____________________________________________________________________________
DREYFUS MASSACHUSETTS TAX EXEMPT BOND FUND
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
OCTOBER 1, 1997
____________________________________________________________________________
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of
Dreyfus Massachusetts Tax Exempt Bond Fund (the "Fund"), dated October 1,
1997, as it 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 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 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.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies............B-2
Management of the Fund..................................B-11
Management Agreement....................................B-16
Purchase of Shares......................................B-17
Shareholder Services Plan...............................B-19
Redemption of Shares....................................B-19
Shareholder Services....................................B-22
Determination of Net Asset Value........................B-24
Dividends, Distributions and Taxes......................B-25
Portfolio Transactions..................................B-27
Performance Information.................................B-27
Information About the Fund..............................B-29
Transfer and Dividend Disbursing Agent, Custodian,
Counsel and Independent Auditors..................B-29
Financial Statements and Report of Independent Auditors.B-30
Appendix A..............................................B-31
Appendix B..............................................B-34
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the sections in the Fund's Prospectus entitled "Description of the
Fund" and "Appendix."
Portfolio Securities
Municipal Obligations. The average distribution of investments (at
value) in Municipal Obligations (including notes) by ratings for the fiscal
year ended May 31, 1997, computed on a monthly basis, was as follows:
Fitch Investors Moody's Investors Standard & Poor's
Service, L.P. Service, Inc. Ratings Group Percentage of
("Fitch") or ("Moody's") or ("S&P") Value
AAA Aaa AAA 57.1%
AA Aa AA 11.1
A A A 14.9
BBB Baa BBB 8.1
F-1 VMIG-1/MIG-1, P-1 SP-1, A-1 0.7()1
Not Rated Not Rated Not Rated 8.1(2)
--------
100.0%
========
- --------------
1 Includes tax exempt notes rated in one of the two highest rating categories
by Moody's, S&P or Fitch. These securities, together with Municipal
Obligations rated Baa or better by Moody's or BBB or better
by S&P or Fitch, are taken into account at the time of a purchase for
purposes of determining that the Fund's portfolio meets the 80% minimum
quality standard discussed in the Fund's Prospectus.
2 Included in the Not Rated category are securities comprising 8.1%
of the Fund's market value which, while not rated, have been determined
by the Manager to be of comparable quality to securities rated Baa/BBB.
The term "Municipal Obligations" generally includes debt obligations
issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and
water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and lending such funds to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide for the construction, equipment,
repair or improvement of privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity,
or sewage or solid waste disposal; the interest paid on such obligations may
be exempt from Federal income tax, although current tax laws place
substantial limitations on the size of such issues. Such obligations are
considered to be Municipal Obligations if the interest paid thereon
qualifies as exempt from Federal income tax in the opinion of bond counsel
to the issuer. There are, of course, variations in the security of
Municipal Obligations, both within a particular classification and between
classifications.
Floating and variable rate demand notes and bonds are tax exempt
obligations ordinarily having stated maturities in excess of one year, but
which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such obligations ordinarily has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders thereof. The interest rate
on a floating rate demand obligation is based on a known lending rate, such
as a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals.
The yields on Municipal Obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a
particular offering, maturity of the obligation and rating of the issue.
The imposition of the Fund's management fee, as well as other operating
expenses, will have the effect of reducing the yield to investors.
Municipal lease obligations or installment purchase contract
obligations (collectively, "lease obligations") have special risks not
ordinarily associated with Municipal Obligations. Although lease
obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation
ordinarily is backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligations. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such
purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event
of foreclosure might prove difficult. The staff of the Securities and
Exchange Commission currently considers certain lease obligations to be
illiquid. Determination as to the liquidity of such securities is made in
accordance with guidelines established by the Fund's Board. Pursuant to
such guidelines, the Board has directed the Manager to monitor carefully the
Fund's investment in such securities with particular regard to (1) the
frequency of trades and quotes for the lease obligation; (2) the number of
dealers willing to purchase or sell the lease obligation and the number of
other potential buyers; (3) the willingness of dealers to undertake to make
a market in the lease obligation; (4) the nature of the marketplace trades
including the time needed to dispose of the lease obligation, the method of
soliciting offers and the mechanics of transfer; and (5) such other factors
concerning the trading market for the lease obligation as the Manager may
deem relevant. In addition, in evaluating the liquidity and credit quality
of a lease obligation that is unrated, the Fund's Board has directed the
Manager to consider (a) whether the lease can be canceled; (b) what
assurance there is that the assets represented by the lease can be sold; (c)
the strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of nonappropriation"); (e)
the legal recourse in the event of failure to appropriate; and (f) such
other factors concerning credit quality as the Manager may deem relevant.
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities. See "Investment Restriction No. 11" below.
The Fund will purchase tender option bonds only when it is satisfied
that the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax exempt status of the
underlying Municipal Obligations and that payment of any tender fees will
not have the effect of creating taxable income for the Fund. Based on the
tender option bond agreement, the Fund expects to be able to value the
tender option bond at par; however, the value of the instrument will be
monitored to assure that it is valued at fair value.
Ratings of Municipal Obligations. Subsequent to its purchase by the
Fund, an issue of rated Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require the sale of such Municipal Obligations by the
Fund, but the Manager will consider such event in determining whether the
Fund should continue to hold the Municipal Obligations. To the extent that
the ratings given by Moody's, S&P or Fitch for Municipal Obligations may
change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Prospectus and this Statement of Additional Information. The ratings of
Moody's, S&P and Fitch represent their opinions as to the quality of the
Municipal Obligations which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings may be an initial
criterion for selection of portfolio investments, the Manager also will
evaluate these securities and the credit worthiness of the issuers of such
securities.
