As filed with the Securities and Exchange Commission on November 5, 1997
Registration No. 33-90538
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 2 [X]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2 [X]
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 830-5220
BERNADETTE N. FINN
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (Date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
262536.3
<PAGE>
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
Registration Statement on Form N-1A
-----------------------
CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)
-----------------------
<TABLE>
<CAPTION>
Part A
Item No. Prospectus Heading
<S> <C> <C>
1. Cover Page........................ Cover Page
2. Synopsis.......................... Introduction; Table of Fees and Expenses
3. Condensed Financial
Information....................... Financial Highlights
4. General Description of
Registrant........................ General Information; Investment Objectives, Policies and
Risks
5. Management of the Fund............ Distribution and Service Plan; Management of the Fund;
Custodian, Transfer Agent
5a. Management's Discussion of
Fund Performance.................. Not Applicable
6. Capital Stock and Other
Securities........................ Description of Common Stock; How to Purchase and
Redeem Shares; General Information; Dividends and
Distributions; Federal Income Taxes
7. Purchase of Securities Being
Offered........................... How to Purchase and Redeem Shares; Distribution and
Service Plan; Net Asset Value
8. Redemption or Repurchase.......... How to Purchase and Redeem Shares
9. Legal Proceedings................. Not Applicable
</TABLE>
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262536.3
<PAGE>
<TABLE>
<CAPTION>
Part B
Item No. Caption in Statement of Additional Information
<S> <C> <C>
10. Cover Page........................ Cover Page
11. Table of Contents................. Contents
12. General Information and
History........................... Manager; Management of the Fund
13. Investment Objectives and
Policies.......................... Investment Objectives, Policies and Risks
14. Management of the Registrant...... Manager; Management of the Fund
15. Control Persons and
Principal Holders of
Securities........................ Management of the Fund; Description of Common Stock
16. Investment Advisory and
Other Services.................... Manager; Expense Limitation; Management of the Fund;
Distribution and Service Plan; Custodian, Transfer Agent
and Dividend Agent
17. Brokerage Allocation.............. Portfolio Transactions
18. Capital Stock and Other
Securities........................ Description of Common Stock
19. Purchase, Redemption and
Pricing of Securities
Being Offered..................... How to Purchase and Redeem Shares; Net Asset Value
20. Tax Status........................ Federal Income Taxes; Virginia Taxes
21. Underwriters...................... Distribution and Service Plan
22. Calculations of Yield
Quotations of Money Market
Funds............................. Yield Quotations
23. Financial Statements.............. Independent Auditor's Report; Statement of Assets and
Liabilities; Notes to Financial Statement
</TABLE>
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262536.3
<PAGE>
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VIRGINIA 600 FIFTH AVENUE
DAILY MUNICIPAL NEW YORK, NY 10020
INCOME FUND, INC. (212) 830-5220
===============================================================================
PROSPECTUS
November 5, 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
- --------------------------------------------------------------------------------
</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
- --------------------------------------------------------------------------------
-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
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261010.3
<PAGE>
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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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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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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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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).
- --------------------------------------------------------------------------------
-20-
261010.3
<PAGE>
- --------------------------------------------------------------------------------
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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261010.3
<PAGE>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
-22-
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
- --------------------------------------------------------------------------------
-23-
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.............................................3 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 5, 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 5, 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 5,
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........5 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
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<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.
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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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261012.3
<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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261012.3
<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
-17-
261012.3
<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-
261012.3
<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., 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 and Area Chairman of Economics in the Graduate School of
Management, Rutgers University, with which he has been associated since 1966.
His address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is also a Director of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., North Carolina Daily
Municipal Income Fund, Inc., Reich & 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 and Vice
President and Treasurer of Cortland Financial Group, Inc. and Vice President of
Cortland Distributors, Inc. from 1989 to December 1990. 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, 0 0 0 $51,750 (13 Funds)
Director
Robert Straniere, 0 0 0 $51,750 (13 Funds)
Director
Yung Wong, 0 0 0 $51,750 (13 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex
for the fiscal year ending ___________ __, 1997 (and, with respect to
certain of the funds in the Fund Complex, estimated to be paid during the
fiscal year ending ________ __, 1997). 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
_________________, 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% 2.4965% 2.9472% 3.0754% 3.3157% 3.5133%
2.5% 3.1206% 3.6841% 3.8442% 4.1446% 4.3916%
3.0% 3.7447% 4.4209% 4.6131% 4.9735% 5.2699%
3.5% 4.3689% 5.1577% 5.3819% 5.8024% 6.1482%
4.0% 4.9930% 5.8945% 6.1508% 6.6313% 7.0265%
4.5% 5.6171% 6.6313% 6.9196% 7.4602% 7.9049%
5.0% 6.2412% 7.3681% 7.6885% 8.2891% 8.7832%
5.5% 6.8653% 8.1049% 8.4573% 9.1180% 9.6615%
6.0% 7.4895% 8.8417% 9.2262% 9.9470% 10.5398%
6.5% 8.1136% 9.5785% 9.9950% 10.7759% 11.4181%
7.0% 8.7377% 10.3154% 10.7639% 11.6048% 12.2965%
- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------
</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.
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>
-36-
261012.3
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
* (A) Financial Statements
Included in Prospectus Part A:
(1) Table of Fees and Expenses
Included in Statement of Additional Information Part B:
(1) Report of McGladrey & Pullen, LLP, independent
accountants, dated October 21, 1997; and
(2) Statement of Assets and Liabilities (audited).
(B) Exhibits
(1) Articles of Incorporation of the Registrant.
(2) By-Laws of the Registrant.
(3) Not applicable.
(4) Not applicable.
* (5) Form of Investment Management Contract between the
Registrant and Reich & Tang Asset Management L.P.
* (6) Form of Distribution Agreement filed as Exhibit 15.2.
(7) Not applicable.
* (8) Form of Custody Agreement between the Registrant and
Investors Fiduciary Trust Company.
* (9) Not Applicable.
* (9.1) Administrative Services Agreement between the
Registrant and Reich & Tang Asset Management L.P.
* (10.1) Consent Opinion of Messrs. Battle Fowler LLP as to
the use of their name under the headings "Federal
Income Taxes" in the Prospectus and "Counsel and
Auditors" in the Statement of Additional Information.
* (10.2) Opinion of Hunton & Williams as to Virginia law,
including their consent to the filing thereof and to
the use of their name under the heading "Virginia
Income Taxes" in the Prospectus and "Counsel and
Auditors" in the Statement of Additional Information.
* (11) Consent of Independent Accountants filed as Exhibit
11 herein.
* (12) Not Applicable.
- --------
* Filed herewith.
262536.3
C-1
<PAGE>
* (13) Form of Written assurance of Reich & Tang Asset
Management L.P. that its purchase of shares of the
Registrant was for investment purposes without any
present intention of redeeming or reselling.
(14) Not Applicable.
* (15.1) Form of Distribution and Service Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
* (15.2) Form of Distribution Agreement between the Registrant
and Reich & Tang Distributors L.P.
* (15.3) Form of Shareholder Servicing Agreement between the
Registrant and Reich & Tang Distributors L.P.
(16) Powers of Attorney
* (17) Not applicable
(18) 18f-3 Multi-Class Plan
Item 25. Persons controlled by or Under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
Number of Record Holders
Title of Class as of
October 20, 1997
Common Stock
(par value $.001)
Class A 0
Class B 1
Item 27. Indemnification.
In accordance with Section 2-418 of the General
Corporation Law of the State of Maryland, Article NINTH of the
Registrant's Articles of Incorporation provides as follows:
"NINTH: (a) The Corporation shall indemnify (i) its
currently acting and former directors and officers, whether
serving the Corporation or at its request any other entity, to
the fullest extent required or permitted by the General Laws of
the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the fullest
extent permitted by law, and (ii) other employees and agents to
such extent as shall be authorized by the Board of Directors or
the By-Laws and as permitted by law. Nothing contained herein
shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The foregoing rights of indemnification shall not be exclusive of
any other rights to which those seeking indemnification may
- --------
* Filed herewith.
262536.3
C-2
<PAGE>
be entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time
such by-laws, resolutions or contracts implementing such
provisions or such indemnification arrangements as may be
permitted by law. No amendment of the charter of the Corporation
or repeal of any of its provisions shall limit or eliminate the
right of indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.
(b) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment
Company Act of 1940, no director or officer of the Corporation
shall be personally liable to the Corporation or its stockholders
for money damages; provided, however, that nothing herein shall
be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. No
amendment of the charter of the Corporation or repeal of any of
its provisions shall limit or eliminate the limitation of
liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such amendment
or repeal."
In Section 7 of the Distribution Agreement relating to the
securities being offered hereby, the Registrant agrees to
indemnify Virginia Daily Municipal Income Fund, Inc. and any
person who controls Virginia Daily Municipal Income Fund, Inc.,
within the meaning of the Securities Act of 1933, against certain
types of civil liabilities arising in connection with the
Registration Statement or Prospectus.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Securities Act") may be
permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than a payment by
the Registrant of expenses incurred or paid by a director,
officer or the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Insofar as the Investment Company Act of 1940 may be
concerned, in the event that a claim for indemnification is
asserted by a director, officer or controlling person of the
Registrant in connection with the securities being registered,
the Registrant will not make such indemnification unless (i) the
Registrant has submitted, before a court or other body, the
question of whether the person to be indemnified was liable by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of duties, and has obtained a final decision
on the merits that such person was not liable by reason of such
conduct or (ii) in the absence of such decision, the Registrant
shall have obtained a reasonable determination, based upon a
review of the facts, that such person was not liable by virtue of
such conduct, by (a) the vote of a majority of directors who are
neither interested persons as such term is defined in the
Investment Company Act of 1940, nor parties to the proceeding or
(b) an independent legal counsel in a written opinion.
The Registrant will not advance attorneys' fees or other
expenses incurred by the person to be indemnified unless the
Registrant shall have received an undertaking by or on behalf of
such person to repay the advance unless it is ultimately
determined that such person is entitled to indemnification and
one of the following conditions shall have occurred: (x) such
person shall provide security for his undertaking, (y) the
Registrant shall be insured against losses arising by reason of
any lawful advances or (z) a majority of the disinterested,
non-party directors of the
262536.3
C-3
<PAGE>
Registrant, or an independent legal counsel in a written opinion,
shall have determined that based on a review of readily available
facts there is reason to believe that such person ultimately will
be found entitled to indemnification.
Item 28. Business and Other Connections of Investment Adviser.
The description of the Reich & Tang Asset Management L.P.
("RTAMLP") under the caption "Management of the Fund" in the Prospectus and
"Management and Investment Management Contract" in the Statement of Additional
Information constituting parts A and B, respectively, of the Registration
Statement are incorporated herein by reference.
New England Investment Companies, L.P. ("NEICLP") is the limited
partner and owner of 99.5% interest in Reich & Tang Asset Management L.P. (the
"Manager"). Reich & Tang Asset Management, Inc. (a wholly-owned subsidiary of
NEICLP) is the sole general partner of NEICLP. Reich & Tang Asset Management
L.P. serves as the sole general partner of Reich & Tang Distributors L.P. Reich
& Tang Asset Management, Inc. serves as the sole limited partner of Reich & Tang
Distributors L.P.
On August 30, 1996, The New England Mutual Life Insurance Company
and Metropolitan Life Insurance Company ("MetLife") merged, with MetLife being
the continuing company. The Manager remains a 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 Holding, Inc., a
wholly-owned subsidiary of MetLife, owns 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.
Registrant's investment adviser, RTAMLP, is a registered
investment adviser. RTAMLP's investment advisory clients include 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, Institutional Daily Income Fund, New Jersey Daily Municipal Income
Fund, Inc., New York Daily Tax Free Income Fund, Inc., Michigan Daily Tax Free
Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Short Term Income Fund, Inc., and Tax
Exempt Proceeds Fund, Inc., registered investment companies whose addresses are
600 Fifth Avenue, New York, New York 10020, which invest principally in money
market instruments, Delafield Fund, Inc. and Reich & Tang Equity Fund, Inc.,
registered investment companies whose addresses are 600 Fifth Avenue, New York,
New York 10020, which invest principally in equity securities. In addition,
Reich & Tang Asset Management L.P. is the sole general partner of Alpha
Associates, August Associates, Reich & Tang Minutus L.P., Reich & Tang Minutus
II, L.P., Reich & Tang Equity Partnerships L.P. and Tucek Partners, L.P.,
private investment partnerships organized as limited partnerships.
Peter S. Voss, President, Chief Executive Officer and a Director of NEIC
since October 1992, Chairman of the Board of NEIC since December 1992, Group
Executive Vice President, Bank of America, responsible for the global asset
management private banking businesses, from April 1992 to October 1992,
Executive Vice President of Security Pacific Bank, and Chief Executive Officer
of Security Pacific Hoare Govett Companies, a wholly owned subsidiary of
Security Pacific Corporation, from April 1988 to April 1992, Director of The New
England since March 1993, Chairman of the Board of Directors of NEIC's
subsidiaries other than Loomis, Sayles & Company, Incorporated ("Loomis") and
Back Bay Advisors, Inc. ("Back Bay"), where he serves as a Director, and
Chairman of the Board of Trustees of all of the mutual funds in the TNE Fund
Group and the Zenith Funds. G. Neal Ryland, Executive Vice President, Treasurer
and Chief Financial Officer of NEIC since July 1993, Executive Vice President
and Chief Financial Officer of The Boston Company, a diversified financial
services company, from March 1989 until July 1993; from September 1985 to
December 1988, Mr. Ryland was employed by Kenner Parker Toys, Inc. as Senior
Vice President and Chief Financial Officer. Edward N. Wadsworth, Executive Vice
President, General Counsel, Clerk and Secretary of NEIC since December 1989,
Senior Vice President and Associate General Counsel of The New England from 1984
until December 1992, and Secretary of Westpeak and Draycott and the Treasurer of
NEIC. Lorraine C. Hysler has been Secretary of RTAM since July 1994, Assistant
Secretary of NEIC since September 1993, Vice President of the Mutual Funds Group
of NEICLP from September 1993 until July 1994, and Vice President of Reich &
Tang Mutual Funds since July 1994. Ms. Hysler joined Reich & Tang, Inc. in May
1977 and served as Secretary from April 1987 until September 1993. Richard E.
