RULE 497(b)
Registration No. 33-74470
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INSTITUTIONAL DAILY INCOME FUND
600 Fifth Avenue, New York, NY 10020
(212) 830-5200
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SUPPLEMENT DATED AUGUST 1, 1996
Reich & Tang Asset Management L.P., the Fund's investment adviser, is a
wholly-owned subsidiary of New England Investment Companies, L.P. ("NEIC"). New
England Mutual Life Insurance Company ("The New England") owns NEIC's sole
general partner and a majority of the limited partnership interest in NEIC. The
New England and Metropolitan Life Insurance Company ("MetLife") have entered
into an agreement to merge, with MetLife to be the survivor of the merger. The
merger is conditioned upon, among other things, approval by the policyholders of
The New England and MetLife and receipt of certain regulatory approvals. The
merger is not expected to occur until after August 15, 1996.
The merger of The New England into MetLife will constitute an "assignment" of
the existing investment advisory agreement relating to the Fund. Under the
Investment Company Act of 1940, such an "assignment" will result in the
automatic termination of the investment advisory agreement, effective at the
time of the merger. In anticipation of the merger, shareholders of the Fund have
approved a new investment advisory agreement, intended to take effect at the
time of the merger. The new agreement will be substantially similar to the
existing agreement. Under the new agreement, however, management fees will be
increased from .08% to .12% of each Portfolio's daily net assets.
<PAGE>
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INSTITUTIONAL 600 FIFTH AVENUE
DAILY INCOME FUND NEW YORK, N.Y. 10020
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PROSPECTUS
August 1, 1996
The Institutional Daily Income Fund (the "Fund") is composed of the U.S.
Treasury Portfolio, the Money Market Portfolio and the Municipal Portfolio (each
a "Portfolio", collectively, the "Portfolios") designed to meet the short-term
investment needs of corporate and institutional investors ("Institutional
Investors").
There are no sales loads, exchange or redemption fees associated with the Fund.
Each Portfolio offers two classes of shares to Institutional Investors - Class A
and Class B shares. The Class A shares of the Fund are subject to a service fee
pursuant to the Fund's Rule 12b-1 Distribution and Service Plan and are sold
through financial intermediaries who provide servicing to Class A shareholders
for which they receive compensation from the Manager or the Distributor. The
Class B shares of the Fund are not subject to a service fee and either are sold
directly to Institutional Investors or are sold through financial intermediaries
that do not receive compensation from the Manager or Distributor. In all other
respects, the Class A and Class B shares represent the same interest in the
income and assets of the Fund. See "Description of Shares."
U.S. Treasury Portfolio - seeks to maximize current income to the extent
consistent with the preservation of capital and the maintenance of liquidity and
maintain a stable net asset value of $1 per share by investing solely in U.S.
Treasury obligations and in other obligations backed by the full faith and
credit of the United States government with maturities of 397 days or less and
repurchase agreements which are collateralized by such obligations calling for
resale in 397 days or less.
Money Market Portfolio - seeks to maximize current income to the extent
consistent with the preservation of capital and the maintenance of liquidity and
maintain a stable net asset value of $1 per share by investing in short-term
money market obligations with maturities of 397 days or less, including bank
certificates of deposit, time deposits, bankers' acceptances, high quality
commercial paper, securities issued or guaranteed by the United States
Government, its agencies or instrumentalities, and repurchase agreements calling
for resale in 397 days or less backed by the foregoing securities.
Municipal Portfolio - seeks to maximize current tax exempt income to the extent
consistent with the preservation of capital and the maintenance of liquidity and
maintain a stable net asset value of $1 per share by investing in a portfolio of
obligations issued by states, territories and possessions of the United States
and their political subdivisions, public authorities and other entities
authorized to issue debt, the interest on which is exempt from regular federal
income taxes. This Portfolio has not yet been activated and is not offered for
sale or distribution.
This Prospectus sets forth concisely the information about each Portfolio that a
prospective investor ought to know before investing and it should be retained
for future reference. Additional information about each Portfolio, including
additional information concerning risk factors relating to an investment in each
Portfolio, has been filed with the Securities and Exchange Commission in a
Statement of Additional Information for the Fund, dated the date of this
Prospectus and as supplemented from time to time. This information is
incorporated by reference and is available without charge and can be obtained by
writing or calling the Fund at the address or telephone number set forth above.
Reich & Tang Asset Management L.P., a registered investment advisor, acts as
manager of the Fund and Reich & Tang Distributors L.P., a registered
broker-dealer and member of the National Association of Securities Dealers,
Inc., acts as distributor of the Fund's shares.
MINIMUM INITIAL PURCHASE $1,000,000 AN INVESTMENT IN THE FUND IS NEITHER INSURED
NOR GUARANTEED BY THE UNITED STATES GOVERNMENT. EACH PORTFOLIO SEEKS TO MAINTAIN
AN INVESTMENT PORTFOLIO WITH A DOLLAR-WEIGHTED AVERAGE MATURITY OF 90 DAYS OR
LESS, AND TO VALUE ITS INVESTMENT PORTFOLIO AT AMORTIZED COST AND MAINTAIN A NET
ASSET VALUE OF $1.00 PER SHARE. THERE CAN BE NO ASSURANCE THAT THE FUND'S
OBJECTIVES WILL BE ACHIEVED OR THAT THE FUND'S STABLE NET ASSET VALUE OF $1.00
PER SHARE CAN BE MAINTAINED.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus should be read and retained by investors for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Estimated Annual Fund Operating Expenses
Money U.S.
Market Treasury Municipal
Portfolio Portfolio Portfolio**
<S> <C> <C> <C> <C> <C> <C>
Class A Class B Class A Class B Class A Class B
Management Fees - After Fee Waiver * .00% .00% .04% .04% .08% .08%
12b-1 Fees .25% None .25% None .25% None
Other Expenses - After Reimbursement * .16% .16% .14% .14% .12% .12%
Administration Fees - After Fee Waiver* .00% .00% .01% .00% .00% .00%
Total Fund Operating Expenses - After Fee
Waivers and Reimbursements* .41% .16% .43% .18% .45% .20%
==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Money U.S.
Market Treasury Municipal
Portfolio Portfolio Portfolio**
Class A Class B Class A Class B Class A Class B
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming 5% annual
return and redemption at the end of each
<S> <C> <C> <C> <C> <C> <C>
time period: 1 year $ 4 $ 2 $ 4 $ 2 $ 5 $ 2
3 years $13 $ 5 $14 $ 6 $14 $ 6
5 years $23 $ 9 $24 $ 10 $25 $11
10 years $52 $20 $54 $23 $57 $26
</TABLE>
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The outstanding shares of the Fund
were reclassified into Class B shares on April 6, 1995. The expneses shown for
the U.S. Treasury Portfolio Class A shares are at levels anticipated for the
current fiscal year. With respect to both the Class A shares and the Class B
shares, the Manager has agreed to waive all of its Management and Administration
Fees and reimburse each Portfolio its operating expenses to the extent necessary
to maintain the total expense ratio of each Portfolio during the first three
years of the Fund at a maximum of .40%, .425% and .45% of the Class A shares'
average daily net assets and at a maximum of .15%, .175% and .20% of the Class B
shares' average daily net assets, respectively. In addition, the Manager has
voluntarily reimbursed the expenses of the Money Market Portfolio to a level
below the agreed maximum. Absent such waivers, Management and Administration
Fees for the Money Market Portfolio and U.S. Treasury Portfolio would have been
.08% and .05%, respectively, for both Class A and Class B shares. Absent the
reimbursement in the Money Market Portfolio, Other Expenses would have been .19%
for both Class A and Class B shares. Absent such reimbursement and fee waivers,
Total Fund Operating Expenses for the Money Market Portfolio for the Class A and
Class B shares would have been .57% and .32%, respectively. Absent such fee
waivers, Total Fund Operating Expenses for the U.S. Treasury Portfolio for the
Class A and Class B shares would have been .51% and .26%, respectively.
The figures reflected in this example should not be considered to
be a representation of past or future expenses. Actual expenses may be greater
or less than those shown above.
*Reimbursement applies only to Money Market Portfolio, waivers apply to Money
Market and U.S. Treasury Portfolios.
** At this time, the Municipal Portfolio of the Fund has not yet been activated
by the Manager.
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SELECTED FINANCIAL INFORMATION
The following financial information of the Money Market Portfolio and the U.S.
Treasury Portfolio of Institutional Daily Income Fund have been audited by
McGladrey & Pullen, LLP, Independent Certified Public Accountants whose report
thereon appears in the Statement of Additional Information and may be obtained
by shareholders upon request. The Money Market Portfolio and the U.S. Treasury
Portfolio were the only activated portfolios of the Fund as of March 31, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Money Market Portfolio U.S. Treasury Portfolio
Class A** Class B Class A
For the April 14,1994 November 29, 1995
Period (Commencement (Commencement
Ended of Operations) to of Operations) to
March 31, 1996 March 31, 1995 March 31, 1996
--------------------------- -------------- --------------
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
------ ----- ------ -----
Income from investment operations:
Net investment income.............. 0.054 0.057 0.045 .017
Less distributions:
Dividends from net investment income (0.054) (0.057) (0.045) (.017)
----- ----- ----- -----
Net asset value, end of period..... $1.00 $1.00 $1.00 $1.00
====== ===== ====== =====
Total Return....................... 5.58% 5.85% 5.16%* 5.18%*
Ratios/Supplemental Data
Net assets, end of period (000).... $ 5 $ 127,282 $ 35,857 $ 291,747
Ratios to average net assets:
Expenses (includes expenses paid
indirectly).......... .41%+ .16%+ .02%*+ .43%*++
Net investment income........... 5.46%+ 5.64%+ 5.14%*+ 5.07%*++
* Annualized.
** Class A commenced operations on April 6, 1995.
+ Net of management and administration fees waived equivalent to .13% for 1996
and 1995 of average net assets. Expenses reimbursed equivalent to .03% and .25%
for 1996 and 1995, respectively, of average net assets.
++ Net of management and administration fees waived equivalent to 0.08% of
average net assets.
</TABLE>
3
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INTRODUCTION
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Institutional Daily Income Fund (the "Fund") is a no-load, diversified, open-end
management investment company offering investors three managed portfolios of
money market instruments (the "Portfolios") together with a high degree of
liquidity. The net asset value of each Fund share is expected to remain constant
at $1.00, although this cannot be assured.
The investment objective of the Fund is, in accordance with the investment
policies of each of the Fund's Portfolios, to maximize current income to the
extent consistent with the preservation of capital and the maintenance of
liquidity. There is no assurance that the Fund will achieve its investment
objective. The investment objective of the Fund may not be changed without
shareholder approval.
The U.S. Treasury Portfolio attempts to achieve its objective through
investments limited to U.S. Treasury obligations and other obligations that are
issued or guaranteed by the U.S. Government and that are backed by the full
faith and credit of the United States with maturities of 397 days or less and
repurchase agreements backed by such obligations calling for resale in 397 days
or less. The Money Market Portfolio attempts to achieve its objective through
investment in short-term money market obligations with maturities of 397 days or
less, including bank certificates of deposit, time deposits, bankers'
acceptances, high quality commercial paper, securities issued or guaranteed by
the United States Government, its agencies or instrumentalities, and repurchase
agreements calling for resale in 397 days or less backed by the forgoing
securities. The Municipal Portfolio attempts to achieve its objective through
investment in a portfolio of obligations issued by states, territories and
possessions of the United States and political subdivisions, public authorities
and other entities authorized to issue debt, the interest on which is exempt
from regular federal income tax. Each Portfolio seeks to maintain an investment
portfolio with a dollar-weighted average maturity of 90 days or less, and to
value its investment portfolio at amortized cost and maintain a net asset value
of $1.00 per share. There can be no assurance that this value will be
maintained.
The Fund's investment manager is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment advisor and which currently acts as
manager or administrator to fifteen other open-end management investment
companies. (See "Management of the Fund" herein.) The Fund's shares are
distributed through Reich & Tang Distributors L.P. (the "Distributor"), with
whom the Fund has entered into a Distribution Agreement and Shareholder
Servicing Agreement (with respect to Class A shares of the Fund only) pursuant
to the Fund's distribution and service plan adopted under Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act"). (See "Distribution
and Service Plan" herein.)
On any day on which Investors Fiduciary Trust Company, the Fund's custodian (the
"Custodian") is open for trading ("Fund Business Day"), investors may, without
charge by the Fund, initiate purchases and redemptions of shares of the Fund's
common stock at their net asset value, which will be determined daily. (See
"Purchase and Redemption of Shares" and "Net Asset Value" herein.) Dividends
from accumulated net income are declared by the Fund on each Fund Business Day.
The Fund pays interest dividends monthly on the last calendar day of the month
or, if the last calendar day of the month is not a Fund Business Day, on the
preceding Fund Business Day.
Net capital gains, if any, will be distributed at least annually, and in no
event later than within 60 days after the end of the Fund's fiscal year. All
dividends and distributions of capital gains are automatically invested in
additional shares of the same class of the Fund unless a shareholder has elected
by written notice to the Fund to receive either of such distributions in cash.
(See "Dividends, Distributions and Taxes" herein.)
The Fund currently has three Portfolios but only the Money Market Portfolio and
the U.S. Treasury Portfolio have been activated by the Manager. The Board of
Trustees of the Fund may in the future determine to establish additional
portfolios, each of which will be consistent with the investment objectives of
the Fund. Set forth below are the investment policies for each of the Fund's
current Portfolios. The investment policies for the Money Market Portfolio, as
well as for any portfolios which the Board of Trustees may determine to
establish in the future, may be changed by the
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Board of Trustees of the Fund without shareholder approval. The investment
policies for the U.S. Treasury Portfolio and the Municipal Portfolio may not be
changed without shareholder approval.
The Fund may from time to time advertise its current yield and effective yield
for each Portfolio (computed separately for each Class of shares). The Fund's
current yield is calculated by dividing its average daily net income per share
of each Portfolio (excluding realized gains or losses) for a recent seven-day
period by its constant net asset value per share of $1.00 and annualizing the
result on a 365-day basis. The Fund's effective yield is calculated by
increasing its current yield according to a formula that takes into account the
compounding effect of the reinvestment of dividends. The Class A shares of each
Portfolio will generally have a lower yield than the Class B shares due to the
expenses attributable to the Class A Shares which are not attributable to the
Class B shares, under the Fund's Distribution and Service Plan. Any fees charged
by a Participating Organization directly to a customer's account will not be
included in yield calculations. See "How to Purchase and Redeem Shares -
Investments through Participating Organizations."
An investment in the Portfolios of the Fund entails certain risks, including
risks associated with the purchase of when-issued securities, repurchase
agreements and with privately placed securities. With respect to the Money
Market Portfolio, certain risks are associated with the purchase of foreign
issues. Risk factors for each Portfolio are further described under "Risk
Factors and Additional Investment Information" herein.
INVESTMENT OBJECTIVES,
POLICIES AND RISKS
U.S. Treasury Portfolio
The U.S. Treasury Portfolio is intended to attain the Fund's investment
objective through investments limited to (i) U.S. Treasury obligations and other
obligations that are issued or guaranteed by the Government and that are backed
by the full faith and credit of the United States, provided that those
obligations have a remaining maturity of 397 days or less and (ii) repurchase
agreements backed by such, calling for resale in 397 days or less.
The investment policies of the U.S. Treasury Portfolio may produce a lower yield
than a policy of investing in other types of money market instruments. The yield
of the U.S. Treasury Portfolio is likely to be lower than the yield of the Money
Market Portfolio.
Permitted Investments:
United States Treasury Obligations: Obligations issued by the full faith and
credit of the United States. U.S. Treasury obligations include bills, notes and
bonds, which principally differ only in their interest rates, maturities and
time of issuance.
Other United States Government Obligations: Marketable securities and
instruments issued or guaranteed by the full faith and credit of the United
States Government. Such obligations that are guaranteed by the full faith and
credit of the United States Government include obligations of the Federal
Housing Administration, the Export-Import Bank of the United States, the Small
Business Administration, the Government National Mortgage Association, the
General Services Administration and the Maritime Administration.
Money Market Portfolio
The Money Market Portfolio is intended to attain the Fund's investment objective
through investments in the securities described below, provided they have a
remaining maturity of 397 days or less or are subject to a repurchase agreement
calling for resale in 397 days or less. Investments in short-term instruments
may, in some circumstances, result in a lower yield than would be available from
investments in instruments with a longer term.
Permitted Investments:
United States Government Securities: Short-term obligations issued or guaranteed
by the United States Government, its agencies or instrumentalities. These
include issues of the United States Treasury, such as bills, certificates of
indebtedness, notes and bonds, and issues of agencies and instrumentalities
established under the authority of an act of Congress. Some of these securities
are supported by the full faith and credit of the United States Treasury, others
are supported by the right of the issuer to borrow from the Treasury, and still
others are supported only by the credit of the agency or instrumentality.
Although
5
<PAGE>
obligations of federal agencies and instrumentalities are not debts of the
United States Treasury, in some cases payment of interest and principal on such
obligations is guaranteed by the United States Government, e.g., obligations of
the Federal Housing Administration, the Export-Import Bank of the United States,
the Small Business Administration, the Government National Mortgage Association,
the General Services Administration and the Maritime Administration; in other
cases payment of interest and principal is not guaranteed, e.g., obligations of
the Federal Home Loan Bank System and the Federal Farm Credit Bank.
Domestic and Foreign Bank Obligations: Certificates of deposit, time deposits,
commercial paper, bankers' acceptances issued by domestic banks, foreign
branches of domestic banks, foreign subsidiaries of domestic banks, and domestic
and foreign branches of foreign banks and corporate instruments supported by
bank letters of credit. See "Risk Factors and Additional Investment Information"
herein. Certificates of deposit are certificates representing the obligation of
a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a bank for a specified period
of time (in no event longer than seven days) at a stated interest rate. Time
deposits and certificates of deposit which may be held by the Portfolio will not
benefit from insurance from the Federal Deposit Insurance Corporation. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. These instruments reflect the obligation both
of the bank and of the drawer to pay the face amount of the instrument upon
maturity. The Money Market Portfolio limits its investments in obligations of
domestic banks, foreign branches of domestic banks and foreign subsidiaries of
domestic banks to banks having total assets in excess of one billion dollars or
the equivalent in other currencies. The Money Market Portfolio limits its
investments in obligations of domestic and foreign branches of foreign banks to
dollar-denominated obligations of such banks which at the time of investment
have more than $5 billion, or the equivalent in other currencies, in total
assets and which are considered by the Fund's Board of Trustees to be First Tier
Eligible Securities (as defined below) at the time of acquisition. The Money
Market Portfolio generally limits investments in bank instruments to (a) those
which are fully insured as to principal by the FDIC or (b) those issued by banks
which at the date of their latest public reporting have total assets in excess
of $1.5 billion. However, the total assets of a bank will not be the sole factor
determining the Money Market Portfolio's investment decisions and the Money
Market Portfolio may invest in bank instruments issued by institutions which the
Board of Trustees believes present minimal credit risks.