Illiquid Securities. Where a substantial market of qualified
institutional buyers develops for certain restricted securities purchased by
the Fund, pursuant to Rule 144A under the Securities Act of 1933, as
amended, the Fund intends to treat such securities as liquid securities in
accordance with procedures approved by the Fund's Board. Because it is not
possible to predict with assurance how the market for restricted securities
pursuant to Rule 144A will develop, the Fund's Board has directed the
Manager to monitor carefully the Fund's investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. To the extent that, for a
period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, the Fund's investing in such securities
may have the effect of increasing the level of illiquidity in its investment
portfolio during such period.
Taxable Investments. Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury
securities, which differ in their interest rates, maturities and times of
issuance. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities are supported by the full faith and credit of the U.S.
Treasury; others by the right of the issuer to borrow from the U.S.
Treasury; others by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others
only by the credit of the agency or instrumentality. These securities bear
fixed, floating or variable rates of interest. Principal and interest may
fluctuate based on generally recognized reference rates or the relationship
of rates. While the U.S. Government provides financial support to such U.S.
Government sponsored agencies or instrumentalities, no assurance can be
given that it will always do so, since it is not so obligated by law.
Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs.
Certificates of deposit are negotiable certificates representing the
obligation of a bank to repay funds deposited with it for a specified period
of time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven
days) at a stated interest rate. Investments in time deposits generally are
limited to London branches of domestic banks that have total assets in
excess of $1 billion. Time deposits which may be held by the Fund will not
benefit from insurance from the Bank Insurance Fund or the Savings
Association Insurance Fund administered by the Federal Deposit Insurance
Corporation.
Bankers' acceptances are credit instruments evidencing the obligation
of a bank to pay a draft drawn on it by a customer. These instruments
reflect the obligation both of the bank and of the drawer to pay the face
amount of the instrument upon maturity. Other short-term bank obligations
may include uninsured, direct obligations bearing fixed, floating or
variable interest rates.
In a repurchase agreement, the Fund buys, and the seller agrees to
repurchase, a security at a mutually agreed upon time and price (usually
within seven days). The repurchase agreement thereby determines the yield
during the purchaser's holding period, while the seller's obligation to
repurchase is secured by the value of the underlying security. The Fund's
custodian or subcustodian will have custody of, and will hold in a
segregated account, securities acquired by the Fund under a repurchase
agreement. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Fund. In an attempt
to reduce the risk of incurring a loss on a repurchase agreement, the Fund
will enter into repurchase agreements only with domestic banks with total
assets in excess of $1 billion, or primary government securities dealers
reporting to the Federal Reserve Bank of New York, with respect to
securities of the type in which the Fund may invest, and will require that
additional securities be deposited with it if the value of the securities
purchased should decrease below resale price. Repurchase agreements could
involve risks in the event of a default or insolvency of the other party to
the agreement, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities.
Management Policies
Derivatives. The Fund may invest in Derivatives (as defined in the
Fund's Prospectus) 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.
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. 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 in connection with its commodities transactions in an amount
generally equal to the value of the underlying commodity. 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 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 and write (i.e., sell) call or
put options with respect to specific securities and interest rate futures
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.
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.
Successful use of options by the Fund will be subject to the Manager's
ability to predict correctly movements in interest rates. To the extent the
Manager's 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.
Lending Portfolio Securities. 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 from 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; and (5) the Fund may pay only reasonable custodian fees in connection
with the loan.
Forward Commitments. Municipal Obligations and other 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.
Investment Considerations and Risks
Investing in Massachusetts Municipal Obligations. Investors should
consider carefully the special risks inherent in the Fund's investment in
Massachusetts Municipal Obligations. Massachusetts' economic and fiscal
difficulties of recent years appear to have abated. While the
Commonwealth's expenditures for state programs and services in each of the
fiscal years 1987 through 1991 exceeded each year's current revenues,
Massachusetts ended each of the fiscal years 1991 through 1996 with a
positive fiscal balance in its general operating funds. A return of
persistent serious financial difficulties could adversely affect the market
values and marketability of, or result in default in payment on, outstanding
Massachusetts Municipal Obligations.
Lower Rated Bonds. The Fund is permitted to invest in securities rated
Ba by Moody's and BB by S&P and Fitch, and as low as the lowest rating
assigned by Moody's S&P or Fitch. Such bonds, though higher yielding, are
characterized by risk. See "Description of the Fund--Investment
Considerations and Risks--Lower Rated Bonds" in the Prospectus for a
discussion of certain risks and "Appendix B" for a general description of
Moody's, S&P and Fitch ratings of Municipal Obligations. Although ratings
may be useful in evaluating the safety of interest and principal payments,
they do not evaluate the market value risk of these bonds. 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 bonds
tend to be more sensitive to economic conditions than are higher rated
securities and will fluctuate over time. These bonds generally are
considered by S&P, Moody's and Fitch to be on balance, 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.
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 bonds 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 the Fund's 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 bonds may be particularly susceptible to economic downturn. It
is likely that any economic recession could disrupt severely the market for
such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
The Fund may acquire these bonds during an initial offering. Such
securities may involve special risks because they are new issues. The Fund
has no arrangement with any person concerning the acquisition of such
securities, and the Manager will review carefully the credit and other
characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also apply
to lower rated zero coupon bonds, in which the Fund may invest up to 5% of
its assets. Zero coupon 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. See "Dividends, Distributions and Taxes."
Investment Restrictions
The Fund has adopted investment restrictions numbered 1 through 7 as
fundamental policies, which cannot be changed without approval by the
holders of a majority (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Fund's outstanding voting shares.
