August 2, 1994
DREYFUS GROWTH OPPORTUNITY FUND, INC.
SUPPLEMENT TO PROSPECTUS DATED APRIL 21, 1994
I. PROPOSED MERGER OF THE DREYFUS CORPORATION
The Fund's adviser, The Dreyfus Corporation ("Dreyfus"), has entered
into an Agreement and Plan of Merger providing for the merger (the
"Merger") of Dreyfus with a subsidiary of Mellon Bank, N.A. ("Mellon").
Following the Merger, it is planned that Dreyfus will be a direct
subsidiary of Mellon. Closing of the Merger is subject to a number of
contingencies, including approvals of the stockholders of Dreyfus and of
Mellon. The Merger is expected to occur in late August 1994, but could
occur significantly later.
The Merger will result in the automatic termination of the Fund's
current investment advisory agreement with Dreyfus as required by the
Investment Company Act of 1940, as amended.
II. RESULTS OF FUND SHAREHOLDER VOTE
THE FOLLOWING INFORMATION SUPPLEMENTS AND SUPERSEDES ANY
CONTRARY INFORMATION CONTAINED IN THE FUND'S PROSPECTUS.
On August 2, 1994, the Fund's shareholders voted to (a) approve a new
investment advisory agreement with Dreyfus, to become effective upon
consummation of the Merger, and (b) change certain of the Fund's
fundamental policies and investment restrictions to permit the Fund to (i)
borrow money to the extent permitted under the Investment Company Act
of 1940, as amended, (ii) pledge its assets to the extent necessary to
secure permitted borrowings and make such policy non-fundamental, (iii)
sell securities short, (iv) lend its portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets, and (v) purchase and sell
options and engage in futures transactions to the extent described below.
III. REVISED MANAGEMENT POLICIES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE FUND'S PROSPECTUS ENTITLED
"DESCRIPTION OF THE FUND--MANAGEMENT POLICIES."
BORROWING MONEY __ As a fundamental policy, the Fund is permitted to
borrow to the extent permitted under the Investment Company Act of
1940. However, the Fund currently intends to borrow money only for
temporary or emergency (not leveraging) purposes, in an amount up to 15%
of the value of the Fund's total assets (including the amount borrowed)
valued at the lesser of cost or market, less liabilities (not including the
amount borrowed) at the time the borrowing is made. While borrowings
exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
SHORT-SELLING __ The Fund may make short sales, which are
transactions in which the Fund sells a security it does not own in
anticipation of a decline in the market value of that security. To complete
such a transaction, the Fund must borrow the security to make delivery to
the buyer. The Fund then is obligated to replace the security borrowed by
purchasing it 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. Until the security is replaced, the Fund is required to pay
to the lender amounts equal to any dividends or interest which accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is
closed out.
Until the Fund closes its short position or replaces the borrowed
security, the Fund will: (a) maintain a segregated account, containing
cash or U.S. Government securities, at such a level that (i) the amount
deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and (ii)
the amount deposited in the segregated account plus the amount deposited
with the broker as collateral will not be less than the market value of the
security at the time it was sold short; or (b) otherwise cover its short
position.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a
gain if the security declines in price between those dates. This result is
the opposite of what one would expect from a cash purchase of a long
position in a security. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium or amounts in
lieu of dividends or interest the Fund may be required to pay in connection
with a short sale.
The Fund may purchase call options to provide a hedge against an
increase in the price of a security sold short by the Fund. When the Fund
purchases a call option it has to pay a premium to the person writing the
option and a commission to the broker selling the option. If the option is
exercised by the Fund, the premium and the commission paid may be more
than the amount of the brokerage commission charged if the security were
to be purchased directly. See "Call and Put Options on Specific Securities"
below.
