FOR USE BY BANKS ONLY
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
Supplement to Prospectus Dated January 30, 1995
All mutual fund shares involve certain investment risks,
including the possible loss of principal.
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PROSPECTUS JANUARY 30, 1995
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
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GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC. (THE "FUND") IS AN
OPEN-END, NONDIVERSIFIED, MANAGEMENT INVESTMENT COMPANY. ITS GOAL IS TO
MAXIMIZE CURRENT INCOME EXEMPT FROM FEDERAL AND STATE OF CALIFORNIA PERSONAL
INCOME TAXES TO THE EXTENT CONSISTENT WITH THE PRESERVATION OF CAPITAL.
YOU CAN INVEST, REINVEST OR REDEEM SHARES AT ANY TIME WITHOUT CHARGE
OR PENALTY IMPOSED BY THE FUND.
THE FUND PROVIDES FREE REDEMPTION CHECKS, WHICH YOU CAN USE IN
AMOUNTS OF $500 OR MORE FOR CASH OR TO PAY BILLS. YOU CONTINUE TO EARN INCOME
ON THE AMOUNT OF THE CHECK UNTIL IT CLEARS. YOU CAN PURCHASE OR REDEEM SHARES
BY TELEPHONE USING DREYFUS TELETRANSFER.
THE DREYFUS CORPORATION PROFESSIONALLY MANAGES THE FUND'S PORTFOLIO.
THE FUND IS PERMITTED TO BEAR CERTAIN COSTS OF ADVERTISING,
ADMINISTRATION AND/OR DISTRIBUTION PURSUANT TO A PLAN ADOPTED IN ACCORDANCE
WITH RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT OF 1940. MANAGEMENT OF THE
FUND, HOWEVER, CURRENTLY DOES NOT INTEND TO IMPLEMENT SUCH PLAN AND WILL ONLY
DO SO IF PRIOR WRITTEN NOTICE IS GIVEN TO SHAREHOLDERS.
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE FUND THAT
YOU SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
PART B (ALSO KNOWN AS THE STATEMENT OF ADDITIONAL INFORMATION), DATED
JANUARY 30, 1995, WHICH MAY BE REVISED FROM TIME TO TIME, PROVIDES A FURTHER
DISCUSSION OF CERTAIN AREAS IN THIS PROSPECTUS AND OTHER MATTERS WHICH MAY BE
OF INTEREST TO SOME INVESTORS. IT HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY REFERENCE. FOR A FREE COPY,
WRITE TO THE FUND AT 144 GLENN CURTISS BOULEVARD, UNIONDALE, NEW YORK
11556-0144, OR CALL 1-800-645-6561. WHEN TELEPHONING, ASK FOR OPERATOR 666.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. THE NET ASSET VALUE OF FUNDS OF THIS TYPE WILL FLUCTUATE FROM TIME TO
TIME.
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TABLE OF CONTENTS
PAGE
ANNUAL FUND OPERATING EXPENSES........................ 3
CONDENSED FINANCIAL INFORMATION....................... 4
DESCRIPTION OF THE FUND............................... 4
MANAGEMENT OF THE FUND................................ 15
HOW TO BUY FUND SHARES................................ 16
SHAREHOLDER SERVICES.................................. 18
HOW TO REDEEM FUND SHARES............................. 20
SERVICE PLAN.......................................... 23
SHAREHOLDER SERVICES PLAN............................. 23
DIVIDENDS, DISTRIBUTIONS AND TAXES.................... 23
PERFORMANCE INFORMATION............................... 25
GENERAL INFORMATION................................... 26
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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This Page Intentionally Left Blank
Page 2
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Management Fees ......................................... .60%
12b-1 Fees............................................... .00%
Other Expenses........................................... .16%
Total Fund Operating Expenses............................ .76%
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period: $8 $24 $42 $94
</TABLE>
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THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS
REPRESENTATIVE OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL
RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL
RETURN GREATER OR LESS THAN 5%.
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The purpose of the foregoing table is to assist you in understanding
the various costs and expenses borne by the Fund, and therefore indirectly by
investors, the payment of which will reduce investors' return on an annual
basis. Although the Fund's Board of Directors has adopted a plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940, management of the Fund
currently does not intend to implement the plan and will only do so if prior
written notice is given to shareholders. If management of the Fund decides to
implement the plan, 12b-1 Fees and Total Fund Operating Expenses would be
.25% and 1.01%, respectively, and the amount of expenses that an investor
would pay, assuming redemption after one, three, five and ten years, would be
$10, $32, $56 and $124, respectively. If the plan were implemented, long-term
investors could pay more in 12b-1 fees than the economic equivalent of paying
a front-end sales charge. Certain Service Agents (as defined below) may
charge their clients direct fees for effecting transactions in Fund shares;
such fees are not reflected in the foregoing table. See "Management of the
Fund," "How to Buy Fund Shares," "Service Plan" and "Shareholder Services
Plan."
page 3
CONDENSED FINANCIAL INFORMATION
The information in the following table has been audited by Ernst &
Young LLP, the Fund's independent auditors, whose report thereon appears in
the Statement of Additional Information. Further financial data and related
notes are included in the Statement of Additional Information, available upon
request.
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share
of Common Stock outstanding, total investment return, ratios to average net
assets and other supplemental data for each year indicated. This information
has been derived from information provided in the Fund's financial
statements.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
PER SHARE DATA: 1990(1) 1991 1992 1993 1994
_______ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year................. $12.50 $12.43 $12.89 $13.33 $14.36
------- ------- -------- ------ -------
INVESTMENT OPERATIONS:
Investment income_net............................. .90 .90 .85 .82 .78
Net realized and unrealized gain (loss) on investments (.08) .47 .44 1.11 (1.40)
------- ------- -------- ------ -------
Total from Investment Operations................. .82 1.37 1.29 1.93 (.62)
------- ------- -------- ------ -------
DISTRIBUTIONS:
Dividends from investment income_net.............. (.89) (.91) (.85) (.82) (.78)
Dividends from net realized gain on investments.... -- -- -- (.08) (.06)
------- ------- -------- ------ -------
TOTAL DISTRIBUTIONS.............................. (.89) (.91) (.85) (.90) (.84)
------- ------- -------- ------ -------
Net asset value, end of year....................... $12.43 $12.89 $13.33 $14.36 $12.90
======= ======= ====== ======= =======
TOTAL INVESTMENT RETURN................................ 6.93%(2) 11.35% 10.31% 15.04% (4.43%)
RATIOS/SUPPLEMENTAL DATA:
Ratios of expenses to average net assets........... -- .21% .37% .64% .76%
Ratios of net investment income to average net assets 7.35%(2) 7.06% 6.47% 5.96% 5.72%
Decrease reflected in the above expense ratios due to undertakings
by The Dreyfus Corporation ...................... 1.05%(2) .62% .39% .11% --
Portfolio Turnover Rate............................ 9.94%(3) 2.81% 23.97% 30.20% 29.74%
Net Assets, end of year (000's Omitted)............ $98,427 $271,656 $374,198 $456,429 $347,063
- ------------------
(1) From October 10, 1989 (commencement of operations) to September 30, 1990.
(2) Annualized.
(3) Not annualized.
</TABLE>
Further information about the Fund's performance is contained in the
Fund's annual report, which may be obtained without charge by writing to the
address or calling the number set forth on the cover page of this Prospectus.
DESCRIPTION OF THE FUND
INVESTMENT OBJECTIVE _ The Fund's goal is to maximize current income exempt
from Federal and State of California personal income taxes to the extent
consistent with the preservation of capital. To accomplish this goal, the
Fund invests primarily in the debt securities of the State of California, its
political subdivisions, authorities and corporations, the interest from which
is, in the opinion of bond counsel to the issuer, exempt from Federal and
State of California personal income taxes (collectively, "California Municipal
Obligations"). To the extent acceptable California Municipal Obligations are
at any time unavailable for investment by the Fund, the Fund will invest
temporarily in other debt securities the interest from which is, in the
opinion of bond counsel to the issuer, exempt from Federal, but not State of
California, income tax. The Fund's investment objective cannot be changed
without approval by the holders of a majority (as defined in the Investment
Company Act of 1940) of the Fund's outstanding voting shares. There can be no
assurance that the Fund's investment objective will be achieved.
MUNICIPAL OBLIGATIONS _ Debt securities the interest from which is, in the
opinion of bond counsel to the issuer, exempt from Federal income tax
("Municipal Obligations") generally include debt
Page 4
obligations issued to obtain funds for various public purposes as well as
certain industrial development bonds issued by or on behalf of public
authorities. Municipal Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general
taxing power. Tax exempt industrial development bonds, in most cases, are
revenue bonds that do not carry the pledge of the credit of the issuing
municipality, but generally are guaranteed by the corporate entity on whose
behalf they are issued. Notes are short-term instruments which are obligations
of the issuing municipalities or agencies and are sold in anticipation of a
bond sale, collection of taxes or receipt of other revenues. Municipal
Obligations include municipal lease/purchase agreements which are similar to
installment purchase contracts for property or equipment issued by
municipalities. Municipal Obligations bear fixed, floating or variable rates
of interest, which are determined in some instances by formulas under which
the Municipal Obligation's interest rate will change directly or inversely to
changes in interest rates or an index, or multiples thereof, in many cases
subject to a maximum and minimum. Certain Municipal Obligations are subject
to redemption at a date earlier than their stated maturity pursuant to call
options, which may be separated from the related Municipal Obligation and
purchased and sold separately.
MANAGEMENT POLICIES _ It is a fundamental policy of the Fund that it will
invest at least 80% of the value of its net assets (except when maintaining a
temporary defensive position) in Municipal Obligations. At least 65% of the
value of the Fund's net assets (except when maintaining a temporary defensive
position) will be invested in bonds and debentures. Under normal
circumstances, at least 65% of the Fund's net assets will be invested in
California Municipal Obligations and the remainder may be invested in
securities that are not California Municipal Obligations and therefore may be
subject to California income taxes. See "Risk Factors_Investing in California
Municipal Obligations" below, and "Dividends, Distributions and Taxes."
At least 65% of the value of the Fund's net assets must consist of
Municipal Obligations which, in the case of bonds, are rated no lower than
Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard &
Poor's Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch"). The
Fund may invest up to 35% of the value of its net assets in Municipal
Obligations which, in the case of bonds, are rated lower than Baa by Moody's
and BBB by S&P and Fitch and as low as the lowest rating assigned by Moody's,
S&P or Fitch. The Fund may invest in short-term Municipal Obligations which
are rated in the two highest rating categories by Moody's, S&P or Fitch. See
"Appendix B" in the Statement of Additional Information. Municipal
Obligations rated BBB by S&P or Fitch or Baa by Moody's are considered
investment grade obligations; those rated BBB by S&P and Fitch are regarded
as having an adequate capacity to pay principal and interest, while those
rated Baa by Moody's are considered medium grade obligations which lack
outstanding investment characteristics and have speculative characteristics.