U.S. dollar-denominated obligations issued by foreign branches of domestic banks
or foreign branches of foreign banks ("Eurodollar" obligations) and domestic
branches of foreign banks ("Yankee dollar" obligations). The Money Market
Portfolio will limit its aggregate investments in foreign bank obligations,
including Eurodollar obligations and Yankee dollar obligations, to 25% of its
total assets at the time of purchase, provided that there is no limitation on
the Money Market Portfolio investments in (a) Eurodollar obligations, if the
domestic parent of the foreign branch issuing the obligations is unconditionally
liable in the event that the foreign branch fails to pay on the Eurodollar
obligation for any reason; and (b) Yankee dollar obligations, if the U.S. branch
of the foreign bank is subject to the same regulation as U.S. banks. Eurodollar,
Yankee dollar and other foreign bank obligations include time deposits, which
are non-negotiable deposits maintained in a bank for a specified period of time
at a stated interest rate. The Money Market Portfolio will limit its purchases
of time deposits to those which mature in seven days or less, and will limit its
purchases of time deposits maturing in two to seven days to 10% of such Fund's
total assets at the time of purchase.
Eurodollar and other foreign obligations involve special investment risks,
including the possibility that liquidity could be impaired because of future
political and economic developments, that the obligations may be less marketable
than comparable domestic obligations of domestic issuers, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that deposits may be seized or nationalized, that foreign
governmental restrictions such as exchange controls may be adopted which
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<PAGE>
might adversely affect the payment of principal of and interest on those
obligations, that the selection of foreign obligations may be more difficult
because there may be less information publicly available concerning foreign
issuers, that there may be difficulties in enforcing a judgment against a
foreign issuer or that the accounting, auditing and financial reporting
standards, practices and requirements applicable to foreign issuers may differ
from those applicable to domestic issuers. In addition, foreign banks are not
subject to examination by United States Government agencies or
instrumentalities.
Since the Money Market Portfolio may contain securities issued by foreign
governments, or any of their political subdivisions, agencies or
instrumentalities, and by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, domestic and foreign branches of foreign banks,
and commercial paper issued by foreign issuers, the Money Market Portfolio may
be subject to additional investment risks with respect to those securities that
are different in some respects from those incurred by a fund which invests only
in debt obligations of the United States and domestic issuers, although such
obligations may be higher yielding when compared to the securities of the United
States and domestic issuers. In making foreign investments, therefore, the Money
Market Portfolio will give appropriate consideration to the following factors,
among others.
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable United States issuers. Similarly,
volume and liquidity in most foreign securities markets are less than in the
United States and, at times, volatility of price can be greater than in the
United States. The issuers of some of these securities, such as bank
obligations, may be subject to less stringent or different regulation than are
United States issuers. In addition, there may be less publicly available
information about a non-United States issuer and non-United States issuers
generally are not subject to uniform accounting and financial reporting
standards, practices and requirements comparable to those applicable to United
States issuers.
Because evidences of ownership of such securities usually are held outside the
United States, the Money Market Portfolio will be subject to additional risks
which include possible adverse political and economic developments, possible
seizure or nationalization of foreign deposits and possible adoption of
governmental restrictions which might adversely affect the payment of principal
and interest on the foreign securities or might restrict the payment of
principal and interest to the issuer, whether from currency blockage or
otherwise.
Furthermore, some of these securities may be subject to stamp or other excise
taxes levied by foreign governments, which have the effect of increasing the
cost of such securities and reducing the realized gain or increasing the
realized loss on such securities at the time of sale. Income earned or received
by the Money Market Portfolio from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States, however, may reduce
or eliminate such taxes. The Manager will attempt to minimize such taxes by
timing of transactions and other strategies, but there can be no assurance that
such efforts will be successful. All such taxes paid by the Money Market
Portfolio will reduce its net income available for distribution to shareholders.
The Manager will consider available yields, net of any required taxes, in
selecting foreign securities.
Variable Amount Master Demand Notes: unsecured demand notes that permit
investment of fluctuating amounts of money at variable rates of interest
pursuant to arrangements with issuers who meet the foregoing quality criteria.
The interest rate on a variable amount master demand note is periodically
redetermined according to a prescribed formula. Although there is no secondary
market in master demand notes, the payee may demand payment of the principal and
interest upon notice not exceeding five business or seven calendar days.
Commercial Paper and Certain Debt Obligations: commercial paper or short-term
debt obligations that have been determined by the Fund's Board of Trustees to
present minimal credit risks and that are First Tier Eligible Securities (as
defined below) at the time of acquisition, so that the Money Market Portfolio
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<PAGE>
is able to employ the amortized cost method of valuation. Commercial paper
generally consists of short-term unsecured promissory notes issued by
corporations, banks or other borrowers.
The Money Market Portfolio may only purchase securities that have been
determined by the Fund's Board of Trustees to present minimal credit risks and
that are First Tier Eligible Securities at the time of acquisition. The term
First Tier Eligible Securities means (i) securities that have remaining
maturities of 397 days or less and are rated in the highest short-term rating
category by any two nationally recognized statistical rating organizations
("NRSROs") or in such category by the only NRSRO that has rated the securities
(collectively, the "Requisite NRSROs") (acquisition in the latter situation must
also be ratified by the Board of Trustees); (ii) securities that have remaining
maturities of 397 days or less but that at the time of issuance were long-term
securities and whose issuer has received from the Requisite NRSROs a rating with
respect to comparable short-term debt in the highest short-term rating category;
and (iii) unrated securities determined by the Fund's Board of Trustees to be of
comparable quality. Where the issuer of a long-term security with a remaining
maturity which would otherwise qualify it as a First Tier Eligible Security does
not have rated short-term debt outstanding, the long-term security is treated as
unrated but may not be purchased if it has a long-term rating from any NRSRO
that is below the two highest long-term categories. A determination of
comparability by the Board of Trustees is made on the basis of its credit
evaluation of the issuer, which may include an evaluation of a letter of credit,
guarantee, insurance or other credit facility issued in support of the
securities or participation certificates. While there are several organizations
that currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's
Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's"). The two
highest ratings by Moody's for debt securities are "Aaa" and "Aa" or by S&P are
"AAA" and "AA". The highest rating for domestic and foreign commercial paper is
"Prime-1" by Moody's or "A-1" by S&P and "SP-1/AA" by S&P or "VMIG-1" and
"VMIG-2" by Moody's in the case of variable and floating rate demand notes. (See
"Description of Ratings" in the Statement of Additional Information.)
Subsequent to its purchase by the Portfolio, the quality of an investment may
cease to be rated or its rating may be reduced so that it ceases to be a First
Tier Eligible Security. If this occurs, the Board of Trustees of the Fund shall
reassess promptly whether the security presents minimal credit risks and shall
cause the Portfolio to take such action as the Board of Trustees determines is
in the best interest of the Portfolio and its shareholders. However,
reassessment is not required if the security is disposed of or matures within
five business days of the Manager becoming aware of the new rating and provided
further that the Board of Trustees is subsequently notified of the Manager's
actions.
In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7 or (3) is determined to no longer present
minimal credit risks, the Portfolio 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 interest of the Portfolio. In the event that the
security is disposed of, it shall be disposed of as soon as practicable,
consistent with achieving an orderly disposition by sale, exercise of any demand
feature, or otherwise. In the event of a default with respect to a security
which immediately before default accounted for 1/2 of 1% or more of the
Portfolio's total assets, the Fund shall promptly notify the Securities and
Exchange Commission of such fact and of the actions that the Fund intends to
take in response to the situation.
The Money Market Portfolio may enter into repurchase agreements providing for
resale in 397 days or less covering any of the foregoing securities which may
have maturities in excess of 397 days, provided that the instruments serving as
collateral for the agreements are eligible for inclusion in the Money Market
Portfolio.
Municipal Portfolio
The Municipal Portfolio seeks to provide as high a level of current income that
is exempt from federal income taxes as is consistent with the preservation of
capital and maintenance of liquidity by investing at least 80% of its assets in
a diversified portfolio of high quality, short-term municipal obligations the
interest income from which is exempt from regular federal income
8
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taxes ("Municipal Securities"). Although the Supreme Court has determined that
Congress has the authority to subject the interest on bonds such as the
Municipal Securities to regular federal income taxation, existing law excludes
such interest from regular federal income tax. However, "exempt-interest
dividends" may be subject to the federal alternative minimum tax. Securities,
the interest income on which may be subject to the federal alternative minimum
tax (including participation certificates in such securities), may be purchased
by the Fund without limit. Securities, the interest income on which is subject
to regular federal, state and local income tax, will not exceed 20% of the value
of the Fund's total assets. (See "Dividends, Distributions and Taxes" herein.)
Permitted Investments:
Municipal Securities: which include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the obtaining of funds for
general operating expenses and lending such funds to other public institutions
and facilities. In addition, certain types of private activity bonds or
industrial development bonds are issued by or on behalf of public authorities to
obtain funds to provide for the construction, equipment, repair or improvement
of privately operated facilities. Such obligations are considered to be
Municipal Securities provided that the interest paid thereon generally qualifies
as exempt from federal income tax in the opinion of bond counsel. However,
interest on certain Municipal Securities may give rise to federal alternative
minimum tax liability and may have other collateral federal income tax
consequences.
The Portfolio may only purchase Municipal Securities that have been determined
by the Fund's Board of Trustees to present minimal credit risks and that are
First Tier Eligible Securities at the time of acquisition. The term First Tier
Eligible Securities means (i) Municipal Securities with remaining maturities of
397 days or less and rated in the two highest short-term rating categories by
any two NRSROs or in such categories by the only NRSRO that has rated the
Municipal Securities (collectively, the "Requisite NRSROs") (acquisition in the
latter situation must also be ratified by the Board of Trustees); (ii) Municipal
Securities with remaining maturities of 397 days or less but that at the time of
issuance were long-term securities (i.e., with maturities greater than 366 days)
and whose issuer has received from the Requisite NRSROs a rating with respect to
comparable short-term debt in the highest rating category and (iii) unrated
Municipal Securities determined by the Fund's Board of Trustees to be of
comparable quality. Where the issuer of a long-term security with a remaining
maturity which would otherwise qualify it as a First Tier Eligible Security does
not have rated short-term debt outstanding, the long-term security is treated as
unrated but may not be purchased if it has a long-term rating from any NRSRO
that is below the two highest long-term 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 Municipal
Securities. The two highest ratings by Moody's for debt securities are "Aaa" and
"Aa" or by S&P are "AAA" and "AA". The highest rating for domestic and foreign
commercial paper is "Prime-1" by Moody's and "A-1" by S&P and "SP-1/AA" by S&P
or "VMIG-1" and "VMIG-2" by Moody's in the case of variable and floating rate
demand notes. (See "Description of Ratings" in the Statement of Additional
Information.)
Subsequent to its purchase by the Portfolio, the quality of an investment may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. If this occurs, the Board of Trustees of the Fund
shall reassess promptly whether the security presents minimal credit risks and
shall cause the Portfolio to take such action as the Board of Trustees
determines is in the best interest of the Portfolio and its shareholders.
However, reassessment is not required if the security is disposed of or matures
within five business days of the Manager becoming aware of the new rating and
provided further that the Board of Trustees is subsequently notified of the
Manager's actions.
In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7 or (3) is determined to no longer present
minimal credit risks, the Portfolio will dispose of the security absent a
determination by the Fund's Board of
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<PAGE>
Trustees that disposal of the security would not be in the best interest of the
Portfolio. In the event that the security is disposed of, it shall be disposed
of as soon as practicable, consistent with achieving an orderly disposition by
sale, exercise of any demand feature, or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Portfolio's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation.
All investments by the Fund will mature or will be deemed to mature in 397 days
or less from the date of acquisition.
The Municipal Portfolio also may purchase any Municipal Securities which depends
on the credit of the United States Government and may invest in Municipal
Securities which are not rated if, in the opinion of the Board of Trustees, such
securities possess creditworthiness comparable to those rated obligations in
which the Municipal Portfolio may invest. The Municipal Portfolio may, from time
to time, on a temporary or defensive basis, invest in short-term, high quality
United States Government Obligations, money market obligations and repurchase
agreements. Income from any such temporary investments would be taxable to
shareholders as ordinary income. It is the present policy of the Municipal
Portfolio to invest only in securities the interest on which is tax-exempt. This
Portfolio will endeavor to be invested at all times in Municipal Securities. It
is a fundamental policy of the Municipal Portfolio that its assets will be
invested so that at least 80% of its income will be exempt from regular federal
income taxes. The Municipal Portfolio may from time to time hold cash reserves.
RISK FACTORS AND ADDITIONAL
INVESTMENT INFORMATION
When-Issued and Delayed Delivery Securities
Each of the Portfolios may purchase securities on a when-issued or delayed
delivery basis. Delayed delivery agreements are commitments by any of the
Portfolios to dealers or issuers to acquire securities beyond the customary
same-day settlement for money market instruments. These commitments fix the
payment price and interest rate to be received on the investment. Delayed
delivery agreements will not be used as a speculative or leverage technique.
Rather, from time to time, the Portfolio's investment advisor can anticipate
that cash for investment purposes will result from scheduled maturities of
existing portfolio instruments or from net sales of shares of a Portfolio;
therefore, to assure that a Portfolio will be as fully invested as possible in
instruments meeting that Portfolio's investment objective, a Portfolio may enter
into delayed delivery agreements, but only to the extent of anticipated funds
available for investment during a period of not more than five business days.
Money Market Obligations and Municipal Securities are sometimes offered on a
"when-issued" basis, that is, the date for delivery of and payment for the
securities is not fixed at the date of purchase, but is set after the securities
are issued (normally within forty-five days after the date of the transaction).
The payment obligation and the interest rate that will be received on the
securities are fixed at the time the buyer enters into the commitment. A
Portfolio will only make commitments to purchase such Money Market Instruments
or Municipal Securities with the intention of actually acquiring such
securities, but a Portfolio may sell these securities before the settlement date
if it is deemed advisable.
If a Portfolio enters into a delayed delivery agreement or purchases a
when-issued security, that Portfolio will direct the custodian to place cash or
other high grade securities (including Money Market Obligations and Municipal
Securities) in a separate account of such Fund in an amount equal to its delayed
delivery agreements or when-issued commitments. If the market value of such
securities declines, additional cash or securities will be placed in the account
on a daily basis so that the market value of the account will equal the amount
of such Portfolio's delayed delivery agreements and when-issued commitments. To
the extent that funds are in a separate account, they will not be available for
new investment or to meet redemptions. Investment in securities on a when-issued
basis and use of delayed agreements may increase a Portfolio's exposure to
market fluctuation; may increase the possibility that the Municipal Portfolio
will incur a short-term gain subject to federal taxation;
10
<PAGE>
or may increase the possibility that a Portfolio will incur a short-term loss,
if the Portfolio must engage in portfolio transactions in order to honor a
when-issued commitment or accept delivery of a security under a delayed delivery
agreement. The Portfolios will employ techniques designed to minimize these
risks.
No additional delayed delivery agreements or when-issued commitments will be
made if more than 25% of a Fund's net assets would become so committed. The
Portfolios will enter into when-issued and delayed delivery transactions only
when the time period between trade date and settlement date is at least 30 days
and not more than 120 days.
Repurchase Agreements
When a Portfolio purchases securities, it may enter into a repurchase agreement
with the seller wherein the seller agrees, at the time of sale, to repurchase
the security at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This arrangement results in a fixed
rate of return insulated from market fluctuations during such period. The U.S.
Treasury Portfolio may only enter into repurchase agreements which are
collateralized by obligations issued or guaranteed by the U.S. Government. The
Money Market Portfolio and the Municipal Portfolio may enter into repurchase
agreements with member banks of the Federal Reserve System and with
broker-dealers who are recognized as primary dealers in United States government
securities by the Federal Reserve Bank of New York whose creditworthiness has
been reviewed and found to meet the investment criteria of the Portfolio.
Although the securities subject to the repurchase agreement might bear
maturities exceeding 397 days, settlement for the repurchase would never be more
than one year after the Portfolio's acquisition of the securities and normally
would be within a shorter period of time. The resale price will be in excess of
the purchase price, reflecting an agreed upon market rate effective for the
period of time the Portfolio's money will be invested in the security, and will
not be related to the coupon rate of the purchased security. At the time a
Portfolio enters into a repurchase agreement the value of the underlying
security, including accrued interest, will be equal to or exceed the value of
the repurchase agreement and, in the case of a repurchase agreement exceeding
one day, the seller will agree that the value of the underlying security,
including accrued interest, will at all times be equal to or exceed the value of
the repurchase agreement. Each Portfolio may engage in a repurchase agreement
with respect to any security in which that Portfolio is authorized to invest,
even though the underlying security may mature in more than one year. The
collateral securing the seller's obligation must be of a credit quality at least
equal to the Portfolio's investment criteria for Portfolio securities and will
be held by the Portfolio's custodian or in the Federal Reserve Book Entry
System. Nevertheless, if the seller of a repurchase agreement fails to
repurchase the obligation in accordance with the terms of the agreement, the
Portfolio which entered into the repurchase agreement may incur a loss to the
extent that the proceeds it realized on the sale of the underlying obligation
are less than the repurchase price. Repurchase agreements may be considered
loans to the seller of the underlying security. Income with respect to
repurchase agreements is not tax-exempt. If bankruptcy proceedings are commenced
with respect to the seller, the Portfolio's realization upon the collateral may
be delayed or limited. Each Portfolio may invest no more than 10% of its net
assets in illiquid securities including repurchase agreements maturing in more
than seven days. See "Investment Restrictions" herein. A Portfolio may, however,
enter into "continuing contract" or "open" repurchase agreements under which the
seller is under a continuing obligation to repurchase the underlying obligation
from the Portfolio on demand and the effective interest rate is negotiated on a
daily basis.
Securities purchased pursuant to a repurchase agreement are held by the Fund's
custodian and (i) are recorded in the name of the Portfolio with the Federal
Reserve Book Entry System or (ii) the Portfolio receives daily written
confirmation of each purchase of a security and a receipt from the custodian.
