RULE 497(e)
Registration No. 33-81920
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FLORIDA
DAILY MUNICIPAL 600 Fifth Avenue, New York, NY 10020
INCOME FUND (212) 830-5220
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STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
AS SUPPLEMENTED ON OCTOBER 31, 2000
RELATING TO THE
FLORIDA DAILY MUNICIPAL INCOME FUND
PROSPECTUS DATED January 1, 2000
This Statement of Additional Information (SAI) is not a Prospectus. The SAI
expands upon and supplements the information contained in the current Prospectus
of the Florida Daily Municipal Income Fund ( the "Fund"), dated January 1, 2000
and should be read in conjunction with the Fund's Prospectus.
A Prospectus may be obtained from any Participating Organization or by writing
or calling the Fund toll-free at 1-(800) 221-3079. The Financial Statements of
the Fund have been incorporated by reference into the SAI from 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 Shares has been
incorporated by reference to the Prospectus.
This Statement of Additional Information is incorporated by reference into the
Prospectus in its entirety.
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Table of Contents
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Fund History.......................................... 2 Capital Stock and Other Securities......................19
Description of the Fund and its Investments and Purchase, Redemption and Pricing Shares.................20
Risks............................................... 2 Taxation of the Fund....................................21
Management of the Fund................................14 Underwriters............................................23
Control Persons and Principal Holders of Calculation of Performance Data.........................23
Securities..........................................15 Financial Statements....................................24
Investment Advisory and Other Services................16 Description of Ratings..................................25
Brokerage Allocation and Other Practices..............19 Corporate Taxable Equivalent Yield Table................26
Individual Taxable Equivalent Yield Table...............27
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I. FUND HISTORY
The Fund was established as a Massachusetts Business Trust under the laws of
Massachusetts by an Agreement and Declaration of Trust dated August 31, 1994.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is an open-end, management investment company that is a short-term,
tax-exempt money market fund. The Fund's investment objectives are to seek to
provide Florida residents with an investment that is, to the extent possible,
exempt from the Florida intangible personal property tax and to seek as high a
level of current income exempt from regular Federal income tax, as is believed
to be consistent with preserving capital, maintaining liquidity and stabilizing
principal. No assurance can be given that these objectives will be achieved.
The following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus for each Class of shares.
The Fund's assets will be invested primarily in (i) high quality debt
obligations issued by or on behalf of the State of Florida, other states,
territories and possessions of the United States and their authorities,
agencies, instrumentalities and political subdivisions, the interest on which
is, in the opinion of bond counsel to the issuer at the date of issuance,
currently exempt from regular Federal income taxation ("Municipal Obligations")
and in (ii) Participation Certificates (which, in the opinion of Battle Fowler
LLP, counsel to the Fund, cause the Fund to be treated as the owner of the
underlying Municipal Obligations for Federal income tax purposes) in Municipal
Obligations purchased from banks, insurance companies or other financial
institutions ("Participation Certificates"). Dividends paid by the Fund are
"exempt-interest dividends" by virtue of being properly designated by the Fund
as derived from Municipal Obligations and Participation Certificates. They will
be exempt from regular Federal income tax provided the Fund complies with
Section 852(b)(5) of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). However, such interest, including "exempt-interest
dividends" may be subject to the Federal alternative minimum tax.
To the extent the Fund's assets consist exclusively of obligations (including
Participation Certificates) issued by or on behalf of the State of Florida or
any Florida local governments, or their instrumentalities, authorities or
districts ("Florida Municipal Obligations") or territories and possessions of
the United States and their authorities, agencies, instrumentalities and
political subdivisions on December 31st of each taxable year, shareholders of
the Fund will be exempt from the Florida intangible personal property tax. (See
"Florida Taxes" herein.) To the extent that suitable Florida Municipal
Obligations are not available for investment by the Fund, the Fund may purchase
Municipal Obligations issued by other states, their agencies and
instrumentalities. The dividends on these will be designated by the Fund as
derived from interest income which will be, in the opinion of bond counsel to
the issuer at the date of issuance, exempt from regular Federal income tax but
will be subject to the Florida intangible personal property tax. Except as a
temporary defensive measure during periods of adverse market conditions as
determined by the Manager, the Fund will invest at least 65% of its assets in
Florida Municipal Obligations, although the exact amount of the Fund's assets
invested in such securities will vary from time to time. The Fund seeks to
maintain an investment portfolio with a dollar-weighted average maturity of 90
days or less and to value its investment portfolio at amortized cost and
maintain a net asset value at $1.00 per share of each Class. There can be no
assurance that this value will be maintained.
The Fund may hold uninvested cash reserves pending investment. The Fund's
investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in Participation
Certificates, the Fund reserves the right to invest up to 20% of the value of
its total assets in securities, the interest income on which is subject to
regular Federal, state and local income tax. The Fund will invest more than 25%
of its assets in Participation Certificates and other Florida Municipal
Obligations. In view of this "concentration" in Participation Certificates in
Florida Municipal Obligations, which may be secured by bank letters of credit or
guarantees, an investment in Fund shares should be made with an understanding of
the characteristics of the banking industry and the risks which such an
investment may entail. (See "Variable Rate Demand Instruments and Participation
Certificates" herein.) The investment objectives of the Fund described in the
preceding paragraphs of this section may not be changed unless approved by the
holders of a majority of the outstanding shares of the Fund that would be
affected by such a change. As used herein, the term "majority of the outstanding
shares" of the Fund means, respectively, the vote of the lesser of (i) 67% or
more of the shares of the Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding shares of the Fund.
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The Fund may only purchase United States dollar-denominated securities that have
been determined by the Fund's Board of Trustees to present minimal credit risks
and that are Eligible Securities at the time of acquisition. The term Eligible
Securities means: (i) securities which have or are deemed to have remaining
maturities of 397 days or less and rated in the two highest short-term rating
categories by any two nationally recognized statistical rating organizations
("NRSROs") or in such categories by the only NRSRO that has rated the Municipal
Obligations (collectively, the "Requisite NRSROs"); or (ii) unrated securities
determined by the Fund's Board of Trustees to be of comparable quality. In
addition, securities which have or are deemed to have remaining maturities of
397 days or less but that at the time of issuance were long-term securities
(i.e. with maturities greater than 366 days) are deemed unrated and may be
purchased if such had received a long-term rating from the Requisite NRSROs in
one of the three highest rating categories. Provided, however, that such may not
be purchased if it (i) does not satisfy the rating requirements set forth in the
preceding sentence and (ii) has received a long-term rating from any NRSRO that
is not within the three highest long-term rating categories. A determination of
comparability by the Board of Trustees is made on the basis of its credit
evaluation of the issuer, which may include an evaluation of a letter of credit,
guarantee, insurance or other credit facility issued in support of the
securities. While there are several organizations that currently qualify as
NRSROs, two examples of NRSROs are Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, ("S&P") and Moody's Investors Service, Inc.
("Moody's"). The two highest ratings by S&P and Moody's are "AAA" and "AA" by
S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by Moody's in the
case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the
case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in
the case of tax-exempt commercial paper. The highest rating in the case of
variable and floating demand notes is "VMIG-1" by Moody's or "SP-1/AA" by S&P.
Such instruments may produce a lower yield than would be available from less
highly rated instruments.
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
Subsequent to its purchase by the Fund, a rated 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 Security under Rule 2a-7 of the 1940 Act or (iii) is determined to
no longer present minimal credit risks, or an event of insolvency occurs with
respect to the issues of a portfolio security or the provider of any Demand
Feature or Guarantee, the Fund will dispose of the security absent a
determination by the Fund's Board of Trustees that disposal of the security
would not be in the best interests of the Fund. Disposal of the security shall
occur as soon as practicable consistent with achieving an orderly disposition by
sale, exercise of any demand feature or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Fund's total assets, the Fund shall promptly notify the SEC of
such fact and of the actions that the Fund intends to take in response to the
situation.
The Fund has elected and intends to continue to qualify as a "regulated
investment company" under Subchapter M of the Code. The Fund will be restricted
in that at the close of each quarter of the taxable year, at least 50% of the
value of its total assets must be represented by cash, government securities,
regulated investment company securities and other securities. The other
securities must be limited in respect of any one issue to not more than 5% in
value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of such issuer. In addition, at the close of each
quarter of its taxable year, not more than 25% in value of the Fund's total
assets may be invested in securities of one issuer other than government
securities or regulated investment company securities. The limitations described
in this paragraph regarding qualification as a "regulated investment company"
are not fundamental policies and may be revised to the extent applicable Federal
income tax requirements are revised. (See "Federal Income Taxes" herein.)
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates".
