STATEMENT OF ADDITIONAL INFORMATION
April 4, 1994
(as revised December 19, 1994)
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. ("Dreyfus/Laurel"), an open-end diversified investment company
that offers shares of common stock of these Funds. Shares of the Funds
are offered without sales commissions.
Prime Money Market Fund ("Prime Fund")
U.S. Treasury Money Market Fund ("U.S. Treasury Fund")
Tax-Exempt Money Market Fund ("Tax-Exempt Fund")
Institutional Prime Money Market Fund ("Institutional Prime
Fund")
Institutional Government Money Market Fund ("Institutional
Government Fund")
Institutional U.S. Treasury Money Market Fund ("Institutional
U.S. Treasury Fund")
Institutional U.S. Treasury Only Money Market Fund
("Institutional Treasury Only Fund")
Institutional Short-Term Bond Fund ("Institutional Short-Term
Bond Fund")
This Statement of Additional Information is not a prospectus and
should be read only in conjunction with each of the Fund s current
prospectus, dated April 4, 1994. A copy of the Prospectus is available
from Premier Mutual Fund Services, Inc., One Exchange Place, Boston, MA
02109.
<PAGE>
TABLE OF CONTENTS
Page
----
General Information . . . . . . . . . . . . . . . . . . . . . . 1
Investment Information and Risk Factors . . . . . . . . . . . . . . 1
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . 11
Controlling Shareholders . . . . . . . . . . . . . . . . . . . . . . 13
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . 13
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . 15
Investment Management and Other Services . . . . . . . . . . . . . . 17
Federal Law Affecting Mellon Bank . . . . . . . . . . . . . . 21
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . 22
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . 24
Dividends, Other Distributions and Taxes . . . . . . . . . . . . . . 25
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 29
Other Information . . . . . . . . . . . . . . . . . . . . . . 30
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
- 2 -
<PAGE>
GENERAL INFORMATION
Tax-Exempt Fund. The Tax-Exempt Fund may invest more than 25% of
its assets in industrial development bonds, in participation interests
therein issued by banks, and in municipal securities and other obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only
by the assets or revenues of the entity, the entity will be deemed to be
the sole issuer of the security. Similarly, in the case of an industrial
development bond backed only by the assets or revenues of the non-
governmental user, the non-governmental user will be deemed to be the sole
issuer of the bond.
The Tax-Exempt Fund will invest in securities, including the
foregoing types of securities, only if the investments are of a type which
would satisfy the requirements of Rule 2a-7 promulgated under the
Investment Company Act of 1940 ("1940 Act") and only to the extent
permitted by the Tax-Exempt Fund's investment limitations. Accordingly,
if the creating agency, authority, instrumentality or other political
subdivision or some other entity, such as an insurance company or other
corporate obligor, guarantees a security purchased by the Tax-Exempt Fund
or a bank issues a letter of credit in support of a security purchased by
the Tax-Exempt Fund, the Fund will not purchase any security which, as to
75% of the value of all securities held by the Fund, would result in the
value of all securities issued or guaranteed by a single guarantor or
issuer of letters of credit exceeding 10% of the total value of the Fund's
assets.
The achievement of the Tax-Exempt Fund's investment objectives is
dependent in part on the continuing ability of the issuers of municipal
securities in which the Fund invests to meet their obligations for the
payment of principal and interest when due. Municipal securities
historically have not been subject to registration with the Securities and
Exchange Commission ("SEC"), although there have been proposals which
would require registration in the future.
Obligations of issuers of municipal securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors. In addition, the obligations of such issuers
may become subject to laws enacted in the future by Congress or state
legislatures, or referenda extending the time for payment of principal
and/or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. There is
also the possibility that, as a result of litigation or other conditions,
the ability of any issuer to pay, when due, the principal of and interest
on its municipal securities may be materially affected.
<PAGE>
INVESTMENT INFORMATION AND RISK FACTORS
Municipal Securities (Tax-Exempt Fund). The municipal securities
in which the Tax-Exempt Fund will invest are limited to those obligations
which at the time of purchase:
1. are backed by the full faith and credit of the United
States; or
2. are municipal notes rated MIG-1/VMIG-1 or MIG-2/VMIG-2 by
Moody's Investors Service, Inc. ("Moody's") or SP-1 or
SP-2 by Standard & Poor's Ratings Group ("S&P"), or, if
not rated, are of equivalent investment quality as
determined by Dreyfus under guidelines approved by the
Board of Directors or are obligations of an issuer which
has outstanding municipal bonds rated Aa or higher by
Moody's or Aa or higher by S&P; or
3. are municipal bonds rated Aa or higher by Moody's or AA
or higher by S&P or, if not rated, are of equivalent
investment quality as determined by Dreyfus under
guidelines approved by the Board of Directors or are
obligations of an issuer which has outstanding municipal
notes rated MIG-1/VMIG-1 or MIG-2/VMIG-2 by Moody's or
SP-1 or SP-2 by S&P; or
4. are other types of municipal securities, provided that
such obligations are rated Prime-2 or higher by Moody's
or A-2 or higher by S&P or determined by Dreyfus to be of
comparable quality pursuant to guidelines approved by the
Board of Directors (see the Appendix for a description of
these ratings.)
The municipal securities in which the Tax-Exempt Fund may invest
include municipal notes, short-term municipal bonds and municipal leases.
Municipal notes are generally used to provide for the issuer's short-term
capital needs and generally have maturities of one year or less. Examples
include tax anticipation and revenue anticipation notes which generally
are issued in anticipation of various seasonal revenues, bond anticipation
notes, construction loan notes and tax exempt commercial paper. Short-
term municipal bonds may include "general obligation bonds," which are
secured by the issuer's pledge of its faith, credit and taxing power for
payment of principal and interest, "revenue bonds," which are generally
paid from the revenues of a particular facility or a specific excise or
other source and "industrial revenue bonds," which are issued by or on
behalf of public authorities to provide funding for various privately
operated industrial and commercial facilities. "Municipal leases," which
may take the form of a lease or an installment purchase or conditional
sale contract, are issued by state and local governments and authorities
to acquire a wide variety of equipment and facilities such as fire and
sanitation vehicles, telecommunications equipment and other capital
assets.