The Portfolios purchase securities subject to a repurchase agreement only when
the purchase price of the security acquired is equal to or less than its market
price at the time of purchase.
Puts for the Municipal Portfolio
The Municipal Portfolio may purchase municipal bonds
11
<PAGE>
or notes with the right to resell them at an agreed price or yield within a
specified period prior to maturity to facilitate portfolio liquidity. This right
to resell is known as a "put." The Municipal Portfolio may also acquire a
"Stand-by Commitment" when it purchases municipal bonds or notes, which is
essentially equivalent to a "put" option. A Stand-by Commitment is a right of
the Municipal Portfolio, when it purchases Municipal Securities for its
portfolio from a broker, dealer or other financial institution, to sell the same
principal amount of such securities back to the seller, at the Municipal
Portfolio's option, at a specified price. The aggregate price paid for
securities with puts may be higher than the price which otherwise would be paid.
Consistent with the investment objectives of this Portfolio and subject to the
supervision of the Trustees, the purpose of this practice is to permit the
Portfolio to be fully invested in tax exempt securities while maintaining the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, to purchase at a later date securities other than
those subject to the put. The acquisition or exercisibility of a Stand-by
Commitment by the Municipal Portfolio will not affect the valuation of the
average weighted maturity of its underlying portfolio securities. The principal
risk of puts is that the put writer may default on its obligation to repurchase.
The Manager will monitor each writer's ability to meet its obligations under
puts. See "Investment Restrictions" and "Tax Status" in the Statement of
Additional Information.
The amortized cost method is used by the Money Market Portfolio and the
Municipal Portfolio to value any municipal securities; no value is assigned to
any puts on such municipal securities. The cost of any such put is carried as an
unrealized loss from the time of purchase until it is exercised or expires.
Privately Placed Securities
The Money Market Portfolio and the Municipal Portfolio may invest in securities
issued as part of privately negotiated transactions between an issuer and one or
more purchasers. Except with respect to certain commercial paper issued in
reliance on the exemption from regulations in Section 4(2) of the Securities Act
of 1933 (the "Securities Act") and securities subject to Rule 144A of the
Securities Act which are discussed below, these securities are typically not
readily marketable and are therefore considered illiquid securities. The price
these Portfolios pay for illiquid securities, and any price received upon
resale, may be lower than the price paid or received for similar securities with
a more liquid market. Accordingly, the valuation of privately placed securities
purchased by a Portfolio will reflect any limitations on their liquidity. As a
matter of policy, a Portfolio will not invest more than 10% of the market value
of the net assets of the Portfolio in repurchase agreements maturing in over
seven days and other illiquid investments.
These Portfolios may purchase securities that are not registered ("restricted
securities") under the Securities Act, but can be offered and sold to "qualified
institutional buyers" under Rule 144A of the Securities Act. These Portfolios
may also purchase certain commercial paper issued in reliance on the exemption
from regulations in Section 4(2) of the Securities Act ("4(2) Paper"). However,
a Portfolio will not invest more than 10% of its net assets in illiquid
investments, which include securities for which there is no readily available
market, securities subject to contractual restriction on resale, certain
investments in asset-backed and receivable-backed securities and restricted
securities (unless, with respect to these securities and 4(2) Paper, the Fund's
Trustees continuously determine, based on the trading markets for the specific
restricted security, that it is liquid). The Trustees may adopt guidelines and
delegate to the Manager the daily function of determining and monitoring
liquidity of restricted securities and 4(2) Paper. The Trustees, however, will
retain sufficient oversight and be ultimately responsible for these
determinations.
Since it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will develop, the
Trustees will carefully monitor the Portfolios' investments in these securities,
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in a Portfolio to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
12
<PAGE>
INVESTMENT RESTRICTIONS
The Fund operates under the following investment restrictions which, together
with the investment objective of the Fund, may not be changed without
shareholder approval and which apply to each of the Portfolios.
The Fund may not:
a) invest more than 5% of the total market value of any Portfolio's assets
(determined at the time of the proposed investment and giving effect
thereto) in the securities of any one issuer other than the United States
Government, its agencies or instrumentalities;
b) with respect to the U.S. Treasury Portfolio and the Money Market Portfolio,
invest more than 25% of the value of the Portfolio's total assets in
securities of companies in the same industry (excluding United States
government securities and, as to the Money Market Portfolio only,
certificates of deposit and bankers' acceptances of domestic banks) and,
with respect to the Municipal Portfolio, purchase (i) pollution control and
industrial revenue bonds or (ii) securities which are not Municipal
Obligations if in either case the purchase would cause more than 25% of the
value of the Portfolio's total assets to be invested in companies in the
same industry (for the purpose of this restriction wholly-owned finance
companies are considered to be in the industry of their parents if their
activities are similarly related to financing the activities of their
parents);
c) acquire securities that are not readily marketable or repurchase agreements
calling for resale within more than seven days if, as a result thereof,
more than 10% of the value of its net assets would be invested in such
illiquid securities;
d) invest more than 5% of a Portfolio's assets in securities that are subject
to underlying puts from the same institution, and no single bank shall
issue its letter of credit and no single financial institution shall issue
a credit enhancement covering more than 5% of the total assets of the Fund.
However, if the puts are exercisable by the Portfolio in the event of
default on payment of principal and interest on the underlying security,
then the Portfolio may invest up to 10% of its assets in securities
underlying puts issued or guaranteed by the same institution; additionally,
a single bank can issue its letter of credit or a single financial
institution can issue a credit enhancement covering up to 10% of the
Portfolio's assets, where the puts offer the Portfolio such default
protection;
e) make loans, except that the Fund may purchase for a Portfolio the debt
securities described above under "Investment Objectives, Policies and
Risks" and may enter into repurchase agreements as therein described;
f) borrow money, unless (i) the borrowing does not exceed 10% of the total
market value of the assets of the Portfolio with respect to which the
borrowing is made (determined at the time of borrowing but without giving
effect thereto) and the money is borrowed from one or more banks as a
temporary measure for extraordinary or emergency purposes or to meet
unexpectedly heavy redemption requests and furthermore each Portfolio will
not make additional investments when borrowings exceed 5% of the
Portfolio's net assets or (ii) with respect to the U.S. Treasury Portfolio,
otherwise provided herein and permissible under the 1940 Act; and
g) pledge, mortgage, assign or encumber any of a Portfolio's assets except to
the extent necessary to secure a borrowing permitted by clause (d) made
with respect to a Portfolio.
MANAGEMENT OF THE FUND
Management and Investment
Management Contract
The Fund's Board of Trustees, which is responsible for the overall management
and supervision of the Fund, has employed Reich & Tang Asset Management L.P.
(the "Manager") to serve as the investment manager of the Fund under an
Investment Management Contract. 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 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
13
<PAGE>
performed by the Manager, the Fund currently has no employees and its officers
are not required to devote full-time to the affairs of the Fund. The Statement
of Additional Information contains general background information regarding each
Trustee and principal officer of the Fund.
The Manager is a Delaware limited partnership and a registered investment
advisor, under the 1940 Act, with its principal office at 600 Fifth Avenue, New
York, New York 10020.
The Manager, as of June 30, 1996, was investment manager, advisor or supervisor
with respect to assets aggregating in excess of $9.1 billion. The Manager acts
as manager or administrator of fifteen other registered investment companies and
also advises pension trusts, profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the limited partnership, Reich & Tang Asset
Management L.P., the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. Reich & Tang Asset Management L.P. has
succeeded NEICLP as the Manager of the Fund.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 55.9% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc., owns
approximately 17.6% of the outstanding partnership units of NEICLP. In addition,
NEIC is a wholly-owned subsidiary of The New England, which may be deemed a
"controlling person" of the Manager.
NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through eleven investment advisory/ management
affiliates and two distribution subsidiaries which include, in addition to the
Manager, Loomis, Sayles & Company, L.P., Copley Real Estate Advisors, Inc., Back
Bay Advisors, L.P., Marlborough Capital Advisors, L.P., Westpeak Investment
Advisors, L.P., Draycott Partners, Ltd., TNE Investment Services, L.P., New
England Investment Associates, Inc., Reich & Tang Distributors L.P., Harris
Associates, Vaughan-Nelson, Scarborough & McConnell, Inc. and an affiliate,
Capital Growth Management Limited Partnership. These affiliates in the aggregate
are investment advisors or managers to 42 other registered investment companies.
Pursuant to the Investment Management Contract for each Portfolio, the Manager
manages each Portfolio's portfolio of securities and makes the decisions with
respect to the purchase and sale of investments, subject to the general control
of the Board of Trustees of the Fund. Under the Investment Management Contract
each of the Portfolios will pay an annual management fee of .08% of such
Portfolio's average daily net assets. The management 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 an Administrative Services Agreement for each Portfolio, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with personnel to (i) supervise the performance of
bookkeeping and related services by Investors Fiduciary Trust Company, the
Fund's bookkeeping agent; (ii) prepare reports to and filings with regulatory
authorities; and (iii) perform such other administrative services as the Fund
may from time to time request of the Manager. The personnel rendering such
services may be employees of the Manager or its affiliates. The Fund reimburses
the Manager for all of the Fund's operating costs including rent, depreciation
of equipment and facilities, interest and amortization of loans financing
equipment used by the Fund and all the expenses incurred to conduct the Fund's
affairs. The amount of such reimbursement must be agreed upon between the Fund
and the Manager. The Manager, at its discretion, may voluntarily waive all or a
portion of the administrative services fee and the operating expense
reimbursement. For its services under the Administrative Services Agreement, the
Manager receives an annual fee of .05% of each Portfolio's average daily net
assets. Any portion of the total fees received by the Manager and its past
profits may be used to provide shareholder services and for distribution of Fund
shares. (See "Distribution and 14
<PAGE>
Service Plan" herein.) The fees are accrued daily and paid monthly.
In addition, Reich & Tang Distributors L.P., the Distributor, receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Class A shares (the "Shareholder Servicing Fee") of the Fund under the
Shareholder Servicing Agreement. The fees are accrued daily and paid monthly.
Investment management fees and operating expenses, which are attributable to
both Classes of shares of the Fund, will be allocated daily to each Class of
shares based on the percentage of shares outstanding for each Class at the end
of the day.
Fees
With respect to each Portfolio, the Manager has voluntarily agreed to waive its
management and administrative services fees in whole or in part and reimburse
each Portfolio its operating expenses to the extent that: (i) such Portfolio's
Class A shares total operating expenses exceed .40%, .425% and .45% of the Class
A shares average daily net assets during the first, second and third fiscal
years of the Fund, respectively; and (ii) such Portfolio's Class B shares total
operating expenses exceed .15%, 175% and .20% of the Class B shares average
daily net assets during the first, second and third fiscal years of the Fund,
respectively. The Manager therefore receives only that portion of its management
and administrative services fees which, when added to all operating expenses
does not result in total operating expenses for each Class of shares of each
Portfolio exceeding the amounts set forth in the preceding sentence during the
first three fiscal years of the Fund. The Manager will not subsequently recoup
any portion of the fees so waived or expenses reimbursed. See "Expense
Limitation" in the Statement of Additional Information.
DESCRIPTION OF SHARES
The Fund was established as a Massachusetts Business Trust under the laws of
Massachusetts by an Agreement and Declaration of Trust dated January 20, 1994.
The Fund has an unlimited authorized number of shares of beneficial interest.
These shares are entitled to one vote per share with proportional voting for
fractional shares. There are no conversion or preemptive rights in connection
with any shares of the Fund. All shares when issued in accordance with the terms
of the offering will be fully paid and non-assessable. Shares of the Fund are
redeemable at net asset value, at the option of the shareholders.
Each Portfolio of the Fund is subdivided into two classes of shares of
beneficial interest, Class A and Class B. Each share, regardless of Class, will
represent an interest in the same portfolio of investments and will have
identical voting, dividend, liquidation and other rights, preferences, powers,
restrictions, limitations, qualifications, designations and terms and
conditions, except that: (i) the Class A and Class B shares will have different
class designations; (ii) only the Class A shares will be assessed a Shareholder
Servicing Fee of .25% of the average daily net assets of the Class A shares of
the Fund pursuant to the Rule 12b-1 Distribution and Service Plan of the Fund;
(iii) only the holders of the Class A shares will be entitled to vote on matters
pertaining to the Plan and any related agreements in accordance with provisions
of Rule 12b-1; and (iv) the exchange privilege will permit shareholders to
exchange their shares only for shares of the same class of any other Portfolio
of the Fund. Payments that are made under the Plans will be calculated and
charged daily to the appropriate Class prior to determining daily net asset
value per share and dividends/distributions.
Generally, all shares will be voted in the aggregate, except if voting by Class
is required by law or the matter involved affects only one Class, in which case
shares will be voted separately by Class. The shares of the Fund have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares outstanding voting for the election of trustees can elect 100% of the
trustees if the holders choose to do so, and, in that event, the holders of the
remaining shares will not be able to elect any person or persons to the Board of
Trustees. The Fund's By-laws provide the holders of a majority of the
outstanding shares of the Fund present at a meeting in person or by proxy will
constitute a quorum for the transaction of business at all meetings.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating
15
<PAGE>
Organizations. Certain Participating Organizations are compensated by the
Distributor from its Shareholder Servicing Fee and by the Manager from its
management fee for the performance of these services. An investor who purchases
shares through a Participating Organization that receives payment from the
Manager or the Distributor will become a Class A shareholder. (See "Investments
Through Participating Organizations" herein.) All other investors, and investors
who have accounts with Participating Organizations but who do not wish to invest
in the Fund through their Participating Organizations, may invest in the Fund
directly as Class B shareholders of the Fund and not receive the benefit of the
servicing functions performed by a Participating Organization. Class B shares
may also be offered to investors who purchase their shares through Participating
Organizations who do not receive compensation from the Distributor or the
Manager because they may not be legally permitted to receive such as
fiduciaries. The Manager pays the expenses incurred in the distribution of Class
B shares. Participating Organizations whose clients become Class B shareholders
will not receive compensation from the Manager or Distributor for the servicing
they may provide to their clients. (See "Direct Purchase and Redemption
Procedures" herein.) With respect to both Classes of shares, the minimum initial
investment in the Fund with respect to each Portfolio is $1,000,000. The minimum
amount for subsequent investments is $10,000 for all shareholders.
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent which
accepts orders for purchases and redemptions from the Distributor and from
shareholders directly.
In order to maximize earnings on its Portfolios, the Fund normally has its
assets as fully invested as is practicable. Many securities in which the Fund
invests require immediate settlement in funds of Federal Reserve member banks on
deposit at a Federal Reserve bank (commonly known as "Federal Funds").
Shares will be issued as of the first determination of the Fund's net asset
value per share made after acceptance of the investor's purchase order. An
investor's funds will not be invested by the Fund during the period before the
Fund's receipt of Federal Funds and its issuance of Fund shares. The Fund
reserves the right to reject any purchase order to its shares.
Shares are issued as of 2:30 p.m., New York City time, on any Fund Business Day,
as defined herein, on which an order for the shares and accompanying Federal
Funds are received by the Fund's transfer agent before 2:30 p.m., New York City
time. Orders accompanied by Federal Funds and received after 2:30 p.m., New York
City time on a Fund Business Day will not result in share issuance until the
following Fund Business Day. Fund shares begin accruing income on the day the
shares are issued to an investor.
There is no redemption charge, no minimum period of investment and no
restriction on frequency of withdrawals. Proceeds of redemptions are paid by
check or bank wire. If a shareholder elects to redeem all the shares of the Fund
he owns, all dividends credited to the shareholder up to the date of redemption
are paid to the shareholder in addition to the proceeds of the redemption.
The date of payment upon redemption may not be postponed for more than seven
days after shares are tendered for redemption, and the right of redemption may
not be suspended, except for any period during which the New York Stock
Exchange, Inc. is closed (other than customary weekend and holiday closings) or
during which the Securities and Exchange Commission determines that trading
thereon is restricted, or for any period during which an emergency (as
determined by the Securities and Exchange Commission) exists as a result of
which disposal by the Fund of its securities is not reasonably practicable or as
a result of which it is not reasonably practicable for the Fund fairly to
determine the value of its net assets, or for such other period as the
Securities and Exchange Commission may by order permit for the protection of the
shareholders of the Fund.
Redemption requests received by the Fund's transfer agent before 2:30 p.m., New
York City time, on any day on which the New York Stock Exchange, Inc.
16
<PAGE>
is open for trading become effective at 2:30 p.m. that day. A redemption request
received after 2:30 p.m. on any day on which the New York Stock Exchange, Inc.
is open for trading becomes effective on the next Fund Business Day. Shares
redeemed are not entitled to participate in dividends declared on the day or
after the day a redemption becomes effective.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in his account after a withdrawal is
less than $250,000. Written notice of any such 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. During the notice period any shareholder who receives such a notice
may (without regard to the normal $10,000 requirement for an additional
investment) make a purchase of additional shares to increase his total net asset
value at least to the minimum amount and thereby avoid such mandatory
redemption.
The Fund has reserved the right to charge individual shareholder accounts for
expenses actually incurred by such account for postage, wire transfers and
certain other shareholder expenses, as well as to impose a monthly service
charge for accounts whose net asset value falls below the minimum amount.
Investments Through
Participating Organizations
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Distributor with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such statements will receive them from the Fund directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. A Participant Investor should read
this Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 2:30 p.m., New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 2:30 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 2:30 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
DIRECT PURCHASE AND
REDEMPTION PROCEDURES
The following purchase and redemption procedures apply to investors who wish to
invest in the Fund
17
<PAGE>
directly. These investors may obtain the subscription order form necessary to
open an account by telephoning the Fund at either 212-830-5220 (within New York
State) or at 800-241-3263 (toll free outside New York State).
All shareholders will receive from the Fund a monthly statement listing the
total number of shares of each Portfolio owned as of the statement closing date,
purchases and redemptions of shares of each Portfolio during the month covered
by the statement and the dividends paid on shares of each Portfolio of each
shareholder during the statement period (including dividends paid in cash or
reinvested in additional shares of each Portfolio).
