RULE 497(e)
Registration No. 33-74470
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INSTITUTIONAL DAILY INCOME FUND 600 Fifth Avenue, New York, NY 10020
(212) 830-5220
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STATEMENT OF ADDITIONAL INFORMATION
July 28, 2000
AS SUPPLEMENTED ON OCTOBER 31, 2000
RELATING TO THE INSTITUTIONAL DAILY INCOME FUND
PROSPECTUS DATED JULY 28, 2000
AND THE PINNACLE CLASS OF SHARES OF INSTITUTIONAL DAILY INCOME FUND
PROSPECTUS DATED JULY 28, 2000
This Statement of Additional Information (SAI) is not a Prospectus. The SAI
expands upon and supplements the information contained in the current
Prospectuses of Institutional Daily Income Fund (the "Fund"), dated July 28,
2000, and should be read in conjunction with each Prospectus.
A Prospectus may be obtained from any Participating Organization or by writing
or calling the Fund toll-free at 1-(800) 221-3079. You may obtain a Prospectus
for the Pinnacle Class of shares of the Fund by writing or calling Mutual
Securities, Inc. toll-free at 1-800-750-7862. The Financial Statements of the
Fund have been incorporated by reference to the Fund's Annual Report. The Annual
Report is available, without charge, upon request by calling the toll-free
number provided. The material relating to Purchase, Redemption, and Pricing of
Shares has been incorporated by reference to the Prospectus of each Class of
shares.
This Statement of Additional Information is incorporated by reference into the
Fund's Prospectus in its entirety.
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Table of Contents
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Fund History.........................................2 Capital Stock and Other Securities......................17
Description of the Fund and its Investments and Purchase, Redemption and Pricing of Shares..............17
Risks..............................................2 Taxation of the Fund....................................18
Management of the Fund..............................10 Underwriters............................................19
Control Persons and Principal Holders of Calculation of Performance Data.........................20
Securities........................................12 Financial Statements....................................20
Investment Advisory and Other Services..............13 Description of Ratings..................................21
Brokerage Allocation and Other Practices............16
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I. FUND HISTORY
The Fund was incorporated on January 20, 1994 in the state of Massachusetts.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is a diversified, no-load, open-end management investment company
consisting of three managed portfolios of money market instruments (the
"Portfolios"). The investment objective of the Fund's Portfolios is to seek as
high a level of current income (or current tax exempt income for the Municipal
Portfolio) to the extent consistent with preserving capital and maintaining
liquidity. The Portfolios were designed to meet the short-term investment needs
of corporate and institutional investors. No assurance can be given that these
objectives will be achieved.
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).
The following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus.
Credit Ratings and Risks
The Money Market and Municipal Portfolios may 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 Portfolios are able to employ the amortized cost
method of evaluation. The term First Tier Eligible Securities means: (i)
securities which have to 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) a security that has a remaining maturity of 397 days or less and
is an unrated security that is, as determined by the Fund's Board of Directors,
to be of comparable quality; (iii) a security otherwise meeting the requirements
set forth in clauses (i) or (ii) and having a Guarantee (as such term is defined
in Rule 2a-7 of the Investment Company Act of 1940, as amended (the "1940 Act")
which has received a rating from the Requisite NRSROs in the highest short-term
rating category for debt obligations; (iv) a security issued by a registered
investment company that is a money market fund; or (v) a government security.
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 three 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. While there are
several organizations that currently qualify as NRSROs, two examples of NRSROs
are Standard & Poor's Rating Services, a division of The McGraw-Hill Companies
("S&P"), and Moody's Investors Service, Inc. ("Moody's"). The two highest
ratings by S&P and Moody's are "AAA" and "AA" by S&P in the case of long-term
bonds and notes or "Aaa" and "Aa" by Moody's in the case of bonds; "SP-1" and
"SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes; "A-1" and
"A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in the case of tax-exempt
commercial paper. The highest rating in the case of variable and floating demand
notes is "VMIG-1" by Moody's or "SP-1/AA" by S&P. Such instruments may produce a
lower yield than would be available from less highly rated instruments.
All investments purchased by the Fund will mature or will be deemed to mature
within 397 days or less from the date of acquisition and the average maturity of
the Fund portfolio (on a dollar-weighted basis) will be 90 days or less. The
maturities of variable rate demand instruments held in the Fund's portfolio will
be deemed to be the longer of the period required before the Fund is entitled to
receive payment of the principal amount of the instrument through demand, or the
period remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
Subsequent to its purchase by the Fund, a rated security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Fund. If this occurs, the Board of Trustees of the Fund shall promptly reassess
whether the security presents minimal credit risks and shall cause the Fund to
take such action as the Board of Trustees determines is in the best interest of
the Fund and its shareholders. However, reassessment is not required if the
security is disposed of or matures within five business days of the Manager
becoming aware of the new rating and provided further that the Board of Trustees
is subsequently notified of the Manager's actions.
In addition, in the event that a security (i) is in default, (ii) ceases to be
an eligible investment under Rule 2a-7 of the 1940 Act or (iii) is determined to
no longer present minimal credit risks, or an event of insolvency occurs with
respect to the issues of a portfolio security or the provider of any Demand
Feature or Guarantee, the Fund will dispose of the
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security absent a determination by the Fund's Board of Trustees that disposal of
the security would not be in the best interests of the Fund. Disposal of the
security shall occur as soon as practicable consistent with achieving an orderly
disposition by sale, exercise of any demand feature or otherwise. In the event
of a default with respect to a security which immediately before default
accounted for 1/2 of 1% or more of the Fund's total assets, the Fund shall
promptly notify the SEC of such fact and of the actions that the Fund intends to
take in response to the situation.
