Registration No. 33-48014
Rule 497(c)
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PENNSYLVANIA 600 FIFTH AVENUE
DAILY MUNICIPAL NEW YORK, N.Y. 10020
INCOME FUND (212) 830-5220
Class A Shares; Class B Shares
PROSPECTUS
March 31, 1999
A money market fund whose investment objectives are to seek as high a level of
current income, exempt from Federal income tax and to the extent possible from
Pennsylvania income tax, as is believed to be consistent with preservation of
capital, maintenance of liquidity and stability of principal.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
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TABLE OF CONTENTS
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TABLE OF CONTENTS
2 Risk/Return Summary: Investments, Risks, 7 Management, Organization and Capital Structure
and Performance 8 Shareholder Information
4 Fee Table 16 Distribution Arrangements
5 Investment Objectives, Principal Investment 18 Financial Highlights
Strategies and Related Risks
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I. RISK/RETURN SUMMARY: INVESTMENTS, RISKS, AND PERFORMANCE
Investment Objectives
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The Fund seeks as high a level of current income, exempt from Federal income
tax and to the extent possible from Pennsylvania income tax, as is believed to
be consistent with preservation of capital, maintenance of liquidity, and
stability of principal. There can be no assurance that the Fund will achieve its
investment objectives.
Principal Investment Strategies
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The Fund intends to achieve its investment objectives by investing
principally in short-term, high quality, debt obligations of:
(i) The Commonwealth of Pennsylvania, and its political subdivisions,
(ii) Puerto Rico
and other United States Territories, and their political subdivisions, and
(iii)Other states.
These debt obligations are collectively referred to throughout this
Prospectus as Municipal Obligations.
The Fund is a money market fund and seeks to maintain an investment
portfolio with a dollar-weighted average maturity of 90 days or less, to value
its investment portfolio at amortized cost and to maintain a net asset value of
$1.00 per share.
The Fund intends to concentrate (i.e. 25% or more of the Fund's total
assets) in Pennsylvania Municipal Obligations, including Participation
Certificates therein. Participation Certificates evidence ownership of an
interest in the underlying Municipal Obligations, purchased from banks,
insurance companies, or other financial institutions.
Principal Risks
o Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.
o The value of the Fund's shares and the securities held by the Fund can each
decline in value.
o An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other governmental agency.
o Because the Fund intends to concentrate in Pennsylvania Municipal
Obligations, including participation certificates therein, investors should
also consider the greater risk of the Portfolio's concentration versus the
safety that comes with a less concentrated investment portfolio.
o In addition, investment in the Fund should be made with an understanding of
the risk which an investment in Pennsylvania Municipal Obligations may
entail. Payment of interest and preservation of capital are dependent upon
the continuing ability of Pennsylvania issuers and/or obligors of state,
municipal and public authority debt obligations to meet their payment
obligations. Risk factors affecting the State of Pennsylvania are described
in "Pennsylvania Risk Factors" in the Statement of Additional Information.
Risk/Return Bar Chart and Table
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The following bar chart and table may assist you in your decision to invest
in the Fund. The bar chart shows the change in the annual returns of the Fund
over the last six calendar years. The table shows the average annual total
returns for the last one and five year periods. The table also includes the
Fund's average annual total return since inception. While analyzing this
information, please note that the Fund's past performance is not an indicator of
how the Fund will perform in the future. The Fund's current 7-day yield may be
obtained by calling the Fund toll-free at 1-800- 221-3079.
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Pennsylvania Daily Municipal Icncome Fund - Class A Shares (1) (2)
[GRAPHIC OMITTED]
Calendar Year % Total Return
1993 2.25%
1994 2.56%
1995 3.50%
1996 2.97%
1997 3.06%
1998 2.91%
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(1) The Fund's highest quarterly return was 0.91% for the quarter ended June
30, 1995; the lowest quarterly return was 0.51% for the quarter ended March
31, 1994.
(2) Participating Organizations may charge a fee to investors for purchasing
and redeeming shares. Therefore, the net return to such investors may be
less than if they had invested in the Fund directly.
Average Annual Total Returns - Pennsylvania Daily Municipal Income Fund
Class A Class B
For the period ended December 31, 1998
One Year 2.91% 3.21%
Five Years 3.00% N/A
Average Annual Total Return
Since Inception 2.87% 3.27%
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FEE TABLE
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Class A Class B
Management Fees............................ 0.40% 0.40%
Distribution and Service (12b-1) Fees...... 0.25% 0.00%
Other Expenses............................. 1.23% 1.23%
Administration Fees...................... 0.21% 0.21%
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Total Annual Fund Operating Expenses....... 1.88% 1.63%
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The Manager has voluntarily waived a portion of the Management Fee and
Administration Fee and reimbursed portion of the Fund's operating expenses with
respect to both Class A and B Shares during the past year. After such waivers,
the Management Fee, with respect to both Class A and B shares, was 0.02%. The
Administration Fee, with respect to Both Class A and B shares, was 0% and Other
Expenses were 0.43%. The actual Total Annual Fund Operating Expenses for Class
A were 0.70% and for Class B were 0.45%. This fee waiver arrangement and
reimbursement may be terminated at any time at the option of the Manager.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other money market funds.
Assume that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. Also assume that
your investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A: $191 $591 $1016 $2200
Class B: $166 $514 $ 886 $1932
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II. INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
Investment Objectives
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The Fund is a short-term, tax-exempt money market fund whose investment
objectives are to seek as high a level of current income exempt from Federal
income tax and, to the extent possible from Pennsylvania income taxes,
consistent with preserving capital, maintaining liquidity and stabilizing
principal.
The investment objectives of the Fund described in this section may only be
changed upon the approval of the holders of a majority of the outstanding shares
of the Fund that would be affected by such a change.
Principal Investment Strategies
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Generally
The Fund will invest primarily (i.e., at least 80%) in short-term, high
quality, debt obligations which include:
(i) Pennsylvania Municipal Obligations issued by or on behalf of the
Commonwealth of Pennsylvania or any Pennsylvania local governments, or
their instrumentalities, authorities or districts;
(ii) Territorial Municipal Obligations issued by or on behalf of Puerto Rico and
the Virgin Islands or their instrumentalities, authorities, agencies and
political subdivisions; and
(iii)Municipal Obligations issued by or on behalf of other states, their
authorities, agencies, instrumentalities and political subdivisions. These
debt obligations are collectively referred to throughout this Prospectus as
Municipal Obligations.
The Fund will also invest in Participation Certificates in Municipal
Obligations. These Participation Certificates are purchased by the Fund from
banks, insurance companies or other financial institutions and in the opinion of
Battle Fowler LLP, counsel to the Fund, cause the Fund to be treated as the
owner of the underlying Municipal Obligations for Federal income tax purposes.
The Fund may invest more than 25% of its assets in (i) Participation
Certificates in Pennsylvania Municipal Obligations and (ii) other Pennsylvania
Municipal Obligations.
Although the Fund will attempt to invest 100% of its total assets in
Municipal Obligations and Participation Certificates, the Fund reserves the
right to invest up to 20% of its total assets in taxable securities whose
interest income is subject to regular Federal, state and local income tax. The
kinds of taxable securities in which the Fund may invest are limited to
short-term, fixed income securities as more fully described in "Taxable
Securities" in the Statement of Additional Information.
The Fund may also purchase securities and Participation Certificates whose
interest income may be subject to the Federal alternative minimum tax and these
investments would be included in the 20% that may be invested in taxable
securities.
To the extent 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 Pennsylvania income tax.
The Fund will invest at least 65% of its total assets in Pennsylvania
Municipal Obligations, although the exact amount may vary from time to time. As
a temporary defensive measure the Fund may, from time to time, invest in
securities that are inconsistent with its principal investment strategies in an
attempt to respond to adverse market, economic, political or other conditions as
determined by the Manager. Such a temporary defensive position may cause the
Fund to not achieve its investment objectives.
With respect to 75% of its total assets, the Fund shall invest not more than
5% of its total assets in Municipal Obligations or Participation Certificates
issued by a single issuer. The Fund shall not invest
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more than 5% of its total assets in Municipal Securities or Participation
Certificates issued by a single issuer unless the Municipal Obligations are of
the highest quality.
With respect to 75% of its total assets, the Fund shall invest not more than
10% of its total assets in Municipal Obligations or Participation Certificates
backed by a demand feature or guarantee from the same institution.
The Fund's investments may also include "when-issued" Municipal Obligations
and stand-by commitments.
The Fund's investment manager considers the following factors when buying
and selling securities for the portfolio: (i) availability of cash, (ii)
redemption requests,(iii) yield management, and (iv) credit management.
In order to maintain a share price of $1.00, the Fund must comply with
certain industry regulations. The Fund will only invest in securities which are
denominated in United States dollars. Other requirements pertain to the maturity
and credit quality of the securities in which the Fund may invest. The Fund will
only invest in securities which have or are deemed to have a remaining maturity
of 397 days or less. Also, the average maturity for all securities contained in
the Fund, on a dollar-weighted basis, will be 90 days or less.
The Fund will only invest in either securities which have been rated (or
whose issuers have been rated) in the highest short-term rating category by
nationally recognized statistical rating organizations, or are unrated
securities which have been determined by the Fund's Board of Trustees to be of
comparable quality.
Subsequent to its purchase by the Fund, the quality of an investment may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. If this occurs, the Board of Trustees of the Fund shall
reassess the security's credit risks and shall take such action as it determines
is in the best interest of the Fund and its shareholders. Reassessment is not
required, however, if the security is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Trustees is subsequently notified of the Manager's
actions.
For a more detailed description of (i) the securities that the Fund will
invest in, (ii) fundamental investment restrictions, and (iii) industry
regulations governing credit quality and maturity, please refer to the Statement
of Additional Information.
Risks
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The Fund complies with industry-standard requirements on the quality,
maturity and diversification of its investments which are designed to help
maintain a $1.00 share price. A significant change in interest rates or a
default on the Fund's investments could cause its share price (and the value of
your investment) to change.
By investing in liquid, short-term, high quality investments that have high
quality credit support from banks, insurance companies or other financial
institutions (i.e. Participation Certificates and other variable rate demand
instruments), the Fund's management believes that it can protect the Fund
against credit risks that may exist on long-term Pennsylvania Municipal
Obligations. The Fund may still be exposed to the credit risk of the institution
providing the investment. Changes in the credit quality of the provider could
affect the value of the security and your investment in the Fund.
Because of the Fund's concentration in investments in Pennsylvania Municipal
Obligations, the safety of an investment in the Fund will depend substantially
upon the financial strength of Pennsylvania and its political subdivisions.
The primary purpose of investing in a portfolio of Pennsylvania Municipal
Obligations is the special tax treatment accorded Pennsylvania resident
individual investors. Payment of interest and preservation of principal,
however, 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
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those of more diversified portfolios, including out-of-state issues, before
making an investment decision.
Because the Fund may concentrate in Participation Certificates which may be
secured by bank letters of credit or guarantees, an investment in the Fund
should be made with an understanding of the characteristics of the banking
industry and the risks which such an investment may entail. This includes
extensive governmental regulations, changes in the availability and cost of
capital funds, and general economic conditions (see "Variable Rate Demand
Instruments and Participation Certificates" in the Statement of Additional
Information) which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which may be
charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit.
As the Year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Manager is in the process of working with the Fund's service
providers to prepare for the Year 2000. Based on information currently
available, the Manager does not expect that the Fund will incur material costs
to be Year 2000 compliant. Although the Manager does not anticipate that the
Year 2000 issue will have a material impact on the Fund's ability to provide
service at current levels, there can be no assurance that steps taken in
preparation for the Year 2000 will be sufficient to avoid an adverse impact on
the Fund. The Year 2000 Problem may also adversely affect issuers of the
securities contained in the Fund, to varying degrees based upon various factors,
and thus may have a corresponding adverse effect on the Fund's performance. The
Manager is unable to predict what effect, if any, the Year 2000 Problem will
have on such issuers. At this time, however, it is generally believed that
municipal issuers may be more vulnerable to Year 2000 issues or problems than
will be other issuers.
III. MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"). The Manager's principal business office is located at 600 Fifth
Avenue, New York, NY 10020. As of January 31, 1999, the Manager was the
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $13.0 billion. The Manager has been an investment adviser since 1970
and currently is manager of seventeen other registered investment companies and
also advises pension trusts, profit-sharing trusts and endowments.