Initial Purchase of Shares
Mail
Investors may send a check made payable to the Fund along with a completed
subscription order form to:
Institutional Daily Income Fund
c/o Reich & Tang Funds
600 Fifth Avenue
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member bank of the Federal Reserve
System can normally be converted into Federal Funds within two business days
after receipt of the check. Checks drawn on a non-member bank may take
substantially longer to convert into Federal Funds and to be invested in Fund
shares. An investor's subscription will not be accepted until the Fund receives
Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, an investor should first obtain a new account number by telephoning
the Fund at either 212-830-5220 (within New York State) or at 800-241-3263
(outside New York State) and then instruct a member commercial bank to wire
money immediately to:
For U.S. Treasury Portfolio
Investors Fiduciary Trust Company
ABA #101003621
Reich & Tang Funds
DDA #890752-951-1
For Institutional Daily Income Fund
U.S. Treasury Portfolio
Account of (Investor's Name)
Fund Account # ____________________
SS #/Tax I.D.# ____________________
For Money Market Portfolio
Investors Fiduciary Trust Company
ABA #101003621
Reich & Tang Funds
DDA #890752-951-1
For Institutional Daily Income Fund
Money Market Portfolio
Account of (Investor's Name)
Fund Account #____________________
SS #/Tax I.D.#_____________________
For Municipal Portfolio
Investors Fiduciary Trust Company
ABA #101003621
Reich & Tang Funds
DDA #890752-951-1
For Institutional Daily Income Fund
Municipal Portfolio
Account of (Investor's Name)
Fund Account #____________________
SS #/Tax I.D.#_____________________
The investor should then promptly complete and mail the subscription order form.
An investor planning to wire funds should instruct his bank early in the day so
the wire transfer can be accomplished 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 2:30 p.m., New York City time, on a Fund Business Day will be treated
as a Federal Funds payment received on that day.
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<PAGE>
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
Portfolio following receipt by the Fund's transfer agent of the redemption
order. Normally payment for redeemed shares is made on the Fund Business Day the
redemption is effected, provided the redemption request is received prior to
2:30 p.m., New York City time and on the next Fund Business Day if the
redemption request is received after 2:30 p.m., New York City time. However,
redemption requests will not be effected unless the check (including a certified
or cashier's check) used for investment has been cleared for payment by the
investor's bank, currently considered by the Fund to occur within 15 days after
investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee. When a
signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and 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:
Institutional Daily Income Fund
c/o Reich & Tang Funds
600 Fifth Avenue
New York, New York 10020
All written requests for redemption must be signed by the shareholder with
signature guaranteed. Normally the redemption proceeds are paid by check mailed
to the shareholder of record.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option. The proceeds of a telephone redemption will be sent to the
shareholder at his address or to his bank account as set forth in the
subscription order form or in a subsequent signature guaranteed written
authorization. Redemptions following an investment by check will not be effected
until the check has cleared, which could take up to 15 days after investment.
The Fund may accept telephone redemption instructions from any person with
respect to accounts of shareholders who elect this service, and thus
shareholders risk possible loss of dividends in the event of a telephone
redemption not authorized by them. Telephone requests to wire redemption
proceeds must be for amounts in excess of $10,000. The Fund will employ
reasonable procedures to confirm that telephone redemption instructions are
genuine, and will require that shareholders electing such option provide a form
of personal identification. The failure by the Fund to employ such reasonable
procedures may cause the Fund to be liable for any losses incurred by investors
due to telephone redemptions based upon unauthorized or fraudulent instructions.
The telephone redemption option may be modified or discontinued at any time upon
60 days written notice to shareholders.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York State at 800-241-3263 and state (i) the name of
the shareholder appearing on the Fund's records, (ii) his account number with
the Fund, (iii) the amount to be withdrawn and (iv) the name of the person
requesting the redemption. Usually, the proceeds are sent to the investor on the
same Fund Business Day the redemption is effected, provided the redemption
request is received prior to 2:30 p.m., New York City time and on the next Fund
Business Day if the redemption request is received after 2:30 p.m., New York
City time.
Exchange of Shares
An investor may, without cost, exchange shares from one Portfolio of the Fund
into the same Class of shares of any other Portfolio of the Fund, subject to the
$1,000,000 minimum initial investment requirement per
19
<PAGE>
Portfolio, the availability of such shares and the maintenance of the suggested
minimum balance of $250,000. Shares are exchanged on the basis of relative net
asset value per share. Exchanges are in effect redemptions from one Portfolio
and purchases of another Portfolio; and the Portfolio's purchase and redemption
procedures and requirements are applicable to exchanges. An exchange pursuant to
this exchange privilege is treated for federal income tax purposes as a sale on
which a shareholder may realize a taxable gain or loss. See "Purchase and
Redemption of Shares" herein.
The exchange privilege is available to shareholders resident in any state in
which shares of the investment company being acquired may legally be sold.
Before making an exchange, the investor should review the current prospectus of
the investment company into which the exchange is being made. Prospectuses may
be obtained by contacting Reich & Tang Distributors L.P. at the address or
telephone number listed on the cover of this Prospectus.
Instructions for exchange may be made in writing to the Transfer Agent at the
appropriate address listed herein or, for shareholders who have elected that
option, by telephone. The Fund reserves the right to reject any exchange request
and will notify shareholders accordingly.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by Rule 12b-1. Effective January 26, 1995, the Fund's Board of
Trustees and Class A shareholders adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund and Reich & Tang Distributors L.P.
(the "Distributor") entered into a Distribution Agreement and a Shareholder
Servicing Agreement (with respect to the Class A shares of the Fund only).
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Under the Distribution Agreement, the Distributor serves as distributor of the
Fund's shares and, for nominal consideration and as agent for the Fund, will
solicit orders for the purchase of the Fund's shares, provided that any orders
will not be binding on the Fund until accepted by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives, with
respect to the Class A shares, a service fee equal to .25% per annum of the
Class A shares' average daily net assets (the "Shareholder Servicing Fee") for
providing personal shareholder services and for the maintenance of shareholder
accounts. The fee is accrued daily and paid monthly and any portion of the fee
may be deemed to be used by the Distributor for payments to Participating
Organizations with respect to their provision of such services to their clients
or customers who are shareholders of the Class A shares of the Fund. The Class B
shareholders do not receive the benefit of such services from Participating
Organizations and, therefore, will not be assessed a Shareholder Servicing Fee.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Distributor and Participating Organizations in carrying out their
obligations under the Shareholder Servicing Agreement and (ii) preparing,
printing and delivering the Fund's prospectus to existing shareholders of the
Fund and preparing and printing subscription application forms for shareholder
accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing on behalf of the Class
A shares of the Fund; (ii) to compensate certain Participating Organizations for
providing assistance in distributing the Class A shares; and (iii) to pay the
costs of printing and distributing the Fund's prospectus to prospective 20
<PAGE>
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 purposes enumerated in (i) above. The
Distributor will determine the amount of such payments made pursuant to the
Plan, provided that such payments will not increase the amount which the Fund is
required to pay to the Manager and Distributor for any fiscal year under either
the Investment Management Contract in effect for that year or under the
Shareholder Servicing Agreement in effect for that year.
For the fiscal year ended March 31, 1996, the total amount spent pursuant to the
Plan for the Money Market Portfolio was 79.17% of the average daily net assets
of the Fund, of which .25% of the average daily net assets was paid by the Fund
to the Distributor. Pursuant to the Shareholder Servicing Agreement an amount
representing 78.92% of the average daily net assets was paid by the Manager
(which may be deemed an indirect payment by the Fund). For the fiscal year ended
March 31, 1996, the total amount spent pursuant to the Plan for the U.S.
Treasury Portfolio was .25% of the average daily net assets of the Fund, of
which .25% of the average daily net assets was paid by the Fund to the
Distributor. Pursuant to the Shareholder Servicing Agreement no payments were
made by the Manager.
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. However, in the opinion of the
Manager 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each dividend and capital gains distribution, if any, declared by the Fund on
its outstanding shares will, at the election of each shareholder, be paid in
cash or in additional shares of the same Class shares of the applicable
Portfolio having an aggregate net asset value as of the payment date of such
dividend or distribution equal to the cash amount of such dividend or
distribution. Election to receive dividends and distributions in cash or shares
is made at the time shares are subscribed for and may be changed by notifying
the Fund in writing at any time prior to the record date for a particular
dividend or distribution. If the shareholder makes no election, the Fund will
make the distribution in shares. There is no sales or other charge in connection
with the reinvestment of dividends and capital gains distributions.
While it is intention of the Fund to distribute to its shareholders
substantially all of each fiscal year's net income and net realized capital
gains, if any, the amount and time of any such dividend or distribution must
necessarily depend upon the realization by the Fund of income and capital gains
from investments.
21
<PAGE>
Except as described herein, each Portfolio's net investment income (including
net realized short-term capital gains, if any) will be declared as a dividend on
each Fund Business Day. The Fund declares dividends for Saturdays, Sundays and
holidays on the previous Fund Business Day. The Fund generally pays dividends
monthly after the close of business on the last calendar day of each month or
after the close of business on the previous Fund Business Day if the last
calendar day of each month is not a Fund Business Day. Capital gains
distributions, if any, will be made at least annually, and in no event later
than 60 days after the end of the Fund's fiscal year. There is no fixed dividend
rate, and there can be no assurance that the Fund will pay any dividends or
realize any capital gains.
The Class A shares will bear the Shareholder Servicing Fee under the Plan. As a
result, the net income of and the dividends payable to the Class A shares will
be lower than the net income of and dividends payable to the Class B shares of
the Fund. Dividends paid to each Class of shares of the Fund will, however, be
declared and paid on the same days at the same times and, except as noted with
respect to the Shareholder Servicing Fee payable under the Plan, will be
determined in the same manner and paid in the same amounts.
The Fund intends to qualify for and elect special treatment applicable to a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended, for each Portfolio. To qualify as a regulated investment company, each
Portfolio must meet certain complex tests concerning its investments and
distributions. For each year a Portfolio qualifies as a regulated investment
company, the Portfolio will not be subject to federal income tax on income
distributed to its shareholders in the form of dividends or capital gains
distributions. Additionally, each Portfolio will not be subject to a federal
excise tax if the Portfolio distributes at least 98% of its ordinary income and
98% of its capital gain income to its shareholders. Dividends of net ordinary
income and distributions of net short-term capital gains are taxable to the
recipient shareholders as ordinary income but will not be eligible, in the case
of corporate shareholders, for the dividend-received deduction.
The Fund is required by Federal law to withhold 31% of reportable payments
(which may include dividends, capital gains distributions and redemptions) paid
to shareholder who have not complied with IRS regulations. In connection with
this withholding requirement, a shareholder will be asked to certify on his
application that the social security or tax identification number provided is
correct and that the shareholder is not subject to 31% backup withholding for
previous underreporting to the IRS.
Distributions from the United States Government Portfolio that are derived from
interest on certain obligations of the United States Government and agencies
thereof may be exempt from state and local taxes in certain states. Investors
should consult their own tax advisors regarding specific questions as to
Federal, state or local taxes.
NET ASSET VALUE
The Fund determines the net asset value of the shares of each Portfolio
(computed separately for each Class of shares) of the Fund as of 2:30 p.m., New
York City time, by dividing the value of each Portfolio's net assets (i.e., the
value of its securities and other assets less its liabilities, including
expenses payable or accrued but excluding capital stock and surplus) by the
number of shares outstanding of that Portfolio at the time the determination is
made. The Fund determines its net asset value on each Fund Business Day. Fund
Business Day for this purpose means any day on which the Fund's custodian is
open for trading. Purchases and redemptions will be effected at the time of
determination of net asset value next following the receipt of any purchase or
redemption order. (See "Purchase and Redemption of Shares" and "Other Purchase
and Redemption Procedures" herein.)
In order to maintain a stable net asset value per share of $1.00, the Fund's
portfolio securities are valued at their amortized cost. Amortized cost
valuation involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, except that if
fluctuating interest rates cause the market value of the Fund's portfolio to
deviate more than 1/2 of 1% from the value determined on the basis of amortized
cost, the Board of Trustees will consider whether any action should be
22
<PAGE>
initiated to prevent any material dilative effect on investors. Although the
amortized cost method provides certainty in valuation, it may result in periods
during which the stated value of an instrument is higher or lower than the price
an investment company would receive if the instrument were sold. There is no
assurance that the Portfolios will maintain a stable net asset value per share
of $1.00.
GENERAL INFORMATION
The Fund was established as a Massachusetts business trust under the laws of
Massachusetts on January 20, 1994 and it is registered with the Securities and
Exchange Commission as a diversified, open-end management investment company.
The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.
Under Massachusetts law, trustees and shareholders of a business trust may, in
certain circumstances, be held personally liable for its obligations. The
Declaration of Trust of the Fund provides that no trustee or shareholder will be
personally liable for obligations of the Fund and that every written contract
made by the Fund must contain a provision to that effect. If any trustee or
shareholder were required to pay any liability of the Fund, that person would be
entitled to reimbursement from the general assets of the Fund.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement filed with the Securities
and Exchange Commission and copies thereof may be obtained upon payment of
certain duplicating fees.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is the custodian for the Fund's cash and securities. Reich & Tang
Services L.P., 600 Fifth Avenue, New York, New York 10020 is the transfer agent
and dividend agent for the shares of the Fund. The Fund's transfer agent and
custodian do not assist in, and are not responsible for, investment decisions
involving assets of the fund.
23
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TABLE OF CONTENTS
Table of Fees and Expenses...........................2 INSTITUTIONAL
Selected Financial Information.......................3 DAILY
Introduction.........................................4 INCOME
Investment Objectives, FUND
Policies and Risks.................................5
U.S. Treasury Portfolio..........................5
Money Market Portfolio...........................5
Municipal Portfolio..............................8
Risk Factors and Additional
Investment Information.............................10
Investment Restrictions..............................13 PROSPECTUS
Management of the Fund...............................13
Description of Shares................................15 AUGUST 1, 1996
How to Purchase and Redeem Shares....................15
Investments Through
Participating Organizations......................17
Direct Purchase and
Redemption Procedures ............................17
Initial Purchase of Shares.....................18
Redemption of Shares...........................19
Exchange of Shares................................19
Distribution and Service Plan........................20
Dividends, Distributions and Taxes...................21
Net Asset Value......................................22
General Information .................................23
Custodian and Transfer Agent.........................23
<PAGE>
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INSTITUTIONAL 600 Fifth Avenue,
DAILY INCOME FUND New York, N.Y. 10020
(212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1996
Institutional Daily Income Fund (the "Fund") is a no-load, open-end diversified
management investment company. The Fund's investment objective is to maximize
current income to the extent consistent with the preservation of capital and the
maintenance of liquidity. The Fund is presently comprised of three separate
Portfolios but only the Money Market Portfolio and the U.S. Treasury Portfolio
have been activated by the Manager.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Fund's
prospectus dated August 1, 1996 (the "Prospectus"). This Statement of Additional
Information contains additional and more detailed information than set forth in
the Prospectus and should be read in conjunction with the Prospectus. The Fund's
Prospectus may be obtained from any Participating Organization or by writing or
calling the Fund. This Statement of Additional Information is incorporated by
reference into the Prospectus in its entirety.
Table of Contents
- --------------------------------------------------------------------------------
Investment Objectives, Policies and Risks.....2 Compensation Table............17
Investment Restrictions......................11 Distribution and Service Plan.17
Portfolio Transactions.......................12 Description of Shares.........19
Purchase and Redemption of Shares Custodian and Transfer Agent..20
and Other Purchase and Redemption Procedures.12 Net Asset Value...............20
Yield Quotations.............................13 Description of Ratings........21
Management and Investment Management Contract.13 Financial Statements.........22
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<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Institutional Daily Income Fund (the "Fund") is a diversified, no-load,
open-end management investment company consisting of three managed portfolios of
money market instruments (each a "Portfolio", collectively, the "Portfolios")
which are designed to meet the short-term investment needs of corporate and
institutional investors. There are no sales loads, exchange or redemption fees
associated with the Fund.
A detailed description of the types and quality of the securities in which the
Portfolios may invest is further described in the Fund's Prospectus and is
incorporated herein by reference. The investment objectives stated below for
each Portfolio are fundamental and may be changed only with the approval of a
majority of outstanding shares of that Portfolio.
General Investment Objectives and Policies of the U.S. Treasury Portfolio
The U.S. Treasury Portfolio's investment objectives are to maximize current
income and to maintain liquidity and a stable net asset value of $1.00 per
share. The U.S. Treasury Portfolio attempts to accomplish these objectives by
investing in U.S. Treasury obligations and other obligations that are issued or
guaranteed by the U.S. Government which have effective maturities of 397 days or
less that enable it to employ the amortized cost method of valuation. At least
65% of the U.S. Treasury Portfolio's total assets will consist of U.S. Treasury
obligations (and repurchase agreements and reverse purchase agreements which are
collateralized by such obligations). There can be no assurance that the U.S.
Treasury Portfolio can achieve these objectives or that it will be able to
maintain a stable net asset value of $1.00 per share.
Risk Factors
The investment objectives and policies of the U.S. Treasury Portfolio are sought
through the following additional strategies employed in the management of the
U.S. Treasury Portfolio which are described under "Investments and Investment
Techniques Common to Two or More Portfolios":
1. Change in Ratings
2. Amortized Cost Valuation of Portfolio Securities
3. When-Issued Securities
4. Repurchase Agreements
5. Reverse Repurchase Agreement
Reverse Repurchase Agreements
Reverse repurchase agreements involve the sale of securities held by a Portfolio
pursuant to an agreement to repurchase the securities at an agreed upon price
and date. The U.S. Treasury Portfolio is permitted to enter into reverse
repurchase agreements for liquidity purposes or when it is able to purchase
other securities which will produce more income than the cost of the agreement.
Each Portfolio permitted to enter into reverse repurchase agreements may do so
only with those member banks of the Federal Reserve System and broker-dealers
who are recognized as primary dealers in U.S. government securities by the
Federal Reserve Bank of New York whose creditworthiness has been reviewed and
found to meet the investment criteria of the Portfolio. When engaging in reverse
repurchase transactions, the Fund will maintain, in a segregated account with
its Custodian, securities equal in value to those subject to the agreement.
These agreements are considered to be borrowings and therefore are included in
the asset restriction contained under "Investment Restrictions" relating to
borrowings which allows a Portfolio to borrow money from banks for extraordinary
or emergency purposes and to engage in reverse repurchase agreements provided
that such in the aggregate do not exceed one-third of the value of the total
assets of that Portfolio less its liabilities. Any Portfolio that utilizes
reverse repurchase agreements to this extent may be considered to be leveraging
its portfolio; however, since the Portfolios are required to maintain segregated
accounts to cover their positions on these reverse repurchase agreements, the
risks inherent in this leveraging technique are minimized.
The Portfolio could experience delays in recovering securities in the event of
the bankruptcy of the other party to a reverse repurchase agreement and could
experience a loss to the extent that the value of the securities may have
decreased in the meantime.