Foreign Securities
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.
Repurchase Agreements
All Portfolios may invest in repurchase agreements. Investments by the Fund in
repurchase agreements are made in accordance with procedures established by the
Fund providing that the securities serving as collateral for each repurchase
agreement are delivered to the Fund's custodian either physically or in book
entry form and that the collateral is marked to the market with sufficient
frequency to ensure that each repurchase agreement is fully collateralized at
all times.
A buyer of a repurchase agreement runs the risk of loss with respect to its
investment in the event of a default by the issuer if, at the time of default,
the value of the collateral securing the agreement is less than the price paid
for the repurchase agreement. Were a default to occur, the Fund would look to
the collateral securing the repurchase agreement to recover its entire
investment. In the event that a vendor defaults on its repurchase obligation,
the Fund might suffer a loss to the extent that the proceeds from the sale of
the collateral are less than the repurchase price. If the vendor becomes
bankrupt, the Fund might be delayed, or may incur costs or possible losses in
selling the collateral.
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 only with member banks of the Federal Reserve System and "primary
dealers" (as designated by the Federal Reserve Bank of New York) in United
States government securities 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.
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.
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In the view of the management of the Fund, the restrictions and procedures
described above which govern the Fund's investments in repurchase agreements
substantially minimize the Fund's risk of losses in making those investments.
Repurchase agreements may be considered to be loans under the 1940 Act.
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 that is 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.
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 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
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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"1 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.
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The 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
variable note demand participation certificates 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 will be adversely
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1 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.
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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.
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.
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
Portfolios 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.
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Description of Municipal Obligations (Municipal Portfolio)
(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 "Taxation of the
Fund" herein.) IRBs are, in most cases, revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. The
payment of the principal and interest on IRBs usually depends solely on the
ability of the user of the facilities financed by the bonds or other
guarantor to meet its financial obligations and, in certain instances, the
pledge of real and personal property as security for payment. If there is
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.
(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.
7
<PAGE>
(5) The Fund expects that, on behalf of the Municipal Portfolio, it will not
invest more than 25% of the Portfolio's total assets in municipal
obligations whose issuers are located in the same state or more than 25% of
the 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 Security 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 Security held in its
portfolio.
Stand-By Commitments
The amount payable to the Municipal 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.
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 Municipal Portfolio 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 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 "Taxation of the Fund" herein). 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.
8
<PAGE>
Put Options
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 and 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 "Tax Consequences" 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.
General
The Fund intends to continue qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code (the "Code"). For the Fund to qualify,
at the close of each quarter of the taxable year, at least 50% of the value of
its total assets must consist of cash, government securities, regulated
investment company securities and other securities. The other securities must be
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. In addition, at the close of each quarter of its taxable year,
not more than 25% in value of the Fund's total assets may be invested in
securities other than Government securities or regulated investment company
securities of one issuer or of two or more issuers which the Fund controls and
which are determined to be engaged in the same or similar trades of businesses
or related trades businesses. The limitations described in this paragraph
regarding qualification as a "regulated investment company" are not fundamental
policies and may be revised if applicable Federal income tax requirements are
revised. (See "Taxation of the Fund" herein.)
Investment Restrictions
The Fund has adopted the following fundamental investment restrictions which
apply to all Portfolios. They may not be changed unless approved by a majority
of the outstanding shares "of each series of the Fund's shares that would be
affected by such a change." The term "majority of the outstanding shares" of the
Fund means the vote of the lesser of (i) 67% or more of the shares of the Fund
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Fund. The Fund may not:
(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 officers and trustees of the
Fund or Reich & Tang Asset Management, Inc., the general partner of its
investment manager, individually own beneficially more than 1/2 of 1% of
the issuer's securities or in the aggregate own more than 5% of the
issuer's securities; and
(c) (1) make investments for the 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 or reorganization
involving the Fund; (4) invest in real estate (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), commodities,
commodity contracts, commodity options, interests in oil or gas or
interests in other mineral exploration or development programs; (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; (9) issue senior securities, except insofar as
the Fund may be deemed to have issued a senior security in connection with
any permitted borrowings; (10) 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; (11) 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; (12) with respect to the U.S. Treasury
Portfolio and the
9
<PAGE>
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); (13) with respect to 75% of the value of a
Portfolio's total assets, the Fund may not invest more than 10% 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 10% of the total assets of the Fund. However, the
Portfolio may only invest more that 10% of its assets in securities subject
to puts from the same institution if such puts are issued by a
non-controlled person (as defined in the 1940 Act); (14) make loans, except
that the Fund may purchase for a Portfolio the debt securities described
above under "Description of the Fund and Its Investments and Risks " and
may enter into repurchase agreements as therein described; (15) 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 value of a
Portfolio's net assets or (ii) with respect to the U.S. Treasury Portfolio,
otherwise provided herein and permissible under the 1940 Act; and (16)
pledge, mortgage, assign or encumber any of a Portfolio's assets except to
the extent necessary to secure a borrowing permitted by clause (13) made
with respect to the Portfolio.
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).
If a percentage restriction is adhered to at the time of an investment a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of a Fund's portfolio's assets will not
constitute a violation of such restriction.