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1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal
agencies (all of which are generally referred to as "municipalities"). They
generally have a maturity at the time of issue of one year or more and are
issued to raise funds for various public purposes such as construction of a
wide range of public facilities, to refund outstanding obligations and to
obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of, and interest on revenue bonds are payable from the income of specific
projects or authorities and generally are not supported by the issuer's
general power to levy taxes. In some cases, revenues derived from specific
taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on IRBs is generally exempt, with certain exceptions,
from regular Federal income tax pursuant to Section 103(a) of the Code,
provided the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes" herein.) IRBs are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. The payment of the principal and interest on IRBs
usually depends solely on the ability of the user of the facilities
financed by the bonds or other guarantor to meet its financial obligations
and, in certain instances, the pledge of real and personal property as
security for payment. If there is no established secondary market for the
IRBs, the IRBs or the Participation Certificates in IRBs purchased by the
Fund will be supported by letters of credit, guarantees or insurance that
meet the definition of Eligible Securities at the time of acquisition and
provide the demand feature which may be exercised by the Fund at any time
to provide liquidity. Shareholders should note that the Fund may invest in
IRBs acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 herein, the Fund is permitted to
invest up to 10% of the portfolio in high quality, short-term Municipal
Obligations (including IRBs) meeting the definition of Eligible Securities
at the time of acquisition that may not be readily marketable or have a
liquidity feature.
2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes
are issued by local agencies and are guaranteed by the United States
Department of Housing and Urban Development. Project notes are also secured
by the full faith and credit of the United States. The Fund's investments
may be concentrated in Municipal Notes of Florida issuers.
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing. They are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses. These clauses provide that the governmental
issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. To reduce this risk,
the Fund will only purchase Municipal Leases subject to a non-appropriation
clause where the payment of principal and accrued interest is backed by an
unconditional irrevocable letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial
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institution. These types of Municipal Leases may be considered illiquid and
subject to the 10% limitation of investments in illiquid securities set
forth under "Investment Restrictions" contained herein. The Board of
Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring the liquidity of Municipal Leases.
In making such determination, the Board and the Manager may consider such
factors as the frequency of trades for the obligation, the number of
dealers willing to purchase or sell the obligations and the number of other
potential buyers and the nature of the marketplace for the obligations,
including the time needed to dispose of the obligations and the method of
soliciting offers. If the Board determines that any Municipal Leases are
illiquid, such lease will be subject to the 10% limitation on investments
in illiquid securities.
5. Any other Federal tax-exempt, and to the extent possible, Florida
tax-exempt obligations issued by or on behalf of states and municipal
governments and their authorities, agencies, instrumentalities and
political subdivisions, whose inclusion in the Fund will be consistent with
the Fund's "Description of the Fund and its Investments and Risks" and
permissible under Rule 2a-7 under the 1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Trustees of the Fund shall promptly
reassess whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Trustees determines is
in the best interest of the Fund and its shareholders. However, reassessment is
not required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Trustees is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (i) is in default, (ii)
ceases to be an Eligible Security under Rule 2a-7 of the 1940 Act or (iii) is
determined to no longer present minimal credit risks, or an event of insolvency
occurs with respect to the issues of a portfolio security or the provider of any
Demand Feature or Guarantee, the Fund will dispose of the security absent a
determination by the Fund's Board of Trustees that disposal of the security
would not be in the best interests of the Fund. Disposal of the security shall
occur as soon as practicable consistent with achieving an orderly disposition by
sale, exercise of any demand feature or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Fund's total assets, the Fund shall promptly notify the SEC of
such fact and of the actions that the Fund intends to take in response to the
situation.
VARIABLE RATE DEMAND INSTRUMENTS AND PARTICIPATION CERTIFICATES
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations. They provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. Variable rate demand instruments that can not be disposed of
properly within seven days in the ordinary course of business are illiquid
securities. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days. The adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund decides
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Trustees to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of a default in the payment of principal or interest on the underlying
securities, that is an Eligible Security or (ii) the instrument is not subject
to an unconditional demand feature but does qualify as an Eligible Security and
has a long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or if unrated, is determined to be of comparable quality by the
Fund's Board of Trustees. The Fund's Board of Trustees may determine that an
unrated variable rate demand instrument meets the Fund's high quality criteria
if it is backed by a letter of credit or guarantee or is insured by an insurer
that meets the quality criteria for the Fund stated herein or on the basis of a
credit evaluation of the underlying obligor. If an instrument is ever not deemed
to be an Eligible Security, the Fund either will sell it in the market or
exercise the demand feature.
* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for Short-Term bans. 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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The variable rate demand instruments that the Fund may invest in include
Participation Certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. The Fund will not purchase Participation Certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
counsel that the Fund will be treated as the owner thereof for Federal income
tax purposes. A participation certificate gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the Municipal Obligation and
provides the demand repurchase feature described below. Where the institution
issuing the participation does not meet the Fund's eligibility criteria, the
participation is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Trustees of the Fund has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution. Where applicable, the Fund can draw on the
letter of credit or insurance after no more than 30 days notice either at any
time or at specified intervals not exceeding 397 days (depending on the terms of
the participation), for all or any part of the full principal amount of the
Fund's participation interest in the security plus accrued interest. The Fund
intends to exercise the demand only (i) upon a default under the terms of the
bond documents, (ii) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares or (iii) to maintain a high quality investment
portfolio. The institutions issuing the Participation Certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate, or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the participation certificate bear
the cost of the insurance. However, the Fund retains the option to purchase
insurance if necessary, in which case the cost of the insurance will be an
expense of the Fund subject to the expense limitation (see "Expense Limitation"
herein). The Manager has been instructed by the Fund's Board of Trustees to
continually monitor the pricing, quality and liquidity of the variable rate
demand instruments held by the Fund, including the Participation Certificates,
on the basis of published financial information and reports of the rating
agencies and other bank analytical services which the Fund may subscribe.
Although these instruments may be sold by the Fund, the Fund intends to hold
them until maturity, except under the circumstances stated above (see "Federal
Income Taxes" herein).
Because the Fund may concentrate in Participation Certificates of Florida
Municipal Obligations, which may be secured by bank letters of credit or
guarantees, an investment in the Fund should be made with an understanding of
the characteristics of the banking industry and the risks which such an
investment may entail. Banks are subject to extensive governmental regulations
which may limit both the amounts and types of loans and other financial
commitments which may be made and interest rates and fees which may be charged.
The profitability of this industry is largely dependent upon the availability
and cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations under a letter of credit. The Fund may invest
25% or more of the net assets of any portfolio in securities that are related in
such a way that an economic, business or political development or change
affecting one of the securities would also affect the other securities. This
includes, for example, securities the interest upon which is paid from revenues
of similar type projects, or securities the issuers of which are located in the
same state.
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable maximum rates set by state law,
which limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent state law contains such limits,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Additionally, the portfolio may contain variable rate
demand Participation Certificates in fixed rate Municipal Obligations. The fixed
rate of interest on these Municipal Obligations will be a ceiling on the
variable rate of the participation certificate. In the event that interest rates
increase so that the variable rate exceeds the fixed rate on the Municipal
Obligations, the Municipal Obligations can no longer be valued at par and may
cause the Fund to take corrective action, including the elimination of the
instruments from the portfolio. Because the adjustment of interest rates on the
variable rate demand instruments is made in relation to movements of the
applicable banks' "prime rates", or other interest rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed rate
securities.
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Accordingly, interest rates on the variable rate demand instruments
may be higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (i) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (ii) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to be an Eligible Security it will be sold in the market or through
exercise of the repurchase demand feature to the issuer.
WHEN-ISSUED SECURITIES
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on these Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way; that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations, it may also acquire stand-by
commitments from banks and other financial institutions. Under a stand-by
commitment, a bank or broker-dealer agrees to purchase at the Fund's option a
specified Municipal Obligation at a specified price with same day settlement. A
stand-by commitment is the equivalent of a "put" option acquired by the Fund
with respect to a particular Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (i) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (ii) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects stand-by commitments to generally be available without the
payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus
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reducing the yield to maturity otherwise available for the same securities). The
total amount paid in either manner for outstanding stand-by commitments held in
the Fund's portfolio will not exceed 1/2 of 1% of the value of the Fund's total
assets calculated immediately after the acquisition of each stand-by commitment.