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General Investment Objectives and Policies of the Money Market Portfolio
The Money Market Portfolio's investment objectives are to maximize current
income and to maintain liquidity and a stable net asset value of $1.00 per
share. The Money Market Portfolio attempts to accomplish these objectives by
investing exclusively in high quality, short-term money market obligations with
maturities of 397 days or less. The Money Market Portfolio will only purchase
high quality money market instruments that have been determined by the Fund's
Board of Trustees to present minimal credit risks and that are First Tier
Eligible Securities at the time of acquisition, so that the Portfolio is able to
employ the amortized cost method of valuation. The term First Tier Eligible
Securities means (i) securities that have remaining maturities of 397 days or
less and are rated in the highest short-term rating category by any two
nationally recognized statistical rating organizations ("NRSROs") or in such
category by the only NRSRO that has rated the securities (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Trustees); (ii) securities that have remaining maturities of 397
days or less but that at the time of issuance were long-term securities and
whose issuer has received from the Requisite NRSROs a rating with respect to
comparable short-term debt in the highest short-term category; and (iii) unrated
securities determined by the Fund's Board of Trustees to be of comparable
quality. Where the issuer of a long-term security with a remaining maturity
which would otherwise qualify it as a First Tier Eligible Security does not have
rated short-term debt outstanding, the long-term security is treated as unrated
but may not be purchased if it has a long-term rating from any NRSRO that is
below the two highest long-term categories. A determination of comparability by
the Board of Trustees is made on the basis of its credit evaluation of the
issuer, which may include an evaluation of a letter of credit, guarantee,
insurance or other credit facility issued in support of the securities or
participation certificates. There can be no assurance that the Money Market
Portfolio can achieve these objectives or that it will be able to maintain a
stable net asset value of $1.00 per share.
Risk Factors
The Money Market Portfolio may invest in certain foreign securities. Investment
in obligations of foreign issuers and in foreign branches of domestic banks
involves somewhat different investment risks from those affecting obligations of
United States domestic issuers. There may be limited publicly available
information with respect to foreign issuers and foreign issuers are not
generally subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to domestic companies. There may
also be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Foreign
securities markets have substantially less volume than national securities
exchanges and securities of some foreign companies are less liquid and more
volatile than securities of comparable domestic companies. Brokerage commissions
and other transaction costs on foreign securities exchanges are generally higher
than in the United States. Dividends and interest paid by foreign issuers may be
subject to withholding and other foreign taxes, which may decrease the net
return on foreign investments as compared to dividends and interest paid to the
Money Market Portfolio by domestic companies. Additional risks include future
political and economic developments, the possibility that a foreign jurisdiction
might impose or change withholding taxes on income payable with respect to
foreign securities, the possible seizure, nationalization or expropriation of
the foreign issuer or foreign deposits and the possible adoption of foreign
governmental restrictions such as exchange controls.
The investment objectives and policies of the Money Market Portfolio are sought
through the following additional strategies employed in the management of the
Money Market Portfolio which are described under "Investments and Investment
Techniques Common to Two or More Portfolios":
1. Change in Ratings
2. Amortized Cost Valuation of Portfolio Securities
3. Variable Rate Demand Instruments
4. When-Issued Securities
5. Repurchase Agreements
6. Participation Interests
7. Domestic and Foreign Bank Obligations, Certificates of Deposit,
Commercial Paper, Time Deposits and Bankers' Acceptances
8. Privately Placed Securities
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General Investment Objectives and Policies of the Municipal Portfolio
The Municipal Portfolio's investment objectives are to maximize current income
that is exempt from regular federal income tax and to maintain liquidity and a
stable net asset value of $1.00 per share. The Municipal Portfolio attempts to
accomplish these objectives by investing in high quality municipal securities
which, in the opinion of bond counsel at the date of issuance, earn interest
exempt from federal income tax and which have effective maturities of 397 days
or less. The Municipal Portfolio will only purchase high quality tax exempt
money market instruments ("Municipal Securities") that have been determined by
the Fund's Board of Trustees to present minimal credit risks and that are
Eligible Securities at the time of acquisition so that the Municipal Portfolio
is able to employ the amortized cost method of valuation. The term Eligible
Securities means (i) Municipal Securities with remaining maturities of 397 days
or less and rated in the First Tier highest short-term rating categories by any
two NRSROs or in such categories by the Requisite NRSRO (acquisition in the
latter situation must also be ratified by the Board of Trustees); (ii) Municipal
Securities with remaining maturities of 397 days or less but that at the time of
issuance were long-term securities and whose issuer has received from the
Requisite NRSROs a rating with respect to comparable short-term debt in the
highest short-term rating categories; and (iii) unrated Municipal Securities
determined by the Fund's Board of Trustees to be of comparable quality. Where
the issuer of a long-term Municipal Securities with a remaining maturity which
would otherwise qualify it as an Eligible Security, does not have rated
short-term debt outstanding, the long-term Municipal Securities is treated as
unrated but may not be purchased if it has a long-term rating from any NRSRO
that is below the two highest long-term categories. A determination of
comparability by the Board of Trustees is made on the basis of its credit
evaluation of the issuer, which may include an evaluation of a letter of credit,
guarantee, insurance or other credit facility issued in support of the Municipal
Securities or participation certificates. Although the Supreme Court has
determined that Congress has the authority to subject the interest on municipal
securities, such as the securities in which the Portfolio will invest, to
regular federal income taxation, existing law excludes such interest from
regular federal income tax. Interest on these securities may be subject to state
and local taxes. See "Dividends, Distributions and Taxes" in the Prospectus.
There can be no assurance that the Municipal Portfolio can achieve these
objectives or that it will be able to maintain a stable net asset value of $1.00
per share.
Risk Factors
(1) Municipal Bonds are debt obligations of states, cities, counties,
municipalities and municipal agencies (all of which are generally referred
to as "municipalities") which generally have a maturity at the time of
issue of one year or more and which are issued to raise funds for various
public purposes such as construction of a wide range of public facilities,
to refund outstanding obligations and to obtain funds for institutions and
facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith and 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 authorizations and generally are not supported by the
issuer's general power to levy taxes. In some cases, revenues derived from
specific taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by or on
behalf of public authorities to provide funding for various privately
operated industrial facilities (hereinafter referred to as "industrial
revenue bonds" or "IRBs"). Interest on the IRBs is generally exempt, with
certain exceptions, from federal income tax pursuant to Section 103(a) of
the Internal Revenue Code (the "Code"), provided the issuer and corporate
obligor thereof continue to meet certain conditions. (See "Dividends,
Distributions and Taxes" in the Prospectus.) 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 not an established secondary market for
the IRBs, the IRBs will be supported by letters of credit, guarantees,
insurance or other credit facilities that meet the high quality criteria of
the Municipal Portfolio stated in the Prospectus and provide a demand
feature which may be exercised by the Portfolio to provide liquidity. In
accordance with the investment restrictions, the Municipal Portfolio is
permitted to invest up to 10% of the portfolio in high quality, short-term
Municipal Securities (including IRBs) that may not be readily marketable or
have a liquidity feature.
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(2) The principal kinds of Municipal Notes include tax anticipation notes, bond
anticipation notes, revenue anticipation notes and grant anticipation
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.
(3) Issues of Municipal Commercial Paper typically represent very short term,
unsecured, negotiable promissory notes. These obligations are often issued
to meet seasonal working capital needs of municipalities or to provide
interim construction financing and are paid from general revenues of
municipalities or are refinanced with long term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
(4) Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchases or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually to
the government issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has
no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the appropriate legislative body
on a yearly or other periodic basis. These types of municipal leases may be
considered illiquid and subject to the 10% limitation of investment 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 leases will be subject to the 10% limitation on
investments in illiquid securities. The Board of Trustees is also
responsible for determining the credit quality of municipal leases, on an
ongoing basis, including an assessment of the likelihood that the lease
will not be canceled.
(5) The Fund expects that, on behalf of the Municipal Portfolio, it will not
invest more than 25% of each Portfolio's total assets in municipal
obligations whose issuers are located in the same state or more than 25% of
each Portfolio's total assets in municipal obligations the security of
which is derived from any one category. There could be economic, business
or political developments which might affect all municipal obligations of a
similar type. However, the Fund believes that the most important
consideration affecting risk is the quality of particular issues of
municipal obligations rather than factors affecting all, or broad classes
of, municipal obligations.
(6) When the Municipal Portfolio purchases Municipal Securities it may also
acquire stand-by commitments from banks and other financial institutions
with respect to such Municipal Securities. Under a stand-by commitment, a
bank or broker-dealer agrees to purchase at the Portfolio's option a
specified Municipal Securities at a specified price with same day
settlement. A stand-by commitment is the equivalent of a "put" option
acquired by the Portfolio with respect to a particular Municipal Securities
held in its portfolio.
The amount payable to the Portfolio upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Securities
(excluding any accrued interest that the Portfolio paid on the acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during the period the Portfolio owned the security plus (2) all
interest accrued on the security since the last interest payment date during the
period the security was owned by the Portfolio. Absent unusual circumstances
relating to a change in market value, the Portfolio would value the underlying
Municipal Security at amortized cost. Accordingly, the amount payable by a bank
or dealer during the time a stand-by commitment is exercisable would be
substantially the same as the market value of the underlying Municipal Security.
The Municipal Portfolio's right to exercise a stand-by commitment would be
unconditional and unqualified. A stand-by commitment would not be transferable
by the Portfolio, although it could sell the underlying Municipal Security to a
third party at any time.
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<PAGE>
The Manager expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary and advisable, the Portfolio 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 Portfolio would not
exceed 1/2 of 1% of the value of the Portfolio's total assets calculated
immediately after each stand-by commitment was acquired.
The Municipal Portfolio would enter into stand-by commitments only with banks
and other financial institutions that, in the Manager's opinion, present minimal
credit risks and where the issuer of the Municipal Obligation meets the
investment criteria of the Municipal Portfolio. The Municipal Portfolio's
reliance upon the credit of these banks and broker-dealers would be supported by
the value of the underlying Municipal Securities held by the Portfolio that were
subject to the commitment.
The Municipal Portfolio 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
Municipal Portfolio to be fully invested in securities the interest on which is
exempt from federal income taxes while preserving the necessary liquidity to
purchase securities on a when-issued basis, to meet unusually large redemptions
and to purchase at a later date securities other than those subject to the
stand-by commitment.
The acquisition of a stand-by commitment would not affect the valuation or
assumed maturity of the underlying Municipal Securities which will continue to
be valued in accordance with the amortized cost method. Stand-by commitments
acquired by the Municipal Portfolio would be valued at zero in determining net
asset value. In those cases in which the Portfolio paid directly or indirectly
for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment is held by the
Portfolio. Stand-by commitments would not affect the dollar weighted average
maturity of the Portfolio. The maturity of a security subject to a stand-by
commitment is longer than the stand-by repurchase date.
The stand-by commitments that the Portfolios may enter into are subject to
certain risks, which include the ability of the issuer of the commitment to pay
for the securities at the time the commitment is exercised, the fact that the
commitment is not marketable by the Municipal Portfolio, and that the maturity
of the underlying security will generally be different from that of the
commitment.
In addition, the Municipal Portfolio 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 "Dividends, Distributions and Taxes" in the Prospectus). In the
absence of a favorable tax ruling or opinion of counsel, the Municipal Portfolio
will not engage in the purchase of securities subject to stand-by commitments.
The Municipal Portfolio may purchase municipal bonds or notes with the right to
resell them at an agreed price or yield within a specified period prior to
maturity to facilitate portfolio liquidity. This right to resell is known as a
"put". The aggregate price paid for securities with puts may be higher than the
price which otherwise would be paid. Consistent with the investment objectives
of this Portfolio and subject to the supervision of the Trustees, the purpose of
this practice is to permit the Portfolio to be fully invested in tax exempt
securities while maintaining the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large redemptions, to purchase at a later
date securities other than those subject to the put. The principal risk of puts
is that the put writer may default on its obligation to repurchase. The Manager
will monitor each writer's ability to meet its obligations under puts. See
"Investment Restrictions" herein and "Dividends, Distributions and Taxes" in the
Prospectus.
The amortized cost method is used by the Money Market Portfolio and the
Municipal Portfolio to value any municipal securities; no value is assigned to
any puts on such municipal securities. The cost of any such put is carried as an
unrealized loss from the time of purchase until it is exercised or expires.
The investment objectives and policies of the Municipal Portfolio are sought
through the following additional strategies employed in the management of the
Municipal Portfolio which are described under "Investments and Investment
Techniques Common to Two or More Portfolios":
1. Change in Ratings
2. Amortized Cost Valuation of Portfolio Securities
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<PAGE>
3. Variable Rate Demand Instruments
4. When-Issued Securities
5. Repurchase Agreements
6. Participation Interests
7. Domestic and Foreign Bank Obligations, Certificates of Deposit and
Bankers' Acceptances
8. Privately Placed Securities
Investments and Investment Techniques Common to Two or More Portfolios
Change in Ratings
Subsequent to its purchase by a Portfolio, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchases
by that Portfolio. To the extent that the ratings accorded by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") for
securities may change as a result of changes in these ratings systems, the
Manager will attempt to use comparable ratings as standards for its investment
in debt securities in accordance with the investment policies contained therein.
However, if these Portfolios hold any variable rate demand instruments with
stated maturities in excess of one year, such instruments must maintain their
high quality rating or must be sold from these Portfolios. See "Variable Rate
Demand Instruments" herein. With regard to each Portfolio, the Board of Trustees
of the Fund shall reassess promptly whether the security presents minimal credit
risks and shall cause these Portfolios to take such action as the Board of
Trustees determines is in the best interest of these Portfolios and their
shareholders. However, reassessment is not required if the security is disposed
of or matures within five business days of the Manager becoming aware of the new
rating and provided further that the Board of Trustees is subsequently notified
of the Manager's actions.
In addition, in the event that a security (1) is in default, (2) ceases to be an
Eligible Security under Rule 2a-7 of the Investment Company Act of 1940 (the
"1940 Act") or (3) is determined to no longer present minimal credit risks,
these Portfolios 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 these Portfolios. In the event that the security is disposed of, it
shall be disposed of as soon as practicable consistent with achieving an orderly
disposition by sale, exercise of any demand feature, or otherwise. In the event
of a default with respect to a security which immediately before default
accounted for 1/2 of 1% or more of a Portfolio's total assets, that Portfolio
shall promptly notify the Securities and Exchange Commission of such fact and of
the actions that such Portfolio intends to take in response to the situation.
Amortized Cost Valuation of Portfolio Securities
Pursuant to Rule 2a-7 under the 1940 Act each of the Portfolios uses the
amortized cost method of valuing its investments, which facilitates the
maintenance of the Portfolios' per share net asset value at $1.00. The amortized
cost method involves initially valuing a security at its cost and thereafter
amortizing to maturity any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
Consistent with the provisions of Rule 2a-7, the Portfolios maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having effective maturities of 397 days or less, and invest only in
securities determined by or under the direction of the Board of Trustees to be
of high quality with minimal credit risks.
The Board of Trustees has also established procedures designed to stabilize, to
the extent reasonably possible, the Portfolios' price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures include review of
the Portfolios' investments by the Board of Trustees at such intervals as they
deem appropriate to determine whether each Portfolio's net asset value
calculated by using available market quotations or market equivalents (i.e.,
determination of value by reference to interest rate levels, quotations of
comparable securities and other factors) deviates from $1.00 per share based on
amortized cost. Market quotations and market equivalents used in such review may
be obtained from an independent pricing service approved by the Board of
Trustees.
The extent of deviation between any Portfolio's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost, will be periodically examined by the Board of Trustees. If such
deviation exceeds 1/2 of 1%, the Board of Trustees will promptly consider what
action, if any, will be initiated. In the event the Board of Trustees determines
that a deviation exists which may result in material dilution
7
<PAGE>
or other unfair results to investors or existing shareholders, they will take
such corrective action as they regard to be necessary and appropriate, including
the sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding part or all of
dividends or payment of distributions from capital or capital gains; redemptions
of shares in kind; or establishing a net asset value per share by using
available market quotations or equivalents. Each Portfolio may hold cash for the
purpose of stabilizing its net asset value per share. Holdings of cash, on which
no return is earned, would tend to lower the yield on the Portfolios' shares.
Variable Rate Demand Instruments
The Money Market Portfolio and Municipal Portfolio may purchase variable rate
demand instruments. Variable rate demand instruments that the Portfolios will
purchase are tax exempt Municipal Securities or taxable (variable amount master
demand notes) debt obligations that provide for a periodic adjustment in the
interest rate paid on the instrument and permit the holder to demand payment of
the unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days' notice either from the issuer or by drawing on a bank
letter of credit, a guarantee, insurance or other credit facility issued with
respect to such instrument.
The variable rate demand instruments in which the Portfolios may invest are
payable on not more than thirty calendar days' notice either on demand or at
specified intervals not exceeding one year depending upon the terms of the
instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to one year and their
adjustments are based upon the prime rate of a bank or other appropriate
interest rate adjustment index as provided in the respective instruments. The
Fund will decide which variable rate demand instruments it will purchase in
accordance with procedures prescribed by its Board of Trustees to minimize
credit risks. A Portfolio utilizing the amortized cost method of valuation may
only purchase variable rate demand instruments if (i) the instrument is subject
to an unconditional demand feature, exercisable by the Portfolio in the event of
default in the payment of principal or interest on the underlying securities,
which itself qualifies as a First Tier Eligible Security or (ii) the instrument
is not subject to an unconditional demand feature but does qualify as a First
Tier 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. If an instrument is ever
deemed to be of less than high quality, the Portfolio either will sell it in the
market or exercise the demand feature.
- --------------------------------------------------------------------------------
* The "prime rate" is generally the rate charged by a bank to its creditworthy
customers for short-term loans. The prime rate of a particular bank may differ
from other banks and will be the rate announced by each bank on a particular
day. Changes in the prime rate may occur with great frequency and generally
become effective on the date announced.