Smith, III has been a Director of Reich & Tang Asset Management Inc. since July
1994, President and Chief Operating Officer of the Capital Management Group of
NEICLP from May 1994 until July 1994, President and Chief Operating Officer of
the Reich & Tang Capital Management Group since July 1994, Executive Vice
President and Director of Rhode Island Hospital Trust from March 1993 to May
1994,
262536.3
C-4
<PAGE>
President, Chief Executive Officer and Director of USF&G Review Management Corp.
from January 1988 until September 1992. Steven W. Duff has been a Director of
RTAM since October 1994, President and Chief Executive Officer of Reich & Tang
Funds since August 1994, Senior Vice President of NationsBank from June 1981
until August 1994; Mr. Duff is President and a Director of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax
Free Income Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey
Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
North Carolina Daily Municipal Income Fund, Inc. and Short Term Income Fund,
Inc., President and Trustee of Florida Daily Municipal Income Fund, Pennsylvania
Daily Municipal Income Fund, President and Chief Executive Officer of Tax Exempt
Proceeds Fund, Inc., and Executive Vice President of Reich & Tang Equity Fund,
Inc. Bernadette N. Finn has been Vice President - Compliance of RTAM since July
1994, Vice President of Mutual Funds Division of NEICLP from September 1993
until July 1994, Vice President of Reich & Tang Funds since July 1994. Ms. Finn
joined Reich & Tang, Inc. in September 1970 and served as Vice President from
September 1982 until May 1987 and as Vice President and Assistant Secretary from
May 1987 until September 1993. Ms. Finn is also Secretary of California Daily
Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal
Income Fund, Michigan Daily Tax Free Income Funds, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc., North
Carolina Daily Municipal Income Fund, Inc., Pennsylvania Daily Municipal Income
Fund and Tax Exempt Proceeds Fund, Inc., a Vice President and Secretary of
Delafield Fund, Inc., Reich & Tang Equity Fund, Inc. and Short Term Income Fund,
Inc. Richard De Sanctis has been Vice President and Treasurer of RTAM since July
1994, Assistant Treasurer of NEIC since September 1993 and Treasurer of the
Mutual Funds Group of NEICLP from September 1993 until July 1994, Treasurer of
the Reich & Tang Funds since July 1994. Mr. De Sanctis joined Reich & Tang, Inc.
in December 1990 and served as Controller of Reich & Tang, Inc., from January
1991 to September 1993. Mr. De Sanctis was Vice President and Treasurer of
Cortland Financial Group, Inc. and Vice President of Cortland Distributors, Inc.
from 1989 to December 1990. Mr. De Sanctis is also Treasurer of AEW Commercial
Mortgage Securities Fund, Inc., California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc.,
Reich & Tang Government Securities Trust, Tax Exempt Proceeds Fund, Inc. and
Short Term Income Fund, Inc. and is Vice President and Treasurer of Cortland
Trust, Inc.
Item 29. Principal Underwriters.
(a) Reich & Tang Distributors L.P., the Registrant's Distributor
is also distributor for 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, Inc., Pennsylvania Daily Municipal
Income Fund, Reich & Tang Equity Fund, Inc., Short Term Income Fund, Inc. and
Tax Exempt Proceeds Fund, Inc.
(b) The following are the directors and officers of Reich & Tang
Asset Management, Inc., the general partner of Reich & Tang Distributors L.P.
Reich & Tang Distributors L.P. does not have any officers. The principal
business address of Messrs. Voss, Ryland, and Wadsworth is 399 Boylston Street,
Boston, Massachusetts 02116. For all other persons the principal address is 600
Fifth Avenue, New York, New York 10020.
262536.3
C-5
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
With the General Partner Positions and Offices
Name of the Distributor With Registrant
<S> <C> <C>
Peter S. Voss Director None
G. Neal Ryland Director None
Edward N. Wadsworth Clerk None
Richard E. Smith III Director None
Steven W. Duff Director President and Director
Bernadette N. Finn Vice President - Compliance Secretary
and Secretary
Lorraine C. Hysler Secretary None
Richard De Sanctis Vice President and Treasurer
Treasurer
Richard I. Weiner Vice President None
</TABLE>
(c) Not applicable
Item 30. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Registrant at Reich &
Tang Asset Management L.P., 600 Fifth Avenue, New York, New York 10020 the
Registrant's Manager; Reich & Tang Services, 600 Fifth Avenue, New York, New
York 10020, the Registrant's transfer agent and dividend distributing agent; and
at Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64104, the Registrant's custodian.
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective
amendment, using financial statements which need not be
certified, within four to six months from the effective
date of its Securities Act Registration Statement.
262536.3
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of New York, and State
of New York, on the 5th day of November, 1997.
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
By: /s/ Bernadette N. Finn
Bernadette N. Finn, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated below.
<TABLE>
<S> <C> <C>
Signature Title Date
(1) Principal Executive Officer: Chairman and President
Steven W. Duff
November 5, 1997
By: /s/ Steven W. Duff
Steven W. Duff
(1) Principal Executive Officer: Chairman and President
Steven W. Duff
November 5, 1997
By: /s/ Steven W. Duff
Steven W. Duff
(2) Principal Financial and
Accounting Officer:
By: /s/ Richard De Sanctis Treasurer November 5, 1997
Richard De Sanctis
(3) Majority of Directors
Steven W. Duff Director November 5, 1997
W. Giles Mellon Director
Yung Wong Director
Robert Straniere Director
By: /s/ Bernadette N. Finn
Bernadette N. Finn
Attorney-in-Fact*
______________________
*The executed copy of Power of Attorney was filed herewith
</TABLE>
262536.3
<PAGE>
INVESTMENT MANAGEMENT CONTRACT
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
the "Fund"
New York, New York
October __, 1997
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10022
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We propose to engage in the business of investing and reinvesting
our assets in securities of the type, and in accordance with the limitations,
specified in our Articles of Incorporation, By-Laws and Registration Statement
filed with the Securities and Exchange Commission under the Investment Company
Act of 1940 (the "1940 Act") and the Securities Act of 1933, including the
Prospectus forming a part thereof (the "Registration Statement"), all as from
time to time in effect, and in such manner and to such extent as may from time
to time be authorized by our Board of Directors. We enclose copies of the
documents listed above and will furnish you such amendments thereto as may be
made from time to time.
2. (a) We hereby employ you to manage the investment and reinvestment
of our assets as above specified, and, without limiting the generality of the
foregoing, to provide the investment management services specified below.
(b) Subject to the general control of our Board of Directors, you
will make decisions with respect to all purchases and sales of the portfolio
securities. To carry out such decisions, you are hereby authorized, as our agent
and attorney-in-fact for our account and at our risk and in our name, to place
orders for the investment and reinvestment of our assets. In all purchases,
sales and other transactions in our portfolio securities you are authorized to
exercise full discretion and act for us in the same manner and with the same
force and effect as our Fund itself might or could do with respect to such
purchases, sales or other transactions, as well as with respect to all other
things necessary or incidental to the furtherance or conduct of such purchases,
sales or other transactions.
-1-
266886.1
<PAGE>
(c) You will report to our Board of Directors at each meeting
thereof all changes in our portfolio since your prior report, and will also keep
us in touch with important developments affecting our portfolio and, on your
initiative, will furnish us from time to time with such information as you may
believe appropriate for this purpose, whether concerning the individual entities
whose securities are included in our portfolio, the activities in which such
entities engage, Federal income tax policies applicable to our investments, or
the conditions prevailing in the money market or the economy generally. You will
also furnish us with such statistical and analytical information with respect to
our portfolio securities as you may believe appropriate or as we may reasonably
request. In making such purchases and sales of our portfolio securities, you
will comply with the policies set from time to time by our Board of Directors as
well as the limitations imposed by our Articles of Incorporation and by the
provisions of the Internal Revenue Code and the 1940 Act relating to regulated
investment companies and the limitations contained in the Registration
Statement.
(d) It is understood that you will from time to time employ,
subcontract with or otherwise associate with yourself, entirely at your expense,
such persons as you believe to be particularly fitted to assist you in the
execution of your duties hereunder.
(e) You or your affiliates will also furnish us, at your own
expense, such investment advisory supervision and assistance as you may believe
appropriate or as we may reasonably request subject to the requirements of any
regulatory authority to which you may be subject. You and your affiliates will
also pay the expenses of promoting the sale of our shares (other than the costs
of preparing, printing and filing our registration statement, printing copies of
the prospectus contained therein and complying with other applicable regulatory
requirements), except to the extent that we are permitted to bear such expenses
under a plan adopted pursuant to Rule 12b-1 under the 1940 Act or a similar
rule.
3. We agree, subject to the limitations described below, to be
responsible for, and hereby assume the obligation for payment of, all our
expenses, including: (a) brokerage and commission expenses, (b) Federal, state
or local taxes, including issue and transfer taxes incurred by or levied on us,
(c) commitment fees and certain insurance premiums, (d) interest charges on
borrowings, (e) charges and expenses of our custodian, (f) charges, expenses and
payments relating to the issuance, redemption, transfer and dividend disbursing
functions for us, (g) recurring and nonrecurring legal and accounting expenses,
including those of the bookkeeping agent, (h) telecommunications expenses, (i)
the costs of organizing and maintaining our
-2-
266886.1
<PAGE>
existence as a corporation, (j) compensation, including directors' fees, of any
of our directors, officers or employees who are not your officers or officers of
your affiliates, and costs of other personnel providing clerical, accounting
supervision and other office services to us as we may request, (k) costs of
shareholder's services including, charges and expenses of persons providing
confirmations of transactions in our shares, periodic statements to
shareholders, and recordkeeping and shareholders' services, (l) costs of
shareholders' reports, proxy solicitations, and corporate meetings, (m) fees and
expenses of registering our shares under the appropriate Federal securities laws
and of qualifying such shares under applicable state securities laws, including
expenses attendant upon the initial registration and qualification of such
shares and attendant upon renewals of, or amendments to, those registrations and
qualifications, (n) expenses of preparing, printing and delivering our
prospectus to existing shareholders and of printing shareholder application
forms for shareholder accounts, (o) payment of the fees and expenses provided
for herein, under the Administrative Services Agreement, and pursuant to the
Shareholder Servicing Agreement, with respect to the Class A shares only, and
Distribution Agreement, and (p) any other distribution or promotional expenses
contemplated by an effective plan adopted by us pursuant to Rule 12b-1 under the
Act. Our obligation for the foregoing expenses is limited by your agreement to
be responsible, while this Agreement is in effect, for any amount by which our
annual operating expenses (excluding taxes, brokerage, interest and
extraordinary expenses) exceed the limits on investment company expenses
prescribed by any state in which our shares are qualified for sale.
4. We will expect of you, and you will give us the benefit of, your
best judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our security
holders by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties hereunder, or by reason of your reckless disregard of
your obligations and duties hereunder.
5. In consideration of the foregoing we will pay you a fee at the
annual rate of .40% of the Fund's average daily net assets. Your fee will be
accrued by us daily, and will be payable on the last day of each calendar month
for services performed hereunder during that month or on such other schedule as
you shall request of us in writing. You may use any portion of this fee for
distribution of our shares, or for making servicing payments to organizations
whose customers or clients are our shareholders. You may waive your right to any
fee to which you are entitled hereunder, provided such waiver is
-3-
266886.1
<PAGE>
delivered to us in writing. Any reimbursement of our expenses, to which we may
become entitled pursuant to paragraph 3 hereof, will be paid to us at the same
time as we pay you.
6. This Agreement will become effective on the date hereof and shall
continue in effect until ____________ __, 1998 and thereafter for successive
twelve-month periods (computed from each ____________), provided that such
continuation is specifically approved at least annually by our Board of
Directors or by a majority vote of the holders of our outstanding voting
securities, as defined in the 1940 Act and the rules thereunder, and, in either
case, by a majority of those of our directors who are neither party to this
Agreement nor, other than by their service as directors of the corporation,
interested persons, as defined in the 1940 Act and the rules thereunder, of any
such person who is party to this Agreement. Upon the effectiveness of this
Agreement, it shall supersede all previous Agreements between us covering the
subject matter hereof. This Agreement may be terminated at any time, without the
payment of any penalty, (i) by vote of a majority of our outstanding voting
securities, as defined in the 1940 Act and the rules thereunder, or (ii) by a
vote of a majority of our entire Board of Directors, on sixty days' written
notice to you, or (iii) by you on sixty days' written notice to us.
7. This Agreement may not be transferred, assigned, sold or in any
manner hypothecated or pledged by you and this agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the Securities and Exchange Commission.
8. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, or
the right of any of your employees or the officers and directors of Reich & Tang
Asset Management, Inc., your general partner, who may also be a director,
officer or employee of ours, or of a person affiliated with us, as defined in
the 1940 Act, to engage in any other business or to devote time and attention to
the management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
If the foregoing is in accordance with your understanding, will you
kindly so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
-4-
266886.1
<PAGE>
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
By:
---------------------------------------
Name:
Title:
ACCEPTED: October __, 1997
REICH & TANG ASSET MANAGEMENT L.P.
By: REICH & TANG ASSET MANAGEMENT, INC., as General Partner
By: ___________________________________
Name:
Title:
-5-
266886.1
CUSTODY AGREEMENT
THIS AGREEMENT made the ___ day of 19__, by and between INVESTORS FIDUCIARY
TRUST COMPANY, a trust company chartered under the laws of the state of
Missouri, having its trust office located at 127 West 10th Street, Kansas City,
Missouri 64105 ("Custodian"), and _______________, a ______________________
having its principal office and place of business at _______________ ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
custodian of the securities and monies of Fund's investment portfolio; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment;
NOW THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints Custodian as
custodian of the securities and monies at any time owned by the Fund.