The Fund will enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks. If the issuer of the Municipal Obligation does not meet the eligibility
criteria, the issuer of the stand-by commitment will have received a rating
which meets the eligibility criteria or, if not rated, will present a minimal
risk of default as determined by the Board of Trustees. The Fund's reliance upon
the credit ofthese banks and broker-dealers will be supported by the value of
the underlying Municipal Obligations held by the Fund that were subject to the
commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income tax
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment. The acquisition
of a stand-by commitment would not affect the valuation or assumed maturity of
the underlying Municipal Obligations which will continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund will be valued at zero in determining net asset value. In those cases in
which the Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments will not affect the
dollar-weighted average maturity of the Fund's portfolio. The maturity of a
security subject to a stand-by commitment is longer than the stand-by repurchase
date.
The stand-by commitments the Fund may enter into are subject to certain risks.
These include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
TAXABLE SECURITIES
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below. The interest income from such
securities is subject to regular Federal income tax and the Florida intangible
personal property tax, under any one or more of the following circumstances: (i)
pending investment of proceeds of sales of Fund shares or of portfolio
securities; (ii) pending settlement of purchases of portfolio securities; and
(iii) to maintain liquidity for the purpose of meeting anticipated redemptions.
In addition, the Fund may temporarily invest more than 20% in such taxable
securities when, in the opinion of the Manager, it is advisable to do so because
of adverse market conditions affecting the market for Municipal Obligations. The
kinds of taxable securities in which the Fund may invest are limited to the
following short-term, fixed-income securities (maturing in 397 days or less from
the time of purchase): (i) obligations of the United States Government or its
agencies, instrumentalities or authorities; (ii) commercial paper meeting the
definition of Eligible Securities at the time of acquisition; (iii) certificates
of deposit of domestic banks with assets of $1 billion or more; and (iv)
repurchase agreements with respect to any Municipal Obligations or other
securities which the Fund is permitted to own.
REPURCHASE AGREEMENTS
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund will acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon.
Additionally, the Fund or its custodian shall have possession of the collateral,
which the Fund's Board believes will give it a valid, perfected security
interest in the collateral. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
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seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs in connection with the disposition of the
collateral. The Fund's Board believes that the collateral underlying repurchase
agreements may be more susceptible to claims of the seller's creditors than
would be the case with securities owned by the Fund. It is expected that
repurchase agreements will give rise to income which will not qualify as
tax-exempt income when distributed by the Fund. The Fund will not invest in a
repurchase agreement maturing in more than seven days if any such investment,
together with illiquid securities held by the Fund, exceeds 10% of the Fund's
total net assets. (See Investment Restriction Number 6 herein.) Repurchase
agreements are subject to the same risks described herein for stand-by
commitments.
FLORIDA RISK FACTORS
Because the Fund invests in Florida issues, it is susceptible to political,
economic, regulatory or other factors affecting issuers of Florida Municipal
Obligations and bank participant certificates therein. The following is only a
brief summary of the special risk factors affecting the State of Florida and
does not purport to be a complete or exhaustive description of all adverse
conditions to which issuers of Florida obligations may be subject.
THE STATE ECONOMY. In 1980 the State of Florida (the "State") ranked seventh
among the fifty states with a population of 9.7 million people. The State has
grown dramatically since then and, as of April 1, 1998, ranked fourth among the
fifty states with an estimated population of 15 million, an overall increase of
approximately 54.4% since 1980. Because of the national recession, Florida's
net-migration declined to 138,000 in 1992, but migration has since recovered to
232,000 in 1998. Since 1987 the prime working age population (18-44) has grown
at an average annual rate of 2%. The share of Florida's total working age
population (18-64) to total state population is approximately 60%. Non-farm
employment has grown by approximately 24.6% since 1992. The service sector is
Florida's largest employment sector, presently accounting for 36% of total
non-farm employment. Manufacturing jobs in Florida are concentrated in the area
of high-tech and high value-added sectors, such as electrical and electronic
equipment as well as printing and publishing. Foreign trade has contributed
significantly to Florida's employment growth. Florida's dependence on highly
cyclical construction and construction-related manufacturing has declined. Total
contract construction employment as a share of total non-farm employment has
fallen from a peak of over 10% in 1973, to approximately 7.5% in the late
1980's, to approximately 5.3% in 1998. Although the non-farm job creation rate
for the State is almost over two times the rate for the nation as a whole, since
1995, the unemployment rate for the State has been below or about the same as
the national average. The rate of unemployment for Florida in 1998 was 4.3%,
while the national unemployment rate was 4.5%. Because Florida has a
proportionately greater retirement age population, property income (dividends,
interest and rent) and transfer payments (social security and pension benefits)
are a relatively more important source of income.
The ability of the State and its local units of government to satisfy the Debt
Obligations may be affected by numerous factors which impact on the economic
vitality of the State in general and the particular region of the State in which
the issuer of the Debt Obligations is located. South Florida is particularly
susceptible to international trade and currency imbalances and to economic
dislocations in Central and South America, due to its geographical location and
its involvement with foreign trade, tourism and investment capital. South and
central Florida are impacted by problems in the agricultural sector,
particularly with regard to the citrus and sugar industries. Short-term adverse
economic conditions may be created in these areas, and in the State as a whole,
due to crop failures, severe weather conditions or other agriculture-related
problems. The State economy also has historically been somewhat dependent on the
tourism and construction industries and is sensitive to trends in those sectors.
THE STATE BUDGET. Florida prepares an annual budget which is formulated each
year and presented to the Government and Legislature. Under the State
Constitution and applicable statutes, the State budget as a whole, and each
separate fund within the State budget, must be kept in balance from currently
available revenues during each State fiscal year. (The State's fiscal year runs
from July 1 through June 30.) The Governor and the Comptroller of the State are
charged with the responsibility of ensuring that sufficient revenues are
collected to meet appropriations and that no deficit occurs in any State fund.
The financial operations of the State covering all receipts and expenditures are
maintained through the use of four types of funds: the General Revenue Fund,
Trust Funds, the Working Capital Fund and the Budget Stabilization Fund. The
majority of the State's tax revenues are deposited in the General Revenue Fund
and moneys in the General Revenue Fund are expended pursuant to appropriations
acts. In fiscal year 1996-97, appropriations for education, health and welfare
and public safety represented approximately 53%, 26% and 14%, respectively, of
funds available from the General Revenue Fund. The Trust Funds consist of moneys
received by the State which under law or trust agreement are segregated for a
purpose authorized by law. Revenues in the General Revenue Fund which are in
excess of the amount needed to meet appropriations may be transferred to the
Working Capital Fund.
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STATE REVENUES. Estimated General Revenues, Working Capital Fund revenue and
Budget Stabilization funds of $19,481.8 million for the fiscal year June 30,
1999 represent an increase of 5.2% over revenues for fiscal year ended June 30,
1998. Estimated Revenue for the fiscal year June 30, 1999 of $17,779.5 million
represents an increase of 5% over the fiscal year ended June 30, 1998. With
combined General Revenues, Working Capital Fund and Budget Stabilization Fund
appropriations at $18,222.0 million, including a $100.9 million transfer to the
Budget Stabilization Fund, unencumbered reserves at fiscal year end June 30,
1999 are estimated at $1,360.7 million.
In the fiscal year ended June 30, 1997, the State derived approximately 67% of
its total direct revenues for deposit in the General Revenue Fund, Trust Funds,
Working Capital Fund and Budget Stabilization funds from State taxes and
fees. Federal Funds and other special revenues accounted for the remaining
revenues. The greatest single source of tax receipts in the State is the 6%
sales and use tax. For the fiscal year ended June 30, 1998, receipts from the
sales and use tax totaled $13,349.3 million, an increase of approximately 10.2%
over the fiscal year ended June 30, 1997. In addition to the 6% State sales tax,
local governments may (by referendum) assess a 0.5% or 1% discretionary sales
surtax within their county. Proceeds from this local option sales tax are
earmarked for funding local infrastructure programs and acquiring land for
public recreation, or the protection or conservation of local resources in
accordance with State law. In addition, non-consolidated counties with a
population in excess of 800,000 may levy a local option sales tax to fund
indigent health care. The tax rate of this health care surtax may not exceed
0.5% and the combined levy of this surtax with the infrastructure surtax may not
exceed 1%. Furthermore, charter counties which adopted a charter prior to June
1, 1976 and each county with a consolidated county/municipal government may (by
referendum) assess up to a 1% discretionary sales surtax within their county, to
be earmarked for the development, construction, maintenance and operation of a
fixed guideway rapid transit system or may be remitted to an expressway or
transportation authority for use on county roads, bridges or bus systems, or to
service bonds financing roads or bridges, in accordance with State law. The
second largest source of State tax receipts is the tax on motor fuels including
the tax receipts distributed to local governments. Receipts from the taxes on
motor fuels are almost entirely dedicated to trust funds for specific purposes
or transferred to local governments and are not included in the General Revenue
Fund. For the fiscal year ended June 30, 1998, collections of this tax totaled
$1,518.3 million.