Pursuant to the Investment Management Contract, the Manager manages the
Fund's portfolio of securities and makes decisions with respect to the purchase
and sale of investments, subject to the general control of the Board of Trustees
of the Fund. Pursuant to the Investment Management Contract, the Fund pays the
Manager a fee equal to .40% per annum of the Fund's average daily net assets for
managing the Fund's investment portfolio and performing related services.
Pursuant to the Administrative Services Contract, the Manager performs clerical,
accounting supervision and office service functions for the Fund. The Manager
provides the Fund with the personnel to perform all other clerical and
accounting type functions not performed by the Manager. For its services under
the Administrative Services Contract, the Fund pays the Manager a fee equal to
.21% per annum of the Fund's average daily net assets.
The Manager, at its discretion, may voluntarily waive all or a portion of
the investment management and the administrative services fee. Any portion of
the total fees received by the Manager may be used to provide shareholder
services and for distribution of Fund shares.
In addition, Reich & Tang Distributors Inc., the Distributor, receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Class A shares of the Fund under the Shareholder Servicing Agreement. The fees
are accrued daily and paid monthly. Investment management fees and operating
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expenses, which are attributable to both Classes of shares of the Fund, will be
allocated daily to each Class of shares based on the percentage of shares
outstanding for each Class at the end of the day.
IV. SHAREHOLDER INFORMATION
The Fund sells and redeems its shares on a continuing basis at their net
asset value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent, who
accepts orders for purchases and redemptions from Participating Organizations
and from investors directly.
Pricing of Fund Shares
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The net asset value of 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 days on which the New York Stock
Exchange is closed for trading. The net asset value of a Class is computed by
dividing the value of the Fund's net assets for such Class (i.e., the value of
its securities and other assets less its liabilities, including expenses payable
or accrued, but excluding capital stock and surplus) by the total number of
shares outstanding for such Class. The Fund intends to maintain a stable net
asset value at $1.00 per share although there can be no assurance that this will
be achieved.
The Fund's portfolio securities are valued at their amortized cost in
compliance with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost
valuation involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium. If fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of 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.
Shares are 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. In order to maximize earnings on its portfolio, the Fund normally has its
assets as fully invested as is practicable. Many securities in which the Fund
invests require the immediate settlement in funds of Federal Reserve member
banks on deposit at a Federal Reserve Bank (commonly known as "Federal Funds").
Fund shares begin accruing income on the day the shares are issued to an
investor. The Fund reserves the right to reject any purchase order for its
shares. Certificates for Fund shares will not be issued to an investor.
Purchase of Fund Shares
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Investors purchasing shares through an account at a Participating
Organization become Class A shareholders. "Participating Organizations" are
securities brokers, banks and financial institutions or other industry
professionals or organizations which have entered into shareholder servicing
agreements with the Distributor with respect to investment of their customer
accounts in the Fund. All other investors, and investors who have accounts with
Participating Organizations but do not wish to invest in the Fund through them,
may invest in the Fund directly as Class B shareholders of the Fund. Class B
shareholders do 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 which, because
they may not be legally permitted to receive such as fiduciaries, do not receive
compensation from the Distributor or the Manager.
The minimum initial investment in the Fund for both classes of shares is (i)
$1,000 for purchases through Participating Organizations - this may be satisfied
by initial investments aggregating $1,000 by a Participating Organization on
behalf of their customers whose initial investments are less than $1,000; (ii)
$1,000 for securities brokers, financial institutions and other industry
professionals that are not Participating Organizations and (iii) $5,000 for all
other investors. 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.
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Each shareholder, except certain shareholders who invest through accounts at
Participating Organizations ("Participant Investors"), will receive a
personalized monthly statement from the Fund listing (i) the total number of
Fund shares owned as of the statement closing date, (ii) purchase and
redemptions of Fund shares and (iii) the dividends paid on Fund shares
(including dividends paid in cash or reinvested in additional Fund shares).
The Fund does not accept a purchase order until an investor's payment has
been converted into Federal Funds and is received by the Fund's transfer agent.
Orders accompanied by Federal Funds and received after 12 noon, New York City
time, on a Fund Business Day will result in the issuance of shares on the
following Fund Business Day.
Investments Through Participating
Organizations - Purchase of Class A Shares
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Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. 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 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. In
addition, Participating Organizations offering purchase and redemption
procedures similar to those offered to shareholders who invest in the Fund
directly, may impose charges, limitations, minimums and restrictions in addition
to or different from those applicable to shareholders who invest in the Fund
directly. Accordingly, the net yield to investors who invest through
Participating Organizations may be less than by investing in the Fund directly.
A Participant Investor should read this Prospectus in conjunction with the
materials provided by the Participating Organization describing the procedures
under which Fund shares may be purchased and redeemed through the Participating
Organization.
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 only if 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 result in share issuance the following Fund Business Day.
Participating Organizations are responsible for instituting procedures to insure
that purchase orders by their respective clients are processed expeditiously.
Initial Direct Purchases of Class B Shares
Investors who wish to invest in the Fund directly may obtain a current
prospectus and the subscription order form necessary to open an account by
telephoning the Fund at the following numbers:
Within New York 212-830-5280
Outside New York (TOLL FREE) 800-221-3079
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
Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
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will normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's purchase order will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of
money among banks, investors should first obtain a new account number by
telephoning the Fund at 212-830-5280 (within New York) or at 1-800-221-3079
(outside New York) and then instruct a member commercial bank to wire money
immediately to:
Investors Fiduciary Trust Company
ABA # 101003621
Reich & Tang Funds
DDA # 890752-954-6
For Pennsylvania Daily Municipal
Income Fund
Account of (Investor's Name)
Account #
SS#/Tax ID#
The investor should then promptly complete and mail the subscription order
form.
Investors planning to wire funds should instruct their bank early in the day
so the wire transfer can be accomplished before 12 noon, New York City time, on
the same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.
Personal Delivery
Deliver a check made payable to "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
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You may purchase shares of the Fund (minimum of $100) by having salary,
dividend payments, interest payments or any other payments designated by you,
federal salary, social security, or certain veteran's, military or other
payments from the federal government, automatically deposited into your Fund
account. You can also have money debited from your checking account. To enroll
in any one of these programs, you must file with the Fund a completed EFT
Application, Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form
for each type of payment that you desire to include in the Privilege. The
appropriate form may be obtained from your broker or the Fund. You may elect at
any time to terminate your participation by notifying in writing the appropriate
depositing entity and/or federal agency. Death or legal incapacity will
automatically terminate your participation in the Privilege. Further, the Fund
may terminate your participation upon 30 days notice to you.
Subsequent Purchases of Shares
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Subsequent purchases can be made 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 07101-3232
There is a $100 minimum for subsequent purchases of shares. All payments
should clearly indicate the shareholder's account number.
Provided that the information on the subscription form on file with the Fund
is still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during the year the shareholder's account is
closed or during the following calendar year.
Redemption of Shares
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A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share of each
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Class upon receipt by the Fund's transfer agent of the redemption order (and any
supporting documentation which it may require). Normally, payment for redeemed
shares is made on the same Fund Business Day after the redemption is effected,
provided the redemption request is received prior to 12 noon, New York City
time. However, redemption payments will not be effected unless the check
(including a certified or cashier's check) used for investment has been cleared
for payment by the investor's bank, which could take up to 15 days after
investment. Shares redeemed are not entitled to participate in dividends
declared on the day a redemption becomes effective.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures require a signature guarantee.
When a signature guarantee is called for, the shareholder should have
"Signature Guaranteed" stamped under his signature. It should be signed and
guaranteed by an eligible guarantor institution which includes a domestic bank,
a domestic savings and loan institution, a domestic credit union, a member bank
of the Federal Reserve system or a member firm of a national securities
exchange, pursuant to the Fund's transfer agent's standards and procedures.
Written Requests
Shareholders may make a redemption in any amount by sending a written
request to the Fund addressed to:
Pennsylvania Daily Municipal Income Fund
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
All previously issued certificates submitted for redemption must be endorsed
by the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with signature guaranteed.
Normally the redemption proceeds are paid by check and mailed to the
shareholder of record.
Checks
By making the appropriate election on their subscription order form,
shareholders may request a supply of checks which may be used to effect
redemptions from the Class of shares of 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, 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 until the check has
cleared, which can take up to 15 days following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The
Fund reserves the right to impose a charge or impose a different minimum check
amount in the future, if the Board of 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 governing checking accounts.
Checks drawn on a jointly owned account may, at the shareholder's election,
require only one signature. Checks in amounts exceeding the value of the
shareholder's account at the time the check is presented for payment will not be
honored. Since the dollar value of the account changes daily, the total value of
the account may not be determined in advance and the account may not be entirely
redeemed by check. In addition, the Fund reserves the right to charge the
shareholder's account a fee up to $20 for checks not honored as a result of an
insufficient account value, a check deemed not negotiable because it has been
held longer than six months, an unsigned check and/or a post-dated check.
11
<PAGE>
Corporations and other entities electing the checking option are required to
furnish a certified resolution or other evidence of authorization in accordance
with the Fund's normal practices. Individuals and joint tenants are not required
to furnish any supporting documentation. 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.
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.
Telephone
The Fund accepts telephone requests for redemption from shareholders who
elect this option on their subscription order form. The proceeds of a telephone
redemption may be sent to the shareholders at their addresses or, if in excess
of $1,000, to their bank accounts, both as set forth in the subscription order
form or in a subsequent written authorization. The Fund may accept telephone
redemption instructions from any person with respect to accounts of shareholders
who elect this service and thus such shareholders risk possible loss of
principal and interest in the event of a telephone redemption not authorized by
them. The Fund will employ reasonable procedures to confirm that telephone
redemption instructions are genuine, and will require that shareholders electing
such option provide a form of personal identification. Failure by the Fund to
employ such reasonable procedures may cause the Fund to be liable for the losses
incurred by investors due to unauthorized or fraudulent telephone redemptions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5280; outside New York at 1-800-221-3079, and state: (i) the name of the
shareholder appearing on the Fund's records; (ii) the shareholder's account
number with the Fund; (iii) the amount to be withdrawn; (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address; and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time. Proceeds are sent the next Fund Business Day if the
redemption request is received after 12 noon, New York City time. The Fund
reserves the right to terminate or modify the telephone redemption service in
whole or in part at any time and will notify shareholders accordingly.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. Unless other instructions are given
in proper form to the Fund's transfer agent, a check for the proceeds of a
redemption will be sent to the shareholders' address of record. If a shareholder
elects to redeem all the shares of the Fund he owns, all dividends accrued to
the date of such redemption will be paid to the shareholder along with the
proceeds of the redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the SEC determines that trading thereon is restricted. Additional exceptions
include any period during which an emergency (as determined by the SEC) exists
as a result of which disposal by the Fund of its portfolio securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or for such other
period as the SEC may by order permit for the protection of the shareholders of
the Fund.
The Fund has reserved the right to redeem the shares of any shareholder if
the net asset value of all the remaining shares in the shareholder's 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
12
<PAGE>
Participating Organization. The Participating Organization will be responsible
for notifying the Participant Investor of the proposed mandatory redemption.
During the notice period a shareholder or Participating Organization who
receives such a notice may avoid mandatory redemption by purchasing sufficient
additional shares to increase his total net asset value to the minimum amount.
Specified Amount Automatic Withdrawal Plan
- --------------------------------------------------------------------------------
Shareholders may elect to withdraw shares and receive payment from the Fund
of a specified amount of $50 or more automatically on a monthly or quarterly
basis. The monthly or quarterly withdrawal payments of the specified amount are
made by the Fund on the 23rd day of the month. Whenever such 23rd day of a month
is not a Fund Business Day, the payment date is the Fund Business Day preceding
the 23rd day of the month. In order to make a payment, a number of shares equal
in aggregate net asset value to the payment amount are redeemed at their net
asset value on the Fund Business Day immediately preceding the date of payment.
To the extent that the redemptions to make plan payments exceed the number of
shares purchased through reinvestment of dividends and distributions, the
redemptions reduce the number of shares purchased on original investment, and
may ultimately liquidate a shareholder's investment.
The election to receive automatic withdrawal payments may be made at the
time of the original subscription by so indicating on the subscription order
form. The election may also be made, changed or terminated at any later time by
sending a signature guaranteed written request to the transfer agent. Because
the withdrawal plan involves the redemption of Fund shares, such withdrawals may
constitute taxable events to the shareholder but the Fund does not expect that
there will be any realized capital gains.