III. MANAGEMENT OF THE FUND
The Fund's Board of Trustees, which is responsible for the overall management
and supervision of the Fund, has employed the Manager to serve as investment
manager of the Fund. The Manager provides persons satisfactory to the Fund's
Board of Trustees to serve as officers of the Fund. Such officers, as well as
certain other employees and trustees of the Fund, may be trustees or officers of
Reich & Tang Asset Management, Inc., the sole general partner of the Manager or
employees of the Manager or its affiliates. Due to the services performed by the
Manager, the Fund currently has no employees and its officers are not required
to devote their full-time to the affairs of the Fund.
The Trustees and Officers of the Fund and their principal occupations during the
past five years are set forth below. Unless otherwise specified, the address of
each of the following persons is 600 Fifth Avenue, New York, New York 10020. Mr.
Duff may be deemed an "interested person" of the Fund, as defined in the 1940
Act, on the basis of his affiliation with Reich & Tang Asset Management L.P.
Steven W. Duff, 46 - President and Director of the Fund, has been President of
the Mutual Funds Division of the Manager since September 1994. Mr. Duff is
President and a Director/Trustee of 13 other funds in the Reich & Tang Fund
Complex, President of Back Bay Funds, Inc., Director of Pax World Money Market
Fund, Inc., and President and Chief Executive Officer of Tax Exempt Proceeds
Fund, Inc.
Dr. W. Giles Mellon, 69 - Director of the Fund, is Professor of Business
Administration in the Graduate School of Management, Rutgers University which he
has been associated with since 1966. His address is Rutgers University
Graduate School of Management, 92 New Street, Newark, New Jersey 07102. Dr.
Mellon is also a Director/Trustee of 14 other funds in the Reich & Tang Fund
Complex.
10
<PAGE>
Robert Straniere, 59 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere Law Firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also a
Director/Trustee of 14 other funds in the Reich & Tang Fund Complex.
Dr. Yung Wong, 61 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong is also a Director/Trustee of 14 other funds in the
Reich & Tang Fund Complex, and is also a Trustee of Eclipse Financial Asset
Trust.
Molly Flewharty, 49 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty is also
Vice President of 17 other funds in the Reich & Tang Fund Complex.
Lesley M. Jones, 51 - Vice President of the Fund, has been Senior Vice President
of the Mutual Funds Division of the Manager since September 1993. Ms. Jones is
also a Vice President of 13 other funds in the Reich & Tang Fund Complex.
Dana E. Messina, 43 - Vice President of the Fund, has been Executive Vice
President of the Mutual Funds Division of the Manager since January 1995 and was
Vice President from September 1993 to January 1995. Ms. Messina is also Vice
President of 14 other funds in the Reich & Tang Fund Complex.
Dawn Fischer 53 - Vice President of the Fund, is a Managing Director of
Thornburg Management Co., Inc. with which she has been associated since August
1982. Her address is 119 East Marcy Street, Suite 202, Santa Fe, New Mexico
87501. Ms. Fischer is also Secretary and Assistant Treasurer of Thornburg
Investment Trust and Secretary of Limited Term Municipal Fund, Inc.
Bernadette N. Finn, 52 - Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn is also
Secretary of 13 other funds in the Reich & Tang Fund Complex, and a Vice
President and Secretary of 4 funds in the Reich & Tang Fund Complex.
Richard DeSanctis, 43 - Treasurer of the Fund, has been Treasurer of the Manager
of the Manager since 1993. Mr. DeSanctis is also Treasurer of 16 other funds in
the Reich & Tang Fund Complex, and is Vice President and Treasurer of Cortland
Trust, Inc.
Rosanne Holtzer, 35 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager with which she was
associated with from June 1986. Ms. Holtzer is also Assistant Treasurer of 17
other funds in the Reich & Tang Fund Complex.
The Fund paid an aggregate remuneration of $12,000 to its trustees with respect
to the period ended March 31, 2000, all of which consisted of trustees' fees
paid to the three disinterested trustees, pursuant to the terms of the
Investment Management Contract (see "Investment Advisory and Other Services"
herein).
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
Name of Person, Aggregate Pension or Retirement Estimated Annual Total Compensation from
Position Compensation from Benefits Accrued as Benefits upon Fund and Fund Complex
the Fund Part of Fund Expenses Retirement Paid to Trustees*
W. Giles Mellon,
Director $4,000 0 0 $59,000 (16 Funds)
Robert Straniere,
Director $4,000 0 0 $59,000 (16 Funds)
Yung Wong,
Director $4,000 0 0 $59,000 (16 Funds)
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex for
the fiscal year ending March 31, 2000. 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.
11
<PAGE>
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On June 30, 2000 there were 616,635,812 Class A shares outstanding in the Money
Market Portfolio, 121,278,061 Class B shares outstanding in the Money Market
Portfolio, 124,889,229 Pinnacle Class shares outstanding in the Money Market
Portfolio, 461,729,586 Class A shares outstanding in the U.S. Treasury
Portfolio, 16,420,541 Class B shares outstanding in the U.S. Treasury Portfolio
and 15,894,710 Pinnacle Class shares outstanding in the U.S. Treasury Portfolio.