The State currently does not impose a personal income tax. However, the State
does impose a corporate income tax on the net income of corporations,
organizations, associations and other artificial entities for the privilege of
conducting business, deriving income or existing within the State. For the
fiscal year ended June 30, 1998, receipts from the corporate income tax totaled
$1,395.6 million, an increase of approximately 2.7% from the fiscal year ended
June 30, 1997. The Documentary Stamp Tax collections totaled $1,005.4 million
during the fiscal year ended June 30, 1998, or approximately an 16.3% increase
from the fiscal year ended June 30, 1997 The Alcoholic Beverage Tax, an excise
tax on beer, wine and liquor and a major source of state funds, totaled $566.3
million in the fiscal year June 30, 1998. Collections of the Intangible Personal
Property Tax raised $1,164.3 million in the fiscal year ended June 30, 1998, a
18.7% increase from the previous fiscal year. The Florida lottery in the fiscal
year ended June 30, 1998 generated $785.2 million for education.
While the State does not levy ad valorem taxes on real property or tangible
personal property, counties, municipalities and school districts are authorized
by law, and special districts may be authorized by law, to levy ad valorem
taxes. Under the State Constitution, ad valorem taxes may not be levied by
counties, municipalities, school districts and water management districts in
excess of the following respective millages upon the assessed value of real
estate and tangible personal property: for all county purposes, 10 mills; for
all municipal purposes, 10 mills; for all school purposes, 10 mills; and for
water management purposes, either 0.05 mill or 1.0 mill, depending upon
geographic location. These millage limitations do not apply to taxes levied for
payment of bonds and taxes levied for periods not longer than two years when
authorized by a vote of the electors. (Note: one mill equals one-tenth of one
cent.)
The State Constitution and statutes provide for the exemption of homesteads from
certain taxes. The homestead exemption is an exemption from all taxation, except
for assessments for special benefits, up to a specific amount of the assessed
valuation of the homestead. This exemption is available to every person who has
the legal or equitable title to real estate and maintains thereon his or her
permanent home. All permanent residents of the State are currently entitled to a
$25,000 homestead exemption from levies by all taxing authorities; however, such
exemption is subject to change upon voter approval.
As of January 1, 1994, the annual increase in the assessed valuation of
homestead property is constitutionally limited to the lesser of 3% or the
increase in the Consumer Price Index during the relevant year, except in the
event of a sale thereof during such year, and except as to improvements thereto
during such year.
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Since municipalities, counties, school districts and other special purpose units
of local governments with power to issue general obligation bonds have authority
to increase the millage levy for voter approved general obligation debt to the
amount necessary to satisfy the related debt service requirements, the
constitutional valuation cap is not expected to adversely affect the ability of
these entities to pay the principal of or interest on such general obligation
bonds. However, in periods of high inflation, those local government units whose
operating millage levies are approaching the constitutional cap and whose tax
base consists largely of residential real estate, may, as a result of the
constitutional valuation cap, need to place greater reliance on non-ad valorem
revenue sources to meet their operating budget needs.
STATE GENERAL OBLIGATION BONDS AND STATE REVENUE BONDS. The State Constitution
does not permit the State to issue debt obligations to fund governmental
operations. Generally, the State Constitution authorizes State bonds pledging
the full faith and credit of the State only to finance or refinance the cost of
State fixed capital outlay projects, upon approval by a vote of the electors,
and provided that the total outstanding principal amount of such bonds does not
exceed 50% of the total tax revenues of the State for the two preceding fiscal
years. Revenue bonds may be issued by the State or its agencies without a vote
of the electors only to finance or refinance the cost of State fixed capital
outlay projects or higher education student loans which are payable solely from
funds derived directly from sources other than State tax revenues.
Exceptions to the general provisions regarding the full faith and credit pledge
of the State are contained in specific provisions of the State Constitution
which authorize the pledge of the full faith and credit of the State, without
electorate approval, but subject to specific coverage requirements, for: certain
road and bridge projects (including the actual and incidental costs of acquiring
real property or the rights thereto for state roads), county education projects,
State higher education projects, State system of Public Education and
construction of air and water pollution control and abatement facilities, solid
waste disposal facilities and certain other water facilities.
LOCAL BONDS. The State Constitution provides that counties, school districts,
municipalities, special districts and local governmental bodies with taxing
powers may issue debt obligations payable from ad valorem taxation and maturing
more than 12 months after issuance, only (i) to finance or refinance capital
projects authorized by law, provided that electorate approval is obtained; or
(ii) to refund outstanding debt obligations and interest and redemption premium
thereon at a lower net average interest cost rate.
Counties, municipalities and special districts are authorized to issue revenue
bonds to finance a variety of self-liquidating projects pursuant to the laws of
the State, such revenue bonds to be secured by and payable from the rates, fees,
tolls, rentals and other charges for the services and facilities furnished by
the financed projects. Under State law, counties and municipalities are
permitted to issue bonds payable from special tax sources for a variety of
purposes, and municipalities and special districts may issue special assessment
bonds.
BOND RATINGS. General obligation bonds of the State are currently rated Aa by
Moody's and AA by S&P's.
FLORIDA RETIREMENT SYSTEM
This system was created in 1970 to provide a retirement and survivor benefit
program for participating public employees. Although retirement coverage is
employee noncontributory and there are cost-of-living adjustments, the
Constitution does not allow any increase in the benefits unless that unit has
made provision for the funding of the increase on a sound actuarial basis. The
latest actuarial update of the Florida Retirement System prepared as of July 1,
1996 indicated that the value of the assets available for benefits funded 86.4%
of the pension benefit obligation.
FLORIDA HURRICANE CATASTROPHE FUND
The Florida Hurricane Catastrophe Fund (FHCF) was created in 1993 as a State
trust fund to provide reimbursement to qualified insurers for a portion of their
catastrophic hurricane losses; thereby creating additional insurance capacity to
ensure that covered structures (and their contents) damaged or destroyed in a
hurricane may be repaired or reconstructed as soon as possible. Payments made to
insurers shall not exceed the monies in the fund, together with the maximum
amount of revenue bonds that may be issued by a county or municipality.
LITIGATION. Due to its size and its broad range of activities, the State (and
its officers and employees) are involved in numerous routine lawsuits. The
managers of the departments of the State involved in such routine lawsuits
believe that the results of such pending litigation will not materially affect
the State's financial position. In addition to the routine litigation pending
against the State, its officers and employees, the following lawsuits and claims
are also pending:
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(a) The Florida Department of Transportation (FDOT) filed an action against the
adjoining property owners seeking a declaratory judgment from the Dade
County Circuit Court that the FDOT is not the owner of the property subject
to a claim by the U.S. Environmental Protection Agency (EPA). The EPA is
seeking clean-up costs, pursuant to the Comprehensive Environmental
Response Compensation and Liability Act, regarding property which the EPA
alleges is owned by the FDOT (and formerly owned by CSX Transportation,
Inc.). The case was dismissed and the FDOT's appeal of the order of
dismissal is pending. The EPA has agreed to await the outcome of the FDOT's
Declaratory Action before proceeding further. If the FDOT is unsuccessful
in its actions, the possible clean-up costs could exceed $25 million.
(b) In a class action suit, clients of residential placement for the placement
of the developmentally disabled are seeking refunds for services where
children were entitled to free education under the Education for
Handicapped Act (EHA). The District Court held that the State did not
charge maintenance fees for children between the ages of 5 and 17 based on
the EHA. All appeals have been exhausted. The State
repaid $217,694 in maintenance fees; however, amounts estimated at $21.6
million due to various third parties have not been paid since the affected
parties have not been identified.
(c) Plaintiffs have challenged the constitutionality of the Public Medical
Assistance Trust annual assessment of net operating revenue of
free-standing out-patient facilities offering sophisticated radiology
services. A trial has not been scheduled. If the State is unsuccessful in
its actions, the potential refund liability could amount to approximately
$70 million.
(d) In an inverse condemnation case claiming that the action of the State
constitutes a taking of the plaintiff's leases for which compensation is
due, final judgment has been made in favor of the State. Although
plaintiffs filed for review by the Supreme Court, the Supreme Court denied
review and the petition for certiorari.
(e) An action has been brought to determine the issue of whether the State's
Refund Statute for dealer repossessions authorizes the Department of
Revenue to grant a refund to a financial institution as the assignee of
numerous security agreements governing the sale of automobiles and other
property sold by dealers. The issue turns on whether the Legislature
intended the Statute only to provide a refund or a credit to the dealer who
actually sold the tangible personal property and collected and remitted the
tax or intended that right to be assignable. Final judgement has been
issued against the State; however, the State plans to appeal the decision.
Several banks have applied for refunds and the potential refund to
financial institutions exceeds $30 million annually.