Dividends and Distributions
- --------------------------------------------------------------------------------
The Fund declares dividends equal to all its net investment income
(excluding capital gains and losses, if any, and amortization of market
discount) on each Fund Business Day and pays dividends monthly. There is no
fixed dividend rate. In computing these dividends, interest earned and expenses
are accrued daily.
Net realized capital gains, if any, are distributed at least annually and in
no event later than 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested,
at no charge, 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.
Because Class A shares bear the service fee under the Fund's 12b-1 Plan, 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.
Exchange Privilege
- --------------------------------------------------------------------------------
Shareholders of the Fund are entitled to exchange some or all of their Class
of shares in the Fund for shares of the same Class of certain other investment
companies which retain Reich & Tang Asset Management L.P. as investment adviser
and which participate in the exchange privilege program with the Fund. If only
one Class of shares is available in a particular exchange fund, the shareholder
of the Fund is entitled to exchange their shares for the shares available in
that exchange fund. Currently the exchange privilege program has been
established between the Fund and California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Georgia Daily Municipal 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., Short Term Income Fund, Inc. and Virginia Daily
Municipal Income Fund, Inc. In the future, the exchange privilege program may be
extended to other investment companies which retain Reich & Tang Asset
Management L.P. as investment adviser or manager.
13
<PAGE>
There is no charge for the exchange privilege or limitation as to frequency
of exchange. The minimum amount for an exchange is $1,000. However, 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 of the same Class may be exchanged
only between 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.
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 telephoning the Fund at
212-830-5220 (within New York) or 1-800-221-3079 (outside New York). The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time.
Tax Consequences
- --------------------------------------------------------------------------------
The purchase of Fund shares will be the purchase of an asset. Dividends
paid by the Fund that are designated by the Fund and derived from Municipal
Obligations and Participation Certificates, will be exempt from regular Federal
income tax, provided the Fund complies with Section 852(b)(5) of the Internal
Revenue Code, but maybe subject to Federal alternative minimum tax. These
dividends are referred to as exempt interest dividends. Exempt interest
dividends derived from obligations issued by or on behalf of the Commonwealth of
Pennsylvania or any Pennsylvania local governments, or their instrumentalities,
authorities or districts will be exempt from Pennsylvania income taxes. Exempt
interest dividends 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, the laws of the United States of America or
the laws of Pennsylvania also should be exempt from Pennsylvania income taxes
provided the Fund complies with Pennsylvania law.
Dividends paid from taxable income, if any, and distributions of any
realized short-term capital gains (from tax-exempt or taxable obligations) are
taxable to shareholders as ordinary income, whether received in cash or
reinvested in additional shares of the Fund.
The Fund does not expect to realize long-term capital gains, and thus does
not contemplate distributing "capital gain dividends" or having undistributed
capital gain income within the meaning of the Code. The Fund will inform
shareholders of the amount and nature of its income and gains in a written
notice mailed to shareholders not later than 60 days after the close of the
Fund's taxable year.
For Social Security recipients, interest on tax-exempt bonds, including
"exempt interest dividends" paid by the Fund, is to be added to adjusted gross
income to determine the amount of Social Security benefits includible in gross
income.
Interest on certain private activity bonds will constitute an item of tax
preference subject to the individual alternative minimum tax. Corporations will
be required to include in alternative minimum taxable income 75% of the amount
by which their adjusted current earnings (including tax-exempt interest) exceeds
their alternative minimum taxable income (determined without this tax item). In
certain cases Subchapter S corporations with accumulated earnings and profits
from Subchapter C years will be subject to a tax on excess "passive investment
income", including tax-exempt interest.
The sale, exchange or redemption of shares will generally be the taxable
disposition of an asset that may result in a taxable gain or loss for the
shareholder if the shareholder receives more or less than it paid for its
shares. An exchange pursuant to the exchange
14
<PAGE>
privilege is treated as a sale on which the shareholder may realize a taxable
gain or loss.
With respect to variable rate demand instruments, including Participation
Certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner of an interest in the underlying Municipal Obligations and that the
interest thereon will be exempt from regular Federal income taxes to the Fund to
the same extent as the interest on the underlying Municipal Obligations. Battle
Fowler LLP has pointed out that the Internal Revenue Service has announced it
will not ordinarily issue advance rulings on the question of the ownership of
securities or participation interests therein subject to a put and could reach a
conclusion different from that reached by counsel.
The United States Supreme Court has held that there is no constitutional
prohibition against the Federal government's taxing the interest earned on state
or other municipal bonds. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Municipal Obligations.
The Fund may invest a portion of its assets in securities that generate
income that is not exempt from Federal or state income tax. Income exempt from
Federal income tax may be subject to state and local income tax.
Pennsylvania Taxes
The following is based upon the advice of Dechert Price & Rhoads, special
Pennsylvania counsel to the Fund.
Pennsylvania Municipal Obligations:
-----------------------------------
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.
Municipal Obligations:
----------------------
The proportion of interest income representing interest income from
Municipal, Obligations distributed to shareholders of the Fund is nontaxable
under the Pennsylvania Corporate Net Income Tax but is taxable under the
Pennsylvania Personal Income Tax and the Philadelphia School District Income
Tax.
The disposition by the Fund of a Municipal Obligation (whether by sale,
exchange, redemption or payment at maturity) will constitute a taxable event to
a shareholder under the Pennsylvania Personal Income Tax and the Pennsylvania
Corporate Net Income Tax. However, the disposition by the Fund of a Municipal
Obligation will not constitute a taxable event to a shareholder under the
Philadelphia School District Income Tax unless the Fund held the Municipal
Obligation for less than six months.
Territorial Obligations:
------------------------
The proportion of interest income representing interest income from
Territorial Obligations distributed to shareholders of the Fund is nontaxable
under the Pennsylvania Corporate Net Income Tax, the Pennsylvania Personal
Income Tax and the Philadelphia School District Income Tax.
15
<PAGE>
The disposition by the Fund of a Territorial Obligation (whether by sale,
exchange, redemption or payment at maturity) will constitute a taxable event to
a shareholder under the Pennsylvania Personal Income Tax and the Pennsylvania
Corporate Net Income Tax. However, the disposition by the Fund of a Territorial
Obligation will not constitute a taxable event to a shareholder under the
Philadelphia School District Income Tax unless the Fund held the Territorial
Obligations for less than six months.
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.
V. DISTRIBUTION ARRANGEMENTS
Rule 12b-1 Fees
- --------------------------------------------------------------------------------
Investors do not pay a sales charge to purchase shares of the Fund. However,
the Fund pays fees in connection with the distribution of shares and for
services provided to the Class A shareholders. The Fund pays these fees from its
assets on an ongoing basis and therefore, over time, the payment of these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
The Fund's Board of Trustees has adopted a Rule 12b-1 distribution and
service plan (the "Plan") and, pursuant to the Plan, the Fund and Reich & Tang
Distributors, Inc. (the "Distributor") have entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to the Class A
shares of the Fund only).
Under the Distribution Agreement, the Distributor serves as distributor of
the Fund's shares. For nominal consideration (i.e., $1.00) and as agent for the
Fund, the Distributor solicits orders for the purchase of the Fund's shares,
provided that any orders will not be binding on the Fund until accepted by the
Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives, with
respect only to the Class A shares, a service fee equal to .25% per annum of the
Class A shares' average daily net assets (the "Shareholder Servicing Fee") for
providing personal shareholder services and for the maintenance of shareholder
accounts. The fee is accrued daily and paid monthly. Any portion of the fee may
be deemed to be used by the Distributor for payments to Participating
Organizations with respect to their provision of such services to their clients
or customers who are shareholders of the Class A shares of the Fund. The Class B
shareholders will not receive the benefit of such services from Participating
Organizations and, therefore, will not be assessed a Shareholder Servicing Fee.
The Plan and the Shareholder Servicing Agreement provide that, in addition
to the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Distributor and Participating Organizations in carrying out their
obligations under the Shareholder Servicing Agreement with respect to Class A
shares, and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts. These payments are limited to a
maximum of .05% per annum of each Class' shares' average daily net assets.
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 costs, and to compensate others, including
Participating Organizations with whom the Distributor has entered into written
agreements, for performing shareholder servicing on behalf of the Class A shares
of the Fund; (ii) to compensate certain Participating Organizations for
providing assistance in distributing the Class A shares of the Fund; and (iii)
to pay the costs of printing and distributing the Fund's prospectus to
prospective investors, and to defray the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including the salaries and/or
commissions of sales personnel in connection
16
<PAGE>
with the distribution of the Fund's Class A shares. The Distributor may also
make payments from time to time from its own resources, which may include the
Shareholding Servicing Fee (with respect to Class A shares) and past profits,
for the purposes enumerated in (i) above. The Distributor will determine the
amount of such payments made pursuant to the Plan, provided that such payments
will not increase the amount which the Fund is required to pay to the Manager
and Distributor for any fiscal year under either the Investment Management
Contract in effect for that year or under the Shareholder Servicing Agreement in
effect for that year.
17
<PAGE>
VI. FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned [or lost] on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McGladrey and Pullen, LLP, whose report, along
with the Fund's financial statements, is included in the annual report, which is
available upon request.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CLASS A Year ended November 30,
- ------- -----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income................. 0.029 0.030 0.030 0.034 0.024
Dividends from net investment income.. (0.029) (0.030) (0.030) (0.034) (0.024)
---------- --------- --------- --------- -------
Net asset value, end of period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............................ 2.95% 3.05% 3.01% 3.50% 2.44%
Ratios/Supplemental Data
Net assets, end of period (000)......... $ 12,873 $ 43,064 $ 36,335 $ 40,980 $ 43,559
Ratios to average net assets:
Expenses.............................. 0.70% 0.70% 0.68% 0.59% 0.49%
Net Investment income................. 2.91% 3.00% 2.97% 3.44% 2.44%
Management, administration fees
and shareholder servicing fees waived 0.59% 0.49% 0.49% 0.61% 0.68%
Expenses reimbursed................... 0.59% -- -- -- --
Expense offsets....................... -- -- 0.01% -- --
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
October 10, 1996
(Commencement of
Class B Year ended November 30, offering) to
1998 1997 November 30, 1996
----------------- ----------------- -----------------
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period.... $ 1.00 $1.00 $1.00
-------------- ---------------- -----------
Income from investment operations:
Net investment income 0.032 0.033 0.005
Less distributions:
Dividends from net investment income.. (0.032) (0.033) (0.005)
----- ----- ------
Net asset value, end of period.......... $ 1.00 $1.00 $1.00
================ ================= ===========
Total Return............................ 3.26% 3.31% 3.25%*
Ratios/Supplemental Data
Net assets, end of period (000)......... $ 933 $ 392 $ 5
Ratios to average net assets:
Expenses................................ 0.45% 0.45% 0.42%*
Net investment income................... 3.13% 3.28% 3.21%*
Management and administration fees waived 0.59% 0.49% 0.27%*
Expenses reimbursed..................... 0.59% -- --
Expense offsets......................... -- -- 0.01%*
* Annualized
</TABLE>
18
<PAGE>
A Statement of Additional Information (SAI) dated March 31, 1999, and the Fund's
Annual and Semi-Annual Reports include additional information about the Fund and
its investments and are incorporated by reference into this prospectus. You may
obtain the SAI and the Annual and Semi-Annual Reports and other material
incorporated by reference without charge by calling the Fund at 1-800-221-3079.
To request other information, please call your financial intermediary or the
Fund.
======================================================
======================================================
A current SAI has been filed with the Securities and Exchange Commission. You
may visit the Securities and Exchange Commission's Internet website
(www.sec.gov) to view the SAI, material incorporated by reference and other
information. These materials can also be reviewed and copied at the Commission's
Public Reference Room in Washington D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. In addition, copies of these materials may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
811-6681
PA599P
PENNSYLVANIA
DAILY
MUNICIPAL
INCOME
FUND
PROSPECTUS
March 31, 1999
Reich & Tang Distributors, Inc.
600 Fifth Avenue
New York, NY 10020
(212) 830-5220
<PAGE>
Registration No. 33-48014
Rule 497(c)
- --------------------------------------------------------------------------------
PENNSYLVANIA
DAILY MUNICIPAL 600 Fifth Avenue, New York, NY 10020
INCOME FUND (212) 830-5220
===============================================================================
STATEMENT OF ADDITIONAL INFORMATION
March 31, 1999
This Statement of Additional Information (SAI) is not a Prospectus. The SAI
expands upon and supplements the information contained in the current Prospectus
of Pennsylvania Daily Municipal Income Fund ( the "Fund"), dated March 31, 1999
and should be read in conjunction with the Fund's Prospectus.