8
<PAGE>
The variable rate demand instruments that the Portfolios may invest in include
participation certificates purchased by the Portfolios from banks, insurance
companies or other financial institutions in fixed or variable rate, tax-exempt
Municipal Securities (expected to be concentrated in IRBs) or taxable debt
obligations (variable amount master demand notes) owned by such institutions or
affiliated organizations. A participation certificate gives the Portfolios an
undivided interest in the obligation in the proportion that the Portfolio's
participation interest bears to the total principal amount of the obligation and
provides the demand repurchase feature described below. Where the institution
issuing the participation does not meet the Portfolio's high quality standards,
the participation is backed by an irrevocable letter of credit or guaranty of a
bank (which may be a bank issuing a confirming letter of credit, or a bank
serving as agent of the issuing bank with respect to the possible repurchase of
the certificate of participation or a bank serving as agent of the issuer with
respect to the possible repurchase of the issue) or insurance policy of an
insurance company that the Board of Trustees of the Fund has determined meets
the prescribed quality standards for the Portfolio. The Portfolio has the right
to sell the participation certificate back to the institution and, where
applicable, draw on the letter of credit, guarantee or insurance after no more
than 30 days' notice either on demand or at specified intervals not exceeding
397 days (depending on the terms of the participation), for all or any part of
the full principal amount of the Portfolio's participation interest in the
security, plus accrued interest. The Portfolios intend to exercise the demand
only (1) upon a default under the terms of the bond documents, (2) as needed to
provide liquidity to the Portfolio in order to make redemptions of the Portfolio
shares, or (3) to maintain a high quality investment portfolio. The institutions
issuing the participation certificates will retain a service and letter of
credit fee (where applicable) and a fee for providing the demand repurchase
feature, in an amount equal to the excess of the interest paid on the
instruments over the negotiated yield at which the participations were purchased
by the Portfolio. The total fees generally range from 5% to 15% of the
applicable "prime rate"* or other interest rate index. With respect to
insurance, the Portfolios will attempt to have the issuer of the participation
certificate bear the cost of the insurance, although the Portfolios retain the
option to purchase insurance if necessary, in which case the cost of insurance
will be an expense of the Portfolio subject to the expense limitation on
investment company expenses prescribed by any state in which the Portfolio's
shares are qualified for sale. 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 Portfolio, including the
participation certificates, on the basis of published financial information and
reports of the rating agencies and other bank analytical services to which the
Portfolio may subscribe. Although these instruments may be sold by the
Portfolio, the Portfolio intends to hold them until maturity, except under the
circumstances stated above (see "Dividends, Distributions and Taxes" in the
Prospectus).
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 securities 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 Portfolios may contain variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value may be somewhat greater
than would be the case without such limits. Additionally, the Portfolios may
contain variable rate demand participation certificates in fixed rate Municipal
Securities and taxable debt obligations (the Portfolios will not acquire a
variable note demand participation certificate in fixed rate municipal
securities without an opinion of counsel). The fixed rate of interest on these
obligations will be a ceiling on the variable rate of the participation
certificate. In the event that interest rates increased so that the variable
rate exceeded the fixed rate on the obligations, the obligations could no longer
be valued at par and this may cause the Portfolios to take corrective action,
including the elimination of the instruments. Because the adjustment of interest
rates on the variable rate demand instruments is made in relation to movements
of the applicable banks' prime rate, 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 or
obligations of comparable quality with similar maturities.
For purposes of determining whether a variable rate demand instrument held by a
Portfolio matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (1) the period required
before the Portfolio is entitled to receive payment of the principal amount of
the instrument or (2) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Portfolios'
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to meet the investment criteria of the Portfolio, it will be sold in the
market or through exercise of the repurchase demand.
When-Issued Securities
All Portfolios may purchase debt obligations offered on a "when-issued" or
"delayed delivery" basis. When so offered, the price, which is generally
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase of debt obligations; during the period between purchase and settlement,
no payment is made by the purchaser to the issuer and no interest accrues to the
purchaser. To the extent that assets of a Portfolio are not invested prior to
the settlement of a purchase of securities, that Portfolio will earn no income;
however, it is intended that each Portfolio will be fully invested to the extent
practicable and subject to the policies stated above. While when-issued
securities may be sold prior to the settlement date, it is intended that each
Portfolio will purchase such securities with the purpose of actually acquiring
them unless a sale appears desirable for investment reasons. At the time the
Portfolio makes the commitment to purchase a debt obligation on a when-issued
basis, it will record the transaction and reflect the value of the security in
determining its net asset value. The Fund does not believe that the net asset
value or income of the Portfolios' securities portfolios will be adversely
affected by their purchase of debt obligations on a when-issued basis. Each
Portfolio will establish a segregated account in which it will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date.
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Repurchase Agreements
When a Portfolio purchases securities, it may enter into a repurchase agreement
with the seller wherein the seller agrees, at the time of sale, to repurchase
the security at a mutually agreed upon time and price. A Portfolio may enter
into repurchase agreements with member banks of the Federal Reserve System and
with broker-dealers who are recognized as primary dealers in United States
government securities by the Federal Reserve Bank of New York. Although the
securities subject to the repurchase agreement might bear maturities exceeding
one year, settlement for the repurchase would never be more than 397 days after
the Portfolio's acquisition of the securities and normally would be within a
shorter period of time. The resale price will be in excess of the purchase
price, reflecting an agreed upon market rate effective for the period of time
the Portfolio's money will be invested in the security, and will not be related
to the coupon rate of the purchased security. At the time a Portfolio enters
into a repurchase agreement the value of the underlying security, including
accrued interest, will be equal to or exceed the value of the repurchase
agreement, and, in the case of a repurchase agreement exceeding one day, the
seller will agree that the value of the underlying security, including accrued
interest, will at all times be equal to or exceed the value of the repurchase
agreement. Each Portfolio may engage in a repurchase agreement with respect to
any security in which that Portfolio is authorized to invest, even though the
underlying security may mature in more than one year. The U.S. Treasury
Portfolio may only invest in repurchase agreements backed by obligations issued
or guaranteed by the United States Government calling for resale in 397 days or
less. The collateral securing the seller's obligation must be of a credit
quality at least equal to the Portfolio's investment criteria for Portfolio
securities and will be held by the Portfolio's custodian or in the Federal
Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
a Portfolio to the seller subject to the repurchase agreement and is therefore
subject to that Portfolio's investment restriction applicable to loans. It is
not clear whether a court would consider the securities purchased by a Portfolio
subject to a repurchase agreement as being owned by that Portfolio or as being
collateral for a loan by that Portfolio to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the securities before repurchase of the security under a repurchase
agreement, a Portfolio may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the security. If the court characterized the transaction as a loan and a
Portfolio has not perfected a security interest in the security, that Portfolio
may be required to return the security to the seller's estate and be treated as
an unsecured creditor of the seller. As an unsecured creditor, a Portfolio would
be at the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt obligation purchased for a Portfolio,
the Manager seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security, in which case a Portfolio
may incur a loss if the proceeds to that Portfolio of the sale to a third party
are less than the repurchase price. However, if the market value of the
securities subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Portfolio involved will direct the seller of the
security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Portfolio will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
Participation Interests
The Money Market Portfolio and Municipal Portfolio may purchase from banks
participation interests in all or part of specific holdings of Municipal or
other debt obligations (including corporate loans). Where the institution
issuing the participation does not meet the Portfolio's quality standards, the
participation may be backed by an irrevocable letter of credit or guarantee that
the Board of Trustees has determined meets the prescribed quality standards of
each Portfolio. Thus, even if the credit of the selling bank does not meet the
quality standards of a Portfolio, the credit of the entity issuing the credit
enhancement will. Each Portfolio will have the right to sell the participation
interest back to the bank for the full principal amount of the Portfolio's
interest in the Municipal or debt obligation plus accrued interest, but only (1)
as required to provide liquidity to that Portfolio, (2) to maintain the quality
standards of each Portfolio's investment portfolio or (3) upon a default under
the terms of the debt obligation. The selling bank may receive a fee from a
Portfolio in connection with the arrangement. When purchasing bank participation
interests, the Portfolio will treat both the bank and the underlying borrower as
the issuer of the instrument for the purpose of complying with the
diversification requirement of the investment restrictions discussed below.
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Domestic and Foreign Bank Obligations, Certificates of Deposit and Bankers'
Acceptances
The Money Market Portfolio and Municipal Portfolio may purchase certificates of
deposit, time deposits, bankers' acceptances, commercial paper and other
obligations issued or guaranteed by the 50 largest banks in the United States.
For this purpose banks are ranked by total deposits as shown by their most
recent annual financial statements. The "other obligations" in which the
Portfolio may invest include instruments (such as bankers' acceptances,
commercial paper and certificates of deposit) issued by United States
subsidiaries of the 50 largest banks in the United States where the instruments
are guaranteed as to principal and interest by such banks. At the time the
Portfolio invests in any certificate of deposit, bankers' acceptance or other
bank obligation, the issuer or its parent must have its debt rated within the
quality standards of the Portfolio or if unrated be of comparable quality as
determined by the Fund's Board of Trustees.
Privately Placed Securities
The Money Market Portfolio and Municipal Portfolio may invest in securities
issued as part of privately negotiated transactions between an issuer and one or
more purchasers. Except with respect to certain commercial paper issued in
reliance on the exemption from regulations in Section 4(2) of the Securities Act
of 1933 (the "Securities Act") and securities subject to Rule 144A of the
Securities Act which are discussed below, these securities are typically not
readily marketable, and therefore are considered illiquid securities. The price
these Portfolios pay for illiquid securities, and any price received upon
resale, may be lower than the price paid or received for similar securities with
a more liquid market. Accordingly, the valuation of privately placed securities
by these Portfolios will reflect any limitations on their liquidity. As a matter
of policy, none of the Portfolios will invest more than 10% of the market value
of the total assets of the Portfolio in repurchase agreements maturing in over
seven days and other illiquid investments. The Portfolios may purchase
securities that are not registered ("restricted securities") under the
Securities Act, but can be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act. The Portfolios may also purchase certain
commercial paper issued in reliance on the exemption from regulations in Section
4(2) of the Securities Act ("4(2) Paper"). However, each Portfolio will not
invest more than 10% of its net assets in illiquid investments, which include
securities for which there is no ready market, securities subject to contractual
restriction on resale, certain investments in asset-backed and receivable-backed
securities and restricted securities (unless, with respect to these securities
and 4(2) Paper, the Fund's Trustees continuously determine, based on the trading
markets for the specific restricted security, that it is liquid). The Trustees
may adopt guidelines and delegate to the Manager the daily function of
determining and monitoring liquidity of restricted securities and 4(2) Paper.
The Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will develop, the
Trustees will carefully monitor the Portfolios investments in these securities,
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Portfolios to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
Other Matters
In addition, for purposes of complying with the securities regulations of
certain states, the Fund has adopted the following additional investment
restrictions, which may be changed by the Fund's Board of Trustees without the
approval by a majority vote of the Fund's outstanding shares.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions which are in addition
to those described in the Prospectus. Under the following restrictions, which
may not be changed without the approval by a majority vote of the Fund's
outstanding shares and which apply to each of the Portfolios, the Fund may not:
(a) invest in securities of companies that have conducted operations for less
than three years, including the operations of predecessors;
(b) invest in or hold securities of any issuer if to the knowledge of the Fund
officers and trustees of the Fund or officers and directors of the Fund and
the Manager, individually owning beneficially more than 1/2 of 1% of the
securities of the issuer, in the aggregate own more than 5% of the issuer's
securities; and
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(c) (1) make investments for purpose of exercising control over any issuer
or other person; (2) purchase securities having voting rights at the time
of purchase; (3) purchase securities of other investment companies, except
in connection with a merger, acquisition, consolidation, reorganization or
acquisition of assets; (4) invest in real estate, including real estate
limited partnerships, (other than debt obligations secured by real estate
or interests therein or debt obligations issued by companies which invest
in real estate or interests therein), (5) invest in commodities, commodity
contracts, commodity options, interests and leases in oil, gas or other
mineral exploration or development programs (a Fund may, however, purchase
and sell securities of companies engaged in the exploration, development,
production, refining transporting and marketing of oil, gas or minerals);
(6) purchase restricted securities or purchase securities on margin; (7)
make short sales of securities or intentionally maintain a short position
in any security or write, purchase or sell puts, calls, straddles, spreads
or any combination thereof; (8) act as an underwriter of securities or (9)
issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with any permitted borrowing.
In addition, the Fund may not, on behalf of the Portfolio or Portfolios
specified:
(d) with respect to the U.S. Treasury Portfolio and the Money Market Portfolio,
invest more than 25% of the value of the Portfolio's total assets in
securities of companies in the same industry (excluding U.S. Government
securities and, as to Money Market Portfolio only, certificates of deposit
and bankers' acceptances of domestic banks); and
(e) with respect to the Municipal Portfolio, purchase (i) pollution control and
industrial revenue bonds or (ii) securities which are not Municipal
Obligations, if in either case the purchase would cause more than 25% of
the value of the Portfolio's total assets to be invested in companies in
the same industry (for the purposes of this restriction wholly-owned
finance companies are considered to be in the industry of their parents if
their activities are primarily related to financing the activities of the
parents).
PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
PURCHASE AND REDEMPTION OF SHARES AND OTHER PURCHASE AND REDEMPTION PROCEDURES
The material relating to the purchase and redemption of shares of each Class in
the Prospectus is herein incorporated by reference.
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YIELD QUOTATIONS
The Fund calculates a seven-day yield quotation (computed separately for each
Class of shares) using a standard method prescribed by the rules of the
Securities and Exchange Commission. Under that method, the Fund's yield figure,
which is based on a chosen seven-day period, is computed as follows: the Fund's
return for the seven-day period (which is obtained by dividing the net change in
the value of a hypothetical account having a balance of one share at the
beginning of the period by the value of such account at the beginning of the
period, which is expected to always be $1.00) is multiplied by (365/7) with the
resulting annualized yield 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.
The Fund also compiles a compound effective yield quotation (computed separately
for each Class of shares) for a seven-day period by using a formula prescribed
by the Securities and Exchange Commission. Under that formula, the Fund's
unannualized return for the seven-day period (described in the preceding
paragraph) is compounded by adding one to the base period return, raising the
sum to a power equal to 365/7 and subtracting one from the result (i.e.,
effective yield = (base 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 for each
Portfolio fluctuates from day to day and that the Fund's yield for any given
period for a Portfolio is not an indication, or representation by the Fund, of
future yields or rates of return on the Fund's shares. The Fund's yields are not
fixed or guaranteed, and an investment in the Fund is not insured. Accordingly,
the Fund's yield information may not necessarily be used to compare Fund shares
with investment alternatives which, like money market instruments or bank
accounts, may provide a fixed rate of interest. In addition, investments in the
Fund may not necessarily be used to compare with investment alternatives which
are insured or guaranteed.
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.
MANAGEMENT AND INVESTMENT MANAGEMENT CONTRACT
The investment manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). The Manager, as of June 30, 1996, was
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $9.1 billion. In addition to the Fund, Reich & Tang Asset Management
L.P.'s advisory clients include, among others, California Daily Tax Free Income
Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc.,
Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Florida Daily Municipal
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax
Exempt Proceeds Fund, Inc. Reich & Tang Asset Management L.P. also advises
pension trusts, profit sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the limited partnership, Reich & Tang Asset
Management L.P., the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. Reich & Tang Asset Management L.P. has
succeeded NEICLP as the Manager of the Fund.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts corporation,
serves as the sole general partner of NEICLP. The New England Mutual Life
Insurance Company ("The New England") owns approximately 55.9% of the total
partnership units outstanding of NEICLP, and Reich & Tang, Inc., owns
approximately 17.6% of the outstanding partnership units of NEICLP. In addition,
NEIC is a wholly-owned subsidiary of The New England, which may be deemed a
"controlling person of the Manager. NEIC is a holding company offering a broad
array of investment styles across a wide range of asset categories through
eleven investment advisory/management affiliates and two distribution
subsidiaries which include, in addition to the Manager, Loomis, Sayles &
Company, L.P., Copley Real Estate Advisors, Inc., Back Bay Advisors, L.P.,
Marlborough Capital Advisors, L.P., Westpeak Investment Advisors, L.P., Draycott
Partners, Ltd., TNE Investment Services L.P., New England Investment
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Associates, Inc., Harris Associates, Vaughan-Nelson, Scarborough & McConnell,
Inc. and an affiliate, Capital Growth Management Limited Partnership. These
affiliates in the aggregate are investment advisors or managers of 42 other
registered investment companies.
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 officers of Reich & Tang Asset
Management, Inc., the sole general partner of the Manager or employees of the
Manager or its affiliates.
The Investment Management Contract has a term which extends to March 31, 1997,
and may be continued in force thereafter for successive twelve-month periods
beginning each April 1st, provided that such continuance is specifically
approved annually by majority vote of the Fund's outstanding voting shares or by
its Board of Trustees, and in either case by a majority of the trustees who are
not parties to the Investment Management Contract or interested persons of any
such party, by votes cast in person at a meeting called for the purpose of
voting on such matter. The Investment Management Contract was approved by the
sole shareholder on March 15, 1994 and the Board of Trustees on January 26,
1996.
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 (.08%) per annum of each Portfolio's average daily net assets. The
fees are accrued daily and paid monthly.
Pursuant to the Administrative Services Agreement with the Fund, the Manager
also performs clerical, accounting supervision, office service and related
functions for the Fund and provides the Fund with personnel to (i) supervise the
performance of bookkeeping and 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. The Fund pays the Manager for such personnel and for
rendering such services at rates which must be agreed upon by the Fund and the
Manager, provided that the Fund does not pay for services performed by any such
persons who are also officers of the general partner of the Manager. It is
intended that such rates will be the actual costs of the Manager. The Fund also
reimburses the Manager for all of the Fund's operating costs, including rent,
depreciation of equipment and facilities, interest and amortization of loans
financing equipment used by the Fund and all the expenses incurred to conduct
the Fund's affairs. The amounts of such reimbursements must be agreed upon
between the Fund and the Manager. The Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee and the
operating expense reimbursement. For its services under the Administrative
Services Agreement, the Manager receives from the Fund a fee equal to .05% per
annum of each Portfolio's average daily net assets.For the fiscal year ended
March 31, 1996, the amount payable to the Manager under the Administrative
Services Contract for the Money Market Portfolio of the Fund was $ 37,740, all
of which was voluntarily waived. For the fiscal year ended March 31, 1996, the
amount payable to the Manager under the Administrative Services Contract for the
U.S. Treasury Portfolio of the Fund was $44,827, of which $36,107 was
voluntarily waived.
The Manager has voluntarily agreed to waive its management and administrative
services fees in whole or in part and reimburse each Portfolio its operating
expenses to the extent that (i) such Portfolio's Class A shares total operating
expenses exceed .40%, .425% and .45% of the Class A shares average daily net
assets during the first, second and third fiscal years of the Fund,
respectively; and (ii) such Portfolio's Class B shares total operating expenses
exceed .15%, .175% and .20% of the Class B shares average daily net assets
during the first, second and third fiscal years of the Fund, respectively. The
Manager therefore receives only that portion of its management and
administrative services fees which, when added to all operating expenses, does
not result in total operating expenses for each Class of shares of each
Portfolio exceeding the amounts set forth in the preceding sentence during the
first three years of the Fund. The Manager will not subsequently recoup any
portion of the fees so waived or expenses reimbursed. For the Money Market
Portfolio, the fee payable to the Manager under the Investment Management
Contract for the fiscal year ended March 31, 1996 was $60,384, of
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which $60,384 was voluntarily waived. For the U.S. Treasury Portfolio, the fee
payable to the Manager under the Investment Management Contract for the fiscal
year ended March 31, 1996 was $71,723, of which $36,843 was voluntarily waived.