(f) Plaintiff has sued the State for $60 million alleging that the State has
breached contracts by first "freezing" the processing of reimbursement
applications and then the termination of the petroleum reimbursement
process. Alternatively, the Plaintiff claims that these actions constitute
torts or impairment of contractual obligations. The Plaintiff also alleges
that the termination of reimbursement claims pursuant to F.S. Section
376.3071 is a breach of contract. In addition to damages, the Plaintiff
seeks recovery of attorney fees and costs. If attorneys fees and costs are
awarded, the potential liability could be as high as $60 million.
(g) The Plaintiffs claim that the State has been responsible for construction
of roads and attendant drainage facilities in Hillsborough County and, as a
result of its construction, has caused the Plaintiffs' property to become
subjected to flooding, thereby amounting to an uncompensated taking. On
December 15, 1998, the court granted the State's Motion for More Definite
Statement as to certain portions of the Plaintiffs' complaint. If the state
is unsuccessful in its actions, potential losses could exceed $40 million.
(h) Taxpayer has challenged the imposition of interest on additional amounts of
corporate income tax due as a result of Federal audit adjustments reported
to Florida. The State's historical position is that interest is due from
the due date of the return until payment of the additional amount of tax is
made. Taxpayer contends that interest should be accrued from the date the
Federal audit adjustments were due to be reported to Florida. A Final Order
was issued adopting the position asserted by the State; however, taxpayer
has filed an appeal of the Final Order. Based upon the best available
information, the potential exposure risk for refunds or lost revenue is in
the range of $12 to $20 million per year.
SUMMARY. Many factors including national, economic, social and environmental
policies and conditions, most of which are not within the control of the State
or its local units of government, could affect or could have an adverse impact
on the financial condition of the State. Additionally, the limitations placed by
the State Constitution on the State and its local units of government with
respect to income taxation, ad valorem taxation, bond indebtedness and other
matters discussed above, as well as other applicable statutory limitations, may
constrain the revenue-generating capacity of the State and its local units of
government and, therefore, the ability of the issuers of the Bonds to satisfy
their obligations thereunder.
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There can be no assurance that general economic difficulties or the financial
circumstances of Florida or its counties and municipalities will not adversely
affect the market value of Florida Municipal Obligations or the ability of the
obligors to pay debt service on such obligations.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios. They may not be changed unless approved by a majority
of the outstanding shares "of each series of the Fund's shares that would be
affected by such a change." The term "majority of the outstanding shares" of the
Fund means the vote of the lesser of (i) 67% or more of the shares of the Fund
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Fund. The Fund may not:
1. Make portfolio investments other than as described under "Description of
the Fund and its Investments and Risks" Any other form of Federal
tax-exempt investment must meet the Fund's high quality criteria, as
determined by the Board of Trustees, and be consistent with the Fund's
objectives and policies.
2. Borrow money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes. This includes the meeting
of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any investments. Interest paid on borrowings
will reduce net income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options. However, securities subject to a demand obligation and
stand-by commitments may be purchased as set forth under "Description of
the Fund and its Investments and Risks" herein.
5. Underwrite the securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests. This shall
not prevent the Fund from investing in Municipal Obligations secured by
real estate or interests in real estate.
8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under " Description of the
Fund and its Investments and Risks" herein.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
10. Invest more than 25% of its assets in the securities of "issuers" in any
single industry. The Fund may invest more than 25% of its assets in
Participation Certificates and there shall be no limitation on the purchase
of those Municipal Obligations and other obligations issued or guaranteed
by the United States Government, its agencies or instrumentalities. When
the assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government creating
the issuing entity and a security is backed only by the assets and revenues
of the entity, the entity would be deemed to be the sole issuer of the
security. Similarly, in the case of an industrial revenue bond, if that
bond is backed only by the assets and revenues of the non-government user,
then such non-government user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity, such
as an insurance company or other corporate obligor, guarantees a security
or a bank issues a letter of credit, such a guarantee or letter of credit
would be considered a separate security and would be treated as an issue of
such government, other entity or bank. Immediately after the acquisition of
any securities subject to a Demand Feature or Guarantee (as such terms are
defined in Rule 2a-7 of the 1940 Act), with respect to 75% of the total
assets of the Fund, not
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more than 10% of the Fund's assets may be invested
in securities that are subject to a Guarantee or Demand Feature from the
same institution. However, the Fund may only invest more than 10% of its
assets in securities subject to a Guarantee or Demand Feature issued by a
Non-Controlled Person (as such term is defined in Rule 2a-7 of the 1940
Act).
11. Invest in securities of other investment companies. The Fund may purchase
unit investment trust securities where such unit trusts meet the investment
objectives of the Fund and then only up to 5% of the Fund's net assets,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets.
12. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with a permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
III. MANAGEMENT OF THE FUND
The Fund's Board of Trustees, which is responsible for the overall management
and supervision of the Fund, has employs the Manager to serve as investment
manager of the Fund. The Manager provides persons satisfactory to the Fund's
Board of Trustees to serve as officers of the Fund. Such officers, as well as
certain other employees and Trustees of the Fund, may be directors or officers
of Reich & Tang Asset Management, Inc., the sole general partner of the Manager
or employees of the Manager or its affiliates. Due to the services performed by
the Manager, the Fund currently has no employees and its officers are not
required to devote their full-time to the affairs of the Fund.
The Trustees and Officers of the Fund and their principal occupations during the
past five years are set forth below. Unless otherwise specified, the address of
each of the following persons is 600 Fifth Avenue, New York, New York 10020. Mr.
Duff may be deemed an "interested person" of the Fund, as defined in the 1940
Act, on the basis of his affiliation with Reich & Tang Asset Management L.P.
STEVEN W. DUFF, 46 - President and Trustee of the Fund, has been President of
the Mutual Funds Division of the Manager since September 1994. Mr. Duff is also
President and a Director/Trustee of 13 other funds in the Reich & Tang Fund
Complex, Director of Pax World Money Market Fund, Inc., Executive Vice President
of Reich & Tang Equity Fund, Inc., President and Chief Executive Officer of Tax
Exempt Proceeds Fund, Inc. and President of Back Bay Funds, Inc.
DR. W. GILES MELLON, 68 - Trustee of the Fund, is Professor of Business
Administration and Area Chairman of Economics 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 15 other
funds in the Reich & Tang Fund Complex.
ROBERT STRANIERE, 58 - Trustee of the Fund, has been a member of the New York
State Assembly and a partner with The Straniere Law Firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also a
Director/Trustee of 15 other funds in the Reich & Tang Fund Complex and a
Director of Life Cycle Mutual Funds, Inc.
DR. YUNG WONG, 61 - Trustee of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong is also a Director/Trustee of 15 other funds in the
Reich & Tang Fund Complex. Dr. Wong is also a Trustee of Eclipse Financial Asset
Trust.
MOLLY FLEWHARTY, 48 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of 18
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 was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to September 1993. Ms. Jones is also a Vice President of 14
other funds in the Reich & Tang Fund Complex.
14
<PAGE>
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 was formerly
Vice President of Reich & Tang, Inc. with which she was associated with from
December 1980 to September 1993. Ms. Messina is also Vice President of 15 other
funds in the Reich & Tang Fund Complex.
BERNADETTE N. FINN, 52 - Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn was formerly
Vice President and Assistant Secretary of Reich & Tang, Inc. which she was
associated with from September 1970 to September 1993. Ms. Finn is also
Secretary of 13 other funds and a Vice President and Secretary of 5 additional
funds in the Reich & Tang Complex.
RICHARD DE SANCTIS, 43 - Treasurer of the Fund, has been Treasurer of the
Manager since September 1993. Mr. De Sanctis is also Treasurer of 17 other funds
in the Reich & Tang Fund Complex and is Vice President and Treasurer of Cortland
Trust, Inc.
ROSANNE HOLTZER, 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 18
other funds in the Reich & Tang Fund Complex.
The Fund paid an aggregate remuneration of $6,000 to its trustees with respect
to the period ended August 31, 1999, all of which consisted of Trustees' fees
paid to the three disinterested trustees, pursuant to the terms of the
Investment Management Contract (see "Manager" herein.)
Trustees of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $1,000 and a fee of $250 for each Board of Trustees meeting
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings.
Trustees who are affiliated with the Manager do not receive compensation from
the Fund. See Compensation Table.
