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DREYFUS A BONDS PLUS, INC.
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
AS REVISED MARCH 9, 2000
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This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of
Dreyfus A Bonds Plus, Inc. (the "Fund"), dated August 1, 1999, as may be revised
from time to time. To obtain a copy of the Fund's Prospectus, please write to
the Fund at 144 Glenn Curtiss Boulevard, Uniondale, New York 11556-0144, or call
one of the following numbers:
Call Toll Free 1-800-645-6561
In New York City -- Call 1-718-895-1206
Outside the U.S. -- Call 516-794-5452
The Fund's most recent Annual Report and Semi-Annual Report to
Shareholders are separate documents supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing in the Annual Report are incorporated by
reference into this Statement of Additional Information.
TABLE OF CONTENTS
Page
Description of the Fund....................................................B-2
Management of the Fund.....................................................B-22
Management Arrangements....................................................B-28
How to Buy Shares..........................................................B-30
Shareholder Services Plan..................................................B-33
How to Redeem Shares.......................................................B-33
Shareholder Services.......................................................B-36
Portfolio Transactions.....................................................B-40
Determination of Net Asset Value...........................................B-40
Dividends, Distributions and Taxes.........................................B-41
Performance Information....................................................B-43
Information About the Fund.................................................B-44
Counsel and Independent Auditors...........................................B-45
Appendix...................................................................B-46
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DESCRIPTION OF THE FUND
The Fund is a Maryland corporation that was organized on February 23, 1976.
The Fund is an open-end management investment company, known as a mutual fund.
The Fund is a diversified fund, which means that, with respect to 75% of the
Fund's total assets, the Fund will not invest more than 5% of its assets in the
securities of any single issuer.
The Dreyfus Corporation (the "Manager") serves as the Fund's investment
adviser.
Premier Mutual Fund Services, Inc. (the "Distributor") is the distributor
of the Fund's shares.
Certain Portfolio Securities
The following information supplements and should be read in conjunction
with the Fund's Prospectus.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar instruments, including certain
convertible securities. Debt securities may be acquired with warrants attached.
Corporate income-producing securities also may include forms of preferred or
preference stock. The rate of interest on a corporate debt security may be
fixed, floating or variable, and may vary inversely with respect to a reference
rate. The rate of return or return of principal on some debt obligations may be
linked or indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies.
Convertible Securities. Convertible securities may be converted at either a
stated price or stated rate into underlying shares of common stock. Convertible
securities have characteristics similar to both fixed-income and equity
securities. Convertible securities generally are subordinated to other similar
but non-convertible securities of the same issuer, although convertible bonds,
as corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Although to a lesser extent than with fixed-income securities, the market
value of convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because of
the conversion feature, the market value of convertible securities tends to vary
with fluctuations in the market value of the underlying common stock. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
Convertible securities are investments that provide for a stable stream of
income with generally higher yields than common stocks. There can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
Municipal Obligations. Municipal obligations are debt obligations issued by
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, or
multistate agencies or authorities, the interest from which, in the opinion of
bond counsel to the issuer, is exempt from Federal income tax. Municipal
obligations generally include debt obligations issued to obtain funds for
various public purposes as well as certain industrial development bonds issued
by or on behalf of public authorities. Municipal obligations are classified as
general obligation bonds, revenue bonds and notes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable from the revenue
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source, but not
from the general taxing power. Industrial development bonds, in most cases, are
revenue bonds that do not carry the pledge of the credit of the issuing
municipality, but generally are guaranteed by the corporate entity on whose
behalf they are issued. Notes are short-term instruments which are obligations
of the issuing municipalities or agencies and are sold in anticipation of a bond
sale, collection of taxes or receipt of other revenues. Municipal obligations
include municipal lease/purchase agreements which are similar to installment
purchase contracts for property or equipment issued by municipalities. Municipal
obligations bear fixed, floating or variable rates of interest, which are
determined in some instances by formulas under which the municipal obligation's
interest rate will change directly or inversely to changes in interest rates or
an index, or multiples thereof, in many cases subject to a maximum and minimum.
Certain municipal obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from the
related municipal obligation and purchased and sold separately. The Fund also
may acquire call options on specific municipal obligations. The Fund generally
would purchase these call options to protect the Fund from the issuer of the
related municipal obligation redeeming, or other holder of the call option from
calling away, the municipal obligation before maturity.
While, in general, municipal obligations are tax exempt securities having
relatively low yields as compared to taxable, non-municipal obligations of
similar quality, certain municipal obligations are taxable obligations, offering
yields comparable to, and in some cases greater than, the yields available on
other permissible Fund investments. Dividends received by shareholders on Fund
shares which are attributable to interest income received by the Fund from
municipal obligations generally will be subject to Federal income tax. The Fund
may invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Fund investments. The Fund currently intends to
invest no more than 25% of its assets in municipal obligations. However, this
percentage may be varied from time to time without shareholder approval.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Fund may invest in floating rate debt instruments ("floaters"). The
interest rate on a floater is a variable rate which is tied to another interest
rate, such as a money-market index or Treasury bill rate. The interest rate on a
floater resets periodically, typically every six months. Because of the interest
rate reset feature, floaters provide the Fund with a certain degree of
protection against rises in interest rates, although the Fund will participate
in any declines in interest rates as well.
The Fund also may invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed or inversely to a multiple of the applicable index. An inverse
floating rate security may exhibit greater price volatility than a fixed rate
obligation of similar credit quality.
Mortgage-Related Securities. Mortgage-related securities are a form of
derivative collateralized by pools of commercial or residential mortgages. Pools
of mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations. These securities may
include complex instruments such as collateralized mortgage obligations and
stripped mortgage-backed securities, mortgage pass-through securities, interests
in real estate mortgage investment conduits ("REMICs"), adjustable rate
mortgages, real estate investment trusts ("REITs"), or other kinds of
mortgage-backed securities, including those with fixed, floating and variable
interest rates, those with interest rates based on multiples of changes in a
specified index of interest rates and those with interest rates that change
inversely to changes in interest rates, as well as those that do not bear
interest.
Residential Mortgage-Related Securities--The Fund may invest in
mortgage-related securities representing participation interests in pools of
one- to four-family residential mortgage loans issued or guaranteed by
governmental agencies or instrumentalities, such as the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by
private entities. Residential mortgage-related securities may be issued using a
variety of structures, including multi-class structures featuring senior and
subordinated classes.
Mortgage-related securities issued by GNMA include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA certificates also
are supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by FNMA
include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are solely the obligations of FNMA and are not backed by or
entitled to the full faith and credit of the United States. Fannie Maes are
guaranteed as to timely payment of principal and interest by FNMA.
Mortgage-related securities issued by FHLMC include FHLMC Mortgage Participation
Certificates (also known as "Freddie Macs" or "PCs"). Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Bank and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
Commercial Mortgage-Related Securities--Commercial mortgage-related securities
generally are multi-class debt or pass-through certificates secured by mortgage
loans on commercial properties. These mortgage-related securities generally are
structured to provide protection to the senior class investors against potential
losses on the underlying mortgage loans. This protection generally is provided
by having the holders of subordinated classes of securities ("Subordinated
Securities") take the first loss if there are defaults on the underlying
commercial mortgage loans. Other protection, which may benefit all of the
classes or particular classes, may include issuer guarantees, reserve funds,
additional Subordinated Securities, cross-collateralization and
over-collateralization.
Subordinated Securities--The Fund may invest in Subordinated Securities issued
or sponsored by commercial banks, savings and loan institutions, mortgage
bankers, private mortgage insurance companies and other non-governmental
issuers. Subordinated Securities have no governmental guarantee, and are
subordinated in some manner as to the payment of principal and/or interest to
the holders of more senior mortgage-related securities arising out of the same
pool of mortgages. The holders of Subordinated Securities typically are
compensated with a higher stated yield than are the holders of more senior
mortgage-related securities. On the other hand, Subordinated Securities
typically subject the holder to greater risk than senior mortgage-related
securities and tend to be rated in a lower rating category, and frequently a
substantially lower rating category, than the senior mortgage-related securities
issued in respect of the same pool of mortgages. Subordinated Securities
generally are likely to be more sensitive to changes in prepayment and interest
rates and the market for such securities may be less liquid than is the case for
traditional fixed-income securities and senior mortgage-related securities.
Collateralized Mortgage Obligations ("CMOs") and Multi-Class
Pass-Through-Securities--A CMO is a multiclass bond backed by a pool of mortgage
pass-through certificates or mortgage loans. CMOs may be collateralized by (a)
Ginnie Mae, Fannie Mae, or Freddie Mac pass-through certificates, (b)
unsecuritized mortgage loans insured by the Federal Housing Administration or
guaranteed by the Department of Veterans' Affairs, (c) unsecuritized
conventional mortgages, (d) other mortgage-related securities, or (e) any
combination thereof.
Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date.
Principal prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
The principal and interest on the underlying mortgages may be allocated among
the several classes of a series of a CMO in many ways. One or more tranches of a
CMO may have coupon rates which reset periodically at a specified increment over
an index, such as the London Interbank Offered Rate ("LIBOR") (or sometimes more
than one index). These floating rate CMOs typically are issued with lifetime
caps on the coupon rate thereon. The Fund also may invest in inverse floating
rate CMOs. Inverse floating rate CMOs constitute a tranche of a CMO with a
coupon rate that moves in the reverse direction to an applicable index such as
LIBOR. Accordingly, the coupon rate thereon will increase as interest rates
decrease. Inverse floating rate CMOs are typically more volatile than fixed or
floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of the applicable indexes. The effect of the coupon varying inversely
to a multiple of an applicable index creates a leverage factor. Inverse floaters
based on multiples of a stated index are designed to be highly sensitive to
changes in interest rates and can subject the holders thereof to extreme
reductions of yield and loss of principal. The markets for inverse floating rate
CMOs with highly leveraged characteristics at times may be very thin. The Fund's
ability to dispose of its positions in such securities will depend on the degree
of liquidity in the markets for such securities. It is impossible to predict the
amount of trading interest that may exist in such securities, and therefore the
future degree of liquidity.
Stripped Mortgage-Backed Securities--The Fund also may invest in stripped
mortgage-backed securities which are created by segregating the cash flows from
underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying securities'
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security, known as an interest-only security, or IO,
and all of the principal is distributed to holders of another type of security
known as a principal-only security, or PO. Strips can be created in a
pass-through structure or as tranches of a CMO. The yields to maturity on IO and
POs are very sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may not
fully recoup its initial investment in IOs. Conversely, if the underlying
mortgage assets experience less than anticipated prepayments of principal, the
yield on POs could be materially and adversely affected.
Real Estate Investment Trusts--A REIT is a corporation, or a business trust that
would otherwise be taxed as a corporation, which meets the definitional
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The
Code permits a qualifying REIT to deduct dividends paid, thereby effectively
eliminating corporate level Federal income tax and making the REIT a
pass-through vehicle for Federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually a substantial portion of its otherwise
taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs.
Equity REITs, which may include operating or finance companies, own real estate
directly and the value of, and income earned by, the REITs depend upon the
income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the Investment Company Act of 1940,
as amended (the "1940 Act").
Adjustable-Rate Mortgage Loans ("ARMs")--ARMs eligible for inclusion in a
mortgage pool will generally provide for a fixed initial mortgage interest rate
for a specified period of time, generally for either the first three, six,
twelve, thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter,
the interest rates are subject to periodic adjustment based on changes in an
index. ARMs typically have minimum and maximum rates beyond which the mortgage
interest rate may not vary over the lifetime of the loans. Certain ARMs provide
for additional limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Negatively amortizing ARMs may
provide limitations on changes in the required monthly payment. Limitations on
monthly payments can result in monthly payments that are greater or less than
the amount necessary to amortize a negatively amortizing ARM by its maturity at
the interest rate in effect during any particular month.
Private Entity Securities--These mortgage-related securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other nongovernmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Fund or the
price of the Fund's shares. Mortgage-related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
Other Mortgage-Related Securities--Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals. Other mortgage-related securities may
be equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
Asset-Backed Securities. Asset-backed securities are a form of derivative.
