497(c)
33-90538
As filed with the Securities and Exchange Commission on November 5, 1997
Registration No. 33-90538
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VIRGINIA 600 FIFTH AVENUE
DAILY MUNICIPAL NEW YORK, NY 10020
INCOME FUND, INC. (212) 830-5220
===============================================================================
PROSPECTUS
November 7, 1997
Virginia Daily Municipal Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that is a short-term, tax-exempt, money
market fund whose investment objectives are to seek as high a level of current
income exempt from Federal income taxes, and to the extent possible, from
Virginia income taxes, as is believed to be consistent with preservation of
capital, maintenance of liquidity and stability of principal. The Fund offers
two classes of shares to the general public. The Class A shares of the Fund are
subject to a service fee pursuant to the Fund's Rule 12b-1 Distribution and
Service Plan and are sold through financial intermediaries who provide servicing
to Class A shareholders for which they receive compensation from the Manager and
the Distributor. The Class B shares of the Fund are not subject to a service fee
and either are sold directly to the public or are sold through financial
intermediaries that do not receive compensation from the Manager or Distributor.
In all other respects, the Class A and Class B shares represent the same
interests in the income and assets of the Fund. See "Description of Common
Stock". The Fund is concentrated in the securities issued by Virginia or
entities within Virginia and the Fund may invest a significant percentage of its
assets in a single issuer; therefore, any investment in the Fund may be riskier
than an investment in other types of Money Market Funds. No assurance can be
given that those objectives will be achieved.
This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions.
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC") and is available upon request and without charge
by calling or writing the Fund at the above address. The Statement of Additional
Information bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety. The SEC maintains a website
(http.//www.sec.gov) that contains the Statement of Additional Information and
other reports and information regarding the Fund which have been filed
electronically with the SEC.
Reich & Tang Asset Management L.P. acts as Manager of the Fund and Reich & Tang
Distributors L.P. acts as Distributor of the Fund's shares. Reich & Tang Asset
Management L.P. is a registered investment adviser. Reich & Tang Distributors
L.P. is a registered broker-dealer and member of the National Association of
Securities Dealers, Inc.
An investment in the Fund is neither insured nor guaranteed by the United States
Government. The Fund intends to maintain a stable net asset value of $1.00 per
share although there can be no assurance that this value will be maintained.
Shares in the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and the shares are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency.
This Prospectus should be read and retained by investors for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
261010.3
<PAGE>
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TABLE OF FEES AND EXPENSES
Annual Fund Operating Expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Class A shares Class B shares
<S> <C> <C>
Management Fees 0.40% 0.40%
12b-1 Fees 0.25% 0.00%
Other Expenses 0.21% 0.21%
Administration Fees 0.21%_________ 0.21%_________
Total Fund Operating Expenses 0.86% 0.61%
Example 1 year 3 years
- ------- ------ -------
You would pay the following on a $1,000 investment, assuming 5% annual return
(cumulative through the end of each year):
Class A $9 $27
Class B $6 $20
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</TABLE>
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses an investor in the Fund will bear directly or
indirectly. The Manager at its discretion may voluntarily waive all or a portion
of the Management Fees and the Administration Fees with respect to both Class A
and Class B shares. The Distributor at its discretion, may voluntarily waive all
or a portion of the 12b-1 Fee. For a further discussion of these fees see
"Management of the Fund" and "Distribution and Service Plan" herein.
The figures reflected in this example should not be considered a representation
of past or future expenses. Actual expenses may be greater or lesser than those
shown above.
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261010.3
<PAGE>
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INTRODUCTION
Virginia Daily Municipal Income Fund, Inc. (the "Fund") is a non-diversified,
open-end, management investment company that is a short-term, tax-exempt money
market fund whose investment objectives are to seek as high a level of current
income exempt under current law, in the opinion of bond counsel to the issuer at
the date of issuance, from regular Federal income tax, and, to the extent
possible, from Virginia income taxes, as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal by
investing principally in short-term, high-quality debt obligations of the
Commonwealth of Virginia, Puerto Rico and other United States territories, and
their political subdivisions as described under "Investment Objectives, Policies
and Risks" herein. The Fund also may invest in municipal securities of issuers
located in states other than Virginia, the interest income on which will be, in
the opinion of bond counsel to the issuer at the date of issuance, exempt from
regular Federal income tax, but will be subject to Virginia income taxes for
Virginia residents. The Fund seeks to maintain an investment portfolio with a
dollar-weighted average maturity of 90 days or less, and to value its investment
portfolio at amortized cost and maintain a net asset value of $1.00 per share,
although there can be no assurance that this value will be maintained. The Fund
intends to invest all of its assets in tax-exempt obligations; however, it
reserves the right to invest up to 20% of its net assets in taxable obligations.
This is a summary of the Fund's fundamental investment policies which are set
forth in full under "Investment Objectives, Policies and Risks" herein and in
the Statement of Additional Information and may not be changed without approval
of a majority of the Fund's outstanding shares. Of course, no assurance can be
given that these objectives will be achieved.
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment adviser and which currently acts as
investment manager or administrator to fifteen other open-end management
investment companies. The Fund's shares are distributed through Reich & Tang
Distributors L.P. (the "Distributor"), with whom the Fund has entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund only) pursuant to the Fund's distribution and
service plan adopted under Rule 12b-1 under the Investment Company Act of 1940,
as amended (the "1940 Act"). (See "Distribution and Service Plan".)
On any day on which the New York Stock Exchange, Inc. is open for trading ("Fund
Business Day"), investors may, without charge by the Fund, purchase and redeem
shares of the Fund's common stock at their net asset value next determined after
receipt of the order. An investor's purchase order will be accepted after the
payment is converted into Federal Funds, and shares will be issued as of the
Fund's next net asset value determination which is made as of 12 noon on each
Fund Business Day. (See "How to Purchase and Redeem Shares" and "Net Asset
Value"). Dividends from accumulated net income are declared by the Fund on each
Fund Business Day.
The Fund generally pays interest dividends monthly. Net capital gains, if any,
will be distributed at least annually, and in no event later than 60 days after
the end of the Fund's fiscal year. All dividends and distributions of capital
gains are automatically invested in additional shares of the same Class of the
Fund unless a shareholder has elected by written
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-3-
261010.3
<PAGE>
- --------------------------------------------------------------------------------
notice to the Fund to receive either of such distributions in cash. (See
"Dividends and Distributions".)
The Fund intends that its investment portfolio will be concentrated in Virginia
Municipal Obligations and bank participation certificates therein. A summary of
special risk factors affecting the Commonwealth of Virginia is set forth under
"Investment Objectives, Policies and Risks" herein and "Virginia Risk Factors"
in the Statement of Additional Information. Investment in the Fund should be
made with an understanding of the risks which an investment in Virginia
Municipal Obligations may entail. Payment of interest and preservation of
capital are dependent upon the continuing ability of Virginia issuers and/or
obligors of state, municipal and public authority debt obligations to meet their
obligations thereunder. Investors should also consider the greater risk of the
Portfolio's concentration versus the safety that comes with a less concentrated
investment portfolio. The Fund's Board of Directors is authorized to divide the
unissued shares into separate series of stock, one for each of the Fund's
separate investment portfolios that may be created in the future.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Fund is a non-diversified, open-end, management investment company that is a
short-term, tax-exempt money market fund whose investment objectives are to seek
as high a level of current income exempt from regular Federal income tax and, to
the extent possible, from Virginia income taxes, as is believed to be consistent
with the preservation of capital, maintenance of liquidity and stability of
principal. There can be no assurance that the Fund will achieve its investment
objectives.
The Fund's assets will be invested primarily in high quality debt obligations
issued by or on behalf of the Commonwealth of Virginia, other states,
territories and possessions of the United States, and their authorities,
agencies, instrumentalities and political subdivisions, the interest on which
is, in the opinion of bond counsel to the issuer at the date of issuance,
currently exempt from regular Federal income taxation ("Municipal Obligations")
and in participation certificates in Municipal Obligations purchased from banks,
insurance companies or other financial institutions. Dividends paid by the Fund
which are "exempt-interest dividends" by virtue of being properly designated by
the Fund as derived from Municipal Obligations and participation certificates in
Municipal Obligations will be exempt from regular Federal income tax provided
the Fund complies with Section 852(b)(5) of Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code").
Although the Supreme Court has determined that Congress has the authority to
subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. However, "exempt-interest dividends" may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), together with securities, the interest income
on which is subject to regular Federal, state and local income tax, will not
exceed 20% of the value of the Fund's net assets. Exempt-interest dividends paid
by the Fund identified by the Fund as derived from obligations issued by or on
behalf of the Commonwealth of Virginia or any Virginia local governments, or
their instrumentalities, authorities or districts ("Virginia Municipal
- --------------------------------------------------------------------------------
-4-
261010.3
<PAGE>
- --------------------------------------------------------------------------------
Obligations") will be exempt from the Virginia Income Tax. Exempt-interest
dividends identified by the Fund as derived from obligations of Puerto Rico and
the Virgin Islands, as well as other types of obligations that Virginia is
prohibited from taxing under the Constitution, the laws of the United States of
America or the laws of the Virginia Constitution ("Territorial Municipal
Obligations") also should be exempt from the Virginia Income Tax provided the
Fund complies with Virginia law. (See "Virginia Income Taxes".) To the extent
suitable Virginia Municipal Obligations are not available for investment by the
Fund, the Fund may purchase Municipal Obligations issued by other states, their
agencies and instrumentalities, the dividends on which will be designated by the
Fund as derived from interest income which will be, in the opinion of bond
counsel to the issuer at the date of issuance, exempt from regular Federal
income tax but will be subject to the Virginia Income Tax. However, only as a
temporary defensive measure during periods of adverse market conditions as
determined by the Manager, will the Fund invest less than 65% of its total
assets in Virginia Municipal Obligations, although the exact amount of the
Fund's assets invested in such securities will vary from time to time. As a
temporary defensive measure the Fund may invest in any security that would
otherwise be permissible for inclusion in the portfolio of the Fund without
limitation. The Fund's investments may include "when-issued" Municipal
Obligations, stand-by commitments and taxable repurchase agreements. Securities,
the interest income on which is subject to regular Federal, state and local
income tax, will not exceed 20% of the value of the Fund's net assets. The Fund
will invest more than 25% of its assets in participation certificates purchased
from banks in industrial revenue bonds and other Virginia Municipal Obligations.
The investment objectives of the Fund described in the preceding paragraphs of
this section may not be changed unless approved by the holders of a majority of
the outstanding shares of the Fund that would be affected by such a change. As
used in this Prospectus, the term "majority of the outstanding shares" of the
Fund means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy or (ii) more
than 50% of the outstanding shares of the Fund.
In view of the concentration of the Fund in bank participation certificates in
Virginia Municipal Obligations, which may be secured by bank letters of credit
or guarantees, an investment in the Fund should be made with an understanding of
the characteristics of the banking industry and the risks which such an
investment may entail, which include extensive governmental regulations, changes
in the availability and cost of capital funds, and general economic conditions
(see "Variable Rate Demand Instruments and Participation Certificates" in the
Statement of Additional Information) which may limit both the amounts and types
of loans and other financial commitments which may be made and interest rates
and fees which may be charged. The profitability of this industry is largely
dependent upon the availability and cost of capital funds for the purpose of
financing lending operations under prevailing money market conditions. Also,
general economic conditions play an important part in the operations of this
industry and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its obligations
under a letter of credit. The Fund may invest 25% or more of the net assets of
the Fund in securities that are related in such a way that an economic, business
or political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state.
- --------------------------------------------------------------------------------
-5-
261010.3
<PAGE>
- --------------------------------------------------------------------------------
The Fund may only purchase Municipal Obligations that have been determined by
the Fund's Board of Directors to present minimal credit risks and that are
Eligible Securities at the time of acquisition. The term Eligible Securities
means (i) Municipal Obligations with remaining maturities of 397 days or less
and rated in the two highest short-term rating categories by any two nationally
recognized statistical rating organizations ("NRSROs") or in such categories by
the only NRSRO that has rated the Municipal Obligations (collectively, the
"Requisite NRSROs") (acquisition in the latter situation must also be ratified
by the Board of Directors); (ii) Municipal Obligations with remaining maturities
of 397 days or less but that at the time of issuance were long-term securities
(i.e., with maturities greater than 366 days) and whose issuer has received from
the Requisite NRSROs a rating with respect to comparable short-term debt in the
two highest short-term rating categories; and (iii) unrated Municipal
Obligations determined by the Fund's Board of Directors to be of comparable
quality. Where the issuer of a long-term security with a remaining maturity
which would otherwise qualify it as an Eligible Security, does not have rated
short-term debt outstanding, the long-term security is treated as unrated but
may not be purchased if it has a long-term rating from any NRSRO that is below
the two highest long-term categories. A determination of comparability by the
Board of Directors is made on the basis of its credit evaluation of the issuer,
which may include an evaluation of a letter of credit, guarantee, insurance or
other credit facility issued in support of the Municipal Obligations or
participation certificates. (See "Variable Rate Demand Instruments and
Participation Certificates" in the Statement of Additional Information.) While
there are several organizations that currently qualify as NRSROs, two examples
of NRSROs are Standard & Poor's 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 or notes and "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;
and "A-1" and "A-2" by S&P and "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 and "SP-1 AA" by S&P. Such
instruments may produce a lower yield than would be available from less highly
rated instruments. The Fund's Board of Directors has determined that obligations
which are backed by the credit of the Federal Government (the interest on which
is not exempt from Federal income taxation) will be considered to have a rating
equivalent to Moody's "Aaa."