<TABLE>
<CAPTION>
COMPENSATION TABLE
AGGREGATE COMPENSATION PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION FROM
NAME OF PERSON, FROM THE FUND BENEFITS ACCRUED AS PART BENEFITS UPON RETIREMENT FUND AND FUND COMPLEX PAID
POSITION OF FUND EXPENSES TO TRUSTEES*
<S> <C> <C> <C> <C>
Dr. W. Giles Mellon, $2,000 0 0 $59,500 (16 Funds)
Trustee
Robert Straniere, $2,000 0 0 $59,500 (16 Funds)
Trustee
Dr. Yung Wong, $2,000 0 0 $59,500 (16 Funds)
Trustee
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex
for the fiscal year ending August 31, 1999. The parenthetical number
represents the number of investment companies (including the Fund) from
which the trustees receive compensation. A Fund is considered to be in the
same Fund complex if, among other things, it has a common investment
adviser.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On November 30, 1999 there were 46,788,377 shares of Class A common stock
outstanding and 26,154,761 shares of Class B Common Stock outstanding. As of
November 30, 1999, 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 November 30, 1999:
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
Name and Address % of Class Nature of Ownership
Virginia Koonce Craig Revocable Trust 5.17% Record and Beneficial
3750 Bobbin Mill Road
Tallahassee, Florida 32312
15
<PAGE>
CLASS B
Mark A. Mansour and Sharon A. Mansour 17.59% Record and Beneficial
2610 NE 40th Street
Ft. Lauderdale, Florida 333085-5737
</TABLE>
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 November 30, 1999, investment
manager, adviser, or supervisor with respect to assets aggregating in excess of
$14.4 billion. In addition to the Fund, the Manager acts as investment manager
and administrator of fifteen other investment companies and also advises pension
trusts, profit-sharing trusts and endowments.
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.
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
amanager, approved the Investment Management Contract for an initial term of two
years, extending to August 31, 2002. The contract may be continued in force
after the inital term for successive twelve-month periods beginning each
September 1, provided that such majority vote of the Fund's outstanding voting
securities or by a majority of the trustees who are not parties to the
Investment Management Contract or interested persons of any such party, by votes
cast in person at a meeting called for the purpose of voting on such matter.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Trustees of
the Fund.
The Manager provides persons satisfactory to the Board of Trustees of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and trustees of the Fund, may be trustees or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Trustees,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence
16
<PAGE>
on the part of the Manager, or of reckless disregard of its obligations
thereunder, the Manager shall not be liable for any action or failure to act in
accordance with its duties thereunder.
Under the Investment Management Contract, the Manager receives from the Fund a
fee equal to .40% per annum of the Fund's average daily net assets. The fees are
accrued daily and paid monthly. The Manager at its discretion may voluntarily
waive all or a portion of the management fee.
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting related services by Investors Fiduciary Trust Company,
the Fund's bookkeeping or recordkeeping agent, (ii) prepare reports to and
filings with regulatory authorities and (iii) perform such other services as the
Fund may from time to time request of the Manager. The personnel rendering such
services may be employees of the Manager, of its affiliates or of other
organizations. For its services under the Administrative Services Contract, the
Manager receives from the Fund a fee equal to .21% per annum of the Fund's
average daily net assets. For the Funds' fiscal years ended August 31, 1999,
August 31, 1998 and August 31, 1997, the Manager received a fee of $196,987,
$284,259 and $179,993 of which $187,607, $270,723 and $171,422 was voluntarily
waived.
For the Fund's fiscal years ended August 31, 1999, August 31, 1998 and August
31, 1997, the fee paid to the Manager under the Investment Management Contract
was $375,213, $541,446 and $342,844, respectively of which $84,262, $94,753 and
$262,474 was voluntarily waived. The Fund's net assets at the close of business
on August 31, 1999 totaled $73,310,928. The Manager may waive its rights to any
portion of the management fee and may use any portion of the Management fee for
purposes of shareholder and administrative services and distribution of the
Fund's shares.
The Manager at its discretion may waive its rights to any portion of the
Management fee or the administrative services fee and may use any portion of the
Management fee for purposes of shareholder and administrative services and
distribution of the Fund's shares. There can be no assurance that such fees will
be waived in the future (see "Distribution and Service Plan" herein).
Investment management fees and operating expenses which are attributable to both
Classes of the Fund will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class A shareholders
pursuant to the Plan shall be compensated by the Distributor from its
shareholder servicing fee, the Manager from its management fee and the Fund
itself. Expenses incurred in the distribution of Class B shares and the
servicing of Class B shares shall be paid by the Manager.
EXPENSE LIMITATION
The Manager has agreed, pursuant to the Investment Management Contract, (See
"Distribution and Service Plan" herein), to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage and extraordinary expenses) which in
any year exceed the limits on investment company expenses prescribed by any
state in which the Fund's shares are qualified for sale. For the purpose of this
obligation to reimburse expenses, the Fund's annual expenses are estimated and
accrued daily, and any appropriate estimated payments are made to it on a
monthly basis. Subject to the obligations of the Manager to reimburse the Fund
for its excess expenses as described above, the Fund has, under the Investment
Management Contract, confirmed its obligation for payment of all its other
expenses. This includes all operating expenses, taxes, brokerage fees and
commissions, commitment fees, certain insurance premiums, interest charges and
expenses of the custodian, transfer agent and dividend disbursing agent's fees,
telecommunications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of trustees, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the Manager
or its affiliates, costs of investor services, shareholders' reports and
corporate meetings, SEC registration fees and expenses, state securities laws
registration fees and expenses, expenses of preparing and printing the Fund's
prospectus for delivery to existing shareholders and of printing application
forms for shareholder accounts, and the fees and reimbursements payable to the
Manager under the Investment Management Contract and the Distributor under the
Shareholder Servicing Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein. The management of the Fund intends to do so
whenever it appears advantageous to the Fund. The Fund's expenses for employees
and for such services are among the expenses subject to the expense limitation
described above.
17
<PAGE>
DISTRIBUTION AND SERVICE PLAN
The Fund's distributor is Reich & Tang Distributors, Inc., a Delaware
corporation with principal officers at 600 Fifth Avenue, New York, New York
10020. Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of Trustees has adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to Class A shares
only) with Reich & Tang Distributors, Inc., (the "Distributor"), as distributor
of the Fund's shares.
The Class A shares will be offered to investors who desire certain additional
shareholder services from Participating Organizations that are compensated by
the Fund's Manager and Distributor for such services. For its services under the
Shareholder Servicing Agreement (with respect to the Class A shares only), the
Distributor receives from the Fund a fee equal to .25% per annum of the Fund's
average daily net assets of the Class A shares of the Fund (the "Shareholder
Servicing Fee"). The fee is accrued daily and paid monthly and any portion of
the fee may be deemed to be used by the Distributor for purposes of distribution
of the Fund's Class A shares and for payments to Participating Organizations
with respect to servicing their clients or customers who are Class A
shareholders of the Fund. The Class B shareholders will not receive the benefit
of such services from Participating Organizations and, therefore, will not be
assessed a Shareholder Servicing Fee.
The following information applies only to the Class A shares of the Fund. For
the Fund's fiscal year ended August 31, 1999, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
adopted thereunder pursuant to Rule 12b-1 under the 1940 Act, totaled $161,198,
none of which was voluntarily waived. During the same period, the Manager and
Distributor made total payments under the Plan to or on behalf of Participating
Organizations of $237,683. The excess of such payments over the total payments
the Distributor received from the Fund under the Plan represents distribution
and servicing expenses funded by the Manager from its own resources including
the management fee. Of the total amount paid pursuant to the Plan, $10,534 was
utilized for compensation to sales personnel, $1,248 on Prospectus printing and
$384 on miscellaneous expenses.
Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses, including the cost of dedicated lines and CRT terminals, incurred by
the Participating Organizations and Distributor in carrying out their
obligations under the Shareholder Servicing Agreement with respect to the Class
A shares and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee, and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Class A shares of the Fund; (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee with respect to Class A shares
and past profits for the purpose enumerated in (i) above. The Distributor
determines the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager or the Distributor for any fiscal year under the Investment
Management Contract or the Shareholder Servicing Agreement in effect for that
year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Trustees. In addition, the Plan requires the
Fund and the Distributor to prepare, at least quarterly, written reports setting
forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan was approved by the shareholders of the Fund at their first annual
meeting on September 1, 1994. The Board of Trustees approved the Plan effective
September 8, 1994. The Plan has a term which extends until August
18
<PAGE>
31, 2000. Thereafter it may continue in effect for successive annual periods
commencing September 1, provided it is approved by the Class A shareholders or
by the Board of 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
Investors Fiduciary Trust Company, 801 Pennsylvania Avenue, Kansas City,
Missouri 64105, is custodian for the Fund's cash and securities. Reich & Tang
Services, Inc., an affiliate of the Fund's Manager, located at 600 Fifth Avenue,
New York, NY 10020, is transfer agent and dividend agent for the shares of the
Fund. The custodian and transfer agents do not assist in, and are not
responsible for, investment decisions involving assets of the Fund.