Investments rated Ba or lower by Moody's and BB or lower by S&P and Fitch
ordinarily provide higher yields but involve greater risk because of their
speculative characteristics. The Fund may invest in Municipal Obligations
rated C by Moody's or D by S&P or Fitch, which is such rating organizations'
lowest rating and indicates that the Municipal Obligation is in default and
interest and/or repayment of principal is in arrears. See "Risk Factors_Lower
Rated Bonds" below for a further discussion of certain risks. The Fund also
may invest in securities which, while not rated, are determined by The
Dreyfus Corporation to be of comparable quality to the rated securities in
which the Fund may invest; for purposes of the 65% requirement described in
this paragraph, such unrated securities shall be deemed to have the rating so
determined. The Fund also may invest in Taxable Investments of the quality
described below. The Fund intends to invest less than 35% of the value of its
net assets in Municipal Obligations rated Ba or lower by Moody's and BB or
lower by S&P and Fitch.
Page 5
The Fund may invest more than 25% of the value of its total assets in
Municipal Obligations which are related in such a way that an economic,
business or political development or change affecting one such security also
would affect the other securities; for example, securities the interest upon
which is paid from revenues of similar types of projects. As a result, the
Fund may be subject to greater risk as compared to a fund that does not
follow this practice.
From time to time, the Fund may invest more than 25% of the value of
its total assets in industrial development bonds which, although issued by
industrial development authorities, may be backed only by the assets and
revenues of the non-governmental users. Interest on Municipal Obligations
(including certain industrial development bonds) which are specified private
activity bonds, as defined in the Internal Revenue Code of 1986, as amended
(the "Code"), issued after August 7, 1986, while exempt from Federal income
tax, is a preference item for the purpose of the alternative minimum tax.
Where a regulated investment company receives such interest, a proportionate
share of any exempt-interest dividend paid by the investment company may be
treated as such a preference item to shareholders. The Fund may invest
without limitation in such Municipal Obligations if The Dreyfus Corporation
determines that their purchase is consistent with the Fund's investment
objective. See"Risk Factors_Other Investment Considerations" below.
The Fund may purchase floating and variable rate demand notes and
bonds, which are tax exempt obligations ordinarily having stated maturities
in excess of one year, but which permit the holder to demand payment of
principal at any time or at specified intervals. Variable rate demand notes
include master demand notes which are obligations that permit the Fund to
invest fluctuating amounts at varying rates of interest, pursuant to direct
arrangements between the Fund, as lender, and the borrower. These obligations
permit daily changes in the amounts borrowed. As mutually agreed, the Fund
may increase or decrease the amounts under these obligations or the borrower
may repay the amount borrowed without penalty. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value, plus accrued interest. Accordingly, where
these obligations are not secured by letters of credit or other credit
support arrangements, the Fund's right to redeem is dependent on the ability
of the borrower to pay principal and interest on demand. Each obligation
purchased by the Fund will meet the quality criteria established for the
purchase of Municipal Obligations. The Dreyfus Corporation, on behalf of the
Fund, will consider on an ongoing basis the creditworthiness of the issuers
of the floating and variable rate demand obligations in the Fund's portfolio.
The Fund may purchase from financial institutions participation
interests in Municipal Obligations (such as industrial development bonds and
municipal lease/purchase agreements). A participation interest gives the Fund
an undivided interest in the Municipal Obligation in the proportion that the
Fund's participation interest bears to the total principal amount of the
Municipal Obligation. These instruments may have fixed, floating or variable
rates of interest. If the participation interest is unrated, it will be
backed by an irrevocable letter of credit or guarantee of a bank that the
Board of Directors has determined meets the prescribed quality standards for
banks set forth below, or the payment obligation otherwise will be
collateralized by U.S. Government securities. For certain participation
interests, the Fund will have the right to demand payment, on not more than
seven days' notice, for all or any part of the Fund's participation interest
in the Municipal Obligation, plus accrued interest. As to these instruments,
the Fund intends to exercise its right to demand payment only upon a default
under the terms of the Municipal Obligation, as needed to provide liquidity
to meet redemptions, or to maintain or improve the quality of its investment
portfolio.
The Fund may purchase tender option bonds. A tender option bond is a
Municipal Obligation (generally held pursuant to a custodial arrangement)
having a relatively long maturity and bearing interest
Page 6
at a fixed rate substantially higher than prevailing short-term tax exempt
rates, that has been coupled with the agreement of a third party, such as a
bank, broker-dealer or other financial institution, pursuant to which such
institution grants the security holders the option, at periodic intervals, to
tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the Municipal
Obligation's fixed coupon rate and the rate, as determined by a remarketing
or similar agent at or near the commencement of such period, that would cause
the securities, coupled with the tender option, to trade at par on the date
of such determination. Thus, after payment of this fee, the security holder
effectively holds a demand obligation that bears interest at the prevailing
short-term tax exempt rate. The Dreyfus Corporation, on behalf of the Fund,
will consider on an ongoing basis the creditworthiness of the issuer of the
underlying Municipal Obligation, of any custodian and of the third party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in
payment of principal or interest on the underlying Municipal Obligation and
for other reasons. The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, which could include tender option bonds as
to which it cannot exercise the tender feature on not more than seven days'
notice if there is no secondary market available for these obligations.
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, the Fund
obligates a broker, dealer or bank to repurchase, at the Fund's option,
specified securities at a specified price and, in this respect, stand-by
commitments are comparable to put options. The exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make
payment on demand. The Fund will acquire stand-by commitments solely to
facilitate its portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. The Fund may pay for stand-by commitments if
such action is deemed necessary, thus increasing to a degree the cost of the
underlying Municipal Obligation and similarly decreasing such security's
yield to investors.The Fund also may acquire call options on specific
Municipal Obligations. The Fund generally would purchase these call options
to protect the Fund from the issuer of the related Municipal Obligation
redeeming, or other holder of the call option from calling away, the
Municipal Obligation before maturity. The sale by the Fund of a call option
that it owns on a specific Municipal Obligation could result in the receipt
of taxable income by the Fund.
The Fund may purchase custodial receipts representing the right to
receive certain future principal and interest payments on Municipal
Obligations which underlie the custodial receipts. A number of different
arrangements are possible. In a typical custodial receipt arrangement, an
issuer or a third party owner of Municipal Obligations deposits such
obligations with a custodian in exchange for two classes of custodial
receipts. The two classes have different characteristics, but, in each case,
payments on the two classes are based on payments received on the underlying
Municipal Obligations. One class has the characteristics of a typical auction
rate security, where at specified intervals its interest rate is adjusted,
and ownership changes, based on an auction mechanism. This class's interest
rate generally is expected to be below the coupon rate of the underlying
Municipal Obligations and generally is at a level comparable to that of a
Municipal Obligation of similar quality and having a maturity equal to the
period between interest rate adjustments. The second class bears interest at
a rate that exceeds the interest rate typically borne by a security of
comparable quality and maturity; this rate also is adjusted, but in this case
inversely to changes in the rate of interest of the first class. If the
interest rate on the first class exceeds the coupon rate of the underlying
Municipal Obligations, its interest rate will exceed the rate paid on the
second class. In no event will the aggregate interest paid with respect to
the two classes exceed the interest paid by the underlying Municipal
Obligations. The value of the second class and similar securities should be
expected to fluctuate more than the value of a Municipal Obligation of
comparable quality and maturity and their purchase by the Fund should
increase the volatility of its net
Page 7
asset value and, thus, its price per share. These custodial receipts are sold
in private placements. The Fund also may purchase directly from issuers, and
not in a private placement, Municipal Obligations having characteristics
similar to custodial receipts. These securities may be issued as part of a
multi-class offering and the interest rate on certain classes may be subject
to a cap or floor.
The Fund may invest up to 15% of the value of its net assets in
securities as to which a liquid trading market does not exist, provided such
investments are consistent with the Fund's investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, and repurchase agreements providing for settlement in more than seven
days after notice. As to these securities, the Fund is subject to a risk that
should the Fund desire to sell them when a ready buyer is not available at a
price that the Fund deems representative of their value, the value of the
Fund's net assets could be adversely affected.
The Fund may invest in zero coupon securities which are debt
securities issued or sold at a discount from their face value which do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified redemption date (or cash payment date). The amount of the discount
varies depending on the time remaining until maturity or cash payment date,
prevailing interest rates, liquidity of the security and perceived credit
quality of the issuer. Zero coupon securities also may take the form of debt
securities that have been stripped of their unmatured interest coupons, the
coupons themselves and receipts or certificates representing interest in such
stripped debt obligations and coupons. The market prices of zero coupon
securities generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit qualities. The Fund may invest up to 5% of its assets
in zero coupon bonds which are rated below investment grade. See "Risk
Factors_Lower Rated Bonds" and "Other Investment Considerations" below, and
"Investment Objective and Management Policies_Risk Factors_Lower Rated Bonds"
and"Dividends, Distributions and Taxes" in the Statement of Additional
Information.
From time to time, on a temporary basis other than for temporary
defensive purposes (but not to exceed 20% of the value of the Fund's net
assets) or for temporary defensive purposes, the Fund may invest in taxable
short-term investments ("Taxable Investments") consisting of: notes of
issuers having, at the time of purchase, a quality rating within the two
highest grades of Moody's, S&P or Fitch; obligations of the U.S. Government,
its agencies or instrumentalities; commercial paper rated not lower than P-2
by Moody's, A-2 by S&P or F-2 by Fitch; certificates of deposit of U.S.
domestic banks, including foreign branches of domestic banks, with assets of
one billion dollars or more; time deposits; bankers' acceptances and other
short-term bank obligations; and repurchase agreements in respect of any of
the foregoing. Dividends paid by the Fund that are attributable to income
earned by the Fund from Taxable Investments will be taxable to investors. See
"Dividends, Distributions and Taxes." Except for temporary defensive
purposes, at no time will more than 20% of the value of the Fund's net assets
be invested in Taxable Investments. When the Fund has adopted a temporary
defensive position, including when acceptable California Municipal
Obligations are unavailable for investment by the Fund, in excess of 35% of
the Fund's net assets may be invested in securities that are not exempt from
California personal income taxes. Under normal market conditions, the Fund
anticipates that not more than 5% of the value of its total assets will be
invested in any one category of Taxable Investments. Taxable Investments are
more fully described in the Statement of Additional Information, to which
reference hereby is made.