The securitization techniques used for asset-backed securities are similar to
those used for mortgage-related securities. These securities include debt
securities and securities with debt-like characteristics. The collateral for
these securities has included home equity loans, automobile and credit card
receivables, boat loans, computer leases, airplane leases, mobile home loans,
recreational vehicle loans and hospital account receivables. The Fund may invest
in these and other types of asset-backed securities that may be developed in the
future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the Fund
with a less effective security interest in the related collateral than do
mortgage-backed securities. Therefore, there is the possibility that recoveries
on the underlying collateral may not, in some cases, be available to support
payments on these securities.
U.S. Treasury Inflation Protection Securities. The Fund may invest in U.S.
Treasury securities including Treasury Inflation-Protection Securities ("TIPS"),
which are securities issued by the U.S. Treasury designed to provide investors a
long term investment vehicle that is not vulnerable to inflation. The interest
rate paid by TIPS is fixed, while the principal value rises or falls
semi-annually based on changes in a published Consumer Price Index. Thus, if
inflation occurs, the principal and interest payments on the TIPS are adjusted
accordingly to protect investors from inflationary loss. During a deflationary
period, the principal and interest payments decrease, although the TIPS'
principal will not drop below its face amount at maturity.
In exchange for the inflation protection, TIPS generally pay lower
interest rates than typical Treasury securities. Only if inflation occurs will
TIPS offer a higher real yield than a conventional Treasury bond of the same
maturity. In addition, it is not possible to predict with assurance how the
market for TIPS will develop; initially, the secondary market for these
securities may not be as active or liquid as the secondary market for
conventional Treasury securities. Principal appreciation and interest payments
on TIPS will be taxed annually as ordinary interest income for Federal income
tax calculations. As a result, any appreciation in principal must be counted as
interest income in the year the increase occurs, even though the investor will
not receive such amounts until the TIPS are sold or mature. Principal
appreciation and interest payments will be exempt from state and local income
taxes.
Zero Coupon Securities. The Fund may invest in zero coupon U.S. Treasury
securities, which are Treasury Notes and Bonds that have been stripped of their
unmatured interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. Receipts
include "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs"), "Liquid Yield Option Notes" ("LYONs"), and "Certificates of Accrual
on Treasury Securities" ("CATS"). TIGRs, LYONs and CATS are interests in private
proprietary accounts while TRs are interests in accounts sponsored by the U.S.
Treasury.
Investment Companies. The Fund may invest in securities issued by other
investment companies to the extent consistent with its investment objective.
Under the 1940 Act, the Fund's investment in such securities, subject to certain
exceptions, currently is limited to (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund's total assets with respect to any one
investment company and (iii) 10% of the Fund's total assets in the aggregate.
Investments in the securities of other investment companies may involve
duplication of advisory fees and certain other expenses.
Foreign Securities; Foreign Government Obligations; Securities of
Supranational Entities. The Fund may invest up to 10% of net assets in foreign
securities. Issuers organized outside the United States that have a majority of
their assets or derive a majority of their annual revenue in the United States
shall be deemed to be U.S. issuers and not foreign issuers for purposes of the
Fund's policy of investing up to 10% of its assets in foreign securities. The
Fund may invest in obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentality's that are determined by the Manager to be of comparable quality
to the other obligations in which the Fund may invest. Such securities also
include debt obligations of supranational entities. Supranational entities
include international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank.
Illiquid Securities. The Fund may invest up to 15% of the value of its net
assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with the Fund's investment objective.
These securities may include securities that are not readily marketable, such as
securities that are subject to legal or contractual restrictions on resale,
repurchase agreements providing for settlement in more than seven days after
notice, and certain privately negotiated, non-exchange traded options and
securities used to cover such options. As to these securities, the Fund is
subject to a risk that should the Fund desire to sell them when a ready buyer is
not available at a price the Fund deems representative of their value, the value
of the Fund's net assets could be adversely affected.
Money Market Instruments. The Fund may invest in money market instruments
consisting of U.S. Government securities, certificates of deposit, time
deposits, bankers' acceptances, short-term investment grade corporate bonds and
other short-term debt instruments, and repurchase agreements. Under normal
market conditions, the Fund does not expect to have more than 20% of its net
assets invested in money market instruments and does not intend to invest more
than 5% of its assets in any one of these types of instruments. However, when
the Manager determines that adverse market conditions exist, the Fund may adopt
a temporary defensive position and invest up to 100% of its assets in money
market instruments.
Investment Techniques
The following information supplements and should be read in conjunction
with the Fund's Prospectus.
Leverage. Leveraging (that is, buying securities using borrowed money)
exaggerates the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. These borrowings will be subject to
interest costs which may or may not be recovered by appreciation of the
securities purchased; in certain cases, interest costs may exceed the return
received on the securities purchased. For borrowings for investment purposes,
the 1940 Act requires the Fund to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed. If the required coverage should decline as a result
of market fluctuations or other reasons, the Fund may be required to sell some
of its portfolio holdings within three days to reduce the amount of its
borrowings and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
The Fund also may be required to maintain minimum average balances in connection
with such borrowing or pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate.
The Fund may enter into reverse repurchase agreements with banks, brokers
or dealers. This form of borrowing involves the transfer by the Fund of an
underlying debt instrument in return for cash proceeds based on a percentage of
the value of the security. The Fund retains the right to receive interest and
principal payments on the security. At an agreed upon future date, the Fund
repurchases the security at principal plus accrued interest. Reverse repurchase
agreements may be preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks and transaction costs. Such
transactions, however, may increase the risk of potential fluctuations in the
market value of the Fund's assets. In addition, interest costs on the cash
received may exceed the return on the securities purchased. To the extent the
Fund enters into a reverse repurchase agreement, the Fund will segregate
permissible liquid assets at least equal to the aggregate amount of its reverse
repurchase obligations, plus accrued interest, in certain cases, in accordance
with releases promulgated by the Securities and Exchange Commission. The
Securities and Exchange Commission views reverse repurchase transactions as
collateralized borrowings by the Fund. Except for these transactions, the Fund's
borrowings generally will be unsecured.
Short-Selling. In these transactions, the Fund sells a security it does
not own anticipation of a decline in the market value of the security. To
complete the transaction, the Fund must borrow the security to make delivery to
the buyer. The Fund is obligated to replace the security borrowed by purchasing
it subsequently at the market price at the time of replacement. The price at
such time may be more or less than the price at which the security was sold by
the Fund, which would result in a loss or gain, respectively.
Securities will not be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Fund's net assets.
The Fund also may make short sales "against the box," in which the Fund
enters into a short sale of a security it owns.
Until the Fund closes its short position or replaces the borrowed
security, it will: (a) segregate permissible liquid assets at such a level that
the amount segregated, together with the amount deposited with the broker as
collateral, always equals the current value of the security sold short; or (b)
otherwise cover its short position.
Lending Portfolio Securities. The Fund may lend securities from its
portfolio to brokers, dealers and other financial institutions needing to borrow
securities to complete certain transactions. The Fund continues to be entitled
to payments in amounts equal to the interest, dividends or other distributions
payable on the loaned securities, which affords the Fund an opportunity to earn
interest on the amount of the loan and on the loaned securities' collateral.
Loans of portfolio securities may not exceed 33-1/3% of the value of the Fund's
total assets, and the Fund will receive collateral consisting of cash, U.S.
Government securities or irrevocable letters of credit which will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. Such loans are terminable by the Fund at any time upon
specified notice. The Fund might experience risk of loss if the institution with
which it has engaged in a portfolio loan transaction breaches its agreement with
the Fund. In connection with its securities lending transactions, the Fund may
return to the borrower or a third party which is unaffiliated with the Fund, and
which is acting as a "placing broker," a part of the interest earned from the
investment of collateral received for securities loaned.
Derivatives. The Fund may invest in, or enter into, derivatives, such as
options and futures, mortgage-related securities and asset-backed securities,
for a variety of reasons, including to hedge certain market risks, to provide a
substitute for purchasing or selling particular securities or to increase
potential income gain. Derivatives may provide a cheaper, quicker or more
specifically focused way for the Fund to invest than "traditional" securities
would.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular derivative and the
portfolio as a whole. Derivatives permit the Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by making
investments in specific securities. However, derivatives may entail investment
exposures that are greater than their cost would suggest, meaning that a small
investment in derivatives could have a large potential impact on the Fund's
performance.
If the Fund invests in derivatives at inopportune times or judges market
conditions incorrectly, such investments may lower the Fund's return or result
in a loss. The Fund also could experience losses if its derivatives were poorly
correlated with its other investments, or if the Fund were unable to liquidate
its position because of an illiquid secondary market. The market for many
derivatives is, or suddenly can become, illiquid. Changes in liquidity may
result in significant, rapid and unpredictable changes in the prices for
derivatives.
Although the Fund will not be a commodity pool, certain derivatives
subject the Fund to the rules of the Commodity Futures Trading Commission which
limit the extent to which the Fund can invest in such derivatives. The Fund may
invest in futures contracts and options with respect thereto for hedging
purposes without limit. However, no Fund may invest in such contracts and
options for other purposes if the sum of the amount of initial margin deposits
and premiums paid for unexpired options with respect to such contracts, other
than for bona fide hedging purposes, exceeds 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on such contracts and options; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount may
be excluded in calculating the 5% limitation.
Derivatives may be purchased on established exchanges or through privately
negotiated transactions referred to as over-the-counter derivatives.
Exchange-traded derivatives generally are guaranteed by the clearing agency
which is the issuer or counterparty to such derivatives. This guarantee usually
is supported by a daily payment system (i.e., variation margin requirements)
operated by the clearing agency in order to reduce overall credit risk. As a
result, unless the clearing agency defaults, there is relatively little
counterparty credit risk associated with derivatives purchased on an exchange.
By contrast, no clearing agency guarantees over-the-counter derivatives.
Therefore, each party to an over-the-counter derivative bears the risk that the
counterparty will default. Accordingly, the Manager will consider the
creditworthiness of counterparties to over-the-counter derivatives in the same
manner as it would review the credit quality of a security to be purchased by
the Fund. Over-the-counter derivatives are less liquid than exchange-traded
derivatives since the other party to the transaction may be the only investor
with sufficient understanding of the derivative to be interested in bidding for
it.
Futures Transactions--In General. The Fund may enter into futures contracts in
U.S. domestic markets, such as the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange. Engaging in these
transactions involves risk of loss to the Fund which could adversely affect the
value of the Fund's net assets. Although the Fund intends to purchase or sell
futures contracts only if there is an active market for such contracts, no
assurance can be given that a liquid market will exist for any particular
contract at any particular time. Many futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit or trading
may be suspended for specified periods during the trading day. Futures contract
prices could move to the limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions and
potentially subjecting the Fund to substantial losses.
Successful use of futures by the Fund also is subject to the Manager's
ability to predict correctly movements in the direction of the relevant market
and, to the extent the transaction is entered into for hedging purposes, to
ascertain the appropriate correlation between the transaction being hedged and
the price movements of the futures contract. For example, if the Fund uses
futures to hedge against the possibility of a decline in the market value of
securities held in its portfolio and the prices of such securities instead
increase, the Fund will lose part or all of the benefit of the increased value
of securities which it has hedged because it will have offsetting losses in its
futures positions. Furthermore, if in such circumstances the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. The Fund may have to sell such securities at a time when it may be
disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, the Fund may be required to segregate permissible liquid
assets to cover its obligations relating to its transactions in derivatives. To
maintain this required cover, the Fund may have to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position at a reasonable price. In addition, the segregation of such
assets will have the effect of limiting the Fund's ability otherwise to invest
those assets.
Specific Futures Transactions. The Fund may purchase and sell stock index
futures contracts. A stock index future obligates the Fund to pay or receive an
amount of cash equal to a fixed dollar amount specified in the futures contract
multiplied by the difference between the settlement price of the contract on the
contract's last trading day and the value of the index based on the stock prices
of the securities that comprise it at the opening of trading in such securities
on the next business day.
The Fund may purchase and sell interest rate futures contracts. An
interest rate future obligates the Fund to purchase or sell an amount of a
specific debt security at a future date at a specific price.
Options--In General. The Fund may purchase call and put options and write (i.e.,
sell) covered call and put option contracts. A call option gives the purchaser
of the option the right to buy, and obligates the writer to sell, the underlying
security or securities at the exercise price at any time during the option
period, or at a specific date. Conversely, a put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
security or securities at the exercise price at any time during the option
period, or at a specific date.