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 will 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, to
reimburse the Fund for its expenses (exclusive of interest, taxes, brokerage and
extraordinary expenses) which in any year exceed the limits on investment
company expenses prescribed by any state in which the Fund's shares are
qualified for sale. For the purpose of this obligation to reimburse expenses,
the Fund's annual expenses are estimated and accrued daily, and any appropriate
estimated payments are made to it on a monthly basis. Subject to the obligations
of the Manager to reimburse the Fund for its excess expenses as described above,
the Fund has, under the Investment Management Contract, confirmed its obligation
for payment of all its other expenses, including 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 disinterested trustees, costs of investor services,
shareholder's reports and corporate meetings, Securities and Exchange Commission
registration fees and expenses, state securities laws registration fees and
expenses, expenses of preparing and printing the Fund's prospectus for delivery
to existing shareholders and of printing application forms for shareholder
accounts and the fees and reimbursements payable to the Manager under the
Investment Management Contract and the Administrative Services Agreement and the
Distributor under the Shareholder Servicing Agreement.
The Fund may from time to time contract to have management services performed by
third parties as discussed herein and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. The Fund's expenses for such
services are among the expenses subject to the expense limitation described
above.
The Fund has reserved the right to charge individual shareholder accounts for
expenses actually incurred by such account for postage, wire transfers and
certain other shareholder expenses, as well as to impose a monthly service
charge for accounts whose net asset value falls below the minimum amount.
Trustees and Officers
The trustees and officers of the Fund, and their principal occupations for the
past five years, are listed below. The address of each such person, unless
otherwise indicated, 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 the Manager.
Steven W. Duff, 42 - President and Trustee of the Fund, is President of the
Mutual Funds division of the Manager since September 1994. Mr. Duff was formerly
Director of Mutual Fund Administration at NationsBank which he was associated
with from June 1981 to August 1994. Mr. Duff is President and a Director of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Daily Tax Free Income Fund, Inc., Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax
Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc. and
Short Term Income Fund, Inc., President and Trustee of Florida Daily Municipal
Income Fund, Pennsylvania Daily Municipal Income Fund, President of Cortland
Trust, Inc., President and Chief Executive Officer of Tax Exempt Proceeds Fund,
Inc., Executive Vice President of Reich & Tang Equity Fund, Inc.
Dr. W. Giles Mellon, 65 - Trustee of the Fund, is Professor of Business
Administration and Area Chairman of Economics in the Graduate School of
Management, Rutgers University with which he has been associated since 1966. His
address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is also a Director of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Reich &
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Tang Equity Fund, Inc. and Short Term Income Fund, Inc., and a Trustee of
Florida Daily Municipal Income Fund and Pennsylvania Daily Municipal Income
Fund.
Robert Straniere, 54 - Trustee of the Fund, has been a member of the New York
State Assembly and a partner with Straniere & Straniere Law Firm of since 1981.
His address is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is
also a Director of California Daily Tax Free Income Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Life Cycle Mutual Funds, Inc., Michigan Daily Tax Free Income Fund,
Inc., New Jersey Daily Municipal Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc. and Short Term
Income Fund, Inc., and a Trustee of Florida Daily Municipal Income Fund and
Pennsylvania Daily Municipal Income Fund.
Dr. Yung Wong, 57 - Trustee of the Fund, was Director of Shaw Investment
Management (U.K.) Limited from 1994 to October 1995 and formerly was a General
Partner of Abacus Partners Limited Partnership (a general partner of a venture
capital investment firm) from 1984 to 1994. His address is 29 Alden Road,
Greenwich, Connecticut 06831. Dr. Wong is a Director of Republic Telecom Systems
Corporation (a provider of telecommunications equipment) since January 1989 and
of TelWatch, Inc. (a provider of network management software) since August 1989.
Dr. Wong is also a Director of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc., and a Trustee
of Florida Daily Municipal Income Fund and Pennsylvania Daily Municipal Income
Fund.
Bernadette N. Finn, 48 - Vice President and Secretary of the Fund, is Vice
President of the Mutual Funds division of the Manager since September 1993. Ms.
Finn was formerly Vice President and Assistant Secretary of Reich & Tang, Inc.
with which she was associated with from September 1970 to September 1993. Ms.
Finn is also Secretary of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax
Free Income Funds, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund and Tax Exempt Proceeds Fund,
Inc., a Vice President and Secretary of Delafield Fund, Inc., Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc.
Molly Flewharty, 45 - Vice President of the Fund, is Vice President of the
Mutual Funds division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. with which she was associated with
from December 1977 to September 1993. Ms. Flewharty is also a Vice President of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax
Free Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short
Term Income Fund, Inc. and Tax Exempt Proceeds Fund, Inc.
Lesley M. Jones, 48 - Vice President of the Fund, is Senior Vice President of
the Mutual Funds division of the Manager since September 1993. Ms. Jones was
formerly Senior Vice President of Reich & Tang, Inc. with which she was
associated with from April 1973 to September 1993. Ms. Jones is also a Vice
President of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc.,
New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc. and Short Term Income
Fund, Inc.
Dana E. Messina, 39 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds division of the Manager since January 1995 and was Vice
President from September 1993 to January 1995. Ms. Messina was formerly Vice
President of Reich & Tang, Inc. with which she was associated with from December
1980 to September 1993. Ms. Messina is also Vice President of California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc.,
New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
16
<PAGE>
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short
Term Income Fund, Inc., and Tax Exempt Proceeds Funds, Inc.
Richard De Sanctis, 39 - Treasurer of the Fund, is Vice President and Treasurer
of the Manager since September 1993. Mr. De Sanctis was formerly Controller of
Reich & Tang, Inc., from January 1991 to September 1993 and Vice President and
Treasurer of Cortland Financial Group, Inc. and Vice President of Cortland
Distributors, Inc. from 1989 to December 1990. Mr. De Sanctis is also Treasurer
of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc.,
New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund,
Inc. and Tax Exempt Proceeds Fund, Inc. and is Vice President and Treasurer of
Cortland Trust, Inc.
Trustees of the Fund not affiliated with the Manager receive from the Fund, per
Portfolio, 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 below.
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Annual Total Compensation
Position Compensation from Retirement Benefits upon from Fund and Fund
Registrant for Benefits Accrued Retirement Complex Paid to
Fiscal Year as Part of Fund Directors
Expenses
W. Giles Mellon, $2,000.00 0 0 $52,000 (13 Funds)
Director
Robert Straniere, $2,000.00 0 0 $52,000 (13 Funds)
Director
Dr. Yung Wong, $2,000.00 0 0 $52,000 (13 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ended March 31, 1996 (and, with respect to certain of the funds
in the Fund Complex, estimated to be paid during the fiscal year ended March
31, 1996). The parenthetical number represents the number of investment
companies (including the Fund) from which such person receives compensation that
are considered part of the same Fund complex as the Fund, because, among other
things, they have a common investment advisor.
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 law are passed upon by Dechert, Price &
Rhoads, Ten Post Office Square South, Boston, Massachusetts 02109-4603.
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Trustees has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
has entered into a Distribution Agreement and a Shareholder Servicing Agreement
(with respect to Class A shares only) with the Reich & Tang Distributors L.P.,
(the "Distributor") as distributor of the Fund's shares.
Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and Reich
& Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
17
<PAGE>
Effective January 26, 1995, a majority of the Fund's Board of Trustees,
including a majority of trustees, who are not interested (as defined in the 1940
Act) approved the creation of a second class of shares of beneficial interest of
the Fund. In furtherance of this action, the Board of Trustees has reclassified
the authorized shares of beneficial interest of the Fund into Class A and Class
B shares (the shares of the Fund outstanding as of January 26, 1995, have been
designated Class B shares). The Class A shares will be offered to investors who
desire certain additional shareholder services from Participating Organizations
that are compensated by the Fund's Manager and Distributor for such services.
Under the Plan, the Fund and the Distributor will enter into a Shareholder
Servicing Agreement, with respect to the Fund's shares. For its services under
the Shareholder Servicing Agreement (with respect to Class A shares only), the
Distributor receives from the Fund a fee equal to .25% per annum of the Class A
shares of the Fund's average daily net assets (the "Shareholder Servicing Fee").
The fee is accrued daily and paid monthly and any portion of the fee may be
deemed to be used by the Distributor for payments to Participating Organizations
with respect to servicing their clients or customers who are shareholders of the
Class A of the Fund. The Class B shareholders do not receive the benefit of such
services from Participating Organizations and, therefore, will not be assessed a
Shareholder Servicing Fee.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Participating Organizations and Distributor in carrying out their
obligations under the Shareholder Servicing Agreement with respect to the Fund's
shares and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from
their own resources, which may include the management fee, and past profits for
the following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Class A shares of the Fund; (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee with respect to Class A shares
and past profits for the purpose enumerated in (i) above. The Distributor will
determine the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager and the Distributor for any fiscal year under the Investment
Management Contract, the Administrative Services Contract or the Shareholder
Servicing Agreement in effect for that year.
For the Fund's fiscal year ended March 31, 1996, the amount payable to the
Distributor under the Plan and Shareholder Servicing Agreement adopted
thereunder pursuant to the Rule 2a-7 under the 1940 Act, totaled $13 for the
Money Market Portfolio. During the same period, the Manager and Distributor made
payments under the Plan totaling $4,004. For the fiscal year ended March 31,
1996, the amount payable to the Distributor under the Plan and Shareholder
Servicing Agreement adopted thereunder pursuant to the Rule 2a-7 under the 1940
Act, totaled $224,133 for the U.S. Treasury Portfolio. During the same period,
the Manager and Distributor made payments under the Plan totaling $227,720, of
which $224,316 was to or on behalf of Participating Organizations.
<PAGE>
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
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 most recently approved the
continuance of the Plan on January 26, 1995, to be effective until December 31,
1995. The Plan was also approved by the Shareholders of the Fund at a meeting
held on January 26, 1995. The Plan further provides that it may not be amended
to increase materially the costs
18
<PAGE>
which may be spent by the Fund for distribution pursuant to the Plan without
shareholder approval, and the other material amendments must be approved by the
trustees in the manner described in the preceding sentence. The Plan may be
terminated at any time by a vote of a majority of the disinterested trustees of
the Fund or the Fund's shareholders.
DESCRIPTION OF SHARES
The Fund was established as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust dated January 20, 1994.
The Fund has an unlimited authorized number of shares of beneficial interest.
These shares are entitled to one vote per share with proportional voting for
fractional shares. There are no conversion or preemptive rights in connection
with any shares of the Fund. All shares when issued in accordance with the terms
of the offering will be fully paid and non-assessable. Shares of the Fund are
redeemable at net asset value, at the option of the shareholders. On March 15,
1994, the Manager purchased $100,000 of the Money Market Portfolio's shares at
an initial subscription price of $1.00 per share.
Each Portfolio of Fund is subdivided into two classes of shares of beneficial
interest, Class A and Class B. Each share, regardless of class, will represent
an interest in the same portfolio of investments and will have identical voting,
dividend, liquidation and other rights, preferences, powers, restrictions,
limitations, qualifications, designations and terms and conditions, except that:
(i) the Class A and Class B shares will have different class designations; (ii)
only the Class A shares will be assessed a service fee of .25% of the average
daily net assets of the Class A shares of the Fund pursuant to the Rule 12b-1
Distribution and Service Plan of the Fund; (iii) only the holders of the Class A
shares would be entitled to vote on matters pertaining to the Plan and any
related agreements in accordance with provisions of Rule 12b-1; and (iv) the
exchange privilege will permit shareholders to exchange their shares only for
shares of the same class of any Portfolio of the Fund. Payments that are made
under the Plans will be calculated and charged daily to the appropriate class
prior to determining daily net asset value per share and
dividends/distributions.
On June 30, 1996 there were 146,225,869 Money Market Portfolio shares and
269,834,995 U.S. Treasury Portfolio shares of the Fund outstanding. As of June
30, 1996 the amount of shares owned by all officers and directors of the Fund,
as a group, was less than 1% of the outstanding shares. Set forth below is
certain information as to persons who owned 5% or more of the Fund's outstanding
shares as of June 30, 1996:
Nature of
Name and address of Class Ownership
Money Market Portfolio-Class B
New England Investment
Co., L.P. 36.0% Record
399 Boylston Street
Boston, MA 02116
United National Bank 25.6% Record
675 Franklin Blvd.
Sommerset, NJ 08873
New England Securities 10.1% Record
399 Boylston Street
Boston, MA 02116
The Tang Fund 5.9% Record
600 Fifth Avenue
New York, NY 10020
New England Funds, L.P. 5.9% Record
399 Boylston Street
Boston, MA 02116
19
<PAGE>
National City Bank 5.2% Record
of Evansville
P.O. Box 868
Evansville, IN 47705
U.S. Treasury Portfolio-Class A
Neuberger & Berman as Agent 99.8% Record
11 Broadway
New York, New York 10004-1302
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
trustees can elect 100% of the trustees if the holders choose to do so and, in
the 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 revised
investment advisory contracts with respect to a particular class or series of
beneficial interest, (c) for approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of beneficial interest,
and (d) upon the written request of holders of shares entitled to cast not less
than 10% of all the votes entitled to be cast at such meeting. Annual and other
meetings may be required with respect to such additional matters relating to the
Fund as may be required by the 1940 Act including the removal of Fund Trustee(s)
and communication among shareholders, any registration of the Fund with the
Securities and Exchange Commission or any state, or as the 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 his or
her successor, elected at such a meeting, or until such Trustee sooner dies,
resigns, retires or is removed by the vote of the shareholders.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is custodian for its cash and securities. Reich & Tang Services L.P., 600
Fifth Avenue, New York, New York 10020 is transfer agent and dividend disbursing
agent for the shares of the Fund. The transfer agent and custodian do not assist
in, and are not responsible for, investment decisions involving assets of the
Fund.
NET ASSET VALUE
Pursuant to rules of the Securities and Exchange Commission, the Board of
Trustees has established procedures to stabilize each Portfolio's net asset
value at $1.00 per share. These procedures include a review of the extent of any
deviation of net asset value per share, based on available market rates, from
$1.00. 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. Each Portfolio 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 or subject to a repurchase
agreement having a duration of greater than one year, will limit portfolio
investments, including repurchase agreements, to those United States
dollar-denominated instruments that each Portfolio's Board of Trustees
determines present minimal credit risks, and will comply with certain reporting
and record-keeping procedures. Each Portfolio has also established procedures to
ensure that portfolio securities meet the quality criteria as provided in Rule
2a-7 of the 1940 Act. (See "Investment Objectives, Policies and Risks" in the
Prospectus.)
20
<PAGE>
DESCRIPTION OF RATINGS
Commercial Paper and Corporate Bond Ratings
Description of Prime-1 and A-1 Commercial Paper Ratings
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations.
Commercial paper rated A by S&P has the following characteristics. Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt rating
should be A or better. In some cases, BBB credits may be allowed if other
factors outweigh the BBB rating. The issuer should have access to at least two
additional channels of borrowing. Basic earnings and cash flow should have an
upward trend with allowances made for unusual circumstances. Typically the
issuer's industry should be well established and the issuer should have a strong
position within its industry and the reliability and quality of management
should be unquestioned. Issuers rated A are further referred by use of numbers
1, 2 and 3 to denote relative strength within this highest classification.
Description of Aa and AA Corporate Bond Ratings
Bonds rate Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with bonds rated Aaa (Moody's highest rating) they comprise
what are generally known as high-grade bonds. Aa bonds are rated lower than the
best bonds because margins of protection may not be as large as 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.
Bonds rated AA by S&P are judged to be high-quality debt obligations. Their
capacity to pay principal and interest is considered very strong, and in the
majority of instances they differ from AAA issues only in a small degree. Bonds
rated AAA are considered by S&P to be highest grade obligations and indicate an
extremely strong capacity to pay principal and interest.
21
<PAGE>
- --------------------------------------------------------------------------------
INSTITUTIONAL DAILY INCOME FUND
INDEPENDENT AUDITOR'S REPORT
================================================================================
The Board of Trustees and Shareholders
Institutional Daily Income Fund
We have audited the accompanying statements of net assets of the Money Market
Portfolio and the U.S. Treasury Portfolio of Institutional Daily Income Fund as
of March 31, 1996, and the related statements of operations, the statements of
changes in net assets, and the selected financial information for each of the
periods indicated in the accompanying financial statements. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of March 31, 1996, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of the Money Market Portfolio and the U.S. Treasury Portfolio of
Institutional Daily Income Fund as of March 31, 1996, the results of its
operations, the changes in its net assets and the selected financial information
for the periods indicated, in conformity with generally accepted accounting
principles.
