principal and accrued interest is backed by an
unconditional irrevocable letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial institution. These types of
municipal leases may be considered illiquid and subject to the 15%
limitation of investments in illiquid securities set forth under
"Investment Restrictions" contained herein. The Board of Trustees 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 15% limitation on investments in illiquid
securities.
5. Any other Federal tax-exempt, and to the extent possible, Pennsylvania
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 Trustees 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 Trustees 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 Trustees 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 Trustees 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 Trustees 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
not more than thirty calendar days' notice and may be exercised at any time or
at specified intervals not exceeding 397 days depending upon the terms of the
instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Trustees to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may only purchase variable rate demand instruments only if (i) the
- -------------------
* The "prime rate" is generally the rate charged by a bank to its creditworthy
customers for short-term loans. The prime rate if a particular bank may differ
from other banks and will be the rate announced by each bank on a particular
day. Changes in the prime rate may occur with great frequency and generally
become effective on the date announced.
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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 Trustees. The Fund's Board of Trustees 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 Trustees 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. The Manager has been instructed
by the Fund's Board of Trustees 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
Pennsylvania 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.
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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 or broker-dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price
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<PAGE>
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 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 Trustees. 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 net
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
taxable
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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
15% of the Fund's net assets. (See Investment Restriction Number 6 herein.)
Repurchase agreements are subject to the same risks described herein for
stand-by commitments.
PENNSYLVANIA RISK FACTORS
Prospective investors should consider the financial difficulties and pressures
which the Commonwealth of Pennsylvania and certain of its municipal subdivisions
have undergone. Both the Commonwealth and the City of Philadelphia have
historically experienced significant revenue shortfalls. There can be no
assurance that the Commonwealth will not experience further declines in economic
conditions or that portions of the Municipal Obligations purchased by the Fund
will not be affected by such declines. Without intending to be complete, the
following briefly summarizes some of these difficulties and the current
financial situation, as well as some of the complex factors affecting the
financial situation in the Commonwealth. It is derived from sources that are
generally available to investors and is based in part on information obtained
from various agencies in Pennsylvania. No independent verification has been made
of the following information.
State Economy
Pennsylvania has been historically identified as a heavy industry state although
that reputation has changed recently as the industrial composition of the
Commonwealth diversified when the coal, steel and railroad industries began to
decline. The major new sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, accounting for
more than $3.6 billion in crop and livestock products annually while
agribusiness and food related industries support $39 billion in economic
activity annually.
Employment within the Commonwealth increased steadily from 1984 to 1990. From
1991 to 1994, employment in the Commonwealth declined 1.2%. The growth in
employment experienced in the Commonwealth during such periods is comparable to
the growth in employment in the Middle Atlantic region of the United States.
Non-manufacturing employment in the Commonwealth has increased steadily since
1980 to its 1994 level of 82.0% of total Commonwealth employment. Manufacturing,
which contributed .8% of 1994 non-agricultural employment, has fallen behind
both the services sector and the trade sector as the
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largest single source of employment within the Commonwealth. In 1994, the
services sector accounted for 29.9% of all non-agricultural employment in the
Commonwealth while the trade sector accounted for 22.9%.
The Commonwealth recently experienced a slowdown in its economy. Moreover,
economic strengths and weaknesses vary in different parts of the Commonwealth.
In general, heavy industry and manufacturing have been facing increasing
competition from foreign producers. During 1995, the annual average unemployment
rate in Pennsylvania was 5.9% compared to 5.6% for the United States. For
January 1996 the unadjusted unemployment rate was 6.7% in Pennsylvania and 6.3%
in the United States, while the seasonally adjusted unemployment rate for the
Commonwealth was 6.1% compared to 5.8% for the United States.
State Budget
The Commonwealth operates under an annual budget which is formulated and
submitted for legislative approval by the Governor each February. The
Pennsylvania Constitution requires that the Governor's budget proposal consist
of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
All funds received by the Commonwealth are subject to appropriation in specific
amounts by the General Assembly or by executive authorization by the Governor.
Total appropriations enacted by the General Assembly may not exceed the ensuing
year's estimated revenues, plus (less) the unappropriated fund balance (deficit)
of the preceding year, except for constitutionally authorized debt service
payments. Appropriations from the principal operating funds of the Commonwealth
(the General Fund, the Motor License Fund and the State Lottery Fund) are
generally made for one fiscal year and are returned to the unappropriated
surplus of the fund if not spent or encumbered by the end of the fiscal year.
The constitution specifies that a surplus of operating funds at the end of a
fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an independent
fiscal and accounting entity with a self balancing set of accounts, recording
cash and/or other resources together with all related liabilities and equities.
In the Commonwealth, over 150 funds have been established by legislative
enactment or in certain cases by administrative action for the purpose of
recording the receipt and disbursement of moneys received by the Commonwealth.
Annual budgets are adopted each fiscal year for the principal operating funds of
the Commonwealth and several other special revenue funds. Expenditures and
encumbrances against these funds may only be made pursuant to appropriation
measures enacted by the General Assembly and approved by the Governor. The
General Fund, the Commonwealth's largest fund, receives all tax revenues,
non-tax revenues and federal grants and entitlements that are not specified by
law to be deposited elsewhere. The majority of the Commonwealth's operating and
administrative expenses are payable from the General Fund. Debt service on all
bond indebtedness of the Commonwealth, except that issued for highway purposes
or for the benefit of other special revenue funds, is payable from the General
Fund.
Financial information for the principal operating funds of the Commonwealth are
maintained on a budgetary basis of accounting, which is used for the purpose of
insuring compliance with the enacted operating budget. The Commonwealth also
prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). Budgetary basis financial reports are based on a
modified cash basis of accounting as opposed to a modified accrual basis of
accounting prescribed by GAAP. Financial information is adjusted at fiscal year
end to reflect appropriate accruals for financial reporting in conformity with
GAAP.
Recent Financial Results
From fiscal 1984, when the Commonwealth first prepared its financial statements
on a GAAP basis, through fiscal 1989, the Commonwealth reported a positive
unreserved-undesignated fund balance for its government fund types (General
Fund, Special Revenue Fund and Capital Projects Fund) at the fiscal year
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end. Slowing economic growth during 1990, leading to a national economic
recession beginning in fiscal 1991, reduced revenue growth and increased costs
of certain governmental programs and contributed to negative
unreserved-undesignated fund balances at the end of the 1990 and 1991 fiscal
years. The negative unreserved-undesignated fund balance was due largely to
operating deficits in the General Fund and the State Lottery Fund during those
fiscal years. Actions taken during fiscal 1992 to bring the General Fund back
into balance, including tax increases and expenditure restraints, resulted in a
$1.1 billion reduction to the unreserved-undesignated fund deficit for combined
governmental fund types and a return to a positive fund balance. Financial
performance continued to improve during the 1993 and 1994 fiscal years. The fund
balance for the governmental fund types increased from $1,692.8 million on June
30, 1993, as restated, to $1,982.0 million on June 30, 1994, an increase of
$289.2 million. An unreserved-undesignated fund balance of $334.7 million was
recorded for fiscal 1994 year end.
The Commonwealth experienced a $454 million General Fund deficit as of the end
of its 1991 fiscal year. The deficit reflected higher than budgeted
expenditures, below-estimate economic activity and growth rates of economic
indicators and total tax revenue shortfalls below those assumed in the enacted
budget. Rising demands on state programs caused by the economic recession,
particularly for medical assistance and cash assistance programs, and the
increased costs of special education programs and correction facilities and
programs, contributed to increased expenditures in fiscal 1991, while tax
revenues for the 1991 fiscal year were severely affected by the economic
recession. Total corporation tax receipts and sales and use tax receipts during
fiscal 1991 were, respectively, 7.3 percent and 0.9 percent below amounts
collected during fiscal 1990. Personal income tax receipts also were affected by
the recession but not to the extent of the other major General Fund taxes,
increasing only 2.0 percent over fiscal 1990 collections. A number of actions
were taken throughout the fiscal year by the Commonwealth to mitigate the
effects of the recession on budget revenues and expenditures. The Commonwealth
initiated a number of cost-saving measures, including the firing of 2,000 state
employees, deferral of paychecks and reduction of funds to state universities,
which resulted in approximately $871 million cost savings. Actions taken during
fiscal 1992 to bring the General Fund budget back into balance, including tax
increases and expenditure restraints resulted in a $1.1 billion reduction for
the unreserved-undesignated fund deficit for combined governmental fund types
and a return to a positive fund balance. Total General Fund revenues for fiscal
1992 were $14,516.8 million which is approximately 22 percent higher than fiscal
1991 revenues of $11,877.3 million due in large part to tax increases. The
increased revenues funded substantial increases in education, social services
and corrections programs. As a result of the tax increases and certain
appropriation lapses, fiscal 1992 ended with an $8.8 million surplus after
having started the year with an unappropriated general fund balance deficit of
$453.6 million.