650203.1
1
<PAGE>
2. REPRESENTATIONS AND WARRANTIES.
A. Fund hereby represents, warrants and acknowledges to Custodian:
1. That it is a corporation or trust (as specified above) duly
organized and existing and in good standing under the laws of its
state of organization, and that it is registered under the
Investment Company Act of 1940 (the "1940 Act"); and
2. That it has the requisite power and authority under applicable
law, its articles of incorporation and its bylaws to enter into
this Agreement; that it has taken all requisite action necessary
to appoint Custodian as custodian for the Fund; that this
Agreement has been duly executed and delivered by Fund; and that
this Agreement constitutes a legal, valid and binding obligation
of Fund, enforceable in accordance with its terms.
B. Custodian hereby represents, warrants and acknowledges to Fund:
1. That it is a trust company duly organized and existing and in
good standing under the laws of the State of Missouri; and
2. That it has the requisite power and authority under applicable
law, its charter and its bylaws to enter into and perform this
Agreement; that this
650203.1
2
<PAGE>
Agreement has been duly executed and delivered by Custodian; and
that this Agreement constitutes a legal, valid and binding
obligation of Custodian, enforceable in accordance with its
terms.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery Of Assets
------------------
Except as permitted by the 1940 Act, Fund will deliver or cause to be
delivered to Custodian on the effective date of this Agreement, or as
soon thereafter as practicable, and from time to time thereafter, all
portfolio securities acquired by it and monies then owned by it or
from time to time coming into its possession during the time this
Agreement shall continue in effect. Custodian shall have no
responsibility or liability whatsoever for or on account of securities
or monies not so delivered.
B. Delivery of Accounts and Records
--------------------------------
Fund shall turn over or cause to be turned over to Custodian all of
the Fund's relevant accounts and records previously maintained.
Custodian shall be entitled to rely conclusively on the completeness
and correctness of the accounts and records turned over to it, and
Fund shall indemnify and hold Custodian harmless of and from any and
all expenses, damages and losses whatsoever arising out of or in
connection with any error, omission, inaccuracy or other deficiency of
650203.1
3
<PAGE>
such accounts and records or in the failure of Fund to provide, or to
provide in a timely manner, any accounts, records or information
needed by the Custodian to perform its functions hereunder.
C. Delivery of Assets to Third Parties
-----------------------------------
Custodian will receive delivery of and keep safely the assets of Fund
delivered to it from time to time segregated in a separate account,
and if Fund is comprised of more than one portfolio of investment
securities (each a "Portfolio") Custodian shall keep the assets of
each Portfolio segregated in a separate account. Custodian will not
deliver, assign, pledge or hypothecate any such assets to any person
except as permitted by the provisions of this Agreement or any
agreement executed by it according to the terms of Section 3.S. of
this Agreement. Upon delivery of any such assets to a subcustodian
pursuant to Section 3.S. of this Agreement, Custodian will create and
maintain records identifying those assets which have been delivered to
the subcustodian as belonging to the Fund, by Portfolio if applicable.
The Custodian is responsible for the safekeeping of the securities and
monies of Fund only until they have been transmitted to and received
by other persons as permitted under the terms of this Agreement,
except for securities and monies transmitted to subcustodians
appointed under
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<PAGE>
Section 3.S. of this Agreement, for which Custodian remains
responsible to the extent provided in Section 3.S. hereof. Custodian
may participate directly or indirectly through a subcustodian in the
Depository Trust Company (DTC), Treasury/Federal Reserve Book Entry
System (Fed System), Participant Trust Company (PTC) or other
depository approved by the Fund (as such entities are defined at 17
CFR Section 270.17f-4(b)) (each a "Depository" and collectively, the
"Depositories").
D. Registration of Securities
--------------------------
The Custodian shall at all times hold registered securities of the
Fund in the name of the Custodian, the Fund, or a nominee of either of
them, unless specifically directed by instructions to hold such
registered securities in so-called "street name," provided that, in
any event, all such securities and other assets shall be held in an
account of the Custodian containing only assets of the Fund, or only
assets held by the Custodian as a fiduciary or custodian for
customers, and provided further, that the records of the Custodian at
all times shall indicate the Fund or other customer for which such
securities and other assets are held in such account and the
respective interests therein. If, however, the Fund directs the
Custodian to maintain securities in "street
650203.1
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<PAGE>
name", notwithstanding anything contained herein to the contrary, the
Custodian shall be obligated only to utilize its best efforts to
timely collect income due the Fund on such securities and to notify
the Fund of relevant corporate actions including, without limitation,
pendency of calls, maturities, tender or exchange offers. All
securities, and the ownership thereof by Fund, which are held by
Custodian hereunder, however, shall at all times be identifiable on
the records of the Custodian. The Fund agrees to hold Custodian and
its nominee harmless for any liability as a shareholder of record of
securities held in custody.
E. Exchange of Securities
----------------------
Upon receipt of instructions as defined herein in Section 4.A,
Custodian will exchange, or cause to be exchanged, portfolio
securities held by it for the account of Fund for other securities or
cash issued or paid in connection with any reorganization,
recapitalization, merger, consolidation, split-up of shares, change of
par value, conversion or otherwise, and will deposit any such
securities in accordance with the terms of any reorganization or
protective plan. Without instructions, Custodian is authorized to
exchange securities held by it in temporary form for securities in
definitive form, to effect an exchange of shares when the par value of
the stock is changed, and,
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<PAGE>
upon receiving payment therefor, to surrender bonds or other
securities held by it at maturity or when advised of earlier call for
redemption, except that Custodian shall receive instructions prior to
surrendering any convertible security.
F. Purchases of Investments of the Fund
------------------------------------
Fund will, on each business day on which a purchase of securities
shall be made by it, deliver to Custodian instructions which shall
specify with respect to each such purchase:
1. If applicable, the name of the Portfolio making such purchase;
2. The name of the issuer and description of the security;
3. The number of shares and the principal amount purchased, and
accrued interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage commission, taxes
and other expenses payable in connection with the purchase;
7. The total amount payable upon such purchase; and
8. The name of the person from whom or the broker or dealer through
whom the purchase was made.
9. Whether the security is to be received in certificated form or
via a specified Depository.
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<PAGE>
In accordance with such instructions, Custodian will pay for out of monies held
for the account of Fund, but only insofar as such monies are available for such
purpose, and receive the portfolio securities so purchased by or for the account
of Fund, except that Custodian may in its sole discretion advance funds to the
Fund which may result in an overdraft because the monies held by the Custodian
on behalf of the Fund are insufficient to pay the total amount payable upon such
purchase. Except as otherwise instructed by Fund, such payment shall be made by
the Custodian only upon receipt of securities: (a) by the Custodian; (b) by a
clearing corporation of a national exchange of which the Custodian is a member;
or (c) by a Depository. Notwithstanding the foregoing, (i) in the case of a
repurchase agreement, the Custodian may release funds to a Depository prior to
the receipt of advice from the Depository that the securities underlying such
repurchase agreement have been transferred by book-entry into the account
maintained with such Depository by the Custodian, on behalf of its customers,
provided that the Custodian's instructions to the Depository require that the
Depository make payment of such funds only upon transfer by book-entry of the
securities underlying the repurchase agreement in such account; (ii) in the case
of time deposits, call account deposits, currency deposits and other deposits,
foreign exchange transactions, futures contracts or options, the Custodian may
make payment therefor before receipt of an advice or confirmation evidencing
said deposit or entry into such transaction; and (iii)
650203.1
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<PAGE>
in the case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make, or cause a
subcustodian appointed pursuant to Section 3.S.2. of this Agreement to make,
payment therefor in accordance with generally accepted local custom and market
practice.
G. Sales and Deliveries of Investments of the Fund - Other than Options
--------------------------------------------------------------------
and Futures
-----------
Fund will, on each business day on which a sale of investment
securities (other than options and futures) of Fund has been made,
deliver to Custodian instructions specifying with respect to each such
sale:
1. If applicable, the name of the Portfolio making such sale;
2. The name of the issuer and description of the securities;
3. The number of shares and principal amount sold, and accrued
interest, if any;
4. The date on which the securities sold were purchased or other
information identifying the securities sold and to be delivered;
5. The trade date;
6. The settlement date;
7. The sale price per unit and the brokerage commission, taxes or
other expenses payable in connection with such sale;
650203.1
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<PAGE>
8. The total amount to be received by Fund upon such sale; and
9. The name and address of the broker or dealer through whom or
person to whom the sale was made.
In accordance with such instructions, Custodian will deliver or cause to be
delivered the securities thus designated as sold for the account of Fund to the
broker or other person specified in the instructions relating to such sale.
Except as otherwise instructed by Fund, such delivery shall be made upon receipt
of payment therefor: (a) in such form as is satisfactory to the Custodian; (b)
credit to the account of the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c) credit to the
account of the Custodian, on behalf of its customers, with a Depository.
Notwithstanding the foregoing: (i) in the case of securities held in physical
form, such securities shall be delivered in accordance with "street delivery
custom" to a broker or its clearing agent; or (ii) in the case of the sale of
securities, the settlement of which occurs outside of the United States of
America, the Custodian may make, or cause a subcustodian appointed pursuant to
Section 3.S.2. of this Agreement to make, payment therefor in accordance with
generally accepted local custom and market practice.
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<PAGE>
H. Purchases or Sales of Options and Futures Fund will, on each business
day on which a purchase or sale of the following options and/or
futures shall be made by it, deliver to Custodian instructions which
shall specify with respect to each such purchase or sale:
1. If applicable, the name of the Portfolio making such purchase or
sale;
2. Security Options
a. The underlying security;
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising, expiring
or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded; and
j. Name and address of the broker or dealer through whom the
sale or purchase was made.
3. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
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<PAGE>
d. The premium;
e. The multiple;
f. The expiration date;
g. Whether the transaction is an opening, exercising, expiring
or closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased; and
j. The name and address of the broker or dealer through whom
the sale or purchase was made, or other applicable
settlement instructions.
4. Security Index Futures Contracts
a. The last trading date specified in the contract and, when
available, the closing level, thereof;
b. The index level on the date the contract is entered into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in addition to
instructions, and if not already in the possession of
Custodian, Fund shall deliver a substantially complete and
executed custodial safekeeping account and procedural
650203.1
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<PAGE>
agreement which shall be incorporated by reference into this
Custody Agreement); and
f. The name and address of the futures commission merchant
through whom the sale or purchase was made, or other
applicable settlement instructions.
5. Options on Index Future Contracts
a. The underlying index future contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
f. Whether the transaction involves an opening, exercising,
expiring or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Securities Pledged or Loaned
If specifically allowed for in the prospectus of Fund, and subject to
such additional terms and conditions as Custodian may require:
1. Upon receipt of instructions, Custodian will release or cause to
be released securities held in custody to the pledgee designated
in such
650203.1
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<PAGE>
instructions by way of pledge or hypothecation to secure any loan
incurred by Fund; provided, however, that the securities shall be
released only upon payment to Custodian of the monies borrowed,
except that in cases where additional collateral is required to
secure a borrowing already made, further securities may be
released or caused to be released for that purpose upon receipt
of instructions. Upon receipt of instructions, Custodian will
pay, but only from funds available for such purpose, any such
loan upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or notes
evidencing such loan.
2. Upon receipt of instructions, Custodian will release securities
held in custody to the borrower designated in such instructions;
provided, however, that the securities will be released only upon
deposit with Custodian of full cash collateral as specified in
such instructions, and that Fund will retain the right to any
dividends, interest or distribution on such loaned securities.
Upon receipt of instructions and the loaned securities, Custodian
will release the cash collateral to the borrower.
650203.1
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<PAGE>
J. Routine Matters
Custodian will, in general, attend to all routine and mechanical
matters in connection with the sale, exchange, substitution, purchase,
transfer, or other dealings with securities or other property of Fund
except as may be otherwise provided in this Agreement or directed from
time to time by the Fund in writing.
K. Deposit Accounts
Custodian will open and maintain one or more special purpose deposit
accounts in the name of Custodian ("Accounts"), subject only to draft
or order by Custodian upon receipt of instructions. All monies
received by Custodian from or for the account of Fund shall be
deposited in said Accounts. Barring events not in the control of the
Custodian such as strikes, lockouts or labor disputes, riots, war or
equipment or transmission failure or damage, fire, flood, earthquake
or other natural disaster, action or inaction of governmental
authority or other causes beyond its control, at 9:00 a.m., Kansas
City time, on the second business day after deposit of any check into
an Account, Custodian agrees to make Fed Funds available to the Fund
in the amount of the check. Deposits made by Federal Reserve wire will
be available to the Fund immediately and ACH wires will be available
to the Fund on the next business day. Income earned on the
650203.1
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<PAGE>
portfolio securities will be credited to the Fund based on the
schedule attached as Exhibit A. The Custodian will be entitled to
reverse any credited amounts where credits have been made and monies
are not finally collected. If monies are collected after such
reversal, the Custodian will credit the Fund in that amount. Custodian
may open and maintain Accounts in its own banking department, or in
such other banks or trust companies as may be designated by it or by
Fund in writing, all such Accounts, however, to be in the name of
Custodian and subject only to its draft or order. Funds received and
held for the account of different Portfolios shall be maintained in
separate Accounts established for each Portfolio.
L. Income and other Payments to the Fund Custodian will:
1. Collect, claim and receive and deposit for the account of Fund
all income and other payments which become due and payable on or
after the effective date of this Agreement with respect to the
securities deposited under this Agreement and credit the account
of Fund in accordance with the schedule attached hereto as
Exhibit A. If, for any reason, the Fund is credited with income
that is not subsequently collected, Custodian may reverse that
credited amount.