A covered call option written by the Fund is a call option with respect to
which the Fund owns the underlying security or otherwise covers the transaction
by segregating cash or other securities. A put option written by the Fund is
covered when, among other things, cash or liquid securities having a value equal
to or greater than the exercise price of the option are segregated to fulfill
the obligation undertaken. The principal reason for writing covered call and put
options is to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. The Fund receives a
premium from writing covered call or put options which it retains whether or not
the option is exercised.
There is no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any particular option
or at any particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a variety
of reasons. In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, at times have rendered certain of the
clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
The Fund may purchase cash-settled options on interest rate swaps in
pursuit of its investment objective. A cash-settled option on a swap gives the
purchaser the right, but not the obligation, in return for the premium paid, to
receive an amount of cash equal to the value of the underlying swap as of the
exercise date. These options typically are purchased in privately negotiated
transactions from financial institutions, including securities brokerage firms.
Successful use by the Fund of options will be subject to the Manager's
ability to predict correctly movements in interest rates and prices of
securities underlying options. To the extent such predictions are incorrect, the
Fund may incur losses.
Future Developments. The Fund may take advantage of opportunities in the
area of options and futures contracts and options on futures contracts and any
other derivatives which are not presently contemplated for use by the Fund or
which are not currently available but which may be developed, to the extent such
opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Before entering into such transactions or
making any such investment, the Fund will provide appropriate disclosure in its
Prospectus or Statement of Additional Information.
Forward Roll Transactions. To enhance current income, the Fund may enter
into forward roll transactions with respect to mortgage-related securities. In a
forward roll transaction, the Fund sells a mortgage-related security to a
financial institution, such as a bank or broker-dealer, and simultaneously
agrees to purchase a similar security from the institution at a later date at an
agreed upon price. The securities that are purchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different pre-payment histories than those sold. During the
period between the sale and purchase, the Fund will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
typically will be invested in short-term instruments, particularly repurchase
agreements, and the income from these investments, together with any additional
fee income received on the sale will be expected to generate income for the Fund
exceeding the yield on the securities sold. Forward roll transactions involve
the risk that the market value of the securities sold by the Fund may decline
below the purchase price of those securities. The Fund will segregate
permissible liquid assets at least equal to the amount of the repurchase price
(including accrued interest).
Forward Commitments. The Fund may purchase or sell securities on a forward
commitment, when-issued or delayed delivery basis, which means delivery and
payment take place a number of days after the date of the commitment to purchase
or sell the securities at a predetermined price and/or yield. Typically, no
interest accrues to the purchaser until the security is delivered. When
purchasing a security on a forward commitment basis, the Fund assumes the rights
and risks of ownership of the security, including the risk of price and yield
fluctuations, and takes such fluctuations into account when determining its net
asset value. Because the Fund is not required to pay for these securities until
the delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund is fully or almost fully invested when
forward commitment purchases are outstanding, such purchases may result in a
form of leverage. The Fund intends to engage in forward commitments to increase
its portfolio's financial exposure to the types of securities in which it
invests. Leveraging the portfolio in this manner will increase the Fund's
exposure to changes in interest rates and will increase the volatility of its
returns. The Fund will segregate permissible liquid assets at least equal at all
times to the amount of the Fund's purchase commitments. At no time will the Fund
have more than 33-1/3% of its assets committed to purchase securities on a
forward commitment basis.
Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating 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. Securities
purchased on a forward commitment or when-issued basis may expose the Fund to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the Fund
is fully or almost fully invested may result in greater potential fluctuation in
the value of the Fund's net assets and its net asset value per share.
Foreign Currency Transactions. The Fund may enter into foreign currency
transactions for a variety of purposes, including: to fix in U.S. dollars,
between trade and settlement date, the value of a security the Fund has agreed
to buy or sell; to hedge the U.S. dollar value of securities the Fund already
owns, particularly if it expects a decrease in the value of the currency in
which the foreign security is denominated; or to gain exposure to the foreign
currency in an attempt to realize gains.
Foreign currency transactions may involve, for example, the Fund's
purchase of foreign currencies for U.S. dollars or the maintenance of short
positions in foreign currencies, which would involve the Fund agreeing to
exchange an amount of a currency it did not currently own for another currency
at a future date in anticipation of a decline in the value of the currency sold
relative to the currency the Fund contracted to receive in the exchange. The
Fund's success in these transactions will depend principally on the Manager's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or political
developments in the United States or abroad.
Investment Considerations and Risks
Fixed-Income Securities. Even though interest-bearing securities are
investments which promise a stable stream of income, the prices of such
securities generally are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Certain
securities that may be purchased by the Fund, such as those with interest rates
that fluctuate directly or indirectly based on multiples of a stated index, are
designed to be highly sensitive to changes in interest rates and can subject the
holders thereof to extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuer. Certain securities purchased
by the Fund, such as those rated Baa or lower by Moody's Investors Service, Inc.
("Moody's") and BBB or lower by Standard & Poor's Rating Group ("S&P"), Fitch
IBCA, Inc. ("Fitch") and Duff & Phelps Credit Rating Co. ("Duff"), may be
subject to such risk with respect to the issuing entity and to greater market
fluctuations than certain lower yielding, higher rated fixed-income securities.
Once the rating of a portfolio security has been changed, the Fund will consider
all circumstances deemed relevant in determining whether to continue to hold the
security.
Lower Rated Securities. The Fund may invest up to 20% of its assets in
higher yielding (and therefore higher risk) debt securities such as those rated
Ba by Moody's or BB by S&P, Fitch or Duff, or as low as the lowest rating
assigned by Moody's, S&P, Fitch or Duff. Such securities, though higher
yielding, are characterized by risk. See "Appendix" for a general description of
Moody's and S&P ratings. Although ratings may be useful in evaluating the safety
of interest and principal payments, they do not evaluate the market value risk
of these securities. The Fund will rely on the Manager's judgment, analysis and
experience in evaluating the creditworthiness of an issuer.
Investors should be aware that the market values of many of these
securities tend to be more sensitive to economic conditions than are higher
rated securities. These securities generally are considered by S&P and Moody's
to be predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation and generally
will involve more credit risk than securities in the higher rating categories.
Companies that issue certain of these securities often are highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of these securities may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be affected adversely by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss because of default by the issuer is significantly greater for the holders
of these securities because such securities generally are unsecured and often
are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many of these
securities, the Fund anticipates that such securities could be sold only to a
limited number of dealers or institutional investors. To the extent a secondary
trading market for these securities does exist, it generally is not as liquid as
the secondary market for higher rated securities. The lack of a liquid secondary
market may have an adverse impact on market price and yield and the Fund's
ability to dispose of particular issues when necessary to meet liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio and
calculating its net asset value. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of these securities. In such cases, judgment may play a greater role
in valuation because less reliable, objective data may be available.
These securities may be particularly susceptible to economic downturns. It
is likely that an economic recession would disrupt severely the market for such
securities and have an adverse impact on the value of such securities, and could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon, which would increase the incidence of
default for such securities.
The Fund may acquire these securities during an initial offering. Such
securities may involve special risks because they are new issues. The Fund has
no arrangement with any persons concerning the acquisition of such securities,
and the Manager will review carefully the credit and other characteristics
pertinent to such new issues.
The average distribution of investments of the Fund in corporate bonds
(excluding convertible preferred stock and convertible bonds) by ratings for the
fiscal year ended March 31, 1999, calculated monthly on a dollar weighted basis,
was as follows:
MOODY'S OR S&P, FITCH OR DUFF PERCENTAGE
------- ------------------ ----------
Aaa AAA 42.6%
Aa AA 10.5%
A A 31.4%
Baa BBB 8.4%
Ba BB 6.5%
B B .3%
NR NR 1.4%*
-----
101.1%**
- ---------------------
* Included in the Not Rated category are securities comprising 1.4% of the
Fund's market value which, while not rated, have been determined by the
Manager to be of comparable quality to securities in the following rating
categories: A/A .1%, Baa/BBB 1.1%, B/B .1% and Caa/CCC .1%.
** The Fund also owns convertible preferred stocks - AAA .3%, BBB .5% and BB
.1%. Approximately (2.0%) of the Fund's assets were invested in cash or
cash equivalents.
The credit risk factors pertaining to lower rated securities also apply to
lower rated zero coupon securities and pay-in-kind bonds, in which the Fund may
invest up to 5% of its total assets. Pay-in-kind bonds pay interest through the
issuance of additional securities. Zero coupon securities and pay-in-kind bonds
carry an additional risk in that, unlike bonds which pay interest throughout the
period to maturity, the Fund will realize no cash until the cash payment date
unless a portion of such securities are sold and, if the issuer defaults, the
Fund may obtain no return at all on its investment.
Mortgage-Related Securities. Mortgage-related securities are complex
derivative instruments, subject to both credit and prepayment risk, and may be
more volatile and less liquid than more traditional debt securities.
Mortgage-related securities generally are subject to credit risks associated
with the performance of the underlying mortgage properties. In certain
instances, the credit risk associated with mortgage-related securities can be
reduced by third party guarantees or other forms of credit support. Improved
credit risk does not reduce prepayment risk which is unrelated to the rating
assigned to the mortgage-related security. Prepayment risk can lead to
fluctuations in value of the mortgage-related security which may be pronounced.
If a mortgage-related security is purchased at a premium, all or part of the
premium may be lost if there is a decline in the market value of the security,
whether resulting from changes in interest rates or prepayments on the
underlying mortgage collateral. Certain mortgage-related securities that may be
purchased by the Fund, such as inverse floating rate CMOs, have coupons that
move inversely to a multiple of a specific index which may result in a form of
leverage. As with other interest-bearing securities, the prices of certain
mortgage-related securities are inversely affected by changes in interest rates.
However, although the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages underlying the security are more likely
to be prepaid. For this and other reasons, a mortgage-related security's stated
maturity may be shortened by unscheduled prepayments on the underlying
mortgages, and, therefore, it is not possible to predict accurately the
security's return to the Fund. Moreover, with respect to certain stripped
mortgage-backed securities, if the underlying mortgage securities experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment even if the securities are rated in the highest
rating category by a nationally recognized statistical rating organization.
During periods of rapidly rising interest rates, prepayments of mortgage-related
securities may occur at slower than expected rates. Slower prepayments
effectively may lengthen a mortgage-related security's expected maturity which
generally would cause the value of such security to fluctuate more widely in
response to changes in interest rates. Were the prepayments on the Fund's
mortgage-related securities to decrease broadly, the Fund's effective duration,
and thus sensitivity to interest rate fluctuations, would increase.
Foreign Securities. Foreign securities markets generally are not as
developed or efficient as those in the United States. Securities of some foreign
issuers are less liquid and more volatile than securities of comparable U.S.
issuers. Similarly, volume and liquidity in most foreign securities markets are
less than in the United States and, at times, volatility of price can be greater
than in the United States.
Because evidences of ownership of foreign securities usually are held
outside the United States, the Fund investing in such securities will be subject
to additional risks which include possible adverse political and economic
developments, seizure or nationalization of foreign deposits and adoption of
governmental restrictions which might adversely affect or restrict the payment
of principal and interest on the foreign securities to investors located outside
the country of the issuer, whether from currency blockage or otherwise.
Moreover, foreign securities held by the Fund may trade on days when the Fund
does not calculate its net asset value and thus affect the Fund's net asset
value on days when investors have no access to the Fund.
Since foreign securities often are purchased with and payable in
currencies of foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations.
Simultaneous Investments. Investment decisions for the Fund are made
independently from those of the other investment companies advised by the
Manager. If, however, such other investment companies desire to invest in, or
dispose of, the same securities as the Fund, available investments or
opportunities for sales will be allocated equitably to each investment company.
In some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by the Fund or the price paid or received by the
Fund.
Investment Restrictions
The Fund's investment objective is a fundamental policy, which cannot be
changed without approval by the holders of a majority (as defined in the 1940
Act) of the Fund's outstanding voting shares. In addition, the Fund has adopted
investment restrictions numbered 1 through 8 as fundamental policies. Investment
restrictions numbered 9 through 12 are not fundamental policies and may be
changed by vote of a majority of the Fund's Board members at any time. The Fund
may not:
1. Borrow money, except to the extent permitted under the 1940 Act (which
currently limits borrowing to no more than 33-1/3% of the value of the Fund's
total assets). For purposes of this Investment Restriction, the entry into
options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indices shall not constitute
borrowing.