Fiscal 1993 closed with revenues higher than anticipated and expenditures
approximately as projected, resulting in an ending unappropriated balance
surplus of $242.3 million. A deduction in the personal income tax rate in July
1992 and the one-time receipt of revenues from retroactive corporate tax
increases in fiscal 1992 were responsible, in part, for the low growth in fiscal
1993. Commonwealth revenues during the 1994 fiscal year totaled $15,210.7
million, $38.6 million above the fiscal year estimate, and 3.9% over
Commonwealth revenues during the 1993 fiscal year. The sales tax was an
important contributor to the higher than estimated revenues. The strength of
collections from the sales tax offset the lower than budgeted performance of the
personal income tax that ended the 1994 fiscal year $74.4 million below
estimate. The shortfall in the personal income tax was largely due to shortfalls
in income not subject to withholding such as interest, dividends and other
income. Expenditures, excluding pooled financing expenditures and net of all
fiscal 1994 appropriation lapses, totaled $14,934.4 million representing a 7.2%
increase over fiscal 1993 expenditures. Medical assistance and prison spending
contributed to the rate spending growth for the 1994 fiscal year. The
Commonwealth maintained an operating balance on a budgetary basis for fiscal
1994 producing a fiscal year ending unappropriated surplus of $335.8 million.
Commonwealth revenues for the 1995 fiscal year were above estimate and exceeded
fiscal year expenditures and encumbrances. Fiscal 1995 was the fourth
consecutive fiscal year the Commonwealth reported an increase in the fiscal
year-end unappropriated balance. Prior to reserves for transfer to the Tax
Stabilization Reserve Fund, the fiscal 1995 closing unappropriated surplus was
$540.0 million, an increase of $204.2 million over the fiscal 1994 closing
unappropriated surplus prior to transfers. Commonwealth revenues during the 1995
fiscal year were $459.4 million, 2.9 percent above the estimate of revenues used
at the time the 1995 fiscal year budget was enacted. Corporation taxes
contributed $329.4 million of the additional receipts largely due to higher
receipts from the corporate net income tax. Fiscal 1995 revenues from the
corporate net income tax were 22.6 percent over collections in fiscal 1994 and
include the effects of the reduction of the tax rate from 12.25 percent to 11.99
percent that became effective with tax years
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beginning on and after January 1, 1994. The sales and use tax and miscellaneous
revenues also showed strong year-over-year growth that produced above-estimate
revenue collections. Sales and use tax revenues were $5,526.9 million, $128.8
million above the enacted budget estimate and 7.9 percent over fiscal 1994
collections. Tax receipts from both motor vehicles and non-motor vehicle sales
contributed to the higher collections. Miscellaneous revenue collections for
fiscal 1995 were $183.5 million, $44.9 million above estimate and were largely
due to additional investment earnings, escheat revenues and other miscellaneous
revenues.
Fiscal 1996 Budget
On June 30, 1995, the Governor signed a $16.2 billion general fund budget, an
increase of approximately 2.7 percent over the total appropriations from
Commonwealth revenues in the fiscal 1995 budget. The appropriations increase for
fiscal 1996 is one of the lowest rates in recent years. Areas receiving the
largest budgetary increases are medical assistance and basic education. In
addition, the budget accelerated corporate net income tax rate reductions,
eliminated the inheritance tax paid by a surviving spouse on jointly owned
property, and made other business tax reductions.
Fiscal 1997 Budget
On February 6, 1996, the Governor submitted to the General Assembly his fiscal
1997 budget that proposes $31,761 billion in total spending including a $16.19
billion General Fund budget, a 0.2% decrease from the fiscal 1996 budget. The
proposed fiscal 1997 budget represents the first time since 1970 that a
Pennsylvania Governor has proposed a budget with less spending that the prior
year. The proposed fiscal 1997 budget contains modest business tax reductions.
Debt Limits and Outstanding Debt
The Constitution of Pennsylvania permits the issuance of the following types of
debt: (i) debt to suppress insurrection or rehabilitate areas affected by
disaster; (ii) electorate approved debt; (iii) debt for capital projects subject
to an aggregate outstanding debt limit of 1.75 times the annual average tax
revenues of the preceding five fiscal years; and (iv) tax anticipation notes
payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required annually to
certify to the Governor and the General Assembly certain information regarding
the Commonwealth's indebtedness. According to the February 29, 1996 Auditor
General certificate, the average annual tax revenues deposited in all funds in
the five fiscal years ended June 30, 1995 was $17.7 billion, and, therefore, the
net debt limitation for the 1996 fiscal year is $30.9 billion. Outstanding net
debt totaled $3.9 billion at June 30, 1995, approximately equal to the net debt
at June 30, 1994. At February 29, 1996, the amount of debt authorized by law to
be issued, but not yet incurred was $16.5 billion.
Outstanding general obligation debt totaled $5,045.4 million at June 30, 1995, a
decrease of $30.4 million from June 30, 1994. Over the ten-year period ending
June 30, 1995, total outstanding general obligation debt increased at an annual
rate of 1.1 percent. Within the most recent five-year period, outstanding
general obligation debt has grown at an annual rate of 1.7 percent.
Debt Ratings
All outstanding general obligation bonds of the Commonwealth are rated "AA-" by
S&P and "A-1" by Moody's.
City of Philadelphia
The City of Philadelphia (the "City" or "Philadelphia") is the largest city in
the Commonwealth. Philadelphia experienced a series of General Fund deficits for
fiscal years 1988 through 1992, which, with an estimated population of 1,585,577
according to the 1900 Census, culminated in serious financial difficulties for
the City. In its 1992 Comprehensive Annual Financial Report, Philadelphia
reported a cumulative General Fund deficit of $71.4 million for the fiscal year
ended June 30, 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to assist
Philadelphia in remedying fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make factual findings and
recommendations to Philadelphia concerning its budgetary and fiscal affairs. The
legislation empowers PICA to issue notes and bonds on behalf of Philadelphia,
and also authorizes Philadelphia to levy a one-percent sales tax, the proceeds
of which would be used to pay off the bonds. In return for PICA's fiscal
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assistance, Philadelphia is required, among other things to establish five-year
financial plans that include balanced annual budgets. Under the legislation, if
Philadelphia does not comply with such requirements, PICA may withhold bond
revenues and certain state funding. At this time, the City is operating under a
five-year fiscal plan approved by PICA on April 17, 1995. Technical
modifications were made to the Plan as of July 12, 1995 and the revised plan,
incorporating such technical modifications, was approved by PICA on July 18,
1995. As of November 15, 1995, PICA has issued approximately $1,418.7 million of
its Special Tax Revenue Bonds.
No further PICA bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired on
December 31, 1994. PICA's authority to issue debt for the purpose of financing a
cash flow deficit expires on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted.
In January 1993, Philadelphia anticipated a cumulative general fund budget
deficit of $57 million for the 1993 fiscal year. In response to the anticipated
deficit, the Mayor unveiled a financial plan eliminating the budget deficit for
the 1993 budget year through significant service cuts that included a plan to
privatize certain city-provided services. Due to an upsurge in tax receipts,
cost-cutting and additional PICA borrowings, Philadelphia completed the 1993
fiscal year with a balanced general fund budget. The audit findings for the
fiscal year 1993 show a cumulative general fund surplus of approximately $3
million for the fiscal year ended June 30, 1993.
In January 1994, the Mayor proposed a $2.3 billion city general fund budget that
included no tax increases, no significant service cuts and a series of modest
health and welfare program increases. At that time, the Mayor also unveiled a
$2.2 billion program (the "Philadelphia Economic Stimulus Program") designed to
stimulate Philadelphia's economy and stop the loss of 1,000 jobs a month. In its
1994 Comprehensive Annual Financial Report, Philadelphia reported a cumulative
general fund surplus of approximately $15.4 million for the fiscal year ended
June 30, 1994, up from approximately $3 million as of June 30, 1993.
Philadelphia's preliminary unaudited General Fund financial statements at June
30, 1995 project a surplus approximating $59.6 million.
S&P rating on Phildelphia's general obligation bonds is "BBB-." Moody's rating
is currently "Baa."
Litigation
The Commonwealth is a party to numerous lawsuits in which an adverse final
decision could materially affect the Commonwealth's governmental operations and
consequently its ability to pay debt service on its obligations. The
Commonwealth also faces tort claims made possible by the limited waiver of
sovereign immunity effected by Act 152, approved September 28, 1978, as amended.
Under Act 152, damages from any loss are limited to $250,000 per person and $1
million for each accident.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund may not:
1. Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's high quality criteria, as determined by
the Board of Trustees 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."
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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 15% 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."