INVESTMENT TECHNIQUES _ The Fund may employ, among others, the investment
techniques described below. Use of certain of these techniques may give rise
to taxable income. Options and futures transactions involve so-called
derivative securities.
WHEN-ISSUED SECURITIES _ New issues of Municipal Obligations usually are
offered on a when-issued basis, which means that delivery and payment for
such Municipal Obligations ordinarily take place
Page 8
within 45 days after the date of the commitment to purchase. The payment
obligation and the interest rate that will be received on the Municipal
Obligations are fixed at the time the Fund enters into the commitment. The
Fund will make commitments to purchase such Municipal Obligations only with
the intention of actually acquiring the securities, but the Fund may sell
these securities before the settlement date if it is deemed advisable,
although any gain realized on such sale would be taxable. The Fund will not
accrue income in respect of a when-issued security prior to its stated
delivery date. No additional when-issued commitments will be made if more
than 20% of the value of the Fund's net assets would be so committed.
Municipal Obligations purchased on a when-issued basis and the
securities held in the Fund's portfolio are subject to changes in value (both
generally changing in the same way, i.e., appreciating when interest rates
decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Municipal Obligations purchased
on a when-issued basis may expose the Fund to risk because they may experience
such fluctuations prior to their actual delivery. Purchasing Municipal
Obligations on a when-issued basis can involve the additional risk that the
yield available in the market when the delivery takes place actually may be
higher than that obtained in the transaction itself. A segregated account of
the Fund consisting of cash, cash equivalents or U.S. Government securities
or other high quality liquid debt securities at least equal at all times to
the amount of the when-issued commitments will be established and maintained
at the Fund's custodian bank. Purchasing Municipal Obligations on a
when-issued basis when the Fund is fully or almost fully invested may result
in greater potential fluctuation in the value of the Fund's net assets and
its net asset value per share.
FUTURES TRANSACTIONS _ IN GENERAL _ The Fund is not a commodity pool.
However, as a substitute for a comparable market position in the underlying
securities and for hedging purposes, the Fund may engage in futures and
options on futures transactions as described below.
The Fund's commodities transactions must constitute bona fide hedging
or other permissible transactions pursuant to regulations promulgated by the
Commodity Futures Trading Commission. In addition, the Fund may not engage in
such transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired commodity options, other than for bona fide
hedging transactions, would exceed 5% of the liquidation value of the Fund's
assets, after taking into account unrealized profits and unrealized losses on
such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5%. Pursuant to regulations and/or
published positions of the Securities and Exchange Commission, the Fund may
be required to segregate cash or high quality money market instruments in
connection with its commodities transactions in an amount generally equal to
the value of the underlying commodity. To the extent the Fund engages in the
use of futures and options on futures for other than bona fide hedging
purposes, the Fund may be subject to additional risk.
Initially, when purchasing or selling futures contracts the Fund will
be required to deposit with its custodian in the broker's name an amount of
cash or cash equivalents up to approximately 10% of the contract amount. This
amount is subject to change by the exchange or board of trade on which the
contract is traded and members of such exchange or board of trade may impose
their own higher requirements. This amount is known as "initial margin" and
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures position,
assuming all contractual obligations have been satisfied. Subsequent
payments, known as "variation margin," to and from the broker will be made
daily as the price of the index or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more
or less valuable, a process known as "marking-to-market." At any time prior
to the expiration of a
Page 9
futures contract, the Fund may elect to close the position by taking an
opposite position at the then prevailing price, which will operate to
terminate the Fund's existing position in the contract.
Although the Fund intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given
that a liquid market will exist for any particular contract at any particular
time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may
be made that day at a price beyond the limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move
to the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Fund to substantial losses. If it is not possible or the Fund
determines not to close a futures position in anticipation of adverse price
movements, the Fund will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
Fund's portfolio being hedged, if any, may offset partially or completely
losses on the futures contract. However, no assurance can be given that the
price of the securities being hedged will correlate with the price movements
in a futures contract and thus provide an offset to losses on the futures
contract.
In addition, to the extent the Fund is engaging in a futures
transactions as a hedging device, due to the risk of an imperfect correlation
between securities in the Fund's portfolio that are the subject of a hedging
transaction and the futures contract used as a hedging device, it is possible
that the hedge will not be fully effective in that, for example, losses on
the portfolio securities may be in excess of gains on the futures contract or
losses on the futures contract may be in excess of gains on the portfolio
securities that were the subject of the hedge. In futures contracts based on
indexes, the risk of imperfect correlation increases as the composition of
the Fund's portfolio varies from the composition of the index. In an effort
to compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of futures contracts, the
Fund may buy or sell futures contracts in a greater or lesser dollar amount
than the dollar amount of the securities being hedged if the historical
volatility of the futures contract has been less or greater than that of the
securities. Such "over hedging" or "under hedging" may adversely affect the
Fund's net investment results if market movements are not as anticipated when
the hedge is established.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a
long position if the option is a put). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated cash balance in the
writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
on the futures contract.
Call options sold by the Fund with respect to futures contracts will
be covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which
are expected to move relatively consistently with the instruments underlying,
the futures contract. Put options sold by the Fund with respect to futures
contracts will be covered when, among other things, cash or liquid securities
are placed in a segregated account to fulfill the obligation undertaken.
The Fund may utilize municipal bond index futures to protect against
changes in the market value of the Municipal Obligations in its portfolio or
which it intends to acquire. Municipal bond index futures contracts are based
on an index of long-term Municipal Obligations. The index assigns relative
values to the Municipal Obligations included in the index, and fluctuates
with changes in the market value of such
Page 10
Municipal Obligations. The contract is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash based upon the
difference between the value of the index at the close of the last trading
day of the contract and the price at which the index contract was originally
written. The acquisition or sale of a municipal bond index futures contract
enables the Fund to protect its assets from fluctuations in rates on tax
exempt securities without actually buying or selling such securities.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS ON INTEREST RATE FUTURES
CONTRACTS _ The Fund may purchase and sell interest rate futures contracts
and options on interest rate futures contracts as a substitute for a
comparable market position and to hedge against adverse movements in interest
rates.
To the extent the Fund has invested in interest rate futures
contracts or options on interest rate futures contracts as a substitute for a
comparable market position, the Fund will be subject to the investment risks
of having purchased the securities underlying the contract.
The Fund may purchase call options on interest rate futures contracts
to hedge against a decline in interest rates and may purchase put options on
interest rate futures contracts to hedge its portfolio securities against the
risk of rising interest rates.
If the Fund has hedged against the possibility of an increase in
interest rates adversely affecting the value of securities held in its
portfolio and rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. These sales of securities may, but will not
necessarily, be at increased prices which reflect the decline in interest
rates.
The Fund may sell call options on interest rate futures contracts to
partially hedge against declining prices of its portfolio securities. If the
futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Fund's
portfolio holdings. The Fund may sell put options on interest rate futures
contracts to hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option sold by the Fund is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing options on futures may, to some
extent, be reduced or increased by changes in the value of its portfolio
securities.
The Fund also may sell options on interest rate futures contracts as
part of closing purchase transactions to terminate its options positions. No
assurance can be given that such closing transactions can be effected or that
there will be a correlation between price movements in the options on
interest rate futures and price movements in the Fund's portfolio securities
which are the subject of the hedge. In addition, the Fund's purchase of such
options will be based upon predictions as to anticipated interest rate
trends, which could prove to be inaccurate.
FUTURE DEVELOPMENTS _ The Fund may take advantage of opportunities in the
area of options and futures contracts and options on futures contracts and
any other derivative investments which are not presently contemplated for use
by the Fund or which are not currently available but which may be developed,
to the extent such opportunities are both consistent with the Fund's
investment objective and legally permissible for the Fund. Before entering
into such transactions or making any such investment, the Fund will provide
appropriate disclosure in its prospectus.
LENDING PORTFOLIO SECURITIES _ From time to time, the Fund may lend
securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions.
Such loans may not exceed 331/3% of the value of the Fund's total assets. In
connection
Page 11
with such loans, the Fund will receive collateral consisting of
cash, U.S. Government securities or irrevocable letters of credit which will
be maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The Fund can increase its income
through the investment of such collateral. However, such income generally
would not be tax exempt. The Fund continues to be entitled to payments in
amounts equal to interest or other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Fund might experience risk
of loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
BORROWING MONEY _ As a fundamental policy, the Fund is permitted to borrow
to the extent permitted under the Investment Company Act of 1940. However,
the Fund currently intends to borrow money only for temporary or emergency
(not leveraging) purposes, in an amount up to 15% of the value of the Fund's
total assets (including the amount borrowed) valued at the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
CERTAIN FUNDAMENTAL POLICIES _ The Fund may (i) borrow money to the extent
permitted under the Investment Company Act of 1940; and (ii) invest up to 25%
of its total assets in the securities of issuers in any particular industry,
provided that there is no such limitation on investments in Municipal
Obligations and, for temporary defensive purposes, obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. This
paragraph describes fundamental policies that cannot be changed without
approval by the holders of a majority (as defined in the Investment Company
Act of 1940) of the Fund's outstanding voting shares. See "Investment
Objective and Management Policies_Investment Restrictions" in the Statement
of Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES _ The Fund may (i) pledge,
hypothecate, mortgage or otherwise encumber its assets, but only to the
extent necessary to secure borrowings for temporary or emergency purposes;
and (ii) invest up to 15% of its net assets in repurchase agreements
providing for settlement in more than seven days after notice and in other
illiquid securities. See "Investment Objective and Management Policies _
Investment Restriction"in the Statement of Additional Information.
RISK FACTORS
INVESTING IN CALIFORNIA MUNICIPAL OBLIGATIONS _ You should consider
carefully the special risks inherent in the Fund's investment in California
Municipal Obligations. These risks result from certain amendments to the
California Constitution and other statutes that limit the taxing and spending
authority of California governmental entities, as well as from the general
financial condition of the State of California. Since the start of the
State's 1990-91 fiscal year, the State has experienced the worst economic,
fiscal and budget conditions since the 1930s. As a result, the State has
experienced recurring budget deficits for four of the five fiscal years ended
1991-92. Revenues and expenditures were essentially equal in 1992-93, but the
original budget for that year projected revenues exceeding expenditures by
$2.6 billion. The excess of revenues over expenditures for the State's
1993-94 fiscal year is expected to have been $500 million, after originally
being estimated to $2.0 billion. By June 30, 1994, according to California's
Department of Finance, the State's Reserve for Economic Uncertainties had an
accumulated deficit, on a budget basis, of approximately $2.0 billion. A
further consequence of the large budget imbalances has been that the State
depleted its available cash resources and has had to use a series of external
borrowings to meet its cash needs. To meet its cash flow needs in the 1994-95
fiscal year, the State issued, in July and August 1994, $4.0 billion of
revenue anticipation warrants and $3.0 billion of revenue anticipation notes.