- 2 -
<PAGE>
Variable Rate Obligations (Tax-Exempt Fund). The interest rates
payable on certain municipal securities, including municipal leases, in
which the Tax-Exempt Fund may invest, called "variable rate" obligations,
are not fixed and may fluctuate based upon changes in market rates. The
interest rate payable on a variable rate municipal security is adjusted
either at predesignated periodic intervals or whenever there is a change
in the market rate to which the security's interest rate is tied. Other
features may include the right whereby the Tax-Exempt Fund may demand
prepayment of the principal amount of the obligation prior to its stated
maturity and the right of the issuer to prepay the principal amount prior
to maturity. The main benefit of variable rate municipal securities is
that the interest rate adjustment minimizes changes in the market value of
the obligation. As a result, the purchase of variable rate municipal
securities enhances the ability of the Tax-Exempt Fund to maintain a
stable net asset value per share and to sell an obligation prior to
maturity at a price approximating the full principal amount of the
obligation. The payment of principal and interest by issuers of certain
municipal securities purchased by the Tax-Exempt Fund may be guaranteed by
letters of credit or other credit facilities offered by banks or other
financial institutions. Such guarantees will be considered in determining
whether a municipal security meets the Tax-Exempt Fund's investment
quality requirements.
Variable rate obligations purchased by the Tax-Exempt Fund may
include participation interests purchased by the Tax-Exempt Fund from
banks, insurance companies or other financial institutions and variable
rate obligations that are backed by irrevocable letters of credit or
guarantees of banks. The Tax-Exempt Fund can exercise the right, on not
more than thirty days' notice, to sell such an instrument back to the bank
from which it purchased the instrument and draw on the letter of credit
for all or any part of the principal amount of the Tax-Exempt Fund's
participation interest in the instrument, plus accrued interest, but will
do so only (i) as required to provide liquidity to the Tax-Exempt Fund,
(ii) to maintain a high quality investment portfolio, or (iii) upon a
default under the terms of the demand instrument. Banks and other
financial institutions retain portions of the interest paid on such
variable rate obligations as their fees for servicing such instruments and
the issuance of related letters of credit, guarantees and repurchase
commitments. With respect to 75% of the Tax-Exempt Fund's net assets, no
single bank will issue its letters of credit with respect to variable rate
obligations or participation interests therein covering more than 10% of
the total assets of the Fund. Dreyfus will monitor the pricing, quality
and liquidity of variable rate demand obligations and participation
interests therein held by the Tax-Exempt Fund on the basis of published
financial information, rating agency reports and other research services
to which the Tax-Exempt Fund may subscribe.
Stand-by Commitments (Tax-Exempt Fund). The Tax-Exempt Fund may
purchase municipal securities together with the right to resell them to
the seller at an agreed-upon price or yield within specified periods prior
to their maturity dates. The right to resell is commonly known as a
"stand-by commitment," and the aggregate price which the Tax-Exempt Fund
- 3 -
<PAGE>
pays for securities with a stand-by commitment may be higher than the
price which otherwise would be paid. The primary purpose of this practice
is to permit the Tax-Exempt Fund to be as fully invested as practicable in
municipal securities while preserving the necessary flexibility and
liquidity to meet unanticipated redemptions. In this regard, the Tax-
Exempt Fund acquires stand-by commitments solely to facilitate portfolio
liquidity and does not exercise its rights thereunder for trading
purposes. In connection with stand-by commitments, the Tax-Exempt Fund
will segregate on the Fund's records cash or liquid high-grade debt
obligations of the Fund in an amount at least equal to the commitments.
On delivery dates under the commitments, the Tax-Exempt Fund will meet its
obligations from maturing securities, sales of securities held in a
separate account or other available sources of cash. Since the value of a
stand-by commitment is dependent on the ability of the stand-by commitment
writer to meet its obligation to repurchase, the Tax-Exempt Fund's policy
is to enter into stand-by commitment transactions only with municipal
securities dealers which are determined to present minimal credit risks as
determined by Dreyfus.
The acquisition of a stand-by commitment does not affect the
valuation or maturity of the underlying municipal securities which
continue to be valued in accordance with the amortized cost method.
Stand-by commitments acquired by the Tax-Exempt Fund are valued at zero in
determining net asset value. When the Tax-Exempt Fund pays directly or
indirectly for a stand-by commitment its cost is reflected as unrealized
depreciation for the period during which the commitment is held. Stand-by
commitments do not affect the average weighted maturity of the Fund's
portfolio of securities.
Floating Rate Securities (Prime, Tax-Exempt, and Institutional
Short-Term Bond Funds). A floating rate security is one whose terms
provide for the automatic adjustment of interest rate 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 (Prime, Tax-Exempt, Institutional Prime
and Institutional Short-Term Bond 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
- 4 -
<PAGE>
obligations of domestic banks. These risks are discussed in the
Prospectus.
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 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 Prime, Tax-Exempt,
Institutional Prime, Institutional Government, and Institutional Short-
Term Bond 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 for 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 as set forth above, since it is
not obligated to do so by law.
Mortgage Pass-Through Certificates (Prime, Tax-Exempt,
Institutional Prime, Institutional Government, and Institutional Short-
Term Bond Funds). 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 buyers 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 governmental
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 and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers also create pass-
- 5 -
<PAGE>
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.
(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 prepayments) of
principal and interest owed by the individual mortgagors, net of fees paid
to GNMA and to 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. The 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. The GNMA guarantee is
backed by the full faith and credit of the United States, and the 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.
- 6 -
<PAGE>
The market value of mortgage-related securities depends on, among
other things, the level of interest rates, the certificates' coupon rates
and the payment history of the mortgagors of the mortgages in the
underlying mortgages.
Repurchase Agreements (All Funds except Institutional Treasury
Only Fund). 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 on 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. Dreyfus 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 Dreyfus/Laurel s Board of Directors.