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 the banking industry through bank participation certificates and
there shall be no limitation on the purchase of those Municipal
Obligations. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity would be deemed to be the
sole issuer of the security. Similarly, in the case of an industrial
revenue bond, if that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. If, however, in either case, the creating government or
some other entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a letter of credit, such a guarantee
or letter of credit would be considered a separate security and would be
treated as an issue of such government, other entity or bank. With respect
to 75% of the total amortized cost value of the Fund's assets, not more
than 5% of the Fund's assets may be invested in securities that are subject
to underlying puts from the same institution, and no single bank shall
issue its letter of credit and no single financial institution shall issue
a credit enhancement covering more than 5% of the total assets of the Fund.
However, if the puts are exercisable by the Fund in the event of default on
payment of principal and interest on the underlying security, then the Fund
may invest up to 10% of its assets in securities underlying puts issued or
guaranteed by the same institution; additionally, a single bank can issue
its letter of credit or a single financial institution can issue a credit
enhancement covering up to 10% of the Fund's assets, where the puts offer
the Fund such default protection.
11. Invest in securities of other investment companies, except (i) 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, (ii) as they may be acquired as part of a merger, consolidation or
acquisition of assets or (iii) as allowed by 12(d) of the 1940 Act
(investments by the Fund in other investment companies subjects that
portion of a shareholder's investment to additional fees resulting in a
duplication of such fees).
12. Issue senior securities except insofar as the Fund may be deemed to have
issued a senior security in connection with any permitted borrowings.
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.
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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 in the Prospectus
is herein incorporated by reference.
NET ASSET VALUE
The Fund does not determine net asset value per share on the following holidays:
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. It is computed by dividing the value of
the Fund's net assets (i.e., the value of its securities and other assets less
its liabilities, including expenses payable or accrued but excluding capital
stock and surplus) by the total number of shares outstanding.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Trustees 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 Trustees 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. 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 Trustees 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.)
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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 1%). 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 1% 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 formula previously discussed) which is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax-exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.
The Fund may from time to time advertise a taxable equivalent yield table which
shows the yield an investor would need to receive from a taxable investment in
order to equal a tax-free yield from the Fund. (See "Taxable Equivalent Yield
Table" herein.)
The Fund's yield for the seven-day period ended February 29, 1996 was 2.86%,
which is equivalent to an effective yield of 2.90%. As the Class B shares were
created January 26, 1995 and have not yet been activated, yields for such class
of shares are not yet available.
MANAGER
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). The Manager was at February 29, 1996
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $8.7 billion. In addition to the Fund, the Manager acts as investment
manager and administrator of eighteen other investment companies and also
advises pension trusts, profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in Reich & Tang Asset Management L.P., the Manager.
Reich & Tang Asset Management, Inc. (a wholly-owned subsidiary of NEICLP) is the
general partner and owner of the remaining .5% interest of the Manager.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 68.1% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc., owns
approximately 22.8% of the outstanding partnership units of NEICLP. In addition,
NEIC is a wholly-owned subsidiary of The New England, which may be deemed a
"controlling person" of the Manager. NEIC is a
16
<PAGE>
holding company offering a broad array of investment styles across a wide range
of asset categories through ten investment advisory/management affiliates and
two distribution subsidiaries. These include Loomis, Sayles & Company, L.P.,
Copley Real Estate Advisors, Inc., Back Bay Advisors, L.P., Westpeak Investment
Advisors, L.P., Draycott Partners, Ltd., TNE Investment Services, L.P., New
England Investment Associates, Inc., Harris Associates, and an affiliate,
Capital Growth Management Limited Partnership. These affiliates in the aggregate
are investment advisors or managers of 42 other registered investment companies.
Pursuant to an 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 Trustees of
the Fund.
The Manager provides persons satisfactory to the Board of Trustees of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and trustees of the Fund, may be directors or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management Contract was approved effective October 1, 1995 by the
Board of Trustees, including a majority of the trustees who are not interested
persons (as defined in the 1940 Act) of the Fund or the Manager. The Investment
Management Contract was approved by a majority of the Fund's shareholders at the
meeting held on July 21, 1993.
The Investment Management Contract has a term which extends to July 31, 1996 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 Trustees, and in either case by a majority of the Trustees who are not
parties to the Investment Management Contract or interested persons of any such
party, by votes cast in person at a meeting called for the purpose of voting on
such matter.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either (1) by majority vote of its
outstanding voting shares or (2) by a vote of a majority of its Board of
Trustees or (3) by the Manager on sixty days' written notice, and will
automatically terminate in the event of its assignment. The Investment
Management Contract provides that in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Manager, or of reckless disregard
of its obligations thereunder, the Manager shall not be liable for any action or
failure to act in accordance with its duties thereunder.
For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .40% per annum of the Fund's average daily net
assets for managing the Fund's investment portfolio. The Manager, at its
discretion, may voluntarily waive all or a portion of the management fee. The
fees are accrued daily and paid monthly. Any portion of the total fees received
by the Manager may be used by the Manager to provide shareholder services. (See
"Distribution and Service Plan" herein.) For the Fund's Fiscal Year ended
November 30, 1995, the fee payable the manager under the Investment management
contract was $155,535, $63,396 of which was waved. The Fund's net assets at the
close of business on November 30, 1995 totaled $40,980,201. For the Fund's
fiscal year ended November 30, 1994, the fee payable to the Manager under the
Investment Management Contract was $158,042, $90,058 of which was waived. The
Fund's net assets at the close of business on November 30, 1994 totaled
$43,559,447. For the Fund's fiscal year ended November 30, 1993, the fee payable
to payable to the Manager under the Investment Management Contract was $92,351,
all of which was waived. The Fund's net assets at the close of business on
November 30, 1993 totaled $38,817,073.
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 bookkeeping related services by Investors Fiduciary Trust
Company, the Fund's bookkeeping agent, (ii) prepare reports to and filings with
regulatory authorities, and (iii) perform such other services as the Fund may
from time to time request of the Manager. The personnel rendering such services
may be employees of the Manager, of its affiliates or of other organizations.
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 from the Fund a fee equal to .21% of the Fund's
average daily net assets not in excess of $1.25 billion, plus .20% of such
assets in excess of $1.25 billion but not in excess of $1.5 billion, plus .19%
of such assets in excess of $1.5 billion. For the Fund's fiscal year ended
November 30, 1995, the fee payable to the manager under the Administrative
Services Contract was $77,767, all of which was waived. For the Fund's fiscal
year ended November 30, 1994, the fee payable to the Manager under the
Administrative Services Contract was
17
<PAGE>
$79,021, all of which was waived. For the Fund's fiscal year ended November 30,
1993, the fee payable to the Manager under the Administrative Services Contract
was $46,176, all of which was waived.
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 and the administrative services 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.
Expense Limitation
The Manager has agreed, pursuant to the Investment Management Contract, to
reimburse the Fund for its expenses (exclusive of interest, taxes, brokerage,
and extraordinary expenses) which in any year exceed the limits on investment
company expenses prescribed by any state in which the Fund's shares are
qualified for sale. For the purpose of this obligation to reimburse expenses,
the Fund's annual expenses are estimated and accrued daily, and any appropriate
estimated payments are made to it on a monthly basis. Subject to the obligations
of the Manager to reimburse the Fund for its excess expenses as described above,
the Fund has, under the Investment Management Contract, confirmed its obligation
for payment of all its other expenses, including 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 trustees, 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 Administrative Services
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.
Pursuant to the previous Investment Management Contract, for the fiscal years
ended November 30, 1993, November 30, 1994, and November 30, 1995, the Manager
received investment Management and administrative services fees aggregating $0,
$67,984, $92,139, respectively.
MANAGEMENT OF THE FUND
The Trustees and Officers of the Fund and their principal occupations during the
past five years are set forth below. Mr. Duff may be deemed an "interested
person" of the Fund, as defined in the Act, on the basis of his affiliation with
Reich & Tang Asset Management L.P. Unless otherwise specified, the address of
each of the following persons is 600 Fifth Avenue, New York 10020.
Steven W. Duff, 41 - President and a Trustee 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 also 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 a Trustee of Florida Daily Municipal
Income Fund, and Institutional Daily Income Fund, President and Chairman of
Reich & Tang Government Securities Trust, President and Chief Executive Officer
of Tax Exempt Proceeds Fund, Inc., Executive Vice President of Reich & Tang
Equity Fund, Inc.
Dr. W. Giles Mellon, 65 - Trustee 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., North Carolina
18
<PAGE>
Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc., Short Term
Income Fund, Inc. and a Trustee of Florida Daily Municipal Income Fund,
Institutional Daily Income Fund and Reich & Tang Government Securities Trust.
Robert Straniere, 55 - Trustee of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere law firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also a
Director of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Life Cycle Mutual Funds, Inc., Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc. and
a Trustee of Florida Daily Municipal Income Fund, Institutional Daily Income
Fund and Reich & Tang Government Securities Trust.