650203.1
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<PAGE>
2. Execute ownership and other certificates and affidavits for all
federal, state and local tax purposes in connection with the
collection of bond and note coupons; and
3. Take such other action as may be necessary or proper in
connection with:
a. the collection, receipt and deposit of such income and other
payments, including but not limited to the presentation for
payment of:
1. all coupons and other income items requiring
presentation; and
2. all other securities which may mature or be called,
redeemed, retired or otherwise become payable and
regarding which the Custodian has actual knowledge, or
should reasonably be expected to have knowledge; and
b. the endorsement for collection, in the name of Fund, of all
checks, drafts or other negotiable instruments.
Custodian, however, will not be required to institute suit or take
other extraordinary action to enforce collection except upon receipt
of instructions and upon being indemnified to its satisfaction against
the costs and expenses of such suit or other actions. Custodian will
receive, claim and collect all stock dividends, rights and
650203.1
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<PAGE>
other similar items and will deal with the same pursuant to
instructions. Unless prior instructions have been received to the
contrary, Custodian will, without further instructions, sell any
rights held for the account of Fund on the last trade date prior to
the date of expiration of such rights.
M. Payment of Dividends and other Distributions
On the declaration of any dividend or other distribution on the shares
of capital stock of Fund ("Fund Shares") by the Board of Directors of
Fund, Fund shall deliver to Custodian instructions with respect
thereto. On the date specified in such instructions for the payment of
such dividend or other distribution, Custodian will pay out of the
monies held for the account of Fund, insofar as the same shall be
available for such purposes, and credit to the account of the Dividend
Disbursing Agent for Fund, such amount as may be necessary to pay the
amount per share payable in cash on Fund Shares issued and outstanding
on the record date established by such resolution.
N. Shares of Fund Purchased by Fund
Whenever any Fund Shares are repurchased or redeemed by Fund, Fund or
its agent shall advise Custodian of the aggregate dollar amount to be
paid for such shares and shall confirm such advice in writing. Upon
receipt of such advice, Custodian shall charge such aggregate
650203.1
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<PAGE>
dollar amount to the account of Fund and either deposit the same in
the account maintained for the purpose of paying for the repurchase or
redemption of Fund Shares or deliver the same in accordance with such
advice. Custodian shall not have any duty or responsibility to
determine that Fund Shares have been removed from the proper
shareholder account or accounts or that the proper number of Fund
Shares have been cancelled and removed from the shareholder records.
O. Shares of Fund Purchased from Fund
Whenever Fund Shares are purchased from Fund, Fund will deposit or
cause to be deposited with Custodian the amount received for such
shares. Custodian shall not have any duty or responsibility to
determine that Fund Shares purchased from Fund have been added to the
proper shareholder account or accounts or that the proper number of
such shares have been added to the shareholder records.
P. Proxies and Notices
Custodian will promptly deliver or mail or have delivered or mailed to
Fund all proxies properly signed, all notices of meetings, all proxy
statements and other notices, requests or announcements affecting or
relating to securities held by Custodian for Fund and will, upon
receipt of instructions, execute and deliver or cause its nominee to
execute and deliver or
650203.1
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<PAGE>
mail or have delivered or mailed such proxies or other authorizations
as may be required. Except as provided by this Agreement or pursuant
to instructions hereafter received by Custodian, neither it nor its
nominee will exercise any power inherent in any such securities,
including any power to vote the same, or execute any proxy, power of
attorney, or other similar instrument voting any of such securities,
or give any consent, approval or waiver with respect thereto, or take
any other similar action.
Q. Disbursements
Custodian will pay or cause to be paid, insofar as funds are available
for the purpose, bills, statements and other obligations of Fund
(including but not limited to obligations in connection with the
conversion, exchange or surrender of securities owned by Fund,
interest charges, dividend disbursements, taxes, management fees,
custodian fees, legal fees, auditors' fees, transfer agents' fees,
brokerage commissions, compensation to personnel, and other operating
expenses of Fund) pursuant to instructions of Fund setting forth the
name of the person to whom payment is to be made, the amount of the
payment, and the purpose of the payment.
650203.1
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<PAGE>
R. Daily Statement of Accounts
Custodian will, within a reasonable time, render to Fund a detailed
statement of the amounts received or paid and of securities received
or delivered for the account of Fund during each business day.
Custodian will, from time to time, upon request by Fund, render a
detailed statement of the securities and monies held for Fund under
this Agreement, and Custodian will maintain such books and records as
are necessary to enable it to do so. Custodian will permit such
persons as are authorized by Fund, including Fund's independent public
accountants, reasonable access to such records or will provide
reasonable confirmation of the contents of such records, and if
demanded, Custodian will permit federal and state regulatory agencies
to examine the securities, books and records. Upon the written
instructions of Fund or as demanded by federal or state regulatory
agencies, Custodian will instruct any subcustodian to permit such
persons as are authorized by Fund, including Fund's independent public
accountants, reasonable access to such records or to provide
reasonable confirmation of the contents of such records, and to permit
such agencies to examine the books, records and securities held by
such subcustodian which relate to Fund.
650203.1
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<PAGE>
S. Appointment of Subcustodians
1. Notwithstanding any other provisions of this Agreement, all or
any of the monies or securities of Fund may be held in
Custodian's own custody or in the custody of one or more other
banks or trust companies acting as subcustodians as may be
selected by Custodian. Any such subcustodian selected by the
Custodian must have the qualifications required for a custodian
under the 1940 Act, as amended. It is understood that Custodian
initially intends to appoint United Missouri Bank, N.A. (UMB) and
United Missouri Trust Company of New York (UMTCNY) as
subcustodians. Custodian shall be responsible to the Fund for any
loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of UMB, UMTCNY and any
other subcustodians selected and appointed by Custodian (except
subcustodians appointed at the request of Fund and as provided in
Subsection 2 below) to the same extent Custodian would be
responsible to the Fund under Section 5. of this Agreement if it
committed the act or omission itself. Upon request of the Fund,
Custodian shall be willing to contract with other subcustodians
reasonably acceptable to the Custodian for purposes of (i)
650203.1
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<PAGE>
effecting third-party repurchase transactions with banks,
brokers, dealers, or other entities through the use of a common
custodian or subcustodian, or (ii) providing depository and
clearing agency services with respect to certain variable rate
demand note securities, or (iii) for other reasonable purposes
specified by Fund; provided, however, that the Custodian shall be
responsible to the Fund for any loss, damage or expense suffered
or incurred by the Fund resulting from the actions or omissions
of any such subcustodian only to the same extent such
subcustodian is responsible to the Custodian. The Fund shall be
entitled to review the Custodian's contracts with any such
subcustodians appointed at the request of Fund. Custodian shall
be responsible to the Fund for any loss, damage or expense
suffered or incurred by the Fund resulting from the actions or
omissions of any Depository only to the same extent such
Depository is responsible to Custodian.
2. Notwithstanding any other provisions of this Agreement, Fund's
foreign securities (as defined in Rule 17f-5(c)(1) under the 1940
Act) and Fund's cash or cash equivalents, in amounts deemed by
the Fund to be reasonably necessary to effect Fund's
650203.1
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<PAGE>
foreign securities transactions, may be held in the custody of
one or more banks or trust companies acting as subcustodians, and
thereafter, pursuant to a written contract or contracts as
approved by Fund's Board of Directors, may be transferred to
accounts maintained by any such subcustodian with eligible
foreign custodians, as defined in Rule 17f-5(c)(2). Custodian
shall be responsible to the Fund for any loss, damage or expense
suffered or incurred by the Fund resulting from the actions or
omissions of any foreign subcustodians or a domestic subcustodian
contracting with such foreign subcustodians only to the same
extent such domestic subcustodian is responsible to the
Custodian.
T. Accounts and Records Property of Fund
-------------------------------------
Custodian acknowledges that all of the accounts and records maintained
by Custodian pursuant to this Agreement are the property of Fund, and
will be made available to Fund for inspection or reproduction within a
reasonable period of time, upon demand. Custodian will assist Fund's
independent auditors, or upon approval of Fund, or upon demand, any
regulatory body, in any requested review of Fund's accounts and
records but shall be reimbursed by Fund for all expenses and employee
time invested in any such review outside of
650203.1
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<PAGE>
routine and normal periodic reviews. Upon receipt from Fund of the
necessary information or instructions, Custodian will supply
information from the books and records it maintains for Fund that Fund
needs for tax returns, questionnaires, periodic reports to
shareholders and such other reports and information requests as Fund
and Custodian shall agree upon from time to time.
U. Adoption of Procedures
Custodian and Fund may from time to time adopt procedures as they
agree upon, and Custodian may conclusively assume that no procedure
approved or directed by Fund or its accountants or other advisors
conflicts with or violates any requirements of its prospectus,
articles of incorporation, bylaws, any applicable law, rule or
regulation, or any order, decree or agreement by which Fund may be
bound. Fund will be responsible to notify Custodian of any changes in
statutes, regulations, rules, requirements or policies which might
necessitate changes in Custodian's responsibilities or procedures.
V. Overdrafts
If Custodian shall in its sole discretion advance funds to the account
of the Fund which results in an overdraft in any Account because the
monies held therein by Custodian on behalf of the Fund are
650203.1
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<PAGE>
insufficient to pay the total amount payable upon a purchase of
securities as specified in Fund's instructions or for some other
reason, the amount of the overdraft shall be payable by the Fund to
Custodian upon demand together with the overdraft charge set forth on
the then-current Fee Schedule from the date advanced until the date of
payment. Fund hereby grants Custodian a lien on and security interest
in the assets of the Fund to secure the full amount of any outstanding
overdraft and related overdraft charges.
W. Exercise of Rights; Tender Offers
Upon receipt of instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar securities to the issuer or
trustee thereof, or to the agent of such issuer or trustee, for the
purpose of exercise or sale, provided that the new securities, cash or
other assets, if any, are to be delivered to the Custodian; and (b)
deposit securities upon invitations for tenders thereof, provided that
the consideration for such securities is to be paid or delivered to
the Custodian or the tendered securities are to be returned to the
Custodian.
INSTRUCTIONS.
A. The term "instructions", as used herein, means written (including
telecopied or telexed) or oral instructions which Custodian reasonably
believes were given by a designated
650203.1
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<PAGE>
representative of Fund. Fund shall deliver to Custodian, prior to delivery
of any assets to Custodian and thereafter from time to time as changes
therein are necessary, written instructions naming one or more designated
representatives to give instructions in the name and on behalf of Fund,
which instructions may be received and accepted by Custodian as conclusive
evidence of the authority of any designated representative to act for Fund
and may be considered to be in full force and effect (and Custodian will be
fully protected in acting in reliance thereon) until receipt by Custodian
of notice to the contrary. Unless such written instructions delegating
authority to any person to give instructions specifically limit such
authority to specific matters or require that the approval of anyone else
will first have been obtained, Custodian will be under no obligation to
inquire into the right of such person, acting alone, to give any
instructions whatsoever which Custodian may receive from such person. If
Fund fails to provide Custodian any such instructions naming designated
representatives, any instructions received by Custodian from a person
reasonably believed to be an appropriate representative of Fund shall
constitute valid and proper instructions hereunder.
B. No later than the next business day immediately following each oral
instruction, Fund will send Custodian written confirmation of such oral
instruction. At Custodian's sole
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<PAGE>
discretion, Custodian may record on tape, or otherwise, any oral
instruction whether given in person or via telephone, each such recording
identifying the parties, the date and the time of the beginning and ending
of such oral instruction.
LIMITATION OF LIABILITY OF CUSTODIAN.
A. Custodian shall at all times use reasonable care and due diligence and act
in good faith in performing its duties under this Agreement. Custodian
shall not be responsible for, and the Fund shall indemnify and hold
Custodian harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability which may be
asserted against Custodian, incurred by Custodian or for which Custodian
may be held to be liable, arising out of or attributable to:
1. All actions taken by Custodian pursuant to this Agreement or any
instructions provided to it hereunder, provided that Custodian has
acted in good faith and with due diligence and reasonable care; and
2. The Fund's refusal or failure to comply with the terms of this
Agreement (including without limitation the Fund's failure to pay or
reimburse Custodian under this indemnification provision), the Fund's
negligence or willful misconduct, or the failure of any representation
or warranty of the Fund hereunder to be
650203.1
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<PAGE>
and remain true and correct in all respects at all times.
B. Custodian may request and obtain at the expense of Fund the advice and
opinion of counsel for Fund or of its own counsel with respect to questions
or matters of law, and it shall be without liability to Fund for any action
taken or omitted by it in good faith, in conformity with such advice or
opinion. If Custodian reasonably believes that it could not prudently act
according to the instructions of the Fund or the Fund's accountants or
counsel, it may in its discretion, with notice to the Fund, not act
according to such instructions.
C. Custodian may rely upon the advice and statements of Fund, Fund's
accountants and officers or other authorized individuals, and other persons
believed by it in good faith to be expert in matters upon which they are
consulted, and Custodian shall not be liable for any actions taken, in good
faith, upon such advice and statements.
D. If Fund requests Custodian in any capacity to take any action which
involves the payment of money by Custodian, or which might make it or its
nominee liable for payment of monies or in any other way, Custodian shall
be indemnified and held harmless by Fund against any liability on account
of such action; provided, however, that nothing herein shall obligate
Custodian to take any such action except in its sole discretion.
650203.1
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<PAGE>
E. Custodian shall be protected in acting as custodian hereunder upon any
instructions, advice, notice, request, consent, certificate or other
instrument or paper appearing to it to be genuine and to have been properly
executed and shall be entitled to receive upon request as conclusive proof
of any fact or matter required to be ascertained from Fund hereunder a
certificate signed by an officer or designated representative of Fund.
F. Custodian shall be under no duty or obligation to inquire into, and shall
not be liable for:
1. The validity of the issue of any securities purchased by or for Fund,
the legality of the purchase of any securities or foreign currency
positions or evidence of ownership required by Fund to be received by
Custodian, or the propriety of the decision to purchase or amount paid
therefor;
2. The legality of the sale of any securities or foreign currency
positions by or for Fund, or the propriety of the amount for which the
same are sold;
3. The legality of the issue or sale of any Fund Shares, or the
sufficiency of the amount to be received therefor;
4. The legality of the repurchase or redemption of any Fund Shares, or
the propriety of the amount to be paid therefor; or
650203.1
30
<PAGE>
5. The legality of the declaration of any dividend by Fund, or the
legality of the issue of any Fund Shares in payment of any stock
dividend.