Reverse Repurchase Agreements (Prime, Tax-Exempt, Institutional
Prime, and Institutional Short-Term Bond Funds). A Fund may enter into
reverse repurchase agreements to meet redemption requests where the
liquidation of portfolio securities is deemed by Dreyfus 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.
- 7 -
<PAGE>
When-Issued Securities (All Funds). New issues of U.S. Treasury
and Government securities are often offered on a when-issued basis. This
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 a 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 of 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 obligations 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, Dreyfus
- 8 -
<PAGE>
considers all relevant factors and circumstances including the
creditworthiness of the borrower.
Futures Contracts and Options (Intermediate and Institutional
Short-Term Bond Funds). 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 each index 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 or 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
- 9 -
<PAGE>
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
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 at 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
futures and options contracts are bought and sold.
Restrictions on the Use of Futures Contracts and Options. 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 in 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 all other assets of the Fund that are
illiquid or are not otherwise readily marketable, would exceed 15% of the
- 10 -
<PAGE>
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 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. 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 be 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 national futures exchanges 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
in 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
- 11 -
<PAGE>
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
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, Dreyfus 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 sustained 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 contracts 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 trades 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 (Prime, Tax-Exempt, Institutional Prime, and
Institutional Short-Term Bond 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 purchaser
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
- 12 -
<PAGE>
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, Dreyfus may determine that Section 4(2) paper is liquid for
the purposes 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 except
that the Institutional Treasury Only Fund has only adopted limitations 2,
4, 5, 6 and 7 noted below. A Fund may not change any of these fundamental
investment limitations or its investment objective 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
- 13 -
<PAGE>
companies that engage in real estate business or invest or deal
in real estate or interests therein).
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, except that the Institutional Treasury Only Fund
has only adopted limitations 1, 2, 4, 8 and 9 noted below. 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 (Funds, other
than the Institutional Short-Term Bond Fund, may not, however
purchase and sell the securities of companies engaged in the
exploration, development, production, refining, transporting, and
marketing of oil, gas or minerals).
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
- 14 -
<PAGE>
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.
6. The Institutional Short-Term Bond Fund will not 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 the trading markets for the
specific security.
7. None of the Prime, U.S. Treasury, Tax-Exempt, Institutional
Prime, Institutional Government and Institutional U.S. Treasury
Funds will invest more than 10% 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 the trading markets for the specific security.
8. No Fund may invest in securities of other investment companies,
except as they may be acquired as part of a merger, consolidation
or acquisition of assets and except to the extent otherwise
permitted by the 1940 Act.
9. No Fund shall purchase any security while borrowings representing
more than 5% of the Fund's total assets are outstanding.
10. No Fund will purchase warrants if at the time of such purchase:
(a) more than 5% of the 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 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).
11. 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%
- 15 -
<PAGE>
of its total assets except that: (a) this limitation shall not
apply to standby commitment, and (b) this limitation shall not
apply to a Fund's transactions in futures contracts and related
options.
CONTROLLING SHAREHOLDERS
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,
84% of the issued and outstanding voting shares of Dreyfus/Laurel as of
March 31, 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 March 31, 1994:
PRIME FUND: InvestNet Corporation, 2 Mellon Bank Center, Pittsburgh, PA
15259-0001, 36% record; Mac & Company, Mellon Bank, N.A., Trust and
Investment Department, 3 Mellon Bank Center, Pittsburgh, PA 15259-0001,
21% record; Mac & Company, Mellon Bank, N.A., Trust and Investment
Department, 3 Mellon Bank Center, Pittsburgh, PA 15259-0001, 10% record;
Mellon Bank, N.A., #14 as Agent for Capital Markets Customers, One Mellon
Bank Center, Room 151-0440, Pittsburgh, PA 15258-0001, 7% record; Saxon &
Co., FBO Mellon Bank GR TR OFF, A/C #10-01-002-1033993, Mutual Fund
Processing, 2nd Floor, P.O. Box 7780-1888, Philadelphia, PA 19182-0001,
6% record.
U.S. TREASURY FUND: Mac & Co., Mellon Bank, N.A., Trust and Investment
Department, 3 Mellon Bank Center, Pittsburgh, PA 15259-0001, 44% record;
InvestNet Corporation, 2 Mellon Bank Center, Pittsburgh, PA 15259-0001,
38% record; Mellon Bank, N.A., Northeastern Region, CTA Operations Unit,
Room 199-5264, P.O. Box 7899, Philadelphia, PA 19101, 11% record.
TAX-EXEMPT FUND: Mac & Co., Mellon Bank, N.A., Trust and Investment
Department, 3 Mellon Bank Center, Pittsburgh, PA 15259-0001, 33% record;
Mellon Bank, N.A., #14 as Agent for Capital Markets Customers, One Mellon
Bank Center, Room 151-0440, Pittsburgh, PA 15258-0001, 21% record; Danco,
c/o Fort Wayne National Bank, P.O. Box 110, Fort Wayne, IN 46801-0110,
14% record; Mac & Co., Mellon Bank, N.A., Trust and Investment Department,
3 Mellon Bank Center, Pittsburgh, PA 15259-0001, 9% record; InvestNet
Corporation, 2 Mellon Bank Center, Pittsburgh, PA 15259-0001, 7% record.
INSTITUTIONAL PRIME FUND: Mac & Co., Mellon Bank, N.A., Trust and
Investment Department, 3 Mellon Bank Center, Pittsburgh, PA 15259-0001,
35% record; Mellon Bank, N.A., #14 as Agent for Capital Markets Customers,
- 16 -
<PAGE>
One Mellon Bank Center, Room 151-0440, Pittsburgh, PA 15258-0001, 18%
record; Mac & Co., One Mellon Bank Center, Room 0525, Pittsburgh, PA
15258-0001, 17% record; Mac & Co., One Mellon Bank Center, Room 0525,
Pittsburgh, PA 15258-0001, 7% record; Mac & Co., Mellon Bank, N.A., Trust
and Investment Department, 3 Mellon Bank Center, Pittsburgh, PA 15259-
0001, 5% record.