/s/McGladrey & Pullen, LLP
April 29, 1996
New York, New York
22
<PAGE>
- --------------------------------------------------------------------------------
INSTITUTIONAL DAILY INCOME FUND
MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS
MARCH 31, 1996
================================================================================
<TABLE>
<CAPTION>
Face Maturity Value
Amount Date Yield (Note 1)
------ ---- ----- --------
Commercial Paper (36.95%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,000,000 Asset Securitization Corporation 04/18/96 5.44% $ 997,469
4,000,000 Asset Securitization Corporation 04/19/96 5.20 3,989,700
4,000,000 Bear Stearns Companies Incorporated 04/12/96 5.23 3,993,669
5,000,000 Ciesco 04/17/96 5.37 4,988,111
4,000,000 Compagnie Bancaire 04/24/96 5.37 3,986,456
5,000,000 Export Development Corporation 04/02/96 5.36 4,999,257
5,000,000 First Chicago Financial Corporation 04/17/96 5.38 4,988,089
5,000,000 Ford Credit Europe 05/09/96 5.30 4,972,239
4,200,000 Island Finance 06/13/96 5.36 4,154,947
5,000,000 Morgan Stanley Group, Incorporated 04/11/96 5.29 4,992,681
5,000,000 Receivables Capital Corporation 05/16/96 5.23 4,967,687
---------- ----------
47,200,000 Total Commercial Paper 47,030,305
---------- ----------
<CAPTION>
Bankers' Acceptances (7.77%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5,000,000 NationsBank 06/03/96 5.35% $ 4,953,712
5,000,000 Trust Company Bank of Georgia 06/28/96 5.34 4,935,589
---------- ----------
10,000,000 Total Bankers' Acceptances 9,889,301
---------- ----------
<CAPTION>
Eurodollar Certificates of Deposit (6.28%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 4,000,000 Banque Nationale de Paris 05/07/96 5.15% $ 3,999,991
4,000,000 Commerzbank A.G. 05/07/96 5.11 4,000,039
---------- ----------
8,000,000 Total Eurodollar Certificates of Deposit 8,000,030
---------- ----------
<CAPTION>
Letter of Credit Commercial Paper (17.97%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5,000,000 Eiger Capital Corporation
LOC Union Bank of Switzerland 04/03/96 5.25% $ 4,998,550
5,000,000 Enterprise Funding
LOC Bayerische Vereinsbank, A.G. 04/12/96 5.52 4,991,597
5,000,000 Guangong Enterprise Limited
LOC Credit Suisse 08/30/96 5.15 4,894,720
5,000,000 SCI Systems
LOC ABN AMRO Bank N.V. 04/22/96 5.31 4,984,600
3,000,000 Unibanco - Uniao de Bancos Grand Cayman
LOC Westdeutsche Landesbank Girozentrale 04/01/96 5.69 3,000,000
---------- ----------
23,000,000 Total Letter of Credit Commercial Paper 22,869,467
---------- ----------
<CAPTION>
Master Notes (3.14%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 4,000,000 Goldman Sachs 11/04/96 5.85% $ 4,000,000
---------- ----------
4,000,000 Total Master Notes 4,000,000
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
23
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
<TABLE>
<CAPTION>
Face Maturity Value
Amount Date Yield (Note 1)
------ ---- ----- --------
Medium Term Notes (1.73%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 2,200,000 First U.S.A. Credit Master Trust - Series 1995-96
Class A (Steers) 12/10/96 5.33% $ 2,200,000
---------- ----------
2,200,000 Total Medium Term Notes 2,200,000
---------- ----------
<CAPTION>
Other Notes (15.21%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2,000,000 Batavia, NY BAN 10/04/96 5.13% $ 2,005,357
3,000,000 County of Passaic, NJ GO Refunding Bond - Series B
LOC Bank of Nova Scotia 09/01/20 (a) 5.50 3,000,000
1,000,000 Fresno County, CA TRAN 06/28/96 6.00 999,852
2,000,000 Mississippi Business Finance Corporation IDRB
(Howard Industries, Inc.) - Series 1995
LOC National Bank of Detroit 06/01/10 (a) 5.65 2,000,000
2,931,000 Rochester NY BAN 03/11/97 5.78 2,921,582
2,240,000 State of Connecticut RRA - Subseries 2
LOC National Westminster Bank PLC 11/15/96 (b) 6.00 2,240,000
2,200,000 State of Missouri HEFA (SSM Health Care System) Series 1995 - Series D
MBIA Insured 06/01/25 (a) 5.50 2,200,000
4,000,000 The City of New York Fiscal 1996 - Series A-2
LOC Societe Generale 08/14/96 5.20 4,000,000
---------- ----------
19,371,000 Total Other Notes 19,366,791
---------- ----------
<CAPTION>
Repurchase Agreements, Overnight (11.00%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 14,000,000 Morgan Stanley & Co., Incorporated (Collateralized by:
$14,510,000, U.S. Treasury Bills, due 06/13/96) 04/01/96 5.38% $ 14,000,000
---------- -----------
14,000,000 Total Repurchase Agreements, Overnight 14,000,000
---------- -----------
Total Investments (100.05%) (Cost $127,355,894+) 127,355,894
Liabilities in Excess of Cash and Other Assets (-0.05%) ( 68,869)
-----------
Net Assets (100.00%) $127,287,025
===========
Net Asset Value, offering and redemption price per share:
Class A shares, 5,261 shares outstanding (Note 3) $ 1.00
===========
Class B shares, 127,281,764 shares outstanding (Note 3) $ 1.00
===========
+ Aggregate cost for federal income tax purposes is identical.
</TABLE>
FOOTNOTES:
(a) Securities are payable on demand at par including accrued interest (usually
with seven days notice) and where applicable are unconditionally secured as
to principal and interest by a letter of credit. The interest rates are
adjustable and are based on market rates. The rate shown is the rate in
effect at the date of this statement.
(b) The maturity date indicated for this security is the mandatory put date.
<TABLE>
<CAPTION>
KEYS:
<S> <C> <C> <C> <C> <C>
BAN = Bond Anticipation Note RRA = Resource Recovery Authority
GO = Government Obligation TRAN = Tax and Revenue Anticipation Note
IDRB = Industrial Development Revenue Bond
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
24
<PAGE>
- --------------------------------------------------------------------------------
INSTITUTIONAL DAILY INCOME FUND
U.S. TREASURY PORTFOLIO
STATEMENT OF NET ASSETS
MARCH 31, 1996
================================================================================
<TABLE>
<CAPTION>
Face Maturity Value
Amount Date Yield (Note 1)
------ ---- ----- --------
Repurchase Agreements, Overnight (61.01%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 103,000,000 Morgan Stanley & Co., Incorporated (Collateralized
by $107,790,000, U.S. Treasury Bills, due 08/22/96) 04/01/96 5.38% $103,000,000
75,000,000 Morgan (JP) Securities, Inc. (Collateralized by $79,415,000,
U.S. Treasury Bills, due 12/12/96) 04/01/96 5.40 75,000,000
----------- -----------
178,000,000 Total Repurchase Agreements, Overnight 178,000,000
----------- -----------
<CAPTION>
U.S. Government Obligations (39.02%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 10,000,000 U.S. Treasury Bills 04/04/96 5.33% $ 9,995,638
10,000,000 U.S. Treasury Bills 05/02/96 5.33 9,955,050
10,000,000 U.S. Treasury Bills 05/09/96 5.40 9,944,372
5,000,000 U.S. Treasury Bills 05/23/96 4.90 4,965,044
10,000,000 U.S. Treasury Bills 06/06/96 4.96 9,910,167
5,000,000 U.S. Treasury Bills 06/13/96 5.06 4,949,306
10,000,000 U.S. Treasury Bills 07/11/96 4.99 9,862,808
5,000,000 U.S. Treasury Bills 08/08/96 4.89 4,914,448
10,000,000 U.S. Treasury Bills 08/22/96 4.90 9,802,481
5,000,000 U.S. Treasury Bills 09/19/96 5.18 4,880,063
10,000,000 U.S. Treasury Bills 10/17/96 5.22 9,720,018
5,000,000 U.S. Treasury Bills 11/14/96 5.05 4,847,090
5,000,000 U.S. Treasury Notes 05/15/96 5.33 5,011,497
10,000,000 U.S. Treasury Notes 07/31/96 4.95 10,031,753
5,000,000 U.S. Treasury Notes 09/30/96 5.06 5,040,888
----------- -----------
115,000,000 Total U.S. Government Obligations 113,830,623
----------- -----------
Total Investments (100.03%) (Cost $291,830,623+) 291,830,623
Liabilities in Excess of Cash and Other Assets (-0.03%) ( 83,177)
-----------
Net Assets (100.00%), 291,747,446 Shares Outstanding(Note 3) $291,747,446
===========
Net Asset Value, offering and redemption price per share $ 1.00
===========
+ Aggregate cost for federal income tax purposes is identical.
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
25
<PAGE>
- -------------------------------------------------------------------------------
INSTITUTIONAL DAILY INCOME FUND
STATEMENTS OF OPERATIONS
===============================================================================
<TABLE>
<CAPTION>
Money Market U.S. Treasury
Portfolio Portfolio
-------------- ---------------
Year November 29, 1995
Ended (Commencement of
March 31, 1996 Operations) to
-------------- March 31, 1996
--------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest................................................... $ 4,346,423 $ 4,922,698
------------------ -----------------
Expenses: (Note 2)
Investment management fee.................................. 60,384 71,723
Administration fee......................................... 37,740 44,827
Distribution fee (Class A)................................. 13 224,133
Custodian expenses......................................... 21,704 6,664
Shareholder servicing and related shareholder expenses..... 10,073 863
Legal, compliance and filing fees.......................... 55,117 84,901
Audit and accounting....................................... 37,164 19,409
Directors' fees ........................................... 7,258 3,000
Amortization of organization costs......................... 10,299 --
Miscellaneous.............................................. 1,475 546
------------------ -----------------
Total expenses......................................... 241,227 456,066
Less:
Reimbursement of expenses from Manager (Note 2)....... ( 24,276) --
Fees waived (Note 2).................................. ( 98,124) ( 72,950)
Expenses paid indirectly.............................. ( 28,313) ( 3,740)
------------------ -----------------
Net expenses................................... 90,514 379,376
------------------ -----------------
Net investment income.......................................... 4,255,909 4,543,322
------------------ -----------------
<CAPTION>
REALIZED GAIN (LOSS) ON INVESTMENTS
<S> <C> <C>
Net realized gain (loss) on investments........................ 847 --
------------------ -----------------
Increase in net assets from operations......................... $ 4,256,756 $ 4,543,322
================== =================
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
26
<PAGE>
- -------------------------------------------------------------------------------
INSTITUTIONAL DAILY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
===============================================================================
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS
Money Market Portfolio U.S. Treasury Portfolio
---------------------------------------------- ----------------------------
April 14, 1994 November 29, 1995
Year (Commencement of Operations) (Commencement of Operations)
Ended to to
March 31, 1996 March 31, 1995 March 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Operations:
Net investment income.................. $ 4,255,909 $ 1,961,158 $ 4,543,322
Net realized gain (loss) on investments 847 -- --
--------------- --------------- ---------------
Increase in net assets from operations. 4,256,756 1,961,158 4,543,322
Dividends to shareholders:
Net investment income
Class A.............................. ( 276) -- ( 4,543,322)
Class B.............................. ( 4,255,633) ( 1,961,158) --
Net realized gain on investments
Class A.............................. -- -- --
Class B.............................. ( 847) -- --
Capital share transactions (Note 3):
Class A.............................. 5,261 -- 291,747,446
Class B.............................. 91,424,998 35,756,766 --
--------------- ------------- ---------------
Total increase (decrease)............ 91,430,259 35,756,766 291,747,446
Net assets:
Beginning of period................. 35,856,766 100,000 -0-
--------------- --------------- -----------------
End of period........................ $ 127,287,025 $ 35,856,766 $ 291,747,446
=============== =============== =================
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
27
<PAGE>
- -------------------------------------------------------------------------------
INSTITUTIONAL DAILY INCOME FUND
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. Summary of Accounting Policies
Institutional Daily Income Fund (the "Fund") is a no-load, diversified, open-end
management investment company registered under the Investment Company Act of
1940. The Fund offers investors three managed portfolios of money market
instruments: U.S. Government Portfolio, Money Market Portfolio and Municipal
Portfolio. Presently only the Money Market Portfolio and U.S. Treasury Portfolio
have been activated. Each Portfolio has two classes of stock authorized, Class A
and Class B. The Class A shares of each Portfolio are subject to a service fee
pursuant to each Portfolio's distribution and service plan. The Class B shares
are not subject to a service fee. In all other respects, the Class A and Class B
shares represent the same interest in the income and assets of each respective
Portfolio. Distribution of Class A shares of the Money Market Portfolio
commenced April 6, 1995. All Fund shares outstanding before April 6, 1995 were
designated as Class B shares. Distribution of Class A shares of the U.S.
Treasury Portfolio commenced November 29, 1995. At March 31, 1996 there were no
Class B shares outstanding in the U.S. Treasury Portfolio.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles for investment companies as follows.
a) Valuation of Securities -
Investments are valued at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any discount or premium is
amortized on a constant basis to the maturity of the instrument.
b) Federal Income Taxes -
It is the policy of each Portfolio to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Dividends and Distributions -
Dividends from investment income (including net realized short-term capital
gains) are declared daily and paid monthly. Capital gains distributions if
any, will be made at least annually and in no event later than sixty days
after the end of the Fund's fiscal year.
d) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.
e) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis. It is the Fund's
policy to take possession of securities as collateral under repurchase
agreements and to determine on a daily basis that the value of such
securities are sufficient to cover the value of the repurchase agreements.
2. Investment Management Fees and Other Transactions with Affiliates
Underthe Investment Management Contract, each Portfolio pays an investment
management fee to Reich & Tang Asset Management, L.P. (the Manager) at the
annual rate of .08% of the Portfolios average daily net assets. The Manager is
required to reimburse the Fund for its expenses (exclusive of interest, taxes,
brokerage, and extraordinary expenses) to the extent that such
- -------------------------------------------------------------------------------
28
<PAGE>
- -------------------------------------------------------------------------------
INSTITUTIONAL DAILY INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
2. Investment Management Fees and Other Transactions with Affiliates (Continued)
expenses, including the investment management and administration fees, for any
fiscal year exceed the limits on investment company expenses prescribed by any
state in which the Fund's shares are qualified for sale.
Pursuant to an Administrative Services Contract each Portfolio pays to the
Manager an annual fee of .05% of the Portfolio's average daily net assets.
The Manager is a wholly-owned subsidiary of New England Investment Companies,
L.P. ("NEIC"). On August 16, 1995, New England Mutual Life Insurance Company
("The New England"), the owner of NEIC's general partner and a majority owner of
the limited partnership interest in NEIC, entered into an agreement to merge
with Metropolitan Life Insurance Company ("MetLife"), with MetLife to be the
survivor of the merger. The merger is subject to several conditions, including
the required approval, by shareholders of the Fund of a proposed new investment
advisory agreement, intended to take effect at the time of the merger. The new
agreement will be substantially similar to the existing agreement.
Pursuant to a distribution and service plan adopted under Securities and
Exchange Commission Rule 12b-1, the Fund and Reich & Tang Distributors L.P. (the
Distributor) have entered into a Distribution Agreement and a Shareholder
Servicing Agreement (with respect to the Class A shares of the Fund only). For
its services under the Shareholder Servicing Agreement, the Distributor receives
from each Portfolio with respect only to the Class A shares, a service fee equal
to .25% of 1% per annum of each Portfolio's average daily net assets.
The Manager has voluntarily agreed to waive its management and administrative
services fees in whole or in part and reimburse each Portfolio its operating
expenses to the extent that (i) such Portfolio's Class A shares total operating
expenses exceed .40%, .425% and .45% of the Class A shares average daily net
assets during the first, second, and third fiscal years of the Fund,
respectively, and (ii) such Portfolio's Class B shares total operating expenses
exceed .15%, .175%, and .20% of the Class B shares average daily net assets
during the first, second, and third fiscal years of the Fund.
During the period ended March 31, 1996, the Manager and Distributor voluntarily
waived investment management fees and administration fees of $60,384 and
$37,740, respectively, for the Money Market Portfolio and $36,843 and $36,107,
respectively, for the U.S. Treasury Portfolio. In addition, although not
required to do so, the Manager has agreed to reimburse expenses amounting to
$24,276 for the Money Market Portfolio.
Fees are paid to Directors who are unaffiliated with the Manager on the basis of
$1,000 per annum plus $250 per meeting attended.
Included in the Statements of Operations under the caption "Custodian expenses"
and "Shareholder servicing and related shareholder expenses" are expense offsets
of $28,313 and $3,740 for the Money Market Portfolio and U.S. Treasury
Portfolio, respectively.
3. Transactions in Shares of Beneficial Interest
At March 31, 1996, an unlimited number of shares of beneficial interest were
authorized and capital paid in for the Money Market Portfolio and the U.S.
Treasury Portfolio amounted to $127,287,025 and $291,747,446, respectively.
Transactions in shares of beneficial interest, all at $1.00 per share, were as
follows:
- --------------------------------------------------------------------------------
29
<PAGE>
================================================================================
<TABLE>
<CAPTION>
3. Transactions in Shares of Beneficial Interest (Continued)
Money Market Portfolio U.S. Treasury Portfolio
-------------------------------------------------- --------------------------------
April 6, 1995 November 29, 1995
(Commencement of Operations) to (Commencement of Operations) to
March 31, 1996 March 31, 1996
-------------- --------------
Class A
<S> <C> <C>
Sold............................... $ 5,009 $ 439,583,631
Issued on reinvestment of dividends 252 4,016,345
Redeemed........................... ( -- ) ( 151,852,530)
------------ ------------
Net increase (decrease)............ 5,261 291,747,446
============ ============
<CAPTION>
Year April 14, 1994
Ended (Commencement of Operations) to
March 31, 1996 March 31, 1995
-------------- --------------
Class B
<S> <C> <C>
Sold............................... $ 553,221,220 $ 301,915,598
Issued on reinvestment of dividends 2,877,254 1,531,019
Redeemed........................... ( 464,673,476) ( 267,689,851)
------------ ------------
Net increase (decrease)............ 91,424,998 35,756,766
============ ============
</TABLE>
30
<PAGE>
- --------------------------------------------------------------------------------
INSTITUTIONAL DAILY INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
4. Selected Financial Information
Money Market Portfolio U.S. Treasury Portfolio
--------------------------------------------- -----------------------
Class A** Class B Class A
--------------- --------------------------- -------------------
For the April 14,1994 November 29, 1995
Period (Commencement (Commencement
Ended of Operations) to of Operations) to
March 31, 1996 March 31, 1995 March 31, 1996
----------------------------- -------------- --------------
Per Share Operating Performance:
(For a share outstanding throughout the period)
<S> <C> <C> <C> <C>
Net asset value, beginning of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- ----------
Income from investment operations:
Net investment income..................... 0.054 0.057 0.045 .017
Less distributions:
Dividends from net investment income...... ( 0.054) ( 0.057) ( 0.045) ( .017)
--------- --------- --------- ----------
Net asset value, end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========== ========= ==========
Total Return.............................. 5.58% 5.85% 5.16%* 5.18%*
Ratios/Supplemental Data
Net assets, end of period (000)........... $ 5 $ 127,282 $ 35,857 $ 291,747
Ratios to average net assets:
Expenses (includes expenses paid
indirectly)....................... .41%+ .16%+ .02%*+ .43%*++
Net investment income.................. 5.46%+ 5.64%+ 5.14%*+ 5.07%*++
* Annualized
** Class A commenced operations on April 6, 1995.
+ Net of management and administration fees waived equivalent to .13% for
1996 and 1995 of average net assets. Expenses reimbursed equivalent to .03%
and .25% for 1996 and 1995, respectively, of average net assets.
++ Net of management and administration fees waived equivalent to 0.08% of
average net assets.
</TABLE>
- --------------------------------------------------------------------------------
31