Investment restrictions numbered 8 through 12 are not fundamental policies
and may be changed by a vote of a majority of the Board members at any time.
The Fund may not:
1. Invest more than 25% of its assets in the securities of issuers in
any single industry; provided that there shall be no limitation on the
purchase of Municipal Obligations and, for temporary defensive purposes,
securities issued by banks and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. 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.
3. Purchase or sell real estate, commodities or commodity contracts,
or oil and gas interests, but this shall not prevent the Fund from investing
in Municipal Obligations secured by real estate or interests therein, or
prevent the Fund from purchasing and selling options, forward contracts,
futures contracts, including those relating to indices, and options on
futures contracts or indices.
4. Underwrite the securities of other issuers, 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, and 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.
5. Make loans to others, except through the purchase of debt
obligations and 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 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.
6. 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 Restrictions numbered 2, 3 and 10 may be deemed to give rise
to a senior security.
7. Sell securities short or purchase securities on margin, but the
Fund may make margin deposits in connection with transactions in options,
forward contracts, futures contracts, including those relating to indices,
and options on futures contracts or indices.
8. Purchase securities other than Municipal Obligations and Taxable
Investments and those arising out of transactions in futures and options or
as otherwise provided in the Fund's Prospectus.
9. Invest in securities of other investment companies, except to the
extent permitted under the 1940 Act.
10. Pledge, hypothecate, mortgage 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, futures contracts, including those related to indices, and options
on futures contracts or indices.
11. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid
(which securities could include participation interest (including municipal
lease/purchase agreements) that are not subject to the demand feature
described in the Fund's Prospectus, and floating and variable rate demand
obligations as to which the Fund cannot exercise the demand feature
described in the Fund's Prospectus on less than seven days' notice and as to
which there is no secondary market), if, in the aggregate, more than 15% of
its net assets would be so invested.
12. Invest in companies for the purpose of exercising control.
For purposes of Investment Restriction No. 1, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together
as an "industry." If a percentage restriction is adhered to at the time of
an investment, a later increase or decrease in percentage resulting from a
change in values or assets will not constitute a violation of such
restriction.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Fund shares in certain states.
Should the Fund determine that a commitment is no longer in the best
interests of the Fund and its shareholders, the Fund reserves the right to
revoke the commitment by terminating the sale of Fund shares in the state
involved.
MANAGEMENT OF THE FUND
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 is
Chairman of the Board of Directors of Noel Group, Inc., a venture
capital company, and Staffing Resources, Inc., a temporary placement
agency; and a director of 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, and Curtis Industries, Inc.,
a national distributor of security products, chemicals, and automotive
and other hardware. 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 53 years old and his address is 200 Park Avenue, New York, New
York 10166.
DAVID W. BURKE, Board Member. Chairman of the Broadcasting Board of
Governors, an independent board within the United States Information
Agency, since August 1995. From August 1994 to December 31, 1994, Mr.
Burke was a Consultant to the Manager, and from October 1990 to August
1994, he was Vice President and Chief Administrative Officer of the
Manager. From 1977 to 1990, Mr. Burke was involved in the management
of national television news, as Vice President and Executive Vice
President of ABC News, and subsequently as President of CBS News. He
is 61 years old and his address is Box 654, Eastham, Massachusetts
02642.
SAMUEL CHASE, Board Member. Since 1982, President of Samuel Chase &
Company, Ltd., an economic consulting firm. He is 65 years old and his
address is 10380 Springhill Road, Belgrade, Montana 59714.
GORDON J. DAVIS, Board Member. Since October 1994, a senior partner with
the law firm of LeBoeuf, Lamb, Greene & MacRae. From 1983 to September
1994, Mr. Davis was a senior partner with the law firm of Lord Day &
Lord, Barrett Smith. From 1978 to 1983, he was Commissioner of Parks
and Recreation for the City of New York. He is also a director of
Consolidated Edison, a utility company, and Phoenix Home Life Insurance
Company and a member of various other corporate and not-for-profit
boards. He is 56 years old and his address is 241 Central Park West,
New York, New York 10023.
JONI EVANS, Board Member. Senior Vice President of the William Morris
Agency since September 1993. From September 1987 to May 1993,
Executive Vice President of Random House Inc. and, from January 1991 to
May 1993, President and Publisher of Turtle Bay Books; from January
1987 to December 1990, Publisher of Random House-Adult Trade Division;
from September 1985 to September 1987, President of Simon and
Schuster-Trade Division. She is 55 years old and her address is 1325
Avenue of the Americas, New York, New York 10019.
ARNOLD S. HIATT, Board Member. Chairman of The Stride Rite Foundation.
From 1969 to June 1992, Chairman of the Board, President or Chief
Executive Officer of The Stride Rite Corporation, a multi-divisional
footwear manufacturing and retailing company. Mr. Hiatt is also a
director of The Cabot Corporation. He is 70 years old and his address
is 400 Atlantic Avenue, Boston, Massachusetts 02110.
DAVID J. MAHONEY, Board Member. President of David Mahoney Ventures since
1983. From 1968 to 1983, he was Chairman and Chief Executive Officer of
Norton Simon Inc., a producer of consumer products and services. Mr.
Mahoney is also a director of Intracoastal Health Systems, Inc. He is
74 years old and his address is 745 Fifth Avenue, Suite 700, New York,
New York 10151.
BURTON N. WALLACK, Board Member. President and co-owner of Wallack
Management Company, a real estate management company managing real
estate in the New York City area. He is 47 years old and his address
is 18 East 64th Street, New York, New York 10021.
