STATEMENT OF ADDITIONAL INFORMATION
December 19, 1994
(as revised January 5, 1995)
THE DREYFUS/LAUREL FUNDS, INC.
200 Park Avenue
New York, NY 10166
For information call 1-800-548-2868
The Funds listed below are portfolios of The Dreyfus/Laurel
Funds, Inc. (formerly The Laurel Funds, Inc.) ("Dreyfus/Laurel"), an open-
end diversified management company that offers shares of common stock of
these Funds. Shares of the Funds are offered without sales commissions.
Dreyfus Disciplined Stock Fund (formerly the Laurel Stock Fund)
("Stock Fund")
Dreyfus S&P 500 Stock Index Fund (formerly the Laurel S&P 500
Stock Index Fund) ("S&P 500 Fund")
Dreyfus Disciplined Midcap Stock Fund (formerly the Laurel Midcap
Stock Fund) ("Midcap Fund")
Dreyfus Bond Market Index Fund (formerly the Laurel Bond Market
Index Fund) ("Bond Market Fund")
Dreyfus European Fund (formerly the Laurel European Fund)
("European Fund")
Dreyfus Equity Income Fund (formerly the Laurel Equity Income
Fund) ("Equity Income Fund")
This Statement of Additional Information is not a prospectus and
should be read only in conjunction with each Fund's current Prospectus,
dated December 19, 1994. A copy of each Prospectus is available from
Premier Mutual Fund Services, Inc., One Exchange Place, Boston, MA 02109.
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TABLE OF CONTENTS
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT INFORMATION AND RISK FACTORS . . . . . . . . . . 3
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . 11
CONTROLLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . 14
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . 14
DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . 15
INVESTMENT MANAGEMENT AND OTHER SERVICES . . . . . . . . . . 18
FEDERAL LAW AFFECTING MELLON BANK . . . . . . . . . . . . . 23
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . 23
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . 27
PERFORMANCE CALCULATIONS . . . . . . . . . . . . . . . . . . 28
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES . . . . . . . . . . 30
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . 35
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 35
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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GENERAL INFORMATION
Dreyfus/Laurel's name was changed from The Laurel Funds, Inc. to
The Dreyfus/Laurel Funds, Inc. effective October 17, 1994. The names of
the Funds also were changed as follows effective October 17, 1994: Laurel
Stock Fund to Dreyfus Disciplined Stock Fund; Laurel Midcap Stock Fund to
Dreyfus Disciplined Midcap Stock Fund; Laurel S&P 500 Stock Index Fund to
Dreyfus S&P Stock Index Fund; Laurel Equity Income Fund to Dreyfus Equity
Income Fund; Laurel European Fund to Dreyfus European Fund; and Laurel
Bond Market Index Fund to Dreyfus Bond Market Index Fund.
European Fund. The European Fund is the successor, through an
acquisition of assets and assumption of liabilities, to the Capstone
European Fund ("Capstone European") of the Capstone International Series
Trust, a Massachusetts business trust organized on May 9, 1986. The
transfer of assets and liabilities of Capstone European to the European
Fund occurred on November 1, 1993. In exchange for the asset transfer,
Capstone European received shares of the European Fund which Capstone
European distributed to its shareholders. Each Capstone European
shareholder received a number of European Fund shares equal to the number
of such shareholder's shares in Capstone European on the date of the
exchange. The Capstone European shares were canceled and Capstone
European ceased operations. The European Fund Prospectus and this
Statement of Additional Information include performance and other
information with respect to Capstone European.
INVESTMENT INFORMATION AND RISK FACTORS
Floating Rate Securities (Bond Market Fund). A floating rate
security is one whose terms provide for the automatic adjustment of
interest rates whenever a specified interest rate changes. The interest
on floating rate securities is ordinarily tied to and is a percentage of
the prime rate of a specified bank or some similar objective standard such
as the 90-day U.S. Treasury bill rate and may change daily. Generally,
changes in interest rates on floating rate securities will reduce changes
in the security's market value from the original purchase price resulting
in the potential for capital appreciation or capital depreciation being
less than for fixed income obligations with a fixed interest rate.
ECDs, ETDs and Yankee CDs (Midcap and Bond Market Funds). These
Funds may purchase Eurodollar certificates of deposit ("ECDs"), which are
U.S. dollar denominated certificates of deposit issued by foreign branches
of domestic banks, Eurodollar time deposits ("ETDs"), which are U.S.
dollar denominated deposits in a foreign branch of a domestic bank or a
foreign bank, and Yankee-Dollar certificates of deposit ("Yankee CDs")
which are certificates of deposit issued by a domestic branch of a foreign
bank denominated in U.S. dollars and held in the United States. ECDs,
ETDs, and Yankee CDs are subject to somewhat different risks than domestic
obligations of domestic banks. These risks are discussed in the
Prospectus.
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Government Obligations (All Funds). Each Fund may invest in a
variety of U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance: (a) U.S. Treasury bills have a
maturity of one year or less, (b) U.S. Treasury notes that have maturities
of one to ten years, and (c) U.S. Treasury bonds generally have maturities
of greater than ten years.
In addition to U.S. Treasury obligations, the Stock, S&P 500,
Midcap, Bond Market, European, and Equity Income Funds may invest in
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the
full faith and credit of the U.S. Treasury (such as Government National
Mortgage Association ("GNMA") participation certificates), (b) the right
of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Treasury, (c) discretionary authority of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality.
(Examples of agencies and instrumentalities are: Federal Land Banks,
Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks, General Services
Administration, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank, Asian-
American Development Bank, Student Loan Marketing Association,
International Bank of Reconstruction and Development and Federal National
Mortgage Association ("FNMA")). No assurance can be given that the U.S.
Government will provide financial support to such U.S. Government agencies
or instrumentalities described in (b), (c) and (d) in the future, other
than set forth above, since it is not obligated to do so by law.
Mortgage Pass-Through Certificates (Stock Fund). Mortgage pass-
through certificates are issued by governmental, government-related and
private organizations which are backed by pools of mortgage loans. These
mortgage loans are made by lenders such as savings and loan institutions,
mortgage bankers, commercial banks and others to residential home buyer
throughout the United States. The securities are "pass-through"
securities because they provide investors with monthly payments of
principal and interest which in effect are a "pass-through" of the monthly
payments made by the individual borrowers on the underlying mortgages, net
of any fees paid to the issuer or guarantor of the pass-through
certificates. The principal government issuer of such securities is the
GNMA, which is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. Government-related issuers
include the Federal Home Loan Mortgage Corporation ("FHLMC") and the FNMA,
both government sponsored corporations owned entirely by private
stockholders. Commercial banks, savings an loan institutions, private
mortgage insurance companies, mortgage bankers and other second market
issuers also create pass-through pools of conventional residential
mortgage loans. Such issuers may be the originators of the underlying
mortgage loans as well as the guarantors of the mortgage-related
securities.
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(1) GNMA Mortgage Pass-Through Certificates ("Ginnie Maes").
Ginnie Maes represent an undivided interest in a pool of mortgages that
are insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. Ginnie Maes
entitle the holder to receive all payments (including prepayment of
principal and interest owed by the individual mortgagors, net of fees paid
to GNMA and the issuer which assembles the mortgage pool and passes
through the monthly mortgage payments to the certificate holders
(typically, a mortgage banking firm), regardless of whether the individual
mortgagor actually makes the payment. Because payments are made to
certificate holders regardless of whether payments are actually received
on the underlying mortgages, Ginnie Maes are of the "modified pass-
through" mortgage certificate type. GNMA is authorized to guarantee the
timely payment of principal and interest on the Ginnie Maes as securities
backed by an eligible pool of mortgages. GNMA guarantee is backed by the
full faith and credit of the United States, and GNMA has unlimited
authority to borrow funds from the U.S. Treasury to make payments under
the guarantee. The market for Ginnie Maes is highly liquid because of the
size of the market and the active participation in the secondary market of
securities dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs").
Freddie Macs represent interests in groups of specified first lien
residential conventional mortgages underwritten and owned by the FHLMC.
Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection
or timely payment of all principal payments on the underlying mortgage
loans. In cases where the FHLMC has not guaranteed timely payment of
principal, the FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation
of the United States or of any Federal Home Loan Bank. The secondary
market for Freddie Macs is highly liquid because of the size of the market
and the active participation in the secondary market of the FHLMC,
securities dealers and a variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes"). Fannie Maes represent an undivided interest in a pool of
conventional mortgage loans secured by first mortgages or deeds of trust,
on one family, or two to four family, residential properties. The FNMA is
obligated to distribute scheduled monthly installments of principal and
interest on the mortgages in the pool, whether or not received, plus full
principal of any foreclosed or otherwise liquidated mortgages. The
obligation of the FNMA under its guaranty is solely the obligation of the
FNMA and is not backed by, nor entitled to, the full faith and credit of
the United States.
The market value of mortgage-related securities depends on, among
other things, the level of interest rates, the certificates' coupon rates
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and the payment history of the mortgagors of the mortgages in the
underlying mortgages.
Repurchase Agreements (All Funds). The Funds may enter into
repurchase agreements with U.S. Government securities dealers recognized
by the Federal Reserve Board, with member banks of the Federal Reserve
System, or with such other brokers or dealers that meet the credit
guidelines of the Board of Directors. In a repurchase agreement, the Fund
buys a security from a seller that has agreed to repurchase the same
security at a mutually agreed upon date and price. A Fund's resale price
will be in excess of the purchase price, reflecting an agreed upon
interest rate. This interest rate is effective for the period of time the
Fund is invested in the agreement and is not related to the coupon rate of
the underlying security. Repurchase agreements may also be viewed as a
fully collateralized loan of money by the Fund to the seller. The period
of these repurchase agreements will usually be short, from overnight to
one week, and at no time will a Fund invest in repurchase agreements for
more than one year. A Fund will always receive as collateral securities
whose market value including accrued interest is, and during the entire
term of the agreement remains, at least equal to 100% of the dollar amount
invested by the Fund in each agreement, and the Fund will make payment for
such securities only upon physical delivery or upon evidence of book entry
transfer to the account of the Custodian. If the seller defaults, the
Fund might incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of a security which
is the subject of a repurchase agreement, realization upon the collateral
by the Fund may be delayed or limited. The Manager seeks to minimize the
risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligors under repurchase agreements, in
accordance with the credit guidelines of the Board of Directors. With
respect to European Fund only, no more the 5% of the Funds' net assets
will be invested in repurchase agreements at any one time.