A Prospectus may be obtained from any Participating Organization or by writing
or calling the Fund toll-free at 1-(800) 221-3079. The Financial Statements of
the Fund have been incorporated by reference to the Fund's Annual Report. The
Annual Report is available, without charge, upon request by calling the
toll-free number provided.
This Statement of Additional Information is incorporated by reference into the
respective Prospectus in its entirety.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Table of Contents
- ---------------------------------------------------------------------------------------------------------------------------
Fund History..........................................2 Purchase, Redemption
Description of the Fund and its Investments and and Pricing Shares.................................20
Risks...............................................2 Taxation of the Fund....................................25
Management of the Fund................................13 Underwriters............................................27
Control Persons and Principal Holders of Calculation of Performance Data.........................28
Securities..........................................15 Financial Statements....................................28
Investment Advisory and Other Services................15 Description of Ratings..................................29
Brokerage Allocation and Other Practices..............19 Corporate Taxable Equivalent Yield Table................30
Capital Stock and Other Securities....................19 Personal Taxable Equivalent Yield Table.................31
</TABLE>
<PAGE>
I. FUND HISTORY
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.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is an 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 income tax and to
the extent possible from Pennsylvania income tax, as is believed to be
consistent with preserving capital, maintaining liquidity and stabilizing
principal. No assurance can be given that these objectives will be achieved.
The following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus.
The Fund's assets will be invested primarily in (i) 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 (ii) Participation Certificates in Municipal Obligations purchased from
banks, insurance companies or other financial institutions (which, in the
opinion of Battle Fowler LLP, counsel to the Fund, cause the Fund to be treated
as the owner of an interest the underlying Municipal Obligations for Federal
income tax purposes). Dividends that are properly designated by the Fund as
derived from Municipal Obligations and Participation Certificates will be exempt
from regular Federal income tax provided the Fund qualifies as a regulated
investment company and complies with Section 852(b)(5) of the Internal Revenue
Code of 1986 (the "Code"). Although the Supreme Court has determined that
Congress has the authority to tax the interest on bonds such as the Municipal
Obligations, existing law excludes such interest from regular Federal income
tax. However, such interest, including "exempt-interest dividends" may be
subject to the Federal alternative minimum tax.
Securities, the interest income on which is subject to regular Federal, state
and local income tax, will not exceed 20% of the value of the Fund's total
assets. (See "Federal Income Taxes" herein.) Exempt-interest dividends 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 Pennsylvania income taxes less any
deductions (not allowable in computing Federal Income Tax) which would have been
allowable if such interest were includable in gross income. 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 these 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 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 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 at $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, the Fund reserves the right to invest up to 20% of the value of
its total assets in securities, the interest income on which is subject to
regular Federal, state and local income tax. The Fund will invest more than 25%
of its assets in Participation Certificates purchased from banks in industrial
revenue bonds and other 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.) 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.
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The Fund may only purchase United States dollar-denominated securities
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) securities which have or are deemed to have remaining
maturities of 397 days or less and rated in the two highest short-term rating
categories by any two nationally recognized statistical rating organizations
("NRSROs") or in such categories by the only NRSRO that has rated the Municipal
Obligations (collectively, the "Requisite NRSROs"); (ii) or (ii) unrated
securities determined by the Fund's Board of Trustees to be of comparable
quality. In addition, securities which have or are deemed to have remaining
maturities of 397 days or less but that at the time of issuance were long-term
securities (i.e. with maturities greater than 366 days) are deemed unrated and
may be purchased if such has received a long-term rating from the Requisite
NRSROs in one of the three highest rating categories. Provided however, that
such may not be purchased if it (i) does not satisfy the rating requirements set
forth in the preceding sentence and (ii) has received a long-term rating from
any NRSRO that is not within the three highest long-term rating categories. A
determination of comparability by the Board of 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 securities. While there are several organizations that currently qualify as
NRSROs, two examples of NRSROs are Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, ("S&P") and Moody's Investors Service, Inc.
("Moody's"). The two highest ratings by S&P and Moody's are "AAA" and "AA" by
S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by Moody's in the
case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the
case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in
the case of tax-exempt commercial paper. The highest rating in the case of
variable and floating demand notes is "VMIG-1" by Moody's or "SP-1/AA" by S&P.
Such instruments may produce a lower yield than would be available from less
highly rated instruments.
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.
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 promptly
reassess whether the Municipal Obligation 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 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 (i) is in default, (ii)
ceases to be an Eligible Security under Rule 2a-7 of the 1940 Act or (iii) is
determined to no longer present minimal credit risks, or an event of insolvency
occurs with respect to the issues of a portfolio security or the provider of any
Demand Feature or Guarantee, the Fund will dispose of the security absent a
determination by the Fund's Board of Trustees that disposal of the security
would not be in the best interests of the Fund. Disposal of the security shall
occur as soon as practicable consistent with achieving an orderly disposition by
sale, exercise of any demand feature or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Fund's total assets, the Fund shall promptly notify the SEC of
such fact and of the actions that the Fund intends to take in response to the
situation.
With respect to 75% of its total assets, the Fund shall invest not more than 5%
of its total assets in Municipal Obligations or Participation Certificates
issued by a single issuer.
The Fund has elected and intends to continue to qualify as a "regulated
investment company" under the Code. The Fund will be restricted in that at the
close of each quarter of the taxable year, at least 50% of the value of its
total assets must be represented by cash, government securities, regulated
investment company securities and other securities. In satisfying this test, the
Fund can include securities of any one issuer only if such securities do not
exceed 5% in value of the total assets of the Fund and 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.)
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Description Of Municipal Obligations
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates".
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal
agencies (all of which are generally referred to as "municipalities"). They
generally have a maturity at the time of issue of one year or more and are
issued to raise funds for various public purposes such as construction of a
wide range of public facilities, to refund outstanding obligations and to
obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of, and interest on revenue bonds are payable from the income of specific
projects or authorities and generally are not supported by the issuer's
general power to levy taxes. In some cases, revenues derived from specific
taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on IRBs is generally exempt, with certain exceptions,
from regular Federal income tax pursuant to Section 103(a) of the Code,
provided the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes" herein.) IRBs are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. The payment of the principal and interest on IRBs
usually depends solely on the ability of the user of the facilities
financed by the bonds or other guarantor to meet its financial obligations
and, in certain instances, the pledge of real and personal property as
security for payment. If there is no established secondary market for the
IRBs, the IRBs or the Participation Certificates in IRBs purchased by the
Fund will be supported by letters of credit, guarantees or insurance that
meet the definition of Eligible Securities at the time of acquisition and
provide the demand feature which may be exercised by the Fund at any time
to provide liquidity. Shareholders should note that the Fund may invest in
IRBs acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 herein, the Fund is permitted to
invest up to 10% of the portfolio in high quality, short-term Municipal
Obligations (including IRBs) meeting the definition of Eligible Securities
at the time of acquisition that may not be readily marketable or have a
liquidity feature.
2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes
are issued by local agencies and are guaranteed by the United States
Department of Housing and Urban Development. Project notes are also secured
by the full faith and credit of the United States. The Fund's investments
may be concentrated in Municipal Notes of 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. They are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, 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. These clauses 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
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<PAGE>
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 and the
number of other potential buyers and the nature of the marketplace for the
obligations, including the time needed to dispose of the obligations and
the method of soliciting offers. If the Board determines that any Municipal
Leases are illiquid, such lease will be subject to the 10% limitation on
investments in illiquid securities.
5. Any other Federal tax-exempt, and to the extent possible, Pennsylvania
tax-exempt obligations issued by or on behalf of states and municipal
governments and their authorities, agencies, instrumentalities and
political subdivisions, whose inclusion in the Fund will be consistent with
the Fund's "Description of the Fund and its Investments and Risks" and
permissible under Rule 2a-7 under the 1940 Act.
Variable Rate Demand Instruments and Participation Certificates
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations. They provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. Variable rate demand instruments that can not be disposed of
properly within seven days in the ordinary course of business are illiquid
securities. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days. The adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund decides
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Trustees to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of a default in the payment of principal or interest on the underlying
securities, that is an Eligible Security or (ii) the instrument is not subject
to an unconditional demand feature but does qualify as an Eligible Security and
has a long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or if unrated, is determined to be of comparable quality by the
Fund's Board of 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. Where applicable, the Fund can draw on the
letter of credit or insurance after no more than 30 days notice either at any
time or at specified intervals not exceeding 397 days (depending on the terms of
the
________________________________
* The prime rate is generally the rate charged by a bank to its most
creditworthy customers shorht-term loans. The prime rate of a particular
bank may differ from other banks and will be the rate announced by each
bank on a particular day. Changes in the prime rate may occur with great
frequency and generally become effective on the date announced.
5
<PAGE>
participation), for all or any part of the full principal amount of the Fund's
participation interest in the security plus accrued interest. The Fund intends
to exercise the demand only (i) upon a default under the terms of the bond
documents, (ii) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares or (iii) to maintain a high quality investment
portfolio. The institutions issuing the participation certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate, or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the participation certificate bear
the cost of the insurance. However, the Fund retains the option to purchase
insurance if necessary, in which case the cost of the insurance will be an
expense of the Fund subject to the expense limitation (see "Expense Limitation"
herein). The Manager has been instructed by the Fund's Board of 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 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 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. This includes, 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.
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable maximum rates set by state law,
which limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent state law contains such limits,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Additionally, the portfolio may contain variable rate
demand participation certificates in fixed rate Municipal Obligations. The fixed
rate of interest on these Municipal Obligations will be a ceiling on the
variable rate of the Participation Certificate. In the event that interest rates
increase so that the variable rate exceeds the fixed rate on the Municipal
Obligations, the Municipal Obligations can no longer be valued at par and may
cause the Fund to take corrective action, including the elimination of the
instruments from the portfolio. Because the adjustment of interest rates on the
variable rate demand instruments is made in relation to movements of the
applicable banks' "prime rates", or other interest rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the variable rate demand instruments
may be higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (i) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (ii) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to be an Eligible Security it will be sold in the market or through
exercise of the repurchase demand feature to the issuer.
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When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on these Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way; that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations, it may also acquire stand-by
commitments from banks and other financial institutions. Under a stand-by
commitment, a bank or broker-dealer agrees to purchase at the Fund's option a
specified Municipal Obligation at a specified price with same day settlement. A
stand-by commitment is the equivalent of a "put" option acquired by the Fund
with respect to a particular Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally will be (i) the acquisition cost of the Municipal Obligation (excluding
any accrued interest that the Fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the security, plus (ii) all interest accrued on the
security since the last interest payment date during the period the security was
owned by the Fund. Absent unusual circumstances relating to a change in market
value, the Fund will 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 will be substantially the same as the market
value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment will be unconditional and
unqualified. A stand-by commitment will not be transferable by the Fund,
although it can sell the underlying Municipal Obligation to a third party at any
time.
The Fund expects stand-by commitments to generally be available without the
payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio will not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after the
acquisition of each stand-by commitment.
The Fund will enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks. If the issuer of the Municipal Obligation does not meet the eligibility
criteria, the issuer of the stand-by commitment will have received a rating
which meets the eligibility criteria or, if not rated, will present a minimal
risk of default as determined by the Board of Trustees. The Fund's reliance upon
the credit of these banks and broker-dealers will be supported by the value of
the underlying Municipal Obligations held by the Fund that were subject to the
commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities, the interest on which is exempt from Federal income tax,
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a
7
<PAGE>
later date securities other than those subject to the stand-by commitment. The
acquisition of a stand-by commitment will not affect the valuation or assumed
maturity of the underlying Municipal Obligations which will continue to be
valued in accordance with the amortized cost method. Stand-by commitments
acquired by the Fund will be valued at zero in determining net asset value. In
those cases in which the Fund pays directly or indirectly for a stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held by the Fund. Stand-by commitments will not
affect the dollar-weighted average maturity of the Fund's portfolio. The
maturity of a security subject to a stand-by commitment is longer than the
stand-by repurchase date.
The stand-by commitments the Fund may enter into are subject to certain risks.
These include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
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 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 will 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.
Additionally, 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, exceeds 10% of the Fund's
total net assets. (See Investment Restriction Number 6 herein.) Repurchase
agreements are subject to the same risks described herein for stand-by
commitments.