Dr. Yung Wong, 57 - Trustee of the Fund, was director of Shaw Investment
Management (UK) Limited from October 1994 to October 1995, formerly General
Partner of Abacus Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong is a Director of 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., North Carolina Daily Municipal Income
Fund, Inc., Reich & Tang Equity Fund, Inc., and Short Term Income Fund, Inc. and
a Trustee of Eclipse Financial Asset Trust, Florida Daily Municipal Income Fund,
Institutional Daily Income Fund and Reich & Tang Government Securities Trust.
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 Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Reich & Tang Equity Fund, Inc., Reich & Tang Government Securities
Trust and Short Term Income Fund, Inc.
Lesley M. Jones, 47 - 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., North Carolina Daily Municipal Income Fund,
Inc., Reich & Tang Equity Fund, Inc., Reich & Tang Government Securities Trust
and Short Term Income Fund, Inc.
Dana E. Messina, 39 - Vice President of the Fund, is Executive Vice President of
the 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. which she was associated with from December 1980
to September 1993. Ms. Messina is also Vice President of California Daily Tax
Free Income Fund Inc., Connecticut Daily Tax Free Income Fund Inc., Cortland
Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Florida
Daily Municipal Income Fund, Institutional Daily Income Fund, 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., Reich & Tang Equity Fund, Inc., Reich & Tang Government Securities Trust,
Short Term Income Fund, Inc., and Tax Exempt Proceeds Fund, Inc.
Bernadette N. Finn, 48 - Secretary of the Fund, is Vice President of the Mutual
Funds Division of the Manger since September 1993. Ms. Finn was formerly Vice
President 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., Delafield Fund, Inc., Florida Daily
Municipal Income Fund, Institutional Daily Income Fund, Michigan Daily Tax Free
Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily
Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Tax Exempt Proceeds Fund, Inc. and a Vice President and Secretary of Reich &
Tang Equity Fund, Inc., Reich & Tang Government Securities Trust and Short Term
Income Fund, Inc.
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<PAGE>
Richard De Sanctis, 39 - 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., Delafield Fund, Inc., Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund,
Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free
Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Reich &
Tang Government Securities Trust, Reich & Tang Equity Fund, Inc. and Short Term
Income Fund, Inc. and is Treasurer and Vice President of Cortland Trust, Inc.
The Fund paid an aggregate remuneration of $6,750 to its trustees with respect
to the period ended November 30, 1995, all of which consisted of aggregate
trustee's fees paid to the three disinterested trustees, pursuant to the terms
of the Investment Management Contract (see "Manager" herein). See Compensation
Table below.
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C> <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*
W. Giles Mellon, $2,250 0 0 $57,000 (14 Funds)
Director
Robert Straniere, $2,250 0 0 $57,000 (14 Funds)
Director
Yung Wong, $2,250 0 0 $57,000 (14 Funds)
Director
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending November 30, 1995 (and, with respect to certain of the
funds in the Fund Complex, estimated to be paid during the fiscal year ending
November 30, 1995). The parenthetical number represents the number of
investment companies (including the Fund) from which such person receives
compensation that are considered part of the same Fund complex as the Fund,
because, among other things, they have a common investment advisor.
</TABLE>
Counsel and Auditors
Legal matters in connection with the Fund are passed upon by Messrs. Battle
Fowler LLP, 75 East 55th Street, New York, New York 10022. Matters in connection
with Massachusetts and Pennsylvania law are passed upon by Dechert Price &
Rhoads, 477 Madison Avenue, New York, New York 10022.
McGladrey & Pullen LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the 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 Trustees 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.
20
<PAGE>
Under the Shareholder Servicing Agreement, the Distributor receives from the
Fund a service fee equal to .25% per annum of the Fund's average daily net
assets (the "Service Fee") for providing personal shareholder services and/or
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 servicing their
clients or customers who are shareholders of the Fund.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Service Fee, the Fund will pay for (i) telecommunications expenses including
the cost of dedicated lines and CRT terminals, incurred by the Manager and
Distributor in carrying out their obligations under the Shareholder Servicing
Agreement and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; 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 Service 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 and the Distributor for any fiscal year
under either the Investment Management Contract in effect for that year, the
Administrative Services Contract in effect for that year or under the
Shareholder Servicing Agreement in effect for that year.
The following information applies only to the Class A shares of the Fund. For
the Fund's fiscal year ended November 30, 1995, the Fund paid a distribution fee
of $0 for expenditures pursuant to the Plan. During such period, the Manager
made payments pursuant to the Plan from its own resources aggregating $132,876,
of which $120,409 was spent on broker assistant payments, $6,808 was spent on
sales personnel and related expenses of the Manager, $1,319 was spent on travel
and entertainment, $3,878 was spent on prospectus and application printing and
$462 was spent on miscellaneous expenses. For the Fund's fiscal year ended
November 30, 1995, the Fund paid shareholder servicing fees of $97,209, all of
which was waived. For the Fund's fiscal year ended November 30, 1994, the Fund
paid a distribution fee of $0 for expenditures pursuant to the Plan. During such
period, the Manager made payments pursuant to the Plan from its own resources
aggregating $128,951, of which $120,535 was spent on broker assistant payments,
$2,945 was spent on sales personnel and related expenses of the Manager, $355
was spent on travel and entertainment, $4,919 was spent on prospectus and
application printing and $197 was spent on miscellaneous expenses. For the
Fund's fiscal year ended November 30, 1994, the Fund paid shareholder servicing
fees of $98,776, all of which was waived. For the Fund's fiscal year ended
November 30, 1993, the Fund paid a distribution fee of $0 for expenditures
pursuant to the Plan. During such period, the Manager made payments pursuant to
the Plan from its own resources aggregating $91,869, of which $74,186 was spent
on broker assistant payments, $5,812 was spent on sales personnel and related
expenses of the Manager, $1,424 was spent on travel and entertainment, $10,094
was spent on prospectus and application printing and $355 was spent on
miscellaneous expenses. For the Fund's fiscal year ended November 30, 1993, the
Fund paid shareholder servicing fees of $57,720, all of which was waived.
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 Trustees. 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.
21
<PAGE>
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the Class A shareholders or by the Board of Trustees,
including a majority of Trustees 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 shall continue in effect until July 31,
1995. 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 Trustees 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
Trustees of the Fund or the Fund's Class A shareholders.
DESCRIPTION OF SHARES
The Fund was established as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust dated July 30, 1992. The
Fund has an unlimited authorized number of shares of beneficial interest. These
shares are entitled to one vote per share with proportional voting for
fractional shares. There are no conversion or preemptive rights in connection
with any shares of the Fund. All shares when issued in accordance with the terms
of the offering will be fully paid and non-assessable. Shares of the Fund are
redeemable at net asset value, at the option of the shareholders. The Fund is
subdivided into two classes of 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 Fund's 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 shareholders to exchange their
shares only for shares of the same class of an Exchange Fund. 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. On February 29, 1996, there were 42,339,631 shares of
the Fund outstanding. As of February 29, 1996, the amount of shares owned by all
officers and trustees 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 February 29, 1996:
Nature of
Name and address % of Class Ownership
- ---------------- ---------- ---------
PNC Securities Corp. 12.04 Record
c/o Pittsburgh National Bank
Fifth Avenue & Wood Street
Pittsburgh PA 15265
Lewco Securities Corp. 7.40 Record
34 Exchange Place
Jersey City NJ 07311
Under its Declaration of Trust the Fund has the right to redeem for cash shares
of beneficial interest owned by any shareholder to the extent and at such times
as the Fund's Board of Trustees determines to be necessary or appropriate to
prevent an undue 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.
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
Trustees can elect 100% of the Trustees 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 Trustees. 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 Trustees, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
beneficial interest, (c) for approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of beneficial interest,
and (d) upon the written request of holders of shares entitled to cast not less
22
<PAGE>
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 Act, including the removal of Fund trustee(s) and
communication among shareholders, any registration of the Fund with the
Securities and Exchange Commission or any state, or as the Trustee may consider
necessary or desirable. For example, procedures for calling a shareholder's
meeting for the removal of Trustees of the Fund, similar to those set forth in
Section 16(c) of the 1940 Act, are available to shareholders of the Fund. A
meeting for such purpose can be called by the holders of at least 10% of the
Fund's outstanding shares of beneficial interest. The Fund will aid shareholder
communications with other shareholders as required under Section 16(c) of the
Act. Each Trustee serves until the next meeting of the shareholders called for
the purpose of considering the election or reelection of such Trustee or of a
successor to such Trustee, and until the election and qualification of his or
her successor, elected at such a meeting, or until such Trustee sooner dies,
resigns, retires or is removed by the vote of the shareholders.
FEDERAL INCOME TAXES
The Fund intends to qualify under the Code and under Pennsylvania 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. As a result, 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. Further, under P.L.
99-514, taxpayers other than corporations are required to include as an item of
tax preference for purposes of the Federal alternative minimum tax all
tax-exempt interest on "private activity" bonds (generally, a bond issue in
which more than 10% of the proceeds are used in a non-governmental trade or
business) (other than Section 501(c)(3) bonds) issued after August 7, 1986.