Ordinarily, no meetings of shareholders will be held for the purpose of
electing Board members unless and until such time as less than a majority of
the Board members holding office have been elected by shareholders, at which
time the Board members then in office will call a shareholders' meeting for
the election of Board members. Under the 1940 Act, shareholders of record
of not less than two-thirds of the Fund's outstanding shares may remove a
Board member through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Board members are
required to call a meeting of shareholders for the purpose of voting upon
the question of removal of any such Board member when requested in writing
to do so by the shareholders of record of not less than 10% of the Fund's
outstanding shares.
For so long as the Fund's plan described in the section "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 per meeting fee of
one half the amount paid to them as Board members. The aggregate amount of
compensation paid by the Fund to each Board member for the fiscal year ended
May 31, 1997, 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, 1996, was as follows:
Total Compensation
Aggregate From Fund and
Name of Board Compensation Fund Complex
Member From Fund* Paid to Board Member
Joseph S. DiMartino $4,375 $517,075 (93)
David W. Burke $3,500 $232,699 (52)
Samuel Chase $3,500 $ 49,370 (12)
Gordon J. Davis $3,250 $ 88,536 (23)
Joni Evans $3,000 $ 45,620 (12)
Arnold S. Hiatt $3,500 $ 45,620 (12)
David J. Mahoney $2,500 $ 40,312 (12)
Burton N. Wallack $3,500 $ 49,370 (12)
_____________________
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $520 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 Boston
Institutional Group, Inc., and an officer of other investment companies
advised or administered by the Manager. She is 40 years old.
JOHN E. PELLETIER, Vice President and Secretary. Senior Vice President and
General Counsel, Secretary and Clerk of the Distributor and Funds
Distributor, Inc., and an officer of other investment companies advised
or administered by the Manager. From February 1992 to July 1994, he
served as Counsel for The Boston Company Advisors, Inc. He is 33 years
old.
RICHARD W. INGRAM, Vice President and Assistant Treasurer. Executive Vice
President of the Distributor and Funds Distributor, Inc. and an officer
of other investment companies advised or administered by the Manager.
From March 1994 to November 1995, he was Vice President and Division
Manager for First Data Investor Services Group. From 1989 to 1994, he
was Vice President, Assistant Treasurer and Tax Director - Mutual Funds
of The Boston Company, Inc. He is 42 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 33 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. From December 1991 to March 1993, he was employed as a
Fund Accountant at The Boston Company, Inc. He is 28 years old.
ELIZABETH A. KEELEY, Vice President 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. She has
been employed by the Distributor since September 1995. She is 28 years
old.
JOSEPH F. TOWER, III, Vice President and Assistant Treasurer. Senior Vice
President, Treasurer and Chief Financial Officer 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 35 years old.
MICHAEL S. PETRUCELLI, Vice President and Assistant Treasurer. Senior Vice
President of Funds Distributor, Inc. and an officer of other investment
companies advised or administered by the Manager. From December 1989
through November 1996, he was employed by GE Investments where he held
various financial, business developments and compliance positions. He
also served as Treasurer of the GE Funds and a Director of GE
Investments Services. He is 36 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 September 8, 1997.
MANAGEMENT AGREEMENT
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Management of the Fund."
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 the 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. The
Agreement was approved by shareholders of the Fund on August 2, 1994, and
was last approved by the Fund's Board, including a majority of the Board
members who are not "interested persons" of any party to the Agreement, at a
meeting held on April 16, 1997. The Agreement is terminable without
penalty, on not more than 60 days' notice, by the Fund's Board or by vote of
the holders of a majority of the Fund's outstanding voting 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: W.
Keith Smith, Chairman of the Board; Christopher M. Condron, President, Chief
Executive Officer, Chief Operating Officer and a director; Stephen E.
Canter, Vice Chairman, Chief Investment Officer and a director; Lawrence S.
Kash, Vice Chairman--Distribution and a director; William T. Sandalls, Jr.,
Senior Vice President and Chief Financial Officer; Mark N. Jacobs, Vice
President, General Counsel and Secretary; Patrice M. Kozlowski, Vice
President--Corporate Communications; Mary Beth Leibig, Vice President--Human
Resources; Jeffrey N. Nachman, Vice President--Mutual Fund Accounting;
Andrew S. Wasser, Vice President-Information Systems; William V. Healey,
Assistant Secretary; and Mandell L. Berman, Burton C. Borgelt and Frank V.
Cahouet, 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 members. The Manager is responsible for investment decisions, and
provides the Fund with portfolio managers who are authorized by the Fund's
Board to execute purchases and sales of securities. The Fund's portfolio
managers are Joseph P. Darcy, A. Paul Disdier, Douglas Gaylor, Karen M.
Hand, Stephen C. Kris, Richard J. Moynihan, W. Michael Petty,
Jill C. Shaffro, Samuel J. Weinstock and Monica S. Wieboldt. 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.
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, loan commitment fees,
interest and distribution paid on securities sold short, 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 the Fund's 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.
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 also may make such advertising and
promotional expenditures, using its own resources, as it from time to time
deems appropriate.
As compensation for the Manager's services, the Fund has agreed to pay
the Manager a monthly management fee at the annual rate of .60 of 1% of the
value of the Fund's average daily net assets. The management fees paid to
the Manager for the fiscal years ended May 31, 1995, 1996 and 1997 amounted
to $943,634, $913,291 and $914,511, respectively.
The Manager has agreed that if in any fiscal year the aggregate
expenses of the Fund, exclusive of taxes, brokerage fees, interest on
borrowings 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 value of the Fund's average net assets for the fiscal
year, the Fund may deduct from the payment to be made to the Manager under
the Agreement, or the Manager will bear, such excess expense. Such
deduction or payment, if any, will be estimated daily, and reconciled and
effected or paid, as the case may be, on a monthly basis.