Subsequent to its purchase by the Fund, the quality of an investment may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the security presents minimal credit risks and shall cause the
Fund to take such action as the Board of Directors 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
Directors is subsequently notified of the Manager's actions.
In addition, in the event that a security (1) is in default, (2) ceases to be an
eligible investment under Rule 2a-7 of the 1940 Act, or (3) is determined to no
longer present minimal credit risks, the Fund will dispose of the security
absent a determination by the Fund's Board of Directors that disposal of the
security would not be in the best interests of the Fund. In the event that the
security is disposed of it shall be disposed of as soon as practicable
consistent with
- --------------------------------------------------------------------------------
-6-
261010.3
<PAGE>
- --------------------------------------------------------------------------------
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.
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.
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund is subject to further investment
restrictions that are set forth in the Statement of Additional Information. The
Fund may not:
1. Borrow money. This restriction shall not apply to borrowings from banks
for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the
untimely disposition of securities, in an amount up to 15% of the value
of the Fund's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at the time
the borrowing was made. While borrowings exceed 5% of the value of the
Fund's total assets, the Fund will not make any investments. Interest
paid on borrowings will reduce net income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets and only to
secure borrowings for temporary or emergency purposes.
3. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand
feature. 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 which are held by the Fund exceed 10%
of the Fund's net assets.
4. Invest more than 25% of its assets in the securities of "issuers" in
any single industry, provided that the Fund will invest more than 25%
of its assets in bank participation certificates and there shall be no
limitation on the purchase of those Municipal Obligations and other
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities. With respect to 75% of the total
amortized cost value of the Fund's assets, not more than 5% of the
Fund's assets may be invested in securities that are subject to
underlying puts from the same institution, and no single bank shall
issue its letter of credit and no single financial institution shall
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-7-
261010.3
<PAGE>
- --------------------------------------------------------------------------------
issue a credit enhancement covering more than 5% of the total assets of
the Fund. However, if the puts are exercisable by the Fund in the event
of default on payment of principal and interest on the underlying
security, then the Fund may invest up to 10% of its assets in
securities underlying puts issued or guaranteed by the same
institution; additionally, a single bank can issue its letter of credit
or a single financial institution can issue a credit enhancement
covering up to 10% of the Fund's assets, where the puts offer the Fund
such default protection.
5. Invest in securities of other investment companies, except 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.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. However, the Fund intends to
qualify as a "regulated investment company" under Subchapter M of the Code. The
Fund will be restricted in that at the close of each quarter of the taxable
year, at least 50% of the value of its total assets must be represented by cash,
government securities, investment company securities and other securities
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. In addition, at the close of each quarter of its taxable year,
not more than 25% in value of the Fund's total assets may be invested in
securities of one issuer other than Government securities. The limitations
described in this paragraph regarding qualification as a "regulated investment
company" are not fundamental policies and may be revised to the extent
applicable Federal income tax requirements are revised. (See "Federal Income
Taxes".)
Because of the Fund's concentration in investments in Virginia Municipal
Obligations, the safety of an investment in the Fund will depend substantially
upon the financial strength of Virginia and its political subdivisions.
The primary purpose of investing in a portfolio of Virginia Municipal
Obligations is the special tax treatment accorded Virginia resident individual
investors. However, payment of interest and preservation of principal are
dependent upon the continuing ability of the Virginia issuers and/or obligors of
state, municipal and public authority debt obligations to meet their obligations
thereunder. Investors should consider the greater risk of the Fund's
concentration versus the safety that comes with a less concentrated investment
portfolio and should compare yields available on portfolios of Virginia issues
with those of more diversified portfolios, including out-of-state issues, before
making an investment decision. The Fund's management believes that by
maintaining the Fund's investment portfolio in liquid, short-term, high quality
investments, including the participation certificates and other variable rate
demand instruments that have high quality credit support from banks, insurance
companies or other financial institutions, the Fund is largely insulated from
the credit risks that may exist on long-term Virginia Municipal Obligations. A
more complete discussion of special risk factors affecting the Commonwealth of
Virginia is set forth under "Virginia Risk Factors" in the Statement of
Additional Information.
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261010.3
<PAGE>
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MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed Reich & Tang Asset Management L.P.
(the "Manager") to serve as investment manager of the Fund. The Manager provides
persons satisfactory to the Fund's Board of Directors to serve as officers of
the Fund. Such officers, as well as certain other employees and directors of the
Fund, may be directors or officers of Reich & Tang Asset Management, Inc., the
sole general partner of the Manager or employees of the Manager or its
affiliates. Due to the services performed by the Manager, the Fund currently has
no employees and its officers are not required to devote full time to the
affairs of the Fund. The Statement of Additional Information contains general
background information regarding each director and principal officer of the
Fund.
The Manager is a Delaware limited partnership with its principal office at 600
Fifth Avenue, New York, New York 10020. The Manager was at July 31, 1997,
investment manager, adviser or supervisor with respect to assets aggregating in
excess of $10.67 billion. The Manager acts as manager or administrator of
thirteen investment companies and also advises pension trusts, profit sharing
trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining 0.5% interest of the Manager. New England Investment Companies, Inc.
("NEIC"), a Massachusetts corporation, serves as the sole general partner of
NEICLP. Reich & Tang Asset Management L.P. succeeded NEICLP as the Manager of
the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns
approximately 48.5% of the outstanding limited partnership interest of NEICLP
and may be deemed a "controlling person" of the Manager. Reich & Tang, Inc. owns
approximately 16% of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $297.6 billion at
December 31, 1996. It is the second largest life insurance company in the United
States in terms of total assets. MetLife provides a wide range of insurance and
investment products and services to individuals and groups and is the leader
among United States life insurance companies in terms of total life insurance in
force, which exceeded $1.6 trillion at December 31, 1996 for MetLife and its
insurance affiliates. MetLife and its affiliates provide insurance or other
financial services to approximately 36 million people worldwide.
NEIC is a holding company offering a broad array of investment styles across a
wide range of asset categories through thirteen subsidiaries, divisions and
affiliates to institutional clients. Its business units, in addition to the
Manger, include AEW Capital Management, L.P., Back Bay
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261010.3
<PAGE>
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Advisors, L.P., Capital Growth Management, L.P., Graystone Partners, L.P.,
Harris Associates, L.P., Jurika & Voyles, L.P., Loomis, Sayles & Company, L.P.,
New England Funds, L.P., New England Investment Associates, Inc., Synder Capital
Management, Inc., Vaughan, Nelson, Scarborough & McConnell, L.P. and Westpeak
Investment Advisors, L.P. These affiliates in the aggregate are investment
advisors or managers to 80 other registered investment companies.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund. For its services under the Investment Management Contract, the Manager
receives from the Fund a fee equal to .40% per annum of the Fund's average daily
net assets (the "Management Fee") for managing the Fund's investment portfolio
and performing related services. The Manager, at its discretion, may voluntarily
waive all or a portion of the Management Fee.
Pursuant to the Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with the personnel to (i) supervise the performance
of bookkeeping and related services by Investors Fiduciary Trust Company, the
Fund's bookkeeping agent, (ii) prepare reports to and filings with regulatory
authorities and (iii) perform such other services as the Fund may from time to
time request of the Manager. The personnel rendering such services may be
employees of the Manager or its affiliates. The Manager, at its discretion, may
voluntarily waive all or a portion of the administrative services fee. For its
services under the Administrative Services Contract, the Manager receives a fee
equal to .21% per annum of the Fund's average daily net assets. Any portion of
the total fees received by the Manager may be used to provide shareholder
services and for distribution of Fund shares. (See "Distribution and Service
Plan".)
In addition, Reich & Tang Distributors L.P., the Distributor, receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Class A shares of the Fund under the Shareholder Servicing Agreement. The fees
are accrued daily and paid monthly. Investment management fees and operating
expenses, which are attributable to both Classes of shares of the Fund, will be
allocated daily to each Class of shares based on the percentage of shares
outstanding for each Class at the end of the day.
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on March 20, 1995. The authorized capital
stock of the Fund consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. The Fund currently has only one
portfolio. Except as noted below, each share when issued has equal dividend,
distribution and liquidation rights within the series for which it was issued,
and each fractional share has rights in proportion to the percentage it
represents of a whole share. Generally, all shares will be voted in the
aggregate, except if voting by Class is required by law or the matter involved
affects only one Class, in which case shares will be voted separately by class.
Shares of all series have identical voting rights,
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<PAGE>
except where, by law, certain matters must be approved by a majority of the
shares of the affected series. There are no conversion or preemptive rights in
connection with any shares of the Fund. All shares when issued in accordance
with the terms offering will be fully paid and non-assessable. Shares of the
Fund are redeemable at net asset value, at the option of the shareholders. On
October 20, 1997, the Manager purchased $100,000 of the Fund's shares at an
initial subscription price of $1.00 per share.
The Fund is subdivided into two classes of common stock, Class A and Class B.
Each share, regardless of class, will represent an interest in the same
portfolio of investments and will have identical voting, dividend, liquidation
and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that: (i) the
Class A and Class B shares will have different class designations; (ii) only the
Class A shares will be assessed a service fee of .25% of the average daily net
assets of the Class A shares of the Fund pursuant to the Rule 12b-1 Distribution
and Service Plan of the Fund; (iii) only the holders of the Class A shares would
be entitled to vote on matters pertaining to the Plan and any related agreements
in accordance with provisions of Rule 12b-1; and (iv) the exchange privilege
will permit shareholders to exchange their shares only for shares of the same
class of a Fund that participates in an exchange privilege with the Fund. (See
"Exchange Privilege") Payments that are made under the Plans will be calculated
and charged daily to the appropriate class prior to determining daily net asset
value per share and dividend/distributions.
Under its Articles of Incorporation the Fund has the right to redeem, for cash,
shares of the Fund owned by any shareholder to the extent and at such times as
the Fund's Board of Directors determines to be necessary or appropriate to
prevent any concentration of share ownership which would cause the Fund to
become a "personal holding company" for federal income tax purposes. In this
regard, the Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) on each
Fund Business Day and generally pays dividends monthly. There is no fixed
dividend rate. In computing these dividends, interest earned and expenses are
accrued daily.
Net realized capital gains, if any, are distributed at least annually and in no
event later than 60 days after the end of the Fund's fiscal year. All dividends
and distributions of capital gains are automatically invested in additional Fund
shares of the same Class immediately upon payment thereof unless a shareholder
has elected by written notice to the Fund to receive either of such
distributions in cash.
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The Class A shares will bear the service fee under the Plan. As a result, the
net income of and the dividends payable to the Class A shares will be lower than
the net income of and dividends payable to the Class B shares of the Fund.
Dividends paid to each Class of shares of the Fund will, however, be declared
and paid on the same days at the same times and, except as noted with respect to
the service fees payable under the Plan, will be determined in the same manner
and paid in the same amounts.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. Certain Participating
Organizations are compensated by the Distributor from its shareholder servicing
fee and by the Manager from its management fee for the performance of these
services. An investor who purchases shares through a Participating Organization
that receives payment from the Manager or the Distributor will become a Class A
shareholder. See "Investments Through Participating Organizations" herein.) All
other investors, and investors who have accounts with Participating
Organizations but who do not wish to invest in the Fund through their
Participating Organizations, may invest in the Fund directly as Class B
shareholders of the Fund and not receive the benefit of the servicing functions
performed by a Participating Organization. Class B shares may also be offered to
investors who purchase their shares through Participating Organizations who do
not receive compensation from the Distributor or the Manager because they may
not be legally permitted to receive such as fiduciaries. The Manager pays the
expenses incurred in the distribution of Class B shares. Participating
Organizations whose clients become Class B shareholders will not receive
compensation from the Manager or Distributor for the servicing they may provide
to their clients. (See "Direct Purchase and Redemption Procedures" herein.) The
minimum initial investment in the Fund by Participating Organizations is $1,000,
which may be satisfied by initial investments aggregating $1,000 by a
Participating Organization on behalf of customers whose initial investments are
less than $1,000. The minimum initial investment for securities brokers,
financial institutions and other industry professionals that are not
Participating Organizations is $1,000. The minimum initial investment for all
other investors is $5,000. Initial investments may be made in any amount in
excess of the applicable minimums. The minimum amount for subsequent investments
is $100 unless the investor is a client of a Participating Organization whose
clients have made aggregate subsequent investments of $100.