As a result of the deterioration in the State's budget and cash situation,
between October 1991 and July 1994 the rating on the State's general
obligation bonds was reduced by S&P from AAA to A, by Moody's from Aaa to A1
and by Fitch from AAA to A. These and
Page 12
other factors may have the effect of impairing the ability of the issuers of
California Municipal Obligations to pay interest on, or repay principal of,
such California Municipal Obligations. You should obtain and review a copy of
the Statement of Additional Information which more fully sets forth these and
other risk factors.
LOWER RATED BONDS _ You should carefully consider the relative risks of
investing in the higher yielding (and, therefore, higher risk) debt
securities in which the Fund may invest up to 35% of the value of its net
assets. These are bonds such as those rated Ba by Moody's or BB by S&P or
Fitch or as low as the lowest rating assigned by Moody's, S&P or Fitch. They
generally are not meant for short-term investing and may be subject to
certain risks with respect to the issuing entity and to greater market
fluctuations than certain lower yielding, higher rated fixed-income
securities. Bonds rated Ba by Moody's are judged to have speculative
elements; their future cannot be considered as well assured and often the
protection of interest and principal payments may be very moderate. Bonds
rated BB by S&P are regarded as having predominantly speculative
characteristics and, while such obligations have less near-term vulnerability
to default than other speculative grade debt, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments. Bonds rated BB by Fitch are considered speculative
and the payment of principal and interest may be affected at any time by
adverse economic changes. Bonds rated C by Moody's are regarded as having
extremely poor prospects of ever attaining any real investment standing.
Bonds rated D by S&P are in default and the payment of interest and/or
repayment of principal is in arrears. Bonds rated DDD, DD or D by Fitch are
in actual or imminent default, are extremely speculative and should be valued
on the basis of their ultimate recovery value in liquidation or
reorganization of the issuer; DDD represents the highest potential for
recovery of such bonds; and D represents the lowest potential for recovery.
Such bonds, though high yielding, are characterized by great risk. See
"Appendix B" in the Statement of Additional Information for a general
description of Moody's, S&P and Fitch ratings of Municipal Obligations. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of the Municipal Obligations which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and, although
ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of these bonds.
Therefore, although these ratings may be an initial criterion for selection
of portfolio investments, The Dreyfus Corporation also will evaluate these
securities and the ability of the issuers of such securities to pay interest
and principal. The Fund's ability to achieve its investment objective may be
more dependent on The Dreyfus Corporation's credit analysis than might be the
case for a fund that invested in higher rated securities. Once the rating of
a portfolio security has been changed, the Fund will consider all
circumstances deemed relevant in determining whether to continue to hold the
security.
The market price and yield of bonds rated Ba or lower by Moody's and
BB or lower by S&P and Fitch are more volatile than those of higher rated
bonds. Factors adversely affecting the market price and yield of these
securities will adversely affect the Fund's net asset value. In addition, the
retail secondary market for these bonds may be less liquid than that of
higher rated bonds; adverse market conditions could make it difficult at
times for the Fund to sell certain securities or could result in lower prices
than those used in calculating the Fund's net asset value.
The Fund may invest up to 5% of the value of its net assets in zero
coupon securities and pay-in-kind bonds (bonds which pay interest through the
issuance of additional bonds) rated Ba or lower by Moody's and BB or lower by
S&P and Fitch. These securities may be subject to greater fluctuations in
value due to changes in interest rates than interest-bearing securities and
thus may be considered more speculative than comparably rated
interest-bearing securities. See "Other Investment Considerations" below, and
"Investment Objective and Management Policies_Risk Factors_Lower Rated Bonds"
and "Dividends, Distributions and Taxes" in the Statement of Additional
Information.
Page 13
OTHER INVESTMENT CONSIDERATIONS _ Even though interest-bearing securities
are investments which promise a stable stream of income, the prices of such
securities are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Certain
securities that may be purchased by the Fund, such as those with interest
rates that fluctuate directly or indirectly based on multiples of a stated
index, are designed to be highly sensitive to changes in interest rates and
can subject the holders thereof to extreme reductions of yield and possibly
loss of principal. The values of fixed-income securities also may be affected
by changes in the credit rating or financial condition of the issuing
entities. The Fund's net asset value generally will not be stable and should
fluctuate based upon changes in the value of the Fund's portfolio securities.
Securities in which the Fund invests may earn a higher level of current
income than certain shorter-term or higher quality securities which generally
have greater liquidity, less market risk and less fluctuation in market
value.
Federal income tax law requires the holder of a zero coupon security
or of certain pay-in-kind bonds to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its
qualification as a regulated investment company and avoid liability for
Federal income taxes, the Fund may be required to distribute such income
accrued with respect to these securities and may have to dispose of portfolio
securities under disadvantageous circumstances in order to generate cash to sa
tisfy these distribution requirements.
Certain municipal lease/purchase obligations in which the Fund may
invest may contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease/purchase obligations are secured by the leased
property, disposition of the leased property in the event of foreclosure
might prove difficult. In evaluating the credit quality of a municipal
lease/purchase obligation that is unrated, The Dreyfus Corporation will
consider, on an ongoing basis, a number of factors including the likelihood
that the issuing municipality will discontinue appropriating funding for the
leased property.
Certain provisions in the Code relating to the issuance of Municipal
Obligations may reduce the volume of Municipal Obligations qualifying for
Federal tax exemption. One effect of these provisions could be to increase
the cost of the Municipal Obligations available for purchase by the Fund and
thus reduce available yield. Shareholders should consult their tax advisers
concerning the effect of these provisions on an investment in the Fund.
Proposals that may restrict or eliminate the income tax exemption for
interest on Municipal Obligations may be introduced in the future. If any
such proposal were enacted that would reduce the availability of Municipal
Obligations for investment by the Fund so as to adversely affect Fund
shareholders, the Fund would reevaluate its investment objective and policies
and submit possible changes in the Fund's structure to shareholders for their
consideration. If legislation were enacted that would treat a type of
Municipal Obligation as taxable, the Fund would treat such security as a
permissible Taxable Investment within the applicable limits set forth herein.
The Fund's classification as a "non-diversified" investment company
means that the proportion of the Fund's assets that may be invested in the
securities of a single issuer is not limited by the Investment Company Act of
1940. A "diversified" investment company is required by the Investment
Company Act of 1940 generally to invest, with respect to 75% of its total
assets, not more than 5% of such assets in the securities of a single issuer.
However, the Fund intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Code, which requires that,
at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Fund's total assets be invested in cash, U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets, and (ii) not more than 25% of the
Page 14
value of its total assets be invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies). Since a relatively high percentage of the Fund's
assets may be invested in the obligations of a limited number of issuers, the
Fund's portfolio securities may be more susceptible to any single economic,
political or regulatory occurrence than the portfolio securities of a
diversified investment company.
Investment decisions for the Fund are made independently from those
of other investment companies advised by The Dreyfus Corporation. However, if
such other investment companies are prepared to invest in, or desire to
dispose of, Municipal Obligations or Taxable Investments at the same time as
the Fund, available investments or opportunities for sales will be allocated
equitably to each investment company. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Fund or the price paid or received by the Fund.
MANAGEMENT OF THE FUND
The Dreyfus Corporation, located at 200 Park Avenue, New York, New
York 10166, was formed in 1947 and serves as the Fund's investment adviser.
The Dreyfus Corporation is a wholly-owned subsidiary of Mellon Bank, N.A.,
which is a wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). As
of December 31, 1994, The Dreyfus Corporation managed or administered
approximately $70 billion in assets for more than 1.9 million investor
accounts nationwide.
The Dreyfus Corporation supervises and assists in the overall
management of the Fund's affairs under a Management Agreement with the Fund,
subject to the overall authority of the Fund's Board of Directors in
accordance with Maryland law. The Fund's primary portfolio manager is A. Paul
Disdier. He has held that position since the Fund's inception and has been
employed by The Dreyfus Corporation since February 1988. The Fund's other
portfolio managers are identified under "Management of the Fund" in the Fund's
Statement of Additional Information. The Dreyfus Corporation also provides
research services for the Fund as well as for other funds advised by The
Dreyfus Corporation through a professional staff of portfolio managers and
securities analysts.
Mellon is a publicly owned multibank holding company incorporated
under Pennsylvania law in 1971 and registered under the Federal Bank Holding
Company Act of 1956, as amended. Mellon provides a comprehensive range of
financial products and services in domestic and selected international
markets. Mellon is among the twenty-five largest bank holding companies in
the United States based on total assets. Mellon's principal wholly-owned
subsidiaries are Mellon Bank, N.A., Mellon Bank (DE) National Association,
Mellon Bank (MD), The Boston Company, Inc., AFCO Credit Corporation and a
number of companies known as Mellon Financial Services Corporations. Through
its subsidiaries, Mellon managed more than $76 billion in assets as of
September 30, 1994, including approximately $76 billion in mutual fund
assets. As of September 30, 1994, various subsidiaries of Mellon provided
non-investment services, such as custodial or administration services, for
approximately $659 billion in assets, including approximately $108 billion in
mutual fund assets.
For the fiscal year ended September 30, 1994, the Fund paid The
Dreyfus Corporation a monthly management fee at the annual rate of .60 of 1%
of the value of the Fund's average daily net assets. From time to time, The
Dreyfus Corporation may waive receipt of its fees and/or voluntarily assume
certain expenses of the Fund, which would have the effect of lowering the
overall expense ratio of the Fund and increasing yield to investors at the
time such amounts are waived or assumed, as the case may be. The Fund will
not pay The Dreyfus Corporation at a later time for any amounts it may waive,
nor will the Fund reimburse The Dreyfus Corporation for any amounts it may
assume.
The Dreyfus Corporation may pay the Fund's distributor for
shareholder services from The Dreyfus Corporation's own assets, including
past profits but not including the management fee paid by the Fund. The
Fund's distributor may use part or all of such payments to pay Service Agents
in respect of these services.