The aggregate of the fees payable to the Manager is not subject to
reduction as the value of the Fund's net assets increases.
PURCHASE OF SHARES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "How to Buy Shares."
The Distributor. The Distributor serves as the Fund's distributor on a
best efforts basis pursuant to an agreement which is renewable annually.
The Distributor also acts as distributor for the other funds in the Dreyfus
Family of Funds and for certain other investment companies.
Transactions Through Securities Dealers. Fund shares may be purchased
and redeemed through securities dealers which may charge a transaction fee
for such services. Some dealers will place Fund shares in an account with
their firm. Dealers also may require that 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 securities dealers, banks and other 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
Fund shares directly from the Fund without imposition of any maintenance or
service charges, other than those already described herein.
Dreyfus TeleTransfer Privilege. Dreyfus TeleTransfer purchase orders
may be made at any time. Purchase orders received by 4:00 p.m., New York
time, on any business day that Dreyfus Transfer, Inc., the Fund's transfer
and dividend disbursing agent (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 business 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 "Redemption of
Shares--Dreyfus TeleTransfer Privilege."
Reopening an Account. An investor may reopen an account with a minimum
investment of $100 without filing a new Account Application during the
calendar year in which 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 following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Shareholder Services
Plan."
The Fund has adopted a Shareholder Services Plan (the "Plan") pursuant
to which the Fund reimburses Dreyfus Service Corporation for certain
allocated expenses of providing personal services and/or maintaining
shareholder accounts. The services provided may include personal services
relating 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
Fund's Board for its review. In addition, the Plan provides that material
amendments of the Plan must be approved by the Fund's 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 July 23, 1997. 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 May 31, 1997, $64,395 was chargeable to the
Fund under the Plan.
REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "How to Redeem Shares."
Redemption Fee. The Fund will deduct a redemption fee equal to 1% of
the net asset value of Fund shares redeemed (including redemptions through
the use of the Fund Exchanges service) less than 15 days following the
issuance of such shares. The redemption fee will be deducted from the
redemption proceeds and retained by the Fund. For the period May 9, 1997
(commencement of imposition of redemption fee) through May 31, 1997, $393
was retained by the Fund.
No redemption fee will be charged on the redemption or exchange of
shares (1) through the Fund's Check Redemption Privilege, Automatic
Withdrawal Plan or Dreyfus Auto-Exchange Privilege, (2) through accounts
that are reflected on the records of the Transfer Agent as omnibus accounts
approved by Dreyfus Service Corporation, (3) through accounts established by
securities dealers, banks or other financial institutions approved by
Dreyfus Service Corporation that utilize the National Securities Clearing
Corporation's networking system, or (4) acquired through the reinvestment of
dividends or distributions. The redemption fee may be waived, modified or
terminated at any time.
Check Redemption Privilege. An investor may indicate on the Account
Application, Shareholder Services Form or by later written request that the
Fund provide Redemption Checks ("Checks") drawn on the investor's Fund
account. Checks will be sent only to the registered owner(s) of the account
and only to the address of record. The Account Application, Shareholder
Services Form or later written request must be manually signed by the
registered owner(s). Checks 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 the investor's agent, will cause
the Fund to redeem a sufficient number of shares in the investor's 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 the
investor. Investors 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 the amount of the Check is greater than the value of the shares in
the investor's account, the Check will be returned marked insufficient
funds. Checks should not be used to close an account.
Wire Redemption Privilege. By using this Privilege, the investor
authorizes the Transfer Agent to act on wire or telephone redemption
instructions from any person representing himself or herself to be the
investor, 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 after receipt by the Transfer Agent
of the 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 the investor on the Account Application or
Shareholder Services Form, or to a correspondent bank if the investor's 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 the investor's bank is necessary to avoid a delay in
crediting the funds to the investor's bank account.
Investors with access to telegraphic equipment may wire redemption
requests to the Transfer Agent by employing the following transmittal code
which may be used for domestic or overseas transmission:
Transfer Agent's
Transmittal Code Answer Back Sign
144295 144295 TSSG PREP
Investors who do not have direct access to telegraphic equipment may
have the wire transmitted by contacting a TRT Cables operator at
1-800-654-7171, toll free. Investors 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
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 "Share Certificates; Signatures."
Dreyfus TeleTransfer Privilege. Investors should be aware that if they
have selected the Dreyfus TeleTransfer Privilege, any request for a wire
redemption will be effected as a Dreyfus TeleTransfer transaction through
the Automated Clearing House ("ACH") system unless more prompt transmittal
specifically is requested. Redemption proceeds will be on deposit in the
investor's account at an ACH member bank ordinarily two business days after
receipt of the redemption request. See "Purchase of Shares--Dreyfus
TeleTransfer Privilege."
Share 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. 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 Fund's portfolio is valued. If the
recipient sold 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
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Shareholder Services."
Fund Exchanges. A 1% redemption fee will be charged upon an exchange
of Fund shares where the exchange occurs less than 15 days following the
issuance of such shares. 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 that are 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") provided that, 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, shareholders must notify
the Transfer Agent of their prior ownership of fund shares and their account
number.
To request an exchange, an investor 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 the investor checks the applicable "No" box on the
Account Application, indicating that the investor specifically refuses this
Privilege. By using the Telephone Exchange Privilege, the investor
authorizes the Transfer Agent to act on telephonic instructions (including
over The Dreyfus Touchr automated telephone system) from any person
representing himself or herself to be the investor, 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.