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent which
accepts orders for purchases and redemptions from Participating Organizations
and from investors directly.
In order to maximize earnings on its portfolio, the Fund normally has its assets
as fully invested as is practicable. Many securities in which the Fund invests
require immediate settlement in funds of Federal Reserve member banks on deposit
at a Federal Reserve Bank (commonly known as "Federal Funds"). Accordingly, the
Fund does not accept a subscription or invest an investor's payment in portfolio
securities until the payment has been converted into Federal Funds.
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Shares will be issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's order at
the net asset value next determined after receipt of the order. Shares begin
accruing income dividends on the day they are purchased. The Fund reserves the
right to reject any purchase order for its shares. Certificates for Fund shares
will not be issued to an investor.
Shares are issued as of 12 noon, New York City time, on any Fund Business Day,
as defined herein, on which an order for the shares and accompanying Federal
Funds are received by the Fund's transfer agent before 12 noon. Orders
accompanied by Federal Funds and received after 12 noon, New York City time, on
a Fund Business Day will not result in share issuance until the following Fund
Business Day. Fund shares begin accruing income on the day the shares are issued
to an investor.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. Unless other instructions are given
in proper form to the Fund's transfer agent, a check for the proceeds of a
redemption will be sent to the shareholder's address of record. If a shareholder
elects to redeem all the shares of the Fund he owns, all dividends accrued to
the date of such redemption will be paid to the shareholder along with the
proceeds of the redemption.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the New York Stock Exchange, Inc.
is closed (other than customary weekend and holiday closings) or during which
the SEC determines that trading thereon is restricted, or for any period during
which an emergency (as determined by the SEC) exists as a result of which
disposal by the Fund of its portfolio securities is not reasonably practicable
or as a result of which it is not reasonably practicable for the Fund fairly to
determine the value of its net assets, or for such other period as the SEC may
by order permit for the protection of the shareholders of the Fund.
Redemption requests received by the Fund's transfer agent before 12 noon, New
York City time, on any Fund Business Day become effective at 12 noon that day.
Shares redeemed are not entitled to participate in dividends declared on the day
a redemption becomes effective. Redemption requests received after 12 noon, New
York City time, on any Fund Business Day becomes effective on the next Fund
Business Day.
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $500.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed or the Fund may
impose a monthly service charge of $10 on such accounts. For Participant
Investor accounts, notice of a proposed mandatory redemption will be given only
to the appropriate Participating Organization, and the Participating
Organization will be responsible for notifying the Participant Investor of the
proposed mandatory redemption. During the notice period a shareholder or
Participating Organization who receives such a notice may avoid mandatory
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redemption by purchasing sufficient additional shares to increase his total net
asset value to the minimum amount and thereby avoid such mandatory redemption.
The redemption of shares may result in the investor's receipt of more or less
than he paid for his shares and, thus, in a taxable gain or loss to the
investor.
Investments Through Participating Organizations
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Distributor with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers'
accounts. Also, Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such confirmations and statements will receive them from the Fund
directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than through investment in the Fund directly. A Participant Investor should
read this Prospectus in conjunction with the materials provided by the
Participating Organization describing the procedures under which Fund shares may
be purchased and redeemed through the Participating Organization.
The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. However, it is the Fund
management's position that banks are not prohibited from acting in other
capacities for investment companies, such as providing administrative and
shareholder account maintenance services and receiving compensation from the
Manager for providing such services. However, this is an unsettled area of the
law and if a determination contrary to the Fund management's position is made by
a bank regulatory agency or court concerning shareholder servicing and
administration payments to banks from the Manager, any such payments will be
terminated and any shares registered in the banks'
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<PAGE>
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names, for their underlying customers, will be reregistered in the name of the
customers at no cost to the Fund or its shareholders. In addition, state
securities laws on this issue may differ from the interpretations of Federal law
expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law.
In the case of qualified Participating Organizations, orders received by the
Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
Direct Purchase and Redemption Procedures
The following purchase and redemption procedures apply to investors who wish to
invest in the Fund directly and not through Participating Organizations. These
investors may obtain a current prospectus and the subscription order form
necessary to open an account by telephoning the Fund at the following numbers:
Within New York State 212-830-5220
Outside New York State (toll free) 800-221-3079
All shareholders, other than certain Participant Investors, will receive from
the Fund individual confirmations of each purchase and redemption of Fund shares
(other than draft check redemptions) and a monthly statement listing the total
number of Fund shares owned as of the statement closing date, purchase and
redemptions of Fund shares during the month covered by the statement and the
dividends paid on Fund shares of each shareholder during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Certificates for Fund shares will not be issued to an investor.
Initial Purchases of Shares
Mail
Investors may send a check made payable to "Virginia Daily Municipal Income
Fund, Inc." along with a completed subscription order form to:
Virginia Daily Municipal Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
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Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non member bank may take substantially
longer to convert into Federal Funds. An investor's subscription will not be
accepted until the Fund receives Federal Funds.
Bank Wire
To purchase shares of the Fund using the wire system for transmittal of money
among banks, investors should first obtain a new account number by telephoning
the Fund at 212-830-5220 (within New York State) or at 800-221-3079 (outside New
York State) and then instruct a member commercial bank to wire money immediately
to:
Investors Fiduciary Trust Company
ABA #
DDA #
For Virginia Daily Municipal Income Fund, Inc.
Account of (Investor's Name)
Fund Account #
SS#/Tax ID#
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time, on the
same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use of Federal Funds. The
Fund does not charge investors in the Fund for its receipt of wire transfers.
Payment in the form of a "bank wire" received prior to 12 noon, New York City
time, on a Fund Business Day will be treated as a Federal Funds payment received
on that day.
Subsequent Purchases of Shares
Subsequent purchases can be made by personal delivery or by bank wire, as
indicated above or by mailing a check to:
Virginia Daily Municipal Income Fund, Inc.
Mutual Funds Group
P.O. Box 13232
Newark, New Jersey 07101-3232
There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.
Provided that the information on the subscription form on file with the Fund is
still applicable, a shareholder may reopen an account without filing a new
subscription order form at any time during the year the shareholder's account is
closed or during the following calendar year.
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Redemption of Shares
A redemption is effected immediately following, and at a price determined in
accordance with, the next determination of net asset value per share of each
Class following receipt by the Fund's transfer agent of the redemption order
(and any supporting documentation which it may require). Normally, payment for
redeemed shares is made on the same Fund Business Day after the redemption is
effected, provided the redemption request is received prior to 12 noon, New York
City time. However, redemption payments will not be effected unless the check
(including a certified or cashier's check) used for investment has been cleared
for payment by the investor's bank, currently considered by the Fund to occur up
to 15 days after investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee.
When a signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his signature and signed and guaranteed by an eligible
guarantor institution which includes a domestic bank, a domestic savings and
loan institution, a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange, pursuant to the
Fund's transfer agent's standards and procedures.
Written Requests
Shareholders may make a redemption in any amount by sending a written request to
the Fund addressed to:
Virginia Daily Municipal Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
All previously issued certificates submitted for redemption must be endorsed by
the shareholder and all written requests for redemption must be signed by the
shareholder, in each case with the signature guaranteed. Normally the redemption
proceeds are paid by check and mailed to the shareholder of record.
Checks
By making the appropriate election on their subscription form, shareholders may
request a supply of checks which may be used to effect redemptions from the
Class of shares of the Fund in which they invest. The checks, which will be
issued in the shareholder's name, are drawn on a special account maintained by
the Fund with the Fund's agent bank. Checks may be drawn in any amount of $250
or more. When a check is presented to the Fund's agent bank, it instructs the
Fund's transfer agent to redeem a sufficient number of full and fractional
shares in the shareholder's account to cover the amount of the check. The use of
a check to
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make a withdrawal enables a shareholder in the Fund to receive dividends on the
shares to be redeemed up to the Fund Business Day on which the check clears.
Checks provided by the Fund may not be certified. Fund shares purchased by check
may not be redeemed by check, until the check has cleared, which can take up to
15 days following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The Fund
reserves the right to impose a charge or impose a different minimum check amount
in the future, if the Board of Directors determines that doing so is in the best
interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures, rules
and regulations of the Fund's agent bank. Checks drawn on a jointly owned
account may, at the shareholder's election, require only one signature. Checks
in amounts exceeding the value of the shareholder's account at the time the
check is presented for payment will not be honored. Since the dollar value of
the account changes daily, the total value of the account may not be determined
in advance and the account may not be entirely redeemed by check. In addition,
the Fund reserves the right to charge the shareholder's account a fee up to $20
for checks not honored as a result of an insufficient account value, a check
deemed not negotiable because it has been held longer than six months, an
unsigned check, a post-dated check and a check written for an amount below the
Fund minimum of $250. The Fund reserves the right to terminate or modify the
check redemption procedure at any time or to impose additional fees.
Investors wishing to avail themselves of this method of redemption should elect
it on their subscription order form. Individuals and joint tenants are not
required to furnish any supporting documentation. Corporations and other
entities making this election, however, are required to furnish a certified
resolution or other evidence of authorization in accordance with the Fund's
normal practices. Appropriate authorization forms will be sent by the Fund or
its agents to corporations and other shareholders who select this option. As
soon as the authorization forms are filed in good order with the Fund's agent
bank, it will provide the shareholder with a supply of checks. This checking
service may be terminated or modified at any time.
Telephone
The Fund accepts telephone requests for redemption from shareholders who elect
this option on their subscription order form. The proceeds of a telephone
redemption may be sent to the shareholders at their addresses or, if in excess
of $1,000, to their bank accounts, both as set forth in the subscription order
form or in a subsequent written authorization. The Fund may accept telephone
redemption instructions from any person with respect to accounts of shareholders
who elect this service and thus such shareholders risk possible loss of
principal and interest in the event of a telephone redemption not authorized by
them. The Fund will employ reasonable procedures to confirm that telephone
redemption instructions are genuine, and will require that shareholders electing
such option provide a form of personal identification. The failure by the Fund
to employ such reasonable procedures may cause the Fund to be liable for the
losses incurred by investors due to telephone redemptions based upon
unauthorized or fraudulent instructions.
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A shareholder making a telephone withdrawal should call the Fund at 212-830-5220
(within New York), outside New York State at 800-221-3079, and state: (i) the
name of the shareholder appearing on the Fund's records, (ii) the shareholder's
account number with the Fund, (iii) the amount to be withdrawn, (iv) whether
such amount is to be forwarded to the shareholder's designated bank account or
address and (v) the name of the person requesting the redemption. Usually the
proceeds are sent to the designated bank account or address on the same Fund
Business Day the redemption is effected, provided the redemption request is
received before 12 noon, New York City time and on the next Fund Business Day if
the redemption request is received after 12 noon, New York City time. The Fund
reserves the right to terminate or modify the telephone redemption service in
whole or in part at any time and will notify shareholders accordingly.
Exchange Privilege
Shareholders of the Fund are entitled to exchange some or all of a Class of
shares in the Fund for shares of the same Class of certain other investment
companies which retain Reich & Tang Asset Management L.P. as investment adviser
and which participate in the exchange privilege program with the Fund. If only
one Class of shares is available in a particular exchange fund, the shareholder
of the Fund is entitled to exchange his or her shares for the shares available
in that exchange fund. Currently the exchange privilege program has been
established between the Fund and California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Florida Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc.,
New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc. and Short Term Income
Fund, Inc. In the future, the exchange privilege program may be extended to
other investment companies which retain Reich & Tang Asset Management L.P. as
investment adviser, manager or administrator. An exchange of shares in the Fund
pursuant to the exchange privilege is, in effect, a redemption of Fund shares
(at net asset value) followed by the purchase of shares of the investment
company into which the exchange is made (at net asset value) and may result in a
shareholder realizing a taxable gain or loss for Federal income tax purposes.
There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000, except that shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the investment company into
which the exchange is being made. Each Class of shares is exchanged at its
respective net asset value.
The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares may be exchanged only between the
same Class of shares of investment company accounts registered in identical
names. Before making an exchange, the investor should review the current
prospectus of the investment company into which the exchange is to be made.
Prospectuses
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<PAGE>
may be obtained by contacting the Distributor at the address or telephone number
set forth on the cover page of this Prospectus.
An exchange pursuant to the exchange privilege is treated for Federal income tax
purposes as a sale on which a shareholder may realize a taxable gain or loss.
Instructions for exchanges may be made by sending a signature guaranteed written
request to:
Virginia Daily Municipal Income Fund, Inc.