INSTITUTIONAL GOVERNMENT FUND: Mac & Co., Mellon Bank, N.A., Trust and
Investment Department, 3 Mellon Bank Center, Pittsburgh, PA 15259-0001,
43% record; Mac & Co., One Mellon Bank Center, Room 0525, Pittsburgh, PA
15258-0001, 21% record; Mac & Co., One Mellon Bank Center, Room 0525,
Pittsburgh, PA 15258-0001, 16% record; Mac & Co., Mellon Bank, N.A.,
Trust and Investment Department, 3 Mellon Bank Center, Pittsburgh, PA
15259-0001, 12% record.
INSTITUTIONAL TREASURY FUND: Mac & Co., Mellon Bank, N.A., Trust and
Investment Department, 3 Mellon Bank Center, Pittsburgh, PA 15259-0001,
51% record; Mac & Co., Mellon Bank, N.A., Trust and Investment Department,
3 Mellon Bank Center, Pittsburgh, PA 15259-0001, 22% record; Mellon Bank,
N.A., #14 as Agent for Capital Markets Customers, One Mellon Bank Center,
Room 151-0440, Pittsburgh, PA 15258-0001, 12% record; Danco, c/o Fort
Wayne National Bank, P.O. Box 110, Fort Wayne, IN 46801-0110, 8% record.
INSTITUTIONAL TREASURY ONLY FUND: Mellon Bank, N.A., #14 as Agent for
Capital Markets Customers, One Mellon Bank Center, Room 151-0440,
Pittsburgh, PA 15258-0001, 37% record; Mac & Co., Mellon Bank, N.A.,
Trust and Investment Department, 3 Mellon Bank Center, Pittsburgh, PA
15259-0001, 33% record; Allegheny County Institution District, 108 Court
House, Pittsburgh, PA 15219, 22% record; Kirkpatrick & Lockhart, Escrow
Account, 1800 M Street, N.W., Suite 900 South Lobby, Washington, DC
20036, 6% record.
INSTITUTIONAL SHORT-TERM BOND FUND: Mac & Co. 178-801, Mellon Bank, N.A.,
Mutual Funds, P.O. Box 320, Pittsburgh, PA 15258, 91% record; Anesthesia
Recording, 1082 Bower Hill Road, Pittsburgh, PA 15243-1324, 7% 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").
- 17 -
<PAGE>
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;
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.
- 18 -
<PAGE>
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
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
- 19 -
<PAGE>
(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.
_____________________________
* "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.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services. The Dreyfus Corporation (200 Park Avenue, New
York, New York 10166) serves as each Fund's investment manager
("Dreyfus"). As of August 31, 1994, Dreyfus managed or administered
approximately $70 billion in assets for more than 1.9 million investor
accounts nationwide. Dreyfus is a wholly-owned subsidiary of Mellon Bank,
N.A. (One Mellon Bank Center, Pittsburgh, PA 15258) ("Mellon Bank"), each
Fund's prior investment manager. Pursuant to an Investment Management
Agreement, transferred from Mellon Bank to Dreyfus effective as of October
17, 1994, Dreyfus provides, or arranges for one or more third parties to
- 20 -
<PAGE>
provide investment advisory, administrative, custody, fund accounting and
transfer agency services to each Fund. As investment manager, Dreyfus
manages each Fund by making investment decisions based on the Fund's
investment objectives, policies and restrictions, and is paid a fee as
described in the Fund's Prospectus. Each Fund continues to be managed by
the same individual who was the portfolio manager of the Fund prior to the
transfer of the Investment Management Agreement.
The Management Agreement 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 their continuance. Dreyfus/Laurel may
terminate the Agreement, without prior notice to Dreyfus, 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
Dreyfus. Dreyfus may terminate the Management Agreement upon written
notice to Dreyfus/Laurel. The Management Agreement will terminate
immediately and automatically upon its assignment.
- 21 -
<PAGE>
For the last three fiscal years, each Fund had the
following expenses:
For the Fiscal Years Ended October 31,
--------------------------------------
1993 1992 1991
---- ---- ----
Prime Fund
----------
Advisory fees (gross of $481,181 $515,936 $616,337
waiver)
Expense reimbursement from 343,319 281,690 217,687
Adviser
Advisory fees waived -- 75,619 123,267
U.S. Treasury Fund
------------------
Advisory fees (gross of $ 333,417 $ 346,626 $135,549 1/
waiver)
Expense reimbursement from 267,656 272,313 170,623 1/
Adviser
Advisory fees waived -- -- 29,882 1/
Tax-Exempt Fund
---------------
Advisory fees (gross of $1,156,577 $1,089,996 $852,712
waiver)
Expense reimbursement from 468,941 524,628 501,225
Adviser
Advisory fees waived -- -- --
Intermediate Fund
-----------------
Advisory fees (gross of $118,161 $ 58,933 $ 7,856 2/
waiver)
Expense reimbursement from 142,319 161,200 53,730 2/
Adviser
1/ For the period February 4, 1991 (commencement of operations) to
October 31, 1991.
2/ For the period July 11, 1991 (commencement of operations) to October
31, 1991.
- 22 -
<PAGE>
For the Fiscal Years Ended October 31,
--------------------------------------
1993 1992 1991
---- ---- ----
Advisory fees waived -- 8,972 7,856 2/
Institutional Prime Fund
------------------------
Advisory fees (gross of $2,085,334 $1,854,273 $1,343,069
waiver)
Expense reimbursement from 55,366 115,869 451,215
Adviser
Advisory fees waived -- --
Institutional Government Fund
-----------------------------
Advisory fees (gross of $ 837,576 $828,072 $385,001
waiver)
Expense reimbursement from 53,054 168,501 259,233
Adviser
Advisory fees waived -- -- --
Institutional U.S.