As of June 30, 2000, the amount of shares owned by all officers and trustees of
the Fund, as a group, was less than 1% of the outstanding shares. Set forth
below is certain information as to persons who owned 5% or more of the Fund's
outstanding shares as of June 30, 2000:
Name and Address % of Class Ownership
Money Market Portfolio- Class A Shares
Hambrecht and Quist 86.35% Record
34 Exchange Place
Jersey City, NJ 07311-3988
Money Market Portfolio - Class B Shares
Copley Institutional Investors 17.00% Record
C/O AEW Capital Management
225 Franklin Street
Boston, MA 02110
Copley Institutional Investors 11.00% Record
C/O AEW Capital Management
225 Franklin Street
Boston, MA 02110
NVEST Companies, L.P. 6.00% Record
399 Boylston Street
Boston, MA 02116
New England Funds, L.P. 5.00% Record
399 Boylston Street
Boston, MA 02116
Copley Institutional Investors 5.00% Record
C/O AEW Capital Management
225 Franklin Street
Boston, MA 02110
New England Life Pension 5.00% Record
C/O AEW Capital Management
225 Franklin Street
Boston, MA 02110
Pinnacle Shares of Money Market Portfolio
NFSC 100.00% Record
200 Liberty Street
New York, NY 10281
U.S. Treasury Portfolio - Class A Shares
Neuberger & Berman 86.00% Record
55 Water Street
New York, NY 10041
12
<PAGE>
Hambrecht and Quist 7.00% Record
34 Exchange Place
Jersey City, NJ 07311-3988
U.S. Treasury Portfolio - Class B Shares
Neuberger & Berman 79.00% Record
55 Water Street
New York, NY 10041
Jane Wan 12.00% Record/Beneficial
1725 York Ave.
New York, NY 10128-7811
Pinnacle Shares of U.S. Treasury Portfolio
NFSC 100.00% Record
200 Liberty Street
New York, NY 10281
V. INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020. The Manager was as of June 30, 2000, investment manager,
adviser, or supervisor with respect to assets aggregating in excess of $15.6
billion. In addition to the Fund, the Manager acts as investment manager and
administrator of seventeen other investment companies and also advises pension
trusts, profit-sharing trusts and endowments.
Nvest Companies, L.P. (Nvest Companies) is the limited partner and owner of a
99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (RTAM) is the
sole general partner and owner of the remaining 0.5% interest of the Manager, as
well as being an indirect wholly-owned subsidiary of Nvest Companies. Nvest
Companies is a publicly traded company of which approximately 13% of its
outstanding partnership interests is owned, directly and indirectly, by Reich &
Tang, Inc.
CDC Asset Management ("CDC AM"), the investment management arm of France's
Caisse des Depots Group, has completed its acquisition of Nvest, L.P. and Nvest
Companies. As a result, CDC AM owns, directly or indirectly, a controlling
interest in the Manager. CDC AM is 60% owned by CDC Finance, a wholly-owned
subsidiary of Caisse des depots et Consignations ("CDC"). Founded in 1816, CDC
is a major diversified financial institution. In addition to its 60% ownership
of CDC AM through CDC Finance, CDC owns 40% of CNP Assurances, the leading
French insurance company, which itself owns 20% of CDC AM. CDC also owns 35% of
Caisse National des Caisses d'Epargne, which also owns 20% of CDC AM. CDC is
100% owned by the French state.
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through seventeen subsidiaries,
divisions and affiliates offering a wide array of investment styles and products
to institutional clients. Its business units, in addition to the Manager,
include AEW Capital Management, L.P., Back Bay Advisors, L.P.; Capital Growth
Management Limited Partnerships; Greystone Partners, L.P.; Harris Associates,
L.P.; Jurika & Voyles, L.P.; Kobrick Funds, LLP, Loomis, Sayles & Company, L.P.;
New England Funds, L.P.; Nvest Associates, Inc.; Snyder Capital Management,
L.P.; Vaughan, Nelson, Scarborough & McCullough, L.P.; and Westpeak Investment
Advisors, L.P. These affiliates in the aggregate are investment advisors or
managers to more than 80 other registered investment companies.
The Nvest-CDC AM transaction involved a change of ownership of Nvest Companies,
which may be deemed to have caused a "change of control" of the Manager, even
though operations did not change as a result. As required by the 1940 Act, the
Fund's shareholders approved a new Investment Management Contract for the Fund
to assure that there was no interruption in the services that the Manager
provides to the Fund. The new Investment Management Contract was approved by the
shareholders on October 10, 2000 and is effective as of October 30, 2000.
13
<PAGE>
On July 25, 2000, the Board of Trustees, including a majority of the trustees
who are not interested persons (as defined in the 1940 Act) of the Fund or the
Manager, approved the Investment Management Contract for an initial term of two
years, extending until March 31, 2002. The contract may be continued in force
after the initial term for successive twelve-month periods beginning each April
1, provided that such continuance is approved by a majority vote of the Fund's
outstanding voting securities or by a majority of the trustees who are not
parties to the Investment Management Contract or interested persons of any such
party, by votes cast in person at a meeting called for the purpose of voting on
such matter.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Trustees of
the Fund.
The Manager provides persons satisfactory to the Board of Trustees of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and trustees of the Fund, may be trustees or officers of RTAM, Inc.,
the sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Trustees,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties thereunder.