Reich & Tang Funds
600 Fifth Avenue - 8th Floor
New York, New York 10020
or, for shareholders who have elected that option, by telephoning the Fund at
212-830-5220 (within New York State) or 800-221-5079 (outside New York State).
The Fund reserves the right to reject any exchange request and may modify or
terminate the exchange privilege at any time upon written notification to the
shareholder.
Specified Amount Automatic Withdrawal Plan
Shareholders may elect to withdraw shares and receive payment from the Fund of a
specified amount of $50 or more automatically on a monthly basis in an amount
approved and confirmed by the Manager. A specified amount plan payment is made
by the Fund on the 23rd day of each month. Whenever such 23rd day of a month is
not a Fund Business Day, the payment date is the Fund Business Day preceding the
23rd day of the month. In order to make a payment, a number of shares equal in
aggregate net asset value to the payment amount are redeemed at their net asset
value on the Fund Business Day immediately preceding the date of payment. To the
extent that the redemptions to make plan payments exceed the number of shares
purchased through reinvestment of dividends and distributions, the redemptions
reduce the number of shares purchased on original investment, and may ultimately
liquidate a shareholder's investment.
The election to receive automatic withdrawal payments may be made at the time of
the original subscription by so indicating on the subscription order form. The
election may also be made, changed or terminated at any later time by the
participant. Because the withdrawal plan involves the redemption of Fund shares,
such withdrawals may constitute taxable events to the shareholder but the Fund
does not expect that there will be any realized capital gains.
DISTRIBUTION AND SERVICE PLAN
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 Directors has adopted a Distribution and Service Plan (the
"Plan") and, pursuant to the Plan, the Fund and Reich & Tang Distributors L.P.
(the "Distributor") have entered into a Distribution Agreement and a Shareholder
Servicing Agreement (with respect to the Class A shares of the Fund only).
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Reich & Tang Asset Management, Inc. serves as the sole general partner for both
Reich & Tang Distributors L.P. and Reich & Tang Asset Management L.P. and serves
as the sole limited partner of the Distributor.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any orders will not be binding on the Fund until accepted
by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives, with
respect only to the Class A shares a service fee equal to .25% per annum of the
Class A shares' average daily net assets (the "Shareholder Servicing Fee") for
providing personal shareholder services and for the maintenance of shareholder
accounts. The fee is accrued daily and paid monthly and any portion of the fee
may be deemed to be used by the Distributor for payments to Participating
Organizations with respect to their provision of such services to their clients
or customers who are shareholders of the Class A shares of the Fund. The Class B
shareholders will not receive the benefit of such services from Participating
Organizations and, therefore, will not be assessed a Shareholder Servicing Fee.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Distributor and Participating Organizations in carrying out their
obligations under the Shareholder Servicing Agreement with respect to Class A
shares and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements, for performing shareholder servicing on behalf of the Class
A shares of the Fund; (ii) to compensate certain Participating Organizations for
providing assistance in distributing the Class A shares of the Fund; and (iii)
to pay the costs of printing and distributing the Fund's prospectus to
prospective investors, and to defray the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including the salaries and/or
commissions of sales personnel in connection with the distribution of the Fund's
shares. The Distributor may also make payments from time to time from its own
resources, which may include the Shareholder Servicing Fee with respect to Class
A shares) and past profits, for the purposes enumerated in (i) above. The
Distributor will determine the amount of such payments made pursuant to the
Plan, provided that such payments will not increase the amount which the Fund is
required to pay to the Manager and Distributor for any fiscal year under either
the Investment Management Contract, the Shareholder Servicing Agreement or the
Administrative Services Contract in effect for that year.
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FEDERAL INCOME TAXES
The Fund intends to elect to qualify under the Code as a regulated investment
company that distributes "exempt-interest dividends" as defined in the Code. The
Fund's policy is to distribute as dividends each year 100% (and in no event less
than 90%) of its tax-exempt interest income, net of certain deductions, and its
investment company taxable income (if any). If distributions are made in this
manner, dividends derived from the interest earned on Municipal Obligations are
"exempt-interest dividends" and are not subject to regular Federal income tax,
although as described below, such "exempt-interest dividends" may be subject to
Federal alternative minimum tax. Dividends paid from taxable income, if any, and
distributions of any realized short-term capital gains (whether from tax-exempt
or taxable obligations) are taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares of the Fund. The Fund does not expect to realize long-term
capital gains, and thus does not contemplate distributing "capital gain
dividends" or having undistributed capital gain income within the meaning of the
Code. The Fund will inform shareholders of the amount and nature of its income
and gains in a written notice mailed to shareholders not later than 60 days
after the close of the Fund's taxable year. For Social Security recipients,
interest on tax-exempt bonds, including exempt interest dividends paid by the
Fund, is to be added to adjusted gross income for purposes of computing the
amount of Social Security benefits includible in gross income. Further,
corporations will be required to include in alternative minimum taxable income
75% of the amount by which their adjusted current earnings (including generally,
tax-exempt interest) exceeds their alternative minimum taxable income
(determined without this tax item). In addition, in certain cases Subchapter S
corporations with accumulated earnings and profits from Subchapter C years will
be subject to a tax on "passive investment income", including tax-exempt
interest. Although the Fund intends to maintain a $1.00 per share net asset
value, a shareholder may realize taxable gain or loss upon the disposition of
shares.
Interest on certain "private activity bonds" (generally, a bond issue in which
more than 10% of the proceeds are used for a non-governmental trade or business
and which meets the private security or payment test, or a bond issue which
meets the private loan financing test) issued after August 7, 1986 will
constitute an item of tax preference subject to the alternative minimum tax.
With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner thereof and that the interest on the underlying Municipal Obligations
will be exempt from regular Federal income taxes to the Fund. Counsel has
pointed out that the Internal Revenue Service has announced that it will not
ordinarily issue advance rulings on the question of the ownership of securities
or participation interests therein subject to a put and could reach a conclusion
different from that reached by counsel. (See "Federal Income Taxes" in the
Statement of Additional Information.)
In South Carolina v. Baker, the 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 the Court further held that there is no constitutional
prohibition against the Federal government's taxing the interest earned on state
- --------------------------------------------------------------------------------
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261010.3
<PAGE>
- --------------------------------------------------------------------------------
or other municipal bonds. The Supreme Court decision affirms the authority of
the Federal government to regulate and control bonds such as the Municipal
Obligations and to tax such bonds in the future. The decision does not, however,
affect the current exemption from taxation of the interest earned on the
Municipal Obligations in accordance with Section 103 of the Code.
VIRGINIA INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. However, assuming that the Fund is a regulated investment company
within the meaning of Section 851 of the Code, and has complied with certain
other requirements, exempt interest dividends received from the Fund need not be
included in Virginia taxable income by shareholders of the Fund subject to
Virginia taxation to the extent such dividends represent interest from
obligations issued by Virginia and political subdivisions of Virginia.
Exempt-interest dividends correctly identified by the Fund as derived from
obligations of Puerto Rico and the Virgin Islands as well as other types of
obligations that Virginia is prohibited from taxing under the Constitution or
the laws of the United States of America or the constitution or laws of Virginia
("Territorial Municipal Obligations") should be exempt from the Virginia Income
Taxation provided the Fund complies with the Virginia law. Exempt-Interest
dividends with respect to obligations from states other than Virginia and its
political subdivisions are required to be added to Federal taxable income in
calculating Virginia taxable income. The portion of distributions from the Fund
that represents capital gain is reportable for Virginia income tax purposes as
capital gain income and not dividend income.
Shareholders are urged to consult their tax advisers with respect to the
treatment of distributions from the Fund and ownership of shares of the Fund in
their own states and localities.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on March 20,
1995 and it is registered with the SEC as a non-diversified, open-end,
management investment company.
The Fund prepares semi-annual unaudited and annual audited reports which include
a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of revised
investment advisory contracts with respect to a particular Class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular Class or series of stock, and (d) upon the written
request of holders of shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the Act including the removal of Fund director(s) and communication among
shareholders, any registration of the Fund with the
- --------------------------------------------------------------------------------
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261010.3
<PAGE>
- --------------------------------------------------------------------------------
SEC or any state, or as the Directors may consider necessary or desirable. Each
Director serves until the next meeting of the shareholders called for the
purpose of considering the election or reelection of such Director or of a
successor to such Director, and until the election and qualification of his or
her successor, elected at such a meeting, or until such Director sooner dies,
resigns, retires or is removed by the vote of the shareholders.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement filed with the SEC,
including the exhibits thereto. The Registration Statement and the exhibits
thereto may be examined at the Commission and copies thereof may be obtained
upon payment of certain duplicating fees.
NET ASSET VALUE
The net asset value of each Class of the Fund's shares is determined as of 12
noon, New York City time, on each Fund Business Day. Fund Business Day means
weekdays (Monday through Friday) except customary business holidays and Good
Friday. 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, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated.
Although the amortized cost method provides certainty in valuation, it may
result in periods during which the value of an instrument is higher or lower
than the price an investment company would receive if the instrument were sold.
The Fund intends to maintain a stable net asset value at $1.00 per share
although there can be no assurance that this will be achieved.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105 is custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020 is transfer agent and dividend
agent for the shares of the Fund. The Fund's custodian and transfer agent do not
assist in, and are not responsible for, investment decisions involving assets of
the Fund.
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261010.3
<PAGE>
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<TABLE>
<S> <C>
TABLE OF CONTENTS VIRGINIA
DAILY
TABLE OF FEES AND EXPENSES...............................2 MUNICIPAL
INTRODUCTION.............................................5 INCOME
INVESTMENT OBJECTIVES, POLICIES FUND, INC.
AND RISKS............................................4
MANAGEMENT OF THE FUND...................................9
DESCRIPTION OF COMMON STOCK............................ 11 PROSPECTUS
DIVIDENDS AND DISTRIBUTIONS.............................12 November 7, 1997
HOW TO PURCHASE AND REDEEM
SHARES..............................................12
Investments Through Participating
Organizations.....................................14
Direct Purchase and Redemption
Procedures........................................15
Initial Purchases of Shares.........................16
Mail................................................16
Bank Wire...........................................16
Subsequent Purchases of Shares......................17
Redemption of Shares................................17
Written Requests....................................17
Checks..............................................18
Telephone...........................................19
Exchange Privilege..................................19
Specified Amount Automatic
Withdrawal Plan...................................20
DISTRIBUTION AND SERVICE PLAN...........................21
FEDERAL INCOME TAXES....................................22
VIRGINIA INCOME TAXES...................................23
GENERAL INFORMATION.....................................24
NET ASSET VALUE.........................................24
CUSTODIAN AND TRANSFER AGENT............................25
</TABLE>
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261010.3
<PAGE>
- -------------------------------------------------------------------------------
VIRGINIA
DAILY MUNICIPAL
INCOME FUND, INC. 600 Fifth Avenue
New York, NY 10020
(212) 830-5220
===============================================================================
STATEMENT OF ADDITIONAL INFORMATION
November 7, 1997
This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of Virginia Daily Municipal Income Fund, Inc. (the "Fund"), dated November 7,
1997 and should be read in conjunction with the Prospectus. The Fund's
Prospectus may be obtained from any Participating Organization or by writing or
calling the Fund. This Statement of Additional Information is incorporated by
reference into the Prospectus in its entirety.
Table of Contents
Investment Objectives, Policies and Risks...2 Manager.......................21
Description of Municipal Obligations........4 Expense Limitation........23
Variable Rate Demand Instruments Management of the Fund........24
and Participation Certificates........8 Compensation Table........27
When-Issued Securities.................10 Counsel and Auditors......27
Stand-by Commitments...................11 Distribution and Service Plan.27
Taxable Securities.........................13 Description of Common Stock...29
Repurchase Agreements..................13 Federal Income Taxes..........30
Virginia Risk Factors......................14 Virginia Income Taxes.........33
Investment Restrictions....................16 Custodian and Transfer Agent..33
Portfolio Transactions.....................18 Description of Ratings........33
How to Purchase and Redeem Shares..........19 Tax Equivalent Yield Tables...36
Net Asset Value............................19 Independent Auditor's Report..37
Yield Quotations...........................20 Financial Statements..........38
261012.3
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is a non-diversified, open-end, management
investment company that is a short-term, tax-exempt money market fund. The
Fund's investment objectives are to seek as high a level of current income,
exempt from regular Federal tax and, to the extent possible, Virginia income
taxes (the "Virginia Income Tax"), as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal. No
assurance can be given that these objectives will be achieved. The following
discussion expands upon the description of the Fund's investment objectives and
policies in the Prospectus.