G. Custodian shall not be liable for, or considered to be Custodian of, any
money represented by any check, draft, wire transfer, clearinghouse funds,
uncollected funds, or instrument for the payment of money to be received by
it on behalf of Fund until Custodian actually receives such money;
provided, however, that it shall advise Fund promptly if it fails to
receive any such money in the ordinary course of business and shall
cooperate with Fund toward the end that such money shall be received.
H. Except as provided in Section 3.S., Custodian shall not be responsible for
loss occasioned by the acts, neglects, defaults or insolvency of any
broker, bank, trust company, or any other person with whom Custodian may
deal.
I. Custodian shall not be responsible or liable for the failure or delay in
performance of its obligations under this Agreement, or those of any entity
for which it is responsible hereunder, arising out of or caused, directly
or indirectly, by circumstances beyond the affected entity's reasonable
control, including, without limitations: any interruption, loss or
malfunction of any utility, transportation, computer (hardware or software)
or communication service; inability to obtain labor, material, equipment or
transportation, or a delay in mails;
650203.1
31
<PAGE>
governmental or exchange action, statute, ordinance, rulings, regulations
or direction; war, strike, riot, emergency, civil disturbance, terrorism,
vandalism, explosions, labor disputes, freezes, floods, fires, tornados,
acts of God or public enemy, revolutions, or insurrection.
J. IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT
BE LIABLE TO ANYONE, INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY, FOR
CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES FOR ANY ACT OR FAILURE TO ACT
UNDER ANY PROVISION OF THIS AGREEMENT EVEN IF ADVISED OF THIS POSSIBILITY
THEREOF.
6. COMPENSATION. In consideration for its services hereunder, Fund will pay to
Custodian such compensation as shall be set forth in a separate fee
schedule to be agreed to by Fund and Custodian from time to time. A copy of
the initial fee schedule is attached hereto and incorporated herein by
reference. Custodian shall also be entitled to receive, and Fund agrees to
pay to Custodian, on demand, reimbursement for Custodian's cash
disbursements and reasonable out-of-pocket costs and expenses, including
attorney's fees, incurred by Custodian in connection with the performance
of services hereunder. Custodian may charge such compensation against
monies held by it for the account of Fund. Custodian will also be entitled
to charge against any monies
650203.1
32
<PAGE>
held by it for the account of Fund the amount of any loss, damage,
liability, advance, overdraft or expense for which it shall be entitled to
reimbursement from Fund, including but not limited to fees and expenses due
to Custodian for other services provided to the Fund by Custodian.
Custodian will be entitled to reimbursement by the Fund for the losses,
damages, liabilities, advances, overdrafts and expenses of subcustodians
only to the extent that (i) Custodian would have been entitled to
reimbursement hereunder if it had incurred the same itself directly, and
(ii) Custodian is obligated to reimburse the subcustodian therefor. 7. TERM
AND TERMINATION. The initial term of this Agreement --------------------
shall be for a period of __________. Thereafter, either party to this
Agreement may terminate the same by notice in writing, delivered or mailed,
postage prepaid, to the other party hereto and received not less than
ninety (90) days prior to the date upon which such termination will take
effect. Upon termination of this Agreement, Fund will pay Custodian its
fees and compensation due hereunder and its reimbursable disbursements,
costs and expenses paid or incurred to such date and Fund shall designate a
successor custodian by notice in writing to Custodian by the termination
date. In the event no written order designating a successor custodian has
been delivered to Custodian on or before the date when such termination
becomes effective,
650203.1
33
<PAGE>
then Custodian may, at its option, deliver the securities, funds and
properties of Fund to a bank or trust company at the selection of
Custodian, and meeting the qualifications for custodian set forth in the
1940 Act and having not less than Two Million Dollars ($2,000,000)
aggregate capital, surplus and undivided profits, as shown by its last
published report, or apply to a court of competent jurisdiction for the
appointment of a successor custodian or other proper relief, or take any
other lawful action under the circumstances; provided, however, that Fund
shall reimburse Custodian for its costs and expenses, including reasonable
attorney's fees, incurred in connection therewith. Custodian will, upon
termination of this Agreement and payment of all sums due to Custodian from
Fund hereunder or otherwise, deliver to the successor custodian so
specified or appointed, or as specified by the court, at Custodian's
office, all securities then held by Custodian hereunder, duly endorsed and
in form for transfer, and all funds and other properties of Fund deposited
with or held by Custodian hereunder, and Custodian will co-operate in
effecting changes in book-entries at all Depositories. Upon delivery to a
successor custodian or as specified by the court, Custodian will have no
further obligations or liabilities under this Agreement. Thereafter such
successor will be the successor custodian under this Agreement and will be
entitled to reasonable compensation for its
650203.1
34
<PAGE>
services. In the event that securities, funds and other properties remain
in the possession of the Custodian after the date of termination hereof
owing to failure of the Fund to appoint a successor custodian, the
Custodian shall be entitled to compensation as provided in the then-current
fee schedule hereunder for its services during such period as the Custodian
retains possession of such securities, funds and other properties, and the
provisions of this Agreement relating to the duties and obligations of the
Custodian shall remain in full force and effect.
8. NOTICES. Notices, requests, instructions and other writings addressed to
Fund at ____________________________, or at such other address as Fund may
have designated to Custodian in writing, will be deemed to have been
properly given to Fund hereunder; and notices, requests, instructions and
other writings addressed to Custodian at its offices at 127 West 10th
Street, Kansas City, Missouri 64105, Attention: Custody Department, or to
such other address as it may have designated to Fund in writing, will be
deemed to have been properly given to Custodian hereunder.
9. MULTIPLE PORTFOLIOS. If Fund is comprised of more than one Portfolio:
A. Each Portfolio shall be regarded for all purposes hereunder as a
separate party apart from each other Portfolio. Unless the context
otherwise requires, with respect to every transaction
650203.1
35
<PAGE>
covered by this Agreement, every reference herein to the Fund shall be
deemed to relate solely to the particular Portfolio to which such
transaction relates. Under no circumstances shall the rights,
obligations or remedies with respect to a particular Portfolio
constitute a right, obligation or remedy applicable to any other
Portfolio. The use of this single document to memorialize the separate
agreement of each Portfolio is understood to be for clerical
convenience only and shall not constitute any basis for joining the
Portfolios for any reason.
B. Additional Portfolios may be added to this Agreement, provided that
Custodian consents to such addition. Rates or charges for each
additional Portfolio shall be as agreed upon by Custodian and Fund in
writing.
10. MISCELLANEOUS.
A. This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws of
the State of Missouri, without reference to the choice of laws
principles thereof.
B. All terms and provisions of this Agreement shall be binding upon,
inure to the benefit of and be
650203.1
36
<PAGE>
enforceable by the parties hereto and their respective successors and
permitted assigns.
C. The representations and warranties and the indemnifications extended
hereunder are intended to and shall continue after and survive the
expiration, termination or cancellation of this Agreement.
D. No provisions of the Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed
by each party hereto.
E. The failure of either party to insist upon the performance of any
terms or conditions of this Agreement or to enforce any rights
resulting from any breach of any of the terms or conditions of this
Agreement, including the payment of damages, shall not be construed as
a continuing or permanent waiver of any such terms, conditions, rights
or privileges, but the same shall continue and remain in full force
and effect as if no such forbearance or waiver had occurred. No
waiver, release or discharge of any party's rights hereunder shall be
effective unless contained in a written instrument signed by the party
sought to be charged.
650203.1
37
<PAGE>
F. The captions in the Agreement are included for convenience of
reference only, and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect.
G. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
H. If any part, term or provision of this Agreement is determined by the
courts or any regulatory authority to be illegal, in conflict with
any law or otherwise invalid, the remaining portion or portions shall
be considered severable and not be affected, and the rights and
obligations of the parties shall be construed and enforced as if the
Agreement did not contain the particular part, term or provision held
to be illegal or invalid.
I. This Agreement may not be assigned by either party hereto without the
prior written consent of the other party.
J. Neither the execution nor performance of this Agreement shall be
deemed to create a partnership or joint venture by and between
Custodian and Fund.
K. Except as specifically provided herein, this Agreement does not in any
way affect any other
650203.1
38
<PAGE>
agreements entered into among the parties hereto and any actions taken
or omitted by either party hereunder shall not affect any rights or
obligations of the other party hereunder.
650203.1
39
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers.
INVESTORS FIDUCIARY TRUST COMPANY
By:
------------------------------------
Title:
---------------------------------
FUND
By:
------------------------------------
Title:
---------------------------------
650203.1
40
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
INVESTORS FIDUCIARY TRUST COMPANY
AVAILABILITY SCHEDULE BY TRANSACTION TYPE
TRANSACTION DTC PHYSICAL FED
----------- --- -------- ---
TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE
- ------------------------- --------------- ------------- ------------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Calls Put As Received C or F* As Received C or F*
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
Tender Reorgs. As Received C As Received C N/A
Dividends Paydate C Paydate C N/A
Floating Rate Int. Paydate C Paydate C N/A
Floating Rate Int. N/A As Rate C N/A
(No Rate) Received
Mtg. Backed P&I Paydate C Paydate + 1 C Paydate F
Bus. Day
Fixed Rate Inc. Paydate C Paydate C Paydate F
Euroclear N/A Paydate C
</TABLE>
Legend
C = Clearinghouse Funds
F = Fed Funds
N/A = Not Applicable
* Availability based on how received.
650203.1
41
ADMINISTRATIVE SERVICES CONTRACT
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
the "Fund"
New York, New York
October __, 1997
Reich & Tang Asset Management L.P.
600 Fifth Avenue
New York, New York 10020
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We propose to engage in the business of investing and reinvesting
our assets in securities of the type, and in accordance with the limitations,
specified in our Articles of Incorporation, By-Laws and Registration Statement
filed with the Securities and Exchange Commission under the Investment Company
Act of 1940 (the "1940 Act") and the Securities Act of 1933, including the
Prospectus forming a part thereof (the "Registration Statement"), all as from
time to time in effect, and in such manner and to such extent as may from time
to time be authorized by our Board of Directors. We enclose copies of the
documents listed above and will furnish you such amendments thereto as may be
made from time to time.
2. (a) We hereby employ you as our administrator (the "Administrator")
to provide all management and administrative services reasonably necessary for
our operation, other than those services you provide to us pursuant to the
Investment Management Contract. The services to be provided by you shall include
but not be limited to those enumerated on Exhibit A hereto. The personnel
providing these services may be your employees or employees of your affiliates
or of other organizations. You shall make periodic reports to the Fund's Board
of Directors in the performance of your obligations under this Agreement and the
execution of your duties hereunder is subject to the general control of the
Board of Directors.
(b) It is understood that you will from time to time employ,
subcontract with or otherwise associate with yourself, entirely at your expense,
such persons as you believe to be particularly fitted to assist you in the
execution of your duties hereunder. While this agreement is in effect, you or
persons affiliated with you, other than us ("your affiliates"),
266955.1 1
<PAGE>
will provide persons satisfactory to our Board of Directors to be elected or
appointed officers or employees of our corporation. These shall be a president,
a secretary, a treasurer, and such additional officers and employees as may
reasonably be necessary for the conduct of our business.
(c) You or your affiliates will also provide persons, who may be
our officers, to (I) supervise the performance of bookkeeping and related
services and calculation of net asset value and yield by our bookkeeping agent
and (ii) prepare reports to and the filings with regulatory authorities, and
(iii) perform such clerical, other office and shareholder services for us as we
may from time to time request of you. Such personnel may be your employees or
employees of your affiliates or of other organizations. Notwithstanding the
preceding, you shall not be required to perform any accounting services not
expressly provided for herein. On behalf of the Fund, we will pay to you the
cost of such personnel for rendering such services to us at such rates as shall
from time to time be agreed upon between us, provided that we shall not bear or
pay any costs in respect of any services performed for us by officers of Reich &
Reich & Tang Asset Management Inc., your general partner, or officers of your
affiliates.
(d) You or your affiliates will also furnish us such
administrative and management supervision and assistance and such office
facilities as you may believe appropriate or as we may reasonably request
subject to the requirements of any regulatory authority to which you may be
subject. On behalf of the Fund, we will reimburse you for all of our operating
costs incurred by you (in addition to the personnel reimbursement described in
the preceding subparagraph (c)), including rent, depreciation of equipment and
facilities, interest and amortization of loans financing equipment used by us
and all the expenses incurred by you to conduct our affairs. The amounts of such
reimbursements shall from time to time be agreed upon between us. You or your
affiliates will also pay the expenses of promoting the sale of our shares (other
than the costs of preparing, printing and filing our Registration Statement,
printing copies of the prospectus contained therein and complying with other
applicable regulatory requirements), except to the extent that we are permitted
to bear such expenses under a plan adopted pursuant to Rule 12b-1 under the 1940
Act or a similar rule.
3. We will expect of you, and you will give us the benefit of, your
best judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our security
holders by reason of willful misfeasance, bad faith or
266955.1
2
<PAGE>
gross negligence in the performance of your duties hereunder, or by reason of
your reckless disregard of your obligations and duties hereunder.
4. In consideration of the foregoing, the Fund will pay you a fee of
.21% of the Fund's average daily net assets. Your fee will be accrued by us
daily, and will be payable on the last day of each calendar month for services
performed hereunder during that month or on such other schedule as we may agree
in writing. You may use any portion of this fee for distribution of our shares,
or for making payments to organizations whose customers or clients are our
shareholders. You may waive your right to any fee to which you are entitled
hereunder, provided such waiver is delivered to us in writing.