Treasury Fund
-------------------
Advisory fees (gross of $1,252,103 $1,094,290 $758,837
waiver)
Expense reimbursement from 25,387 165,341 303,637
Adviser
Advisory fees waived -- -- --
Institutional Treasury
Only Fund
---------------------
Advisory fees (gross of $ 117,491 $ 46,906 3/ --
waiver)
Expense reimbursement from 183,354 179,597 3/ --
Adviser
Advisory fees waived -- -- --
3/ For the period January 22, 1992 (commencement of operations) to
October 31, 1992.
- 23 -
<PAGE>
Service Organizations. With respect to Classes I and II of the
Institutional Funds (as defined in the Prospectus), Dreyfus may select
certain broker/dealers, banks, and other financial institutions
("Servicing Agents") to provide shareholder servicing with respect to
shares of each Fund held by Servicing Agents for their customers or by
their customers directly. Such services shall be provided pursuant to
agreements between Dreyfus/Laurel and the Servicing Agents (the
"Shareholder Servicing Agreements"). Under the Shareholder Servicing
Agreements, the Servicing Agents may provide various services for such
customers, including: aggregating and processing purchase and redemption
requests and transmitting net purchase and redemption orders to the
distributor or transfer agent; providing customers with a service that
invests the assets of their accounts pursuant to specific or pre-
authorized instructions; processing dividend and distribution payments;
providing information periodically to customers; arranging for bank wires;
responding to customers inquiries concerning their investment; providing
subaccounting; if required by law, forwarding shareholder communications
from Dreyfus to customers; forwarding proxy statements and proxies
containing any proposals regarding the Shareholder Servicing Agreement to
customers; general shareholder liaison services; and providing such other
similar services as may be reasonably requested and as permitted under
applicable statutes, rules and regulations. Each Shareholder Servicing
Agreement is terminable at any time upon written notice to the other party
or a majority of the Directors who are not interested persons and have no
direct or indirect financial interest in such Agreement.
Servicing Agents will provide services under Shareholder
Servicing Agreements in consideration of a fee, computed monthly in the
manner set forth in the applicable Fund's Prospectus, at an annual rate of
up to 0.15% of the average daily nets asset value of Class I shares, and
up to 0.05% of the average daily net asset value of Class II shares, owned
by or for shareholders with whom the Servicing Agent has a servicing
relationship.
With respect to the Investor Class of Dreyfus/Laurel's Retail
Funds (as described in the Prospectus) Dreyfus/Laurel's Distributor may
select certain banks, broker/dealers or other financial institutions (the
"Selling and Servicing Agents") to provide shareholder servicing and sales
support services pursuant to Shareholder Servicing and Sales Support
Agreements entered into between the Distributor and Selling and Servicing
Agents. Under the Shareholder Servicing and Sales Support Agreements,
Selling and Servicing Agents will provide those services described above
under the Shareholder Servicing Agreements. Each Shareholder Servicing
and Sales Support Agreement is terminable at any time upon written notice
to the other party or by a majority of the Directors who are not
interested persons and have no direct or indirect financial interest in
such Agreement.
Selling and Servicing Agents will provide services under
Shareholder Servicing and Sales Support Agreements in consideration of a
fee, computed monthly in the manner set forth in the applicable Fund's
Prospectus, at an annual rate of up to 0.25% of the average daily net
- 24 -
<PAGE>
asset value of a Fund's shares owned by or for shareholders with whom the
Selling and Servicing Agent has a servicing relationship.
Distribution and Shareholder Services Plan. The SEC has adopted
Rule 12b-1 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 of the Retail Funds, Dreyfus/Laurel has
adopted a Distribution Plan ("Plan"), and may enter into Shareholder
Servicing and Sales Support Agreements with Selling and Servicing Agents
pursuant to its Plan. With respect to the Class I and Class II Shares of
the Institutional Prime, Institutional Government, Institutional U.S.
Treasury, Institutional Treasury Only and Institutional Short-Term Bond
Funds, Dreyfus/Laurel has adopted a Shareholder Servicing Plan (the
"Institutional Plan") (collectively, the "Plans"), and may enter into
Shareholder Servicing and Sales Support Agreements with Selling and
Servicing Agents.
Under the Plan, the Investor Class of each Retail Class of the
Funds may spend annually up to 0.20%, and the Retail Class of all other
Funds 0.25%, of the average of its net asset values for costs and expenses
incurred in connection with the sale of Fund shares.
The Institutional Plan permits each Institutional Fund to
compensate certain banks, brokers, dealers or other financial institutions
(including Dreyfus and its affiliates) (collectively "Agents") that have
entered into Shareholder Servicing Agreements ("Agreements") with
Dreyfus/Laurel. Payments under the Institutional Plan are calculated
daily and paid monthly at a rate or rates set from time to time by a Fund,
provided that the annual rate may not exceed: (i) 0.15% of the average
daily net asset value of the Class I Shares, or (ii) 0.05% of the average
daily net asset value of the Class II Shares.
The fees payable under the Institutional Plan are used primarily
to compensate or reimburse Agents for shareholder services provided, and
related expenses incurred by such Agents. The shareholder services
provided by Agents may include: (i) aggregating and processing purchase
and redemption requests for Class I or Class II Shares from their
customers and transmitting net purchase and redemption orders to the
Distributor or Transfer Agent; (ii) providing customers with a service
that invests the assets of their accounts in Class I or Class II Shares
pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from a Fund on behalf of customers;
(iv) providing information periodically to customers showing their
positions in Class I or Class II Shares; (v) arranging for bank wires; and
(vi) providing general shareholder liaison services.
- 25 -
<PAGE>
The Plans provide that a report of the amounts expended under
each Plan, and the purposes for which such expenditures were incurred,
must be made to the Directors for their review at least quarterly. In
addition, each 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 and who do not have any direct or indirect financial
interest in the operation of the Plan or in the related Shareholder
Servicing and Sales Support Agreements, cast in person at a meeting called
for the purpose of considering such amendments. Both Plans are subject to
annual approval by all of the Directors and by the Directors who are
neither interested persons nor have any direct or indirect financial
interest in the operation of either Plan or in the related Shareholder
Servicing and Sales Support Agreements, by vote cast in person at a
meeting called for the purpose of voting on the Plan. The Plans are
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 in
the related Shareholder Servicing and Sales Support Agreements or by vote
of the holders of a majority of the outstanding shares of such class of a
Fund.