The Fund's assets will be invested primarily in high quality debt obligations
issued by or on behalf of the Commonwealth of Virginia, other states,
territories and possessions of the United States and their authorities,
agencies, instrumentalities and political subdivisions, the interest on which
is, in the opinion of bond counsel to the issuer at the date of issuance,
currently exempt from regular Federal income taxation "Municipal Obligations")
and in participation certificates (which, in the opinion of Battle Fowler LLP,
counsel to the Fund, cause the Fund to be treated as the owner of the underlying
Municipal Obligations for Federal income tax purposes) in Municipal Obligations
purchased from banks, insurance companies or other financial institutions.
Dividends paid by the Fund which are "exempt-interest dividends" by virtue of
being properly designated by the Fund as derived from Municipal Obligations and
participation certificates in Municipal Obligations will be exempt from regular
Federal income tax provided the Fund complies with Section 852(b)(5) of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
However, "exempt-interest dividends" may be subject to the Federal alternative
minimum tax. Although the Supreme Court has determined that Congress has the
authority to subject the interest on bonds such as the Municipal Obligations to
Federal income taxation, existing law excludes such interest from regular
Federal income tax. Securities, the interest income on which may be subject to
the Federal alternative minimum tax (including participation certificates in
such securities), may be purchased by the Fund without limit. Securities, the
interest income on which is subject to regular Federal, state and local income
tax, will not exceed 20% of the value of the Fund's net assets. (See "Federal
Income Taxes".) Exempt-interest dividends paid by the Fund that are correctly
identified by the Fund as derived from obligations issued by or on behalf of the
Commonwealth of Virginia or any Virginia local governments, or their
instrumentalities, authorities or districts ("Virginia Municipal Obligations")
will be exempt from the Virginia Income Tax. Exempt-interest dividends correctly
identified by the Fund as derived from obligations of Puerto Rico and the Virgin
Islands, as well as any other types of obligations that Virginia is prohibited
from taxing under the Constitution, the laws of the United States of America or
the Virginia Constitution ("Territorial Municipal Obligations"), also should be
exempt from Virginia Income Tax provided the Fund complies with Virginia laws.
(See "Virginia Income Taxes".) To the extent that suitable Virginia Municipal
Obligations are not available for investment by the Fund, the Fund may purchase
Municipal Obligations issued by other states, their agencies and
instrumentalities, the dividends on which will be designated by the Fund as
derived from interest income which will be, in the opinion of bond counsel to
the issuer at the date of issuance, exempt from regular Federal income tax but
will be subject to the Virginia Income Tax. Except as a temporary defensive
measure during periods of adverse
-2-
261012.3
<PAGE>
market conditions as determined by the Manager, the Fund will invest at least
65% of its assets in Virginia Municipal Obligations, although the exact amount
of the Fund's assets invested in such securities will vary from time to time.
The Fund seeks to maintain an investment portfolio with a dollar-weighted
average maturity of 90 days or less and to value its investment portfolio at
amortized cost and maintain a net asset value of $1.00 per share of each Class.
There can be no assurance that this value will be maintained.
The Fund may hold uninvested cash reserves pending investment. The Fund's
investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in participation
certificates in Municipal Obligations, the Fund reserves the right to invest up
to 20% of the value of its net assets in securities, the interest income on
which is subject to regular Federal, state and local income tax. The Fund will
invest more than 25% of its assets in participation certificates purchased from
banks in industrial revenue bonds and other Virginia Municipal Obligations. In
view of this concentration in bank participation certificates in Virginia
Municipal Obligations, an investment in Fund shares should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail. (See "Variable Rate Demand Instruments and
Participation Certificates" herein.) The investment objectives of the Fund
described in the preceding paragraphs of this section may not be changed unless
approved by the holders of a majority of the outstanding shares of the Fund that
would be affected by such a change. As used herein, the term "majority of the
outstanding shares" of the Fund means, respectively, the vote of the lesser of
(i) 67% or more of the shares of the Fund present at a meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding shares of the
Fund.
The Fund may only purchase Municipal Obligations and participation certificates
in Municipal Obligations that have been determined by the Fund's Board of
Directors to present minimal credit risks and that are Eligible Securities at
the time of acquisition. The term Eligible Securities means (i) Municipal
Obligations with remaining maturities of 397 days or less and rated in the two
highest short-term rating categories by any two nationally recognized
statistical rating organizations ("NRSROs") or in such categories by the only
NRSRO that has rated the Municipal Obligations (collectively, the "Requisite
NRSROs") (acquisition in the latter situation must also be ratified by the Board
of Directors); (ii) Municipal Obligations with remaining maturities of 397 days
or less but that at the time of issuance were long-term securities (i.e., with
maturities greater than 366 days) and whose issuer has received from the
Requisite NRSROs a rating with respect to comparable short-term debt in the two
highest short-term rating categories and (iii) unrated Municipal Obligations
determined by the Fund's Board of Directors to be of comparable quality. Where
the issuer of a long-term security with a remaining maturity which would
otherwise qualify it as an Eligible Security does not have rated short-term debt
outstanding, the long-term security is treated as unrated but may not be
purchased if it has a long-term rating from any NRSRO that is below the two
highest long-term categories. A determination of comparability by the Board of
Directors is made on the basis of its credit evaluation of the issuer, which may
include an evaluation of a letter of credit, guarantee, insurance or other
credit facility issued in support of the Municipal Obligations or
-3-
261012.3
<PAGE>
participation certificates. (See "Variable Rate Demand Instruments and
Participation Certificates" herein). While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's 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 or notes and "Aaa" and "Aa" by
Moody's in the case of bonds; "SP-1" or "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 and "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 and "SP-1 AA"
by S&P. Such instruments may produce a lower yield than would be available from
less highly rated instruments. The Fund's Board of Directors has determined that
Municipal Obligations which are backed by the credit of the Federal Government
(the interest on which is not exempt from Federal income taxation) will be
considered to have a rating equivalent to Moody's "Aaa". (See "Description of
Ratings" herein.)
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the Investment Company Act of 1940 (the "1940 Act")
with respect to investing its assets in one or relatively few issuers. This
non-diversification may present greater risks than in the case of a diversified
company. However, the Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. The Fund will be
restricted in that at the close of each quarter of the taxable year, at least
50% of the value of its total assets must be represented by cash, government
securities, investment company securities and other securities limited in
respect of any one issuer to not more than 5% in value of the total assets of
the Fund and to not more than 10% of the outstanding voting securities of such
issuer. In addition, at the close of each quarter of its taxable year, not more
than 25% in value of the Fund's total assets may be invested in securities of
one issuer other than Government securities. The limitations described in this
paragraph regarding qualification as a "regulated investment company" are not
fundamental policies and may be revised to the extent applicable Federal income
tax requirements are revised. (See "Federal Income Taxes".)
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates".
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition.
-4-
261012.3
<PAGE>
Municipal Bonds are debt obligations of states, cities, counties,
municipalities and municipal agencies (all of which are generally referred
to as "municipalities") which generally have a maturity at the time of
issue of one year or more and which are issued to raise funds for various
public purposes such as construction of a wide range of public facilities,
to refund outstanding obligations and to obtain funds for institutions and
facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of faith, credit and taxing power for the payment of
principal and interest. Issuers of general obligation bonds include states,
counties, cities, towns and other governmental units. The principal of, and
interest on, revenue bonds are payable from the income of specific projects
or authorities and generally are not supported by the issuer's general
power to levy taxes. In some cases, revenues derived from specific taxes
are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on the IRBs is generally exempt, with certain exceptions,
from regular Federal income tax pursuant to Section 103(a) of the Code,
provided the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes".) 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 Virginia issuers.
-5-
261012.3
<PAGE>
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has
no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the appropriate legislative body
on a yearly or other periodic basis. To reduce this risk, the Fund will
only purchase Municipal Leases subject to a non-appropriation clause where
the payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit, a guarantee, insurance or other comparable
undertaking of an approved financial institution. These types of Municipal
Leases may be considered illiquid and subject to the 10% limitation of
investments in illiquid securities set forth under "Investment
Restrictions" contained herein. The Board of Directors 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. The
Fund has no intention to invest in Municipal Leases in the foreseeable
future and will amend this Statement of Additional Information in the event
that such an intention should develop in the future.
5. Any other Federal tax-exempt, and to the extent possible, Virginia Income
tax-exempt obligations issued by or on behalf of states and municipal
governments and their authorities, agencies, instrumentalities and
political subdivisions, whose
-6-
261012.3
<PAGE>
inclusion in the Fund would be consistent with the Fund's "Investment
Objectives, Policies and Risks" and permissible under Rule 2a-7 under the
1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines in
the best interest of the Fund and its shareholders. However, reassessment is not
required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Directors that disposal
of the Municipal Obligation would not be in the best interests of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain obligations issued by
instrumentalities of the United States Government are not backed by the full
faith and credit of the United States Treasury but only by the creditworthiness
of the instrumentality. The Fund's Board of Directors has determined that any
obligation that depends directly, or indirectly through a government insurance
program or other guarantee, on the full faith and credit of the United States
Government will be considered to have a rating in the highest category. Where
necessary to ensure that the Municipal Obligations are Eligible Securities or
where the obligations are not freely transferable, the Fund will require that
the obligation to pay the principal and accrued interest be backed by an
unconditional irrevocable bank letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial institution that would qualify
the investment as an Eligible Security.
-7-
261012.3
<PAGE>
Variable Rate Demand Instruments
and Participation Certificates
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
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. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may only purchase variable rate demand instruments only if (i) the 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, (ii) the instrument is an Eligible Security, or (iii) 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 Directors. The Fund's Board of
Directors may determine that an unrated variable rate demand instrument meets
the Fund's high quality criteria if it is backed by a letter of credit or
guarantee or is insured by an insurer that meets the quality criteria for the
Fund stated herein or on the basis of a credit evaluation of the underlying
obligor. If an instrument is ever not deemed to be an Eligible Security, the
Fund either will sell it in the market or exercise the demand feature.
The variable rate demand instruments that the Fund may invest in include
participation certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. The Fund will not purchase participation certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
counsel that the Fund will be treated as the owner thereof for Federal income
tax purposes. A participation certificate gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest
- --------
* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of a particular
bank may differ from other banks and will be the rate announced by each
bank on a particular day. Changes in the prime rate may occur with great
frequency and generally become effective on the date announced.
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<PAGE>
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
Directors of the Fund has determined meets the prescribed quality standards for
the Fund. The Fund has the right to sell the participation certificate back to
the institution and, where applicable, draw on the letter of credit or insurance
after no more than 30 days notice either at any time or at specified intervals
not exceeding 397 days (depending on the terms of the participation), for all or
any part of the full principal amount of the Fund's participation interest in
the security plus accrued interest. The Fund intends to exercise the demand only
(1) upon a default under the terms of the bond documents, (2) as needed to
provide liquidity to the Fund in order to make redemptions of Fund shares or (3)
to maintain a high quality investment portfolio. The institutions issuing the
participation certificates will retain a service and letter of credit fee (where
applicable) and a fee for providing the demand repurchase feature, in an amount
equal to the excess of the interest paid on the instruments over the negotiated
yield at which the participations were purchased by the Fund. The total fees
generally range from 5% to 15% of the applicable prime rate or other interest
rate index. With respect to insurance, the Fund will attempt to have the issuer
of the participation certificate bear the cost of the insurance, although the
Fund retains the option to purchase insurance if necessary, in which case the
cost of insurance will be an expense of the Fund subject to the expense
limitation (see "Expense Limitation" herein). The Manager has been instructed by
the Fund's Board of Directors to continually monitor the pricing, quality and
liquidity of the variable rate demand instruments held by the Fund, including
the participation certificates, on the basis of published financial information
and reports of the rating agencies and other bank analytical services to which
the Fund may subscribe. Although these instruments may be sold by the Fund, the
Fund intends to hold them until maturity, except under the circumstances stated
above. (See "Federal Income Taxes".)
In view of the concentration of the Fund in bank participation certificates in
Virginia Municipal Obligations, which may be secured by bank letters of credit
or guarantees, an investment in the Fund should be made with an understanding of
the characteristics of the banking industry and the risks which such an
investment may entail. Banks are subject to extensive governmental regulations
which may limit both the amounts and types of loans and other financial
commitments which may be made and interest rates and fees which may be charged.