Reverse Repurchase Agreements (Stock, S&P 500, Bond Market Index,
Midcap and Equity Income Funds). A Fund may enter into reverse repurchase
agreements to meet redemption requests where the liquidation of portfolio
securities is deemed by the Manager to be inconvenient or disadvantageous.
A reverse repurchase agreement is a transaction whereby a Fund transfers
possession of a portfolio security to a bank or broker-dealer in return
for a percentage of the portfolio security's market value. The Fund
retains record ownership of the security involved including the right to
receive interest and principal payments. At an agreed upon future date,
the Fund repurchases the security by paying an agreed upon purchase price
plus interest. Cash or liquid high-grade debt obligations of the Fund
equal in value to the repurchase price including any accrued interest will
be maintained in a segregated account while a reverse repurchase agreement
is in effect.
When-Issued Securities (All Funds). New issues of U.S. Treasury
and Government securities are often offered on a when-issued basis. This
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means that delivery and payment for the securities normally will take
place approximately 7 to 15 days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at
the time the buyer enters into the commitment. Each Fund will make
commitments to purchase such securities only with the intention of
actually acquiring the securities, but the Fund may sell these securities
or dispose of the commitment before the settlement date if it is deemed
advisable as matter of investment strategy. Cash or marketable high grade
debt securities equal to the amount of the above commitments will be
segregated on each Fund's records. For the purpose of determining the
adequacy of these securities the segregated securities will be valued at
market. If the market value of such securities declines, additional cash
or securities will be segregated on the Fund's records on a daily basis so
that the market value of the account will equal the amount of such
commitments by the Fund.
Securities purchased on a when-issued basis and the securities
held by each Fund are subject to changes in market value based upon the
public's perception of changes in the level interest rates. Generally,
the value of such securities will fluctuate inversely to changes in
interest rates -- i.e., they will appreciate in value when interest rates
decline and decrease in value when interest rates rise. Therefore, if in
order to achieve higher interest income each Fund remains substantially
fully invested at the same time that it has purchased securities on a
"when issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, each Fund will
meet its obligation from then-available cash flow, the sale of segregated
securities, the sale of other securities, or and although it would not
normally expect to do so, from the sale of the when-issued securities
themselves (which may have a market value greater or less than the Fund's
payment obligation). The sale of securities to meet such obligations
carries with it a greater potential for the realization of capital gains,
which are subject to federal income taxes.
Loans of Fund Securities (All Funds). Each Fund has authority to
lend its portfolio securities provided (1) the loan is secured
continuously by collateral consisting of U.S Government securities or cash
or cash equivalents adjusted daily to make a market value at least equal
to the current market value of these securities loaned; (2) the Fund may
at any time call the loan and regain the securities loaned; (3) the Fund
will receive any interest or dividends paid on the loaned securities; and
(4) the aggregate market value of securities loaned will not at any time
exceed one-third of the total assets of the Fund. In addition, it is
anticipated that a Fund may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium
for the loan. In determining whether to lend securities, the Manager (and
in the case of European Fund, the sub-adviser) considers all relevant
factors and circumstance including the creditworthiness of the borrower.
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Futures Contracts and Options (All Funds, except the Stock Fund).
For the purpose of creating market exposure for uncommitted cash balances,
reducing transaction costs associated with rebalancing a Fund,
facilitating trading or seeking higher investment returns when a futures
contract is priced more attractively than the underlying security or
index, each of the above-referenced Funds may enter into futures
contracts, options, and options on futures contracts with respect to
securities in which the Funds may invest and indices comprised of such
securities.
Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security or
securities index at a specified future time and at a specified price.
Where the underlying security is an index, no physical transfer of
securities takes place; rather, upon expiration of the contract, the
parties settle by exchanging cash in an amount equal to the difference
between the contract price and the closing value of the index at
expiration, net of variation margin previously paid. Futures contracts
that are standardized as to maturity date and underlying interest are
traded on national futures exchanges.
Futures traders are required to make a good faith margin deposit
in cash or government securities with a broker or custodian to initiate
and maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of
the underlying security) if it is not terminated prior to the specified
delivery date. Minimal initial margin requirements are established by the
futures exchange and may be changed. Brokers may establish deposit
requirements which are higher than the exchange minimums.
After a futures contract position is opened, the value of the
contract is marked to market daily. If the futures contract price changes
to the extent that the margin on deposit does not satisfy margin
requirements, payment of additional "variation" margin will be required.
Conversely, change in the contract value may reduce the required margin,
resulting in a repayment of excess margin to the contract holder.
Variation margin payments are made to and from the futures broker for as
long as the contract remains open. Each Fund expects to earn interest
income on its margin deposits.
Options are of two basic types, either call or put options, and
may relate to a single security, a securities index or a futures contract.
A call option on a security permits the holder of the option to purchase
the underlying security at a specified price ("strike price") at any time
during the term of the option. Thus, in exchange for the premium paid to
the writer, the purchaser obtains the right to profit from any
appreciation in the value of the underlying security above the strike
price. A put option permits the holder to sell the underlying security to
the writer at the strike price at any time during the term of the
contract. Thus, in exchange for the premium paid to the writer, the
purchaser is relieved of the risk of a decline in the value of the
underlying security below the strike price. An option on a securities
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index gives the holder the right to receive cash from the writer in an
amount equal to the difference between the strike price of the option and
the value of the underlying index multiplied by a factor established by
the exchange upon which the option is traded. An option on a futures
contract gives the holder, in return for the premium paid to the writer,
the right to assume a position in the underlying futures contract a
specified price at any time during the term of the option.
Although futures and options contracts by their terms call for
actual delivery or acceptance of the underlying securities, in most cases
the contracts are closed out before the settlement date without the making
or taking of delivery. Closing out an open futures position is done by
taking an opposite position ("buying" a contract which has previously been
"sold," or "selling" a contract previously purchased) in an identical
contract to terminate the position. An option purchased may be closed out
by selling the option. An option written is closed out by purchasing an
option identical to that written. Brokerage commissions are incurred when
future and options contracts are bought and sold.
Restrictions on the Use of Futures Contracts and Options (All
Funds, except the Stock Fund). Each Fund will not enter into futures
contracts to the extent that its outstanding obligations under these
contracts would exceed 25% of the Fund's total assets. To the extent that
a Fund enters into futures contracts and options on futures positions that
are not for bona fide hedging purposes (as defined by the Commodity
Futures Trading Commission), the aggregate initial margin and premiums on
these positions (excluding the amount by which options are "in-the-money")
may not exceed 5% of the Fund's net assets.
Transactions using options and futures contracts (other than
options that the Fund has purchased) expose the Fund to an obligation to
another party. A Fund will not enter into any such transactions unless it
owns either (1) an offsetting ("covered") position in securities or other
options or futures contracts or (2) cash, receivables and short-term debt
securities with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. Each Fund will comply
with SEC guidelines regarding cover for these instruments and, if the
guidelines so require, set aside cash, U.S. Government securities or other
liquid, high-grade debt securities a segregated account with its custodian
in the prescribed amount.
All options purchased or written by a Fund must be listed on a
national securities or futures exchange or traded in the over-the-counter
("OTC") market. A Fund will not purchase or write OTC options if, as a
result of such transaction, the sum of (i) the market value of outstanding
OTC options purchased by the Fund, (ii) the market value of the underlying
securities covered by outstanding OTC call options written by the Fund,
and (iii) the market value of other assets of the Fund that are illiquid
or are not otherwise readily marketable, would exceed 15% of the net
assets of the Fund, taken at market value. However, if an OTC option is
sold by a Fund to a primary U.S. Government securities dealer recognized
by the Federal Reserve Bank of New York and the Fund has the unconditional
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contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Fund will treat as illiquid such amount of
the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (the difference between
current market value of the underlying security and the option's strike
price). The repurchase price with primary dealers is typically a formula
price which is generally based on a multiple of the premium received for
the option plus the amount by which the option is "in-the-money."
Each Fund may write only covered options. A call option is
covered if the Fund owns the underlying security or a call option on the
same security with a lower strike price. A put option is covered if the
Fund segregates cash and/or short-term debt securities in an amount
necessary to pay the strike price of the option or purchases a put option
on the same underlying security with a higher strike price.
Each Fund will not purchase puts, calls, straddles, spreads or
any combination thereof, if as a result of such purchase the value of the
Fund's aggregate investment in such securities would exceed 5% of the
Fund's total assets.
Risk Factors in Futures and Options Transactions (All Funds,
except the Stock Fund). There can be no assurance that a liquid secondary
market will exist for any particular futures or option contract at any
specific time. Thus, it may not be possible to close a futures or option
position. In the event of adverse price movements, each Fund would
continue to be required to make daily cash payments to maintain its
required margin with respect to open futures or written options positions.
In such a situation, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily margin requirements at a time when
it may be disadvantageous to do so. In addition, a Fund may required to
make or take delivery of the securities underlying futures contracts that
it holds and options contracts that it has written.
Each Fund will seek to minimize the risk that it will be unable
to close out a futures contract by entering into only those futures
contracts that are listed on a national futures exchange and for which
there appears to be a liquid secondary market. Likewise, each Fund will
enter into only those option contracts that are listed on a national
securities exchange or traded in the OTC market for which there appears to
be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies
can be substantial, due both to the low margin deposits required, and the
extremely high degree of leverage involved in futures pricing. As a
result, a relatively small price movement in a futures contract may result
immediate and substantial loss (as well as gain) to the investor. For
example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of
the futures contract would result in a total loss of margin deposit,
before any deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150% if the
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original margin deposit for the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of
the amount invested in the contract. Options transactions are subject to
similar risks. However, because each Fund will not engage in futures or
options transactions for speculative purposes, the Manager believes that a
Fund's risk of loss is less than the risk of loss associated with
speculative transactions. Moreover, in the foregoing example, the Fund
would presumably have sustain comparable losses if, instead of the futures
contract, it had invested in the underlying security and sold it after the
decline.
Utilization of futures contracts and options transactions by each
Fund does involve the risk of imperfect or no correlation where the
securities underlying futures and options contract are different from the
portfolio securities being hedged. It is also possible that a Fund could
both lose money on futures and options contracts and also experience a
decline in value of its portfolio securities. There is also the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or option
thereon.
Most futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end
of a trading session. Once the daily limit has been reached in a
particular type of contract, no trade may be made on that day at a price
beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses,
because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading thereby
preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
Futures and options contracts involve special tax considerations.
See "Dividends, Other Distributions and Taxes" for further information.