2. Underwrite the securities of other issuers except to the extent the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended, by
virtue of disposing of portfolio securities, and except that the Fund may bid
separately or as part of a group for the purchase of municipal obligations
directly from an issuer for its own portfolio to take advantage of the lower
purchase price available.
3. Purchase or sell real estate, commodities or oil and gas interests,
provided that the Fund may purchase and sell securities that are secured by real
estate or interests therein or issued by companies that invest or deal in real
estate or interests therein or real estate investment trusts and hold and sell
real estate as a result of ownership of such securities or instruments, and
provided further that the Fund may purchase and sell options, forward contracts,
futures contracts, including those relating to indices, and options on futures
contracts or indices.
4. Make loans to others, except through the purchase of debt obligations or
the entry into repurchase agreements. However, the Fund may lend its portfolio
securities in an amount not to exceed 33-1/3% of the value of the Fund's total
assets. Any loans of portfolio securities will be made according to guidelines
established by the Securities and Exchange Commission and the Fund's Board.
5. With respect to 75% of the value of its total assets, invest more than
5% of its assets in the securities of any one issuer or hold more than 10% of
the outstanding voting securities of such issuer, except for securities issued
or guaranteed by the U.S. Government or any of its agencies or institutions
which may be purchased without limitation.
6. Invest more than 25% of its assets in any particular industry, provided
that there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentality's.
7. Issue any senior security (as such term is defined in Section 18(f) of
the 1940 Act), except to the extent that the activities permitted in Investment
Restriction Nos. 1, 3, 8 and 12 may be deemed to give rise to a senior security.
8. Purchase securities on margin, but the Fund may make margin deposits in
connection with transactions in options, forward contracts, futures contracts,
including those related to indices, and options on futures contracts or indices.
9. Invest in companies for the purpose of exercising control.
10. Invest in securities of other investment companies, except to the
extent permitted under the 1940 Act.
11. Enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase securities which are illiquid if, in the
aggregate, more than 15% of the value of the Fund's net assets would be so
invested.
12. Pledge, mortgage, hypothecate or otherwise encumber its assets, except
to the extent necessary to secure permitted borrowings and to the extent related
to the deposit of assets in escrow in connection with the purchase of securities
on a when-issued or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to options, forward contracts,
futures contracts, including those related to indices, and options on futures
contracts or indices.
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values of assets will not
constitute a violation of such restriction.
MANAGEMENT OF THE FUND
The Fund's Board is responsible for the management and supervision of the
Fund. The Board approves all significant agreements between the Fund and those
companies that furnish services to the Fund. These companies are as follows:
The Dreyfus Corporation...................Investment Adviser
Premier Mutual Fund Services, Inc.........Distributor
Dreyfus Transfer, Inc.....................Transfer Agent
Mellon Bank, N.A..........................Custodian
Board members and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below.
Board Members of the Fund
JOSEPH S. DiMARTINO, Chairman of the Board. Since January 1995, Chairman of the
Board of various funds in the Dreyfus Family of Funds. He also is a
director of The Noel Group, Inc., a venture capital company (for which,
from February 1995 until November 1997, he was Chairman of the Board), The
Muscular Dystrophy Association, HealthPlan Services Corporation, a
provider of marketing, administrative and risk management services to
health and other benefit programs, Carlyle Industries, Inc. (formerly,
Belding Heminway Company, Inc.), a button packager and distributor, Career
Blazers Inc. (formerly, Staffing Resources), a temporary placement firm
and Century Business Services, Inc., a provider of various outsourcing
functions for small and medium sized companies. For more than five years
prior to January 1995, he was President, a director and, until August
1994, Chief Operating Officer of the Manager and Executive Vice President
and a director of Dreyfus Service Corporation, a wholly-owned subsidiary
of the Manager and, until August 24, 1994, the Fund's distributor. From
August 1994 until December 31, 1994, he was a director of Mellon Bank
Corporation. He is 55 years old and his address is 200 Park Avenue, New
York, New York 10166.
DAVID P. FELDMAN, Board Member. A director of several mutual funds in the 59
Wall Street Mutual Funds Group, and of the Jeffrey Company, a private
investment company. He was employed by AT&T from July 1961 to his
retirement in May 1997, most recently serving as Chairman and Chief
Executive Officer of AT&T Investment Management Corporation. He is 59
years old and his address is 466 Lexington Avenue, New York, New York
10017.
JOHN M. FRASER, JR., Board Member. Retired President of Fraser Associates, a
service company for planning and arranging corporate meetings and other
events. From September 1975 to June 1978, he was Executive Vice President
of Flagship Cruises Ltd.. Prior thereto, he was Senior Vice President and
Resident Director of the Swedish-American Line for the United States and
Canada. He is 78 years old and his address is 133 East 64th Street, New
York, New York 10021.
ROBERTR. GLAUBER, Board Member. Research Fellow, Center for Business and
Government at the John F. Kennedy School of Government, Harvard University
since January 1992. He was Under Secretary of the Treasury for Finance at
the U.S. Treasury Department from May 1989 to January 1992. For more than
five years prior thereto, he was a Professor of Finance at the Graduate
School of Business Administration of Harvard University and, from 1985 to
1989, Chairman of its Advancement Management Program. He is Chairman of
The Measurisk Group, a risk measurement advisory and software development
firm, Co-Chairman of the Investment Committee for Massachusetts State
Retirement Fund, and a director of the Dun & Bradstreet Corp., Excel
Limited, a Bermuda - based insurance company, Cooke & Bieler, investment
counselors, NASD Regulation, Inc. and the Federal Reserve Bank of Boston.
He is 60 years old and his address is 79 John F. Kennedy Street,
Cambridge, Massachusetts 02138.
JAMES F. HENRY, Board Member. President of the CPR Institute for Dispute
Resolution, a non-profit organization principally engaged in the
development of alternatives to business litigation. He was a partner of
Lovejoy, Wasson & Ashton from January 1977 to September 1979. He was
President and director of the Edna McConnell Clark Foundation, a
philanthropic organization, from September 1971 to December 1976. He is 68
years old and his address is c/o CPR Institute for Dispute Resolution, 366
Madison Avenue, New York, New York 10017.
ROSALIND GERSTEN JACOBS, Board Member. Merchandise and marketing Consultant.
From 1997 to 1998, Director of Merchandise and Marketing of Corporate
Property Investors, a real estate investment company. From 1974 to 1976,
she was owner and manager of a merchandise and marketing consulting firm.
Prior to 1974, she was a Vice President of Macy's, New York. She is 74
years old and her address is c/o Corporate Property Investors, 305 East
47th Street, New York, New York 10017.
IRVING KRISTOL, Board Member. John M. Olin Distinguished Fellow of American
Enterprise Institute for Public Policy Research, co-editor of The Public
Interest magazine, and an author or co-editor of several books. From May
1981 to December 1994, he was a consultant to the Manager on economic
matters; from 1969 to 1988, he was Professor of Social Thought at the
Graduate School of Business Administration, New York University; from
September 1969 to August 1979, he was Henry R. Luce Professor of Urban
Values at New York University; from 1975 to 1990, he was a director of
Lincoln National Corporation, an insurance company; and from 1977 to 1990,
he was a director of Warner-Lambert Company, a pharmaceutical and consumer
products company. He is 79 years old and his address is c/o The Public
Interest, 1112 16th Street, N.W., Suite 530, Washington, D.C. 20036.
DR. PAUL A. MARKS, Board Member. President and Chief Executive Officer of
Memorial Sloan-Kettering Cancer Center. He is also a director emeritus of
Pfizer, Inc., a pharmaceutical company, where he served as a director from
1978 to 1996; and a director of Tulerik, Inc., a biotechnology company, and
Genos, Inc., a genomics company. He was Vice President for Health Sciences
and Director of the Cancer Center at Columbia University from 1973 to
September 1980, and Professor of Medicine and of Human Genetics and
Development at Columbia University from 1968 to 1982. He was a director of
Life Technologies, Inc., a life science company producing products for cell
and molecular biology and microbiology from 1986 to 1996. He is 72 years
old and his address is c/o Memorial Sloan-Kettering Cancer Center, 1275
York Avenue, New York, New York 10021.
DR. MARTIN PERETZ, Board Member. Editor-in-Chief of The New Republic magazine
and a lecturer in Social Studies at Harvard University, where he has been a
member of the faculty since 1965. He is a trustee of The Center for Blood
Research at the Harvard Medical School, and of the Academy for Liberal
Education, an accrediting agency for colleges and universities certified by
the U.S. Department of Education; and a director of LeukoSite Inc., a
biopharmaceutical company. Dr. Peretz is also Co-chairman of The
Street.com, a financial daily on the Web and a director of The Electronic
Newsstand, a distributor of magazines on the Web. From 1988 to 1989, he was
a director of Bank Leumi Trust Company of New York; and from 1988 to 1991
he was a director of Carmel Container Corporation. Dr. Peretz is 60 years
old and his address is c/o The New Republic, 1220 19th Street, N.W.,
Washington, D.C. 20036.
BERT W. WASSERMAN, Board Member. Financial Consultant. He is also a director of
Malibu Entertainment International, Inc., the Lillian Vernon Corporation
and Winstar Communications, Inc. He was, from January 1990 to March 1995,
Executive Vice President and Chief Financial Officer, and from January 1990
to March 1993, a director, of Time Warner Inc.; from 1981 to 1990, he was a
member of the office of the President and a director of Warner
Communications, Inc. He is 66 years old and his address is 126 East 57th
Street, Suite 12 North, New York, New York 10022-3613.
For so long as the Fund's plan described in the section captioned
"Shareholder Services Plan" remains in effect, the Board members of the Fund who
are not "interested persons" of the Fund, as defined in the 1940 Act, will be
selected and nominated by the Board members who are not "interested persons" of
the Fund.
The Fund typically pays its Board members an annual retainer and a per
meeting fee and reimburses them for their expenses. The Chairman of the Board
receives an additional 25% of such compensation. Emeritus Board members are
entitled to receive an annual retainer and a per meeting fee of one-half the
amount paid to them as Board members. The aggregate amount of compensation paid
to each Board member by the Fund for the fiscal year ended March 31, 1999 and by
all other funds in the Dreyfus Family of Funds for which such person is a Board
member (the number of which is set forth in parenthesis next to each Board
member's total compensation)* for the year ended December 31, 1998, was as
follows:
Total Compensation
from Fund and Fund
Aggregate Complex
Name of Board Member Compensation from Fund** Paid to Board Members
- -------------------- ------------------------ ---------------------
Joseph S. DiMartino $6,875 $619,660 (187)
David P. Feldman $5,000 $106,750 (56)
John M. Fraser, Jr. $5,000 $ 75,750 (42)
Robert R. Glauber $5,000 $ 88,250 (41)
James F. Henry $5,500 $ 54,250 (28)
Rosalind Gersten Jacobs $5,000 $ 84,000 (44)
Irving Kristol $5,000 $ 50,000 (28)
Dr. Paul A. Marks $5,000 $ 50,000 (28)
Dr. Martin Peretz $5,500 $ 54,250 (28)
Bert W. Wasserman $5,500 $ 54,250 (28)
- ---------------------------
* Represents the number of separate portfolios comprising the investment
companies in the Fund Complex, including the Fund, for which the Board
member serves.
** Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $3,036 for all Board members as a group.
Officers of the Fund
MARIE E. CONNOLLY, President and Treasurer. President, Chief Executive Officer,
Chief Compliance Officer and a director of the Distributor and Funds
Distributor, Inc., the ultimate parent of which is Boston Institutional
Group, Inc., and an officer of other investment companies advised or
administered by the Manager. She is 42 years old.
MARGARET W. CHAMBERS, Vice President and Secretary. Senior Vice President and
General Counsel of Funds Distributor Inc., and an officer of other
investment companies advised or administered by the Manager. From August
1996 to March 1998, she was Vice President and Assistant General Counsel
for Loomis, Sayles & Company, L.P. From January 1986 to July 1996, she was
an associate with the law firm of Ropes & Gray. She is 39 years old.