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
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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.
Non-manufacturing employment in Pennsylvania has increased in recent years to
82.7% of total employment in 1997. Consequently, manufacturing employment
constitutes a diminished share of total employment within the Commonwealth.
Manufacturing, contributing 17.3% of 1997 non-agricultural employment, has
fallen behind both the services sector and the trade sector as the largest
single source of employment within the Commonwealth. In 1997, the services
sector accounted for 31.6% of all non-agricultural employment while the trade
sector accounted for 22.5%.
Pennsylvania's annual average unemployment rate was below the national average
from 1986 until 1990. Slower economic growth caused the unemployment rate in the
Commonwealth to rise to 6.9% in 1991 and 7.5% in 1992. The resumption of faster
economic growth resulted in a decrease in the Commonwealth's unemployment rate
to 7.1% in 1993. For 1994 through 1997, Pennsylvania's annual average
unemployment rate was below the Middle Atlantic Region's average, but slightly
higher than that of the United States. As of October 1998, the seasonally
adjusted unemployment rate for the Commonwealth was 4.7% compared to 4.6% 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
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<PAGE>
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
The fiscal years 1993 through 1997 were years of recovery for Pennsylvania from
the recession in 1990 and 1991. The recovery fiscal years were characterized by
modest economic growth and low inflation rates in the Commonwealth. These
economic conditions, combined with several years of tax reductions following the
various tax rate increases and tax base expansions enacted in fiscal 1991 for
the General Fund, produced modest increases in Pennsylvania's tax revenues
during the period. Tax revenues from fiscal 1993 through 1997 rose at an annual
average rate of 4.1%. Total revenues and other income sources increased during
this period by an average annual rate of 4.7%. Expenditures and other uses
during the fiscal 1993 through 1997 period rose at a 3.8% annual rate, led by
annual average increases of 13.8% for protection of persons and property program
costs. At the close of fiscal 1997, the fund balance for the governmental fund
types totaled $2,900.9 million, an increase of $914.6 million over fiscal 1996
and $940.9 million over fiscal 1993. Commonwealth revenues for the 1997 fiscal
year were above estimate and exceeded fiscal year expenditures and encumbrances.
Fiscal 1997 was the sixth consecutive fiscal year the Commonwealth reported an
increase in the fiscal year-end unappropriated balance. The last four enacted
budgets have had an average spending growth of 2.75%, as compared to an average
growth of 5.44% during the previous ten-year period.
Fiscal 1998 Budget
The budget for fiscal 1998 was enacted in May 1997. Commonwealth revenues for
the fiscal year totaled $18,123.2 million before reserves for tax refunds. That
represented an increase over fiscal 1997 Commonwealth revenues of 3.9 percent.
Fiscal 1998 estimates for Commonwealth revenues were based on an economic
forecast for national economic growth to slow through the end of calendar year
1997.
The rate of anticipated growth of Commonwealth revenues was affected by the
enactment of tax reductions and tax revenue dedications effective for the 1998
fiscal year.
Major funding increases provided by the fiscal 1998 budget included; (i) $166
million of appropriations for elementary and secondary education plus an
estimated $51 million in reduced employer retirement contributions payable by
local school districts due to a reduction in the contribution rate; (ii) $42
million for higher education institutions plus $16 million for student
scholarships; (iii) $70 million for higher caseload, utilization, and cost of
nursing home care; (iv) $60 million for economic development assistance through
programs providing incentive grants and loans; and (v) $38 million for
corrections including $17 million for operating costs for new and expanded
facilities. The balance of the increase was spread over many other departments
and program operations.
Reserves established during fiscal 1998 for tax refunds totaled $910 million,
representing a $370 million (68.4%) increase over tax refund reserves for fiscal
1997. Expenditures from all fiscal 1998 appropriations totaled $17,229.8 million
(excluding pooled financing expenditures and net of current year lapses),
representing a 4.5% increase of fiscal 1997 appropriation expenditures.
Fiscal 1999 Budget
In April 1998, the General Fund budget for fiscal 1999 was enacted. Revenue
estimates in the proposed budget were developed using a national economic
forecast with a projected real gross domestic product growth annual rate below 2
percent, and were originally projected to be $18,456.6 million. In November
1998, due to the passage of tax legislation, the estimate was reduced by $1.1
million.
The 1999 official revenue is 3.0% over actual fiscal 1998 revenues. The adjusted
estimate, taking into account enacted tax changes, shows a 1.66% increase over
actual revenues for fiscal 1998. The forecasts are based on assumptions that
consumer spending will slow, especially in the area of motor vehicles, housing
and other durable goods, as will business spending on fixed investments. Also,
the economic difficulties being experienced in Asia and Latin America are
expected to reduce foreign demand for domestic goods. The 1999 tax reduction is
projected to amount to $241.0 million. The budget also includes major increases
in expenditure for education, higher education, the correctional system,
long-term care medical assistance costs, cost of living increases for state and
school district employees, and bond funding for equipment loans for volunteer
fire and rescue companies. As of October 1998, revenues were $69.2 million
(1.3%) above estimates for the period.
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<PAGE>
Proposed Fiscal 2000 Budget
On February 2, 1999, the Governor submitted the Commonwealth's fiscal year 2000
budget to the General Assembly. The General Fund budget is $18.6 billion,
representing an increase of $527 million or 2.9% over fiscal year 1998. Tax
reductions totaling an estimated $273 million are proposed to stimulate the job
market, and monies are proposed to be dedicated to the business community to
attract high technology jobs to the Commonwealth. $5.8 billion in support has
been recommended for local school districts, representing an increase, and a
2.5% increase of $26.4 million has been recommended for high education. Law
enforcement increases are proposed, as are increases for health insurance,
medical assistance and welfare needs-based programs. $1.219 billion has been
recommended for state highways and bridge maintenance, and an overall increase
in support has been recommended for public libraries.
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 to certify
to the Governor and the General Assembly certain information regarding the
Commonwealth's indebtedness. According to the August 26, 1998 Auditor General
certificate, the average annual tax revenues deposited in all funds in the five
fiscal years ended August 26, 1998 was approximately $20.4 billion, outstanding
net debt totaled $3.7 billion at August 26, 1998, and therefore, the net debt
limitation for the 1998 fiscal year is $32.0 billion. At August 26, 1998, the
amount of debt authorized by law to be issued, but not yet incurred, was $22.7
billion.
Outstanding general obligation debt totaled $4,724.1 million at June 30, 1998, a
decrease of $70.6 million from June 30, 1997. Over the ten-year period ended
June 30, 1998, total outstanding general obligation debt increased at an annual
rate of 0.1 percent. Within the most recent five-year period, outstanding
general obligation debt has decreased at an annual rate of 1.3 percent.
Debt Ratings
All outstanding general obligation bonds of the Commonwealth are rated "AA-" by
S&P and "Aa3" by Moody's.
City of Philadelphia
The City of Philadelphia (the "City" or "Philadelphia") is the largest city in
the Commonwealth, with an estimated population of 1,585,577 according to the
1990 Census. Philadelphia experienced a series of general fund deficits for
fiscal years 1988 through 1992 which 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
fiscal 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Corporation 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 empowered PICA to issue notes and bonds on behalf of Philadelphia,
and also authorized Philadelphia to levy a one-percent sales tax the proceeds of
which would be used to pay off the bonds. In return for PICA'a fiscal
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
the Sixth Five-Year Plan approved by PICA on May 20, 1997. The adopted General
Fund budget for fiscal year 1998, including prior adjustments, was balanced for
the sixth consecutive year without a deficit elimination grant from PICA. As of
February 28, 1997, PICA has issued approximately $1,761.7 million of its Special
Tax Revenue Bonds. The financial assistance has included the refunding of
certain city general obligation bonds, funding of capital projects and the
liquidation of the City's Cumulative General Fund balance deficit as of June 30,
1992 of $244.9 million.
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 expired on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted. PICA had $1,055.0 million in Special Tax
Revenue Bonds outstanding as of June 30, 1998.
The audited General Fund balance of the City as of fiscal year 1998 showed a
fund balance in the General Fund of $169.2 million, an increase of $40.4 million
over the fiscal year 1997 fund balance.
S&P's rating on Philadelphia's general obligation bonds is "BBB-." Moody's
rating is currently "Baa."
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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. They 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 term "majority of the outstanding shares" of the
Fund means 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 not:
1. Make portfolio investments other than as described under "Description of
the Fund and its Investments and Risks." Any other form of Federal
tax-exempt investment must meet the Fund's high quality criteria, as
determined by the Board of Trustees, and be 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. This includes 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. However, securities subject to a demand obligation and
stand-by commitments may be purchased as set forth under "Description of
the Fund and its Investments and Risks" herein.
5. Underwrite the securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests. 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 " Description of the
Fund and its Investments and Risks" herein.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
10. Invest more than 25% of its assets in the securities of "issuers" in any
single industry. The Fund may invest more than 25% of its assets in
Participation Certificates and there shall be no limitation on the purchase
of those Municipal Obligations and other obligations issued or guaranteed
by the United States Government, its agencies or instrumentalities. When
the assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government creating
the issuing entity and a security is backed only by the assets and revenues
of the entity, the entity will be deemed to be the sole issuer of the
security. Similarly, in the case of an industrial revenue bond, if that
bond is backed only by the assets and revenues of the non-government user,
then such non-government user will 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
will be considered a separate security and would be treated as an issue of
such government, other entity or bank. Immediately after
12
<PAGE>
the acquisition of any securities subject to a Demand Feature or Guarantee
(as such terms are defined in Rule 2a-7 of the 1940 Act), with respect to
75% of the total assets of the Fund, not more than 10% of the Fund's assets
may be invested in securities that are subject to a Guarantee or Demand
Feature from the same institution. However, the Fund may only invest more
than 10% of its assets in securities subject to a Guarantee or Demand
Feature issued by a Non-Controlled Person (as such term is defined in Rule
2a-7 of the 1940 Act).
11. Invest in securities of other investment companies. The Fund may purchase
unit investment trust securities where such unit trusts meet the investment
objectives of the Fund and then only up to 5% of the Fund's net assets,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets.
12. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with a permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
III. MANAGEMENT OF THE FUND
The Fund's Board of Trustees, which is responsible for the overall management
and supervision of the Fund, employs the Manager to serve as investment manager
of the Fund. The Manager provides persons satisfactory to the Fund's Board of
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 their full-time to the affairs of the Fund.
The Trustees and Officers of the Fund and their principal occupations during the
past five years are set forth below. Unless otherwise specified, the address of
each of the following persons is 600 Fifth Avenue, New York, New York 10020. Mr.
Duff may be deemed an "interested person" of the Fund, as defined in the 1940
Act, on the basis of his affiliation with Reich & Tang Asset Management L.P.
Steven W. Duff, 45 - President and Trustee of the Fund, has been President of
the Mutual Funds Division of the Manager since September 1994. Mr. Duff was
formerly Director of Mutual Fund Administration at NationsBank which he was
associated with from June 1981 to August 1994. Mr. Duff is also President and a
Director /Trustee of 14 other funds in the Reich & Tang Fund Complex, Director
of Pax World Money Market Fund, Inc., Executive Vice President of Reich & Tang
Equity Fund, Inc., and President and Chief Executive Officer of Tax Exempt
Proceeds Fund, Inc. and President of Back Bay Funds, Inc.
Dr. W. Giles Mellon, 68 - Trustee of the Fund, is Professor of Business
Administration in the Graduate School of Management, Rutgers University which he
has been associated with since 1966. His address is Rutgers University Graduate
School of Management, 92 New Street, Newark, New Jersey 07102. Dr. Mellon is
also a Director/Trustee of 14 other funds in the Reich & Tang Fund Complex and a
Director of Pax World Money Market Fund, Inc.
Robert Straniere, 58 - 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/Trustee of 14 other funds in the Reich & Tang Fund Complex and a
Director of Pax World Money Market /Fund, Inc.
Dr. Yung Wong, 60 - Trustee of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong has been a Director of Republic Telecom Systems
Corporation (a provider of telecommunications equipment) since January 1989 and
of TelWatch, Inc. (a provider of network management software) since August 1989.
Dr. Wong is also a Director/Trustee of 14 other funds in the Reich & Tang Fund
Complex and a Director of Pax World Money Market Fund, Inc. Dr. Wong is also a
Trustee of Eclipse Financial Asset Trust.