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
Matters in connection with Florida law are passed upon by Gunster, Yoakley,
Valdes - Fauli & Stewart, P.A., 777 South Flagler Drive, Suite 500 East, West
Palm Beach, FL 33401-6194.
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 portfolio
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases Participation
Certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund are made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
VII. CAPITAL STOCK AND OTHER SECURITIES
The Fund has an unlimited authorized number of shares of beneficial interest.
These shares are entitled to one vote per share with proportional voting for
fractional shares. There are no conversion or preemptive rights in connection
with any shares of the Fund. All shares, when issued in accordance with the
terms of the offering, will be
19
<PAGE>
fully paid and nonassessable. Shares are redeemable at net asset value, at the
option of the shareholder. The Fund is subdivided into two classes of common
stock, Class A and Class B. Each share, regardless of class, represents an
interest in the same portfolio of investments and has identical voting,
dividend, liquidation and other rights, preferences, powers, restrictions,
limitations, qualifications, designations and terms and conditions, except: (i)
the Class A and Class B shares have different class designations; (ii) only the
Class A shares are assessed a service fee pursuant to the Rule 12b-1
Distribution and Service Plan of the Fund of .25% of the Class A shares' average
daily net assets; and (iii) only the holders of the Class A shares will be
entitled to vote on matters pertaining to the Plan and any related agreements in
accordance with provisions of Rule 12b-1. The exchange privilege permits
stockholders to exchange their shares only for shares of the same class of an
investment company that participates on an exchange privilege program with the
Fund. Payments made under the Plan are calculated and charged daily to the
appropriate class prior to determining daily net asset value per share and
dividends/distributions.
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. Meetings of shareholders may be called at any time by the
President, and at the request in writing, or by resolution, of a majority of
Trustees, or upon the written request of holders of shares entitled to cast not
less than 10% of all the votes entitled to be cast at such meeting. Annual and
other meetings may be required with respect to such additional matters relating
to the Fund as may be required by the 1940 Act, such as for the election of
Trustees, for approval of the revised investment advisory contracts with respect
to a particular class or series of shares, for approval of the Fund's
distribution agreement with respect to a particular class or series of shares
and the removal of Fund Trustee(s) and communication among shareholders, any
registration of the Fund with the Securities and Exchange Commission or any
state, or as the Trustees may consider necessary or desirable. Each Trustee
serves until his successor is elected and qualified, or until such Trustee
sooner dies, resigns, retires or is removed by the vote of the shareholders.
VIII. PURCHASE, REDEMPTION AND PRICING SHARES
The material relating to purchase, redemption and pricing of shares is located
in the Shareholder Information section of the 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.'s Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value of a Class is computed
by dividing the value of the Fund's net assets for such Class (i.e., the value
of its securities and other assets less its liabilities, including expenses
payable or accrued but excluding capital stock and surplus) by the total number
of shares outstanding for such Class.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter 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
20
<PAGE>
reporting and record keeping procedures. The Fund has also established
procedures to ensure compliance with the requirement that portfolio securities
are Eligible Securities. (See "Description of the Fund and its Investments and
Risks" herein.)
IX. TAXATION OF THE FUND
Federal Income Taxes
The Fund has elected to qualify under the Code, as a "regulated investment
company" that distributes "exempt-interest dividends". The Fund intends to
continue to qualify for regulated investment company status so long as such
qualification is in the best interest of its shareholders. Such qualification
relieves the Fund of liability for Federal income taxes to the extent its
earnings are distributed in accordance with the applicable provisions of the
Code.
The Fund's policy is to distribute as dividends each year 100%, and in no event
less than 90%, of its net tax-exempt interest income. Exempt-interest dividends
are dividends paid by the Fund that are attributable to interest on obligations,
the interest on which is exempt from regular Federal income tax, and designated
by the Fund as exempt-interest dividends in a written notice mailed to the
Fund's shareholders not later than 60 days after the close of its taxable year.
The percentage of the total dividends paid by the Fund during any taxable year
that qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends during the year.
Exempt-interest dividends are excludable from are gross income under Section
103(a) of the Code although the amount of tax exempt interest received must be
disclosed on the shareholders' Federal income tax returns. Shareholders should
consult their tax advisors with respect to whether exempt-interest dividends
retain the exclusion under Section 103 of the Code if they would be treated as
"substantial users" or "related persons" under Section 147(a) of the Code with
respect to some or all of any "private activity bonds" held by the Fund. If a
shareholder receives an exempt-interest dividend with respect to any share that
it has held for six months or less, then any loss on the sale or exchange of
such share will be disallowed to the extent of the amount of such
exempt-interest dividend. For Social Security recipients, interest on tax-exempt
bonds, including exempt-interest dividends paid by the Fund, must be added to
adjusted gross income for purposes of computing the amount of social security
benefits includible in gross income. Taxpayers other than corporations are
required to include as an item of tax preference for purposes of the Federal
alternative minimum tax all tax-exempt interest on "private activity" bonds
(generally, a bond issue in which more than 10% of the proceeds are used in a
non-governmental trade or business, other than Section 501(c)(3) bonds) issued
after August 7, 1986. Thus, this provision will apply to any exempt-interest
dividends from the Fund's assets that are attributable to such post-August 7,
1986 private activity bonds acquired by the Fund. Corporations are required to
increase their alternative minimum taxable income for purposes of calculating
their alternative minimum tax liability by 75% of the amount by which the
adjusted current earnings (which will include tax-exempt interest) of the
corporation exceeds it's alternative minimum taxable income (determined without
this item). In addition, in certain cases, Subchapter S corporations with
accumulated earnings and profits from Subchapter C years are subject to a
minimum tax on excess "passive investment income", which includes tax-exempt
interest.
Although not intended, it is possible that the Fund may realize short-term or
long-term capital gains or losses from its portfolio transactions. The Fund may
also realize market discount income, short-term or long-term capital gains upon
the maturity or disposition of securities acquired at discounts resulting from
market fluctuations. Accrued market discount income and short-term capital gains
will be taxable to shareholders as ordinary income when they are distributed.
Any net capital gains (the excess of net long-term capital gain over net
short-term capital loss) will be distributed annually to the Fund's
shareholders. The Fund will have no tax liability with respect to distributed
net capital gains and the distributions are taxable to shareholders as long-term
capital gains regardless of how long the shareholders have held Fund shares.
However, Fund shareholders who at the time of such a net capital gain
distribution have not held their Fund shares for more than 6 months, and who
subsequently dispose of those shares at a loss, will be required to treat such
loss as a long-term capital loss to the extent of the net capital gain
distribution. Distributions of net capital gain will be designated as capital
gain dividends in a written notice mailed to the Fund's shareholders not later
than 60 days after the close of the Fund's taxable year. Capital gains realized
by corporations are generally taxed at the same rate as ordinary income.
However, capital gains are generally taxable at a maximum rate of 20% to
non-corporate shareholders who have a holding period of more than 12 months.
Corresponding maximum rate and holding period rules apply with respect to
capital gains dividends distributed by the Fund, without regard to the length of
time shares have been held by the shareholder.
The Fund also intends to distribute at least 90% of its investment company
taxable income (taxable income including short term capital gain but subject to
certain adjustments, exclusive of the excess of its net long-term capital gain
over its net short-term capital loss) for each taxable year. This distribution
will be subject to shareholders as ordinary income. The Fund will be subject to
Federal income tax on any undistributed investment
21
<PAGE>
company taxable income. Expenses paid or incurred by the Fund will be allocated
between tax-exempt and taxable income in the same proportion as the amount of
the Fund's tax-exempt income bears to the total of such exempt income and its
gross income (excluding from gross income the excess of capital gains over
capital losses). If the Fund does not distribute at least 98% of its ordinary
income and 98% of its capital gain net income for a taxable year, the Fund will
be subject to a nondeductible 4% excise tax on the excess of such amounts over
the amounts actually distributed.
If a shareholder (other than a corporation) fails to provide the Fund with a
current taxpayer identification number, the Fund generally is required to
withhold 31% of taxable interest, dividend payments, and proceeds from the
redemption of shares of the Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund.
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner of an interest in the underlying Municipal
Obligations and that the interest thereon will be exempt from regular Federal
income taxes to the Fund and its shareholders to the same extent as interest on
the underlying Municipal Obligations. Counsel has pointed out that the Internal
Revenue Service has announced that it will not ordinarily issue advance rulings
on the question of ownership of securities or participation interests therein
subject to a put and, as a result, the Internal Revenue Service could reach a
conclusion different from that reached by counsel.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry tax-exempt bonds is not deductible by most taxpayers.