The Fund anticipates that the frequency of short sales will vary
substantially under different market conditions, and it does not intend
that any specified portion of its assets, as a matter of practice, will be
invested in short sales. However, no securities will 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 may not sell short the securities of any single issuer
listed on a United States national securities exchange to the extent of
more than 5% of the value of the Fund's net assets. The Fund may not sell
short the securities of any class of an issuer to the extent, at the time of
the transaction, of more than 5% of the outstanding securities of that
class.
In addition to the short sales discussed above, the Fund may make short
sales "against the box," a transaction in which the Fund enters into a
short sale of a security which the Fund owns. The proceeds of the short
sale will be held by a broker until the settlement date at which time the
Fund delivers the security to close the short position. The Fund receives
the net proceeds from the short sale. The Fund at no time will have more
than 15% of the value of its net assets in deposits on short sales against
the box. It currently is anticipated that the Fund will make short sales
against the box for purposes of protecting the value of the Fund's net
assets.
The Fund also may maintain short positions in forward currency
exchange transactions, 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 will maintain in a segregated custodial account cash or U.S.
Government securities or other high quality liquid debt securities at least
equal to the aggregate amount of its short positions, plus accrued
interest, in certain cases, in accordance with releases promulgated by the
Securities and Exchange Commission.
OPTIONS ON FOREIGN CURRENCY __ The Fund may purchase and sell call and
put options on foreign currency for the purpose of hedging against changes
in future currency exchange rates. Call options convey the right to buy the
underlying currency at a price which is expected to be lower than the spot
price of the currency at the time the option expires. Put options convey
the right to
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sell the underlying currency at a price which is anticipated to
be higher than the spot prices of the currency at the time the option
expires. The Fund may use foreign currency options for the same purposes
as forward currency exchange and futures transactions, as described
herein. See also "Call and Put Options on Specific Securities" and
"Currency Futures and Options on Currency Futures" below.
CALL AND PUT OPTIONS ON SPECIFIC SECURITIES __ The Fund may invest up
to 5% of its assets, represented by the premium paid, in the purchase of
call and put options in respect of specific securities (or groups or
"baskets" of specific securities) in which the Fund may invest. The Fund
may write covered call and put option contracts to the extent of 20% of
the value of its net assets at the time such option contracts are written.
A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, the underlying security at the exercise price
at any time during the option period. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy,
the underlying security at the exercise price at any time during the option
period. A covered call option sold by the Fund, which is a call option with
respect to which the Fund owns the underlying security or securities,
exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or securities or to possible continued holding of a security or
securities which might otherwise have been sold to protect against
depreciation in the market price thereof. A covered put option sold by the
Fund exposes the Fund during the term of the option to a decline in price of
the underlying security or securities. A put option sold by the Fund is
covered when, among other things, cash or liquid securities are placed in a
segregated account with the Fund's custodian to fulfill the obligation
undertaken.
To close out a position when writing covered options, the Fund may
make a "closing purchase transaction," which involves purchasing an
option on the same security or securities with the same exercise price
and expiration date as the option which it has previously written. To close
out a position as a purchaser of an option, the Fund may make a "closing
sale transaction," which involves liquidating the Fund's position by
selling the option previously purchased. The Fund will realize a profit or
loss from a closing purchase or sale transaction depending upon the
difference between the amount paid to purchase an option and the amount
received from the sale thereof.
The Fund intends to treat options in respect of specific securities that
are not traded on a U.S. or foreign national securities exchange and the
securities underlying covered call options written by the Fund as illiquid
securities. See "Certain Portfolio Securities--Illiquid Securities" above.
The Fund will purchase options only to the extent permitted by the
policies of state securities authorities in states where shares of the Fund
are qualified for offer and sale.
STOCK INDEX OPTIONS __ The Fund may purchase and write put and call
options on stock indexes listed on U.S. or foreign securities exchanges or
traded in the over-the-counter market. A stock index fluctuates with
changes in the market values of the stocks included in the index.