Commercial Paper (All Funds). The Funds may invest in commercial
paper issued in reliance on the so called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to
disposition under the federal securities laws and generally is sold to
investors who agree that they are purchasing the paper for an investment
and not with a view to public distribution. Any resale by the purchase
must be in an exempt transaction. Section 4(2) paper is normally resold
to other investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Pursuant to guidelines established by Dreyfus/Laurel's Board
of Directors, the Manager, (or in the case of European Fund, the sub-
adviser) may determine that Section 4(2) paper is liquid for the purposes
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of complying with the Fund's investment restriction relating to
investments in illiquid securities.
INVESTMENT LIMITATIONS
The following limitations have been adopted by each Fund. A Fund
may not change any of these fundamental investment limitations without the
consent of: (a) 67% or more of the shares present at a meeting of
shareholders duly called if the holders of more than 50% of the
outstanding shares of a Fund are present or represented by proxy; or (b)
more than 50% of the outstanding shares of a Fund, whichever is less.
Each Fund may not:
1. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting
their principal activities in the same industry. (For purposes
of this limitation, U.S. Government securities, and state or
municipal governments and their political subdivisions are not
considered members of any industry. In addition, this limitation
does not apply to investments in domestic banks, including U.S.
branches of foreign banks and foreign branches of U.S. banks).
2. Borrow money or issue senior securities as defined in the 1940
Act except that (a) a Fund may borrow money in an amount not
exceeding one-third of the Fund's total assets at the time of
such borrowings, and (b) a Fund may issue multiple classes of
shares. The purchase or sale of futures contracts and related
options shall not be considered to involve the borrowing of money
or issuance of senior securities.
3. Purchase with respect to 75% of a Fund's total assets securities
of any one issuer (other than securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities) if, as a
result, (a) more than 5% of a Fund's total assets would be
invested in the securities of that issuer, or (b) a Fund would
hold more than 10% of the outstanding voting securities of that
issuer.
4. Make loans or lend securities, if as a result thereof more than
one-third of the Fund's total assets would be subject to all such
loans. For purposes of this limitation debt instruments and
repurchase agreements shall not be treated as loans.
5. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent a Fund from investing in securities or other instruments
backed by real estate, including mortgage loans, or securities of
companies that engage in real estate business or invest or deal
in real estate or interests therein).
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6. Underwrite securities issued by any other person, except to the
extent that the purchase of securities and later disposition of
such securities in accordance with the Fund's investment program
may be deemed an underwriting.
7. Purchase or sell commodities except that each Fund may enter into
futures contracts and related options, forward currency contacts
and other similar instruments.
Each Fund may:
Notwithstanding any other fundamental investment policy or
limitation, invest all of its investable assets in securities of
a single open-end management investment company with
substantially the same investment objectives, policies and
limitations as the Fund.
The Funds above have adopted the following additional non-
fundamental restrictions. These non-fundamental restrictions may be
changed without shareholder approval, in compliance with applicable law
and regulatory policy.
1. No Fund shall sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amounts to the
securities sold short, and provided that transactions in futures
contracts are not deemed to constitute selling short.
2. No Fund shall purchase securities on margin, except that a Fund
may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
3. No Fund shall purchase oil, gas or mineral leases.
4. Each Fund will not purchase or retain the securities of any
issuer if the officers, Directors of the Fund, its advisers, or
managers, owning beneficially more than one half of one percent
of the securities of such issuer, together own beneficially more
than five percent of such securities.
5. No Fund will purchase securities of issuers (other than
securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof), including their
predecessors, that have been in operation for less than three
years, if by reason thereof, the value of such Fund's investment
in securities would exceed 5% of such Fund's total assets. For
purposes of this limitation, sponsors, general partners,
guarantors and originators of underlying assets may be treated as
the issuer of a security.
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<PAGE>
6. None of the Stock, S&P 500, Midcap, Bond Market, European, and
Equity Income Funds will invest more than 15% of the value of its
net assets in illiquid securities, including repurchase
agreements with remaining maturities in excess of seven days,
time deposits with maturities in excess of seven days and other
securities which are not readily marketable. For purposes of this
limitation illiquid securities shall not include Section 4(2)
paper and securities which may be resold under Rule 144A under
the Securities Act of 1933, provided that the Board of Directors,
or its delegate, determines that such securities are liquid based
upon trading markets for the specific security.
7. No Fund may invest in securities of other investment companies,
except as they may acquired as part of a merger, consolidation or
acquisition of assets and except to extent otherwise permitted by
the 1940 Act.
8. No Fund shall purchase any security while borrowings representing
more than 5% of Fund's total assets are outstanding.
9. No Fund will purchase warrants if at the time of such purchase:
(a) more than 5% of value of such Fund's assets would be invested
in warrants, or (b) more than 2% of the value of the Fund's
assets would be invested in warrants that are not listed on the
New York Stock Exchange ("NYSE") or American Stock Exchange (for
purposes of this limitation, warrants acquired by a Fund in units
or attached to securities will be deemed to have no value).
10. No Fund will purchase puts, calls, straddles, spreads and any
combination thereof if by reason thereof the value of its
aggregate investment in such classes of securities will exceed 5%
of its total assets except that: (a) this limitation shall not
apply to standby commitments, and (b) this limitation shall not
apply to a Fund's transactions in future contracts and related
options.
11. The European Fund will not invest more than 25% of the market
value of its total assets in securities issued or guaranteed by a
single Western European government or its agencies and
instrumentalities.
As an operating policy, all Funds will not invest more the 25% of the
value of the Fund's total assets, at the time of such purchase, in
domestic banks, including U.S. branches of foreign banks and foreign
branches of U.S. banks. The Board of Directors may change this operating
policy without shareholder approval. Notice will be given to shareholders
if this policy is changed by the Board of Directors.
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<PAGE>
CONTROLLING SHAREHOLDERS
The Dreyfus/Laurel Funds. Inc.
Mellon Bank Corporation, a Pennsylvania corporation registered as
a bank holding company under the Bank Holding Company Act of 1956, as
amended, owned of record, through its direct and indirect subsidiaries,
79% of the issued and outstanding voting shares of Dreyfus/Laurel as of
November 30, 1994, and is, as a consequence, deemed to be a controlling
shareholder of Dreyfus/Laurel as that term is defined under the 1940 Act.
The address of Mellon Bank Corporation is: Mellon Bank Corporation, Mutual
Funds Department, 2 Mellon Bank Center, Pittsburgh, PA 15259.
PRINCIPAL SHAREHOLDERS
The following shareholder(s) owned 5% or more of the outstanding
voting shares of the Funds at November 30, 1994:
STOCK FUND: InvestNet Corporation, Two Mellon Bank Center, Pittsburgh, PA
15259-0001, 20% record; Mac & Co. 171-027, Mellon Bank, N.A., as Nominee
for Trust Custodian, Mutual Funds, P.O. Box 320, Pittsburgh, PA 15230-
0320, 8% record.
S&P 500 FUND: Mac & Co. 194-803, Mellon Bank, N.A., as Nominee for Trust
Custodian, Mutual Funds, P.O. Box 320, Pittsburgh, PA 15230, 32% record;
Mac & Co. 862-823, Mellon Bank, N.A., as Nominee for Trust Custodian,
Mutual Fund P.O. Box 320, Pittsburgh, PA 15230-0320, 29% record; Mac & Co.
853-922, Mellon Bank, N.A., as Nominee for Trust Custodian, Mutual Funds,
P.O. Box 320, Pittsburgh, PA 15230-0320, 19% record; Mac & Co. 178-827,
Mellon Bank, N.A., as Nominee for Trust Custodian, Mutual Funds, P.O. Box
320, Pittsburgh, PA 15230, 10% record.
MIDCAP FUND: Mac & Co. 171-028, Mellon Bank, N.A., as Nominee for Trust
Custodian, Mutual Funds, P.O. Box 320, Pittsburgh, PA 15230, 66% record.
BOND MARKET FUND: Mac & Co. 178-832, Mellon Bank, N.A., as Nominee for
Trust Custodian, Mutual Funds, P.O. Box 320, Pittsburgh, PA 15258, 42%
record; Mac & Co. 057-090, Mellon Bank, N.A., as Nominee for Trust
Custodian, Mutual Funds, P.O. Box 320, Pittsburgh, PA 15230-0320, 13%
record; Mac & Co. 833-6BP, Mellon Bank, N.A., as Nominee for Trust
Custodian, Mutual Funds, P.O. Box 320, Pittsburgh, PA 15258, 8% record;
Mac & Co. 180-192, Mellon Bank, N.A., as Nominee for Trust Custodian,
Mutual Funds, P.O. Box 320, Pittsburgh, PA 15258, 6% record.
EUROPEAN FUND: Mutavie, 9 Rue Huymanns, 75006 Paris, France, 20% record;
Elysees Ecrins, c/o CCF SAM Back Office, 37 Avenue Pierre 1er de Serbie,
75008 Paris, France, 14% record; Selection Mondiale, c/o CCF SAM Back
Office, 37 Avenue Pierre 1er de Serbie, 75008 Paris, France, 13% record;
Selection Europe-SICAV, c/o CCF SAM Back Office, 37 Avenue Pierre 1er de
Serbie, 75008 Paris, France, 10% record; Azur Gestion Fund, c/o CCF SAM
15
<PAGE>
Back Office, 3 Avenue Pierre 1er de Serbie, 75008 Paris, France, 6%
record.
EQUITY INCOME FUND: Mac & Co. 080-056, Mellon Bank, N.A., as Nominee for
Trust Custodian, Mutual Funds, P.O. Box 320, Pittsburgh, PA 15230-0320,
99% record.