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. For
Dreyfus-sponsored Keogh plans, IRAs and IRAs set up under a Simplified
Employee Pension Plan ("SEP-IRAs") with only one participant, the minimum
initial investment is $750. To exchange shares held in corporate plans,
403(b)(7) Plans and SEP-IRAs with more than one participant, the minimum
initial investment is $100 if the plan has at least $2,500 invested among
the funds in the Dreyfus Family of Funds. To exchange shares held in
personal retirement plans, the shares exchanged must have a current value of
at least $100.
Dreyfus Auto-Exchange Privilege. Dreyfus Auto-Exchange Privilege
permits an investor to purchase, in exchange for shares of the Fund, shares
of another fund in the Dreyfus Family of Funds. 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 the investor. An investor
will be notified if his account falls below the amount designated under this
Privilege. In this case, an investor's 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 resident in any state in which shares of the fund being
acquired legally may 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 the
Dreyfus Auto-Exchange Privilege may be modified or terminated at any time
upon notice to shareholders.
Automatic Withdrawal Plan. The Automatic Withdrawal Plan permits an
investor with a $5,000 minimum account to request withdrawal of a specified
dollar amount (minimum of $50) on either a monthly or quarterly basis.
Withdrawal payments are the proceeds from sales of Fund shares, not the
yield on the shares. If withdrawal payments exceed reinvested dividends and
distributions, the investor's shares will be reduced and eventually may be
depleted. Automatic Withdrawal may be terminated at any time by the
investor, the Fund or the Transfer Agent. Shares for which certificates
have been issued may not be redeemed through the Automatic Withdrawal Plan.
Dreyfus Dividend Sweep. Dreyfus Dividend Sweep allows investors to
invest automatically their 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 the investor is 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 that
are 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"), provided
that, 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.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. The Fund's investments are valued
by an independent pricing service (the "Service") approved by the Fund's
Board. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of
the market, these investments 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 securities) are carried at fair value as determined by the
Service, based on methods which include consideration of: yields or prices
of municipal bonds of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. The
Service may employ electronic data processing techniques and/or a matrix
system to determine valuations. The Service's procedures are reviewed by
the Fund's officers under the general supervision of the Fund's Board.
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
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Dividends, Distributions
and Taxes."
Management believes that the Fund has qualified as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), for the fiscal year ended May 31, 1997 and the Fund intends to
continue to so qualify, if such qualification is in the best interests of
its shareholders. To qualify as a regulated investment company, the Fund
must distribute at least 90% of its net income (consisting of net investment
income from tax exempt obligations and net short-term capital gains) to its
shareholders, must derive less than 30% of its annual gross income from gain
on the sale of securities held for less than three months, and must meet
certain asset diversification and other requirements. Accordingly, the Fund
may be restricted in the selling of securities held for less than three
months. The term "regulated investment company" does not imply the
supervision of management or investment practices or policies by any
government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the net asset value of his shares below the
cost of his investment. Such a distribution would be a return on investment
in an economic sense although taxable as stated under "Dividends,
Distributions and Taxes" in the Prospectus. In addition, the Code provides
that if a shareholder has not held his Fund shares for more than six months
(or such shorter period as the Internal Revenue Service may prescribe by
regulation) and has received an exempt-interest dividend with respect to
such shares, any loss incurred on the sale of such shares will be disallowed
to the extent of the exempt-interest dividend received.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the Fund's total assets consists of Federal tax exempt
obligations, the Fund may designate and pay Federal exempt-interest
dividends from interest earned on all such tax exempt obligations. Such
exempt-interest dividends may be excluded by shareholders of the Fund from
their gross income for Federal income tax purposes. Dividends derived from
taxable investments, together with distributions from any net realized
short-term securities gains, generally are taxable as ordinary income for
Federal income tax purposes whether or not reinvested. Distributions from
net realized long-term securities gains generally are taxable as long-term
capital gains to a shareholder who is a citizen or resident of the United
States, whether or not reinvested and regardless of the length of time the
shareholder has held his shares.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gain or loss. However, 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. In
addition, 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, gain or loss realized by the Fund from
certain financial futures 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 futures and options
as well as from closing transactions. In addition, any such futures 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 financial
futures contracts or options transactions may be considered, for tax
purposes, to 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
Section 1256 of the Code. As such, all or a portion of any short or long-
term capital gain from certain "straddle" and/or conversion transactions may
be recharacterized as ordinary income.
If the Fund were treated as entering into "straddles" by reason of its
engaging in financial futures contracts or options transactions, such
"straddles" would be characterized as "mixed straddles" if the futures or
options 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." 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 any offsetting positions.
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 gain may be recharacterized as
short-term capital gain or ordinary income.
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 take into account 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 have to dispose of securities which it
might otherwise have continued to hold in order to generate cash to satisfy
these distribution requirements.
PORTFOLIO TRANSACTIONS
Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly-issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that
the best price or execution will be obtained. Usually no brokerage
commissions, as such, are paid by the Fund for such purchases and sales,
although the price paid usually includes an undisclosed compensation to the
dealer acting as agent. The prices paid to underwriters of newly-issued
securities usually include a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers
ordinarily are executed at a price between the bid and asked price. No
brokerage commissions have been paid by the Fund to date.
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.
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.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Performance
Information."
The Fund's current yield for the 30-day period ended May 31, 1997 was
5.04%. 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 distributions, 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.
Based upon a combined 1997 Federal and Massachusetts tax rate of
46.85%, the Fund's tax equivalent yield for the 30-day period ended May 31,
1997 was 9.48%. Tax equivalent yield is computed by dividing that portion
of the current yield (calculated as described above) which is tax exempt by
1 minus a stated tax rate and adding the quotient to that portion, if any,
of the yield of the Fund that is not tax exempt.