Molly Flewharty, 48 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of 17
other funds in the Reich & Tang Fund Complex and a Director of Pax World Money
Market Fund, Inc.
Lesley M. Jones, 50 - Vice President of the Fund, has been 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 14
other funds in the Reich & Tang Fund Complex.
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Dana E. Messina, 42 - Vice President of the Fund, has been Executive Vice
President of the Mutual Funds Division of the Manager since January 1995 and was
Vice President from September 1993 to January 1995. Ms. Messina was formerly
Vice President of Reich & Tang, Inc. with which she was associated with from
December 1980 to September 1993. Ms. Messina is also Vice President of 15 other
funds in the Reich & Tang Fund Complex.
Bernadette N. Finn, 51 - Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn was formerly
Vice President and Assistant Secretary of Reich & Tang, Inc. which she was
associated with from September 1970 to September 1993. Ms. Finn is also
Secretary of 13 other funds in the Reich & Tang Fund Complex, and a Vice
President and Secretary of 5 additional funds in the Reich & Tang Fund Complex.
In addition, Ms. Finn is also a Secretary of Pax World Money Market Fund, Inc.
Richard DeSanctis, 42 - Treasurer of the Fund, has been Vice President and
Treasurer of the Manager since September 1993. Mr. DeSanctis was formerly
Controller of Reich & Tang, Inc., from January 1991 to September 1993. Mr. De
Sanctis is also Treasurer of 17 other funds in the Reich & Tang Fund Complex,
and is Vice President and Treasurer of Cortland Trust, Inc.
Rosanne Holtzer, 34 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager with which she was
associated with from June 1986. Ms. Holtzer is also Assistant Treasurer of 18
other funds in the Reich & Tang Fund Complex.
The Fund paid an aggregate remuneration of $6,000 to its Trustees with respect
to the period ended November 30, 1998, all of which consisted of Trustees' fees
paid to the three disinterested Trustees, pursuant to the terms of the
Investment Management Contract (see "Manager" herein.)
Trustees of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $1,000 and a fee of $250 for each Board of Trustees meeting
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Trustees who are affiliated with the Manager do not
receive compensation from the Fund. See Compensation Table.
Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Name of Person, Aggregate Compensation Pension or Retirement Estimated Annual Total Compensation From
Position From the Fund Benefits Accrued as Part Benefits Upon Retirement Fund and Fund Complex Paid
of Fund Expenses to Trustees*
Dr. W. Giles Mellon, $2,000 0 0 $58,000 ( 16 Funds)
Trustee
Robert Straniere, $2,000 0 0 $58,000 ( 16 Funds)
Trustee
Dr. Yung Wong, $2,000 0 0 $58,000 ( 16 Funds)
Trustee
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex
for the fiscal year ending November 30, 1998. The parenthetical number
represents the number of investment companies (including the Fund) from
which such person receives compensation that are considered part of the
same Fund complex as the Fund, because, among other things, they have a
common investment advisor.
14
<PAGE>
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On February 28, 1999 there were 13,802,248 shares of Class A common stock
outstanding and 1,147,501 shares of Class B common stock outstanding. As of
February 28, 1999, the amount of shares owned by all officers and Trustees of
the Fund as a group were less than 1% of the outstanding shares of the Fund. Set
forth below is certain information as to persons who owned 5% or more of the
Fund's outstanding shares as of February 28, 1999:
Name and Address % of Class Nature of Ownership
CLASS A
PNC Securities Corp. 22.69 Beneficial Interest
Fifth Wood Street
Pittsburgh, PA 15265
Lewco Securities 7.51 Beneficial Interest
34 Exchange Place
Jersey City, NJ
Lewco Securities 6.45 Beneficial Interest
34 Exchange Place
Jersey City, NJ
Philip Sullivan 5.31 Record
1329 Beaumont Drive
Gladwyne, PA 19035
CLASS B
Lewco Securities 64.17 Beneficial Interest
34 Exchange Place
Jersey City, NJ
John E. Wengert 20.48 Record
401 Butler Road
Lebanon, PA 17042-8935
Lewco Securities 14.45 Beneficial Interest
34 Exchange Place
Jersey City, NJ
V. INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020. The Manager was, as of January 31, 1999, investment
manager, adviser, or supervisor with respect to assets aggregating in excess of
$13.0 billion. In addition to the Fund, the Manager acts as investment manager
and administrator of fifteen other investment companies and also advises pension
trusts, profit-sharing trusts and endowments.
Effective January 1, 1998, NEIC Operating Partnership, L.P. ("NEICOP") was the
limited partner and owner of a 99.5% interest in the Manager replacing New
England Investment Companies, L.P. ("NEICLP") as the limited partner and owner
of such interest in the Manager due to a restructuring by New England Investment
Companies, Inc. ("NEIC"). Subsequently, effective March 31, 1998, Nvest
Companies, L.P. ("Nvest Companies") due to a change in name of NEICOP, replaces
NEICOP as the limited partner and owner of a 99.5% interest in the Manager.
Reich & Tang Asset Management, Inc. (an indirect wholly-owned subsidiary of
Nvest Companies) is the sole general partner and owner of the remaining 0.5%
interest of the Manager. Nvest Corporation, a Massachusetts Corporation
(formerly known as New England Investment Companies, Inc.), serves as the
managing general partner of Nvest Companies.
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<PAGE>
Reich & Tang Asset Management, Inc. is an indirect subsidiary of Metropolitan
Life Insurance Company ("MetLife"). MetLife directly and indirectly owns
approximately 47% of the outstanding partnership interests of Nvest Companies
and may be deemed a "controlling person" of the Manager. Reich & Tang, Inc.
owns, directly and indirectly, approximately 13% of the outstanding partnership
interests of Nvest Companies.
MetLife is a mutual life insurance company and is the second largest life
insurance company in the United States in terms of total assets. MetLife
provides a wide range of insurance and investment products and services to
individuals and groups and is the leader among United States life insurance
companies in terms of total life insurance in force. MetLife and its affiliates
provide insurance or other financial services to approximately 36 million people
worldwide.
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through thirteen subsidiaries, divisions
and affiliates offering a wide array of investment styles and products to
institutional clients. Its business units, in addition to the manager, include
AEW Capital Management, L.P., Back Bay Advisors, L.P., Capital Growth Management
Limited Partnerships; Greystone Partners; L.P. Harris Associates; L.P. Jurika &
Voyles, L.P., Loomis, Sayles & Company, L.P., New England Funds, L.P., Nvest
Associates, Inc., Snyder Capital Management, L.P., Vaughan, Nelson, Scarborough
& McCullough, L.P., and Westpeak Investment Advisors, L.P. These affiliates in
the aggregate are investment advisors or managers to 80 other registered
investment companies.
The recent name change did not result in a change of control of the Manager and
has no impact upon the Manager's performance of its responsibilities and
obligations.
On July 17, 1998, 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, approved the continuance of the Investment Management Contract and
extended the term to July 31, 1999. It is continued in force thereafter for
successive twelve-month periods beginning each August 1, provided that such
majority vote of the Fund's outstanding voting securities or 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.
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.
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 trustees or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Trustees,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties thereunder.
Under the Investment Management Contract, the Manager receives from the Fund a
fee equal to .40% per annum of the Fund's average daily net assets. The fees are
accrued daily and paid monthly. The Manager, at its discretion, may voluntarily
waive all or a portion of the management fee.
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting related services by Investors Fiduciary Trust Company,
the Fund's bookkeeping or recordkeeping agent, (ii) prepare reports to and
filings with regulatory authorities and (iii) perform such other services as the
Fund may from time to time request of the Manager. The personnel rendering such
services may be employees of the Manager, of its affiliates or of other
organizations. For its services under the Administrative Services Contract, the
Manager receives from the Fund a fee equal to .21% per annum of the Fund's
average daily net assets, 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 Funds' fiscal years ended
November 30, 1998, November 30, 1997 and November 30, 1996, the Manager received
a fee of $31,548, $89,693 and $84,054 of which $31,305, $85,422 and $80,051 was
voluntarily waived.
For the Fund's fiscal years ended November 30, 1998, November 30, 1997 and
November 30, 1996, the fee paid to the Manager under the Investment Management
Contract was $60,092, $170,844, and $160,103, respectively of which $57,905,
$124,396 and $28,516 was voluntarily waived. The Fund's net assets at the close
of business on
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<PAGE>
November 30, 1998 totaled $13,805,859. The Manager may waive its rights to any
portion of the management fee and may use any portion of the Management fee for
purposes of shareholder and administrative services and distribution of the
Fund's shares.
The Manager at its discretion may waive its rights to any portion of the
Management fee or the administrative services fee and may use any portion of the
Management fee for purposes of shareholder and administrative services and
distribution of the Fund's shares. There can be no assurance that such fees will
be waived in the future (see "Distribution and Service Plan" herein).
Investment management fees and operating expenses which are attributable to both
Classes of the Fund will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class A shareholders
pursuant to the Plan shall be compensated by the Distributor from its
shareholder servicing fee, the Manager from its management fee and the Fund
itself. Expenses incurred in the distribution of Class B shares and the
servicing of Class B shares shall be paid by the Manager.
Expense Limitation
The Manager has agreed, pursuant to the Investment Management Contract (See
"Distribution and Service Plan" herein), to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage and extraordinary expenses) which in
any year exceed the limits on investment company expenses prescribed by any
state in which the Fund's shares are qualified for sale. For the purpose of this
obligation to reimburse expenses, the Fund's annual expenses are estimated and
accrued daily, and any appropriate estimated 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. This includes all operating expenses, taxes, brokerage fees and
commissions, commitment fees, certain insurance premiums, interest charges and
expenses of the custodian, transfer agent and dividend disbursing agent's fees,
telecommunications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of 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, SEC registration fees and expenses, state securities laws
registration fees and expenses, expenses of preparing and printing the Fund's
prospectus for delivery to existing shareholders and of printing application
forms for shareholder accounts, and the fees and reimbursements payable to the
Manager under the Investment Management Contract and the Distributor under the
Shareholder Servicing Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein. 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.
Distribution And Service Plan
The Fund's distributor is Reich & Tang Distributors, Inc., a Delaware
corporation with principal officers at 600 Fifth Avenue, New York, New York
10020. Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of 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 Reich & Tang Distributors, Inc., (the "Distributor"), as distributor
of the Fund's shares.
The Class A shares will be offered to investors who desire certain additional
shareholder services from Participating Organizations that are compensated by
the Fund's Manager and Distributor for such services. For its services under the
Shareholder Servicing Agreement (with respect to the Class A shares only), the
Distributor receives from the Fund a fee equal to .25% per annum of the Fund's
average daily net assets of the Class A shares of the Fund (the "Shareholder
Servicing Fee"). The fee is accrued daily and paid monthly and any portion of
the fee may be deemed to be used by the Distributor for purposes of distribution
of the Fund's Class A shares and for payments to Participating Organizations
with respect to servicing their clients or customers who are Class A
shareholders of the Fund. The Class B shareholders will not receive the benefit
of such services from Participating Organizations and, therefore, will not be
assessed a Shareholder Servicing Fee.
The following information applies only to the Class A shares of the Fund. For
the Fund's fiscal year ended November 30, 1998, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
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<PAGE>
totaled $35,316, none of which was voluntarily waived. During the same period,
the Manager and Distributor made total payments under the Plan to or on behalf
of Participating Organizations of $60,372. The excess of such payments over the
total payments the Distributor received by the Fund under the Plan represents
distribution and servicing expenses funded by the Manager from its own resources
including the management fee. Of the total amount paid pursuant to the Plan,
$2,432 was utilized for compensation to sales personnel, $2,470 on Prospectus
printing and $848 on miscellaneous expenses. For the fiscal year ended November
30, 1998, the total amount spent pursuant to the Plan for Class A shares was
0.47% of the average daily net assets of the Fund, of which 0.25% of the average
daily net assets was paid by the Fund to the Distributor, pursuant to the
Shareholder Servicing Agreement. For the Fund's fiscal year ended November 30,
1997, the Fund paid a distribution fee of $106,492 for expenditures pursuant to
the Plan. During such period, the Manager made payments pursuant to the Plan
from its own resources aggregating $149,853, of which $145,066 was spent on
broker assistant payments, $3,974 was spent on sales personnel and related
expenses of the Manager, $630 was spent on travel and entertainment, $115 was
spent on prospectus and application printing and $67 was spent on miscellaneous
expenses. For the Fund's fiscal year ended November 30, 1997, the amount payable
by the Fund for shareholder servicing fees was $106,492, of which none was
waived. For the Fund's fiscal year ended November 30, 1996, the Fund paid a
distribution fee of $12,023 for expenditures pursuant to the Plan. During such
period, the Manager made payments pursuant to the Plan from its own resources
aggregating $124,650, of which $115,931 was spent on broker assistant payments,
$3,482 was spent on sales personnel and related expenses of the Manager, $1,137
was spent on travel and entertainment, $4,009 was spent on prospectus and
application printing and $91 was spent on miscellaneous expenses. For the Fund's
fiscal year ended November 30, 1996, the amount payable by the Fund for
shareholder servicing fees was $100,062, of which $88,039 was waived.
Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses, including the cost of dedicated lines and CRT terminals, incurred by
the Participating Organizations and Distributor in carrying out their
obligations under the Shareholder Servicing Agreement with respect to the Class
A shares and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from 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 Class A shares of the Fund; (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee with respect to Class A shares
and past profits for the purpose enumerated in (i) above. The Distributor
determines the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager or the Distributor for any fiscal year under the Investment
Management Contract or the Shareholder Servicing Agreement in effect for that
year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
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.
The Plan provides that it may continue in effect for successive annual periods
commencing August 1, 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 Board of Trustees
approved the continuance of the Plan through July 31, 1999 at the Board of
Trustees meeting held on July 17, 1998. 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
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<PAGE>
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.
Custodian And Transfer Agent
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105, is custodian for the Fund's cash and securities. Reich & Tang Services,
Inc., an affiliate of the Fund's Manager, located at 600 Fifth Avenue, New York,
NY 10020, is transfer agent and dividend agent for the shares of the Fund. The
custodian and transfer agents do not assist in, and are not responsible for,
investment decisions involving assets of the Fund.
Counsel and Auditors
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
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.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Thus, the Fund will select a broker
for such a transaction based upon which broker can effect the trade at the best
price and execution available. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases Participation
Certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the Participation Certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund are made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
VII. CAPITAL STOCK AND OTHER SECURITIES
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 nonassessable. Shares are
redeemable at net asset value, at the option of the shareholder. The Fund is
subdivided into two classes of common stock, Class A and Class B. Each share,
regardless of class, represents an interest in the same portfolio of investments
and has identical voting, dividend, liquidation and other rights, preferences,
powers, restrictions, limitations, qualifications, designations and terms and
conditions, except: (i) the Class A and Class B shares have different class
designations; (ii) only the Class A shares are assessed a service fee pursuant
to the Rule 12b-1 Distribution and Service Plan of the Fund of .25% of the Class
A shares' average daily net assets; and (iii) only the holders of the Class A
shares will be entitled to vote on matters pertaining to the
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<PAGE>
Plan and any related agreements in accordance with provisions of Rule 12b-1. The
exchange privilege permits stockholders to exchange their shares only for shares
of the same class of an investment company that participates on an exchange
privilege program with the Fund. Payments made under the Plan are calculated and
charged daily to the appropriate class prior to determining daily net asset
value per share and dividends/distributions.
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. 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 shareholders entitled to cast not less than
25% of all the votes entitled to be cast at such meeting. Annual and other
meetings may be required with respect to such additional matters relating to the
Fund as may be required by the 1940 Act, including the removal of Fund
trustee(s) and communication among shareholders, any registration of the Fund
with the SEC 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 1940 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 this or her successor,
elected at such a meeting, or until such trustee sooner dies, resigns, retires
or is removed by the vote of shareholders.
VIII. PURCHASE, REDEMPTION AND PRICING SHARES
Pricing of Fund Shares
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 days on which the New York Stock
Exchange is closed for trading. The net asset value of a Class is computed by
dividing the value of the Fund's net assets for such Class (i.e., the value of
its securities and other assets less its liabilities, including expenses payable
or accrued, but excluding capital stock and surplus) by the total number of
shares outstanding for such Class. The Fund intends to maintain a stable net
asset value at $1.00 per share although there can be no assurance that this will
be achieved.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. If fluctuating interest
rates cause the market value of the Fund's portfolio to deviate more than 1/2 of
1% from the value determined on the basis of amortized cost, the Board of
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.
Shares are 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.
In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require the immediate settlement in funds of Federal Reserve member banks on
deposit at a Federal Reserve Bank (commonly known as "Federal Funds"). Fund
shares begin accruing income on the day the shares are issued to an investor.
The Fund reserves the right to reject any purchase order for its shares.
Certificates for Fund shares will not be issued to an investor.
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<PAGE>
Purchase of Fund Shares
Investors purchasing shares through an account at a Participating Organization
become Class A shareholders. "Participating Organizations" are securities
brokers, banks and financial institutions or other industry professionals or
organizations which have entered into shareholder servicing agreements with the
Distributor with respect to investment of their customer accounts in the Fund.
All other investors, and investors who have accounts with Participating
Organizations but do not wish to invest in the Fund through them, may invest in
the Fund directly as Class B shareholders of the Fund. Class B shareholders do
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 which, because they may not be
legally permitted to receive such as fiduciaries, do not receive compensation
from the Distributor or the Manager.
The minimum initial investment in the Fund for both classes of shares is (i)
$1,000 for purchases through Participating Organizations - this may be satisfied
by initial investments aggregating $1,000 by a Participating Organization on
behalf of their customers whose initial investments are less than $1,000; (ii)
$1,000 for securities brokers, financial institutions and other industry
professionals that are not Participating Organizations and (iii) $5,000 for all
other investors. 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 does not accept a purchase order until an investor's payment has been
converted into Federal Funds and is received by the Fund's transfer agent.
Orders accompanied by Federal Funds and received after 12 noon, New York City
time, on a Fund Business Day will result in the issuance of shares on the
following Fund Business Day.
Each shareholder, except certain Participant Investors, will receive a
personalized monthly statement from the Fund listing (i) the total number of
Fund shares owned as of the statement closing date, (ii) purchase and
redemptions of Fund shares and (iii) the dividends paid on Fund shares
(including dividends paid in cash or reinvested in additional Fund shares).
Investments Through Participating Organizations - Purchase of Class A Shares
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. 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 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. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly, may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. A Participant Investor should read
this Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
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 only if 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 result in share issuance 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>
Initial Direct Purchases of Class B Shares
Investors who wish to invest in the Fund directly may obtain a current
prospectus and the subscription order form necessary to open an account by
telephoning the Fund at the following numbers:
Within New York 212-830-5220
Outside New York (TOLL FREE) 800-221-3079
Mail
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
Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
will normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's purchase order will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, investors should first obtain a new account number by telephoning
the Fund at 212-830-5220 (within New York) or at 1-800-221-3079 (outside New
York) and then instruct a member commercial bank to wire money immediately to:
Investors Fiduciary Trust Company
ABA # 101003621
Reich & Tang Funds
DDA # 890752-954-6
For Pennsylvania Daily Municipal
Income Fund
Account of (Investor's Name)
Fund Account #
SS#/Tax ID#
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on the
same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.
Personal Delivery
Deliver a check made payable to "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, federal
salary, social security, or certain veteran's, military or other payments from
the federal government, automatically deposited into your Fund account. You can
also have money debited from your checking account. To enroll in any one of
these programs, you must file with the Fund a completed EFT Application,
Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form for each
type of payment that you desire to include in the Privilege. The appropriate
form may be obtained from your broker or the Fund. You may elect at any time to
terminate your participation by notifying in writing the appropriate depositing
entity and/or federal agency. Death or legal incapacity will automatically
terminate your participation in the Privilege. Further, the Fund may terminate
your participation upon 30 days notice to you.
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<PAGE>
Subsequent Purchases of Shares
Subsequent purchases can be made 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 07101-3232
There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.
Provided that the information on the subscription form on file with the Fund is
still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during the year the shareholder's account is
closed or during the following calendar year.
Redemption of Shares
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share of each
Class upon receipt by the Fund's transfer agent of the redemption order (and any
supporting documentation which it may require). Normally, payment for redeemed
shares is made on the same Fund Business Day after the redemption is effected,
provided the redemption request is received prior to 12 noon, New York City
time. However, redemption payments will not be effected unless the check
(including a certified or cashier's check) used for investment has been cleared
for payment by the investor's bank, which could take up to 15 days after
investment. Shares redeemed are not entitled to participate in dividends
declared on the day a redemption becomes effective.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee.
When a signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature. It should be signed and guaranteed by
an eligible guarantor institution which includes a domestic bank, a domestic
savings and loan institution, a domestic credit union, a member bank of the
Federal Reserve system or a member firm of a national securities exchange,
pursuant to the Fund's transfer agent's standards and procedures.
Written Requests
Shareholders may make a redemption in any amount by sending a written request to
the Fund addressed to:
Pennsylvania Daily Municipal Income Fund
c/o Reich & Tang Funds
600 Fifth Avenue-8th Floor
New York, New York 10020
All previously issued certificates submitted for redemption must be endorsed by
the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with signature guaranteed.
Normally the redemption proceeds are paid by check and mailed to the shareholder
of record.
Checks
By making the appropriate election on their subscription order form,
shareholders may request a supply of checks which may be used to effect
redemptions from the Class of shares of 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, 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 until the check has
cleared, which can take up to 15 days following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Trustees determines that doing so is in the best
interests of the Fund and its shareholders.
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Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank governing checking accounts. Checks
drawn on a jointly owned account may, at the shareholder's election, require
only one signature. Checks in amounts exceeding the value of the shareholder's
account at the time the check is presented for payment will not be honored.
Since the dollar value of the account changes daily, the total value of the
account may not be determined in advance and the account may not be entirely
redeemed by check. In addition, the Fund reserves the right to charge the
shareholder's account a fee up to $20 for checks not honored as a result of an
insufficient account value, a check deemed not negotiable because it has been
held longer than six months, an unsigned check and/or a post-dated check.
Corporations and other entities electing the checking option are required to
furnish a certified resolution or other evidence of authorization in accordance
with the Fund's normal practices. Individuals and joint tenants are not required
to furnish any supporting documentation. 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.
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.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option on their subscription order form. The proceeds of a telephone
redemption may be sent to the shareholders at their addresses or, if in excess
of $1,000, to their bank accounts, both as set forth in the subscription order
form or in a subsequent written authorization. The Fund may accept telephone
redemption instructions from any person with respect to accounts of shareholders
who elect this service and thus such shareholders risk possible loss of
principal and interest in the event of a telephone redemption not authorized by
them. The Fund will employ reasonable procedures to confirm that telephone
redemption instructions are genuine, and will require that shareholders electing
such option provide a form of personal identification. Failure by the Fund to
employ such reasonable procedures may cause the Fund to be liable for the losses
incurred by investors due to unauthorized or fraudulent telephone redemptions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York at 1-800-241-3263, and state: (i) the name of the
shareholder appearing on the Fund's records; (ii) the shareholder's account
number with the Fund; (iii) the amount to be withdrawn; (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address; and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time. Proceeds are sent the next Fund Business Day if the
redemption request is received after 12 noon, New York City time. The Fund
reserves the right to terminate or modify the telephone redemption service in
whole or in part at any time and will notify shareholders accordingly.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. Unless other instructions are given
in proper form to the Fund's transfer agent, a check for the proceeds of a
redemption will be sent to the shareholders' address of record. If a shareholder
elects to redeem all the shares of the Fund he owns, all dividends accrued to
the date of such redemption will be paid to the shareholder along with the
proceeds of the redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the SEC determines that trading thereon is restricted. Additional exceptions
include any period during which an emergency (as determined by the SEC) exists
as a result of which disposal by the Fund of its portfolio securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or for such other
period as the SEC may by order permit for the protection of the shareholders of
the Fund.
The Fund reserves 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. The Participating Organization
will be responsible for notifying the Participant Investor of the proposed
mandatory redemption. During the notice period a shareholder or Participating
Organization who receives such a notice may avoid mandatory redemption by
purchasing sufficient additional shares to increase his total net asset value to
the minimum amount.
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Net Asset Value
The Fund does not determine net asset value per share of each Class on any day
in which the New York Stock Exchange is closed for trading. Those days include:
New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value of a Class is computed
by dividing the value of the Fund's net assets for such Class (i.e., the value
of its securities and other assets less its liabilities, including expenses
payable or accrued but excluding capital stock and surplus) by the total number
of shares outstanding for such Class.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. 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 of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar-denominated
instruments that the Fund's Board of 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 "Description of the Fund
and its Investments and Risks" herein.)