DIRECTORS AND OFFICERS
Dreyfus/Laurel has a Board composed of twelve Directors which
supervises Dreyfus/Laurel's investment activities and reviews contractual
arrangements with companies that provide the Funds with services. The
following lists the Directors and officers and their positions with
Dreyfus/Laurel and their present and principal occupations during the past
five years. Each Director who is an "interested person" of Dreyfus/Laurel
Funds, Inc. (as defined in the Investment Company Act of 1940, as amended
(the "Act")) is indicated by an asterisk. Each of the Directors also
serves as a Trustee of The Dreyfus/Laurel Funds Trust, The Dreyfus/Laurel
Investment Series and The Dreyfus/Laurel Tax-Free Municipal Funds
(collectively "The Dreyfus Family of Funds").
o + RUTH MARIE ADAMS. Director of The Dreyfus/Laurel Funds, Inc.;
Professor of English and Vice President Emeritus, Dartmouth
College; Senator, United Chapters of Phi Beta Kappa; Trustee,
Woods Hole Oceanographic Institution. Address: 1026 Kendal Lyme
Road, Hanover, New Hampshire 03755.
o + FRANCIS P. BRENNAN. Chairman of the Board of Directors and
Assistant Treasurer of The Dreyfus/Laurel Funds, Inc.; Director
and Chairman, Massachusetts Business Development Corp.; Director,
Boston Mutual Insurance Company; Director and Vice Chairman of
the Board, Home Owners Federal Savings and Loan (prior to May
1990). Address: Massachusetts Business Development Corp., One
Liberty Square, Boston, Massachusetts 02109.
o + JAMES M. FITZGIBBONS. Director of The Dreyfus/Laurel Funds,
Inc.; President and Director, Amoskeag Company; Chairman, Howes
Leather Company, Inc.; Director, Fiduciary Trust Company;
Chairman, CEO and Director, Fieldcrest-Cannon Inc.; Director,
Lumber Mutual Insurance Company; Director, Barrett Resources,
Inc. Address: 40 Norfolk Road, Brookline, Massachusetts 02167.
o * J. TOMLINSON FORT. Director of The Dreyfus/Laurel Funds, Inc.;
Partner, Reed, Smith, Shaw & McClay (law firm). Address: 204
Woodcock Drive, Pittsburgh, Pennsylvania 15215.
o + ARTHUR L. GOESCHEL. Director of The Dreyfus/Laurel Funds, Inc.;
Director, Chairman of the Board and Director, Rexene Corporation;
Director, Calgon Carbon Corporation; Director, National Picture
Frame Corporation; Chairman of the Board and Director, Tetra
Corporation 1991-1993; Director, Medalist Corporation 1992-1993;
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<PAGE>
From 1988-1989 Director, Rexene Corporation. Address: Way
Hallow Road and Woodland Road, Sewickley, Pennsylvania 15143.
o + KENNETH A. HIMMEL. Director of The Dreyfus/Laurel Funds, Inc.;
Director, The Boston Company, Inc. and Boston Safe Deposit and
Trust Company; President and Chief Executive Officer, Himmel &
Co., Inc.; Vice Chairman, Sutton Place Gourmet, Inc. and Florida
Hospitality Group; Managing Partner, Himmel/MKDG, Franklin
Federal Partners, Reston Town Center Associates and Grill 23 &
Bar. Address: Himmel and Company, Inc., 101 Federal Street, 22nd
Floor, Boston, Massachusetts 02110.
o + ARCH S. JEFFERY. Director of The Dreyfus/Laurel Funds, Inc.;
Financial Consultant. Address: 1817 Foxcroft Lane, Allison
Park, Pennsylvania 15101.
o + STEPHEN J. LOCKWOOD. Director of The Dreyfus/Laurel Funds, Inc.;
President and CEO, LDG Management Company Inc.; CEO, LDG
Reinsurance Underwriters, SRRF Management Inc. and Medical
Reinsurance Underwriters Inc. Address: 401 Edgewater Place,
Wakefield, Massachusetts 01880.
o + ROBERT D. MCBRIDE. Director of The Dreyfus/Laurel Funds, Inc.;
Director, Chairman and CEO, McLouth Steel; Director, Salem
Corporation. Director, SMS/Concast, Inc. (1983-1991). Address:
15 Waverly Lane, Grosse Pointe Farms, Michigan 48236.
o + JOHN L. PROPST. Director of The Dreyfus/Laurel Funds, Inc.; Of
Counsel, Reed, Smith, Shaw & McClay (law firm). Address: 5521
Dunmoyle Street, Pittsburgh, Pennsylvania 15217.
o + JOHN J. SCIULLO. Director of The Dreyfus/Laurel Funds, Inc.;
Dean Emeritus and Professor of Law, Duquesne University Law
School; Director, Urban Redevelopment Authority of Pittsburgh.
Address: 321 Gross Street, Pittsburgh, Pennsylvania 15224
o + ROSLYN M. WATSON. Director of The Dreyfus/Laurel Funds, Inc.;
Principal, Watson Ventures, Inc., prior to February, 1993; Real
Estate Development Project Manager and Vice President, The Gunwyn
Company. Address: 25 Braddock Park, Boston, Massachusetts 02116-
5816.
# MARIE E. CONNOLLY. President and Treasurer of The Dreyfus/Laurel
Funds, Inc., The Dreyfus/Laurel Investment Series, The
Dreyfus/Laurel Funds Trust and The Dreyfus/Laurel Tax-Free
Municipal Funds (since September 1994); Vice President of The
Dreyfus/Laurel Funds, Inc. (March 1994 to September 1994);
President, Funds Distributor, Inc. (since 1992); Treasurer, Funds
Distributor, Inc. (July 1993 to April 1994); COO, Funds
Distributor, Inc. (since April 1994); Director, Funds
Distributor, Inc. (since July 1992); President, COO and Director,
Premier Mutual Fund Services, Inc. (since April 1994); Senior
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<PAGE>
Vice President and Director of Financial Administration, The
Boston Company Advisors, Inc. (December 1988 to May 1993).
Address: One Exchange Place, Boston, Massachusetts 02109.
# FREDERICK C. DEY. Vice President of The Dreyfus/Laurel Funds,
Inc., The Dreyfus/Laurel Investment Series, The Dreyfus/Laurel
Funds Trust and The Dreyfus/Laurel Tax-Free Municipal Funds
(since September 1994); Senior Vice President, Premier Mutual
Fund Services, Inc. (since August 1994); Vice President, Funds
Distributor, Inc. (since August 1994); Fundraising Manager, Swim
Across America (October 1993 to August 1994); General Manager,
Spring Industries (August 1988 to October 1993). Address: Premier
Mutual Fund Services, Inc., 200 Park Avenue New York, New York
10166.
# ERIC B. FISCHMAN. Vice President of The Dreyfus/Laurel Funds,
Inc., The Dreyfus/Laurel Investment Series, The Dreyfus/Laurel
Funds Trust and The Dreyfus/Laurel Tax-Free Municipal Funds
(since September 1994); Vice President and Associate General
Counsel, Premier Mutual Fund Services, Inc. (Since August 1994);
Vice President and Associate General Counsel, Funds Distributor,
Inc. (since August 1994); Staff Attorney, Federal Reserve Board
(September 1992 to June 1994); Summer Associate, Venture
Economics (May 1991 to September 1991); Summer Associate, Suffolk
County District Attorney (June 1990 to August 1990). Address:
Premier Mutual Fund Services, Inc., 200 Park Avenue, New York,
New York 10166.
RICHARD W. HEALEY. Vice President of The Dreyfus/Laurel Funds
Inc., The Dreyfus/Laurel Investment Series, The Dreyfus/Laurel
Tax-Free Municipal Funds Trust and The Dreyfus/Laurel Funds Trust
(since March 1994); Senior Vice President, Funds Distributor,
Inc. (since March 1993); Vice President, The Boston Company Inc.,
(March 1993 to May 1993); Vice President of Marketing, Calvert
Group (1989 to March 1993); Fidelity Investments (prior to 1989).
Address: One Exchange Place, Boston, Massachusetts 02109.
# JOHN E. PELLETIER. Vice President and Secretary of The
Dreyfus/Laurel Funds, Inc.; The Dreyfus/Laurel Investment Series,
The Dreyfus/Laurel Funds Trust and The Dreyfus/Laurel Tax-Free
Municipal Funds (since September 1994); Senior Vice President,
General Counsel and Secretary, Funds Distributor, Inc. (since
April 1994); Senior Vice President, General Counsel and
Secretary, Premier Mutual Fund Services, Inc. (since August
1994); Counsel, The Boston Company Advisors, Inc. (February 1992
to March 1994); Associate, Ropes & Gray (August 1990 to February
1992); Associate, Sidley & Austin (June 1989 to August 1990).
Address: One Exchange Place, Boston, Massachusetts 02109.
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<PAGE>
___________________________
* "Interested person" of The Dreyfus/Laurel Funds, Inc., as defined
in the 1940 Act.
o Member of the Audit Committee.
+ Member of the Nominating Committee.
# Officer also serves as an officer for other investment companies
advised by The Dreyfus Corporation.
The officers and Directors of Dreyfus/Laurel as a group owned
beneficially less than 1% of the total shares of each Fund outstanding as
of December 1, 1994.
No officer or employee of TSSG or Premier (or of any parent or
subsidiary thereof) receives any compensation from Dreyfus/Laurel for
serving as an officer or Director of Dreyfus/Laurel. In addition, no
officer or employee of Dreyfus (or of any parent or subsidiary thereof)
serves as an officer or Director of Dreyfus/Laurel. The Dreyfus/Laurel
Fund Family pays each Trustee/Director who is not an officer or employee
of Premier or any of its affiliates, $27,000 per annum (and an additional
$75,000 for the Chairman of the Board of Directors/Trustees of the
Dreyfus/Laurel Fund Family). In addition, the Dreyfus/Laurel Fund Family
pays each Trustee/Director $ 1,000 per joint Dreyfus/Laurel Fund Family
meeting attended, plus $750 per joint Dreyfus/Laurel Fund Family Audit
Committee meeting attended, and reimburses each Trustee/Director for
travel and out-of-pocket expenses. For the fiscal year ended December 31,
1993 the fees for meetings and expenses totaled $79,598.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services. The Dreyfus Corporation ("Dreyfus") serves as
the investment manager (the "Manager") for the Funds pursuant to an
Investment Management Agreement with Dreyfus/Laurel dated April 4, 1994
("Management Agreement"), transferred from Mellon Bank, N.A. (One Mellon
Bank Center, Pittsburgh, PA 15258) ("Mellon Bank"), to Dreyfus effective
October 17, 1994. Dreyfus is a wholly-owned subsidiary of Mellon Bank.
Pursuant to the Investment Management Agreement, Dreyfus provides, or
arranges for one or more third parties to provide investment advisory,
administrative, custody, fund accounting and transfer agency service to
each Fund. As Manager, Dreyfus manages each Fund by making investment
decisions based on such Fund's investment objective, policies and
restrictions. For these services, each Fund pays a fee to Dreyfus at the
rates stated in the Prospectus.