Under the Investment Management Contract each of the Portfolios will pay an
annual management fee of .12% of such Portfolio's average daily net assets. The
Manager, at its discretion, may voluntarily waive all or a portion of the
management fee. The fees are accrued daily and paid monthly. Any portion of the
total fees received by the Manager may be used by the Manager to provide
shareholder services and for distribution of Fund shares. For the Fund's fiscal
year ended March 31, 2000 the Manager received investment management fees
totaling $836,918 of which $22,036 was waived, from the Money Market Portfolio
and $901,607, of which $0 was waived, from the U.S. Treasury Portfolio. For the
Fund's fiscal year ended March 31, 1999 the Manager received investment
management fees totaling $472,729, of which $90,521 was waived, from the Money
Market Portfolio and $809,496, of which $126,559 was waived, from the U.S.
Treasury Portfolio. For the Fund's fiscal year ended March 31, 1998 the Manager
received investment management fees totaling $348,323, of which $115,985 was
waived, from the Money Market Portfolio and $468,085, of which $156,029 was
waived, from the U.S. Treasury Portfolio.
Pursuant to an Administrative Services Contract with the Fund, the manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of bookkeeping related services by Investors Fiduciary Trust
Company, the Fund's bookkeeping agent, (ii) prepare reports to and filings with
regulatory authorities, and (iii) perform such other services as the Fund may
from time to time request of the Manager. The personnel rendering such services
may be employees of the Manager, of its affiliates or of other organizations.
The Manager, at its discretion, may voluntarily waive all or a portion of the
administrative services fee. For its services under the Administrative Services
Contract, the Manager receives an annual fee of .05% of each Portfolio's average
daily net assets. For the Fund's fiscal year ended March 31, 2000 the Manager
received administration fees in the aggregate of $348,716, of which $161,522 was
waived, from the Money Market Portfolio and $375,670, of which $181,253 was
waived, from the U.S. Treasury Portfolio. For the Fund's fiscal year ended March
31, 1999, the Manager received administration fees in the aggregate of $196,971,
of which $118,182 was waived, from the Money Market Portfolio and $337,290, of
which $170,996 was waived, from the U.S. Treasury Portfolio. For the Fund's
fiscal year ended March 31, 1998, the Manager received administration fees in
the aggregate of $145,134, of which $87,081 was waived, from the Money Market
Portfolio and $195,035, of which $117,021 was waived, from the U.S. Treasury
Portfolio.
The Manager at its discretion may waive its rights to any portion of the
management fee or the administrative services fee and may use any portion of the
management fee for purposes of shareholder and administrative services and
distribution of the Fund's shares. There can be no assurance that such fees will
be waived in the future.
Investment management fees and operating expenses which are attributable to all
Classes of a Portfolio will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class A shareholders
pursuant to the Plan shall be compensated by the Distributor from its
shareholder servicing fee, or by the Manager from its management fee. Expenses
incurred in the distribution of Class B shares and the servicing of Class B
shares shall be paid by the Manager.
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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) that in any year exceed the limits on investment company
expenses prescribed by any state in which the Fund's shares are qualified for
sale. For the purpose of this obligation to reimburse expenses, the Fund's
annual expenses are estimated and accrued daily, and any appropriate estimated
payments are made to it on a monthly basis. Subject to the obligations of the
Manager to reimburse the Fund for its excess expenses as described above, the
Fund has, under the Investment Management Contract, confirmed its obligation for
payment of all its other expenses. This includes all operating expenses, taxes,
brokerage fees and commissions, commitment fees, certain insurance premiums,
interest charges and expenses of the custodian, transfer agent and dividend
disbursing agent's fees, telecommunications expenses, auditing and legal
expenses, bookkeeping agent fees, costs of forming the corporation and
maintaining corporate existence, compensation of trustees, officers and
employees of the Fund and costs of other personnel performing services for the
Fund who are not officers of the Manager or its affiliates, costs of investor
services, shareholders' reports and corporate meetings, SEC registration fees
and expenses, state securities laws registration fees and expenses, expenses of
preparing and printing the Fund's Prospectus for delivery to existing
shareholders and of printing application forms for shareholder accounts, and the
fees and reimbursements payable to the Manager under the Investment Management
Contract and the Distributor under the Shareholder Servicing Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein. The management of the Fund intends to do so
whenever it appears advantageous to the Fund. The Fund's expenses for employees
and for such services are among the expenses subject to the expense limitation
described above.
Distribution And Service Plan
The Fund's distributor is Reich & Tang Distributors, Inc. (the "Distributor"), a
Delaware corporation with principal officers at 600 Fifth Avenue, New York, New
York 10020. Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that
an investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of Trustees has adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to Class A shares
only) with the Distributor, as distributor of the Fund's shares.
Under the Plan, the Fund and the Distributor will enter into a Shareholder
Servicing Agreement with respect to the Class A shares. Under the Shareholder
Servicing Agreement, the Distributor receives from each Portfolio a Service Fee
equal to .25% per annum of the Fund's Class A shares average daily net assets
(the "Service Fee"). The service fee is in exchange for providing personal
shareholder services and for the maintenance of shareholder accounts. The
Service Fee is accrued daily and paid monthly and any portion of the Service Fee
may be deemed to be used by the Distributor for payments to Participating
Organizations with respect to servicing their clients or customers who are
shareholders of the Fund. The Class B and Pinnacle shareholders will not receive
the benefit of such services from Participating Organizations and, therefore,
will not be assessed a Service Fee.
The following information applies only to the Class A shares of the Portfolios.