5. This Agreement will become effective on the date hereof and shall
continue in effect until _________________ and thereafter for successive
twelve-month periods (computed from each _____________), provided that such
continuation is specifically approved at least annually by our Board of
Directors and by a majority of those of our directors who are neither party to
this Agreement nor, other than by their service as directors of the Fund,
interested persons, as defined in the 1940 Act, of any such person who is party
to this Agreement. This Agreement may be terminated at any time, without the
payment of any penalty, (I) by vote of a majority of the outstanding voting
securities of each respective Portfolio voting separately, as defined in the
1940 Act, or (ii) by a vote of a majority of our entire Board of Directors, on
sixty days' written notice to you, or by you on sixty days' written notice to
us.
6. This Agreement may not be transferred, assigned, sold or in any
manner hypothecated or pledged by you and this Agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the Securities and Exchange Commission.
7. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, or
the right of any of your officers, directors or employees who may also be a
director, officer or employee of ours, or of a person affiliated with us, as
defined in the Act, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
266955.1
3
<PAGE>
8. This Agreement shall be construed in accordance with the laws of
the State of New York and the applicable provisions of the 1940 Act.
If the foregoing is in accordance with your understanding, will you
kindly so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
By:
----------------------------------------
Name:
Title:
ACCEPTED: October __, 1997
REICH & TANG ASSET MANAGEMENT L.P.
By: REICH & TANG ASSET MANAGEMENT INC., as General Partner
By:
---------------------------------
Name:
Title:
266955.1
4
<PAGE>
Exhibit A
Administration Services To Be Performed
By Reich & Tang Asset Management L.P.
-------------------------------------
Administration Services
- -----------------------
1. In conjunction with Fund counsel, prepare and file all
Post-Effective Amendments to the Registration Statement, all
state and federal tax returns and all other required regulatory
filings.
2. In conjunction with Fund counsel, prepare and file all Blue Sky
filings, reports and renewals.
3. Coordinate, but not pay for, required Fidelity Bond and Directors
and Officers Insurance (if any) and monitor their compliance with
Investment Company Act.
4. Coordinate the preparation and distribution of all materials for
Directors, including the agenda for meetings and all exhibits
thereto, and actual and projected quarterly summaries.
5. Coordinate the activities of the Fund's Manager, Custodian, Legal
Counsel and Independent Accountants.
6. Prepare and file all periodic reports to shareholders and proxies
and provide support for shareholder meetings.
7. Monitor daily and periodic compliance with respect to all
requirements and restrictions of the Investment Company Act, the
Internal Revenue Code and the Prospectus.
8. Monitor daily the Fund's bookkeeping services agent's calculation
of all income and expense accruals, sales and redemptions of
capital shares outstanding.
9. Evaluate expenses, project future expenses, and process payments
of expenses.
10. Monitor and evaluate performance of accounting and accounting
related services by Fund's bookkeeping services agent. Nothing
herein shall be construed to require you to perform any
accounting services not expressly provided for in this Agreement.
266955.1
5
CONSENT OF MESSRS. BATTLE FOWLER
We consent to the reference to our Firm in the Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-1A of Virginia Daily
Municipal Income Fund, Inc. as filed with the Securities and Exchange Commission
on November 5, 1997.
BATTLE FOWLER LLP
New York, New York
November 5, 1997
650483.1
HUNTON & WILLIAMS
RIVERFRONT PLAZA, EAST TOWER
951 EAST BYRD STREET
RICHMOND, VIRGINIA 23219-4074
Telephone (804) 788-8200
File No.: 53032.2
Facsimile (804) 788-8218
Direct Dial: 804-788-8200
November 4, 1997
Virginia Daily Municipal Income Fund, Inc.
c/o Reich & Tang Asset Management, L.P.
600 Fifth Avenue
New York, New York 10020
Virginia Income Taxes
Gentlemen:
You have asked for our opinion on the Virginia income taxation
of distributions from the Virginia Daily Municipal Income Fund, Inc. (the
"Fund"). In rendering this opinion, we have relied upon (i) the facts stated in
this letter and (ii) the facts stated and representations made in the Fund's
prospectus (the "Prospectus") and Statement of Additional Information (the
"Statement") contained in the Pre-Effective Amendment No. 2 to the registration
statement of the Fund (No. 33-90582). We also have relied on the opinion of
Battle Fowler LLP, counsel to the Fund, that the participation certificates,
described in the paragraph immediately below, cause the Fund to be treated as
the owner of the underlying obligations for federal income tax purposes.
FACTS
The Fund has registered with the SEC as a non-diversified,
open-end management investment company under the Investment Company Act of 1940.
The Fund seeks to provide shareholders with the maximum amount of income that is
exempt from both regular federal and Virginia income taxes. In particular, the
Fund will invest primarily, but not necessarily exclusively, in (i) obligations
the interest on which is exempt from both regular federal and Virginia income
taxation and (ii) participation certificates in such obligations purchased from
banks, insurance companies, and other financial institutions.
The Fund intends (i) to qualify for treatment as a separate
regulated investment company under ss.ss.851 - 855 of the Internal Revenue Code
(the "Code") and (ii) to operate as what is commonly known as a "money market
fund." As a money market fund, the Fund, on a daily basis, will compute and
credit to each shareholder of the Fund his pro rata share of the
650205.1
<PAGE>
Fund's interest and other net investment income (excluding capital gains and
losses, if any, and amortization of market discount). That pro rata share
generally will be distributed monthly.
OPINIONS
Subject to the correctness of the facts and assumptions stated
above and in the documents referred to above, it is our opinion that under
existing Virginia law:
1. So long as the Fund qualifies as a "regulated investment
company" for federal income tax purposes and at least 50% of the value of the
total assets of the Fund at the end of each quarter of its taxable year consists
of obligations described in ss. 103(a) of the Code or participation certificates
in such obligations, distributions from the Fund will not be subject to Virginia
individual, estate, trust, or corporate income taxation to the extent that such
distributions are either (i) excludable from gross income for federal income tax
purposes and attributable to interest on obligations issued by the Commonwealth
of Virginia or any of its political subdivisions or instrumentalities ("Virginia
Obligations") or obligations issued by Puerto Rico, the United States Virgin
Islands, or Guam ("Possession Obligations") or (ii) attributable to interest on
obligations issued by the United States or any authority, commission, or
instrumentality of the United States in the exercise of the borrowing power, and
backed by the full faith and credit, of the United States ("United States
Obligations"). For shareholders of the Fund who are subject to Virginia income
taxation, distributions to such shareholders from the Fund (whether paid in cash
or reinvested in additional shares) generally will be includable in Virginia
taxable income to the extent not described in the preceding sentence. Thus, for
example, the portion of a distribution excludable from gross income for federal
income tax purposes and attributable to interest on obligations of a state other
than Virginia will not be exempt from Virginia income taxation.
2. Capital gain distributions from the Fund and gain
recognized on the sale, exchange, redemption, or other disposition of shares of
the Fund generally will not be exempt from Virginia income taxation.
3. Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund (i) will not be deductible
for Virginia income tax purposes to the extent that such interest expense
relates to the portions of distributions from the Fund exempt from Virginia
income taxation and (ii) will be deductible for Virginia income tax purposes as
an offset against the portions of the distributions from the Fund attributable
to interest income not exempt from Virginia income taxation to the extent that
such interest expense is not deducted in determining federal taxable income and
is related to such non-exempt portions.
650205.1
<PAGE>
The foregoing opinions on Virginia income taxes are contingent
upon the Fund, shortly after the end of each calendar year, providing each
shareholder of the Fund a report stating the percentage of total distributions
during each month that represents interest on Virginia Obligations, Possession
Obligations, and United States Obligations ("Exempt Percentage"). Thus, a
shareholder will be given twelve Exempt Percentages, one for each month. The
shareholder then will determine the portion of the total amount of his
distributions from the Fund during the year that is exempt from Virginia income
taxation by (i) multiplying his total distributions during each month by the
Exempt Percentage for that month and (ii) adding those products. The shareholder
is to follow this procedure even if he was a shareholder for only part of any
month because he purchased or redeemed shares in the middle of the month.
For example, X first became a shareholder in the Fund on
August 10. Thus, X received distributions only for the months of August through
December. X will compute the portion of the distributions during the year that
is exempt from Virginia income taxation as follows:
<TABLE>
<CAPTION>
Distributions
During the times Exempt equals Exempt
Month Month Percentage Portion
----------------------- ----------------- -------
<S> <C> <C> <C>
January $ 0 99% $ 0
February 0 100% 0
March 0 98% 0
April 0 100% 0
May 0 98% 0
June 0 98% 0
July 0 98% 0
August 100.00 96% 96.00
September 105.00 95% 99.75
October 101.00 95% 95.95
November 103.00 95% 97.85
December 102.00 94% 95.88
----------------------- -------
TOTALS $ 511.00 $485.43
</TABLE>
The opinions expressed herein represent our judgment regarding
the proper Virginia tax treatment of the Fund and the shareholders of the Fund
who are subject to Virginia taxation. Our conclusions are based on our analysis
of the provisions of the Virginia Code, the
650205.1
<PAGE>
Virginia Income Tax Regulations, Virginia case law, and published rulings of the
Virginia Department of Taxation (the "Department") that exist as of the date of
this opinion, all of which may be subject to prospective or retroactive change.
Our opinions represent our best judgment regarding the questions presented and
does not bind the Department or any court. Moreover, our opinions do not provide
any assurance that a position taken in reliance on the opinions will not be
challenged by the Department or rejected by a court.
We have not examined any of the obligations to be acquired by
the Fund and express no opinion as to whether interest on those obligations is
either excluded from gross income for federal income tax purposes or exempt from
Virginia income taxation.
This letter is solely for the benefit of the Fund and is not
to be quoted in whole or in part or otherwise referred to in any document
without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit
to the registration statement (No. 33-90582) and to the use of our firm's name
in that registration statement and the related prospectus.
Very truly yours,
HUNTON & WILLIAMS
650205.1
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated October 21,
1997, on the financial statement referred to therein, in this Registration
Statement on Form N-1A of Virginia Daily Municipal Income Fund, Inc., as filed
with the Securities and Exchange Commission.
We also consent to the reference to our Firm in the Statement
of Additional Information under the caption "Counsel and Auditors."
McGladrey & Pullen, LLP
New York, New York
October 21, 1997
650206.1
November 5, 1997
Board of Directors of Virginia
Daily Municipal Income Fund, Inc.
Gentlemen:
We hereby subscribe for 100,000 shares of common stock, $.001
par value per share, of Virginia Daily Municipal Income Fund, Inc., a Maryland
corporation (the "Corporation"), at $1.00 per share for an aggregate purchase
price of $100,000. Our payment in full is confirmed.
We hereby represent and agree that we are purchasing these
shares of common stock for investment purposes, for our own account and risk and
not with a view to any sale, division or other distribution thereof within the
meaning of the Securities Act of 1933 as amended, nor with any present intention
of distribution or selling such shares. We further agree that if any of such
shares are redeemed during the period that the deferred organizational expenses
of the Corporation are being amortized, we will reimburse the Corporation the
then unamortized organizational expenses in the same ratio as the number of
shares redeemed bears to the number of such shares held at the time of
redemption.
Very truly yours,
REICH & TANG ASSET MANAGEMENT L.P.
By: REICH & TANG ASSET MANAGEMENT,
INC., General Partner
By:/s/ Richard De Sanctis
--------------------------------------
Confirmed and Accepted:
VIRGINIA DAILY MUNICIPAL
INCOME FUND, INC.
By:/s/ Bernadette N. Finn
----------------------
650587.1
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
Distribution and Service Plan Pursuant to Rule
12b-1 Under the Investment Company Act of 1940
The Distribution and Service Plan (the "Plan") is adopted by Virginia
Daily Municipal Income Fund, Inc. (the "Fund") in accordance with the provisions
of Rule 12b-1 under the Investment Company Act of 1940 (the "Act").
The Plan
--------
1. The Fund and the Distributor, have entered into a Distribution
Agreement, in a form satisfactory to the Fund's Board of Directors, under which
the Distributor will act as distributor of the Fund's shares. Pursuant to the
Distribution Agreement, the Distributor, as agent of the Fund, will solicit
orders for the purchase of the Fund's shares, provided that any subscriptions
and orders for the purchase of the Fund's shares will not be binding on the Fund
until accepted by the Fund as principal.
2. The Fund and the Distributor have entered into a Shareholder
Servicing Agreement with respect to the Class A shares of the Fund, in a form
satisfactory to the Fund's Board of Directors, which provides that the
Distributor will be paid a service fee for providing or for arranging for others
to provide all personal shareholder servicing and related maintenance of
shareholder account functions not performed by us or our transfer agent.
266880.1
<PAGE>
3. The Manager may make payments from time to time from its own
resources, which may include the management fees and administrative services
fees received by the Manager from the Fund and from other companies, and past
profits for the following purposes:
(i) to pay the costs of, and to compensate others, including
organizations whose customers or clients are Class A Fund Shareholders
("Participating Organizations"), for performing personal shareholder
servicing and related maintenance of shareholder account functions on
behalf of the Fund;
(ii) to compensate Participating Organizations for providing
assistance in distributing the Fund's Class A Shares; and
(iii) to pay the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective
shareholders, advertising, and other promotional activities, including
salaries and/or commissions of sales personnel of the Distributor and
other persons, in connection with the distribution of the Fund's
shares.
The Distributor may also make payments from time to time from its own resources,
which may include the service fee and past profits for the purpose enumerated in
(i) above. Further, the Distributor may determine the amount of such payments
made pursuant to the Plan, provided that such payments will not
-2-
266880.1
<PAGE>
increase the amount which the Fund is required to pay to (1) the Manager for any
fiscal year under the Investment Management Contract or the Administrative
Services Agreement in effect for that year or otherwise or (2) to the
Distributor under the Shareholder Servicing Agreement in effect for that year or
otherwise. The Investment Management Contract will also require the Manager to
reimburse the Fund for any amounts by which the Fund's annual operating
expenses, including distribution expenses, exceed in the aggregate in any fiscal
year the limits prescribed by any state in which the Fund's shares are qualified
for sale.