The tax equivalent yield noted above represents the application of the
highest Federal and Commonwealth of Massachusetts marginal personal income
tax rates presently in effect. For Federal personal income tax purposes, a
39.6% tax rate has been used. For Massachusetts personal income tax
purposes, a 12% tax rate has been used. The tax equivalent figure, however,
does not include the potential effect of any local (including, but not
limited to, county, district or city) taxes, including applicable
surcharges. In addition, there may be pending legislation which could
affect such stated tax rates or yield. Each investor should consult its tax
adviser, and consider its own factual circumstances and applicable tax laws,
in order to ascertain the relevant tax equivalent yield.
The Fund's average annual total return for the 1, 5 and 10 year periods
ended May 31, 1997 was 8.37%, 6.37% and 7.21%, 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
"n"th root of the quotient (where "n" is the number of years in the period)
and subtracting 1 from the result.
The Fund's aggregate total return for the period June 11, 1985
(commencement of operations) through May 31, 1997 was 131.25%. 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.
From time to time, the Fund may use hypothetical tax equivalent yields
or charts in its advertising. These hypothetical yields or charts will be
used for illustrative purposes only and are not representative of the Fund's
past or future performance.
From time to time, advertising materials for the Fund may refer to or
discuss then-current or past economic conditions, developments and/or
events, actual or proposed tax legislation, or to statistical or other
information concerning trends relating to investment companies, as compiled
by industry associations such as the Investment Company Institute. From
time to time, advertising materials for the Fund also may refer to
Morningstar ratings and related analyses supporting the ratings.
From time to time, advertising material for the Fund may include
biographical information relating to its portfolio manager and may refer to,
or include commentary by the portfolio manager relating to investment
strategy, asset growth, current or past business, political, economic or
financial conditions and other matters of general interest to investors.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "General Information."
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.
The Fund sends annual and semi-annual financial statements to all its
shareholders.
TRANSFER AND DIVIDEND DISBURSING AGENT, CUSTODIAN,
COUNSEL AND INDEPENDENT AUDITORS
Dreyfus Transfer, Inc., 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. For the fiscal year ended May 31, 1997, the Fund paid
the Transfer Agent $70,840.
The Bank of New York, 90 Washington Street, New York, New York 10286,
is the Fund's custodian.
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, 787 Seventh Avenue, New York, New York 10019,
independent auditors, have been selected as independent auditors of the Fund
FINANCIAL STATEMENT AND REPORT OF INDEPENDENT AUDITORS
------------------------------------------------------
The Fund's Annual Report to Shareholders for the fiscal year ended May
31, 1997, is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes, and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
.
APPENDIX A
The following information constitutes only a brief summary, does not
purport to be a complete description, and is based on information drawn from
official statements relating to securities offerings of the Commonwealth of
Massachusetts available as of the date of this Statement of Additional
Information. While the Fund has not independently verified this
information, it has no reason to believe that such information is not
correct in all material aspects.
The economy of the Commonwealth of Massachusetts is experiencing
recovery following a slowdown that began in mid-1988. Massachusetts had
benefited from an annual job growth rate of approximately 2% since the early
1980s, but by 1989 employment started to decline. Between 1988 and 1992,
total employment in Massachusetts declined 10.7%. In 1993, 1994 and 1995,
however, total employment increased by 1.6%, 2.2% and 2.4% respectively.
Employment levels increased in all sectors except manufacturing. Between
1990 and 1992, the Commonwealth's unemployment rate was considerably higher
than the national average, however, unemployment rates in Massachusetts
since 1993 have declined faster than the national average (6.9% compared to
6.8% in 1993) and the employment rate in Massachusetts in 1994 and 1995 was
slightly below the national average (6.0% compared to 6.1% for 1994 and 5.4%
compared with 5.6% for 1995).
While the Commonwealth's expenditures for State programs and services
in each of the fiscal years 1987 through 1991 exceeded each year's current
revenues, Massachusetts ended each of the fiscal years 1991 to 1996 with a
positive closing fund balance in its budgeted operating funds, and expects
to do so again at the close of fiscal 1997.
In recent years, health related costs have risen dramatically in
Massachusetts and across the nation and the increase in the State's Medicaid
and group health insurance costs reflects this trend. In fiscal 1993,
Medicaid was the largest item in Massachusetts' budget and has been one of
the fastest growing budget items, although the rate of increase has abated
in recent years. During fiscal years 1989, 1990, 1991 and 1992, Medicaid
expenditures were $1.83 billion, $2.12 billion, $2.77 billion and $2.82
billion, respectively, representing an average annual increase of 15.4%.
Expenditures for fiscal 1993 were $3.15 billion, an 11.8% increase over
fiscal 1992. Medicaid expenses in fiscal 1994 were $3.31 billion, in fiscal
1995 they were $3.398 billion, and in fiscal 1996 they were $3.415 billion.
The average annual growth from fiscal 1992 to fiscal 1996 was 3.9% compared
with approximately 17% between fiscal 1987 and fiscal 1991.
Massachusetts' pension costs have risen dramatically as the State has
appropriated funds to address in part the unfunded liabilities that had
accumulated over several decades. Total pension costs increased at an
average rate of 7.6% from $751.5 million in fiscal 1992 to $1.005 billion in
fiscal 1996.