With respect to the European Fund, S.A.M. Finance, S.A. ("CCF
SAM") 115 Avenue des Champs-Elysees, Paris, France 75008, serves as an
investment sub-adviser. CCF SAM serves as adviser for the European Fund
pursuant to a Sub-Advisory Agreement among Dreyfus/Laurel, CCF SAM and
Mellon Bank dated August 31, 1993 ("European Sub-Advisory Agreement"),
transferred to Dreyfus effective as of October 17, 1994, (the "Sub-
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<PAGE>
Advisory Agreement"), transferred to Dreyfus effective as of October 17,
1994. CCF SAM is a wholly-owned subsidiary of Credit Commercial de France
("CCF"), a French bank. Under the Management and Sub-Advisory Agreements,
CCF SAM directs the investments of substantially all of the European
Fund's assets in accordance with their respective investment objectives,
policies and limitations. The Manager has overall responsibility for
general management of the European Fund, and for compliance with
applicable law and the European Fund's investment objectives, policies and
limitations. The Manager also directs investments of all assets not
assigned to CCF SAM. For these services, the European Fund pays a fee to
the Manager, and the Manager pays a portion thereof to CCF SAM, at the
rates stated in the Prospectus.
The Management and Sub-Advisory Agreements will continue from
year to year provided that a majority of the Directors who are not
interested persons of Dreyfus/Laurel and either a majority of all
Directors or a majority of the shareholders of each Fund approve the
continuance. Dreyfus/Laurel may terminate the Agreements, without prior
notice to the Manager or CCF SAM, upon the vote of a majority of the Board
of Directors or upon the vote of a majority of the outstanding voting
securities of each Fund on 60 days' written notice to the Manager or CCF
SAM. The Manager may terminate the Management Agreement upon written
notice to Dreyfus/Laurel; the Manager or CCF SAM may terminate the Sub-
Advisory Agreement upon 60 days' notice to the other parties. The
Management Agreement and the Sub-Advisory Agreement each will terminate
immediately and automatically upon its assignment.
CCF International Finance Corp. ("CCIF"), a wholly owned
subsidiary of CCF, was the adviser to Capstone European and received an
investment advisory fee equal to an annual rate of .65% of Capstone
European's average net assets. CCIF agreed, at least through February 1,
1995, to waive a portion of its fees, thereby reducing the amount payable
to CCIF to an annual rate of .50% of Capstone European's average net
assets.
Except as noted below, each of the Funds did not pay a management
fee. For the last three fiscal years, each Fund had the following
expenses:
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<PAGE>
For the Fiscal Years Ended
October 31,
--------------------------
1993 1992 1991
Equity Income Fund (1)
------------------ -- -- --
Advisory fees (gross of waiver) -- -- --
Expense reimbursement from -- -- --
Adviser
Advisory fees waived
Midcap Fund (2)
----------- -- -- --
Advisory fees (gross of waiver) -- -- --
Expense reimbursement from -- -- --
Adviser
Advisory Fees waived
Stock Fund
---------- $574,496 $332,843 $152,424
Advisory fees (gross of waiver) 244,604 234,231 210,020
Expense reimbursement from -- -- --
Adviser
Advisory Fees waived
Bond Market Fund (3)
---------------- -- -- --
Advisory fees (gross of waiver) -- -- --
Expense reimbursement from -- -- --
Adviser
Advisory Fees waived
S&P 500 Fund
------------ 5,476 (4) -- --
Advisory fees (gross of waiver) 30,614 (4) -- --
Expense reimbursement from -- (4) -- --
Adviser
Advisory Fees waived
European Fund
------------- 77,215 (5) 71,546 (5) 76,139 (5)
Advisory fees (gross of waiver) -- -- --
Expense reimbursement from 17,819 -- --
Adviser
Advisory Fees waived
(1) Equity Income Fund commenced operations on September 2, 1994.
(2) Midcap Fund commenced operations on November 12, 1993.
(3) Bond Market Index Fund commenced operations on November 30, 1993.
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<PAGE>
(4) For the period September 30, 1993 (commencement of operations) to
October 31, 1993.
(5) Advisory fee paid by Capstone European to CCIF.
Distribution Plan--Investor Shares. The Securities and Exchange
Commission ("SEC") has adopted Rule 12b-l under the 1940 Act ("Rule")
regulating the circumstances under which investment companies such as
Dreyfus/Laurel may, directly or indirectly, bear the expenses of
distributing their shares. The Rule defines distribution expenses to
include expenditures for "any activity which is primarily intended to
result in the sale of fund shares." The Rule, among other things,
provides that an investment company may bear such expenses only pursuant
to a plan adopted in accordance with the Rule. With respect to the
Investor Class shares of the Funds, Dreyfus/Laurel has adopted a
Distribution Plan ("Plan"), and may enter into Selling Agreements with
Service Agents pursuant to the Plan.
Under the Plan, Investor Class shares of each Fund may spend
annually up to 0.25% of the average of its net asset values for costs and
expenses incurred in connection with the distribution of, and shareholder
servicing with respect to, the Fund's Investor Class shares.
The Plan provides that a report of the amounts expended under the
Plan, and the purposes for which such expenditures were incurred, must be
made to Dreyfus/Laurel's Directors for their review at least quarterly.
In addition, the Plan provides that it may not be amended to increase
materially the costs which a Fund may bear for distribution pursuant to
the Plan without approval of a Fund's shareholders, and that other
material amendments of the Plan must be approved by the vote of a majority
of the Directors and of the Directors who are not "interested persons" of
Dreyfus/Laurel (as defined in the 1940 Act) and who do not have any direct
or indirect financial interest in the operation the Plan, cast in person
at a meeting called for the purpose of considering such amendments. The
Plan is subject to annual approval by the entire Board of Directors and by
the Directors who are neither interested persons nor have any direct or
indirect financial interest in the operation of the Plan, by vote cast in
person at a meeting called for the purpose of voting on the Plan. The
Plan is terminable, as to a Fund's class of shares, at any time by vote of
a majority of the Directors who are not interested persons and have no
direct or indirect financial interest in the operation of the Plan or by
vote of the holders of a majority of the outstanding shares of the such
class of the Fund.
With respect to the European Fund, Capstone European had adopted
a Service and Distribution Plan (the "Capstone Plan"), effective August 1,
1992, pursuant to which it used assets to finance activities relating to
the distribution of its shares to investors and provision of certain
stockholder services. The Capstone Plan permitted payments to be made by
Capstone European to its distributor, Capstone Asset Planning Company
("Asset Planning"), to reimburse it for expenditures incurred by it in
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<PAGE>
connection with the distribution of Capstone European shares to investors
and provision of certain stockholder services including but not limited to
the payment of compensation, including incentive compensation, to
securities dealers (which included Asset Planning itself) and other
financial institutions and organizations to obtain various distribution
related and/or administrative services for Capstone European. Under the
Capstone Plan, payments made to Asset Planning could not exceed an amount
computed at an annual rate of 0.35% of the average net assets of Capstone
European. Of this amount, Asset Planning could reallocate amounts up to
0.25% of Capstone European's average net assets Service Organizations
(which included Asset Planning).
The Distributor; Sub-Administrator. Premier Mutual Fund
Services, Inc. One Exchange Place, Boston, Massachusetts 02109)
("Premier"), a wholly-owned subsidiary of Institutional Administration
Services, Inc., serves as the Fund's distributor pursuant to an agreement
with Dreyfus effective October 17, 1994. Premier also acts as distributor
for other funds in the Dreyfus Family of Funds and for certain other
investment companies. Premier also serves as Sub-Administrator ("Sub-
Administrator") to the Funds pursuant to a Sub-Administration Agreement
effective October, 17, 1994.
With respect to European Fund, until October 31, 1993 Capstone
Asset Management Company served as Capstone European's administrator and
received a fee, computed daily and payable monthly, at an annual rate of
.35% of the Capstone European's average net assets. Capstone Asset
Management Company agreed, at least through February 1, 1995, to limit its
fees to a .25% annual rate. For the fiscal years ended October 31, 1993,
and 1992, Capstone Asset Management Company received $65,577 and $91,093,
respectively, in administration fees from Capstone European.
Suspension of Redemptions. The right of redemption may be
suspended or the date of payment postponed (a) during any period when the
NYSE 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 SEC 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 SEC by order
may permit to protect the Fund's shareholders.
Redemption Commitment. Each Fund has committed itself to pay in
cash all redemption requests by any shareholder of record of the Fund,
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 SEC. In
the case of requests for redemption in excess of such amount, the Board of
Directors reserves the right to make payments in whole or in part in
securities or other assets 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 this 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 would be incurred.
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<PAGE>
Custodian and Fund Accountant (European Fund). Boston Safe
Deposit & Trust Company, One Boston Place, Boston, Massachusetts 02109
("Boston Safe") serves as custodian and fund accountant for the European
Fund pursuant to a Custodian Agreement and Fund Accountant Agreement with
Laurel, dated November 1, 1993. Prior to effectiveness of the Investment
Management Agreement for its services as custodian to the European Fund,
Boston Safe was paid an annual fee of $20,000, a per security holding
charge of $5.00 per month, a monthly global safekeeping charge based on
asset level and country invested in, and an additional charge of $20.00
for each third party transaction. For its services as fund accountant,
Boston Safe was paid an annual fee of $20,000 and an annual asset-based
fee of .12% of the first $10 million of the European Fund's average daily
net assets, .10% on the next $10 million of average daily net assets and
.08% on average daily net assets over $20 million. In addition, Boston
Safe is reimbursed for out-of-pocket expenses that include wire fees,
telephone expenses, postage fee and courier services.
CCF served as the custodian for the CCF Capstone European with
respect to all securities owned by Capstone European and cash from the
sale of its securities. The cash from the purchase and sale of Capstone
European shares was held by National Westminister Bank, NJ. CCF charged
Capstone European $26,826 in 1990 for custodial services.
Custodian, Fund Accountant (All Funds, except the European Fund).
Mellon Bank serves as custodian and fund accountant with respect to each
Fund except the European Fund. Mellon Bank provides portfolio and
shareholder recordkeeping required for regulatory and financial reporting
purposes. Mellon Bank, as Custodian and Fund Accountant, has no part in
determining the investment policies of the Fund or which securities are to
be purchased or sold by the Fund.
Prior to the effectiveness of the Management Agreement for its
services as custodian and fund accountant Mellon Bank was paid an annual
fee of $30,000 per portfolio and, for all portfolios, an annual
administrative account maintenance fee of $ 10,000, an annual on-line fee
of $3,600, an asset-based fee of .02% of the first $500 million of
Dreyfus/Laurel's net assets and .01% of net assets over $500 million, plus
a specified transaction fee for each transaction.