FREDERICK C. DEY, Vice President and Assistant Secretary and Assistant
Treasurer. Vice President, New Business Development of Funds Distributor,
Inc. and an officer of other investment companies advised or administered
by the Manager. From 1988 to August 1994, he was Manager of High
Performance Fabrics Division of Springs Industries, Inc., where he was
responsible for sales and marketing. Prior to joining Springs Industries,
he served as an analyst at Lebow Industries. He is 38 years old.
STEPHANIE D. PIERCE, Vice President, Assistant Treasurer and Assistant
Secretary. Vice President of the Distributor and Funds Distributor, Inc.,
and an officer of other investment companies advised or administered by
the Manager. From April 1997 to March, 1998, she was employed as a
Relationship Manager with Citibank, N.A. From August 1995 to April 1997,
she was an Assistant Vice President with Hudson Valley Bank, and from
September 1990 to August 1995, she was Second Vice President with Chase
Manhattan Bank. She is 30 years old.
JOHN P. COVINO, Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of Funds
Distributor, Inc. and an officer of other investment companies advised or
administered by the Manager. From December 1995 to November 1998, he was
employed by Fidelity Investments where he held multiple positions in their
Institutional Brokerage Group. Prior to joining Fidelity, he was employed
by SunGard Brokerage systems where he was responsible for the technology
and development of the accounting product group. He is 36 years old.
MARY A. NELSON, Vice President and Assistant Treasurer. Vice President of the
Distributor and Funds Distributor, Inc., and an officer of other investment
companies advised or administered by the Manager. From September 1989 to
July 1994, she was an Assistant Vice President and Client Manager for The
Boston Company, Inc. She is 35 years old.
GEORGE A. RIO, Vice President and Assistant Treasurer. Executive Vice President
and Client Service Director of Funds Distributor, Inc., and an officer of
other investment companies advised or administered by the Manager. From
June 1995 to March 1998, he was Senior Vice President and Senior Key
Account Manager for Putnam Mutual Funds. From May 1994 to June 1995, he was
Director of Business Development for First Data Corporation. He is 44 years
old.
JOSEPH F. TOWER, III, Vice President and Assistant Treasurer. Senior Vice
President, Treasurer, Chief Financial Officer and a director of the
Distributor and Funds Distributor, Inc., and an officer of other investment
companies advised or administered by the Manager. From July 1988 to August
1994, he was employed by The Boston Company, Inc. where he held various
management positions in the Corporate Finance and Treasury areas. He is 37
years old.
DOUGLAS C. CONROY, Vice President and Assistant Secretary. Assistant Vice
President of Funds Distributor, Inc., and an officer of other investment
companies advised or administered by the Manager. From April 1993 to
January 1995, he was a Senior Fund Accountant for Investors Bank & Trust
Company. He is 30 years old.
CHRISTOPHER J. KELLEY, Vice President and Assistant Secretary. Vice President
and Senior Associate General Counsel of Funds Distributor, Inc., and an
officer of other investment companies advised or administered by the
Manager. From April 1994 to July 1996, he was Assistant Counsel at Forum
Financial Group. He is 34 years old.
KATHLEEN K. MORRISEY, Vice President and Assistant Secretary. Manager of
Treasury Services Administration of Funds Distributor, Inc., and an officer
of other investment companies advised or administered by the Manager. From
July 1994 to November 1995, she was the Fund Accountant for Investors Bank
& Trust Company. She is 27 years old.
ELBA VASQUEZ, Vice President and Assistant Secretary. Assistant Vice President
of Funds Distributor, Inc., and an officer of other investment companies
advised or administered by the Manager. From March 1990 to May 1996, she
was employed by U.S. Trust Company of New York where she held various sales
and marketing positions. She is 37 years old.
KAREN JACOPPO-WOOD, Vice President and Assistant Secretary. Vice President and
Senior Counsel of Funds Distributor, Inc. and an officer of other
investment companies advised or administered by the Manager. From June 1994
to January 1996, she was Manager of SEC Registration at Scudder, Stevens &
Clark, Inc. She is 33 years old.
The address of each officer of the Fund is 200 Park Avenue, New York, New
York 10166.
The Fund's Board members and officers, as a group, owned less than 1% of
the Fund's shares outstanding on July 13, 1999.
The following shareholders owned, either beneficially or of record, 5% or
more of the outstanding voting securities of the Fund on July 13, 1999:
Nationwide QPVA c/o IPO CO 67, Columbus, Ohio 43218 - 17.34%; Charles Schwab &
Co., Inc. Reinvest Account, San Francisco California 94104 - 9.33%; and Boston
Safe Deposit & Trust Co. TTGE as Agent - Omnibus Account, Medford, Massachusetts
02155 - 5.64%.
MANAGEMENT ARRANGEMENTS
Investment Adviser. The Manager is a wholly-owned subsidiary of Mellon
Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank Corporation
("Mellon"). Mellon is a publicly owned multibank holding company incorporated
under Pennsylvania law in 1971 and registered under the Federal Bank Holding
Company Act of 1956, as amended. Mellon provides a comprehensive range of
financial products and services in domestic and selected international markets.
Mellon is among the twenty-five largest bank holding companies in the United
States based on total assets.
The Manager provides management services pursuant to the Management
Agreement (the "Agreement") dated August 24, 1994, with the Fund, which is
subject to annual approval by (i) the Fund's Board or (ii) vote of a majority
(as defined in the 1940 Act) of the outstanding voting securities of the Fund,
provided that in either event its continuance also is approved by a majority of
the Board members who are not "interested persons" (as defined in the 1940 Act)
of the Fund or the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval. Shareholders approved the Agreement on
August 2, 1994. The Fund's Board, including a majority of its members who are
not "interested persons" of any party to the Agreement, last voted to renew the
Agreement at a meeting held on September 14, 1998. The Agreement is terminable
without penalty, on 60 days' notice, by the Fund's Board or by vote of a
majority of the Fund's shares or, upon not less than 90 days' notice, by the
Manager. The Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
The following persons are officers and/or directors of the Manager:
Christopher M. Condron, Chairman of the Board and Chief Executive Officer;
Stephen E. Canter, President, Chief Operating Officer, Chief Investment Officer
and a director; Thomas F. Eggers, Vice Chairman--Institutional; Lawrence S.
Kash, Vice Chairman and a director; J. David Officer, Vice Chairman and a
director; Ronald P. O'Hanley III, Vice Chairman; William T. Sandalls, Jr.,
Executive Vice President; Mark N. Jacobs, Vice President, General Counsel and
Secretary; Diane P. Durnin, Vice President--Product Development; Patrice M.
Kozlowski, Vice President--Corporate Communications; Mary Beth Leibig, Vice
President--Human Resources; Andrew S. Wasser, Vice President--Information
Systems; Theodore A. Schachar, Vice President; Wendy Strutt, Vice President;
Richard Terres, Vice President; William H. Maresca, Controller; James Bitetto,
Assistant Secretary; Steven F. Newman, Assistant Secretary; and Mandell L.
Berman, Burton C. Borgelt, Steven G. Elliott, Martin C. McGuinn, Richard W. Sabo
and Richard F. Syron, directors.
The Manager manages the Fund's portfolio of investments in accordance with
the stated policies of the Fund, subject to the approval of the Fund's Board.
The Manager is responsible for investment decisions and provides the Fund with
portfolio managers who are authorized by the Board to execute purchases and
sales of securities. The Fund's portfolio managers, who comprise the Manager's
Taxable Fixed-Income Committee, are Michael Hoeh, Roger King, John Koerber, C.
Matthew Olson and Gerald E. Thunelius. The Manager also maintains a research
department with a professional staff of portfolio managers and securities
analysts who provide research services for the Fund and for other funds advised
by the Manager.
The Manager maintains office facilities on behalf of the Fund and furnishes
statistical and research data, clerical help, accounting, data processing,
bookkeeping and internal auditing and certain other required services to the
Fund. The Manager may pay the Distributor for shareholder services from the
Manager's own assets, including past profits but not including the management
fees paid by the Fund. The Distributor may use part or all of such payments to
pay securities dealers, banks or other financial institutions in respect of
these services. The Manager also may make such advertising and promotional
expenditures, using its own resources, as it from time to time deems
appropriate.
Under the Manager's personal securities trading policy (the "Policy"), the
Manager employees must preclear personal transactions in securities not exempt
under the Policy. In addition, the Manager's employees must report their
personal securities transactions and holdings, which are reviewed for compliance
with the Policy. In that regard, the Manager's portfolio managers and other
investment personnel also are subject to the oversight of Mellon's Investment
Ethics Committee. The Manager's portfolio managers and other investment
personnel who comply with the Policy's preclearance and disclosure procedures,
and the requirements of the Committee, may be permitted to purchase, sell or
hold securities which also may be or are held in fund(s) they manage or for
which they otherwise provide investment advice.
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by the Manager. The expenses borne by
the Fund include: taxes, interest, brokerage fees and commissions, if any, fees
of Board members who are not officers, directors, employees or holders of 5% or
more of the outstanding voting securities of the Manager, Securities and
Exchange Commission fees, state Blue Sky qualification fees, advisory fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, outside auditing and legal
expenses, costs of independent pricing services, costs of maintaining corporate
existence, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of shareholders' reports
and meetings, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
shareholders, and any extraordinary expenses.
As compensation for the Manager's services, the Fund has agreed to pay the
Manager a monthly management fee at the annual rate of .65% of the value of the
Fund's average daily net assets. All expenses are accrued daily and deducted
before declaration of dividends to investors. The management fees paid by the
Fund to the Manager for the fiscal years ended March 31, 1997, 1998 and 1999
amounted to $3,885,766, $3,914,925 and $3,967,610, respectively.
The Manager has agreed that if the aggregate expenses of the Fund,
excluding taxes, brokerage commissions and, with the prior written consent of
the necessary state securities commissions, extraordinary expenses, but
including the management fee, exceed 1 1/2% of the average value of the Fund's
net assets for the fiscal year, the Fund may deduct from the fees to be paid to
the Manager, or the Manager will bear such excess expenses. No expense
reimbursement was required under the Agreement for fiscal 1997, 1998 and 1999.
The aggregate of the fees payable to the Manager is not subject to
reduction as the value of the Fund's net assets increases.
Distributor. The Distributor, located at 60 State Street, Boston,
Massachusetts 02109, serves as the Fund's distributor on a best efforts basis
pursuant to an agreement which is renewable annually.
The Distributor may pay dealers a fee based on the amount invested through
such dealers in Fund shares by employees participating in qualified or
non-qualified employee benefit plans or other programs where (i) the employers
or affiliated employers maintaining such plans or programs have a minimum of 250
employees eligible for participation in such plans or programs, or (ii) such
plan's or program's aggregate investment in the Dreyfus Family or Funds or
certain other products made available by the Distributor to such plan or
programs exceeds $1,000,000 ("Eligible Benefit Plans"). Generally, the fee paid
to dealers will not exceed 1% of the amount invested through such dealers. The
Distributor, however, may pay dealers a higher fee and reserves the right to
cease paying these fees at any time. The Distributor will pay such fees from its
own funds, other than amounts received from the Fund, including past profits or
any other source available to it.
Transfer and Dividend Disbursing Agent and Custodian. Dreyfus Transfer,
Inc., (the "Transfer Agent"), a wholly-owned subsidiary of the Manager, P.O. Box
9671, Providence, Rhode Island 02940-9671, is the Fund's transfer and dividend
disbursing agent. Under a transfer agency agreement with the Fund, the Transfer
Agent arranges for the maintenance of shareholder account records for the Fund,
the handling of certain communications between shareholders and the Fund and the
payment of dividends and distributions payable by the Fund. For these services,
the Transfer Agent receives a monthly fee computed on the basis of the number of
shareholder accounts it maintains for the Fund during the month, and is
reimbursed for certain out-of-pocket expenses.
Mellon Bank, N.A. (the "Custodian"), the Manager's parent, One Mellon Bank
Center, Pittsburgh, Pennsylvania 15258, is the Fund's custodian. Under a custody
agreement with the Fund, the Custodian holds the Fund's securities and keeps all
necessary accounts and records. For its custody services, the Custodian receives
a monthly fee based on the market value of the Fund's assets held in custody and
receives certain securities transactions charges.
HOW TO BUY SHARES
General. Fund shares are sold without a sales charge. You may be charged a
fee if you effect transactions in Fund shares through a securities dealer, bank
or other financial institution. Share certificates are issued only upon your
written request. No certificates are issued for fractional shares. The Fund
reserves the right to reject any purchase order.