4. 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 its obligations under the
Shareholder Servicing Agreement with respect to the Class A shares of the Fund
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.
5. Payments by the Distributor or Manager to Participating
Organizations as set forth herein are subject to compliance by them with the
terms of written agreements in a form satisfactory to the Fund's Board of
Directors to be entered into between the Distributor and the Participating
Organizations.
-3-
266880.1
<PAGE>
6. The Fund and the Distributor will prepare and furnish to the Fund's
Board of Directors, at least quarterly, written reports setting forth all
amounts expended for servicing and distribution purposes by the Fund, the
Distributor and the Manager, pursuant to the Plan and identifying the servicing
and distribution activities for which such expenditures were made.
7. The Plan became effective upon approval by (i) a majority of the
outstanding voting securities of the Fund (as defined in the Act), and (ii) a
majority of the Board of Directors of the Fund, including a majority of the
Directors who are not interested persons (as defined in the Act) of the Fund and
who have no direct or indirect financial interest in the operation of the Plan
or in any agreement entered into in connection with the Plan, pursuant to a vote
cast in person at a meeting called for the purpose of voting on the approval of
the Plan.
8. The Plan will remain in effect until ___________ __, 1997 unless
earlier terminated in accordance with its terms, and thereafter may continue in
effect for successive annual periods if approved each year in the manner
described in clause (ii) of paragraph 7 hereof.
9. The Plan may be amended at any time with the approval of the Board
of Directors of the Fund, provided that (i) any material amendments of the terms
of the Plan will be effective only upon approval as provided in clause (ii) of
paragraph 7 hereof, and (ii) any amendment which increases materially
-4-
266880.1
<PAGE>
the amount which may be spent by the Fund pursuant to the Plan will be effective
only upon the additional approval as provided in clause (i) of paragraph 7
hereof (with each class of the Fund voting separately).
10. The Plan may be terminated without penalty at any time (i) by a
vote of the majority of the entire Board of Directors of the Fund and by a vote
of a majority of the Directors of the Fund who are not interested persons (as
defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to the Plan,
or (ii) by a vote of a majority of the outstanding voting securities of the Fund
(with each class of the Fund voting separately) (as defined in the Act).
-5-
266880.1
DISTRIBUTION AGREEMENT
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
the "Fund"
600 Fifth Avenue
New York, New York 10020
October __, 1997
Reich & Tang Distributors L.P.
600 Fifth Avenue
New York, New York 10020
Ladies and Gentlemen:
We hereby confirm our agreement with you as follows:
1. In consideration of the agreements on your part herein contained
and of the payment by us to you of a fee of $1 per year and on the terms and
conditions set forth herein we have agreed that you shall be, for the period of
this agreement, a distributor, as our agent, for the unsold portion of such
number of shares of common stock, $.001 par value per share, as may be
effectively registered from time to time under the Securities Act of 1933, as
amended (the "1933 Act"). This agreement is being entered into pursuant to the
Distribution and Service Plan (the "Plan") adopted by us in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act").
2. We hereby agree that you will act as our agent, and hereby appoint
you our agent, to offer, and to solicit offers to subscribe to, the unsold
balance of shares of our common stock as shall then be effectively registered
under the Act. All subscriptions for shares of our common stock obtained by you
shall be directed to us for acceptance and shall not be binding on us until
accepted by us. You shall have no authority to make binding subscriptions on our
behalf. We reserve the right to sell shares of our common stock through other
distributors or directly to investors through subscriptions received by us at
our principal office in New York, New York. The right given to you under this
agreement shall not apply to shares of our common stock issued in connection
with (a) the merger or consolidation of any other investment company with us,
(b) our acquisition by purchase or otherwise of all or substantially all of the
assets or stock of any other investment company, or (c) the reinvestment in
shares of our common stock by our shareholders of dividends or
266952.1
<PAGE>
other distributions or any other offering by us of securities to our
shareholders.
3. You will use your best efforts to obtain subscriptions to shares of
our common stock upon the terms and conditions contained herein and in our
Prospectus, as in effect from time to time. You will send to us promptly all
subscriptions placed with you. We shall furnish you from time to time, for use
in connection with the offering of shares of our common stock, such other
information with respect to us and shares of our common stock as you may
reasonably request. We shall supply you with such copies of our Registration
Statement and Prospectus, as in effect from time to time, as you may request.
Except as we may authorize in writing, you are not authorized to give any
information or to make any representation that is not contained in the
Registration Statement or Prospectus, as then in effect. You may use employees,
agents and other persons, at your cost and expense, to assist you in carrying
out your obligations hereunder, but no such employee, agent or other person
shall be deemed to be our agent or have any rights under this agreement. You may
sell our shares to or through qualified brokers, dealers and financial
institutions under selling and servicing agreements provided that no dealer,
financial institution or other person shall be appointed or authorized to act as
our agent without our written consent.
With respect to the Class A Shares of the Fund, you will arrange for
organizations whose customers or clients are shareholders of our Fund
("Participating Organizations") to enter into agreements with you for the
performance of shareholder servicing and related administrative functions not
performed by you or the Transfer Agent. Pursuant to our Shareholder Servicing
Agreement with you with respect to the Class A Shares, you may make payments to
Participating Organizations for performing shareholder servicing and related
administrative functions with respect to the Class A Shares. Such payments will
be made only pursuant to written agreements approved in form and substance by
our Board of Directors to be entered into by you and the Participating
Organizations. It is recognized that we shall have no obligation or liability to
you or any Participating Organization for any such payments under the agreements
with Participating Organizations. Our obligation is solely to make payments to
you under the Shareholder Servicing Agreement (with respect to the Class A
Shares) and to the Manager under the Investment Management Contract and the
Administrative Services Contract. All sales of our shares effected through you
will be made in compliance with all applicable federal securities laws and
regulations and the Constitution, rules and regulations of the National
Association of Securities Dealers, Inc. ("NASD").
4. We reserve the right to suspend the offering of shares of our
common stock at any time, in the absolute
-2-
266952.1
<PAGE>
discretion of our Board of Directors, and upon notice of such suspension you
shall cease to offer shares of our beneficial interests hereunder.
5. Both of us will cooperate with each other in taking such action as
may be necessary to qualify shares of our common stock for sale under the
securities laws of such states as we may designate, provided, that you shall not
be required to register as a broker-dealer or file a consent to service of
process in any such state where you are not now so registered. Pursuant to the
Investment Management Contract in effect between us and the Manager, we will pay
all fees and expenses of registering shares of our common stock under the Act
and of qualification of shares of our common stock, and to the extent necessary,
our qualification under applicable state securities laws. You will pay all
expenses relating to your broker-dealer qualification.
6. We represent to you that our Registration Statement and Prospectus
have been carefully prepared to date in conformity with the requirements of the
1933 Act and the 1940 Act and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder. We represent and warrant to you, as
of the date hereof, that our Registration Statement and Prospectus contain all
statements required to be stated therein in accordance with the 1933 Act and the
1940 Act and the SEC's rules and regulations thereunder; that all statements of
fact contained therein are or will be true and correct at the time indicated or
the effective date as the case may be; and that neither our Registration
Statement nor our Prospectus, when they shall become effective or be authorized
for use, will include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of shares of our common stock. We will
from time to time file such amendment or amendments to our Registration
Statement and Prospectus as, in the light of future development, shall, in the
opinion of our counsel, be necessary in order to have our Registration Statement
and Prospectus at all times contain all material facts required to be stated
therein or necessary to make any statements therein not misleading to a
purchaser of shares of our common stock. If we shall not file such amendment or
amendments within fifteen days after our receipt of a written request from you
to do so, you may, at your option, terminate this agreement immediately. We will
not file any amendment to our Registration Statement or Prospectus without
giving you reasonable notice thereof in advance; provided, however, that nothing
in this agreement shall in any way limit our right to file such amendments to
our Registration Statement or Prospectus, of whatever character, as we may deem
advisable, such right being in all respects absolute and unconditional. We
represent and warrant to you that any amendment to our Registration Statement or
Prospectus hereafter
-3-
266952.1
<PAGE>
filed by us will be carefully prepared in conformity within the requirements of
the 1933 Act and the 1940 Act and the SEC's rules and regulations thereunder and
will, when it becomes effective, contain all statements required to be stated
therein in accordance with the 1933 Act and the 1940 Act and the SEC's rules and
regulations thereunder; that all statements of fact contained therein will, when
the same shall become effective, be true and correct; and that no such
amendment, when it becomes effective, will include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a purchaser of our
shares.
7. We agree to indemnify, defend and hold you, and any person who
controls you within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which you or any such controlling
person may incur, under the 1933 Act or the 1940 Act, or under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in our Registration Statement or Prospectus in effect
from time to time or arising out of or based upon any alleged omission to state
a material fact required to be stated in either of them or necessary to make the
statements in either of them not misleading; provided, however, that in no event
shall anything herein contained be so construed as to protect you against any
liability to us or our security holders to which you would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties under this agreement. Our agreement to indemnify you and
any such controlling person is expressly conditioned upon our being notified of
any action brought against you or any such controlling person, such notification
to be given by letter or by telegram addressed to us at our principal office in
New York, New York, and sent to us by the person against whom such action is
brought within ten days after the summons or other first legal process shall
have been served. The failure so to notify us of any such action shall not
relieve us from any liability which we may have to the person against whom such
action is brought other than on account of our indemnity agreement contained in
this paragraph 7. We will be entitled to assume the defense of any suit brought
to enforce any such claim, and to retain counsel of good standing chosen by us
and approved by you. In the event we do elect to assume the defense of any such
suit and retain counsel of good standing approved by you, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case we do not elect to assume the
defense of any such suit, or in case you, in good faith, do not approve of
counsel chosen by us, we will
-4-
266952.1
<PAGE>
reimburse you or the controlling person or persons named as defendant or
defendants in such suit, for the fees and expenses of any counsel retained by
you or them. Our indemnification agreement contained in this paragraph 7 and our
representations and warranties in this agreement shall remain in full force and
effect regardless of any investigation made by or on behalf of you or any
controlling person and shall survive the sale of any shares of our common stock
made pursuant to subscriptions obtained by you. This agreement of indemnity will
inure exclusively to your benefit, to the benefit of your successors and
assigns, and to the benefit of any of your controlling persons and their
successors and assigns. We agree promptly to notify you of the commencement of
any litigation or proceeding against us in connection with the issue and sale of
any shares of our common stock.
8. You agree to indemnify, defend and hold us, our several officers
and directors, and any person who controls us within the meaning of Section 15
of the 1933 Act, free and harmless from and against any and all claims, demands,
liabilities, and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any reasonable counsel fees incurred in
connection therewith) which we, our officers or directors, or any such
controlling person may incur under the 1933 Act or under common law or
otherwise, but only to the extent that such liability or expense incurred by us,
our officers or directors or such controlling person shall arise out of or be
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by you to us for use in our Registration
Statement or Prospectus as in effect from time to time, or shall arise out of or
be based upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. Your agreement
to indemnify us, our officers and directors, and any such controlling person is
expressly conditioned upon your being notified of any action brought against us,
our officers or directors or any such controlling person, such notification to
be given by letter or telegram addressed to you at your principal office in New
York, New York, and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is based
solely upon such alleged misstatement or omission on your part, and in any other
event you and we, our officers or directors or such controlling person shall
each have the right to participate in the defense or preparation of the defense
of any such action. The failure so to notify you of any such action shall not
relieve you from any liability which you may have to us, to our officers
-5-
266952.1
<PAGE>
or directors, or to such controlling person other than on account of your
indemnity agreement contained in this paragraph 8.
9. We agree to advise you immediately:
a. of any request by the SEC for amendments to our Registration
Statement or Prospectus or for additional information,
b. of the issuance by the SEC of any stop order suspending the
effectiveness of our Registration Statement or Prospectus or the initiation of
any proceedings for that purpose,
c. of the happening of any material event which makes untrue any
statement made in our Registration Statement or Prospectus or which requires the
making of a change in either of them in order to make the statements therein not
misleading, and
d. of all action of the SEC with respect to any amendments to our
Registration Statement or Prospectus.
10. This agreement will become effective on the date hereof and will
remain in effect thereafter for successive twelve-month periods (computed from
each ____________), provided that such continuation is specifically approved at
least annually by vote of our Board of Directors and of a majority of those of
our directors who are not interested persons (as defined in the 1940 Act) and
have no direct or indirect financial interest in the operation of the Plan or in
any agreements related to the Plan, cast in person at a meeting called for the
purpose of voting on this agreement. This agreement may be terminated at any
time, without the payment of any penalty, (i) by vote of a majority of our
entire Board of Directors, and by a vote of a majority of our Directors who are
not interested persons (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan, or (ii) by vote of a majority of our outstanding voting
securities, as defined in the Act, on sixty days' written notice to you, or
(iii) by you on sixty days' written notice to us.
11. This Agreement may not be transferred, assigned, sold or in any
manner hypothecated or pledged by you and this Agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the SEC thereunder.
12. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, the
right of any of your employees or the
-6-
266952.1
<PAGE>
right of any officers or directors of Reich & Tang Asset Management Inc., your
general partner, who may also be a director, officer or employee of ours, or of
a person affiliated with us, as defined in the 1940 Act, to engage in any other
business or to devote time and attention to the management or other aspects of
any other business, whether of a similar or dissimilar nature, or to render
services of any kind to another corporation, firm, individual or association.
If the foregoing is in accordance with your understanding, will you
kindly so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
By:
----------------------------------------
Accepted: October __, 1997
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT INC., as General Partner
By: ___________________________________
- 7-
266952.1
SHAREHOLDER SERVICING
AGREEMENT
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
CLASS A SHARES
(the "Fund")
600 Fifth Avenue
New York, New York 10020
October __, 1997
Reich & Tang Distributors L.P. ("Distributor")
600 Fifth Avenue
New York, New York 10020
Gentlemen:
We herewith confirm our agreement with you as follows:
1. We hereby employ you, pursuant to the Distribution and Service
Plan, as amended, adopted by us in accordance with Rule 12b-1 (the "Plan") under
the Investment Company Act of 1940, as amended (the "Act"), to provide the
services listed below on behalf of the Class A Shares. You will perform, or
arrange for others including organizations whose customers or clients are
shareholders of our corporation (the "Participating Organizations") to perform,
all personal shareholder servicing and related maintenance of shareholder
account functions ("Shareholder Services") not performed by us or our transfer
agent.