Page 15
The Fund is permitted to bear certain costs of distributing Fund
shares in accordance with a plan (the "Service Plan") adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940. Management of the Fund,
however, currently does not intend to implement the Service Plan and will
only do so if prior written notice is given to shareholders. See "Annual Fund
Operating Expenses" and "Service Plan."
The Fund's distributor is Premier Mutual Fund Services, Inc. (the
"Distributor"), located at One Exchange Place, Boston, Massachusetts 02109.
The Distributor 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.
The Shareholder Services Group, Inc., a subsidiary of First Data
Corporation, P.O. Box 9671, Providence, Rhode Island 02940-9671, is the
Fund's Transfer and Dividend Disbursing Agent (the "Transfer Agent"). The
Bank of New York, 110 Washington Street, New York, New York 10286, is the
Fund's Custodian.
HOW TO BUY FUND SHARES
You can purchase Fund shares through the Distributor or certain
financial institutions (which may include banks), securities dealers
("Selected Dealers") and other industry professionals, such as investment
advisers, accountants and estate planning firms (collectively, "Service
Agents") that have entered into service agreements with the Distributor.
Stock certificates are issued only upon your written request. No certificates
are issued for fractional shares. It is not recommended that the Fund be used
as a vehicle for Keogh, IRA or other qualified retirement plans. The Fund
reserves the right to reject any purchase order.
The minimum initial investment is $2,500, or $1,000 if you are a
client of a Service Agent which has made an aggregate minimum initial
purchase for its customers of $2,500. Subsequent investments must be at least
$100. The initial investment must be accompanied by the Fund's Account
Application. For full-time or part-time employees of The Dreyfus Corporation
or any of its affiliates or subsidiaries, directors of The Dreyfus
Corporation, Board members of a fund advised by The Dreyfus Corporation,
including members of the Fund's Board, or the spouse or minor child of any of
the foregoing, the minimum initial investment is $1,000. For full-time or
part-time employees of The Dreyfus Corporation or any of its affiliates or
subsidiaries who elect to have a portion of their pay directly deposited into
their Fund account, the minimum initial investment is $50. The Fund reserves
the right to vary further the initial and subsequent investment minimum
requirements at any time.
You may purchase Fund shares by check or wire, or through the Dreyfus
TeleTransfer Privilege described below. Checks should be made payable to "The
Dreyfus Family of Funds." Payments to open new accounts which are mailed
should be sent to The Dreyfus Family of Funds, P.O. Box 9387, Providence,
Rhode Island 02940-9387, together with your Account Application. For
subsequent investments, your Fund account number should appear on the check
and an investment slip should be enclosed and sent to The Dreyfus Family of
Funds, P.O. Box 105, Newark, New Jersey 07101-0105. Neither initial nor subseq
uent investments should be made by third party check. Purchase orders may be
delivered in person only to a Dreyfus Financial Center. THESE ORDERS WILL BE
FORWARDED TO THE FUND AND WILL BE PROCESSED ONLY UPON RECEIPT THEREBY. For
the location of the nearest Dreyfus Financial Center, please call the
telephone number listed under "General Information."
Wire payments may be made if your bank account is in a commercial
bank that is a member of the Federal Reserve System or any other bank having
a correspondent bank in New York City. Immediately available funds may be
transmitted by wire to The Bank of New York, DDA#8900051736/General
California Municipal Bond Fund, Inc., for purchase of Fund shares in your
name. The wire must include your Fund account number (for new accounts, your
Taxpayer Identification Number ("TIN") should be included instead), account
registration and dealer number, if applicable. If your initial purchase of
Fund
Page 16
shares is by wire, please call 1-800-645-6561 after completing your wire
payment to obtain your Fund account number. Please include your Fund account
number on the Fund's Account Application and promptly mail the Account
Application to the Fund, as no redemptions will be permitted until the
Account Application is received. You may obtain further information about
remitting funds in this manner from your bank. All payments should be made in
U.S. dollars and, to avoid fees and delays, should be drawn only on U.S.
banks. A charge will be imposed if any check used for investment in your
account does not clear. Other purchase procedures may be in effect for
clients of certain Service Agents. The Fund makes available to certain large
institutions the ability to issue purchase instructions through compatible
computer facilities.
Subsequent investments also may be made by electronic transfer of
funds from an account maintained in a bank or other domestic financial
institution that is an Automated Clearing House member. You must direct the
institution to transmit immediately available funds through the Automated
Clearing House to The Bank of New York with instructions to credit your Fund
account. The instructions must specify your Fund account registration and
your Fund account number PRECEDED BY THE DIGITS "1111."
Management understands that some Service Agents may impose certain
conditions on their clients which are different from those described in this
Prospectus, and, to the extent permitted by applicable regulatory authority,
may charge their clients direct fees for Servicing (as defined under "Service
Plan"). These fees would be in addition to any amounts which might be
received under the Service Plan, if it were implemented. Each Service Agent
has agreed to transmit to its clients a schedule of such fees. You should
consult your Service Agent in this regard.
Fund shares are sold on a continuous basis at the net asset value per
share next determined after an order in proper form is received by the
Transfer Agent. Net asset value per share is determined as of the close of
trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New
York time), on each day the New York Stock Exchange is open for business. For
purposes of determining net asset value per share, options and futures
contracts will be valued 15 minutes after the close of trading on the floor
of the New York Stock Exchange. Net asset value per share is computed by
dividing the value of the Fund's net assets (i.e., the value of its assets
less liabilities) by the total number of shares outstanding. The Fund's
investments are valued by an independent pricing service approved by the
Board of Directors and are valued at fair value as determined by the pricing
service. The pricing service's procedures are reviewed under the general
supervision of the Board of Directors. For further information regarding the
methods employed in valuing Fund investments, see "Determination of Net Asset
Value" in the Fund's Statement of Additional Information.
Federal regulations require that you provide a certified TIN upon
opening or reopening an account. See "Dividends, Distributions and Taxes" and
the Fund's Account Application for further information concerning this
requirement. Failure to furnish a certified TIN to the Fund could subject you
to a $50 penalty imposed by the Internal Revenue Service (the "IRS").
DREYFUS TELETRANSFER PRIVILEGE _ You may purchase Fund shares (minimum $500,
maximum $150,000 per day) by telephone if you have checked the appropriate
box and supplied the necessary information on the Fund's Account Application
or have filed a Shareholder Services Form with the Transfer Agent. The
proceeds will be transferred between the bank account designated in one of
these documents and your Fund account. Only a bank account maintained in a
domestic financial institution which is an Automated Clearing House member
may be so designated. The Fund may modify or terminate this Privilege at any
time or charge a service fee upon notice to shareholders. No such fee
currently is contemplated.
If you have selected the Dreyfus TELETRANSFER Privilege, you may
request a Dreyfus TELETRANSFER purchase of Fund shares by telephoning
1-800-221-4060 or, if you are calling from overseas, call
1-401-455-3306.
Page 17
SHAREHOLDER SERVICES
The services and privileges described under this heading may not be
available to clients of certain Service Agents and some Service Agents may
impose certain conditions on their clients which are different from those
described in this Prospectus. You should consult your Service Agent in this
regard. In addition, use of the privileges noted below may require that the
proper forms and information be filed with and processed by the Transfer
Agent.
FUND EXCHANGES _ You may purchase, in exchange for shares of the Fund,
shares of certain other funds managed or administered by The Dreyfus
Corporation, to the extent such shares are offered for sale in your state of
residence. These funds have different investment objectives which may be of
interest to you. If you desire to use this service, please call
1-800-645-6561 to determine if it is available and whether any conditions are
imposed on its use.
To request an exchange, you must give exchange instructions to the
Transfer Agent in writing or by telephone. Before any exchange, you must
obtain and should review a copy of the current prospectus of the fund into
which the exchange is being made. Prospectuses may be obtained by calling
1-800-645-6561. Except in the case of Personal Retirement Plans, the shares
being exchanged must have a current value of at least $500; furthermore, when
establishing a new account by exchange, the shares being exchanged must have
a current value of at least the minimum initial investment required for the
fund into which the exchange is being made. The ability to issue exchange
instructions by telephone is given to all Fund shareholders automatically,
unless you check the relevant "NO" box on the Account Application, indicating
that you specifically refuse this Privilege. The Telephone Exchange Privilege
may be established for an existing account by written request, signed by all
shareholders on the account, or by a separate signed Shareholder Services
Form, also available by calling 1-800-645-6561. If you previously have
established the Telephone Exchange Privilege, you may telephone exchange
instructions by calling 1-800-221-4060 or, if you are calling from overseas,
call 1-401-455-3306. See "How to Redeem Fund Shares_Procedures." Upon an
exchange into a new account, the following shareholder services and
privileges, as applicable and where available, will be automatically carried
over to the fund into which the exchange is made: Telephone Exchange
Privilege, Check Redemption Privilege, Wire Redemption Privilege, Telephone
Redemption Privilege, Dreyfus TELETRANSFER Privilege, and the
dividend/capital gain distribution option (except for Dreyfus Dividend Sweep)
selected by the investor.
Shares will be exchanged at the next determined net asset value;
however, a sales load may be charged with respect to exchanges into funds
sold with a sales load. If you are exchanging into a fund that charges a
sales load, you may qualify for share prices which do not include the sales
load or which reflect a reduced sales load, if the shares of the fund from
which you are exchanging were: (a) purchased with a sales load, (b) acquired
by a previous exchange from shares purchased with a sales load, or (c)
acquired through reinvestment of dividends or distributions paid with respect
to the foregoing categories of shares. To qualify, at the time of your
exchange you must notify the Transfer Agent or your Service Agent must notify
the Distributor. Any such qualification is subject to confirmation of your
holdings through a check of appropriate records. See "Shareholder Services"
in the Statement of Additional Information. No fees currently are charged
shareholders directly in connection with exchanges, although the Fund
reserves the right, upon not less than 60 days' written notice, to charge
shareholders a nominal fee in accordance with rules promulgated by the
Securities and Exchange Commission. The Fund reserves the right to reject any
exchange request in whole or in part. The availability of Fund Exchanges may
be modified or terminated at any time upon notice to shareholders.
The exchange of shares of one fund for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by
the shareholder and, therefore, an exchanging shareholder may realize a
taxable gain or loss.