The minimum initial investment is $2,500, or $1,000 if you are a client of
a securities dealer, bank or other financial institution which maintains an
omnibus account in the Fund and has made an aggregate minimum initial purchase
for its customers of $2,500. Subsequent investments must be at least $100.
However, the minimum initial investment is $750 for Dreyfus-sponsored Keogh
Plans, IRAs (including regular IRAs, spousal IRAs for a non-working spouse, Roth
IRAs, IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs"), and
rollover IRAs) and 403(b)(7) Plans with only one participant and $500 for
Dreyfus-sponsored Education IRAs, with no minimum for subsequent purchases. The
initial investment must be accompanied by the Account Application. For full-time
or part-time employees of the Manager or any of its affiliates or subsidiaries,
directors of the Manager, Board members of a fund advised by the Manager,
including members of the Fund's Board, or the spouse or minor child of any of
the foregoing, the minimum initial investment is $1,000. For full-time or
part-time employees of the Manager or any of its affiliates or subsidiaries who
elect to have a portion of their pay directly deposited into their Fund
accounts, the minimum initial investment is $50. The Fund reserves the right to
offer Fund shares without regard to minimum purchase requirements to employees
participating in certain qualified or non-qualified employee benefit plans or
other programs where contributions or account information can be transmitted in
a manner and form acceptable to the Fund. The Fund reserves the right to further
vary the initial and subsequent investment minimum requirements at any time.
Fund shares also are offered without regard to the minimum initial
investment requirements through Dreyfus-Automatic Asset Builder(R), Dreyfus
Government Direct Deposit Privilege or Dreyfus Payroll Savings Plan pursuant to
the Dreyfus Step Program described under "Shareholder Services." These services
enable you to make regularly scheduled investments and may provide you with a
convenient way to invest for long-term financial goals. You should be aware,
however, that periodic investment plans do not guarantee a profit and will not
protect you against loss in a declining market.
Shares are sold on a continuous basis at the net asset value per share
next determined after an order in proper form is received by the Transfer Agent
or other authorized entity. Net asset value per share is determined as of the
close of trading on the floor of the New York Stock Exchange (currently 4:00
p.m., New York time), on each day the New York Stock Exchange is open for
business. For purposes of determining net asset value per share, options and
futures contracts will be valued 15 minutes after the close of trading on the
floor of the New York Stock Exchange. Net asset value per share is computed by
dividing the value of the Fund's net assets (i.e., the value of its assets less
liabilities) by the total number of shares outstanding. See "Determination of
Net Asset Value."
For certain institutions that have entered into agreements with the
Distributor, payment for the purchase of Fund shares may be transmitted, and
must be received by the Transfer Agent, within three business days after the
order is placed. If such payment is not received within three business days
after the order is placed, the order may be canceled and the institution could
be held liable for resulting fees and/or losses.
Dreyfus TeleTransfer Privilege. You may purchase shares by telephone if
you have checked the appropriate box and supplied the necessary information on
the Account Application or have filed a Shareholder Services Form with the
Transfer Agent. The proceeds will be transferred between the bank account
designated in one of these documents and your Fund account. Only a bank account
maintained in a domestic financial institution which is an Automated Clearing
House ("ACH") member may be so designated.
Dreyfus TeleTransfer purchase orders may be made at any time. Purchase
orders received by 4:00 p.m., New York time, on any day the Transfer Agent and
the New York Stock Exchange are open for business will be credited to the
shareholder's Fund account on the next bank business day following such purchase
order. Purchase orders made after 4:00 p.m., New York time, on any day the
Transfer Agent and the New York Stock Exchange are open for business, or orders
made on Saturday, Sunday or any Fund holiday (e.g., when the New York Stock
Exchange is not open for business), will be credited to the shareholder's Fund
account on the second bank business day following such purchase order. To
qualify to use the Dreyfus TeleTransfer Privilege, the initial payment for
purchase of Fund shares must be drawn on, and redemption proceeds paid to, the
same bank and account as are designated on the Account Application or
Shareholder Services Form on file. If the proceeds of a particular redemption
are to be wired to an account at any other bank, the request must be in writing
and signature-guaranteed. See "How to Redeem Shares--Dreyfus TeleTransfer
Privilege."
Transactions Through Securities Dealers. Fund shares may be purchased and
redeemed through securities dealers which may charge a fee for such services.
Some dealers will place the Fund's shares in an account with their firm. Dealers
also may require the following: that the customer invest more than the $1,000
minimum investment through dealers; the customer not take physical delivery of
stock certificates; the customer not request redemption checks to be issued in
the customer's name; fractional shares not be purchased; monthly income
distributions be taken in cash; or other conditions.
There is no sales or service charge by the Fund or the Distributor,
although investment dealers, banks and other financial institutions may make
reasonable charges to investors for their services. The services provided and
the applicable fees are established by each dealer or other institution acting
independently of the Fund. The Fund has been given to understand that these fees
may be charged for customer services including, but not limited to, same-day
investment of client funds; same-day access to client funds; advice to customers
about the status of their accounts, yield currently being paid or income earned
to date; provision of periodic account statements showing security and money
market positions; other services available from the dealer, bank or other
institution; and assistance with inquiries related to their investment. Any such
fees will be deducted monthly from the investor's account, which on smaller
accounts could constitute a substantial portion of distributions. Small,
inactive, long-term accounts involving monthly service charges may not be in the
best interest of investors. Investors should be aware that they may purchase
shares of the Fund directly from the Fund without imposition of any maintenance
or service charges, other than those already described herein.
Reopening an Account. You may reopen an account with a minimum investment
of $100 without filing a new Account Application during the calendar year the
account is closed or during the following calendar year, provided the
information on the old Account Application is still applicable.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the "Plan") pursuant to
which the Fund reimburses Dreyfus Service Corporation an amount not to exceed an
annual rate of .25% of the value of the Fund's average daily net assets for
certain allocated expenses of providing personal services and/or maintaining
shareholder accounts. The services provided may include personal services
related to shareholder accounts, such as answering shareholder inquiries
regarding the Fund and providing reports and other information, and services
related to the maintenance of shareholder accounts.
A quarterly report of the amounts expended under the Plan, and the
purposes for which such expenditures were incurred, must be made to the Board
for its review. In addition, the Plan provides that material amendments of the
Plan must be approved by the Board and by the Board, members who are not
"interested persons" (as defined in the 1940 Act) of the Fund and have no direct
or indirect financial interest in the operation of the Plan by vote cast in
person at a meeting called for the purpose of considering such amendments. The
Plan is subject to annual approval by such vote of the Board members cast in
person at a meeting called for the purpose of voting on the Plan. The Plan was
last so approved on September 14, 1998. The Plan is terminable at any time by
vote of a majority of the Board members who are not "interested persons" and
have no direct or indirect financial interest in the operation of the Plan.
For the fiscal year ended March 31, 1999, the Fund was charged $831,198
pursuant to the Plan.
HOW TO REDEEM SHARES
Check Redemption Privilege. The Fund provides Redemption Checks ("Checks")
automatically upon opening an account, unless you specifically refuse the Check
Redemption Privilege by checking the applicable "No" box on the Account
Application. Checks will be sent only to the registered owner(s) of the account
and only to the address of record. The Check Redemption Privilege may be
established for an existing account by a separate signed Shareholder Services
Form. The Account Application or Shareholder Services Form must be manually
signed by the registered owner(s). Checks are drawn on your Fund account and may
be made payable to the order of any person in an amount of $500 or more. When a
Check is presented to the Transfer Agent for payment, the Transfer Agent, as
your agent, will cause the Fund to redeem a sufficient number of shares in your
account to cover the amount of the Check. Dividends are earned until the Check
clears. After clearance, a copy of the Check will be returned to you. You
generally will be subject to the same rules and regulations that apply to
checking accounts, although election of this Privilege creates only a
shareholder-transfer agent relationship with the Transfer Agent. If you hold
shares in a Dreyfus-sponsored IRA account, you may be permitted to make
withdrawals from your IRA account using checks furnished to you by The Dreyfus
Trust Company.
You should date your Checks with the current date when you write them.
Please do not postdate your Checks. If you do, the Transfer Agent will honor,
upon presentment, even if presented before the date of the Check, all postdated
Checks which are dated within six months of presentment for payment, if they are
otherwise in good order.
Checks are free, but the Transfer Agent will impose a fee for stopping
payment of a Check upon your request or if the Transfer Agent cannot honor a
Check due to insufficient funds or other valid reason. If the amount of the
Check is greater than the value of the shares in your account, the Check will be
returned marked insufficient funds. Checks should not be used to close an
account.
This Privilege will be terminated immediately, without notice, with
respect to any account which is, or becomes, subject to backup withholding on
redemptions. Any Check written on an account which has become subject to backup
withholding on redemptions will not be honored by the Transfer Agent.
Wire Redemption Privilege. By using this Privilege, you authorize the
Transfer Agent to act on wire, telephone or letter redemption instructions from
any person representing himself or herself to be you, and reasonably believed by
the Transfer Agent to be genuine. Ordinarily, the Fund will initiate payment for
shares redeemed pursuant to this Privilege on the next business day if the
Transfer Agent receives a redemption request in proper form. Redemption proceeds
($1,000 minimum) will be transferred by Federal Reserve wire only to the
commercial bank account specified by you on the Account Application or
Shareholder Services Form, or to a correspondent bank if your bank is not a
member of the Federal Reserve System. Fees ordinarily are imposed by such bank
and borne by the investor. Immediate notification by the correspondent bank to
your bank is necessary to avoid a delay in crediting the funds to your bank
account.
If you have access to telegraphic equipment, you may wire redemption
requests to the Transfer Agent by employing the following transmittal code which
may be used for domestic or overseas transmissions:
Transfer Agent's
Transmittal Code Answer Back Sign
144295 144295 TSSG PREP
If you do not have direct access to telegraphic equipment, you may have
the wire transmitted by contacting a TRT Cables operator at 1-800-654-7171, toll
free. You should advise the operator that the above transmittal code must be
used and should also inform the operator of the Transfer Agent's answer back
sign.
To change the commercial bank or account designated to receive wire
redemption proceeds, a written request must be sent to the Transfer Agent. This
request must be signed by each shareholder, with each signature guaranteed as
described below under "Stock Certificates; Signatures."
Dreyfus TeleTransfer Privilege. You may request by telephone that
redemption proceeds be transferred between your Fund account and your bank
account. Only a bank account maintained in a domestic financial institution
which is an ACH member may be designated. Redemption proceeds will be on deposit
in your account at an ACH member bank ordinarily two business days after receipt
of the redemption request. Holders of jointly registered Fund or bank accounts
may redeem through the Dreyfus TeleTransfer Privilege for transfer to their bank
account not more than $250,000 within any 30-day period. You should be aware
that if you have selected the Dreyfus TeleTransfer Privilege, any request for a
wire redemption will be effected as a Dreyfus TeleTransfer transaction through
the ACH system unless more prompt transmittal specifically is requested. See
"How to Buy Shares--Dreyfus TeleTransfer Privilege."
Stock Certificates; Signatures. Any certificates representing Fund shares
to be redeemed must be submitted with the redemption request. Written redemption
requests must be signed by each shareholder, including each holder of a joint
account, and each signature must be guaranteed. Signatures on endorsed
certificates submitted for redemption also must be guaranteed. The Transfer
Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP") and the
Stock Exchanges Medallion Program. Guarantees must be signed by an authorized
signatory of the guarantor and "Signature-Guaranteed" must appear with the
signature. The Transfer Agent may request additional documentation from
corporations, executors, administrators, trustees or guardians, and may accept
other suitable verification arrangements from foreign investors, such as
consular verification. For more information with respect to
signature-guarantees, please call one of the telephone numbers listed on the
cover.
Redemption Commitment. The Fund has committed itself to pay in cash all
redemption requests by any shareholder of record, limited in amount during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission and is a
fundamental policy of the Fund which may not be changed without shareholder
approval. In the case of requests for redemption in excess of such amount, the
Fund's Board reserves the right to make payments in whole or in part in
securities or other assets of the Fund in case of an emergency or any time a
cash distribution would impair the liquidity of the Fund to the detriment of the
existing shareholders. In such event, the securities would be valued in the same
manner as the portfolio of the Fund is valued. If the recipient sells such
securities, brokerage charges might be incurred.