For the fiscal year ended March 31, 2000, the Fund paid a Service Fee for
expenditures pursuant to the Plan in amounts aggregating $1,023,406 with respect
to the Money Market Portfolio and $1,673,442 with respect to the U.S. Treasury
Portfolio. During such period, the Manager and Distributor made payments
pursuant to the Plan to or on behalf of Participating Organizations of
$1,000,025 with respect to the Money Market Portfolio and $1,690,476 with
respect to the U.S. Treasury Portfolio. Of the payments made pursuant to the
Plan by the Fund, the Money Market Portfolio spent $12,421 on printing and
mailing of prospectuses to other than current shareholders, $25,792 on
compensation to sales personnel, and $128 on miscellaneous expenses. Of the
payments made pursuant to the Plan by the Fund, the U.S. Treasury Portfolio
spent $5,130 on printing and mailing of prospectuses to other than current
shareholders, $16,183 on compensation to sales personnel, and $158 on
miscellaneous expenses. The excess of such payments over the total payments the
Distributor received from the Fund represents distribution and servicing
expenses funded by the Distributor from its own resources, or the Manager from
its own resources (which may be deemed to be an indirect payment by the Fund).
For the fiscal year ended March 31, 2000, the total amount spent pursuant to the
Plan for the Class A shares for the U.S. Treasury Portfolio and the Money Market
Portfolio were .26% and .25%, respectively, of the average daily net assets of
the Class A shares of the particular Portfolio, of which 0.25% of the average
daily net assets for both Portfolios was paid by the Fund to the Distributor,
pursuant to the Shareholder Servicing Agreement.
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Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that the Distributor
will pay for (i) telecommunications expenses, including the cost of dedicated
lines and CRT terminals, incurred by the Participating Organizations and
Distributor in carrying out their obligations under the Shareholder Servicing
Agreement with respect to the Class A shares and (ii) preparing, printing and
delivering the Fund's prospectus to existing shareholders of the Fund and
preparing and printing subscription application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from
their own resources, which may include the management fee, and past profits for
the following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Class A shares of the Fund; (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Service Fee with respect to Class A shares and past
profits for the purpose enumerated in (i) above. The Distributor will determine
the amount of such payments made pursuant to the Plan, provided that such
payments will not increase the amount which the Fund is required to pay to the
Manager or the Distributor for any fiscal year under the Investment Management
Contract or the Shareholder Servicing Agreement in effect for that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Trustees. In addition, the Plan requires the
Fund and the Distributor to prepare, at least quarterly, written reports setting
forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan provides that it will remain in effect until December 31, 2000.
Thereafter it may continue in effect for successive annual periods commencing
January 1, provided it is approved by the Class A shareholders or by the Board
of Trustees. This includes a majority of trustees who are not interested persons
of the Fund and who have no direct or indirect interest in the operation of the
Plan or in the agreements related to the Plan. The Plan further provides that it
may not be amended to increase materially the costs which may be spent by the
Fund for distribution pursuant to the Plan without Class A shareholder approval,
and the other material amendments must be approved by the trustees in the manner
described in the preceding sentence. The Plan may be terminated at any time by a
vote of a majority of the disinterested trustees of the Fund or the Fund's Class
A shareholders.
Custodian And Transfer Agent
State Street Kansas City, 801 Pennsylvania, Kansas City, Missouri 64105, is
custodian for the Fund's cash and securities. Reich & Tang Services, Inc., an
affiliate of the Fund's Manager, located at 600 Fifth Avenue, New York, NY
10020, is transfer agent and dividend agent for the shares of the Fund. The
custodian and transfer agent do not assist in, and are not responsible for,
investment decisions involving assets of the Fund.
Counsel and Independent Accountants
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, New York,
New York 10022.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, independent certified public accountants, have been selected as auditors
for the Fund.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Thus, the Fund will select a broker
for such a transaction based upon which broker can effect the trade at the best
price and execution available. Purchases from underwriters of
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portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
VII. CAPITAL STOCK AND OTHER SECURITIES
The Fund has an unlimited authorized number of shares of beneficial interest,
having a par value of one tenth of one cent ($.01) per share. These shares are
entitled to one vote per share with proportional voting for fractional shares.
The Fund's Board of Trustees is authorized to divide the shares into separate
series of stock, one for each of the Portfolios that may be created. There are
no conversion or preemptive rights in connection with any shares of the Fund.
All shares, when issued in accordance with the terms of the offering, will be
fully paid and nonassessable. Shares are redeemable at net asset value, at the
option of the shareholder.
Each Portfolio of the Fund is subdivided into three Classes of shares of
beneficial interest, Class A, Class B and Pinnacle Class. 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, Class B and Pinnacle Class shares will
have different Class designations; (ii) only the Class A shares will be assessed
a service fee pursuant to the Rule 12b-1 Distribution and Service Plan of the
Fund of .25% of the Class A shares' average daily net assets; (iii) only the
holders of the Class A shares 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 stockholders to exchange their
shares only for shares of the same Class of any other Portfolio of the Fund.
Payments that are made under the Plan will be calculated and charged daily to
the appropriate Class prior to determining daily net asset value per share and
dividends/distributions.