2. You will be responsible for the payment of all expenses incurred by
you in rendering the foregoing services, except that we will pay for (i)
telecommunications expenses, including the cost of dedicated lines and CRT
terminals, incurred by the Distributor and Participating Organizations in
rendering such services to the Class A Shareholders, and (ii) preparing,
printing and delivering our prospectus to existing shareholders and preparing
and printing subscription application forms for shareholder accounts.
3. You may make payments from time to time from your own resources,
including the fee payable hereunder and past profits to compensate Participating
Organizations, for providing Shareholder Services to the Class A Shareholders of
the Fund. Payments to Participating Organizations to compensate them for
providing Shareholder Services are subject to compliance by them
266875.1
1
<PAGE>
with the terms of written agreements satisfactory to our Board of Directors to
be entered into between the Distributor and the Participating Organizations. The
Distributor will in its sole discretion determine the amount of any payments
made by the Distributor pursuant to this Agreement, provided, however, that no
such payment will increase the amount which we are required to pay either to the
Distributor under this Agreement or to the Manager under the Investment
Management Contract, the Administrative Services Agreement, or otherwise.
4. We will expect of you, and you will give us the benefit of, your
best judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you will not be liable
hereunder for any mistake of judgment or for any other cause, provided that
nothing herein shall protect you against any liability to us or to our
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
5. In consideration of your performance, we will pay you a service fee
as defined by Article III, Section 26(b)(9) of the Rules of Fair Practice, as
amended, of the National Association of Securities Dealers, Inc. at the annual
rate of one quarter of one percent (0.25%) of the Fund's Class A Share's average
daily net assets. Your fee will be accrued by us daily, and will be payable on
the last day of each calendar month for services performed hereunder during that
month or on such other schedule as you shall request of us in writing. You may
waive your right to any fee to which you are entitled hereunder, provided such
waiver is delivered to us in writing.
6. This Agreement will become effective on the date hereof and
thereafter for successive twelve-month periods (computed from each ___________),
provided that such continuation is specifically approved at least annually by
vote of our Board of Directors and of a majority of those of our directors who
are not interested persons (as defined in the Act) and have no direct or
indirect financial interest in the operation of the Plan or in any agreements
related to the Plan, cast in person at a meeting called for the purpose of
voting on this Agreement. This Agreement may be terminated at any time, without
the payment of any penalty, (i) by vote of a majority of our entire Board of
Directors, and by a vote of a majority of our Directors who are not interested
persons (as defined in the Act) and who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to the Plan,
or (ii) by vote of a majority of the outstanding voting securities of the Fund's
Class A Shares, as defined in the Act, on sixty days' written notice to you, or
(iii) by you on sixty days' written notice to us.
266875.1
2
<PAGE>
7. This Agreement may not be transferred, assigned, sold or in any
manner hypothecated or pledged by you and this Agreement shall terminate
automatically in the event of any such transfer, assignment, sale, hypothecation
or pledge by you. The terms "transfer", "assignment" and "sale" as used in this
paragraph shall have the meanings ascribed thereto by governing law and in
applicable rules or regulations of the Securities and Exchange Commission
thereunder.
8. Except to the extent necessary to perform your obligations
hereunder, nothing herein shall be deemed to limit or restrict your right, the
right of any of your employees or the right of any officers or directors of
Reich & Tang Asset Management Inc., your general partner, who may also be a
director, officer or employee of ours, or of a person affiliated with us, as
defined in the Act, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to another
corporation, firm, individual or association.
If the foregoing is in accordance with your under standing, will you
kindly so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
VIRGINIA DAILY MUNICIPAL INCOME FUND, INC.
CLASS A SHARES
By:
----------------------------------------
ACCEPTED: October __, 1997
REICH & TANG DISTRIBUTORS L.P.
By: REICH & TANG ASSET MANAGEMENT INC., as General Partner
By: _____________________________________
266875.1
3
SIGNATURES
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Steven W. Duff and Bernadette N. Finn, and each of
them, with full power of substitution, as his true and lawful attorney and agent
to execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto
(including pre-effective amendments) filed by Virginia Daily Municipal Income
Fund, Inc. (the "Fund") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorney and
agent deems necessary or advisable to enable the Fund to comply with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorney and agent shall do or cause to be done
by virtue hereof.
/s/ Robert Straniere
--------------------
Robert Straniere
648828.1
<PAGE>
SIGNATURES
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Bernadette N. Finn, with full power of substitution, as
his true and lawful attorney and agent to execute in his name and on his behalf,
in any and all capacities, the Registration Statement on Form N-1A, and any and
all amendments thereto (including pre-effective amendments) filed by Virginia
Daily Municipal Income Fund, Inc. (the "Fund") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, and any and all other instruments
which such attorney and agent deems necessary or advisable to enable the Fund to
comply with the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, the rules, regulations and requirements of the Securities
and Exchange Commission, and the securities or Blue Sky laws of any state or
other jurisdiction; and the undersigned hereby ratifies and confirms as his own
act and deed any and all that such attorney and agent shall do or cause to be
done by virtue hereof.
/s/ Steven W. Duff
------------------
Steven W. Duff
648828.1
<PAGE>
SIGNATURES
KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Steven W. Duff and Bernadette N. Finn, and each of
them, with full power of substitution, as his true and lawful attorney and agent
to execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto
(including pre-effective amendments) filed by Virginia Daily Municipal Income
Fund, Inc. (the "Fund") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and under the Investment Company Act of
1940, as amended, and any and all other instruments which such attorney and
agent deems necessary or advisable to enable the Fund to comply with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorney and agent shall do or cause to be done
by virtue hereof.
/s/ Dr. W. Giles Mellon
-----------------------
Dr. W. Giles Mellon
648828.1
REICH & TANG ASSET MANAGEMENT, L.P.
AMENDMENT NO. 2
TO
RULE 18f-3 MULTI-CLASS PLAN
October 16, 1997
I. Introduction.
Pursuant to Rule 18f-3 under the Investment Company Act of
1940, as amended (the "1940 Act"), the following sets forth the method for
allocating fees and expenses among each class of shares of the underlying
investment funds sponsored by Reich & Tang Asset Management, L.P. as set forth
in Exhibit A (each Fund referred to herein as the "Company") that issues
multiple classes of shares (the "Multi-Class Funds"). In addition, this Rule
18f-3 Multi-Class Plan (the "Plan") sets forth the shareholder servicing
arrangements, distribution arrangements, conversion features, exchange
privileges and other shareholder services of each class of shares in the
Multi-Class Funds.
The Company is an open-end series investment company
registered under the 1940 Act and the shares of which are registered on Form
N-1A under the Securities Act of 1933 (see Exhibit A for each Company's
registration number). Upon the effective date of this Plan, the Company hereby
elects to offer multiple classes of shares in the Multi-Class Funds pursuant to
the provisions of Rule 18f-3 and this Plan. This Plan does not make any material
changes to the class arrangements and expense allocations previously approved by
the Board of Directors of the Company pursuant to the exemptive order issued by
the Securities and Exchange Commission to California Daily Tax Free Income Fund,
et al. under Section 6(c) of the 1940 Act on November 18, 1992 (1940 Act Release
No. 812-7852).
The Company currently consists of the following sixteen
separate Funds:
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, Georgia Daily Municipal Income Fund,
Inc., Institutional Daily Income Fund, Kentucky Daily Municipal Income Fund,
Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Tax Free
Income Fund, Inc., North Carolina Daily Municipal Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fun, Short Term Income Fund, Inc., Tennessee
Daily Municipal Income Fund, Inc., Texas Daily Municipal Income Fund, Inc. and
Virginia Daily Municipal Income Fund, Inc.
642263.2
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This Amendment No. 2 serves to include the following Funds in
the definition of Multi-Class Funds: Georgia Daily Municipal Income Fund, Inc.,
Kentucky Daily Municipal Income Fund, Inc., Tennessee Daily Municipal Income
Fund, Inc. and Texas Daily Municipal Income Fund, Inc. Formerly, Amendment No. 1
served to create a Class C of shares of the Multi-Class Funds for the purpose of
accommodating clients and customers of Schroeder & Co. ("Schroeder"). All
investors in Class C shares will be clients of Schroeder maintained in omnibus
account on the books of each Multi-Class Fund with all sub-accounting performed
by Schroeder.
II. Allocation of Expenses.
Pursuant to Rule 18f-3 under the 1940 Act, the Company shall
allocate to each class of shares in a Multi-Class Fund (i) any fees and expenses
incurred by the Company in connection with the distribution of such class of
shares under a distribution and service plan adopted for such class of shares
pursuant to Rule 12b-1, and (ii) any fees and expenses incurred by the Company
under a shareholder servicing plan in connection with the provision of
shareholder services to the holders of such class of shares. In addition,
pursuant to Rule 18f-3, the Company may allocate the following fees and expenses
to a particular class of shares in a single Multi-Class Fund:
(i) transfer agent fees and related expenses
identified by the transfer agent as being
attributable to such class of shares;
(ii) printing and postage expenses related to
preparing and distributing materials such as
shareholder reports, prospectuses, reports,
and proxies to current shareholder of such
class of shares or to regulatory agencies
with respect to such class of shares;
(iii) blue sky registration or qualification fees
incurred by such class of shares;
(iv) Securities and Exchange Commission
registration fees incurred by such class of
shares;
(v) the expense of administrative personnel and
services (including, but not limited to,
those of a fund accountant, [custodian]1 or
divided paying agent charged with
calculating net asset values or determining
or paying dividends) as required to support
the shareholders of such class of shares;
- ---------------------------
1. Rule 18f-3 requires that services related to the management of the
portfolio's assets, such as custodial fees, be borne by the fund and not
by class.
642263.2
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(vi) litigation or other legal expenses relating
solely to such class of shares;
(vii) fees of the Company's Directors incurred as
a result of issues relating to such class of
shares; and
(viii) independent accountants' fees relating
solely to such class of shares.
The initial determination of the class expenses that will be
allocated by the Company to a particular class of shares and any subsequent
changes thereto will be reviewed by the Board of Directors and approved by a
vote of the Directors of the Company, including a majority of the Directors who
are not interested persons of the Company.
Income, realized and unrealized capital gains and losses, and
any expenses of the Multi-Class Funds not allocated to a particular class of any
such Fund pursuant to this Plan shall be allocated to each class of the Fund on
the basis of the net asset value of that class in relation to the net asset of
the Fund.
III. Class Arrangements.
The following summarizes the Rule 12b-1 distribution fees,
shareholder servicing fees, exchange privileges and other shareholder services
applicable to each class of shares of the Multi-Class Funds. Additional details
regarding such fees and services are set forth in each Fund's current Prospectus
and Statement of Additional Information.
A. Class A Shares -
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: Up to
.25% per annum of average daily net assets.
6. Conversion Features: None.
7. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Class A Shares may be exchanged for Class A
shares of any other Fund.
642263.2
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8. Other Incidental Shareholder Services: As
provided in the Prospectus.
B. Class B Shares -
1. Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: None.
6. Conversion Features: None.
7. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Class B shares may be exchanged for Class B
shares of other Multi-Class Funds.
8. Other Incidental Shareholder Services: As
provided in the Prospectus.
C. Class C (created for all funds which are purchased by
Schroeder & Co. clients)
1. Maximum Initial Sales Load: None.
2. Contingent Deferred Sales Charge: None.
3. Redemption Fees: None.
4. Rule 12b-1 Distribution Fees: None.
5. Rule 12b-1 Shareholder Servicing Fees: .25%
per annum of the average daily net assets.
6. Sub-Accounting/Transfer Agent Fee: .20% per
annum of the average daily net assets.
7. Conversion Features: None.
642263.2
<PAGE>
8. Exchange Privileges: Subject to restrictions
and conditions set forth in the Prospectus,
Class C Shares may be exchanged for Class C
shares of any other Fund.
9. Other Incidental Shareholder Services: As
provided in the Prospectus.
IV. Board Review.
The Board of Directors of the Company shall review this Plan
as frequently as it deems necessary. Prior to any material amendments to this
Plan, the Company's Board of Directors, including a majority of the Directors
that are not interested persons of the Company, shall find that the Plan, as
proposed to be amended (including any proposed amendments to the method of
allocating class and/or fund expenses, is in the best interest of each class of
shares of a Multi-Class Fund individually and the Fund as a whole. In
considering whether to approve any proposed amendments(s) to the Plan, the
Directors of the Company shall request and evaluate such information as they
consider reasonably necessary to evaluate the proposed amendments(s) to the
Plan.
In making its initial determination to approve this Plan, the
Board focused on, among other things, the relationship between or among the
classes and examined potential conflicts of interest between classes regarding
the allocation of fees, services, waivers and reimbursement of expenses, and
voting rights. The Board evaluated the level of services provided to each class
and the cost of those services to ensure that the services are appropriate and
the allocation of expenses is reasonable. In approving any subsequent amendments
to this Plan, the Board shall focus on and evaluate such factors as well as any
others deemed necessary by the Board.
642263.2
<PAGE>
EXHIBIT A
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
Georgia Daily Municipal Income Fund, Inc.
Institutional Daily Income Fund
Kentucky Daily Municipal Income Fund, Inc.
Michigan Daily Tax Free Income Fund, Inc.
New Jersey Daily Tax Free Income Fund, Inc.
North Carolina Daily Municipal Income Fund, Inc.
Pennsylvania Daily Municipal Income Fund
Short Term Income Fund, Inc.
Tennessee Daily Municipal Income Fund, Inc.
Texas Daily Municipal Income Fund, Inc.
Virginia Daily Municipal Income Fund, Inc.
642263.2
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