Administration Agreement. Premier Mutual Fund Services, Inc.
(One Exchange Place, Boston, Massachusetts 02109) ("Premier") serves as
each Fund's distributor. Premier is a wholly-owned subsidiary of
Institutional Administration Services, Inc., a provider of mutual fund
administration services, the parent company of which is Boston
Institutional Group, Inc. Premier also serves as each Fund's sub-
administrator and, pursuant to a Sub-Administration Agreement, provides
various administrative and corporate secretarial services to each Fund.
The Administration Agreement will continue from year to year.
The Agreement may be terminated with respect to each Fund by
Dreyfus/Laurel upon 120 days' notice to the Administrator.
Custodian, Fund Accountant (All Funds) and Transfer and Dividend
Disbursing Agent (All Funds). Mellon Bank serves as custodian and fund
accountant with respect to each Fund. Mellon Bank provides portfolio and
shareholder recordkeeping required for regulatory and financial reporting
purposes. Prior to the effectivness of the Investment 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.
The Shareholder Services Group, Inc., a subsidiary of First Data
Corporation, serves as transfer agent ("Transfer Agent") for each Fund's
- 26 -
<PAGE>
shares. The Transfer Agent is located at One American Express Plaza,
Providence, Rhode Island 02903.
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 that
business. The activities of Mellon Bank in informing its customers of,
and performing, investment and redemption services in connection with a
Fund, and in providing services to a Fund as custodian, and transfer
agent, shareholder servicing and dividend disbursing agent, as well as
Mellon Bank's investment advisory activities, may raise issues under these
provisions. Mellon Bank has been advised by its counsel that its
activities contemplated under this arrangement are consistent with its
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 from continuing to perform all or a part of the above services
for its customers and/or a Fund. If Mellon Bank were prohibited from
serving a Fund in any of its present capacities the Board of 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 Dreyfus. 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. Dreyfus 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. Dreyfus 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 a Fund are selected on the basis of their
professional capability and the value and quality of their services. In
selecting brokers or dealers, Dreyfus 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
- 27 -
<PAGE>
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.
Brokers or dealers may be selected who provide brokerage and/or
research services to a Fund and/or other accounts over which Dreyfus 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 Dreyfus, 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 Dreyfus 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 additional expenses
which might otherwise be incurred if these organizations were to attempt
to develop comparable information through their own staffs.
The Directors periodically review Dreyfus' performance of its
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 Dreyfus manages 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 Dreyfus.
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 Dreyfus 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
- 28 -
<PAGE>
transactions, it is their present opinion that the desirability of
retaining Dreyfus as investment advisers to the Funds outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
Each of the Funds do not pay a stated brokerage commission.
NET ASSET VALUE
Each Fund's net asset value per share is calculated on each
business day. A business day is any day on which the New York Stock
Exchange is open for business. Prime, U.S. Treasury and Tax-Exempt Funds
determine net asset value twice daily, as of 12:00 p.m. and 4:00 p.m.,
Eastern time. Institutional Prime, Institutional Government,
Institutional U.S. Treasury and Institutional Treasury Only Funds
determine net asset value three times daily, as of 12:00 p.m., 3:00 p.m.
and 4:00 p.m., Eastern time.
It is the policy of each Fund to use its best efforts to maintain
a constant price per share of $1.00. There can be no assurance that a
$1.00 net asset value per share will be maintained. These Funds'
portfolio instruments are valued based on the amortized cost valuation
technique pursuant to Rule 2a-7 under the 1940 Act. This involves valuing
an instrument at its cost and thereafter assuming a constant amortization
to maturity of any discount or premium, even though the portfolio security
may increase or decrease in market value generally in response to changes
in interest rates. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost,
is higher or lower than the price the Fund would receive if it sold the
instrument.
The use of amortized cost is permitted by Rule 2a-7 under the
1940 Act. Pursuant to the provisions of Rule 2a-7, the Directors have
established procedures reasonably designed to stabilize each Fund's price
per share, as computed for the purpose of sale and redemption, at $1.00.
These procedures include the determination by the Directors, at such times
as they deem appropriate, of the extent of deviation, if any, of each
Fund's current net asset value, using market values, from $1.00; periodic
review by the Directors of the amount of and the methods used to calculate
the deviation; maintenance of records of the determination; and review of
such deviations. The procedures to stabilize each Fund's price per share
require the Directors to promptly consider what action, if any, should be
taken by the Directors if such deviation exceeds 1/2 of one percent. Such
procedures also require the Directors to take appropriate action to
eliminate or reduce, to the extent reasonably practicable, material
dilution or other unfair effects resulting from any deviation. In
addition to such procedures, Rule 2a-7 requires each Fund to purchase
instruments having remaining maturities of 397 days or less, to maintain a
dollar-weighted average portfolio maturity of 90 days or less and to
invest only in securities determined by the Directors to be of high
quality, as defined in Rule 2a-7, with minimal credit risks.
- 29 -
<PAGE>
In periods of declining interest rates, the indicated daily yield
on shares of a Fund computed by dividing the annualized daily income on
the Fund by the net asset value computed as above may tend to be higher
than a similar computation made by using a method of valuation based upon
market prices and estimates. In periods of rising interest rates, the
indicated daily yield on shares of a Fund computed the same way may tend
to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
PERFORMANCE CALCULATIONS
Each Fund computes its current annualized and compound effective
yields using standardized methods required by the SEC. The annualized
yield for each Fund is computed by (a) determining the net change in the
value of a hypothetical account having a balance of one share at the
beginning of a seven calendar day period; (b) dividing the net change by
the value of the account at the beginning of the period to obtain the base
period return; and (c) annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account
reflects the value of additional shares purchased with dividends declared
on both the original share and such additional shares, but does not
include realized gains and losses or unrealized appreciation and
depreciation. Compound effective yields are computed by adding 1 to the
base period return (calculated as described above), raising that sum to a
power equal to 365/7 and subtracting 1.