Under its Declaration of Trust, the Fund has the right to redeem for cash shares
of stock owned by any shareholder to the extent and at such times as the Fund's
Board of Trustees determines to be necessary or appropriate to prevent an undue
concentration of stock ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
trustees can elect 100% of the Trustees if the holders choose to do so. In that
event, the holders of the remaining shares will not be able to elect any person
or persons to the Board of Trustees. Unless specifically requested by an
investor, the Fund will not issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
or special meetings only (i) for the election (or re-election) of Trustees, (ii)
for approval of the revised investment advisory contracts with respect to a
particular class or series of beneficial interest, (iii) for approval of the
Fund's distribution agreement with respect to a particular class or series of
beneficial interest, and (iv) upon the written request of shareholders entitled
to cast not less than 10% of all the votes entitled to be cast at
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such meeting. Annual and other meetings may be required with respect to such
additional matters relating to the Fund as may be required by the 1940 Act,
including the removal of Fund Trustee(s) and communication among shareholders,
any registration of the Fund with the SEC or any state, or as the Trustees may
consider necessary or desirable. Each Trustee serves until his successor is
elected or qualified, or until such Trustee sooner dies, resigns, retires or is
removed by the vote of the shareholders.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
The material relating to the purchase, redemption and pricing of shares for each
Class of shares is located in the Shareholder Information section of each
prospectus and is hereby incorporated by reference.
Net Asset Value
The Fund does not determine net asset value per share of each Class on any day
in which the New York Stock Exchange is closed for trading. Those days include:
New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of each Portfolio of the Fund's shares is determined as of
12:00 noon, New York City time, on each Fund Business Day. The net asset value
of a Class is computed by dividing the value of the Fund's net assets for such
Class (i.e., the value of its securities and other assets less its liabilities,
including expenses payable or accrued but excluding capital stock and surplus)
by the total number of shares outstanding for such Class.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. If fluctuating interest
rates cause the market value of the Fund's portfolio to deviate more than 1/2 of
1% from the value determined on the basis of amortized cost, the Board of
Trustees will consider whether any action should be initiated, as described in
the following paragraph. Although the amortized cost method provides certainty
in valuation, it may result in periods during which the value of an instrument
is higher or lower than the price an investment company would receive if the
instrument were sold.
The Fund's Board of Trustees has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
available market rates, from the Fund's $1.00 amortized cost per share of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar-denominated
instruments that the Fund's Board of Trustees determines present minimal credit
risks, and will comply with certain reporting and record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities.
IX. TAXATION OF THE FUND
Taxes
The Fund intends, for each Portfolio, to qualify and elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, the Fund must
distribute to shareholders at least 90% of its investment company taxable income
(which includes, among other items, dividends, taxable interest and the excess
of net short-term capital gains over net long-term capital losses), and meet
certain diversification of assets, source of income, and other requirements of
the Code. By meeting these requirements, the Fund generally will not be subject
to Federal income tax on its investment company taxable income distributed to
shareholders or on its net capital gains (the excess of net long-term capital
gains over net short-term capital losses) designated by the Fund as capital gain
dividends and distributed to shareholders. If the Fund does not meet all of
these Code requirements, it will be taxed as an ordinary corporation and its
distributions will generally be taxed to shareholders as ordinary income. In
determining the amount of net capital gains to be distributed, any capital loss
carryover from prior years will be applied against capital gains to reduce the
amount of distributions paid.
Amounts, other than tax-exempt interest, not distributed on a timely basis in
accordance with a calendar year distribution requirement may be subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund
must distribute for the calendar year an amount equal to the sum of (1) at least
98% of its ordinary income (excluding any capital gains or losses) for the
calendar year, (2) at least 98% of the excess of its capital gains over capital
losses (adjusted for certain losses) for the one-year period ending October 31
of such year, and (3) all ordinary
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income and capital gain net income (adjusted for certain ordinary losses) for
previous years that were not distributed during such years.
Generally, on the sale or exchange of obligations held for more than one year,
gain realized by the Fund that is not attributable to accrued market discount
will be long-term capital gain. However, gain on the disposition of a bond
purchased at a market discount generally will be treated as ordinary income
rather than capital gain, to the extent of the accrued market discount.
Distributions of investment company taxable income generally are taxable to
shareholders as ordinary income. Distributions from the Fund are not eligible
for the dividends-received deduction available to corporations. Distributions of
net capital gains, if any, designated by the Fund as capital gain dividends are
taxable to shareholders as long-term capital gains, regardless of the length of
time the Fund's shares have been held by the shareholder. All distributions are
taxable to the shareholder whether reinvested in additional shares or received
in cash. Shareholders will be notified annually as to the Federal tax status of
distributions.
Upon the taxable disposition (including a sale or redemption) of shares of the
Fund, a shareholder may realize a gain or loss, depending upon its basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands, and will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares. Non-corporate shareholders are subject to tax at a maximum rate of 20%
on capital gains resulting from the disposition of shares held for more than 12
months. A loss realized by a shareholder on the disposition of Fund shares with
respect to which capital gains dividends have been paid will, to the extent of
such capital gain dividends, also be treated as long-term capital loss if such
shares have been held by the shareholder for six months or less.
Income received by the Fund from sources within foreign countries may be subject
to withholding and other similar income taxes imposed by the foreign country,
which may decrease the net return on foreign investments as compared to
dividends and interest paid by domestic issuers. The Fund does not expect to be
eligible to elect to allow shareholders to claim such foreign taxes as a credit
against their U.S. tax liability.
The Fund is required to report to the Internal Revenue Service ("IRS") all
distributions to shareholders except in the case of certain exempt shareholders.
Distributions by the Fund (other than distributions to exempt shareholders) are
generally subject to back up withholding of Federal income tax at a rate of 31%
if (1) the shareholder fails to furnish the Fund with and to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Fund or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. If the withholding provisions are applicable, distributions
(whether requested to be reinvested in additional shares or taken in cash) will
be reduced by the amounts required to be withheld.