The profitability of this industry is largely dependent upon the availability
and cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations under a letter of credit. The Fund may invest
25% or more of the net assets of any portfolio in securities that are related in
such a way that an economic, business or political development or change
affecting one of the securities would also affect the other securities
including, for
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<PAGE>
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,
limit the degree to which interest on such variable rate demand instruments may
fluctuate; to the extent it does, increases or decreases in value may be
somewhat greater than would be the case without such limits. Additionally, the
portfolio may contain variable rate demand participation certificates in fixed
rate Municipal Obligations. The fixed rate of interest on these Municipal
Obligations will be a ceiling on the variable rate of the participation
certificate. In the event that interest rates increase so that the variable rate
exceeds the fixed rate on the Municipal Obligations, the Municipal Obligations
could no longer be valued at par and may cause the Fund to take corrective
action, including the elimination of the instruments from the portfolio. Because
the adjustment of interest rates on the variable rate demand instruments is made
in relation to movements of the applicable banks' "prime rates", or other
interest rate adjustment index, the variable rate demand instruments are not
comparable to long-term fixed rate securities. Accordingly, interest rates on
the variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates increase, the Fund's
yield will increase and its shareholders will have reduced risk of capital
depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (1) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment. The maturity of a variable rate demand instrument will be determined
in the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. If a variable rate demand instrument ceases to be an
Eligible Security it will be sold in the market or through exercise of the
repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make
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<PAGE>
commitments to purchase when-issued Municipal Obligations with the intention of
actually acquiring them, the Fund may sell these securities before the
settlement date if deemed advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way, that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by the Fund with respect to a particular
Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (2) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
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<PAGE>
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects that stand-by commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio would not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after each stand-by
commitment was acquired.
The Fund would enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not meet the
eligibility criteria, only where the issuer of the stand-by commitment has
received a rating which meets the eligibility criteria or, if not rated,
presents a minimal risk of default as determined by the Board of Directors. The
Fund's reliance upon the credit of these banks and broker-dealers would be
supported by the value of the underlying Municipal Obligations held by the Fund
that were subject to the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from regular Federal
income taxes while preserving the necessary liquidity to purchase securities on
a when-issued basis, to meet unusually large redemptions and to purchase at a
later date securities other than those subject to the stand-by commitment. The
acquisition of a stand-by commitment would not affect the valuation or assumed
maturity of the underlying Municipal Obligations which will continue to be
valued in accordance with the amortized cost method. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value. In
those cases in which the Fund paid directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment is held by the Fund. Stand-by commitments
would not affect the dollar-weighted average maturity of the Fund's portfolio.
The maturity of a security subject to a stand-by commitment is longer than the
stand-by repurchase date.
The stand-by commitments that the Fund may enter into are subject to certain
risks, which include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes"
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<PAGE>
herein). In the absence of a favorable tax ruling or opinion of counsel, the
Fund will not engage in the purchase of securities subject to stand-by
commitments.
TAXABLE SECURITIES
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its net
assets in securities of the kind described below, the interest income on which
is subject to Federal income tax, under any one or more of the following
circumstances: (a) pending investment of proceeds of sales of Fund shares or of
portfolio securities, (b) pending settlement of purchases of portfolio
securities and (c) to maintain liquidity for the purpose of meeting anticipated
redemptions. In addition, the Fund may temporarily invest more than 20% in such
taxable securities when, in the opinion of the Manager, it is advisable to do so
because of adverse market conditions affecting the market for Municipal
Obligations. The kinds of taxable securities in which the Fund may invest are
limited to the following short-term, fixed-income securities (maturing in 397
days or less from the time of purchase): (1) obligations of the United States
Government or its agencies, instrumentalities or authorities; (2) commercial
paper meeting the definition of Eligible Securities at the time of acquisition;
(3) certificates of deposit of domestic banks with assets of $1 billion or more;
and (4) repurchase agreements with respect to any Municipal Obligations or other
securities which the Fund is permitted to own. (See "Federal Income Taxes". )
Repurchase Agreements
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon, and the
Fund or its custodian shall have possession of the collateral, which the Fund's
Board believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
in connection with the disposition of the collateral. The Fund's Board believes
that the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned by
the Fund. It is expected that repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by the Fund. The
Fund will not invest in a repurchase agreement maturing in more than seven days
if any such investment together with illiquid securities held by the Fund exceed
10% of the
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<PAGE>
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.
VIRGINIA RISK FACTORS
Because of the Fund's concentration in investments in Virginia Municipal
Obligations, the safety of an investment in the Fund will depend substantially
upon the financial strength of Virginia and its political subdivisions. Bonds in
the Fund may include primarily debt obligations of the subdivisions of the
Commonwealth of Virginia issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, schools, streets and water and sewer works. Other
purposes for which bonds may be issued include the obtaining of funds to lend to
public or private institutions for the construction of facilities such as
educational, hospital, housing, and solid waste disposal facilities. The latter
are generally payable from private sources which, in varying degrees, may depend
on local economic conditions, but are not necessarily affected by the ability of
the Commonwealth of Virginia and its political subdivisions to pay their debts.
Therefore, the general risk factors as to the credit of the State or its
political subdivision discussed herein may not be relevant to the Fund.
To the extent bonds of the Commonwealth of Virginia are included in the Fund,
information on the financial condition of the Commonwealth is noted. The
Constitution of Virginia limits the ability of the Commonwealth to create debt.
The Constitution requires a balanced budget. The Commonwealth has maintained a
high level of fiscal stability for many years due in large part to conservative
financial operations and diverse sources of revenue. The economy of the
Commonwealth of Virginia is based primarily on manufacturing, the government
sector (including defense), agriculture, mining and tourism. The Federal Base
Closing Commission has ordered that a number of military facilities in Virginia
be closed or reduced, as a result of recessionary conditions. In 1995 Motorola
and IBM each announced the location of major manufacturing facilities in
Virginia. The Commonwealth ended the fiscal year on June 30, 1996 with general
fund revenues exceeding budget projections by $78.1 million. The preliminary
unaudited results at the end of such fiscal year show a general fund balance of
$476.3 million. The balance grew by $125.6 million as a result of greater than
expected revenues and transfers and reduced expenditure growth.
In Davis v. Michigan (decided March 28, 1989), the United States Supreme Court
ruled unconstitutional Michigan's statute exempting from state income tax the
retirement benefits paid by the state and local governments and not exempting
retirement benefits paid by the federal government. In Harper v. Virginia
Department of Taxation (decided June 18, 1993), the United States Supreme Court
held, in a suit involving claims for refunds by Federal retirees living in
Virginia that Virginia State Income Tax Statutes violated the principles of
Davis v. Michigan, but remanded for further relief so long as the relief was
consistent with Federal due process. The Governor and the General Assembly
authorized settlement with moneys payable into a special trust fund in years
1994 through 1998. On September 15, 1995, the Supreme Court of Virginia rendered
its decision in Harper and entered final judgment in favor of the taxpayers who
had not previously settled. The total cost of the settlement (approximately
$316.2 million) and the judgment ($78.5
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<PAGE>
million) is approximately $394.7 million. Of that amount, $203.2 million ($124.5
million in respect of the settlement and the entire $78.7 million in respect of
the judgment) has been paid, leaving $191.5 million payable in respect of the
settlement -- approximately $63.2 million in the fiscal year ending June 30,
1997, $62.5 million on March 31, 1998 and, subject to appropriation, $66 million
on March 31, 1999.
The Governor proposed a plan to the General Assembly to eliminate or reduce
parole for persons convicted of violent crime. In that connection he proposed
the issuance of bonds to finance part of the cost of additional prisons that
would result from the program. The General Assembly approved part of the plan,
with bonds to be issued by the Virginia Public Building Authority or other
entities and leased to the Commonwealth.
The Commonwealth currently has a Standard & Poor's rating of AAA and a Moody's
rating of Aaa on its general obligation bonds. There can be no assurance that
the economic conditions on which these ratings are based will continue or that
particular bond issues may not be adversely affected by changes in economic or
political conditions. Further, the credit of the Commonwealth is not material to
the ability of political subdivisions and private entities to make payments on
the obligations described below.
General obligations of cities, towns and counties in Virginia are payable from
the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. The obligation to levy taxes could be enforced
by mandamus, but such a remedy may be impracticable and difficult to enforce.
Under section 15.1-227.61 of the Code of Virginia of 1950, as amended, a holder
of any general obligation bond in default may file an affidavit setting forth
such default with the Governor. If, after investigating, the Governor determines
that such default exists, he is directed to order the State Comptroller to
withhold State funds appropriated and payable to the entity and apply the amount
so withheld to unpaid principal and interest. The Commonwealth, however, has no
obligation to provide any additional funds necessary to pay such principal and
interest.
Revenue bonds issued by Virginia political subdivisions include (1) revenue
bonds payable exclusively from revenue producing governmental enterprises and
(2) industrial revenue bonds, college and hospital revenue bonds and other
"private activity bonds" which are essentially non-governmental debt issues and
which are payable exclusively by private entities such as non-profit
organizations and business concerns of all sizes. State and local governments
have no obligation to provide for payment of such private activity bonds and in
many cases would be legally prohibited from doing so. The value of such private
activity bonds may be affected by a wide variety of factors relevant to
particular localities or industries, including economic developments outside of
Virginia.
Virginia municipal securities that are lease obligations are customarily subject
to "non-appropriation" clauses which allow the municipality, or other public
entity, to terminate its lease obligations if moneys to make the lease payments
are not appropriated for that purpose. Legal principles may restrict the
enforcement of provisions in lease financing limiting the municipal issuer's
ability to utilize property similar to that leased in the event that debt
service is not appropriated.
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<PAGE>
Recent amendments to Chapter 9 of the United States Bankruptcy Code, which
applies to bankruptcies by political subdivisions, limit the filing under that
chapter to political subdivisions that have been specifically authorized to do
so under applicable state law. The Sponsors are not aware of any statute in
Virginia that gives any such authorization to political subdivisions in
Virginia. Bonds payable exclusively by private entities may be subject to the
provisions of the United States Bankruptcy Code other than Chapter 9.
Virginia municipal issuers have generally not been required to provide ongoing
information about their finances and operations to holders of their debt
obligations, although a number of cities, counties and other issuers prepare
annual reports. Virginia political subdivisions that sell bonds after July 3,
1995, will be subject to Rule 15c2-12 of the Securities and Exchange Commission
that requires continuing disclosure, including annual audited financial
statements, with respect to those obligations, unless exempted by the Rule.
Although revenue obligations of the Commonwealth or its political subdivisions
may be payable from a specific project or source, including lease rentals, there
can be no assurance that future economic difficulties and the resulting impact
on Commonwealth and local government finances will not adversely affect the
market value of the portfolio of the Fund or the ability of the respective
obligors to make timely payments of principal and interest on such obligations.
The information summarized above describes some of the more significant events
relating to the Fund. Sources of such information are the official statements of
the issuers located in the Commonwealth of Virginia, as well as other publicly
available documents and information. While the Manager has not independently
verified such information, it has no reason to believe it is not correct in all
material respects.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund may not:
1. Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's high quality criteria, as determined by
the Board of Directors and which is consistent with the Fund's objectives
and policies.
2. Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments. Interest paid on borrowings will reduce
net income.
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<PAGE>
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options, except to the extent that securities subject to a demand
obligation and stand-by commitments may be purchased as set forth under
"Investment Objectives, Policies and Risks" 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, but this
shall not prevent the Fund from investing in Municipal Obligations secured
by real estate or interests in real estate.
8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Investment Objectives,
Policies and Risks" 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, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity would be deemed to be the
sole issuer of the security. Similarly, in the case of an industrial
revenue bond, if that bond is backed only by the assets and revenues of the
non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. If, however, in either case, the creating government or
some other entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a letter of credit, such a guarantee
or letter of credit would
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<PAGE>
be considered a separate security and would be treated as an issue of such
government, other entity or bank. With respect to 75% of the total
amortized cost value of the Fund's assets, not more than 5% of the Fund's
assets may be invested in securities that are subject to underlying puts
from the same institution, and no single bank shall issue its letter of
credit and no single financial institution shall issue a credit enhancement
covering more than 5% of the total assets of the Fund. However, if the puts
are exercisable by the Fund in the event of default on payment of principal
and interest on the underlying security, then the Fund may invest up to 10%
of its assets in securities underlying puts issued or guaranteed by the
same institution; additionally, a single bank can issue its letter of
credit or a single financial institution can issue a credit enhancement
covering up to 10% of the Fund's assets, where the puts offer the Fund such
default protection.
11. Invest in securities of other investment companies, except 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.
PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. 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
-18-
261012.3
<PAGE>
orders in an effective manner at the most favorable price. No preference in
purchasing portfolio securities will be given to banks or dealers that are
Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of shares of each Class in
the Prospectus is herein incorporated by reference.
NET ASSET VALUE
The Fund does not determine net asset value per share of each Class on the
following holidays: New Year's Day, Martin Luther King's Birthday, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
The net asset value of each Class of the Fund's shares is determined as of 12
noon, New York City time, on each Fund Business Day. 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, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors 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.
-19-
261012.3
<PAGE>
The Fund's Board of Directors 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 Directors determines present minimal credit
risks, and will comply with certain reporting and record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities. (See "Investment Objectives,
Policies and Risks" herein.)