Page 18
DREYFUS AUTO-EXCHANGE PRIVILEGE _ Dreyfus Auto-Exchange Privilege enables
you to invest regularly (on a semi-monthly, monthly, quarterly or annual
basis), in exchange for shares of the Fund, in shares of other funds in the
Dreyfus Family of Funds of which you are currently an investor. The amount
you designate, which can be expressed either in terms of a specific dollar or
share amount ($100 minimum), will be exchanged automatically on the first
and/or fifteenth day of the month according to the schedule you have
selected. Shares will be exchanged at the then-current net asset value;
however, a sales load may be charged with respect to exchanges into funds
sold with a sales load. See "Shareholder Services" in the Statement of
Additional Information. The right to exercise this Privilege may be modified
or cancelled by the Fund or the Transfer Agent. You may modify or cancel your
exercise of this Privilege at any time by writing to The Dreyfus Family of
Funds, P.O. Box 9671, Providence, Rhode Island 02940-9671. The Fund may
charge a service fee for the use of this Privilege. No such fee currently is
contemplated. The exchange of shares of one fund for shares of another is
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder and, therefore, an exchanging shareholder may
realize a taxable gain or loss. For more information concerning this
Privilege and the funds in the Dreyfus Family of Funds eligible to
participate in this Privilege, or to obtain a Dreyfus Auto-Exchange
Authorization Form, please call toll free 1-800-645-6561.
DREYFUS-AUTOMATIC ASSET BUILDER _ Dreyfus-AUTOMATIC Asset Builder permits
you to purchase Fund shares (minimum of $100 and maximum of $150,000 per
transaction) at regular intervals selected by you. Fund shares are purchased
by transferring funds from the bank account designated by you. At your
option, the account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first
or fifteenth day, or twice a month, on both days. Only an account maintained
at a domestic financial institution which is an Automated Clearing House
member may be so designated. To establish a Dreyfus-AUTOMATIC Asset Builder
account, you must file an authorization form with the Transfer Agent. You may
obtain the necessary authorization form by calling 1-800-645-6561. You may
cancel this Privilege or change the amount of purchase at any time by mailing
written notification to The Dreyfus Family of Funds, P.O. Box 9671,
Providence, Rhode Island 02940-9671, and the notification will be effective
three business days following receipt. The Fund may modify or terminate this
Privilege at any time or charge a service fee. No such fee currently is
contemplated.
DREYFUS GOVERNMENT DIRECT DEPOSIT PRIVILEGE _ Dreyfus Government Direct
Deposit Privilege enables you to purchase Fund shares (minimum of $100 and
maximum of $50,000 per transaction) by having Federal salary, Social
Security, or certain veterans', military or other payments from the Federal
government automatically deposited into your Fund account. You may deposit as
much of such payments as you elect. To enroll in Dreyfus Government Direct
Deposit, you must file with the Transfer Agent a completed Direct Deposit
Sign-Up Form for each type of payment that you desire to include in this
Privilege. The appropriate form may be obtained by calling 1-800-645-6561.
Death or legal incapacity will terminate your participation in this
Privilege. You may elect at any time to terminate your participation by
notifying in writing the appropriate Federal agency. Further, the Fund may
terminate your participation upon 30 days' notice to you.
DREYFUS DIVIDEND OPTIONS _ Dreyfus Dividend Sweep enables you to invest
automatically dividends or dividends and capital gain distributions, if any,
paid by the Fund in shares of another fund in the Dreyfus Family of Funds of
which you are a shareholder. Shares of the other fund will be purchased at
the then-current net asset value; however, a sales load may be charged with
respect to investments in shares of a fund sold with a sales load. If you are
investing in a fund that charges a sales load, you may qualify for share
prices which do not include the sales load or which reflect a reduced sales
load. If you are investing in a fund that charges a contingent deferred sales
charge, the shares purchased will be subject on redemption to the contingent
deferred sales charge, if any, applicable to the purchased shares. See
"Shareholder Services" in the Statement of Additional Information. Dreyfus
Dividend ACH permits you
Page 19
to transfer electronically on the payment date dividends or dividends and
capital gain distributions, if any, from the Fund to a designated bank
account. Only an account maintained at a financial institution which is an
Automated Clearing House member may be so designated. Banks may charge a fee
for this service.
For more information concerning these privileges, or to request a
Dividend Options Form, please call toll free 1-800-645-6561. You may cancel
these privileges by mailing written notification to The Dreyfus Family of
Funds, P.O. Box 9671, Providence, Rhode Island 02940-9671. Enrollment in or
cancellation of these privileges is effective three business days following
receipt. These privileges are available only for existing accounts and may
not be used to open new accounts. Minimum subsequent investments do not apply
for Dreyfus Dividend Sweep. The Fund may modify or terminate these privileges
at any time or charge a service fee. No such fee currently is contemplated.
DREYFUS PAYROLL SAVINGS PLAN _ Dreyfus Payroll Savings Plan permits you to
purchase Fund shares (minimum of $100 per transaction) automatically on a
regular basis. Depending upon your employer's direct deposit program, you may
have part or all of your paycheck transferred to your existing Dreyfus
account electronically through the Automated Clearing House system at each
pay period. To establish a Dreyfus Payroll Savings Plan account, you must
file an authorization form with your employer's payroll department. Your
employer must complete the reverse side of the form and return it to The
Dreyfus Family of Funds, P.O. Box 9671, Providence, Rhode Island 02940-9671.
You may obtain the necessary authorization form by calling 1-800-645-6561.
You may change the amount of purchase or cancel the authorization only by
written notification to your employer. It is the sole responsibility of your
employer, not the Distributor, The Dreyfus Corporation, the Fund, the
Transfer Agent or any other person, to arrange for transactions under the
Dreyfus Payroll Savings Plan. The Fund may modify or terminate this Privilege
at any time or charge a service fee. No such fee currently is contemplated.
AUTOMATIC WITHDRAWAL PLAN _ The Automatic Withdrawal Plan permits you to
request withdrawal of a specified dollar amount (minimum of $50) on either a
monthly or quarterly basis if you have a $5,000 minimum account. An
application for the Automatic Withdrawal Plan can be obtained by calling
1-800-645-6561. There is a service charge of 50cents for each withdrawal
check. The Automatic Withdrawal Plan may be ended at any time by you, the
Fund or the Transfer Agent. Shares for which certificates have been issued
may not be redeemed through the Automatic Withdrawal Plan.
HOW TO REDEEM FUND SHARES
GENERAL _ You may request redemption of your shares at any time. Redemption
requests should be transmitted to the Transfer Agent as described below. When
a request is received in proper form, the Fund will redeem the shares at the
next determined net asset value.
The Fund imposes no charges when shares are redeemed directly through
the Distributor. Service Agents may charge a nominal fee for effecting
redemptions of Fund shares. Any certificates representing Fund shares being
redeemed must be submitted with the redemption request. The value of the
shares redeemed may be more or less than their original cost, depending upon
the Fund's then-current net asset value.
The Fund ordinarily will make payment for all shares redeemed within
seven days after receipt by the Transfer Agent of a redemption request in
proper form, except as provided by the rules of the Securities and Exchange
Commission. HOWEVER, IF YOU HAVE PURCHASED FUND SHARES BY CHECK, BY DREYFUS
TELETRANSFER PRIVILEGE OR THROUGH DREYFUS-AUTOMATIC ASSET BUILDER AND
SUBSEQUENTLY SUBMIT A WRITTEN REDEMPTION REQUEST TO THE TRANSFER AGENT, THE
REDEMPTION PROCEEDS WILL BE TRANSMITTED TO YOU PROMPTLY UPON BANK CLEARANCE
OF YOUR PURCHASE CHECK, DREYFUS TELETRANSFER PURCHASE OR DREYFUS-AUTOMATIC
ASSET BUILDER ORDER, WHICH MAY TAKE UP TO EIGHT BUSINESS DAYS OR MORE. IN
ADDITION, THE FUND WILL NOT HONOR REDEMPTION CHECKS UNDER THE CHECK
REDEMPTION PRIVILEGE AND WILL REJECT REQUESTS TO REDEEM SHARES BY WIRE OR
TELEPHONE OR
Page 20
PURSUANT TO THE DREYFUS TELETRANSFER PRIVILEGE, FOR A PERIOD OF
EIGHT BUSINESS DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE PURCHASE
CHECK, THE DREYFUS TELETRANSFER PURCHASE OR THE DREYFUS-AUTOMATIC ASSET
BUILDER ORDER AGAINST WHICH SUCH REDEMPTION IS REQUESTED. THESE PROCEDURES
WILL NOT APPLY IF YOUR SHARES WERE PURCHASED BY WIRE PAYMENT, OR IF YOU
OTHERWISE HAVE A SUFFICIENT COLLECTED BALANCE IN YOUR ACCOUNT TO COVER THE
REDEMPTION REQUEST. PRIOR TO THE TIME ANY REDEMPTION IS EFFECTIVE, DIVIDENDS
ON SUCH SHARES WILL ACCRUE AND BE PAYABLE, AND YOU WILL BE ENTITLED TO
EXERCISE ALL OTHER RIGHTS OF BENEFICIAL OWNERSHIP. Fund shares will not be
redeemed until the Transfer Agent has received your Account Application.
The Fund reserves the right to redeem your account at its option upon
not less than 30 days' written notice if your account's net asset value is
$500 or less and remains so during the notice period.
PROCEDURES _ You may redeem Fund shares by using the regular redemption
procedure through the Transfer Agent, the Check Redemption Privilege, the
Wire Redemption Privilege, the Telephone Redemption Privilege, or the Dreyfus
TELETRANSFER Privilege. The Fund makes available to certain large
institutions the ability to issue redemption instructions through compatible
computer facilities.
You may redeem Fund shares by telephone if you have checked the
appropriate box on the Fund's Account Application or have filed a Shareholder
Services Form with the Transfer Agent. If you select a telephone redemption
privilege or telephone exchange privilege (which is granted automatically
unless you refuse it), you authorize the Transfer Agent to act on telephone
instructions from any person representing himself or herself to be you, or a
representative of your Service Agent, and reasonably believed by the Transfer
Agent to be genuine. The Fund will require the Transfer Agent to employ
reasonable procedures, such as requiring a form of personal identification,
to confirm that instructions are genuine and, if it does not follow such
procedures, the Fund or the Transfer Agent may be liable for any losses due
to unauthorized or fraudulent instructions. Neither the Fund nor the Transfer
Agent will be liable for following telephone instructions reasonably believed
to be genuine.
During times of drastic economic or market conditions, you may
experience difficulty in contacting the Transfer Agent by telephone to
request a redemption or exchange of Fund shares. In such cases, you should
consider using the other redemption procedures described herein. Use of these
other redemption procedures may result in your redemption request being
processed at a later time than it would have been if telephone redemption had
been used. During the delay, the Fund's net asset value may fluctuate.
REGULAR REDEMPTION _ Under the regular redemption procedure, you may redeem
your shares by written request mailed to The Dreyfus Family of Funds, P.O.