Payments for debt service on Massachusetts general obligation bonds and
notes have risen at an average annual rate of 10.27% from $649.8 million in
fiscal 1989 to $1.184 billion in fiscal 1996. Debt service payments were
$898.3 million in fiscal 1992, $1.14 billion in fiscal 1993, $1.15 billion
in fiscal 1994, $1.23 billion in fiscal 1995 and $1.18 billion in fiscal
1996. In 1990, legislation was enacted which generally imposes a 10% limit
on the total appropriations in any fiscal year that may be expended for
payment of interest and principal on general obligation debt. As of January
1, 1995, the State had approximately $9.256 billion of long-term general
obligation debt outstanding and short-term direct obligations of the
Commonwealth totalled $240 million.
Certain independent authorities and agencies within the State are
statutorily authorized to use debt for which Massachusetts is directly, in
whole or in part, or indirectly liable. The State's liabilities are either
in the form of (i) a direct guaranty, (ii) State support through contract
assistance payments for debt service, or (iii) indirect obligations. The
State is indirectly liable for the debt of certain authorities through a
moral obligation to maintain the funding of reserve funds which are pledged
as security for the authorities' debt.
In November 1980, voters in the Commonwealth approved a State-wide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees
imposed on cities and towns by certain government entities, including county
governments. The law is not a constitutional provision and accordingly is
subject to amendment or repeal by the legislature. Proposition 2-1/2 limits
the property taxes which a Massachusetts city or town may assess in any
fiscal year to the lesser of (i) 2.5% of the full and fair cash value of
real estate and personal property therein and (ii) 2.5% over the previous
year's levy limit plus any growth in the tax base from certain new
construction and parcel subdivisions. In addition, Proposition 2 1/2 limits
any increase in the charges and fees assessed by certain governmental
entities, including county governments, on cities and towns to the sum of
(i) 2.5% of the total charges and fees imposed in the preceding fiscal year,
and (ii) any increase in charges for services customarily provided locally
or services obtained by the city or town at its option. The law contains
certain override provisions which require voter approval at a general or
special election. Propositions 2 1/2 also limits any annual increase in the
total assessments on cities and towns by any county, district, authority,
the Commonwealth, or any other governmental entity except regional school
districts and regional water and sewer districts whose budgets are approved
by 2/3 of their member cities and towns. During the 1980s, Massachusetts
increased payments to the cities, towns and regional school districts
("Local Aid") to mitigate the impact of Proposition 2 1/2 on local programs and
services. In fiscal 1996, approximately 19.2% of Massachusetts' budget was
allocated to Local Aid. Direct Local Aid dropped from a high of $2.961
billion in fiscal 1989 to $2.727 billion in fiscal 1994, but increased to
$2.976 billion in fiscal 1995 and $3.246 billion in fiscal 1996. Recent
increases are largely a result of comprehensive education reform legislation
enacted in 1993 that requires annual increase in state expenditures for
education funding, subject to annual legislative appropriations, above a
fiscal 1993 base of approximately $1.288 billion. Increases of $175 million
above the base for fiscal 1994 to $867 million for fiscal 1997 have been
fully funded. Additional increases are called for in future years.
Many factors affect the financial condition of the Commonwealth and its
cities, towns and public bodies, such as social, environmental, and economic
conditions, many of which are not within the control of such entities. As
is the case with most urban States, the continuation of many of
Massachusetts' programs, particularly its human services programs, is in
significant part dependent upon continuing Federal reimbursements which have
been steadily declining. The loss of grants to Massachusetts and its cities
and towns could further slow economic development. To the extent that such
factors may exist, they could have an adverse effect on economic conditions
in Massachusetts, although what effects, if any, such factors would have on
Massachusetts' Municipal Obligations cannot be predicted.
APPENDIX B
Description of certain S&P, Moody's and Fitch ratings:
S&P
Municipal Bond Ratings
An S&P municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A
Principal and interest payments on bonds in this category are regarded
as safe. This rating describes the third strongest capacity for payment of
debt service. It differs from the two higher ratings because:
General Obligation Bonds -- There is some weakness in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer
to meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Of the investment grade, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several
of the above factors could contribute to a lesser capacity for payment of
debt service. The difference between A and BBB rating is that the latter
shows more than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC, CC
Debt rated BB, B, CCC or CC is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the lowest degree of speculation and CC 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 payment.
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 typically is 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.
S&P's letter ratings may be modified by the addition of a plus or minus
sign designation, which is used to show relative standing within the major
rating categories, except in the AAA (Prime Grade) category.
Municipal Note Ratings
SP-1
The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) sign designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest.
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.
Moody's
Municipal Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are
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 desirable
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 represent 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.
For bond issues in the health care, higher education and other not-for-
profit sectors, Moody's provides numerical modifiers 1, 2 and 3 to the
generic rating categories Aa through B; the modifier 1 indicates that the
issue ranks in the higher end of the generic rating category; the modifier 2
indicates that the issue is in the mid-range of the generic rating category;
and the modifier 3 indicates that the issue is in the low end of the generic
rating category. For all other municipal bonds, Moody's provides either a
generic rating or a rating with the numerical modifier 1 for the rating
categories Aa through B, with the latter indicating that the issue ranks in
the higher end of the rating category.
Municipal Note Ratings
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). Such ratings recognize
the difference between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run.
A short-term rating may also be assigned on an issue having a demand
feature. Such ratings will be designated as VMIG or, if the demand feature
is not rated, as NR. Short-term ratings on issues with demand features are
differentiated by the use of the VMIG symbol to reflect such characteristics
as payment upon periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Additionally, investors should be alert to
the fact that the source of payment may be limited to the external liquidity
with no or limited legal recourse to the issuer in the event the demand is
not met.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1
This description denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2
This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
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
ordinarily will 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
Municipal 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 or imminent 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 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. Plus and
minus signs, however, are not used in the AAA category covering 12-36 months
or the DDD, DD or D categories.
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+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the F-1+ and -1 categories.