Transfer and Dividend Disbursing Agent (All Funds). The
Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation, is the Fund's transfer and dividend disbursing agent. TSSG
has no part in determining the investment policies of the Fund or which
securities are to be purchased or sold by the Fund.
FEDERAL LAW AFFECTING MELLON BANK
The Glass-Steagall Act of 1933 prohibits national banks from
engaging in the business of underwriting, selling or distributing
securities and prohibits a member bank of the Federal Reserve System from
having certain affiliations with an entity engaged principally in the
business. The activities of Mellon Bank in informing its customers of,
24
<PAGE>
and performing, investment and redemption services in connection with a
Fund, and in providing services to a Fund as custodian and fund
accountant, as well as Dreyfus' investment advisory activities, may raise
issues under these provisions. Mellon Bank has been advised by counsel
that its activities contemplated under this arrangement are consistent
with Mellon Bank's statutory and regulatory obligations.
Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of such future statutes and regulations could prevent
Mellon Bank or Dreyfus from continuing to perform all or a part of the
above services for its customers and/or a Fund. If Mellon Bank or Dreyfus
were prohibited from serving a Fund in any of its present capacities the
Directors would seek an alternative provider(s) of such services.
PORTFOLIO TRANSACTIONS
All portfolio transactions of each Fund are placed on behalf of a
Fund by the Manager or in the case of European Fund, CCF SAM. Debt
securities purchased and sold by a Fund are generally traded on a net
basis (i.e., without commission) through dealers acting for their own
account and not as brokers, or otherwise involve transactions directly
with the issuer of the instrument. This means that a dealer (the
securities firm or bank dealing with a Fund) makes a market for securities
by offering to buy at one price and sell at a slightly higher price. The
difference between the prices is known as a spread. Other portfolio
transactions may be executed through brokers acting as agent. A Fund will
pay a spread or commissions in connection with such transactions. The
Manager, or in the case of European Fund CCF SAM, each uses its best
efforts to obtain execution of portfolio transactions at prices which are
advantageous to a Fund and at spreads and commission rates, if any, which
are reasonable in relation to the benefits received. The Manager, or in
the case of European Fund CCF SAM, also places transactions for other
accounts that it provides with investment advice.
Brokers and dealers involved in the execution of portfolio
transactions on behalf of Fund are selected on the basis of their
professional capability and the value and quality of their services. In
selecting brokers or dealers, the Manager, or in the case of European Fund
CCF SAM, each will consider various relevant factors, including, but not
limited to, the size and type of the transaction; the nature and character
of the markets for the security to be purchased or sold; the execution
efficiency, settlement capability, and financial condition of the broker-
dealer; the broker-dealer's execution services rendered on a continuing
basis; and the reasonableness of any spreads (or commissions, if any).
Any spread, commission, fee or other remuneration paid to an affiliated
broker-dealer is paid pursuant to Dreyfus/Laurel's procedures adopted in
accordance with Rule 17e-1 of the 1940 Act.
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<PAGE>
Brokers or dealers may be selected who provide brokerage and/or
research services to a Fund and/or other accounts over which the Manager,
or in the case of European Fund CCF SAM, or its affiliates exercise
investment discretion. Such services may include advice concerning the
value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or the purchasers or
sellers of securities; furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy
and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and
settlement).
The receipt of research services from broker-dealers may be
useful to the Manager, or in the case of European Fund CCF SAM, in
rendering investment management services to a Fund and/or its other
clients; and, conversely, such information provided by brokers or dealers
who have executed transaction orders on behalf of other clients of the
Manager, or in the case of European Fund CCF SAM, may be useful to these
organizations in carrying out their obligations to a Fund. The receipt of
such research services does not reduce these organizations' normal
independent research activities; however, it enables these organizations
to avoid the addition expenses which might otherwise be incurred if these
organizations were to attempt to develop comparable information through
their own staffs.
The Directors periodically review the Manager's and CCF SAM's
performance of responsibilities in connection with the placement of
portfolio transactions on behalf of a Fund and review the prices paid by
the Fund over representative periods of time to determine if they are
reasonable in relation to the benefits to the Fund.
Although the Manager and CCF SAM manage other accounts in
addition to the Funds, investment decisions for each Fund are made
independently from decisions made for these other accounts. It sometimes
happens that the same security is held by more than one of the accounts
managed by the Manager, or in the case of European Fund CCF SAM.
Simultaneous transactions may occur when several accounts are managed by
the same investment adviser, particularly when the same investment
instrument is suitable for the investment objective of more than one
account.
When more than one account is simultaneously engaged in the
purchase or sale of the same investment instrument, the prices and amounts
are allocated in accordance with a formula considered by the Manager, or
in the case of European Fund CCF SAM, to be equitable to each account. In
some cases this system could have a detrimental effect on the price or
volume of the investment instrument as far as a Fund is concerned. In
other cases, however, the ability of the Fund to participate in volume
transactions will produce better executions for the Fund. While the
Directors will continue to review simultaneous transactions, it is their
present opinion that the desirability of retaining the Manager, or in the
case of European Fund CCF SAM, as investment advisers to the Funds
26
<PAGE>
outweighs any disadvantages that may be said to exist from exposure to
simultaneous transactions.
Except as noted below, each of the Funds do not pay a stated
brokerage commission.
The brokerage commissions paid by the Stock Fund for fiscal years
ended October 31, 1993, 1992 and 1991 were $141,241, $90,162 and $37,000,
respectively. The principal reason for the increase in the Stock Fund's
brokerage commissions for the three years was an increase in assets.
For the period September 30, 1993 (commencement of operations) to
October 31, 1993, S&P 500 Fund paid brokerage commissions amounting to
$1,194.
Brokerage commissions paid by Capstone European on portfolio
transactions during the fiscal year ended October 31, 1993 totaled $65,168
which represented .62% of Capstone European's assets. Of that total,
payments were made to the following affiliates of CCIF, Capstone
European's previous adviser. CCF SAM and CCIF are both wholly owned
subsidiaries of CCF.
% of Total
% of Total Transactions
Brokerage Involving Payment
Broker Payments Commissions of Commission
------ -------- ----------- ----------------
CCF Frankfurt $12,606 19.34% 14.95%
CCF Geneva 3,918 6.01 6.31
Elysees Bourse 10,040 15.41 14.68
Brokerage commissions paid by Capstone European on portfolio
transactions during the fiscal year ended October 31, 1992, totaled
$31,228, which represented .17% of Capstone European's assets. Of that
total, payments were made to the following affiliates of CCIF:
% of Total
% of Total Transactions
Brokerage Involving Payment
Broker Payments Commissions of Commission
------ -------- ----------- ----------------
CCF Geneva $4,825 15.45% 15.20%
CCF Frankfurt 4,690 15.02 15.46
Elysees Bourse 3,849 12.32 13.36
CCF Milan 2,067 6.62 5.66
Brokerage commissions paid by Capstone European on portfolio
transactions during the fiscal year ended October 31, 1991 totaled
27
<PAGE>
$38,753, which represented .62% of Capstone European's assets. Of that
total, payments were made to the following affiliates of CCIF:
% of Total
% of Total Transactions
Brokerage Involving Payment
Broker Payments Commissions of Commission
------ -------- ----------- -----------------
Elysees Bourse $3,388 8.7% 10.8%
CCF Frankfurt 3,016 7.8 14.8
CCF Geneva 10,591 27.3 18.9
CCF Luxembourg 828 2.1 4.6
The percentage of Capstone European's aggregate dollar amount of
transactions involving the payment of commissions effected through
affiliates for the fiscal years ended October 31, 1993, 1992 and 1991 was
35.9%, 49.4% and 49.1%, respectively. During the fiscal years ended
October 31, 1993, 1992 and 1991 Capstone European also executed trades in
the amount of $107,436, $50,708 and $794,385, respectively, in which a
"mark-up" (the dealers profit) was included in the price of the
securities, which trades are excluded when calculating average commission
rates.
Portfolio Turnover. The portfolio turnover rate for each Fund is
calculated by dividing the lesser of a Fund's annual sales or purchases of
portfolio securities (exclusive of purchases and sales of securities whose
maturities at the tine of acquisition were one year or less) by the
monthly average value of securities in the Fund during the year.
The portfolio turnover rates for the last two years for each Fund
were:
Fiscal Year Ended October 31,
-----------------------------
1993 1992
---- ----
Stock Fund 64% 84%
Equity Income -- --
S&P 500 Fund (1) 22 --
European Fund -- --
Bond Market Fund 12 7
Midcap Fund -- --
(1) For the period September 30, 1993 (commencement of operations) to
October 31, 1993. Turnover calculation does not include in-kind purchases
of $22,472,314.
Those Funds without portfolio turnover figures had not commenced
operations as of October 31, 1993.
28
<PAGE>
NET ASSET VALUE
The Fund's net asset value per share is calculated on each
business day. A business day is any day on which the NYSE is open for
business. The Fund determines net asset value as of the close of business
of the regular session of NYSE (currently 4:00 p.m. Eastern time). The
holidays (as observed) on which the NYSE is closed currently are: New
Years Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
All Funds. Equity securities listed or traded on a stock
exchange, are valued at the latest sale price. If no sale is reported,
the mean of the latest bid and asked prices is used. Securities traded
over-the-counter are priced at the mean of the latest bid and asked prices
but will be valued at the last sale price if required by regulations of
the SEC. When market quotations are not readily available, securities and
other assets are valued at fair value as determined in good faith in
accordance procedures established by the Board of Directors.
Bonds are valued through valuations obtained from a commercial
pricing service or the most recent mean of the bid and asked prices
provided by investment dealers in accordance with procedures established
by the Board of Directors. Pursuant to a determination by
Dreyfus/Laurel's Board of Directors that such value represents fair value,
debt securities with maturities of 60 days or less are valued at amortized
cost.
For purposes of determining the Fund's net asset value, all
assets and liabilities initially expressed in foreign currency values will
be converted into U.S. dollar values at the mean between the bid and
offered quotations of such currencies against U.S. dollars as last quoted
by any recognized dealer. If an event were to occur after the value of a
portfolio instrument was so established but before the net asset value per
share is determined which is likely to materially change the net asset
value, then the portfolio instrument would be valued using fair value
considerations established by Dreyfus/Laurel's Board of Directors.
Securities for which market quotations are not readily available
are valued at fair value as determined in good faith and pursuant to
procedures approved by Dreyfus/Laurel's Board of Directors. Because of
the need to obtain prices as of the close of trading on the exchanges on
which portfolio securities are most frequently traded, the calculation of
net asset value may not take place contemporaneously with the
determination of the prices of the majority of the Fund's portfolio
securities.