The foregoing discussion relates only to Federal income tax law as applicable to
U.S. persons (i.e., U.S. citizens and residents and U.S. domestic corporations,
partnerships, trusts and estates). Distributions by the Fund also may be subject
to state and local taxes, and the treatment of distributions under state and
local income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisors with respect to particular
questions of Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisors regarding U.S. foreign tax
consequences of ownership of shares of the Fund, including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
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.
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
and as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. On November 16, 1999,
President Clinton signed the Gramm-Leach-Bliley Act, repealing certain
provisions of the Glass-Steagall Act which have restricted affiliation between
banks and securities firms and amending the Bank Holding Company Act
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thereby removing restrictions on banks and insurance companies. The new
legislation grants banks new authority to conduct certain authorized activity
through financial subsidiaries. In the opinion of the Manager, however, based on
the advice of counsel, these laws and regulations do not prohibit such
depository institutions from providing other services for investment companies
such as the shareholder servicing and related administrative functions referred
to above. The Fund's Board of Trustees will consider appropriate modifications
to the Fund's operations, including discontinuance of any payments then being
made under the Plan to banks and other depository institutions, in the event of
any future change in such laws or regulations which may affect the ability of
such institutions to provide the above-mentioned services. It is not anticipated
that the discontinuance of payments to such an institution would result in loss
to shareholders or change in the Fund's net asset value. In addition, state
securities laws on this issue may differ from the interpretations of Federal law
expressed herein and banks and financial institutions may be required to
register ad dealers pursuant to state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the SEC. Under that method, the Fund's portfolios'
yield figures, which are based on a chosen seven-day period, are computed as
follows: the portfolio's return for the seven-day period is obtained by dividing
the net change in the value of a hypothetical account having a balance of one
share at the beginning of the period by the value of such account at the
beginning of the period (expected to always be $1.00). This is multiplied by
(365/7) with the resulting annualized figure carried to the nearest hundredth of
one percent. For purposes of the foregoing computation, the determination of the
net change in account value during the seven-day period reflects (i) dividends
declared on the original share and on any additional shares, including the value
of any additional shares purchased with dividends paid on the original share,
and (ii) fees charged to all shareholder accounts. Realized capital gains or
losses and unrealized appreciation or depreciation of the Fund's portfolio
securities are not included in the computation. Therefore annualized yields may
be different from effective yields quoted for the same period.
A Portfolio's "effective yield" for each Class is obtained by adjusting its
"current yield" to give effect to the compounding nature of the Portfolio, as
follows: the unannualized base period return is compounded and brought out to
the nearest one hundredth of one percent by adding one to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result, i.e., effective yield = [(base period return + 1)365/7]-1.
Although published yield information is useful to investors in reviewing the
Portfolios' performance, investors should be aware that the Portfolios' yields
fluctuate from day to day. The yields for any given period are not an
indication, or representation by the Fund, of future yields or rates of return
on the Fund's shares, and may not provide a basis for comparison with bank
deposits or other investments that pay a fixed yield for a stated period of
time. Investors who purchase the Fund's shares directly may realize a higher
yield than Participant Investors because they will not be subject to any fees or
charges that may be imposed by Participating Organizations.
The Fund may from time to time advertise its portfolios' tax equivalent current
yield. The tax equivalent yield for each Class is computed based upon a 30-day
(or one month) period ended on the date of the most recent balance sheet
included in this Statement of Additional Information. It is computed by dividing
that portion of the yield of the Fund (as computed pursuant to the formulae
previously discussed) which is tax exempt by one minus a stated income tax rate
and adding the quotient to that portion, if any, of the yield of the Fund that
is not tax exempt. The tax equivalent yield for the Fund may also fluctuate
daily and does not provide a basis for determining future yields.
The Fund may from time to time advertise a tax equivalent effective yield table
which shows the yield that an investor would need to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt.
The Fund's Money Market Portfolio's Class A shares' yield for the seven day
period ended March 31, 2000 was 5.70% which is equivalent to an effective yield
of 5.86%. The Fund's U.S. Treasury Portfolio's Class A shares' yield for the
seven day period ended March 31, 2000 was 5.53% which is equivalent to an
effective yield of 5.68%.
The Fund's Money Market Portfolio's Class B shares' yield for the seven day
period ended March 31, 2000 was 5.94% which is equivalent to an effective yield
of 6.12%. The Fund's U.S. Treasury Portfolio's Class B shares' yield for the
seven day period ended March 31, 2000 was 5.78% which is equivalent to an
effective yield of 5.95%.
The Fund's Money Market Portfolio's Pinnacle Class shares' yield for the seven
day period ended March 31, 2000 was 5.94% which is equivalent to an effective
yield of 6.12%. The Fund's U.S. Treasury Portfolio's Pinnacle Class shares'
yield for the seven day period ended March 31, 2000 was 5.78% which is
equivalent to an effective yield of 5.95%.
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XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended March
31, 2000 and the report therein of PricewaterhouseCoopers LLP, are herein
incorporated by reference to the Fund's Annual Report. The Annual Report is
available upon request and without charge.
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DESCRIPTION OF RATINGS*
Description of Moody's Investors Service, Inc.'s Two Highest Municipal Bond
Ratings:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. ( c ): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings
of State and Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus
or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Description of Moody's Investors Service, Inc.'s Two Highest
Commercial Paper Ratings:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
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* As described by the rating agencies.
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