Thus, this provision will apply to the portion of the exempt-interest dividends
from the Fund's assets, that are attributable to such post-August 7, 1986
private activity bonds, if any of such bonds are acquired by the Fund.
Corporations are required to increase their alternative minimum taxable income
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 tax 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
23
<PAGE>
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 anet capital gain
distribution have not held their Fund shares for more than 6 months, and who
subsequently dispose of those shares at a loss, will be required to treat such
loss as a long-term capital loss to the extent of the net capital gain
distribution. Distributions of net capital gain will be designated as a "capital
gain dividend" in a written notice mailed to the Fund's shareholders not later
than 60 days after the close of the Fund's taxable year.
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term capital loss) for each
taxable year. The Fund will be subject to Federal income tax on any
undistributed investment company taxable income. To the extent such income is
distributed it will be taxable to shareholders as ordinary income. Expenses paid
or incurred by the Fund will be allocated between tax-exempt and taxable income
in the same proportion as the amount of the Fund's tax-exempt income bears to
the total of such exempt income and its gross income (excluding from gross
income the excess of capital gains over capital losses). If the Fund does not
distribute at least 98% of its ordinary income and 98% of its capital gain net
income for a taxable year, the Fund will be subject to a nondeductible 4% excise
tax on the excess of such amounts over the amounts actually distributed.
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.
PENNSYLVANIA INCOME TAXES
The following is based upon the advice of Dechert Price & Rhoads, special
Pennsylvania counsel to the Fund.
Shares of the Fund are not subject to any of the personal property taxes
presently in effect in Pennsylvania to the extent of that proportion of the Fund
represented by Pennsylvania Municipal Obligations. The taxes referred to above
include the County Personal Property Tax, the additional personal property taxes
imposed on Pittsburgh residents by the School District of Pittsburgh and by the
City of Pittsburgh. Shares of the Fund may be taxable under the Pennsylvania
inheritance and estate taxes.
The proportion of interest income representing interest income from Pennsylvania
Municipal Obligations distributed to shareholders of the Fund is not taxable
under the Pennsylvania Personal Income Tax or
24
<PAGE>
under the Corporate Net Income Tax, nor will such interest be taxable under the
Philadelphia School District Investment Income Tax imposed on Philadelphia
resident individuals.
The disposition by the Fund of a Pennsylvania Municipal Obligation (whether by
sale, exchange, redemption or payment at maturity) will not constitute a taxable
event to a shareholder under the Pennsylvania Personal Income Tax if the
Pennsylvania Municipal Obligation was issued prior to February 1, 1994.
Further,although there is no published authority on the subject, counsel is of
the opinion that (i) a shareholder of the Fund will not have a taxable event
under the Pennsylvania state and local income taxes referred to in the preceding
paragraph (other than the Corporate Net Income Tax) upon the redemption or sale
of his shares to the extent that the Fund is then comprised of Pennsylvania
Municipal Obligations and (ii) the disposition by the Fund of a Pennsylvania
Municipal Obligation (whether by sale, exchange, redemption or payment at
maturity) will not constitute a taxable event to a shareholder under the
Corporation Income Tax or the Philadelphia School District Investment Income Tax
if the Pennsylvania Municipal Obligation was issued prior to February 1, 1994.
(The School District tax has no application to gain on the disposition of
property held by the taxpayer for more than six months.)
The foregoing is a general, abbreviated summary of certain of the provisions of
Pennsylvania statutes and administrative interpretations presently in effect
governing the taxation of shareholders of the Fund. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Shareholders are advised to
consult with their own tax advisers for more detailed information concerning
Pennsylvania tax matters.
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 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.
25
<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 denotesprobable credit stature upon completion of
construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). A short-term issue having a demand
feature ( i.e., payment relying on external liquidity and usually payable on
demand rather than use of fixed maturity dates) is differentiated by Moody's
with the symbol VMIG, instead of MIG. This distinction is in recognition of the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower are uppermost in importance in short-term
borrowing, while various factors of the first importance in bond risk are of
lesser importance in the short run. Symbols used will be as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Corporation's Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Description of Standard & Poor's Corporation's Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
- -------------
* As decribed by the rating agencies.
26
<PAGE>
<TABLE>
<CAPTION>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
1. If Your Corporate Taxable Income Bracket Is . . .
_________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate $0 $50,001 $75,001 $100,001 $335,001 $10,000,001 15,000,001 $18,333,334
Return 50,000 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 . . .
_________________________________________________________________________________________________________________________
Federal
Tax 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
Rate
_________________________________________________________________________________________________________________________
State
Tax 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% 10.75%
Rate
_________________________________________________________________________________________________________________________
Combined
Marginal 24.14% 33.06% 41.10% 45.56% 41.10% 41.99% 44.67% 41.99%
Tax Rate
_________________________________________________________________________________________________________________________
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
_________________________________________________________________________________________________________________________
2.00% 2.64% 2.99% 3.40% 3.67% 3.40% 3.45% 3.61% 3.45%
_________________________________________________________________________________________________________________________
2.50% 3.30% 3.73% 4.24% 4.59% 4.24% 4.31% 4.52% 4.31%
_________________________________________________________________________________________________________________________
3.00% 3.95% 4.48% 5.09% 5.51% 5.09% 5.17% 5.42% 5.17%
_________________________________________________________________________________________________________________________
3.50% 4.61% 5.23% 5.94% 6.43% 5.94% 6.03% 6.33% 6.03%
_________________________________________________________________________________________________________________________
4.00% 5.27% 5.98% 6.79% 7.35% 6.79% 6.90% 7.23% 6.90%
_________________________________________________________________________________________________________________________
4.50% 5.93% 6.72% 7.64% 8.27% 7.64% 7.76% 8.13% 7.76%
_________________________________________________________________________________________________________________________
5.00% 6.59% 7.47% 8.49% 9.18% 8.49% 8.62% 9.04% 8.62%
_________________________________________________________________________________________________________________________
5.50% 7.25% 8.22% 9.34% 10.10% 9.34% 9.48% 9.94% 9.48%
_________________________________________________________________________________________________________________________
6.00% 7.91% 8.96% 10.19% 11.02% 10.19% 10.34% 10.84% 10.34%
_________________________________________________________________________________________________________________________
6.50% 8.57% 9.71% 11.03% 11.94% 11.03% 11.20% 11.75% 11.20%
_________________________________________________________________________________________________________________________
7.00% 9.23% 10.46% 11.88% 12.86% 11.88% 12.07% 12.65% 12.07%
_________________________________________________________________________________________________________________________
</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.
27
<PAGE>
<TABLE>
<CAPTION>
PERSONAL TAXABLE EQUIVALENT YIELD TABLE
_____________________________________________________________________________________________________
1. If Your Taxable Income Bracket Is . . .
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Single $0- $24,001- $58,151 $121,301- $263,751
Return 24,000 58,150 121,300 263,750 and over
_____________________________________________________________________________________________________
Joint $0- $40,101- $96,901- $147,701- $263,751
Return 40,100 96,900 147,700 263,750 and over
_____________________________________________________________________________________________________
2. Then Your Combined Income Tax Bracket Is . . .
_____________________________________________________________________________________________________
Federal
Tax Rate 15.00% 28.00% 31.00% 36.00% 39.60%
_____________________________________________________________________________________________________
State
Tax Rate 2.80% 2.80% 2.80% 2.80% 2.80%
_____________________________________________________________________________________________________
Combined
Tax Rate 17.38% 30.02% 32.93% 37.79% 41.29%
____________________________________________________________________________________________________
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
_____________________________________________________________________________________________________
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
_____________________________________________________________________________________________________
2.0% 2.42% 2.86% 2.98% 3.22% 3.41%
_____________________________________________________________________________________________________
2.5% 3.03% 3.57% 3.73% 4.02% 4.26%
_____________________________________________________________________________________________________
3.0% 3.63% 4.29% 4.47% 4.82% 5.11%
_____________________________________________________________________________________________________
3.5% 4.24% 5.00% 5.22% 5.63% 5.96%
_____________________________________________________________________________________________________
4.0% 4.84% 5.72% 5.96% 6.43% 6.81%
_____________________________________________________________________________________________________
4.5% 5.45% 6.43% 6.71% 7.23% 7.66%
_____________________________________________________________________________________________________
5.0% 6.05% 7.14% 7.46% 8.04% 8.52%
____________________________________________________________________________________________________
5.5% 6.66% 7.86% 8.20% 8.84% 9.37%
_____________________________________________________________________________________________________
6.0% 7.26% 8.57% 8.95% 9.65% 10.22%
_____________________________________________________________________________________________________
6.5% 7.87% 9.29% 9.69% 10.45% 11.07%
____________________________________________________________________________________________________
7.0% 8.47% 10.00% 10.44% 11.25% 11.92%
____________________________________________________________________________________________________
</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.