European Fund. Equity securities which are traded on a Western
European securities exchange are valued at the last sale price on that
exchange or, if there is no recent last sale price available, at the last
current bid quotation. An equity security which is listed or traded on
more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security by CCF SAM. All
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<PAGE>
other equity securities not so traded are valued at the last sale price
prior to the time of valuation.
PERFORMANCE CALCULATIONS
All Funds. Each Fund computes average annual total return by
using a standardized method required by the SEC. Average annual total
return is computed by finding the average annual compounded rates of
return on hypothetical initial investment of $1,000 over the periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
n
P(1+T) = ERV
Where: P = $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end
of the year or period
The calculation assumes (1) the deduction of the maximum sales
load (and any other charges deducted, if any, from payment) and all
recurring fees that are charged to all shareholder accounts, and (2) the
reinvestment of all dividends and other distributions by the Fund at the
price stated in the Prospectus on the reinvestment dates during the
period.
Average annual total return (expressed as a percentage) for
Investor Shares of each Fund for the periods noted were:
Annualized Total Return for the
Periods Ended April 30, 1994
-------------------------------
Fund: 1 Year 5 Years 10 Years Inception
---- ------ ------ -------- ---------
Stock Fund -- -- -- (4/6/94)
S&P 500 Fund -- -- -- (4/18/94)
Equity Income Fund -- -- -- (9/02/94)
European Fund -- -- -- (4/14/94)
Bond Index Fund -- -- -- (4/28/94)
Midcap Fund -- -- -- (4/6/94)
Inception dates appear in parentheses following the annual total return
since inception.
Average annual total return (expressed as a percentage) for Class
R shares of each Fund for the periods noted were:
30
<PAGE>
Annualized Total Return for the
Periods Ended April 30, 1994
-------------------------------
Fund: 1 Year 5 Years 10 Years Inception
---- ------ ------- ------- ---------
Stock Fund 6.84% 13.42% -- 14.46%
(12/31/87)
S&P 500 Fund -- -- -- (9/30/93)
Equity Income Fund -- -- -- (9/02/94)
European Fund 13.03 7.71 -- 5.12
(1/5/87)
Bond Index Fund -- -- -- (11/30/93)
Midcap Fund -- -- -- (11/12/93)
Inception dates appear in parentheses following the annual total return
since inception.
Certain Funds may also advertise yield from time to time. Yields
are computed by using standardized methods of calculation required by the
SEC. Yields are calculated by dividing the net investment income per
share earn during a 30-day (or one month) period by the maximum offering
price per share on the last day of the period, according to the following
formula:
6
YIELD = 2[a-b/cd+1) -1]
Where: a = dividends and interest earned during
the period;
b = expenses accrued for the period (net of
reimbursements);
c = average daily number of shares outstanding during
the period that were entitled to receive
dividends; and
d = the maximum offering price per share
on the last day of the period.
The 30-day yield for each Fund quoting yield for the period ended
April 30, 1994:
Bond Market Fund (Class R) 5.97%
Performance information for the Funds may be compared, in reports
and promotional literature, to indexes including, but not limited to: (i)
the Morgan Stanley European Index; (ii) the Standard & Poor's 500
Composite Stock Price Index ("S&P 500"), the Dow Jones Industrial Average
("DJIA"), or other appropriate unmanaged domestic or foreign indices of
performance of various types of investments so that investors may compare
31
<PAGE>
the Fund's results with those of indices widely regarded by investors as
representative of the securities markets in general; (iii) other groups of
mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or
other criteria; (iv) the Consumer Price Index (a measure of inflation) to
assess the real rate of return from an investment in the Fund; and (v)
products managed by a universe of money managers with similar country
allocation and performance objectives. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions or
administrative and management costs and expenses.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
The term "regulated investment company" does not imply the supervision of
management or investment practices or policies by a government agency.
Federal Tax--General. To qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as
amended, ("Code") each Fund -- each of which is treated as a separate
corporation for federal tax purposes-- must distribute to shareholders for
each taxable year at least 90% of its investment company taxable income
(generally consisting of taxable net investment income, net short-term
capital gain and, in the case of European Fund, net gains from certain
foreign currency transactions) and must meet several additional
requirements. For each Fund these requirements include the following:
(1) the Fund must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies or other income (including gains from options, futures, or
forward contracts) derived with respect to its business of investing in
securities or other currencies ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale
or other disposition of securities held for less than three months -
options, futures, or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward
contacts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); (3) at the close of each quarter of
the Fund's taxable year, at least 50% of the value of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed
5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities; and (4) at
the close of each quarter of the Fund's taxable year, not more than 25% of
the value its total assets may be invested in securities (other than U.S.
government securities or securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Fund in October,
November or December of any year and payable to shareholders of record on
32
<PAGE>
a date in any of those months are deemed to have been paid by the Fund and
received by the shareholders on December 31 of the year if the
distributions are paid by the Fund during the following January.
Accordingly, those distributions will be taxed to shareholders for the
year in which that December 31 falls.
If Fund shares are sold at a loss after being held six months or
less the loss will be treated as a long-term, instead of short-term,
capital loss to the extent of capital gain distributions on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any distribution, the shareholder will pay full price
for the shares and receive some portion of the price back as a taxable
dividend or capital gain distribution.
If a Fund retains net capital gain (the excess of net long-term
capital gains over net short-term capital loss) for reinvestment, although
it has no plans to do so, the Fund may elect to treat such amounts as
having been distributed to its shareholders. As a result, the Fund's
shareholders would be subject to tax on the undistributed net capital
gain, would be able to claim their proportionate share of the federal
income tax paid by the Fund on that gain as a credit against their own
federal income tax liabilities, and would be entitled to an increase in
their basis for their Fund shares.
Hedging Transactions. Certain Funds may employ hedging
strategies, such as writing (selling) and purchasing options and futures
contracts and entering into forward contracts. The use of these
strategies involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses a
Fund realizes in connection therewith. Income from foreign currencies
(except certain gains therefrom may be excluded by future regulations) and
income from transactions in options, futures and forward contracts derived
by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under the Income
Requirement. However, income from disposition of options and futures
contracts, other than those on foreign currencies, will be subject to the
Short-Short Limitation if they are held for less than three months.
Income from the disposition of foreign currencies, and options, futures
and forward contracts thereon, that are not directly related to a Fund's
principal business of investing in securities (or options and futures with
respect thereto) also will be subject to the Short-Short Limitation if
they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value
of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of an offsetting hedging
position during the period of the hedge for purposes of determining
whether the Fund satisfies the Short-Short Limitation. Thus, only the net
gain (if any) from the designated hedge will be included in gross income
for purposes of that limitation. Each Fund will consider, when it engages
in hedging strategies, whether it should seek to qualify for this
treatment. To the extent a Fund does not qualify therefor, it may be
33
<PAGE>
forced to defer the closing out of certain options, futures and forward
contracts beyond the time when it otherwise would be advantageous to do
so, in order for the Fund to continue to qualify as a RIC.
Certain futures contracts in which some Funds may invest are
"section 1256 contracts." Section 1256 contracts held by a Fund at the
end of each taxable year are "marked-to-market" (that is, treated as sold
for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses are treated as though they were
realized. Sixty percent of any net gain or loss recognized on these
deemed sales, and 60% of any net realized gain or loss from any actual
sales of section 1256 contracts, are treated as long-term capital gain or
loss, and the balance is treated as short-term capital gain or loss.
These contracts also may be marked-to-market for purposes of the 4% excise
tax described in the Prospectuses ("Excise Tax") and for other purposes.
Certain futures contracts entered into by a Fund may result in
"straddles" for federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by a Fund on straddle
positions. In addition, losses realized by the Fund on straddle positions
may be deferred under the straddle rules. If a Fund makes certain
elections, the amount, character and timing of the recognition of gains
and losses from the affected straddle positions will determined under
rules that vary according to the elections made.
Passive Foreign Investment Companies (European Fund). The Fund
may invest in the stock of foreign corporations that are classified as
"passive foreign investment companies" ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
passive income. An "excess distribution" received with respect to a
PFIC's stock and gain from the disposition of such stock will be treated
as having been realized ratably over the entire period during which the
Funds held the PFIC stock. The Fund itself will be subject to tax on the
portion, if any, of the excess distribution and gain that is allocated to
the portion of that holding period in prior taxable years (and an interest
factor will be added to the tax, as if the tax had actually been payable
in those prior taxable years), even if the Fund distributes the
corresponding income to shareholders. All excess distributions and such
gains are taxable as ordinary income.
The Fund may elect alternative tax treatment with respect to any
PFIC stock holds. Under the election, the Fund generally would be
required to include in their gross income each year their share of the
PFIC earnings and capital gains of a PFIC for the year regardless of
whether any distributions are received from the PFIC, and the special
rules in the preceding paragraph would not apply; the amount so included
in the Fund's income would have to be distributed to that Fund's
shareholders to satisfy the Distribution Requirement and to avoid
imposition of the Excise Tax. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
34
<PAGE>
Three bills passed by Congress in 1991 and 1992 and vetoed by
Former President Bush, would have substantially modified the taxation of
shareholders of foreign corporations, including eliminating the provisions
described above dealing with PFICs and replacing them (and other
provisions) with a regulatory scheme involving entities called "passive
foreign corporations." The "Tax Simplification Bill of 1993," approved
November 1993 by the House Ways and Means Committee, contains the same
modifications. It is unclear at this time whether, and in what form, the
proposed modifications may be enacted into law.
Pursuant to proposed regulations, open-end RICs, such as the
Fund, would be entitled to elect to "mark-to-market" their stock in
certain PFICs. "Marking-to-Market," in this context, means recognizing as
gain for each taxable year the excess, as of the end of that year, of the
fair market value of the PFIC's stock over the adjusted basis in that
stock (including mark-to-market gain for each prior year for which an
election was in effect).
Foreign Currency Gains and Losses (European Fund). Gains and
losses attributable to fluctuations in foreign currency exchange rates
that occur between the time the Fund accrues dividends, interest or other
receivables, or expenses or other liabilities, denominated in a foreign
currency and the time that Fund actually collects the receivables or pays
the liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on the disposition of a debt security denominated in a foreign
currency, or of an option or forward contract on a foreign currency, gains
or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security, option, or contract and
the date of disposition also are treated as ordinary gain or loss. These
gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders.