The effectiveness of purchasing or writing stock index options will
depend upon the extent to which price movements in the Fund's
investments correlate with price movements of the stock index selected.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular stock, whether the Fund
will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of stock prices in the stock
market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular
stock. Accordingly, successful use by the
Page 3
Fund of options on stock indexes
will be subject to Dreyfus' ability to predict correctly movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the
price of individual stocks.
When the Fund writes an option on a stock index, the Fund will place in
a segregated account with its custodian or sub-custodian cash or liquid
securities in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is
open or otherwise will cover the transaction.
FUTURES TRANSACTIONS__IN GENERAL __ The Fund will not be a commodity
pool. However, as a substitute for a comparable market position in the
underlying securities and for hedging purposes, the Fund may engage in
futures and options on futures transactions, as described below.
The Fund may trade futures contracts and options on futures contracts
in U.S. domestic markets, such as the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange, or, to
the extent permitted under applicable law, on exchanges located outside
the United States, such as the London International Financial Futures
Exchange and the Sydney Futures Exchange Limited. Foreign markets may
offer advantages such as trading in commodities that are not currently
traded in the United States or arbitrage possibilities not available in the
United States. Foreign markets, however, may have greater risk potential
than domestic markets. See "Risk Factors--Foreign Commodity
Transactions" below.
The Fund's commodities transactions must constitute bona fide hedging
or other permissible transactions pursuant to regulations promulgated by
the Commodity Futures Trading Commission (the "CFTC"). In addition, the
Fund may not engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity
options, other than for bona fide hedging transactions, would exceed 5% of
the liquidation value of the Fund's assets, after taking into account
unrealized profits and unrealized losses on such contracts it has entered
into; 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%. Pursuant to regulations and/or published positions
of the Securities and Exchange Commission, the Fund may be required to
segregate cash or high quality money market instruments in connection
with its commodities transactions in an amount generally equal to the
value of the underlying commodity.
Initially, when purchasing or selling futures contracts the Fund will be
required to deposit with its custodian in the broker's name an amount of
cash or cash equivalents up to approximately 10% of the contract amount.
This amount is subject to change by the exchange or board of trade on
which the contract is traded and members of such exchange or board of
trade may impose their own higher requirements. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of
the futures position, assuming all contractual obligations have been
satisfied. Subsequent payments, known as "variation margin," to and from
the broker will be made daily as the price of the index or securities
underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known
as "marking-to-market." At any time prior to the expiration of a futures
contract, the Fund may elect to close the position by taking an opposite
position, at the then prevailing price, which will operate to terminate the
Fund's existing position in the contract.
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
Page 4
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. If it is
not possible, or the Fund determines not, to close a futures position in
anticipation of adverse price movements, the Fund will be required to
make daily cash payments of variation margin. In such circumstances, an
increase in the value of the portion of the portfolio being hedged, if any,
may offset partially or completely losses on the futures contract.
However, no assurance can be given that the price of the securities being
hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.
In addition, to the extent the Fund is engaging in a futures transaction
as a hedging device, due to the risk of an imperfect correlation between
securities in the Fund's portfolio that are the subject of a hedging
transaction and the futures contract used as a hedging device, it is
possible that the hedge will not be fully effective in that, for example,
losses on the portfolio securities may be in excess of gains on the futures
contract or losses on the futures contract may be in excess of gains on the
portfolio securities that were the subject of the hedge. In futures
contracts based on indexes, the risk of imperfect correlation increases as
the composition of the Fund's portfolio varies from the composition of the
index. In an effort to compensate for the imperfect correlation of
movements in the price of the securities being hedged and movements in
the price of futures contracts, the Fund may buy or sell futures contracts
in a greater or lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging"
or "under hedging" may adversely affect the Fund's net investment results
if market movements are not as anticipated when the hedge is established.
Successful use of futures by the Fund also is subject to Dreyfus' ability
to predict correctly movements in the direction of the market or interest
rates. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting the value of securities held in
its portfolio and prices increase instead, 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. In addition,
in such situations, if the Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which
reflect the rising market. The Fund may have to sell securities at a time
when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the option exercise period.