Box 9671, Providence, Rhode Island 02940-9671. Redemption requests may be
delivered in person only to a Dreyfus Financial Center. THESE REQUESTS WILL
BE FORWARDED TO THE FUND AND WILL BE PROCESSED ONLY UPON RECEIPT THEREBY. For
the location of the nearest Dreyfus Financial Center, please call the
telephone number listed under "General Information." Redemption requests must
be signed by each shareholder, including each owner of a joint account, and
each signature must be guaranteed. The Transfer Agent has adopted standards
and procedures pursuant to which signature-guarantees in proper form
generally will be accepted from domestic banks, brokers, dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations, as well as from participants in
the New York Stock Exchange Medallion Signature Program, the Securities
Transfer Agents Medallion Program ("STAMP"), and the Stock Exchanges
Medallion Program. If you have any questions with respect to
signature-guarantees, please call the telephone number listed under "General
Information."
Redemption proceeds of at least $1,000 will be wired to any member
bank of the Federal Reserve System in accordance with a written
signature-guaranteed request.
CHECK REDEMPTION PRIVILEGE _ You may request on the Account Application,
Shareholder Services Form or by later written request that the Fund provide
Redemption Checks drawn on the Fund's account. Redemption Checks may be made
payable to the order of any person in the amount of $500 or
Page 21
more. Potential fluctuations in the net asset value of Fund shares should be
considered in determining the amount of the check. Redemption Checks should
not be used to close your account. Redemption Checks are free, but the
Transfer Agent will impose a fee for stopping payment of a Redemption Check
upon your request or if the Transfer Agent cannot honor the Redemption Check
due to insufficient funds or other valid reason. You should date your
Redemption Checks with the current date when you write them. Please do not
postdate your Redemption Checks. If you do, the Transfer Agent will honor
upon presentment, even if presented before the date of the check, all
postdated Redemption Checks which are dated within six months of presentment
for payment, if they are otherwise in good order. Shares for which
certificates have been issued may not be redeemed by Redemption Check. This
Privilege may be modified or terminated at any time by the Fund or the
Transfer Agent upon notice to shareholders.
WIRE REDEMPTION PRIVILEGE _ You may request by wire or telephone that
redemption proceeds (minimum $1,000) be wired to your account at a bank which
is a member of the Federal Reserve System, or a correspondent bank if your
bank is not a member. To establish the Wire Redemption Privilege, you must
check the appropriate box and supply the necessary information on the Fund's
Account Application or file a Shareholder Services Form with the Transfer
Agent. You may direct that redemption proceeds be paid by check (maximum
$150,000 per day) made out to the owners of record and mailed to your
address. Redemption proceeds of less than $1,000 will be paid automatically
by check. Holders of jointly registered Fund or bank accounts may have
redemption proceeds of not more than $250,000 wired within any 30-day period.
You may telephone redemption requests by calling 1-800-221-4060 or, if you
are calling from overseas, call 1-401-455-3306. The Fund reserves the right
to refuse any redemption request, including requests made shortly after a chan
ge of address, and may limit the amount involved or the number of such
requests. This Privilege may be modified or terminated at any time by the
Transfer Agent or the Fund. The Fund's Statement of Additional Information
sets forth instructions for transmitting redemption requests by wire. Shares
for which certificates have been issued are not eligible for this Privilege.
TELEPHONE REDEMPTION PRIVILEGE _ You may redeem Fund shares of the Fund
(maximum $150,000 per day) by telephone if you have checked the appropriate
box on the Fund's Account Application or have filed a Shareholder Services
Form with the Transfer Agent. The redemption proceeds will be paid by check
and mailed to your address. You may telephone redemption instructions by
calling 1-800-221-4060 or, if you are calling from overseas, call
1-401-455-3306. The Fund reserves the right to refuse any request made by
telephone, including requests made shortly after a change of address, and may
limit the amount involved or the number of telephone redemption requests.
This Privilege may be modified or terminated at any time by the Transfer
Agent or the Fund. Shares for which certificates have been issued are not
eligible for this Privilege.
DREYFUS TELETRANSFER PRIVILEGE _ You may redeem Fund shares (minimum $500
per day) by telephone if you have checked the appropriate box and supplied
the necessary information on the Fund's Account Application or have filed a
Shareholder Services Form with the Transfer Agent. The proceeds will be
transferred between your Fund account and the bank account designated in one
of these documents. Only a bank account maintained in a domestic financial
institution which is an Automated Clearing House member may be so designated.
Redemption proceeds will be on deposit in your account at an Automated
Clearing House member bank ordinarily two days after receipt of the
redemption request or at your request, paid by check (maximum $150,000 per
day) and mailed to your address. Holders of jointly registered Fund or bank
accounts may redeem through the Dreyfus TELETRANSFER Privilege for transfer
to their bank account not more than $250,000 within any 30-day period. The
Fund reserves the right to refuse any request made by telephone, including
requests made shortly after a change of address, and may limit the amount
involved or the number of such requests.
Page 22
The Fund may modify or terminate this Privilege at any time or charge a
service fee upon notice to shareholders. No such fee currently is
contemplated.
If you have selected the Dreyfus TELETRANSFER Privilege, you may
request a Dreyfus TELETRANSFER redemption of Fund shares by telephoning
1-800-221-4060 or, if you are calling from overseas, call
1-401-455-3306.
SERVICE PLAN
Under the Service Plan, adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the Fund may (a) reimburse the Distributor
for payments to certain Service Agents for distributing the Fund's shares and
servicing shareholder accounts ("Servicing") and (b) pay The Dreyfus
Corporation, Dreyfus Service Corporation, a wholly-owned subsidiary of The
Dreyfus Corporation, and any affiliate of either of them (collectively,
"Dreyfus") for advertising and marketing relating to the Fund and for servicin
g, at an aggregate annual rate of .25 of 1% of the value of the Fund's
average daily net assets. Each of the Distributor and Dreyfus may pay one or
more Service Agents a fee in respect of Fund shares owned by shareholders
with whom the Service Agent has a Servicing relationship or for whom the
Service Agent is the dealer or holder of record. Each of the Distributor and
Dreyfus determine the amount, if any, to be paid to Service Agents under the
Service Plan and the basis on which such payments are made. The fees payable
under the Service Plan are payable without regard to actual expenses
incurred.
The Fund is permitted to bear the costs of preparing and printing
prospectuses and statements of additional information used for regulatory
purposes and for distribution to existing shareholders. Under the Service
Plan, the Fund is permitted to bear (a) the costs of preparing, printing and
distributing prospectuses and statements of additional information used for
other purposes and (b) the costs associated with implementing and operating
the Service Plan (such as costs of printing and mailing service agreements),
the aggregate of such amounts not to exceed in any fiscal year of the Fund
the greater of $100,000 or .005 of 1% of the value of the Fund's average
daily net assets for such fiscal year. Each item for which a payment may be
made under the Service Plan may constitute an expense of distributing Fund
shares as the Securities and Exchange Commission construes such term under
Rule 12b-1.
Management of the Fund currently does not intend to implement the
Service Plan and will only do so if prior written notice is given to
shareholders.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan pursuant to which
the Fund reimburses Dreyfus Service Corporation an amount not to exceed an
annual rate of .25 of 1% of the value of the Fund's average daily net assets
for certain allocated expenses of providing personal services and/or
maintaining shareholder accounts. The services provided may include personal
services relating to shareholder accounts, such as answering shareholder
inquiries regarding the Fund and providing reports and other information, and
services related to the maintenance of shareholder accounts.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund ordinarily declares dividends from its net investment income
on each day the New York Stock Exchange is open for business. Fund shares
begin earning income dividends on the day following the date of purchase.
Dividends usually are paid on the last business day of each month and are
automatically reinvested in additional Fund shares at net asset value or, at
your option, paid in cash. The Fund's earnings for Saturdays, Sundays and
holidays are declared as dividends on the next business day. If you redeem
all shares in your account at any time during the month, all dividends to
which you are entitled will be paid to you along with the proceeds of the
redemption. Distributions from net realized securities gains, if any,
generally are declared and paid once a year, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
Page 23
provisions of the Investment Company Act of 1940. The Fund will not make
distributions from net realized securities gains unless capital loss
carryovers, if any, have been utilized or have expired. You may choose
whether to receive distributions in cash or to reinvest in additional Fund
shares at net asset value. All expenses are accrued daily and deducted before
declaration of dividends to investors.
Except for dividends from Taxable Investments, the Fund anticipates
that substantially all dividends paid by the Fund will not be subject to
Federal or California personal income taxes. To the extent that you are
obligated to pay state or local taxes outside of the State of California,
dividends earned by an investment in the Fund may represent taxable income.
Dividends derived from Taxable Investments, together with distributions from
any net realized short-term securities gains and all or a portion of any
gains realized from the sale or other disposition of certain market discount
bonds, are subject to Federal income tax as ordinary income whether or not
reinvested. No dividend paid by the Fund will qualify for the dividends
received deduction allowable to certain U.S. corporations. Distributions from
net realized long-term securities gains of the Fund generally are taxable as
long-term capital gains for Federal income tax purposes if you are a citizen
or resident of the United States. Dividends and distributions attributable to
income or gain derived from securities transactions and from the use of
certain of the investment techniques described under "Description of the
Fund_Investment Techniques" will be subject to Federal income tax. The Code pr
ovides that the net capital gain of an individual generally will not be
subject to Federal income tax at a rate in excess of 28%. Under the Code,
interest on indebtedness incurred or continued to purchase or carry Fund
shares which is deemed to relate to exempt-interest dividends is not
deductible.
Although all or a substantial portion of the dividends paid by the
Fund may be excluded by shareholders of the Fund from their gross income for
Federal income tax purposes, the Fund may purchase specified private activity
bonds, the interest from which may be (i) a preference item for purposes of
the alternative minimum tax, (ii) a component of the "adjusted current
earnings" preference item for purposes of the corporate alternative minimum
tax as well as a component in computing the corporate environmental tax or
(iii) a factor in determining the extent to which a shareholder's Social
Security benefits are taxable. If the Fund purchases such securities, the
portion of the Fund's dividends related thereto will not necessarily be tax
exempt to an investor who is subject to the alternative minimum tax and/or
tax on Social Security benefits and may cause an investor to be subject to
such taxes.