Suspension of Redemptions. The right of redemption may be suspended or the
date of payment postponed (a) during any period when the New York Stock Exchange
is closed (other than customary weekend and holiday closings), (b) when trading
in the markets the Fund ordinarily utilizes is restricted, or when an emergency
exists as determined by the Securities and Exchange Commission so that disposal
of the Fund's investments or determination of its net asset value is not
reasonably practicable or (c) for such other periods as the Securities and
Exchange Commission by order may permit to protect the Fund's shareholders.
SHAREHOLDER SERVICES
Fund Exchanges. You may purchase, in exchange for shares of the Fund,
shares of certain other funds managed or administered by the Manager, to the
extent such shares are offered for sale in your state of residence. Shares of
other funds purchased by exchange will be purchased on the basis of relative net
asset value per share as follows:
A. Exchanges for shares of funds offered without a sales load will be
made without a sales load.
B. Shares of funds purchased without a sales load may be exchanged for
shares of other funds sold with a sales load, and the applicable sales
load will be deducted.
C. Shares of funds purchased with a sales load may be exchanged without a
sales load for shares of other funds sold without a sales load.
D. Shares of funds purchased with a sales load, shares of funds acquired
by a previous exchange from shares purchased with a sales load and
additional shares acquired through reinvestment of dividends or
distributions of any such funds (collectively referred to herein as
"Purchased Shares") may be exchanged for shares of other funds sold
with a sales load (referred to herein as "Offered Shares"), but if the
sales load applicable to the Offered Shares exceeds the maximum sales
load that could have been imposed in connection with the Purchased
Shares (at the time the Purchased Shares were acquired), without
giving effect to any reduced loads, the difference will be deducted.
To accomplish an exchange under item D above, you must notify the Transfer
Agent of your prior ownership of fund shares and your account number.
To request an exchange, you must give exchange instructions to the
Transfer Agent in writing or by telephone. The ability to issue exchange
instructions by telephone is given to all Fund shareholders automatically,
unless you check the applicable "No" box on the Account Application, indicating
that you specifically refuse this privilege. By using the Telephone Exchange
Privilege, you authorize the Transfer Agent to act on telephonic instructions
(including over The Dreyfus Touch(R) automated telephone system) from any person
representing himself or herself to be you, and reasonably believed by the
Transfer Agent to be genuine. Telephone exchanges may be subject to limitations
as to the amount involved or the number of telephone exchanges permitted. Shares
issued in certificate form are not eligible for telephone exchange. No fees
currently are charged shareholders directly in connection with exchanges,
although the Fund reserves the right, upon not less than 60 days' written
notice, to charge shareholders a nominal administrative fee in accordance with
rules promulgated by the Securities and Exchange Commission.
To establish a personal retirement plan by exchange, shares of the fund
being exchanged must have a value of at least the minimum initial investment
required for the fund into which the exchange is being made.
Dreyfus Auto-Exchange Privilege. Dreyfus Auto-Exchange Privilege permits
you to purchase, in exchange for shares of the Fund, shares of another fund in
the Dreyfus Family of Funds of which you are a shareholder. This Privilege is
available only for existing accounts. Shares will be exchanged on the basis of
relative net asset value as described above under "Fund Exchanges." Enrollment
in or modification or cancellation of this Privilege is effective three business
days following notification by you. You will be notified if your account falls
below the amount designated to be exchanged under this Privilege. In this case,
your account will fall to zero unless additional investments are made in excess
of the designated amount prior to the next Auto-Exchange transaction. Shares
held under IRA and other retirement plans are eligible for this Privilege.
Exchanges of IRA shares may be made between IRA accounts and from regular
accounts to IRA accounts, but not from IRA accounts to regular accounts. With
respect to all other retirement accounts, exchanges may be made only among those
accounts.
Fund Exchanges and the Dreyfus Auto-Exchange Privilege are available to
shareholders residing in any state in which shares of the fund being acquired
may legally be sold. Shares may be exchanged only between accounts having
identical names and other identifying designations.
Shareholder Services Forms and prospectuses of the other funds may be
obtained by calling 1-800-645-6561. The Fund reserves the right to reject any
exchange request in whole or in part. The Fund Exchanges service or Dreyfus
Auto-Exchange Privilege may be modified or terminated at any time upon notice to
shareholders.
Dreyfus-Automatic Asset Builder(R). Dreyfus-Automatic Asset Builder
permits you to purchase Fund shares (minimum of $100 and maximum of $150,000 per
transaction) at regular intervals selected by you. Fund shares are purchased by
transferring funds from the bank account designated by you.
Dreyfus Government Direct Deposit Privilege. Dreyfus Government Direct
Deposit Privilege enables you to purchase Fund shares (minimum of $100 and
maximum of $50,000 per transaction) by having Federal salary, Social Security,
or certain veterans', military or other payments from the U.S. Government
automatically deposited into your Fund account. You may deposit as much of such
payments as you elect.
Dreyfus Payroll Savings Plan. Dreyfus Payroll Savings Plan permits you to
purchase Fund shares (minimum of $100 per transaction) automatically on a
regular basis. Depending upon your employer's direct deposit program, you may
have part or all of your paycheck transferred to your existing Dreyfus account
electronically through the ACH system at each pay period. To establish a Dreyfus
Payroll Savings Plan account, you must file an authorization form with your
employer's payroll department. It is the sole responsibility of your employer to
arrange for transactions under the Dreyfus Payroll Savings Plan.
Dreyfus Step Program. The Dreyfus Step Program enables you to purchase
Fund shares without regard to the Fund's minimum initial investment requirements
through Dreyfus-Automatic Asset Builder(R), Dreyfus Government Direct Deposit
Privilege or Dreyfus Payroll Savings Plan. To establish a Dreyfus Step Program
account, you must supply the necessary information on the Account Application
and file the required authorization form(s) with the Transfer Agent. For more
information concerning this Program, or to request the necessary authorization
form(s), please call toll free 1-800-782-6620. You may terminate your
participation in this Program at any time by discontinuing your participation in
Dreyfus-Automatic Asset Builder, Dreyfus Government Direct Deposit Privilege or
Dreyfus Payroll Savings Plan, as the case may be, as provided under the terms of
such Privilege(s). Investors who wish to purchase Fund shares through the
Dreyfus Step Program in conjunction with a Dreyfus-sponsored retirement plan may
do so only for IRAs, SEP-IRAs and IRA "Rollover Accounts." The Fund may modify
or terminate this Program at any time.
Dreyfus Dividend Options. Dreyfus Dividend Sweep allows you to invest
automatically your dividends or dividends and capital gain distributions, if
any, from the Fund in shares of another fund in the Dreyfus Family of Funds of
which you are a shareholder. Shares of other funds purchased pursuant to this
privilege will be purchased on the basis of relative net asset value per share
as follows:
A. Dividends and distributions paid by a fund may be invested without
imposition of a sales load in shares of other funds offered without a
sales load.
B. Dividends and distributions paid by a fund which does not charge a
sales load may be invested in shares of other funds sold with a sales
load, and the applicable sales load will be deducted.
C. Dividends and distributions paid by a fund which charges a sales load
may be invested in shares of other funds sold with a sales load
(referred to herein as "Offered Shares"), but if the sales load
applicable to the Offered Shares exceeds the maximum sales load
charged by the fund from which dividends or distributions are being
swept (without giving effect to any reduced loads), the difference
will be deducted.
D. Dividends and distributions paid by a fund may be invested in shares
of other funds that impose a contingent deferred sales charge ("CDSC")
and the applicable CDSC, if any, will be imposed upon redemption of
such shares.
Dreyfus Dividend ACH permits you to transfer electronically dividends or
dividends and capital gain distributions, if any, from the Fund to a designated
bank account. Only an account maintained at a domestic financial institution
which is an ACH member may be so designated. Banks may charge a fee for this
service.
Automatic Withdrawal Plan. The Automatic Withdrawal Plan permits you to
request withdrawal of a specified dollar amount (minimum of $50) on either a
monthly or quarterly basis if you have a $5,000 minimum account. Withdrawal
payments are the proceeds from sales of Fund shares, not the yield on the
shares. If withdrawal payments exceed reinvested dividends and distributions,
your shares will be reduced and eventually may be depleted. The Automatic
Withdrawal Plan may be terminated at any time by you, the Fund or the Transfer
Agent. Shares for which share certificates have been issued may not be redeemed
through the Automatic Withdrawal Plan.
Corporate Pension/Profit-Sharing and Personal Retirement Plans. The Fund
makes available to corporations a variety of prototype pension and
profit-sharing plans including a 401(k) Salary Reduction Plan. In addition, the
Fund makes available Keogh Plans, IRAs (including regular IRA, spousal IRAs for
a non-working spouse, Roth IRAs, SEP-IRAs, Education IRAs and IRA "Rollover
Accounts") and 403(b)(7) Plans. Plan support services also are available.
Investors who wish to purchase Fund shares in conjunction with a Keogh
Plan, a 403(b)(7) Plan or an IRA, including a SEP-IRA, may request forms for
adoption of such plans from the Distributor.
The entity acting as custodian for Keogh Plans, 403(b)(7) Plans or IRAs
may charge a fee, payment of which could require the liquidation of shares. All
fees charged are described in the appropriate form.
Shares may be purchased in connection with these plans only by direct
remittance to the entity acting as custodian. Purchases for these plans may not
be made in advance of receipt of funds.
You should read the prototype retirement plan and the form of custodial
agreement for further details on eligibility, service fees and tax implications,
and should consult a tax adviser.
PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities ordinarily are purchased directly from the
issuer or from an underwriter or a market maker for the securities. Usually no
brokerage commissions are paid by the Fund for such purchases. Purchases of
portfolio securities from underwriters include a commission or concession paid
by the issuer to the underwriter and the purchase price paid to market makers
for the securities may include the spread between the bid and asked price. No
brokerage commissions or concessions were paid by the Fund during the 1997, 1998
and 1999 fiscal years.
Transactions are allocated to various dealers by the Fund's portfolio
managers in their best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for research, statistical or
other services to enable the Manager to supplement its own research and analysis
with the views and information of other securities firms and may be selected
based upon their sales of shares of the Fund or other funds advised by the
Manager or its affiliates.
Research services furnished by brokers through which the Fund effects
securities transactions may be used by the Manager in advising other funds it
advises and, conversely, research services furnished to the Manager by brokers
in connection with other funds the Manager advises may be used by the Manager in
advising the Fund. Although it is not possible to place a dollar value on these
services, it is the opinion of the Manager that the receipt and study of such
services should not reduce the overall expenses of its research department.
DETERMINATION OF NET ASSET VALUE
Valuation of Portfolio Securities. Substantially all of the Fund's
investments (excluding short-term investments) are valued each business day by
an independent pricing service (the "Service") approved by the Fund's Board.
Securities valued by the Service for which quoted bid prices in the judgment of
the Service are readily available and are representative of the bid side of the
market are valued at the mean between the quoted bid prices (as obtained by the
Service from dealers in such securities) and asked prices (as calculated by the
Service based upon its evaluation of the market for such securities). Other
investments (which constitute a majority of the portfolio of securities) valued
by the Service are carried at fair value as determined by the Service, based on
methods which include consideration of: yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. Short-term investments are not valued by
the Service and are carried at amortized cost, which approximates value. Other
investments that are not valued by the Service are valued at the average of the
most recent bid and asked prices in the market in which such investments are
primarily traded, or at the last sales price for securities traded primarily on
an exchange. In the absence of reported sales of investments traded primarily on
an exchange, the average of the most recent bid and asked prices is used. Bid
price is used when no asked price is available. Investments traded in foreign
currencies are translated to U.S. dollars at the prevailing rates of exchange.
Expenses and fees, including the management fee (reduced by the expense
limitation, if any), are accrued daily and are taken into account for the
purpose of determining the net asset value of Fund shares.
New York Stock Exchange Closings. The holidays (as observed) on which the
New York Stock Exchange is closed currently are: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Management believes that the Fund qualified as a "regulated investment
company" under the Code for the fiscal year ended March 31, 1999. The Fund
intends to continue to so qualify if such qualification is in the best interests
of its shareholders. As a regulated investment company, the Fund will pay no
Federal income tax on its net investment income and net realized capital gains
to the extent such income and gains are distributed to shareholders in
accordance with applicable provisions of the Code. If the Fund did not qualify
as a regulated investment company, it would be treated for tax purposes as an
ordinary corporation subject to Federal income tax. The term "regulated
investment company" does not imply the supervision of management or investment
practices or policies by any government agency.