The writer of the option is required upon exercise to assume an offsetting
futures position (a short position if the option is a call and a long position
if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's
futures margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Page 5
Call options sold by the Fund with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of
which are expected to move relatively consistently with the instruments
underlying, the futures contract. Put options sold by the Fund with respect
to futures contracts will be covered in the same manner as put options on
specific securities as described above.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES __ The Fund
may purchase and sell stock index futures contracts and options on stock
index futures contracts.
A stock index future obligates the seller to deliver (and the purchaser
to take) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is
made. No physical delivery of the underlying stocks in the index is made.
With respect to stock indexes that are permitted investments, the Fund
intends to purchase and sell futures contracts on
the stock index for which it can obtain the best price with consideration
also given to liquidity.
The Fund may use index futures as a substitute for a comparable market
position in the underlying securities.
The price of stock index futures may not correlate perfectly with the
movement in the stock index because of certain market distortions. First,
all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which would distort the normal relationship between the
index and futures markets. Secondly, from the point of view of
speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market also may
cause temporary price distortions.
CURRENCY FUTURES AND OPTIONS ON CURRENCY FUTURES __ The Fund may
purchase and sell currency futures contracts and options thereon. See
"Call and Put Options on Specific Securities" above. By selling foreign
currency futures, the Fund can establish the number of U.S. dollars it will
receive in the delivery month for a certain amount of a foreign currency.
In this way, if the Fund anticipates a decline of a foreign currency against
the U.S. dollar, the Fund can attempt to fix the U.S. dollar value of some or
all of its securities that are denominated in that currency. By purchasing
foreign currency futures, the Fund can establish the number of U.S. dollars
it will be required to pay for a specified amount of a foreign currency in
the delivery month. Thus, if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund, for
the price of the currency future, can attempt to fix the price in U.S.
dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium it must pay for the option, to decide whether or not
to buy (in the case of a call option) or to sell (in the case of a put option)
a futures contract at a specified price at any time during the period
before the option expires. If the Fund, in purchasing an option, has been
correct in its judgment concerning the direction in which the price of a
foreign currency would move as against the U.S. dollar, it may exercise the
option and thereby take a futures position to hedge against the risk it had
correctly anticipated or close out the option position at a gain that will
offset, to some extent, currency exchange losses otherwise suffered by
the Fund. If exchange rates move in a way the Fund did not anticipate, the
Fund will have incurred the expense of the option without obtaining
Page 6
the
expected benefit. As a result, the Fund's profits on the underlying
securities transactions may be reduced or overall losses incurred.
OPTIONS ON SWAPS __ The Fund may purchase cash-settled options on
interest rate swaps, interest rate swaps denominated in foreign currency
and equity index swaps. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or
receive interest (for example, an exchange of floating-rate payments for
fixed-rate payments) denominated in U.S. dollars or foreign currency.
Equity index swaps involve the exchange by the Fund with another party of
cash flows based upon the performance of an index or a portion of an index
of securities which usually includes dividends. 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.
LENDING PORTFOLIO SECURITIES __ From time to time, the Fund may lend
securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain
transactions. Such loans may not exceed 33-1/3% of the value of the
Fund's total assets. In connection with such loans, the Fund will receive
collateral consisting of cash, 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. The Fund can increase its
income through the investment of such collateral. The Fund continues to be
entitled to payments in amounts equal to the interest, dividends and other
distributions payable on the loaned security and receives interest on the
amount of the loan. Such loans will be terminable 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.
RISK FACTORS__FOREIGN COMMODITY TRANSACTIONS __ Unlike trading on
domestic commodity exchanges, trading on foreign commodity exchanges
is not regulated by the CFTC and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges are
principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition,
unless the Fund hedges against fluctuations in the exchange rate between
the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Fund might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Fund could
incur losses as a result of those changes. Transactions on foreign
exchanges may include both commodities which are traded on domestic
exchanges and those which are not.