Yield may fluctuate daily and does not provide a basis for
determining future yields. Because each Fund's yield fluctuates, its
yield cannot be compared with yields on savings accounts or other
investment alternatives that provide an agreed-to or guaranteed fixed
yield for a stated period of time. However, yield information may be
useful to an investor considering temporary investments in money market
instruments. In comparing the yield of one money market fund to another,
consideration should be given to each Fund's investment policies,
including the types of investments made, length of maturities of portfolio
securities, the methods used by each fund to compute the yield (methods
may differ) and whether there are any special account charges which may
reduce effective yield.
The following are the current and effective yields for the Funds
for the seven-day period ended October 31, 1993:
Current Yield Effective Yield
------------- ---------------
Prime Fund 2.72% 2.76%
U.S. Treasury Fund 2.65 2.69
Tax-Exempt Fund 2.17 2.20
Institutional Prime Fund 3.02 3.07
Institutional Government Fund 2.82 2.86
Institutional U.S. Treasury Fund 2.91 2.95
Institutional Treasury Only Fund 2.82 2.86
- 30 -
<PAGE>
The Tax-Exempt Fund may also, from time to time, utilize tax-
equivalent yields. The tax-equivalent yield is calculated by dividing
that portion of the Fund's yield (as calculated above) which is tax-exempt
by one minus a stated tax rate and adding the quotient to that portion of
the Fund's yield, if any (as calculated above) that is not tax-exempt.
The following are the current and effective tax-equivalent yields based on
a tax rate of 39.6% for the Tax-Exempt Fund for the seven day period ended
October 31, 1993:
Current Tax-Equivalent Yield 3.59%
Effective Tax-Equivalent Yield 3.64%
The Tax-Exempt Fund may from time to time for illustrative
purposes only use tax-equivalency tables which compare tax-exempt yields
to their equivalent taxable yields for relevant federal income tax
brackets. The following is an example of such a table:
Tax Bracket 28% 31% 36% 39.6%
Tax-Exempt Yields Equivalent Taxable Yields
4.5% 6.25% 6.52% 7.03% 7.45%
5.0% 6.94% 7.25% 7.81% 8.28%
5.5% 7.64% 7.97% 8.59% 9.11%
6.0% 8.33% 8.70% 9.38% 9.93%
6.5% 9.03% 9.42% 10.16% 10.76%
A Money Market Fund may from time to time advertise non-
standardized performance, including average annual total return, computed
as noted above.
For the fiscal year ending October 31, 1993, the average annual
total return for each money market Fund was as follows:
Prime Fund 2.84%
U.S. Treasury Fund 2.77
Tax-Exempt Fund 2.10
Institutional Prime Fund 3.04
Institutional Government Fund 2.97
Institutional U.S. Treasury Fund 2.91
Institutional Treasury Only Fund 2.90
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
Federal Tax--General. In order 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 its
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) -- or, in the case of the Tax-
- 31 -
<PAGE>
Exempt Fund, at least 90% of the sum of that income plus its net interest
income excludable from gross income under section 103(a) of the Code --
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 of its total assets
may be invested in securities (other than U.S. government securities or
the 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
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 that 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.
- 32 -
<PAGE>
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 cerain 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 the 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 the 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
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 Propsectuses ("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 be determined under
rules that vary according to the elections made.
- 33 -
<PAGE>
Tax-Exempt Fund. Dividends paid by the Tax-Exempt Fund will
qualify as "exempt-interest dividends," and thus will be excludable from
gross income by its shareholders, if that Fund satisfies the requirement
that, at the close of each quarter of its taxable year, at least 50% of
the value of its total assets consists of securities the interest on which
is excludable from gross income under section 103(a) of the Code; that
Fund intends to continue to satisfy this requirement. The aggregate
dividends excludable from the shareholders' treatment of dividends from
that Fund under local and state income tax laws may differ from the
treatment thereof under the Code.
If shares of the Tax-Exempt Fund are sold at a loss after being
held for six months or less, the loss will be disallowed to the extent of
any exempt-interest dividends received on those shares.
Tax-exempt interest attributable to certain private activity
bonds ("PABs") (including, in the case of a RIC receiving interest on such
bonds, a proportionate part of the exempt-interest dividends paid by that
RIC) is an item of tax preference for purposes of the alternative minimum
tax. Exempt-interest dividends received by a corporate shareholder also
may be indirectly subject to that tax without regard to whether the Tax-
Exempt Fund's tax-exempt interest was attributable to those bonds.
Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by PABs or
industrial development bonds ("IDBs") should consult their tax advisers
before purchasing shares of the Tax-Exempt Fund because, for users of
certain of these facilities, the interest on those bonds is not exempt
from federal income tax. For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses
in trade or business a part of a facility financed from the proceeds of
PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may
be included in taxable income for recipients whose adjusted gross income
(including income from tax-exempt sources such as the Tax-Exempt Fund)
plus 50% of their benefits exceeds certain base amounts. Exempt-interest
dividends paid by that Fund still are tax-exempt to the extent described
in the Fund's Prospectus; they are only included in the calculation of
whether a recipient's income exceeds the established amounts.
If the Tax-Exempt Fund invests in any instrument that generate
taxable income, under the circumstances described in the Prospectus,
distributions of the interest earned thereon will be taxable to that
Fund's shareholders as ordinary income to the extent of that Fund's
earnings and profits. Moreover, if the Tax-Exempt Fund realizes capital
gain as a result of market transactions, any distribution of that gain
will be taxable to its shareholders. There also may be collateral federal
income tax consequences regarding the receipt of exempt-interest dividends
by shareholders such as S corporations, financial institutions and
property and casualty insurance companies. A shareholder falling into any
- 34 -
<PAGE>
such category should consult its tax adviser concerning its investment in
shares of the Tax-Exempt Fund.
State and Local Taxes. Depending upon the extent of 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 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 an 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 a 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 its 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 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 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.