The Fund ordinarily declares and pays dividends from net investment income
monthly, and distributes net realized securities gains, if any, once a year, but
it may make distributions on a more frequent basis to comply with the
distribution requirements of the Code, in all events in a manner consistent with
the provisions of the 1940 Act. The Fund will not make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired.
If you elect to receive dividends and distributions in cash, and your
dividend and distribution check is returned to the Fund as undeliverable or
remains uncashed for six months, the Fund reserves the right to reinvest such
dividend or distribution and all future dividends and distributions payable to
you in additional Fund shares at net asset value. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Any dividend or distribution paid shortly after an investor's purchase may
have the effect of reducing the aggregate net asset value of his shares below
the cost of the investment. Such a dividend or distribution would be a return on
investment in an economic sense, although taxable as stated in the Prospectus.
In addition, the Code provides that if a shareholder holds shares of the Fund
for six months or less and has received a capital gain distribution with respect
to such shares, any loss incurred on the sale of such shares will be treated as
a long-term capital loss to the extent of the capital gain distribution
received.
Ordinarily, gains and losses realized from portfolio transactions will be
treated as capital gains and losses. However, a portion of the gain or loss
realized from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial futures and options, and certain
preferred stock) may be treated as ordinary income or loss under Section 988 of
the Code. In addition, all or a portion of any gains realized from the sale or
other disposition of certain market discount bonds will be treated as ordinary
income under Section 1276 of the Code. Finally, all or a portion of the gain
realized from engaging in "conversion transactions" may be treated as ordinary
income under Section 1258 of the Code. "Conversion transactions" are defined to
include certain forward, futures, option and "straddle" transactions,
transactions marketed or sold to produce capital gains, or transactions
described in Treasury regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss the Fund realizes from
certain forward contracts and options transactions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Gain or
loss will arise upon exercise or lapse of such contracts and options as well as
from closing transactions. In addition, any such contracts or options remaining
unexercised at the end of the Fund's taxable year will be treated as sold for
their then fair market value, resulting in additional gain or loss to the Fund
characterized as described above.
Offsetting positions held by the Fund involving certain foreign currency
forward contracts or options may be considered, for tax purposes, constitute
"straddles". "Straddles" are defined to include "offsetting positions" in
actively traded personal property. The tax treatment of "straddles" is governed
by Sections 1092 and 1258 of the Code, which, in certain circumstances, override
or modify the provisions of Sections 1256 and 988 of the Code.
If the Fund were treated as entering into "straddles" by reason of its
engaging in certain forward contracts or options transactions, such "straddles"
would be characterized as "mixed straddles" if the forward contracts or options
transactions comprising a part of such "straddles" were governed by Section 1256
of the Code. The Fund may make one or more elections with respect to "mixed
straddles". Depending on which election is made, if any, the results to the Fund
may differ. If no election is made, to the extent the "straddle" rules apply to
positions established by the Fund, losses realized by the Fund will be deferred
to the extent of unrealized gain in the offsetting position. Moreover, as a
result of the "straddle" rules, short-term capital loss on "straddle" positions
may be recharacterized as long-term capital loss, and long-term capital gain may
be recharacterized as short-term capital gain or ordinary income.
The Taxpayer Relief Act of 1997 included constructive sale provisions that
generally apply if the Fund either (1) holds an appreciated financial position
with respect to stock, certain debt obligations, or partnership interests
("appreciated financial position") and then enters into a short sale, futures,
forward, or offsetting notional principal contract (collectively, a "Contract")
respecting the same or substantially identical property or (2) holds an
appreciated financial position that is a Contract and then acquires property
that is the same as, or substantially identical to, the underlying property. In
each instance, with certain exceptions, the Fund generally will be taxed as if
the appreciated financial position were sold at its fair market value on the
date the Fund enters into the financial position or acquires the property,
respectively. Transactions that are identified hedging or straddle transactions
under other provisions of the Code can be subject to the constructive sale
provisions.
Investment by the Fund in securities issued at a discount or providing for
deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to shareholders. For example, the Fund could be
required to recognize annually a portion of the discount (or deemed discount) at
which such securities were issued and to distribute such portion in order to
maintain its qualification as a regulated investment company. In such case, the
Fund may be required to dispose of securities which it might otherwise have
continued to hold in order to generate cash to satisfy these distribution
requirements.
PERFORMANCE INFORMATION
The Fund's current yield for the 30-day period ended March 31, 1999 was
6.04%. Current yield is computed pursuant to a formula which operates as
follows: The amount of the Fund's expenses accrued for the 30-day period is
subtracted from the amount of the dividends and interest earned (computed in
accordance with regulatory requirements) by the Fund during the period. That
result is then divided by the product of: (a) the average daily number of shares
outstanding during the period that were entitled to receive dividends, and (b)
the net asset value per share on the last day of the period less any
undistributed earned income per share reasonably expected to be declared as a
dividend shortly thereafter. The quotient is then added to 1, and that sum is
raised to the 6th power, after which 1 is subtracted. The current yield is then
arrived at by multiplying the result by 2.
The Fund's average annual total return for the one, five and ten year
periods ended March 31, 1999 was 2.05%, 6.55% and 8.73%, respectively. Average
annual total return is calculated by determining the ending redeemable value of
an investment purchased with a hypothetical $1,000 payment made at the beginning
of the period (assuming the reinvestment of dividends and distributions),
dividing by the amount of the initial investment, taking the "nth root of the
quotient (where "n" is the number of years in the period) and subtracting 1 from
the result.
The Fund's total return for the period June 25, 1976 to March 31, 1999 was
637.44%. Total return is calculated by subtracting the amount of the Fund's net
asset value per share at the beginning of a stated period from the net asset
value per share at the end of the period (after giving effect to the
reinvestment of dividends and distributions during the period), and dividing the
result by the net asset value per share at the beginning of the period.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Consumer Price
Index, Lipper Analytical Services, Inc., Moody's Bond Survey Bond Index, Lehman
Brothers Corporate Bond Index, Salomon Smith Barney High Grade Index,
Morningstar, Inc., IBC Bond Fund Report and other industry publications. From
time to time, advertising materials may refer to studies performed by the
Manager or its affiliates, such as "The Dreyfus Tax Informed Investing Study" or
"The Dreyfus Gender Investment Comparison Study (1996 and 1997)."
INFORMATION ABOUT THE FUND
Each Fund share has one vote and, when issued and paid for in accordance
with the terms of the offering, is fully paid and nonassessable. Fund shares are
of one class and have equal rights as to dividends and in liquidation. Shares
have no preemptive, subscription or conversion rights and are freely
transferable.
Unless otherwise required by the 1940 Act, ordinarily it will not be
necessary for the Fund to hold annual meetings of shareholders. As a result,
Fund shareholders may not consider each year the election of Board members or
the appointment of auditors. However, the holders of at least 10% of the shares
outstanding and entitled to vote may require the Fund to hold a special meeting
of shareholders for purposes of removing a Board member from office. Fund
shareholders may remove a Board member by the affirmative vote of a majority of
the Fund's outstanding voting shares. In addition, the Board will call a meeting
of shareholders for the purpose of electing Board members if, at any time, less
than a majority of the Board members then holding office have been elected by
shareholders.
The Fund is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term market
movements. A pattern of frequent purchases and exchanges can be disruptive to
efficient portfolio management and, consequently, can be detrimental to the
Fund's performance and its shareholders. Accordingly, if the Fund's management
determines that an investor is following a market-timing strategy or is
otherwise engaging in excessive trading, the Fund, with or without prior notice,
may temporarily or permanently terminate the availability of Fund Exchanges, or
reject in whole or part any purchase or exchange request, with respect to such
investor's account. Such investors also may be barred from purchasing other
funds in the Dreyfus Family of Funds. Generally, an investor who makes more than
four exchanges out of the Fund during any calendar year or who makes exchanges
that appear to coincide with a market-timing strategy may be deemed to be
engaged in excessive trading. Accounts under common ownership or control will be
considered as one account for purposes of determining a pattern of excessive
trading. In addition, the Fund may refuse or restrict purchase or exchange
requests by any person or group if, in the judgment of the Fund's management,
the Fund would be unable to invest the money effectively in accordance with its
investment objective and policies or could otherwise be adversely affected or if
the Fund receives or anticipates receiving simultaneous orders that may
significantly affect the Fund (e.g., amounts equal to 1% or more of the Fund's
total assets). If an exchange request is refused, the Fund will take no other
action with respect to the shares until it receives further instructions from
the investor. The Fund may delay forwarding redemption proceeds for up to seven
days if the investor redeeming shares is engaged in excessive trading or if the
amount of the redemption request otherwise would be disruptive to efficient
portfolio management or would adversely affect the Fund. The Fund's policy on
excessive trading applies to investors who invest in the Fund directly or
through financial intermediaries, but does not apply to the Dreyfus
Auto-Exchange Privilege, to any automatic investment or withdrawal privilege
described herein, or to participants in employer-sponsored retirement plans.
During times of drastic economic or market conditions, the Fund may
suspend Fund Exchanges temporarily without notice and treat exchange requests
based on their separate components -- redemption orders with a simultaneous
request to purchase the other fund's shares. In such a case, the redemption
request would be processed at the Fund's next determined net asset value but the
purchase order would be effective only at the net asset value next determined
after the fund being purchased receives the proceeds of the redemption, which
may result in the purchase being delayed.
The Fund sends annual and semi-annual financial statements to all its
shareholders.
COUNSEL AND INDEPENDENT AUDITORS
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
being sold pursuant to the Fund's Prospectus.
Ernst & Young LLP, independent auditors, 787 Seventh Avenue, New York, New
York 10019, have been selected as the Fund's independent auditors.
<PAGE>
APPENDIX
Description of certain S&P and Moody's ratings:
S&P
Debt Ratings
AAA
Bonds rated AAA have the highest rating assigned to a debt obligation.
Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB
Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B
Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions would likely impair capacity or willingness to
pay interest and repay principal.
CCC
Debt rated CCC has a current identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payments of principal. In the event of adverse business, financial or
economic conditions, it is not likely to have the capacity to pay interest and
repay principal.
CC
The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C
The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Commercial Paper Ratings
The rating A is the highest rating and is assigned by S&P to issues that
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. Paper rated A-1 indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation. Paper rated A-1 must have the following characteristics: liquidity
ratios are adequate to meet cash requirements, long-term senior debt is rated
"A" or better, the issuer has access to at least two additional channels of
borrowing, and basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances. Typically, the issuer's industry is well
established and the issuer has a strong position within the industry; the
reliability and quality of management are unquestioned.
Moody's
Debt Rating
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and therefore not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desired
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca
Bonds which are rated Ca present obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major ratings categories, except in the Aaa category and in
categories below B. The modifier 1 indicates a ranking for the security in the
higher end of a rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating assigned
by Moody's. issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations, and ordinarily will be evidenced by leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Fitch
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take into
consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these bonds
and, therefore, impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B
Bonds rated B are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC
Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or principal.
DDD, DD and D
Bonds rated DDD, DD and D are in actual default of interest and/or
principal payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery on these bonds
and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the existence
of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
Duff
Bond Ratings
AAA
Bonds rated AAA are considered highest credit quality. The risk factors
are negligible, being only slightly more than for risk-free U.S. Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB
Bonds rated BBB are considered to have below average protection factors
but still considered sufficient for prudent investment. Considerable variability
in risk exists during economic cycles.
BB
Bonds rated BB are below investment grade but are deemed by Duff as likely
to meet obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes. Overall
quality may move up or down frequently within the category.
B
Bonds rated B are below investment grade and possess the risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in quality rating within
this category or into a higher or lower quality rating grade.
CCC
Bonds rated CCC are well below investment grade securities. Such bonds may
be in default or have considerable uncertainty as to timely payment of interest,
preferred dividends and/or principal. Protection factors are narrow and risk can
be substantial with unfavorable economic or industry conditions and/or with
unfavorable company developments.
DD
Defaulted debt obligations. Issuer has failed to meet scheduled principal
and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA) to
indicate the relative position of a credit within the rating category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor.