YIELD QUOTATIONS
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the Securities and Exchange Commission. Under that
method, the Fund's yield figure, which is based on a chosen seven-day period, is
computed as follows: the Fund's return for the seven-day period (which is
obtained by dividing the net change in the value of a hypothetical account
having a balance of one share at the beginning of the period by the value of
such account at the beginning of the period (expected to always be $1.00) is
multiplied by (365/7) with the resulting annualized figure carried to the
nearest one-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" 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
-20-
261012.3
<PAGE>
period of time. Investors who purchase the Fund's shares directly may realize a
higher yield than Participant Investors because they will not be subject to any
fees or charges that may be imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent yield. The tax
equivalent yield is computed based upon a 30-day (or one month) period ended on
the date of the most recent balance sheet included in this Statement of
Additional Information, computed by dividing that portion of the yield of the
Fund (as computed pursuant to the formulae previously discussed) which is tax
exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.
The Fund may from time to time advertise a taxable equivalent yield table which
shows the yield that an investor would need to receive from a taxable investment
in order to equal a tax-free yield from the Fund. (See "Taxable Equivalent Yield
Table" herein.)
MANAGER
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). The Manager was at July 31, 1997
investment manager, advisor or supervisor with respect to assets aggregating in
excess of $10.67 billion. In addition to the Fund, the Manager acts as
investment manager and administrator of thirteen investment companies and also
advises pension trusts, profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. Reich & Tang Asset Management L.P. has
succeeded NEICLP as the Manager of the Fund.
On August 30, 1996, The New England Mutual Life Insurance Company ("The New
England") and Metropolitan Life Insurance Company ("MetLife") merged, with
MetLife being the continuing company. The Manager remains an indirect
wholly-owned subsidiary of NEICLP, but Reich & Tang Asset Management, Inc., its
sole general partner, is now an indirect subsidiary of MetLife. Also, MetLife
New England Holdings, Inc., a wholly-owned subsidiary of MetLife, owns
approximately 48.5% of the outstanding limited partnership interest of NEICLP
and may be deemed a "controlling person" of the Manager. Reich & Tang, Inc. owns
approximately 16% of the outstanding partnership units of NEICLP.
MetLife is a mutual life insurance company with assets of $297.6 billion at
December 31, 1996. It is the second largest life insurance company in the United
States in terms of total assets. MetLife provides a wide range of insurance and
investment products and services to individuals and groups and is the leader
among United States life insurance companies in terms of total life insurance in
force, which exceeded $1.6 trillion at December 31, 1996
-21-
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<PAGE>
for MetLife and its insurance affiliates. MetLife and its affiliates provide
insurance or other financial services to approximately 36 million people
worldwide.
NEIC is a holding company offering a broad array of investment styles
across a wide range of asset categories through thirteen subsidiaries, divisions
and affiliates 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, L.P., Graystone Partners, L.P., Harris Associates, L.P.,
Jurika & Voyles, L.P., Loomis, Sayles & Co., L.P., New England Funds, L.P., New
England Investment Associates, Inc., Snyder Capital Management, L.P., Vaughan,
Nelson, Scarborough & McConnell L.P. and Westpeak Investment Advisors, L.P.
These affiliates in the aggregate are investment advisors or managers to 80
other registered investment companies.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund. The Manager provides persons satisfactory to the Board of Directors of
the Fund to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors or officers of NEIC,
the sole general partner of the Manager, or employees of the Manager or its
affiliates. The Investment Management Contract was approved by the Board of
Directors, including a majority of directors who are not interested persons (as
defined in the Act) of the Fund or the Manager. The Investment Management
Contract was approved by the shareholders of the Fund on October 20, 1997.
The Investment Management Contract has a term which extends to September
30,1999, and may be continued in force thereafter for successive twelve-month
periods beginning each October 1, provided that such continuance is specifically
approved annually by majority vote of the Fund's outstanding voting securities
or by its Board of Directors, and in either case by a majority of the directors
who are not parties to the Investment Management Contract or interested persons
by any such party, by votes cast in person at a meeting called for the purpose
of voting on such matter.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties thereunder.
For its services under the Investment Management Contract, the Manager receives
from the Fund a fee equal to .40% per annum of the Fund's average daily net
assets (the "Management Fee") for managing the Fund's investment portfolio and
performing related administrative and clerical services. The fees are accrued
daily and paid monthly. The Manager may waive its rights to any portion of the
Management Fee and may waive its rights to any portion of the Management Fee for
purposes of shareholder and administrative services and distribution of the
Fund's shares. Investment management fees and operating
-22-
261012.3
<PAGE>
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.
Pursuant to the Administrative Services Contract with the Fund, the Manager
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. 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. (See
"Distribution and Service Plan" herein).
Expense Limitation
The Manager has agreed to reimburse the Fund for its expenses (exclusive of
interest, taxes, brokerage, and extraordinary expenses) which in any year exceed
the limits on investment company expenses prescribed by any state in which the
Fund's shares are qualified for sale. For the purpose of this obligation to
reimburse expenses, the Fund's annual expenses are estimated and accrued daily,
and any appropriate estimated payments are made to it on a monthly basis.
Subject to the obligations of the Manager to reimburse the Fund for its excess
expenses as described above, the Fund has, under the Investment Management
Contract, confirmed its obligation for payment of all its other expenses,
including all operating expenses, taxes, brokerage fees and commissions,
commitment fees, certain insurance premiums, interest charges and expenses of
the custodian, transfer agent and dividend disbursing agent's fees,
telecommunications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the Manager
or its affiliates, costs of investor services, shareholders' reports and
corporate meetings, Securities and Exchange Commission registration fees and
expenses, state securities laws registration fees and expenses, expenses of
preparing and printing the Fund's prospectus for delivery to existing
shareholders and of printing application forms for shareholder accounts, and the
fees payable to the Manager under the Investment Management Contract.
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
-23-
261012.3
<PAGE>
herein, and the management of the Fund intends to do so whenever it appears
advantageous to the Fund. The Fund's expenses for employees and for such
services are among the expenses subject to the expense limitation described
above. As a result of the recent passage of the National Securities Markets
Improvement Act of 1996, all state expense limitations have been eliminated at
this time.
MANAGEMENT OF THE FUND
The Directors 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 the Manager.
Steven W. Duff, 43 - President of the Fund, has been President of the Mutual
Funds Division of the Manager since September 1994. Mr. Duff was formerly
Director of Mutual Fund Administration at NationsBank, with which he was
associated with from June 1981 to August 1994. Mr. Duff is President and a
Director of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc. and Short Term Income Fund, Inc., President and a
Trustee of Florida Daily Municipal Income Fund, Institutional Daily Income Fund,
and Pennsylvania Daily Municipal Income Fund, Executive Vice President of Reich
& Tang Equity Fund, Inc., and President and Chief Executive Officer of Tax
Exempt Proceeds Fund, Inc.
Dr. W. Giles Mellon, 66 - Director of the Fund, is Professor of Business
Administration in the Graduate School of Management, Rutgers University, with
which he has been associated since 1966. His address is Rutgers University
Graduate School of Management, 92 New Street, Newark, New Jersey 07102. Dr.
Mellon is also a Director of California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey
Daily Municipal Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc., and a
Trustee of Florida Daily Municipal Income Fund, Institutional Daily Income Fund,
and Pennsylvania Daily Municipal Income Fund.
Robert Straniere, 55 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere & Straniere Law Firm since 1981.
His address is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is
also a Director of California Daily Tax Free Income Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Life Cycle Mutual Funds, Inc., New Jersey Daily Municipal Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc., and a Trustee of Florida
Daily Municipal Income Fund, Institutional Daily Income Fund, and Pennsylvania
Daily Municipal Income Fund.
-24-
261012.3
<PAGE>
Dr. Yung Wong, 58 - Director of the Fund, was director of Shaw Investment
Management (UK) Limited from October 1994 to October 1995, and formerly General
Partner of Abacus Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong has been a Director of Republic Telecom Systems
Corporation (provider of telecommunications equipment) since January 1989 and of
TelWatch, Inc. (provider of network management software) since August 1989. Dr.
Wong is a Director of California Daily Tax Free Income Fund, Inc., Connecticut
Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Reich & Tang Equity Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of
Florida Daily Municipal Income Fund, Institutional Daily Income Fund,
Pennsylvania Daily Municipal Income Fund and Eclipse Financial Asset Trust.
Molly Flewharty, 46 - 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
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily Income
Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal
Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina
Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax Exempt
Proceeds Fund, Inc.
Lesley M. Jones, 48 - Vice President of the Fund, has been Senior Vice President
of the Reich & Tang Mutual Funds Division of the Manager since September 1993.
Ms. Jones was formerly Senior Vice President of Reich & Tang, Inc. with which
she was associated from April 1973 to September 1993. Ms. Jones is also a Vice
President of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Institutional Daily Income Fund, Michigan
Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund, Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund,
Inc., and Short Term Income Fund, Inc.
Dana E. Messina, 40 - 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 from December
1980 to September 1993. Ms. Messina is also Vice President of California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Florida Daily Municipal Income Fund, Institutional Daily Income Fund, Michigan
Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc.,
New York Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income
Fund,
-25-
261012.3
<PAGE>
Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc.,
Short Term Income Fund, Inc. and Tax Exempt Proceeds Fund, Inc.
Bernadette N. Finn, 49 - 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. with which she was
associated from September 1970 to September 1993. Ms. Finn is also Secretary of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Florida
Daily Municipal Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., North Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund and Tax Exempt Proceeds Fund, Inc. and Vice President and
Secretary of Delafield Fund, Inc., Institutional Daily Income Fund, Reich & Tang
Equity Fund, Inc. and Short Term Income Fund, Inc.
Richard De Sanctis, 40 - Treasurer of the Fund, has been Vice President and
Treasurer of the Manager since September 1993. Mr. De Sanctis was formerly
Controller of Reich & Tang, Inc., from January 1991 to September 1993. He is
also Treasurer of California Daily Tax Free Income Fund, Inc., Connecticut Daily
Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund,
Inc., Florida Daily Municipal Income Fund, Institutional Daily Income Fund,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income Fund, Reich &
Tang Equity Fund, Inc., Short Term Income Fund, Inc. and Tax Exempt Proceeds
Fund, Inc., and Vice President and Treasurer of Cortland Trust, Inc.
-26-
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Aggregate Pension or Retirement
Compensation from Benefits Accrued as Estimated Annual Total Compensation from
Name of Person, Registrant for Fiscal Part of Fund Benefits upon Fund and Fund Complex
Position Year Expenses Retirement Paid to Directors*
<S> <C> <C> <C> <C>
W. Giles Mellon, 2,000 0 0 $53,125 (13 Funds)
Director
Robert Straniere, 2,000 0 0 $53,125 (13 Funds)
Director
Yung Wong, 2,000 0 0 $53,125 (13 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex
for the fiscal year ending September 30, 1998 (and, with respect to
certain of the funds in the Fund Complex, estimated to be paid during the
fiscal year ending September 30, 1998). The parenthetical number represents
the number of investment companies (including the Fund) from which such
person receives compensation that are considered part of the same Fund
complex as the Fund, because, among other things, they have a common
investment advisor.
Counsel and Auditors
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Messrs. Battle Fowler LLP, 75 East 55th Street, New York, New
York 10022. Matters in connection with Virginia law are passed upon by Hunton &
Williams, 951 East Byrd Street, Richmond, Virginia 23219.
McGladrey & Pullen LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 (the "Rule") under the 1940 Act, the Securities and
Exchange Commission has required that an investment company which bears any
direct or indirect expense of distributing its shares must do so only in
accordance with a plan permitted by the Rule. The Fund's Board of Directors has
adopted a distribution and service plan (the "Plan") and, pursuant to the Plan,
the Fund has entered into a Distribution Agreement and a Shareholder Servicing
Agreement (with respect to Class A shares only) with the Reich & Tang
Distributors L.P. (the "Distributor"), as distributor of the Fund's shares.
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 payments to Partici-
pating 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
-27-
261012.3
<PAGE>
services from Participating Organizations and, therefore, will not be assessed a
Shareholder Servicing Fee.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Participating Organizations and Distributor in carrying out their
obligations under the Shareholder Servicing Agreement with respect to the Class
A shares and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from
their own resources, which may include the Management Fee, and past profits for
the following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Class A shares of the Fund; (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee with respect to Class A shares
and past profits for the purpose enumerated in (i) above. The Distributor will
determine the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager or the Distributor for any fiscal year under the Investment
Management Contract, the Administrative Services Contract or the Shareholder
Servicing Agreement in effect for that year.