- 35 -
<PAGE>
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 all distributions to that shareholder
and any gains realized by that shareholder on the disposition of 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
Funds, Inc. has obtained a Certificate of Authority to do business as a
foregin corporation in Pennsylvania. In the opinion of counsel, shares of
The Dreyfus/Laurel Funds, Inc. 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 accompanies
this Statement of Additional Information and is incorporated herein by
reference. The unaudited financial statements for each Fund which has not
yet completed a reporting period will be available within four to six
months from commencement of operations. Audited financial statements will
be available within 60 days following each Fund's fiscal year end.
OTHER INFORMATION
Auditor. KPMG Peat Marwick was appointed by the Directors to
serve as the Funds' 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 SEC (3) review of the annual federal income tax return
and the Pennsylvania excise tax return filed on behalf of Dreyfus/Laurel.
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 Prospectus and this Statement of
Additional Information.
- 36 -
<PAGE>
APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Municipal and Debt Instruments Ratings
--------------------------------------
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.
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.
- 37 -
<PAGE>
Short Term Municipal Loans
--------------------------
Moody's:
-------
MIG-1/VMIG-1 -- Securities rated MIG-1/VMIG-1 are of the best
quality, enjoying strong protection from established cash flows of funds
for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG-2/VMIG-2 -- Loans bearing the MIG-2/VMIG-2 designation are
of high quality, with margins of protection ample although not so large as
in the MIG-1/VMIG-1 group.
S&P:
---
SP-1 -- Short-term municipal securities bearing the SP-1
designation have very strong or strong capacity to pay principal and
interest. Those issues rated SP-1 which are determined to possess
overwhelming safety characteristics will be given a plus (+) designation.
SP-2 -- Issues rated SP-2 have satisfactory capacity to pay
principal and interest.
Other Municipal Securities and Commercial Paper Ratings
-------------------------------------------------------
Moody's:
-------
Commercial paper rated Prime by Moody's is based upon its
evaluation of many factors, including: (l) 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-l,
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
- 38 -
<PAGE>
(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 are adequate to meet cash requirements. Long-term senior
debt is rated A or better. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically,
the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management
are unquestioned. Relative strength or weakness of the above factors
determine whether the issuer's commercial paper is rated A-l, 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.:
--------------------
- 39 -
<PAGE>
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 '1+' (one plus) and '1-' (one minus) to assist investors in
recognizing those differences.
Duff 1+--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 fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to 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 is 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.
- 40 -
<PAGE>
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 published 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's 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.
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 our
ratings. Before dispatch to subscribers, a draft of the report is
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.
A1+--Obligations supported by the highest capacity for timely
repayment.
A1--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.
- 41 -
<PAGE>
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.
- 42 -
<PAGE>
DESCRIPTION OF MUNICIPAL SECURITIES
Municipal Notes generally are used to provide for short-term
capital needs and usually have maturities of one year or less. They
include the following:
1. Tax Anticipation Notes are issued to finance working
capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use
and business taxes, and are payable from these specific future taxes.
2. Revenue Anticipation Notes are issued in expectation of
receipt of other types of revenues, such as Federal revenues available
under the Federal Revenue Sharing Programs.
3. Bond Anticipation Notes are issued to provide interim
financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the Notes.
4. Construction Loan Notes are sold to provide construction
financing. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration
under the Federal National Mortgage Association ("Fannie Mae") or the
Government National Mortgage Association ("Ginnie Mae").
5. Tax-Exempt Commercial Paper is a short-term obligation
with a stated maturity of 365 days or less. It is issued by agencies of
state and local governments to finance seasonal working capital needs or
as short-term financing in anticipation of longer term financing.
Municipals Bonds, which meet longer term capital needs and
generally have maturities of more than one year when issued, have three
principal classifications:
1. General Obligation Bonds are issued by such entities as
states, counties, cities, towns, and regional districts. The proceeds of
these obligations are used to fund a wide range of public projects,
including construction or improvement of schools, highways and roads, and
water and sewer systems. The basic security behind General Obligation
Bonds is the issuer's pledge of its full faith and credit and taxing power
for the payment of principal and interest. The taxes that can be levied
for the payment of debt service may be limited or unlimited as to the rate
or amount of special assessments.
2. Revenue Bonds generally are secured by the net revenues
derived from a particular facility, group of facilities, or, in some
cases, the proceeds of a special excise or other specific revenue source.
Revenue Bonds are issued to finance a wide variety of capital projects
including electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and
hospitals. Many of these Bonds provide additional security in the form of
a debt service reserve fund to be used to make principal and interest
- 43 -
<PAGE>
payments. Housing authorities have a wide range of security, including
partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other
public projects. Some authorities provide further security in the form of
a state's ability (without obligation) to make up deficiencies in the debt
service reserve fund.
3. Industrial Development Bonds are considered municipal
bonds if the interest paid thereon is exempt from Federal income tax and
are issued by or on behalf of public authorities to raise money to finance
various privately operated facilities for business and manufacturing,
housing, health, sports, and pollution control. These Bonds are also used
to finance public facilities such as airports, mass transit systems,
ports, and parking. The payment of the principal and interest on such
Bonds is dependent solely on the ability of the facility's user to meet
its financial obligations and the pledge, if any, of real and personal
property as security for such payment.
4. Other Municipal Obligations incurred for a variety of
financing purposes, including: Municipal Leases, which may take the form
of a lease or an installment purchase or conditional sale contract, are
issued by state and local governments and authorities to acquire a wide
variety of equipment and facilities such as fire and sanitation vehicles,
telecommunications equipment and other capital assets. Municipal leases
frequently have special risks not normally associated with general
obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased
asset to pass eventually to the government issuer) have evolved as a means
for governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of debt.
The debt-issuance limitations of many state constitutions and statutes are
deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. To
reduce this risk, the Tax-Exempt Money Fund will only purchase Municipal
leases subject to a non-appropriation clause when the payment of principal
and accrued interest is backed by an unconditional irrevocable letter of
credit, or guarantee of a bank or other entity acceptable to the Adviser.
- 44 -
<PAGE>