28
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
INDEPENDENT AUDITOR'S REPORT
===============================================================================
The Board of Trustees and Shareholders
Pennsylvania Daily Municipal Income Fund
We have audited the accompanying statement of net assets of Pennsylvania Daily
Municipal Income Fund as of November 30, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the selected financial
information for each of the two years in the period then ended and for the
period from December 16, 1992 (Commencement of Operations) to November 30, 1993.
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 November 30, 1995, 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 Pennsylvania Daily Municipal Income Fund as of November 30, 1995,
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
December 26, 1995
- -------------------------------------------------------------------------------
29
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF NET ASSETS
NOVEMBER 30, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Tax Exempt Investments (18.94%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,500,000 Central Blair County, PA Sanitary Authority RN (b) 05/15/96 4.33% $ 1,505,534
1,300,000 Philadelphia, PA School District TRAN - Series 1995-96 06/28/96 3.95 1,303,955 Aaa SP-1
1,000,000 Philadelphia, PA Water & Sewer (11th Series) - Subseries A 12/01/95 3.86 1,020,000 Aaa AAA
1,575,000 State of Pennsylvania IDA GH3
AMBAC Insured 01/01/96 4.55 1,575,316 Aaa AAA
1,500,000 Temple University (University Funding Obligation) - Series 1995 05/22/96 4.07 1,505,846 SP-1+
800,000 York County, PA IDA First Mortgage
(Fairview Village Associates Project) 06/01/96 3.93 849,424 Aaa AA
- -------------- ----------
7,675,000 Total Other Tax Exempt Investments 7,760,075
- -------------- ----------
<CAPTION>
Other Variable Rate Demand Instruments (c) (50.39%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 200,000 Alleghany County, PA ACES (Alleghany Hospital) - Series 1988C
LOC PNC Bank 03/01/13 3.60% $ 200,000 VMIG-1 A1+
1,200,000 Alleghany County, PA HDA RB
Alleghany General Hospital - Series B
LOC Morgan Guaranty 09/01/10 3.55 1,200,000 VMIG-1 A1+
500,000 Alleghany, PA IDA
(Commercial Development Parkway Center Project) - Series A
LOC Mellon Bank, N.A. 05/01/09 4.00 500,000 A1
1,000,000 Allegheny County, PA
(Childrens Hospital of Pittsburgh) - Series 1985B
MBIA Insured 12/01/15 3.60 1,000,000 VMIG-1 A1
2,000,000 Beaver County, PA IDA
LOC Barclays Bank 08/01/20 3.65 2,000,000 P1 A1+
1,500,000 Cambria County, PA IDA
(Cambria Generation Project) - Series VI
LOC Fuji Bank, Ltd. 09/01/19 3.90 1,500,000 VMIG-1 A1
200,000 Cambria County, PA IDA
(Cogenation Project) - Series 1991
LOC Fuji Bank, Ltd. 09/01/19 3.90 200,000 VMIG-1 A1+
400,000 Chartiers Valley IDA
(Commercial Steel Corporation) - Series 1990A (b)
LOC PNC Bank 09/01/05 4.00 400,000
1,900,000 Clarion County, PA EDA (Piney Creek) - Series A
LOC Swiss Bank Corp. 12/01/11 3.80 1,900,000 VMIG-1 A1+
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
30
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF NET ASSETS (CONTINUED)
NOVEMBER 30, 1995
===============================================================================
<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>
$ 375,000 Clinton County, PA Municipal Authority HRB
(Lock Haven Hospital Project) - Series 1991A (b)
LOC Mellon Bank, N.A. 09/01/07 3.80% $ 375,000 A1
1,000,000 College Township IDA
LOC Wachovia Bank & Trust Co., N.A. 11/01/11 3.75 1,000,000 A1+
800,000 Delaware County, PA IDA (British Petroleum Oil Incorporated) 12/01/09 3.80 800,000 P1 A1+
1,600,000 Delaware County, PA IDA (Scott Paper Company) - Series A
LOC Fuji Bank, Ltd. 12/01/18 4.10 1,600,000 P1 A1
400,000 Emmaus General Authority, PA
Local Government RB - Series 1989 F4
GIC Goldman Sachs 03/01/24 3.75 400,000 A1
2,000,000 Geisinger Authority, PA Health System
(Geisinger Health System) - Series 1992B 07/01/22 3.70 2,000,000 A1+
400,000 Jeannette, PA Health Services Authority (Jeannette Corporation)
LOC PNC Bank 07/01/99 4.00 400,000 VMIG-1
500,000 Lehigh County, PA IDA - Series 1985A
LOC Rabobank Nederland 12/01/15 3.80 500,000 P1
675,000 PA Economic Development Financing Authority RB - Series D11
LOC PNC Bank 11/01/05 4.00 675,000 A1
1,000,000 Pennsylvania HEFA RB (Carnegie Mellon University) - Series B 11/01/27 3.70 1,000,000 A1+
100,000 Pennsylvania State EDA (B&W Ebensburg Project)
LOC Swiss Bank Corp. 12/01/11 3.75 100,000 VMIG-1
1,100,000 Pennsylvania State Higher Education Assistance Agency
Student Loan 07/01/18 3.80 1,100,000 VMIG-1 A1+
1,000,000 Quakertown, PA Hospital Group Pooled RB
LOC First National Bank of Chicago 07/01/05 3.70 1,000,000 VMIG-1
800,000 Sewickley Valley Hospital Authority, PA RN
(D.T. Watson Rehabilitation Hospital)
LOC PNC Bank 10/01/97 4.38 800,000 P1 A1
----------- ----------
20,650,000 Total Other Variable Rate Demand Instruments 20,650,000
----------- ----------
<CAPTION>
Put Bonds (d) (6.59%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,700,000 Alleghany County, PA
LOC Canadian Imperial Bank of Commerce 11/07/96 3.75% $ 2,700,000 P1 A1
----------- ----------
2,700,000 Total Put Bonds 2,700,000
----------- ----------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
31
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF NET ASSETS (CONTINUED)
NOVEMBER 30, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Tax Exempt Commercial Paper (14.64%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,400,000 Alleghany County, PA IDA PCRB
LOC Norinchukin Bank, Ltd. 12/07/95 4.15% $ 2,400,000 P1 A1
1,000,000 Beaver County, PA IDA PCRB (Duquesne Light Company)
LOC Union Bank of Switzerland 02/09/96 3.80 1,000,000 VMIG-1 A1+
1,000,000 City of Philadelphia, PA Gas Works - Series B
LOC Canadian Imperial Bank of Commerce 02/22/96 3.75 1,000,000 P1 A1+
800,000 Venango County, PA IDA RB (Scrubgrass Project) - Series A
LOC National Westminster Bank PLC 12/13/95 3.85 800,000 P1 A1+
800,000 Venango County, PA IDA RB (Scrubgrass Project) - Series B
LOC National Westminster Bank PLC 02/12/96 3.80 800,000 P1 A1+
----------- ------------
6,000,000 Total Tax Exempt Commercial Paper 6,000,000
----------- ------------
<CAPTION>
Variable Rate Demand Instruments -
Private Placements (c) (7.32%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 3,000,000 Pennsylvania Economic Development
Financing Authority - Series 1992E (b)
LOC First National Bank of Maryland 12/01/17 4.32% $ 3,000,000
----------- ------------
3,000,000 Total Variable Rate Demand Instruments - Private Placements 3,000,000
----------- ------------
Total Investments (97.88%) (Cost $40,110,075+) 40,110,075
Cash and Other Assets, Net of Liabilities (2.12%) 870,126
------------
Net Assets (100.00%), 40,981,143 Shares Outstanding (Note 3) $ 40,980,201
============
Net Asset Value, offering and redemption price per share $ 1.00
============
+ Aggregate cost for federal income tax purposes is identical.
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
32
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF NET ASSETS (CONTINUED)
NOVEMBER 30, 1995
===============================================================================
FOOTNOTES:
(a) The ratings noted for variable rate demand instruments are those of the
bank whose letter of credit secures such instruments or guarantor of the
bond. P1 and A1+ are the highest ratings assigned for tax exempt commercial
paper.
(b) Securities that are not rated have been determined by the Fund's Board of
Trustees to be of comparable quality to the rated securities in which the
Fund may invest.
(c) Securities payable on demand at par including accrued interest (usually
with seven days notice) and where indicated are 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 for the put bonds is the next put date.