THE FOLLOWING INFORMATION SUPERSEDES CERTAIN INFORMATION
CONTAINED IN THE SECTION OF THE PROSPECTUS ENTITLED "MANAGEMENT
OF THE FUND:"
Garitt Kono became the Fund's primary portfolio manager in June 1994 and
has been employed by The Dreyfus Corporation since September 1, 1992.
For more than five years prior to joining The Dreyfus Corporation, Mr. Kono
was Vice President __ Fixed Income at The First Boston Corporation.
018/stkr080294
Page 7
August 2, 1994
DREYFUS GROWTH OPPROTUNITY FUND, INC.
Supplement to the Statement of Additional Information
Dated April 21, 1994
At a meeting of Fund shareholders held on August 2, 1994, shareholders
approved new Investment Restrictions which supersede and replace the Fund's
current Investment Restrictions numbered 6, 7, 8 and 13 in the section in
the Fund's Statement of Additional Information entitled "Investment
Objective and Management Policies--Investment Restrictions." New
Investment Restriction number 7 is a fundamental policy. This restriction
cannot be changed without approval by the holders of a majority (as defined
in the Investment Company Act of 1940, as amended (the "Act")) of the
Fund's outstanding voting shares. Investment Restrictions numbered 6, 8,
13, and 16 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:
6. Invest in commodities, except that the Fund may purchase and sell
options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
7. Borrow money, except to the extent permitted under the Act.
8. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements referred to in the
Fund's Prospectus. However, the Fund may lend its portfolio securities in
an amount not to exceed 33-1/3% of the value of its 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.
13. Purchase, sell or write puts, calls, or combinations thereof,
except as described in the Fund's Prospectus and Statement of Additional
Information.
16. Pledge, mortgage, hypothecate or otherwise encumber its assets,
except to the extent necessary to secure permitted borrowings.
Options Transactions. The Fund may engage in options transactions,
such as purchasing or writing covered call or put options. The principal
reason for writing covered call options is to realize, through the receipt
of premiums, a greater return than would be realized on the Fund's
portfolio securities alone. In return for a premium, the writer of a
covered call option forfeits the right to any appreciation in the value of
the underlying security above the strike price for the life of the option
(or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the
underlying security. Similarly, the principal reason for writing covered
put options is to realize income in the form of premiums. The writer of a
covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that the Fund may receive
may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing
activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may
be below, equal to or above the market values of the underlying securities
at the time the options are written. In the case of call options, these
exercise prices are referred to as "in-the-money," "at-the-money" and "out-
of-the-money," respectively. The Fund may write (a) in-the-money call
options when the Manager expects that the price of the underlying security
will remain stable or decline moderately during the option period, (b) at-
the-money call options when the Manager expects that the price of the
underlying security will remain stable or advance moderately during the
option period and (c) out-of-the-money call options when the Manager
expects that the premiums received from writing the call option plus the
appreciation in market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price,
the amount of any realized loss will be offset wholly or in part by the
premium received. Out-of-the-money, at-the-money and in-the-money put
options (the reverse of call options as to the relation of exercise price
to market price) may be utilized in the same market environments that such
call options are used in equivalent transactions.
So long as the Fund's obligation as the writer of an option continues,
the Fund may be assigned an exercise notice by the broker-dealer through
which the option was sold, requiring the Fund to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. The
Fund can no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice.
While it may choose to do otherwise, the Fund generally will purchase
or write only those options for which the Advisers believe there is an
active secondary market so as to facilitate closing transactions. 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 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
otherwise may 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.
Stock Index Options. The Fund may purchase and write put and call
options on stock indexes listed on U.S. or foreign securities exchanges or
traded in the over-the-counter market. A stock index fluctuates with
changes in the market values of the stocks included in the index.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are generally monthly,
while those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make
delivery of a stock at a specified price, an option on a stock index gives
the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." Receipt of this cash amount will
depend upon the closing level of the stock index upon which the option is
based being greater than, in the case of a call, or less than, in the case
of a put, the exercise price of the option. The amount of cash received
will be equal to such difference between the closing price of the index and
the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a
closing transaction on an exchange or it may let the option expire
unexercised.