IX. TAXATION OF THE FUND
Federal Income Taxes
The Fund has elected to qualify under the Code, and under Pennsylvania law as a
"regulated investment company" that distributes "exempt-interest dividends" and
intends to continue to qualify as long as qualification is in the best interests
of its shareholders because 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 net tax-exempt interest income. Exempt-interest dividends
are dividends paid by the Fund that are attributable to interest on obligations,
the interest on which is exempt from regular Federal income tax, and are
designated by the Fund as exempt-interest dividends in a written notice mailed
to the Fund's shareholders not later than 60 days after the close of its taxable
year. 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 excludable from the Fund's shareholders' gross
income under Section 103(a) of the Code, although the amount of such interest
will have to be disclosed on the shareholder's federal tax return.. However, a
shareholder should consult his tax advisors with respect to whether
exempt-interest dividends retain the exclusion under Section 103 of the Code if
such shareholder will be treated as a "substantial user" or "related person"
under Section 147(a) of the Code with respect to some or all of the "private
activity" bonds, if any, held by the Fund. If a shareholder receives an
exempt-interest dividend with respect to any share and such share has been held
for six months or less, then any loss on the sale or exchange of such share will
be disallowed to the extent of the amount of such exempt-interest dividend. The
Code provides that interest on indebtedness incurred, or continued, to purchase
or carry certain tax-exempt securities such as shares of the Fund is not
deductible. Therefore, among other consequences, a certain proportion of
interest on indebtedness incurred, or continued, to purchase or carry securities
on margin may not be deductible during the period an investor holds shares of
the Fund. For Social Security recipients, interest on tax-exempt bonds,
including exempt-interest dividends paid by the Fund, is added to adjusted gross
income for purposes of computing the amount of social security benefits
includible in gross income. The amount of tax-exempt interest received,
including exempt-interest dividends, will have to be disclosed on the
shareholders' Federal income tax returns. Taxpayers are required to include as
an item of tax preference for
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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
any portion of the exempt-interest dividends from the Fund's assets that are
attributable to such private activity bonds, less any deductions (not allowable
in computing Federal Income Tax) which would have been allowable if such
interest were includable in gross income. Corporations are required to increase
their alternative minimum taxable income for purposes of calculating their
alternative minimum tax liability by 75% of the amount by which the adjusted
current earnings (which will include tax-exempt interest) of the corporation
exceeds its alternative minimum taxable income (determined without this item).
In addition, in certain cases, Subchapter S corporations with accumulated
earnings and profits from Subchapter C years are subject to a minimum tax on
excess "passive investment income," which includes tax-exempt interest.
Although 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 are taxable to shareholders as ordinary
income when they are distributed. Any net capital gains (the excess of its net
realized long-term capital gain over its net realized short-term capital loss)
will be distributed annually to the Fund's shareholders. The Fund will have no
tax liability with respect to distributed net capital gains and the
distributions are taxable to shareholders as long-term capital gains regardless
of how long the shareholders have held Fund shares. However, Fund shareholders
who at the time of such a net capital gain distribution have not held their Fund
shares for more than 6 months, and who subsequently dispose of those shares at a
loss, will be required to treat such loss as a long-term capital loss to the
extent of the net capital gain distribution. Distributions of net capital gain
will be designated as a "capital gain dividend" in a written notice mailed to
the Fund's shareholders not later than 60 days after the close of the Fund's
taxable year. Capital gains realized by corporations are generally taxed at the
same rate as ordinary income. Generally, capital gains are taxable at a maximum
rate of 20% to non-corporate shareholders who have a holding period of more than
12 months. Corresponding maximum rate rules apply with respect to capital gains
dividends distributed by the Fund, without regard to the length of time shares
have been held by the shareholder.
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. These distributions will be taxable to shareholders as ordinary
income. 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 of an interest in the underlying Municipal
Obligations and the interest thereon will be exempt from regular Federal income
taxes to the Fund and its shareholders to the same extent as interest on the
underlying Municipal Obligation. Battle Fowler LLP has pointed out that the
Internal Revenue Service has announced that it will not ordinarily issue advance
rulings on the question of ownership of securities or participation interests
therein subject to a put and, as a result, the Internal Revenue Service could
reach a conclusion different from that reached by counsel.
In South Carolina v. Baker, the United States Supreme Court held that the
Federal government may constitutionally require states to register bonds they
issue and may subject the interest on such bonds to Federal tax if not
registered, and that there is no constitutional prohibition against the Federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the Federal government to
regulate and control bonds such as Municipal Obligations and to tax the interest
on such bonds in the future. The decision does not, however, affect the current
exemption from regular income taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.
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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.
Pennsylvania Taxes
The following is based upon the advice of Dechert Price & Rhoads, special
Pennsylvania counsel to the Fund.
Pennsylvania Municipal Obligations:
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 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.
Municipal Obligations:
The proportion of interest income representing interest income from Municipal,
Obligations distributed to shareholders of the Fund is nontaxable under the
Pennsylvania Corporate Net Income Tax but is taxable under the Pennsylvania
Personal Income Tax and the Philadelphia School District Income Tax.
The disposition by the Fund of a Municipal Obligation (whether by sale,
exchange, redemption or payment at maturity) will constitute a taxable event to
a shareholder under the Pennsylvania Personal Income Tax and the Pennsylvania
Corporate Net Income Tax. However, the disposition by the Fund of a Municipal
Obligation will not constitute a taxable event to a shareholder under the
Philadelphia School District Income Tax unless the Fund held the Municipal
Obligation for less than six months.
Territorial Obligations:
The proportion of interest income representing interest income from Territorial
Obligations distributed to shareholders of the Fund is nontaxable under the
Pennsylvania Corporate Net Income Tax, the Pennsylvania Personal Income Tax and
the Philadelphia School District Income Tax.
The disposition by the Fund of a Territorial Obligation (whether by sale,
exchange, redemption or payment at maturity) will constitute a taxable event to
a shareholder under the Pennsylvania Personal Income Tax and the Pennsylvania
Corporate Net Income Tax. However, the disposition by the Fund of a Territorial
Obligation will not constitute a taxable event to a shareholder under the
Philadelphia School District Income Tax unless the Fund held the Territorial
Obligations for less 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.
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
and as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
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The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. In the opinion of the Manager,
however, based on the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Trustees will
consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution would result in loss to shareholders or change
in the Fund's net asset value. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the SEC. Under that method, the Fund's yield figure,
which is based on a chosen seven-day period, is computed as follows: the Fund's
return for the seven-day period is obtained by dividing the net change in the
value of a hypothetical account having a balance of one share at the beginning
of the period by the value of such account at the beginning of the period
(expected to always be $1.00). This is multiplied by (365/7) with the resulting
annualized figure carried to the nearest hundredth of one percent. For purposes
of the foregoing computation, the determination of the net change in account
value during the seven-day period reflects (i) dividends declared on the
original share and on any additional shares, including the value of any
additional shares purchased with dividends paid on the original share, and (ii)
fees charged to all shareholder accounts. Realized capital gains or losses and
unrealized appreciation or depreciation of the Fund's portfolio securities are
not included in the computation. Therefore, annualized yields may be different
from effective yields quoted for the same period.
The Fund's "effective yield" for each Class is obtained by adjusting its
"current yield" to give effect to the compounding nature of the Fund's
portfolio, as follows: the unannualized base period return is compounded and
brought out to the nearest one hundredth of one percent by adding one to the
base period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, i.e., effective yield = [(base period return +
1)365/7] - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent current yield. The
tax equivalent yield for each Class is computed based upon a 30-day (or one
month) period ended on the date of the most recent balance sheet included in
this Statement of Additional Information. It is computed by dividing that
portion of the yield of the Fund (as computed pursuant to the formulae
previously discussed) which is tax exempt by one minus a stated income tax rate
and adding the quotient to that portion, if any, of the yield of the Fund that
is not tax exempt. The tax equivalent yield for the Fund may also fluctuate
daily and does not provide a basis for determining future yields.
The Fund may from time to time advertise a tax equivalent effective yield table
which shows the yield that an investor needs to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt. See "Taxable Equivalent
Yield Table" herein.
The Fund's Class A shares' yield for the seven day period ended November 30,
1998 was 2.69% which is equivalent to an effective yield of 2.73%. The Fund's
Class B shares' yield for the seven day period ended November 30, 1998 was 2.94%
which is equivalent to an effective yield of 2.98%.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended November
30, 1998 and the report therein of McGladrey & Pullen, LLP, are herein
incorporated by reference to the Fund's Annual Report. The Annual Report is
available upon request and without charge.
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DESCRIPTION OF RATINGS*
Description of Moody's Investors Service, Inc.'s Two Highest Municipal Bond
Ratings:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. ( ... ) Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used are as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Description of Moody's Investors Service, Inc.'s Two Highest Commercial Paper
Ratings:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
___________________________________
As described by the rating agencies.
29
<PAGE>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective Until December 31, 1999)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
1. If Your Corporate Taxable Income Bracket Is . . .
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
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 Rate 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
State
Tax Rate 9.99% 9.99% 9.99% 9.99% 9.99% 9.99% 9.99% 9.99%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
Combined
Marginal
Tax Rate 23.49% 32.49% 40.59% 45.09% 40.59% 41.49% 44.19% 41.49%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------------------------------------------------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------- ----------------------------------------------------------------------------------------------------------
Tax Exempt Equivalent Taxable Investment Yield
Yield Requires to Match Tax Exempt Yield
- ---------------------- ----------------------------------------------------------------------------------------------------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
2.00% 2.61% 2.96% 3.37% 3.64% 3.37% 3.42% 3.58% 3.42%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
2.50% 3.27% 3.70% 4.21% 4.55% 4.21% 4.27% 4.48% 4.27%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
3.00% 3.92% 4.44% 5.05% 5.46% 5.05% 5.13% 5.38% 5.13%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
3.50% 4.57% 5.18% 5.89% 6.37% 5.89% 5.98% 6.27% 5.98%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
4.00% 5.23% 5.93% 6.73% 7.29% 6.73% 6.84% 7.17% 6.84%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
4.50% 5.88% 6.67% 7.57% 8.20% 7.57% 7.69% 8.06% 7.69%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
5.00% 6.54% 7.41% 8.42% 9.11% 8.42% 8.55% 8.96% 8.55%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
5.50% 7.19% 8.15% 9.26% 10.02% 9.26% 9.40% 9.86% 9.40%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
6.00% 7.84% 8.89% 10.10% 10.93% 10.10% 10.26% 10.75% 10.26%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
6.50% 8.50% 9.63% 10.94% 11.84% 10.94% 11.11% 11.65% 11.11%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
7.00% 9.15% 10.37% 11.78% 12.75% 11.78% 11.96% 12.54% 11.96%
- ---------------- ------------ ------------- ------------ ------------- -------------- ------------- ------------- ---------------
</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.
30
<PAGE>
PERSONAL TAXABLE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective Until December 31, 1999)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
1. If Your Taxable Income Bracket Is . . .
- ------------------------- ---------------------- ------------------- --------------------- -------------------- ------------------
Single $0- $25,751-- $62,451- $130,251- $283,151
Return 25,750 62,450 130,250 283,150 and over
- ------------------------- ---------------------- ------------------- --------------------- -------------------- ------------------
- ------------------------- ---------------------- ------------------- --------------------- -------------------- ------------------
Joint $0- $43,051- $104,051- $158,551- $283,151
Return 43,050 104,050 158,550 283,150 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
- ------------------------- --------------------------------------------------------------------------------------------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
2.00% 2.42% 2.86% 2.98% 3.22% 3.41%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
2.50% 3.03% 3.57% 3.73% 4.02% 4.26%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
3.00% 3.63% 4.29% 4.47% 4.82% 5.11%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
3.50% 4.24% 5.00% 5.22% 5.63% 5.96%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
4.00% 4.84% 5.72% 5.96% 6.43% 6.81%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
4.50% 5.45% 6.43% 6.71% 7.23% 7.66%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
5.00% 6.05% 7.14% 7.46% 8.04% 8.52%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
5.50% 6.66% 7.86% 8.20% 8.84% 9.37%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
6.00% 7.26% 8.57% 8.95% 9.65% 10.22%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
6.50% 7.87% 9.29% 9.69% 10.45% 11.07%
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
- ------------------------- -------------------- --------------------- --------------------- -------------------- ------------------
7.00% 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.
31