<TABLE>
<CAPTION>
KEY:
<S> <C> <C> <C> <C> <C>
EDA = Economic Development Authority PCRB = Pollution Control Revenue Bond
HEFA = Health & Education Finance Authority RB = Revenue Bond
HDA = Hospital Development Authority RN = Revenue Note
HRB = Hospital Revenue Bond TRAN = Tax and Revenue Anticipation Note
IDA = Industrial Development Authority
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
33
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1995
===============================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Income:
Interest................................................................................ $ 1,569,689
------------
Expenses: (Note 2)
Investment management fee............................................................... 155,535
Administration fee...................................................................... 77,767
Distribution fee........................................................................ 97,209
Custodian, shareholder servicing and related shareholder expenses....................... 55,166
Legal, compliance and filing fees....................................................... 11,933
Audit and accounting.................................................................... 51,809
Trustees' fees.......................................................................... 6,861
Amortization of organization expenses................................................... 9,848
Other................................................................................... 3,052
------------
Total expenses........................................................................ 469,180
Fees waived........................................................................... ( 238,372)
------------
Net expenses.......................................................................... 230,808
------------
Net investment income....................................................................... 1,338,881
<CAPTION>
REALIZED GAIN (LOSS) ON INVESTMENTS
<S> <C>
Net realized gain (loss) on investments..................................................... 707
------------
Increase in net assets from operations...................................................... $ 1,339,588
============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
34
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED NOVEMBER 30, 1995 AND 1994
===============================================================================
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income......................................... $ 1,338,881 $ 963,160
Net realized gain (loss) on investments...................... 707 3,570
--------------- --------------
Increase in net assets from operations............................ 1,339,588 966,730
Dividends to shareholders from net investment income.............. ( 1,338,881)* ( 963,160)*
Capital share transactions (Note 3)............................... ( 2,579,953) 4,738,804
--------------- --------------
Total increase (decrease)................................. ( 2,579,246) 4,742,374
Net assets:
Beginning of year............................................. 43,559,447 38,817,073
--------------- --------------
End of year................................................... $ 40,980,201 $ 43,559,447
=============== ==============
* Designated as exempt-interest dividends for federal income tax purposes.
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
35
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. Summary of Accounting Policies.
Pennsylvania Daily Municipal Income Fund, a Massachusetts business trust, is a
no-load, non-diversified, open-end management investment company registered
under the Investment Company Act of 1940. Its financial statements are prepared
in accordance with generally accepted accounting principles for investment
companies as follows:
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 Trustees.
d) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis.
2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management L.P. (Manager), equal to .40% of the Fund's
average daily net assets. The Manager is required to reimburse the Fund for its
expenses (exclusive of interest, taxes, brokerage, and extraordinary expenses)
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 November 30, 1995.
Pursuant to an Administrative Services Contract the Fund pays to the Manager an
annual fee of .20% of the Fund's average daily net assets not in excess of $1.25
billion, plus .19% of such assets in excess of $1.25 billion but not in excess
of $1.5 billion, plus .18% of such assets in excess of $1.5 billion.
The Manager is a wholly-owned subsidiary of New England Investment Companies,
L.P. ("NEIC"). On August 16, 1995, New England Mutual Life Insurance Company
("The New England"), the owner of NEIC's general partner and a majority owner of
the limited partnership interest in NEIC, entered into an agreement to merge
with Metropolitan Life Insurance Company ("MetLife"), with MetLife to be the
survivor of the merger. The merger is subject to several conditions, including
the required approval, by shareholders of the Fund of a proposed new investment
advisory agreement, intended to take effect at the time of the merger. The new
agreement will be substantially similar to the existing agreement.
- -------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
2. Investment Management Fees and Other Transactions with Affiliates
(Continued).
Pursuant to a distribution and service plan adopted under Securities and
Exchange Commission Rule 12b-1, the Fund and Reich & Tang Distributors L.P.,
(the Distributor), an affiliate of the Manager, have entered into a Distribution
Agreement and a Shareholder Servicing Agreement. For its services under the
Shareholder Servicing Agreement, the Distributor receives from the Fund a fee
equal to .25% of the Fund's average daily net assets. There were no additional
expenses borne by the Fund pursuant to the Distribution Plan.
For the year ended November 30, 1995 the Manager voluntarily waived investment
management fees and administration fees and the Distributor voluntarily waived
shareholder servicing fees of $63,396, $77,767 and $97,209, 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 "Custodian,
shareholder servicing and related shareholder expenses" are fees of $19,354 paid
to Fundtech Services L.P., an affiliate of the Manager, as servicing agent for
the Fund.
3. Capital Stock.
At November 30, 1995, an unlimited number of shares of beneficial interest ($.01
par value) were authorized and capital paid in amounted to $40,981,143.
Transactions in capital stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>
Year Year
Ended Ended
November 30, 1995 November 30, 1994
----------------- -----------------
<S> <C> <C>
Sold........................................ 125,004,714 111,398,451
Issued on reinvestment of dividends......... 1,130,639 686,315
Redeemed.................................... ( 128,715,306) ( 107,345,962)
---------------- ---------------
Net increase (decrease)..................... ( 2,579,953) 4,738,804
================ ===============
</TABLE>
4. Concentration of Credit Risk.
The Fund invests primarily in obligations of political subdivisions of the State
of Pennsylvania and, accordingly, is subject to the credit risk associated with
the non-performance of such issuers. Approximately 65% 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.
- -------------------------------------------------------------------------------
37
<PAGE>
- -------------------------------------------------------------------------------
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
5. Sales of Securities.
Accumulated undistributed realized losses at November 30, 1995 amounted to $942
which represents tax basis capital losses which may be carried forward to offset
future gains through November 30, 2001.
6. Selected Financial Information.
Reference is made to page 3 of the Prospectus for Selected Financial
Information.
- -------------------------------------------------------------------------------
38
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits.
(a) Financial Statements.
Included in Prospectus (Part A):
(1) Financial Highlights
(2) Table of Fees and Expenses
Included in Statement of Additional Information (Part B):
(1) Report of McGladrey & Pullen LLP, independent certified public
accountants, dated December 26, 1995.
(2) Statement of Net Assets (audited), dated December 26, 1995.
(3) Statement of Operations (audited), dated December 26, 1995.
(4) Statement of Changes in Net Assets (audited) as of December 26,
1995.
(5) Notes to Financial Statements.
(b) Exhibits.
* (1) Declaration of Trust of the Registrant.
* (2) By-laws of the Registrant.
(3) Not applicable.
(4) Not applicable.
** (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 filed as Exhibit 8 herein.
(9) Not applicable.
* (10.1) Consent of Messrs. Battle Fowler LLP to the use of their name
under the heading "Federal Income Taxes" and "Investment
Objectives, Policies and Risks" in the Prospectus.
- --------------------
* Filed with Pre-Effective Amendment No. 1 to Registration Statement No.
33-48014 on November 13, 1992, and is incorporated herein by reference.
** Filed with Post-Effective Amendment No. 2 to Registration Statement No.
33-48014 on Janaury 21, 1994, and is incorporated herein by reference.
C-1
<PAGE>
* (10.2) Opinion of Dechert, Price & Rhoads as to the legality of the
securities being registered, and as to Pennsylvania Law,
including their consent to the filing thereof and to the use of
their name under the heading "Pennsylvania Income Taxes" in the
Prospectus.
(11) Consent of Independent Certified Public Accountants filed as
Exhibit 11 herein.
(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 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.
** (15.3) Amended Shareholder Servicing and Administration Agreement between
the Registrant and Reich & Tang Distributors L.P.
(15.4) Administrative Services Agreement between the Registrant and Reich
& Tang Asset Management L.P. filed as exhibit 15.4 herein.
(16) Powers of Attorney of Messrs. Straniere, Wong, and Mellon (filed
with Post-Effective Amendment No. 1 to Registration Statement on
Form N-1A (File Nos. 33-48014 and 811-6681) filed on November 13,
1992, and incorporated herein by reference), and Power of Attorney
for Mr. Steven W. Duff (filed with Post-Effective Amendement No. 3
to Registration Statement on Form N-1A (File Nos. 33-48014 and
811-6681) filed on March 29, 1995 and incorporated herein by
reference).
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 February 29, 1996
-------------- -----------------------
Common Stock
(par value $.001) 1,436
ITEM 27. Indemnification.
Registrant incorporates herein by reference to Item 27 of the Registration
Statement filed with the Commission on December 18, 1990.
- --------------------
* Filed with Pre-Effective Amendment No. 1 to said Registration Statement No.
33-48014 on November 13, 1992, and is incorporated herein by reference.
** Filed with Post-Effective Amendment No. 2 to Registration Statement No.
33-48014 on Janaury 21, 1994, 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 Mutual Life Insurance Company, ("The New England") of which New
England Investment Companies, Inc. ("NEIC") is an indirect wholly-owned
subsidiary, owns approximately 68.1% of the outstanding partnership units of New
England Investment Companies, L.P. ("NEICLP) and Reich & Tang, Inc. owns
approximately 22.8% of the outstanding partnership units of NEICLP. NEICLP is
the limited partner and owner of a 99.5% interest in Reich & Tang Asset
Management L.P. ("RTAMLP"). Reich & Tang Asset Management, Inc. ("RTAM") serves
as the sole general partner and owner of the remaining .5% interest of RTAMLP
and serves as the sole general partner of Reich & Tang Distributors L.P. RTAMLP
serves as the sole limited partner of the Distributor.