Futures Contracts and Options on Futures Contracts. Upon exercise of
an option, the writer of the option will deliver to the holder of the
option the futures position and the accumulated balance in the writer's
futures margin account, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. The potential loss related to the purchase of options on futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the time of sale,
there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and
that change would be reflected in the net asset value of the Fund.
Foreign Currency Transactions. If the Fund enters into a currency
transaction, it will deposit, if so required by applicable regulations,
with its custodian cash or readily marketable securities in a segregated
account of the Fund in an amount at least equal to the value of the Fund's
total assets committed to the consummation of the forward contract. If the
value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the
value of the account will equal the amount of the Fund's commitment with
respect to the contract.
At or before the maturity of a forward contract, the Fund either may
sell a security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing
a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to
deliver. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or loss to the extent movement
has occurred in forward contract prices. Should forward prices decline
during the period between the Fund's entering into a forward contract for
the sale of a currency and the date it enters into an offsetting contract
for the purchase of the currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase,
the Fund will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in
currency exchange usually are conducted on a principal basis, no fees or
commissions are involved. The use of forward currency exchange contracts
does not eliminate fluctuations in the underlying prices of the securities,
but it does establish a rate of exchange that can be achieved in the
future. If a devaluation generally is anticipated, the Fund may not be
able to contract to sell the currency at a price above the devaluation
level it anticipates. The requirements for qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), may cause the Fund to restrict the degree to which it engages in
currency transactions. See "Dividends, Distributions and Taxes."
Lending Portfolio Securities. To a limited extent, the Fund may lend
its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value
of the securities loaned. By lending its portfolio securities, the Fund
can increase its income through the investment of the cash collateral. For
purposes of this policy, the Fund considers collateral consisting of U.S.
Government securities or irrevocable letters of credit issued by banks
whose securities meet the standards for investment by the Fund to be the
equivalent of cash. From time to time, 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.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned:
(1) the Fund must receive at least 100% cash collateral from the borrower;
(2) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (3) the Fund must
be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or
other distributions payable on the loaned securities, and any increase in
market value; (5) the Fund may pay only reasonable custodian fees in
connection with the loan; and (6) while voting rights on the loaned
securities may pass to the borrower, the Fund's Board must terminate the
loan and regain the right to vote the securities if a material event
adversely affecting the investment occurs. These conditions may be subject
to future modification.
The following information supplements and should be read in
conjunction with the section in the Fund's Statement of Additional
Information entitled "Dividends, Distributions and Taxes."
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 foreign currencies (including foreign
currency denominated bank deposits) and non-U.S. dollar denominated
securities (including debt instruments and certain forward contracts and
options) may be treated as ordinary income or loss under Section 988 of the
Code. In addition, all or a portion of the gain realized from the
disposition of certain market discount bonds will be treated as ordinary
income under Section 1278. Finally, all or a portion of the gain realized
from engaging in "conversion transactions" may be treated as ordinary
income under Section 1258. "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 in the manner described
above.
Offsetting positions held by the Fund involving certain foreign
currency forward contracts or options may constitute "straddles."
"Straddles" are defined to include "offsetting positions" in actively
traded personal property. The tax treatment of "straddles" is governed by
Section 1092 and 1258 of the Code, which, in certain circumstances,
overrides or modifies the provisions of Sections 1256 and 988. As such,
all or a portion of any short or long-term capital gain from certain
"straddle" and/or conversion transactions may be recharacterized to
ordinary income.
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" and the conversion transaction rules, short-term capital loss on
"straddle" positions may be recharacterized as long-term capital loss, and
long-term capital gains may be treated as short-term capital gains or
ordinary income.