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 Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the Class A shareholders or by the Board of
Directors, including a majority of directors who are not interested persons of
the Fund and who have no direct or indirect interest in the operation of the
Plan or in the agreements related to the Plan. The Board of
-28-
261012.3
<PAGE>
Directors approved the Plan on April 7, 1997 to be effective until
September 30, 1998. The Plan further provides that it may not be amended to
increase materially the costs which may be spent by the Fund for distribution
pursuant to the Plan without shareholder approval, and the other material
amendments must be approved by the directors 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 directors of the Fund or the Fund's Class A
shareholders.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on March 20,
1995 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. The Fund's Board of Directors is
authorized to divide the shares into separate series of stock, one for each of
the portfolios that may be created. Each share of any series of shares when
issued will have equal dividend, distribution and liquidation rights within the
series for which it was issued and each fractional share has those rights in
proportion to the percentage that the fractional share represents of a whole
share. Shares of all series have identical voting rights, except where, by law,
certain matters must be approved by a majority of the shares of the unaffected
series. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
nonassessable. Shares are redeemable at net asset value, at the option of the
shareholder. The Fund is subdivided into two Classes of common stock, Class A
and Class B. Each share, regardless of Class, will represent an interest in the
same portfolio of investments and will have identical voting, dividend,
liquidation and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that: (i) the
Class A and Class B shares will have different class designations; (ii) only the
Class A shares will be assessed a service fee pursuant to the Rule 12b-1
Distribution and Service Plan of the Fund of .25% of the Class A shares' average
daily net assets; (iii) only the holders of the Class A shares would be entitled
to vote on matters pertaining to the Plan and any related agreements in
accordance with provisions of Rule 12b-1; and (iv) the exchange privilege will
permit 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 that are made under the Plan will be calculated and charged
daily to the appropriate class prior to determining daily net asset value per
share and dividends/distributions.
Under its Articles of Incorporation the Fund has the right to redeem for cash
shares of stock owned by any shareholder to the extent and at such times as the
Fund's Board of Directors determines to be necessary or appropriate to prevent
an undue concentration of stock ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect
-29-
261012.3
<PAGE>
100% of the directors if the holders choose to do so, and, in that event, the
holders of the remaining shares will not be able to elect any person or persons
to the Board of Directors.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of holders of shares entitled to cast not less than twenty-five percent
of all the votes entitled to be cast at such meeting. Annual and other meetings
may be required with respect to such additional matters relating to the Fund as
may be required by the Act, including the removal of Fund director(s) and
communication among shareholders, any registration of the Fund with the
Securities and Exchange Commission or any state, or as the Directors may
consider necessary or desirable. Each Director serves until the next meeting of
the shareholders called for the purpose of considering the election or
re-election of such Director or of a successor to such Director, and until the
election and qualification of his or her successor, elected at such a meeting,
or until such Director sooner dies, resigns, retires or is removed by the vote
of the shareholders.
FEDERAL INCOME TAXES
The Fund intends to elect to qualify under the Internal Revenue Code of 1986, as
amended (the "Code"), and under Virginia law as a "regulated investment company"
that distributes "exempt-interest dividends". The Fund intends to continue to
qualify for regulated investment company status so long as such qualification is
in the best interests of its shareholders. Such qualification relieves the Fund
of liability for Federal income taxes to the extent its earnings are distributed
in accordance with the applicable provisions of the Code.
The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its tax -exempt interest income, net of certain deductions.
Exempt-interest dividends, as defined in the Code, are dividends or any part
thereof (other than capital gain dividends) paid by the Fund that are
attributable to interest on obligations, the interest on which is exempt from
regular Federal income tax, and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by the Fund during any taxable year that qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends during the year.
Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code.
However, a shareholder is advised to consult his tax advisors with respect to
whether exempt-interest dividends retain the exclusion under Section 103 of the
Code if such shareholder would be treated as a "substantial user" or "related
person" under Section 147(a) of the Code with respect to some or all of the
"private activity" bonds, if any, held by the Fund. If a shareholder receives an
exempt-interest dividend with respect to any share and such share has been held
for six months or less, then any loss on the sale or exchange of such share
-30-
261012.3
<PAGE>
will be disallowed to the extent of the amount of such exempt-interest dividend.
The Code provides that interest on indebtedness incurred, or continued, to
purchase or carry certain tax-exempt securities such as shares of the Fund is
not deductible. Therefore, among other consequences, a certain proportion of
interest on indebtedness incurred, or continued, to purchase or carry securities
on margin may not be deductible during the period an investor holds shares of
the Fund. For Social Security recipients, interest on tax exempt bonds,
including exempt-interest dividends paid by the Fund, is to be added to adjusted
gross income for purposes of computing the amount of social security benefits
includible in gross income. The amount of such interest received will have to be
disclosed on the shareholders' Federal income tax returns. Further, taxpayers
other than corporations are required to include as an item of tax preference for
purposes of the Federal alternative minimum tax all tax-exempt interest on
"private activity" bonds (generally, a bond issue in which more than 10% of the
proceeds are used in a non-governmental trade or business) (other than Section
501(c)(3) bonds) issued after August 7, 1986. Thus, this provision will apply to
the portion of the exempt-interest dividends from the Fund's assets that are
attributable to such post-August 7, 1986 private activity bonds, if any of such
bonds are acquired by the Fund. Corporations are required to increase their
alternative minimum taxable income for purposes of calculating their alternative
minimum tax liability by 75% of the amount by which the adjusted current
earnings (which will include tax-exempt interest) of the corporation exceeds the
alternative minimum taxable income (determined without this item). Further,
interest on the Municipal Obligations is includable in a 0.12% additional
corporate minimum tax imposed by the Superfund Amendments and Reauthorization
Act of 1986. In addition, in certain cases, Subchapter S corporations with
accumulated earnings and profits from Subchapter C years are subject to a
minimum tax on excess "passive investment income" which includes tax-exempt
interest.
Although it is not intended, it is possible that the Fund may realize short-term
or long-term capital gains or losses from its portfolio transactions. The Fund
may also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's shareholders. The Fund will
have no tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than 6 months, and who subsequently dispose of
those shares at a loss, will be required to treat such loss as a long-term
capital loss to the extent of the net capital gain distribution. Distributions
of net capital gain will be designated as a "capital gain dividend" in a written
notice mailed to the Fund's shareholders not later than 60 days after the close
of the Fund's taxable year. Net capital gain realized by corporations are
generally taxable at the same rates as ordinary income. Net capital gains
realized by individuals are taxable at a maximum rate of 28% if the individual
has a holding period of more than 12 months and 20% if the individual had a
holding period of more than 18 months.
-31-
261012.3
<PAGE>
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term capital loss) for each
taxable year. The Fund will be subject to Federal income tax on any
undistributed investment company taxable income. To the extent such income is
distributed it will be taxable to shareholders as ordinary income. Expenses paid
or incurred by the Fund will be allocated between tax-exempt and taxable income
in the same proportion as the amount of the Fund's tax-exempt income bears to
the total of such exempt income and its gross income (excluding from gross
income the excess of capital gains over capital losses). If the Fund does not
distribute at least 98% of its ordinary income and 98% of its capital gain net
income for a taxable year, the Fund will be subject to a nondeductible 4% excise
tax on the excess of such amounts over the amounts actually distributed.
If a shareholder fails to provide the Fund with a current taxpayer
identification number, the Fund generally is required to withhold 31% of taxable
interest, dividend payments, and proceeds from the redemption of shares of the
Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund.
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation interests therein subject to a put and, as a result, the Internal
Revenue Service could reach a conclusion different from that reached by counsel.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would reevaluate its investment objective and policies and consider
changes in the structure.
In South Carolina v. Baker, the United States Supreme Court held that the
Federal government may constitutionally require states to register bonds they
issue and may subject the interest on such bonds to Federal tax if not
registered, and that there is no constitutional prohibition against the Federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the Federal government to
regulate and control bonds such as the Municipal Obligations and to tax such
bonds in the future. The decision does not, however, affect the current
exemption regular income tax of the interest earned on the Municipal Obligations
in accordance with Section 103 of the Code.
-32-
261012.3
<PAGE>
VIRGINIA INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. However, assuming that the Fund is a regulated investment company
within the meaning of Section 851 of the Code, and has complied with certain
other requirements, exempt interest dividends received from the Fund need not be
included in Virginia taxable income by shareholders of the Fund subject to
Virginia taxation to the extent such dividends represent interest from
obligations issued by Virginia and political subdivisions of Virginia.
Exempt-interest dividends correctly identified by the Fund as derived from
obligations of Puerto Rico and the Virgin Islands, as well as other types of
obligations that Virginia is prohibited from taxing under the Constitution or
the laws of the United States of America or the constitution of laws of Virginia
("Territorial Municipal Obligations") should be exempt from the Virginia Income
Taxation provided the Fund complies with the Virginia law. Exempt-Interest
dividends with respect to obligations from states other than Virginia and its
political subdivisions are required to be added to Federal taxable income in
calculating Virginia taxable income. The portion of distributions from the Fund
that represents capital gain is reportable for Virginia income tax purposes as
capital gain income and not dividend income.
Shareholders are urged to consult their tax advisers with respect to the
treatment of distributions from the Fund and ownership of shares of the Fund in
their own states and localities.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is custodian for the Fund's cash and securities. Reich & Tang Services
L.P., 600 Fifth Avenue, New York, New York 10020, is the transfer agent and
dividend agent for shares of the Fund. The transfer agent and custodian do not
assist in, and are not responsible for, investment decisions involving assets of
the Fund.
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.
- --------
* As described by the rating agencies.
-33-
261012.3
<PAGE>
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. ( ): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc's Two Highest Ratings of State and
Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services' Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment
-34-
261012.3
<PAGE>
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.
-35-
261012.3
<PAGE>
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT YIELD TABLE
1. If Your Taxable Income Bracket Is . . .
<S> <C> <C> <C> <C> <C> <C>
Single $0- $24,651- $59,751- $124,651- $271,051
Return 24,650 59,750 124,650 271,050 and over
Joint $0- $42,201- $99,601- $151,751- $271,051
Return 41,200 99,600 151,750 271,050 and over
2. Then Your Combined Income Tax
Bracket Is . . .
Federal
Tax Bracket 15.00% 28.00% 31.00% 36.00% 39.60%
State
Tax Bracket 5.75% 5.75% 5.75% 5.75% 5.75%
Combined
Tax Bracket 19.89% * 32.14% 34.97% 39.68% 43.07%
3. Now Compare Your Tax Free Income Yields
with Taxable Income Yields
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
2.0% 2.50% 2.95% 3.08% 3.32% 3.51%
2.5% 3.12% 3.68% 3.84% 4.14% 4.39%
3.0% 3.74% 4.42% 4.61% 4.97% 5.27%
3.5% 4.37% 5.16% 5.38% 5.80% 6.15%
4.0% 4.99% 5.89% 6.15% 6.63% 7.03%
4.5% 5.62% 6.63% 6.92% 7.46% 7.90%
5.0% 6.24% 7.37% 7.69% 8.29% 8.78%
5.5% 6.87% 8.10% 8.46% 9.12% 9.66%
6.0% 7.49% 8.84% 9.23% 9.95% 10.54%
6.5% 8.11% 9.58% 10.00% 10.78% 11.42%
7.0% 8.74% 10.32% 10.76% 11.60% 12.30%
- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
- --------
* This rate is calculated using the highest Virginia state marginal tax rates
that apply to the bracket.
-36-
MCGLADREY & PULLEN, LLP
-----------------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Directors and Shareholder
Virginia Daily Municipal Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Virginia Daily Municipal Income Fund, Inc. as of October 20, 1997. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Virginia Daily Municipal
Income Fund, Inc. as of October 20, 1997, in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
New York, New York
October 21, 1997
650681.1
<PAGE>
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
October 20, 1997
ASSETS
Cash $100,000
Deferred organization expense 17,000
--------
Total Assets 117,000
LIABILITIES
Payable for deferred organization expense 17,000
NET ASSETS
Net assets applicable to 100,000 shares of common stock
outstanding, $.001 par value per share; 20,000,000,000
shares authorized $100,000
========
Net asset value, offering and redemption price per share $ 1.00
========
See Notes to Financial Statement.
650681.1
<PAGE>
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENT
Note 1. Virginia Daily Municipal Income Fund, Inc. (the "Fund") was
incorporated under the laws of the state of Maryland on March
20, 1995 and is authorized to issue 20,000,000,000 shares of
common stock, $.001 par value. The Fund is registered under
the Investment Company Act of 1940 as a non-diversified,
open-end management investment company and has had no
operations to date other than those relating to its
organization and the sale and issuance of 100,000 shares of
common stock interest to Reich & Tang Asset Management L.P.,
its Manager. The Investment Management Contract, the
Administrative Services Contract and the Shareholder
Servicing Agreement are described elsewhere in the Prospectus
and Statement of Additional Information.
Note 2. Organizational expenses are being deferred and will be
amortized on a straight- line basis over a five year period.
During the amortization period the proceeds of any redemption
of initial shares by any holder thereof will be reduced by a
pro rata portion of any then unamortized organization
expense, based on the ratio of the shares redeemed to the
total initial shares outstanding immediately prior to the
redemption.
650681.1
<PAGE>
261012.3