State and Local Taxes. Depending a Fund's activities in states
and localities in which its offices are maintained, in which its agents or
independent contractors are located, or in which it is otherwise deemed to
be conducting business, the Fund may be subject to the tax laws of such
states or localities. Shareholders are advised to consult their tax
advisers concerning the application of state and local taxes.
Foreign Taxes (European Fund). Dividends and interest received
by the Fund may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions that would reduce the yield on
its securities. Tax conventions between certain countries and the United
States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of
investment by foreign investors. If more than 50% of the value of the
Fund's total assets at the close of taxable year consists of securities of
foreign corporations, it will be eligible to, and may, file an election
with the Internal Revenue Service that will enable its shareholders, in
effect, to receive the benefit of the foreign tax credit with respect to
any foreign or U.S. possessions' income taxes paid by it. Pursuant to the
election, that Fund would treat those taxes as dividends paid to
35
<PAGE>
shareholders and each shareholder would be required to (1) include in
gross income, and treat as paid by him or her, his or her proportionate
share of those taxes, (2) treat his or her share of those taxes and of any
dividend paid by that Fund that represents income from foreign or U.S.
possession sources as his or her own income from those sources and (3)
either deduct the taxes deemed paid by him or her in computing his or her
taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against his or her federal income tax.
No deduction for foreign taxes may be claimed by a shareholder who does
not itemize deductions. Generally, a credit for foreign taxes may not
exceed the shareholder's federal income tax attributable to his total
foreign source taxable income. The European Fund will report to its
shareholders shortly after each taxable year their respective shares of
the income from sources within, and taxes paid to, foreign countries and
U.S. possessions if it makes this election.
Foreign Shareholders - U.S. Federal Income Taxation. U.S.
federal income taxation of a shareholder who, as to the United States, is
a non-resident alien individual, a foreign trust or estate, a foreign
corporation or a foreign partnership (a "foreign shareholder"), depends on
whether the income from a Fund is "effectively connected" with a U.S.
trade or business carried on by the shareholder, as discussed generally
below. Special U.S. federal income tax rules that differ from those
described below may apply to certain foreign persons who invest in a Fund.
For example, the tax consequences to a foreign shareholder entitled to
claim the benefits of a applicable tax treaty may be different from those
described below. Foreign shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
Foreign Shareholders - Income Not Effectively Connected. If the
income from a Fund is not effectively connected with a U.S. trade or
business carried on by the foreign shareholder, distributions of
investment company taxable income generally will be subject to U.S.
federal withholding tax of 30% (or lower treaty rate) on the gross amount
of the distribution. Foreign shareholders also may be subject to U.S.
federal withholding tax on income resulting from any election by a Fund to
treat foreign taxes paid by it as paid by shareholders (see discussion
above), but foreign shareholders will not be able to claim a credit or
deduction for the foreign taxes treated as having been paid by them.
Capital gains realized by foreign shareholders on the sale of
Fund shares and distributions to them of net capital gain, as well as
amounts retained by the Fund that are designated as undistributed capital
gains, generally will not be subject to U.S. federal income <<MARK>>>tax
unless the foreign shareholder is a non-resident alien individual and is
physically present in the United States for more than 182 days during the
taxable year. However, this rule only applies in exceptional cases,
because any individual present in the United States for more than 182 days
during the taxable year generally is treated as a resident for U.S.
federal income tax purposes on his worldwide income at the graduated rates
applicable to U.S. citizens, rather than the 30% U.S. federal withholding
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tax rate. In the case of certain foreign shareholders, a Fund may be
required to withhold U.S. Federal income tax at a rate of 31% of capital
gain distributions and of the gross proceeds from a redemption of Fund
shares unless the shareholder furnishes the Fund with a certificate
regarding the shareholder's foreign status.
Foreign Shareholders - Effectively Connected Income. If income
from a Fund is effectively connected with a U.S. trade or business carried
on by a foreign shareholder, then distributions to that shareholder and
any gains realized by that shareholder on the disposition the Fund shares
will be subject to U.S. federal income tax at the graduated rates
applicable to U.S. citizens and domestic corporations, as the case may be.
Foreign shareholders also may be subject to the branch profits tax.
Foreign Shareholders - Estate Tax. Foreign individuals generally
are subject to U.S. federal estate tax on their U.S. situs property, such
as shares of a Fund, that they own at the time of their death. Certain
credits against that tax and relief under applicable tax treaties may be
available.
Pennsylvania Personal Property Tax Exemption. The Dreyfus/Laurel
has obtained a Certificate of Authority to do business as a foreign
corporation in Pennsylvania. In the opinion of counsel, shares of The
Dreyfus/Laurel are exempt from Pennsylvania personal property taxes.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended October 31,
1993, including notes to the financial statements and supplementary
information and the Report of Independent Auditors, are included in the
Annual Report to shareholders. A copy of the Annual Report, as well as
the Funds' Semi-Annual Report for the six months ended April 30, 1994
(unaudited), accompanies this Statement of Additional Information. The
financial statements for the Annual Report and the Semi-Annual Report are
incorporated herein by reference.
OTHER INFORMATION
Auditor. KPMG Peat Marwick LLP was appointed by the Directors to
serve as each Fund's independent auditors for the year ending October 31,
1994, providing audit services including (1) examination of the annual
financial statements, (2) assistance, review and consultation in
connection with the SEC and (3) review of the annual federal income tax
return and the Pennsylvania excise tax return filed on behalf of
Dreyfus/Laurel Funds, Inc. Tait, Weller & Baker served as independent
auditors to the Capstone European Fund, predecessor to the Dreyfus
European Fund, for the fiscal year ended October 31, 1993.
Legal Counsel. Kirkpatrick & Lockhart, 1800 M Street, N.W., South
Lobby - 9th Floor, Washington, D.C. 20036, has passed upon the legality of
the shares offered by the Prospectuses and this Statement of Additional
Information.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Municipal and Debt Instruments Rating
-------------------------------------
Moody's Investors Service. Inc. (Moody's):
-----------------------------------------
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 exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
AA -- Bonds which are rated AA are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in AAA
Securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in AAA securities.
A -- Bonds rated A possess many favorable investment attributes
and are considered "upper medium grade obligations."
Those Bonds in the AA and A group which Moody's believes possess
the strongest investment attributes are designated by the symbols AA 1 and
A 1.
Standard & Poor's Ratings Group ("S&P"):
---------------------------------------
AAA -- This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very strong, and
in the majority of instances they differ from AAA issues only in small
degree.
A -- Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
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Plus (+) or Minus (-): The AA rating may be modified by the
addition of a plus or minus sign to show relative standing within the AA
rating category.
Commercial Paper Ratings
------------------------
Moody's:
-------
Commercial paper rated Prime by Moody's is based upon its
evaluation of many factors including: (1) management of the issuer; (2)
the issuer's industry or industries and the speculative-type risks which
may be inherent in certain areas; (3) the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality
of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist
with the issue; and (8) recognition by the management of obligations which
may be present or may arise as a result of public interest questions and
preparations to meet such obligations. Relative differences in these
factors determine whether the issuer's commercial paper is rated Prime-1,
Prime-2, or Prime-3.
Prime-1 indicates a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: (1) leading market positions
in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate
reliance on debt and ample asset protection; (4) broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
(5) well established access to a range of financial markets and assured
sources of alternative liquidity.
Prime-2 indicates a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
S&P
---
Commercial paper rated by S&P has the following characteristics:
liquidity ratios adequate to meet cash requirements. Long-term senior
debt is rated A or better. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically,
the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management
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are unquestioned. Relative strength or weakness of the above factors
determine whether the issuer's commercial paper is rated A-1, A-2, or A-3.
A-1 -- This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this
designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1.
Fitch Investors Service. Inc. ("Fitch"):
--------------------------------------
Commercial paper rated by Fitch reflects Fitch's current
appraisal of the degree of assurance of timely payment of such debt. An
appraisal results in the rating of an issuer's paper as F-1, F-2, F-3, or
F-4.
F-1 -- This designation indicates that the commercial paper is
regarded as having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than those issues
rated F- 1.
Duff and Phelps. Inc.:
---------------------
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities of under one year including commercial paper,
the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and
current maturities of long-term debt. Asset-backed commercial paper is
also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash
from operations, but also access to alternative sources of funds including
trade credit, bank lines, and the capital markets. An important
consideration is the level of an obligor's reliance on short-term funds on
an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings
is the refinement of the traditional '1' category. The majority of
short-term debt issuers carry the highest rating, yet quality differences
exist within that tier. As a consequence, Duff & Phelps has incorporated
gradations of 'l+' (one plus) and '1-' (one minus) to assist investors in
recognizing those differences.
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Duff l+ -- Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1 -- Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1 -- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk
factors are very small.
Good Grade
Duff 2 -- Good certainty of timely payment. Liquidity factors
and company fundamental are sound. Although ongoing funding needs may
enlarge total financing requirements, access capital markets is good.
Risk factors are small.
Satisfactory Grade
Duff 3 -- Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment expected.
Non-Investment Grade
Duff 4 -- Speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.
Default
Duff 5 -- Issuer failed to meet scheduled principal and/or
interest payments.
IBCA. Inc.:
----------
In addition to conducting a careful review of an institution's
reports and publish figures, IBCA's analysts regularly visit the companies
for discussions with senior management. These meetings are fundamental to
the preparation of individual reports and ratings. To keep abreast of any
changes that may affect assessments, analysts maintain contact throughout
the year with the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover,
which is essential to maximize the value of their meetings with management
and to properly analyze a company written materials. They also have a
thorough knowledge of the laws and accounting practices that govern the
operations and reporting of companies within the various countries.
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Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While these data cannot be
disclosed in reports, they are taken into account when assigning IBCA's
ratings. Before dispatch to subscribers, a draft of the report submitted
to each company to permit correction of any factual errors and to enable
clarification of issues raised.
IBCA's Rating Committees meet at regular intervals to review all
ratings and to ensure that individual ratings are assigned consistently
for institutions in all the countries covered. Following the Committee
meetings, ratings are issued directly to subscribers. At the same time the
company is informed of the ratings as a matter of courtesy, but not for
discussion.
Al+ -- Obligations supported by the highest capacity for timely
repayment.
Al -- Obligations supported by a very strong capacity for timely
repayment.
A2 -- Obligations supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
B1 -- Obligations supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in
business, economic, or financial conditions than for obligations in higher
categories.
B2 -- Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial
conditions.
C1 -- Obligations for which there is an inadequate capacity to
ensure timely repayment.
D1 -- Obligations which have a high risk of default or which are
currently in default.
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