Therefore, a certain portion of interest on indebtedness incurred, or continued,
to purchase or carry securities, including margin interest, may not be
deductible during the period an investor holds shares of the Fund.
In South Carolina v. Baker, the United States Supreme Court held that the
Federal government may constitutionally require states to register bonds they
issue and may subject the interest on such bonds to Federal tax if not
registered, and that there is no constitutional prohibition against the Federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the Federal government to
regulate and control bonds such as Municipal Obligations and to tax such bonds
in the future. The decision does not, however, affect the current exemption from
regular income taxation of the interest earned on the Municipal Obligations in
accordance with Section 103 of the Code.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would reevaluate its investment objective and policies and consider
changes in the structure.
The exemption for Federal income tax purposes of exempt-interest dividends does
not necessarily result in an exemption under the income or other tax laws of any
state or local taxing authority. Shareholders of the Fund may be exempt from
state and local taxes on distributions of tax-exempt interest income derived
from obligations of the state and/or municipalities of the state in which they
may reside but may be subject to tax on income derived from obligations of other
jurisdictions. Shareholders are advised to consult with their tax advisers
concerning the application of state and local taxes to investments in the Fund
which may differ from the Federal income tax consequences described above.
FLORIDA TAXES
The following is based upon the advice of Gunster, Yoakley, Valdes-Fauli &
Stewart, PA., special Florida counsel to the Fund.
The Fund will not be subject to income, franchise or other taxes of a similar
nature imposed by the State of Florida or its subdivisions, agencies or
instrumentalities. Florida does not currently impose an income tax on
individuals. Thus, individual shareholders of the Fund will not be subject to
any Florida state income tax on distributions received from the Fund. However,
certain distributions will be taxable to corporate shareholders which are
subject to Florida corporate income tax. Florida currently imposes an
"intangibles tax" at the annual rate of 0.15% on certain securities and other
intangible assets owned by Florida residents. Bonds (including Participation
Certificates) issued by the State of Florida or its subdivisions ("Florida
Securities"), as well as bonds issued by the government of the United States or
the governments of certain U.S. territories and possessions, including Guam and
Puerto Rico (collectively, "Federal Securities"), are exempt from the Florida
intangibles tax. If,
22
<PAGE>
on December 31 of any year, the Fund's portfolio consists solely of Florida and
Federal Securities, the Fund's shares will be exempt from the Florida
intangibles tax. If, however, the Fund's December 31 portfolio includes any
nonexempt securities, then the Fund shares owned by Florida residents may be
subject to the Florida intangibles tax to the extent the Fund's portfolio
includes securities other than Federal Securities. The Fund itself will not be
subject to the Florida intangibles tax.
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. In the opinion of the Manager,
however, based on the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Trustees will
consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution would result in loss to shareholders or change
in the Fund's net asset value. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the SEC. Under that method, the Fund's yield figure,
which is based on a chosen seven-day period, is computed as follows: the Fund's
return for the seven-day period is obtained by dividing the net change in the
value of a hypothetical account having a balance of one share at the beginning
of the period by the value of such account at the beginning of the period
(expected to always be $1.00). This is multiplied by (365/7) with the resulting
annualized figure carried to the nearest hundredth of one percent. For purposes
of the foregoing computation, the determination of the net change in account
value during the seven-day period reflects (i) dividends declared on the
original share and on any additional shares, including the value of any
additional shares purchased with dividends paid on the original share, and (ii)
fees charged to all shareholder accounts. Realized capital gains or losses and
unrealized appreciation or depreciation of the Fund's portfolio securities are
not included in the computation. Therefore, annualized yields may be different
from effective yields quoted for the same period.
The Fund's "effective yield" for each Class is obtained by adjusting its
"current yield" to give effect to the compounding nature of the Fund's
portfolio, as follows: the unannualized base period return is compounded and
brought out to the nearest one hundredth of one percent by adding one to the
base period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, i.e., effective yield = [(base period return +
1)365/7] - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent current yield. The
tax equivalent yield for each Class is computed based upon a 30-day (or one
month) period ended on the date of the most recent balance sheet included in
this Statement of Additional Information. It is computed by dividing that
portion of the yield of the Fund (as computed pursuant to the formulae
previously discussed) which is tax exempt by one minus a stated income tax rate
and adding the quotient to that portion, if any, of the yield of the Fund that
is not tax exempt. The tax equivalent yield for the Fund may also fluctuate
daily and does not provide a basis for determining future yields.
The Fund may from time to time advertise a tax equivalent effective yield table
which shows the yield that an investor needs to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt. See "Taxable Equivalent
Yield Table" herein.
23
<PAGE>
The Fund's Class A shares' yield for the seven day period ended November 30,
1999 was 2.93% which is equivalent to an effective yield of 2.97%. The Fund's
Class B shares' yield for the seven day period ended November 30, 1999 was 3.22%
which is equivalent to an effective yield of 3.27%.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended August
31, 1999 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.
24
<PAGE>
DESCRIPTION OF RATINGS*
Description of Moody's Investors Service, Inc.'s Two Highest Municipal Bond
Ratings:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. ( ... ) Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used are as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Description of Moody's Investors Service, Inc.'s Two Highest Commercial Paper
Ratings:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
-----------------------------------------
* As described by the rating agencies.
25
<PAGE>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
(Based on Estimated Tax Rates Effective Until December 31, 2000)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1. If Your Taxable Income Bracket is . . .
--------------------------------------------------------------------------------------------------------------------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
Corporate 50,001- 75,001- 100,001- 335,001- 10,000,001- 15,000,001- 18,333,334-
75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 and over
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
--------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
--------------------------------------------------------------------------------------------------------------------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
Federal
Tax Rate 25.00% 34.00% 39.00% 34.00% 35.0% 38.0% 35.0%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
State
Tax Rate 5.50% 5.50% 5.50% 7.25% 5.50% 5.50% 5.50%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
Combined
Marginal
Tax Rate 29.13% 37.63% 42.36% 37.63% 38.58% 41.41% 38.58%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
--------------------------------------------------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
--------------------------------------------------------------------------------------------------------------------------
----------------- --------------------------------------------------------------------------------------------------------
Tax
Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
----------------- --------------------------------------------------------------------------------------------------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
2.00% 2.82% 3.21% 3.47% 3.21% 3.26% 3.41% 3.26%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
2.50% 3.53% 4.01% 4.34% 4.01% 4.07% 4.27% 4.07%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
3.00% 4.23% 4.81% 5.20% 4.81% 4.88% 5.12% 4.88%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
3.50% 4.94% 5.61% 6.07% 5.61% 5.70% 5.97% 5.70%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
4.00% 5.64% 6.41% 6.94% 6.41% 6.51% 6.83% 6.51%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
4.50% 6.35% 7.22% 7.81% 7.22% 7.33% 7.68% 7.33%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
5.00% 7.05% 8.02% 8.67% 8.02% 8.14% 8.53% 8.14%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
5.50% 7.76% 8.82% 9.54% 8.82% 8.95% 9.39% 8.95%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
6.00% 8.47% 9.62% 10.41% 9.77% 9.77% 10.24% 9.77%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
6.50% 9.17% 10.42% 11.28% 10.58% 10.58% 11.09% 10.58%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
7.00% 9.88% 11.22% 12.14% 11.40% 11.40% 11.95% 11.40%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, to section three, to see the equivalent taxable yields
for each of the tax free income yields given.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
INDIVIDUAL TAXABLE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective Until December 31, 2000)
------------------ ------------- -------------- --------------- -------------- ------------------
Single $0- $26,251- $63,551- $132,601- $288,351
Return 26,250 63,550 132,600 288,350 and over
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
Joint $0- $43,851- $105,951- $161,451- $288,351
Return 43,850 105,950 161,450 288,350 and over
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
Federal 15.00% 28.00% 31.00% 36.00% 39.60%
Tax Bracket
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
State 7.00% 7.0% 7.75% 7.75% 7.75%
Tax Bracket
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
Combined 20.95% 33.04% 36.35% 36.65% 40.96%
Tax Bracket
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------------------------------------------------------------------------
Tax
Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
------------------ ------------------------------------------------------------------------------
------------------ ------------- -------------- --------------- -------------- ------------------
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
------------------ ------------- -------------- --------------- -------------- ------------------
------------------ ------------- -------------- --------------- -------------- ------------------
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
------------------ ------------- -------------- --------------- -------------- ------------------
</TABLE>
To use this chart, find the applicable level of taxable income based on your
tax filing status in section one. Then read down to section two to determine
your combined tax bracket and, to in section three, to see the equivalent
taxable yields for each of the tax free income yields given.
27