Registrant's investment adviser, RTAMLP, is a registered investment
adviser. RTAMLP's investment advisory clients include California Daily Tax Free
Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free
Income Fund, Inc., Cortland Trust, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., 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., registered investment companies whose addresses are 600 Fifth
Avenue, New York, New York 10020, which invests principally in equity
securities, and Reich & Tang Government Securities Trust, a registered
investment company whose address is 600 Fifth Avenue, New York, New York 10020,
which invests solely in securities issued or guaranteed by the United States
Government. In addition, RTAMLP is the sole general partner of Alpha Associates,
August Associates, Reich & Tang Minutus 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, L.P. ("Loomis") and Back Bay Advisors, L.P.
("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
Reich & Tang Asset Management Inc. 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
Chairman of Reich & Tang Government Securities Trust, 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., Reich & Tang Government Securities Trust 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., Reich & Tang Government Securities Trust,
Tax Exempt Proceeds Fund, Inc. and Short Term Income Fund, Inc. and is Vice
President and Treasurer of Cortland Trust, Inc.
C-4
<PAGE>
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., Delafield 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., North
Carolina Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Reich &
Tang Government Securities Trust, 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.
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 President and
Trustee
Bernadette N. Finn Vice President - Compliance Secretary
and Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Vice President and Treasurer
Treasurer
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 Reich & Tang
Asset Management L.P., 600 Fifth Avenue, New York, New York 10020, the
Registrant's manager; and at Investors Fiduciary Trust Company, 127 West 10th
Street, Kansas City, Missouri 64105, the Registrant's custodian.
ITEM 31. Management Services.
Not applicable.
ITEM 32. Undertaking.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
(g) The Registrant undertakes to call a meeting of its shareholders for the
purpose of voting on the question of removal of a trustee or trustees
when requested to do so by the holders of at least 10% of the
Registrant's outstanding shares of beneficial interest, and in
connection with such meeting will comply with the shareholders
communications s provisions of Section 16(c) of the Investment Company
Act of 1940.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it has
met all of the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this 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 25th day of March, 1996.
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
By: /s/ Bernadette N. Finn
Bernadette N. Finn
Secretary
Pursuant to the requirements of the Securities Act of 1933, this 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
/s/Steven W. Duff President and March 25, 1996
Steven W. Duff Trustee
(2) Principal Financial and
Accounting Officer
/s/ Richard De Sanctis
Richard De Sanctis Treasurer March 25, 1996
(3) Majority of Directors
W. Giles Mellon (Trustee)*
Robert Straniere (Trustee)*
Yung Wong (Trustee)*
By: /s/ Bernadette N. Finn March 25, 1996
Bernadette N. Finn
Attorney-in-Fact*
* Powers of Attorney filed as Exhibits 16 with Post-Effective Amendment No. 1
to said Registration Statement on November 13, 1992, and with Post-Effective
Amendment No. 3 to said Registration Statement on March 29, 1995 and are
incorporated herein by reference.
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 December 26, 1995, on the
financial statements referred to therein in Post-Effective Amendment No. 5 to
the Registration Statement on Form N-1A, File No. 33-48014 of Pennsylvania Daily
Municipal Income Fund, 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
March 16, 1996
EXHIBIT 15.4
ADMINISTRATIVE SERVICES CONTRACT
PENNSYLVANIA DAILY MUNICIPAL INCOME FUND
the "Fund"
New York, New York
00
December 1, 1995
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 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 as our administrator (the "Administrator")
to provide all management and administrative services reasonably necessary for
our operation, other than those services you provide to us pursuant to the
Investment Management Contract. The services to be provided by you shall include
but not be limited to those enumerated on Exhibit A hereto. The personnel
providing these services may be your employees or employees of your affiliates
or of other organizations. You shall make periodic reports to the Fund's Board
of Directors in the performance of your obligations under this Agreement and the
execution of your duties hereunder is subject to the general control of the
Board of Directors.
b. 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. While this agreement is in effect, you or
persons affiliated with you, other than us ("your affiliates"),
<PAGE>
will provide persons satisfactory to our Board of Directors to be elected or
appointed officers or employees of our corporation. These shall be a president,
a secretary, a treasurer, and such additional officers and employees as may
reasonably be necessary for the conduct of our business.
c. You or your affiliates will also provide persons, who may be
our officers, to (i) supervise the performance of bookkeeping and related
services and calculation of net asset value and yield by our bookkeeping agent,
(ii) prepare reports to and the filings with regulatory authorities, and (iii)
perform such clerical, other office and shareholder services for us as we may
from time to time request of you. Such personnel may be your employees or
employees of your affiliates or of other organizations. Notwithstanding the
preceding, you shall not be required to perform any accounting services not
expressly provided for herein.
d. You or your affiliates will also furnish us such administrative
and management supervision and assistance and such office facilities 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 or 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 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.
4. In consideration of the foregoing we will pay you an annual fee of .21%
of the Fund's average daily net assets not in excess of $1.25 billion, plus .20%
of such assets in excess of $1.25 billion but not in excess of $1.5 billion,
plus .19% of
<PAGE>
such assets in excess of $1.5 billion. 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 we may agree in
writing. You may use any portion of this fee for distribution of our shares, or
for making payments to organizations whose customers or clients are our
stockholders. You may waive yourright to any fee to which you are entitled
hereunder, provided such waiver is delivered to us in writing.
5. This Agreement will become effective on the date hereof and shall
continue in effect until November 30, 1995 and thereafter for successive
twelve-month periods (computed from each December 1), provided that such
continuation is specifically approved at least annually by our Board of
Directors and 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, of any such person who is party
to this Agreement. This Agreement may be terminated at any time, without the
payment of any penalty, (i) by vote of a majority of our outstanding voting
securities, as defined in the 1940 Act, or (ii) by a vote of a majority of our
entire Board of Directors, on sixty days' written notice to you, or (iii) by you
on sixty days' written notice to us.
6. 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.
7. 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 officers, directors or employees 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 any other corporation,
firm, individual or association.
8. This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the 1940 Act.
<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,
PENNYSLVANIA DAILY TAX FREE INCOME FUND
By: /s/ Bernadette N. Finn
ACCEPTED: December 1, 1995
REICH & TANG ASSET MANAGEMENT L.P.
By: REICH & TANG ASSET MANAGEMENT, INC., General Partner
By: /s/ Lorraine C. Hysler
<PAGE>
Exhibit A
Administration Services To Be Performed
by Reich & Tang Asset Management L.P.
Administration Services
1. In conjunction with Fund counsel, prepare and file all Post-Effective
Amendments to the Registration Statement, all state and federal tax
returns and all other regulatory filings.
2. In conjunction with Fund counsel, prepare and file all Blue Sky
filings, reports and renewals.
3. Coordinate, but not pay for, required Fidelity Bond and Trustees and
Officers Insurance (if any) and monitor their compliance with
Investment Company Act.
4. Coordinate the preparation and distribution of all materials for
Trustees, including the agenda for meetings and all exhibits thereto,
and actual and projected quarterly summaries.
5. Coordinate the activities of the Fund's Manager, Custodian, Legal
Counsel and Independent Accountants.
6. Prepare and file all periodic reports to shareholders and proxies and
provide support for shareholders meetings.
7. Monitor daily and periodic compliance with respect to all requirements
and restrictions of the Investment Company Act, the Internal Revenue
Code and the Prospectus.
8. Monitor daily the Fund's bookkeeping services agent's calculation of
all income and expense accruals, sales and redemptions of capital
shares outstanding.
9. Evaluate expenses, project future expenses, and process payments of
expenses.
10. Monitor and evaluate performance of accounting and accounting related
services by Fund's bookkeeping services agent. Nothing herein shall be
construed to require you to perform any accounting services not
expressly provided for in this Agreement.
<TABLE> <S> <C>
<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> 0000888130
<NAME> Pennsylvania Daily Municipal Income Fund
<S> <C>
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 40110075
<INVESTMENTS-AT-VALUE> 40110075
<RECEIVABLES> 329372
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 616957
<TOTAL-ASSETS> 41056404
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76203
<TOTAL-LIABILITIES> 76203
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40981143
<SHARES-COMMON-STOCK> 40981143
<SHARES-COMMON-PRIOR> 43561097
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 941
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 40980201
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1569689
<OTHER-INCOME> 0
<EXPENSES-NET> 230808
<NET-INVESTMENT-INCOME> 1338881
<REALIZED-GAINS-CURRENT> 708
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1339589
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1338881
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 125004714
<NUMBER-OF-SHARES-REDEEMED> 128715306
<SHARES-REINVESTED> 1130638
<NET-CHANGE-IN-ASSETS> 2579246
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155535
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 469180
<AVERAGE-NET-ASSETS> 38883602
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .03
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