Notice as to the tax status of your dividends and distributions will
be mailed to you annually. You also will receive periodic summaries of your
account which will include information as to dividends and distributions from
securities gains, if any, paid during the year. These statements set forth
the dollar amount of income exempt from Federal tax and the dollar amount, if
any, subject to Federal tax. These dollar amounts will vary depending on the
size and length of time of your investment in the Fund. If the Fund pays
dividends derived from taxable income, it intends to designate as taxable the
same percentage of the day's dividend as the actual taxable income earned on
that day bears to total income earned on that day. Thus, the percentage of
the dividend designated as taxable, if any, may vary from day to day.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of taxable dividends,
distributions from net realized securities gains and the proceeds of any
redemption, regardless of the extent to which gain or loss may be realized,
paid to a shareholder if such shareholder fails to certify either that the
TIN furnished in connection with opening an account is correct, or that such
shareholder has not received notice from the IRS of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Furthermore, the IRS may
notify the Fund to institute backup withholding if the IRS determines a
shareholder's TIN is incorrect or if a shareholder has failed to properly
report taxable dividend and interest income on a Federal income tax return.
Page 24
A TIN is either the Social Security number or employer identification
number of the record owner of the account. Any tax withheld as a result of
backup withholding does not constitute an additional tax imposed on the
record owner of the account, and may be claimed as a credit on the record
owner's Federal income tax return.
Management of the Fund believes that the Fund has qualified for the
fiscal year ended September 30, 1994 as a "regulated investment company"
under the Code. The Fund intends to continue to so qualify if such
qualification is in the best interests of its shareholders. Such
qualification relieves the Fund of any liability for Federal income tax to
the extent its earnings are distributed in accordance with applicable
provisions of the Code. The Fund is subject to a non-deductible 4% excise
tax, measured with respect to certain undistributed amounts of taxable
investment income and capital gains.
You should consult your tax adviser regarding specific questions as
to Federal, state or local taxes.
PERFORMANCE INFORMATION
For purposes of advertising, performance may be calculated on several
bases, including current yield, tax equivalent yield, average annual total
return and/or total return.
Current yield refers to the Fund's annualized net investment income
per share over a 30-day period, expressed as a percentage of the net asset
value per share at the end of the period. For purposes of calculating current
yield, the amount of net investment income per share during that 30-day
period, computed in accordance with regulatory requirements, is compounded by
assuming that it is reinvested at a constant rate over a six-month period. An
identical result is then assumed to have occurred during a second six-month
period which, when added to the result for the first six months, provides an
"annualized" yield for an entire one-year period. Calculations of the Fund's
current yield may reflect absorbed expenses pursuant to any undertaking that
may be in effect. See "Management of the Fund."
Tax equivalent yield is calculated by determining the pre-tax yield
which, after being taxed at a stated rate, would be equivalent to a stated
current yield calculated as described above.
Average annual total return is calculated pursuant to a standardized
formula which assumes that an investment in the Fund was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of
a stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the
redeemable value of the investment at the end of the period. Advertisements
of the Fund's performance will include the Fund's average annual total return
for one, five and ten year periods, or for shorter time periods depending
upon the length of time during which the Fund has operated.
Total return is computed on a per share basis and assumes the
reinvestment of dividends and distributions. Total return generally is
expressed as a percentage rate which is calculated by combining the income
and principal changes for a specified period and dividing by the net asset
value per share at the beginning of the period. Advertisements may include
the percentage rate of total return or may include the value of a
hypothetical investment at the end of the period which assumes the
application of the percentage rate of total return.
Performance will vary from time to time and past results are not
necessarily representative of future results. You should remember that
performance is a function of portfolio management in selecting the type and
quality of portfolio securities and is affected by operating expenses.
Performance information, such as that described above, may not provide a
basis for comparison with other investments or other investment companies
using a different method of calculating performance.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Moody's Bond Survey Bond Index, Lehman Brothers
Municipal Bond Index, Morningstar, Inc. and other industry publications.
Page 25
GENERAL INFORMATION
The Fund was incorporated under Maryland law on August 18, 1989, and
commenced operations on October 10, 1989. The Fund is authorized to issue 500
million shares of Common Stock, par value $.001 per share. Each share has one
vote.
On August 3, 1994, the Fund's shareholders approved a proposal to
change, among other things, certain of the fund's fundamental policies and
investment restrictions to (i) increase the amount the Fund may borrow, (ii)
increase the amount of the Fund's assets that it may pledge to secure such
borrowings and make such policy non-fundamental and (iii) make the Fund's
policy regarding investments in illiquid securities non-fundamental.
Unless otherwise required by the Investment Company Act of 1940,
ordinarily it will not be necessary for the Fund to hold annual meetings of
shareholders. As a result, Fund shareholders may not consider each year the
election of Directors or the appointment of auditors. However, pursuant to
the Fund's By-Laws, the holders of at least 10% of the shares outstanding and
entitled to vote may require the Fund to hold a special meeting of
shareholders for purposes of removing a Director from office and for any
other purpose. Fund shareholders may remove a Director by the affirmative
vote of a majority of the Fund's outstanding voting shares. In addition, the
Board of Directors will call a meeting of shareholders for the purpose of
electing Directors if, at any time, less than a majority of the Directors
then holding office have been elected by shareholders.
The Transfer Agent maintains a record of your ownership and sends
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at 144 Glenn
Curtiss Boulevard, Uniondale, New York 11556-0144, or by calling toll free
1-800-645-6561.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
FUND'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE FUND'S
SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM,
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
(This Page Intentionally Left Blank)
DREYFUS
GENERAL
CALIFORNIA
MUNICIPAL BOND
FUND, INC.
PROSPECTUS
(LION LOGO)
(copyright logo)1995 Dreyfus Service Corporation
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
JANUARY 30, 1995
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of
General California Municipal Bond Fund, Inc. (the "Fund"), dated January 30,
1995, as it may be revised from time to time. To obtain a copy of the Fund's
Prospectus, please write to the Fund at 144 Glenn Curtiss Boulevard,
Uniondale, New York 11556-0144, or call toll free 1-800-645-6561.
The Dreyfus Corporation (the "Manager") serves as the Fund's investment
adviser.
Premier Mutual Fund Services, Inc. (the "Distributor") is the distributor
of the Fund's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies. . . . . . . . .B-2
Management of the Fund. . . . . . . . . . . . . . . . . . . .B-10
Management Agreement. . . . . . . . . . . . . . . . . . . . .B-12
Purchase of Fund Shares . . . . . . . . . . . . . . . . . . .B-14
Service Plan. . . . . . . . . . . . . . . . . . . . . . . . .B-15
Shareholder Services Plan . . . . . . . . . . . . . . . . . .B-15
Redemption of Fund Shares . . . . . . . . . . . . . . . . . .B-16
Shareholder Services. . . . . . . . . . . . . . . . . . . . .B-18
Determination of Net Asset Value. . . . . . . . . . . . . . .B-20
Portfolio Transactions. . . . . . . . . . . . . . . . . . . .B-21
Dividends, Distributions and Taxes. . . . . . . . . . . . . .B-22
Performance Information . . . . . . . . . . . . . . . . . . .B-24
Information About the Fund. . . . . . . . . . . . . . . . . .B-25
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors . . . . . . . . . . . .B-26
Appendix A. . . . . . . . . . . . . . . . . . . . . . . . . B-27
Appendix B. . . . . . . . . . . . . . . . . . . . . . . . . .B-40
Financial Statements. . . . . . . . . . . . . . . . . . . . .B-48
Report of Independent Auditors. . . . . . . . . . . . . . . .B-59
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Description of the Fund."
The average distribution of investments (at value) in Municipal
Obligations (including notes) by ratings for the fiscal year ended September
30, 1994, computed on a monthly basis, was as follows:
Fitch Moody's Standard
Investors Investors & Poor's
Service, Inc. Service, Inc. Corporation Percentage
("Fitch") or ("Moody's") or ("S&P") of Value
- ------------- ------------- ----------- ----------
AAA Aaa AAA 22.6%
AA Aa AA 18.9
A A A 37.0
BBB Baa BBB 13.5
D D D .4
F-1+/F-1 VMIG1/MIG1, SP-1+/SP-1, .7
P-1 A-1
Not Rated Not Rated Not Rated 6.9 (*)
-----
100.0%
======
- -----------------------------
* Included in the Not Rated category are securities comprising 6.6% of the
Fund's market value which, while not rated, have been determined by the
Manager to be of comparable quality to securities in the following rating
categories: Aaa/AAA(.8%) and Baa/BBB (5.8%).
Municipal Obligations. The term "Municipal Obligations" generally
includes debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and lending such funds to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide for the construction, equipment, repair or improvement of
privately operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, industrial, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste
disposal; the interest paid on such obligations may be exempt from Federal
income tax, although current tax laws place substantial limitations on the
size of such issues. Such obligations are considered to be Municipal
Obligations if the interest paid thereon qualifies as exempt from Federal
income tax in the opinion of bond counsel to the issuer. There are, of
course, variations in the security of Municipal Obligations, both within a
particular classification and between classifications.
Floating and variable rate demand notes and bonds are tax exempt
obligations ordinarily having stated maturities in excess of one year, but
which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such obligations ordinarily has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligation plus accrued interest upon a
specified number of days' notice to the holders thereof. The interest rate
on a floating rate demand obligation is based on a known lending rate, such
as a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand obligation is adjusted
automatically at specified intervals.
The yields on Municipal Obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a particular
offering, maturity of the obligation and rating of the issue. The imposition
of the Fund's management fee, as well as other operating expenses, including
fees paid under the Fund's Service and Shareholder Services Plans, will have
the effect of reducing the yield to investors.
Municipal lease obligations or installment purchase contract obligations
(collectively, "lease obligations") have special risks not ordinarily
associated with Municipal Obligations. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation ordinarily is
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has
no obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
The staff of the Securities and Exchange Commission currently considers
certain lease obligations to be illiquid. Determination as to the liquidity
of such securities is made in accordance with guidelines established by the
Fund's Board. Pursuant to such guidelines, the Board has directed the Manager
to monitor carefully the Fund's investment in such securities with particular
regard to (1) the frequency of trades and quotes for the lease obligation; (2)
the number of dealers willing to purchase or sell the lease obligation and the
number of other potential buyers; (3) the willingness of dealers to undertake
to make a market in the lease obligation; (4) the nature of the marketplace
trades including the time needed to dispose of the lease obligation, the
method of soliciting offers and the mechanics of transfer; and (5) such other
factors concerning the trading market for the lease obligation as the Manager
may deem relevant. In addition, in evaluating the liquidity and credit
quality of a lease obligation that is unrated, the Fund's Board has directed
the Manager to consider (a) whether the lease can be cancelled; (b) what
assurance there is that the assets represented by the lease can be sold; (c)
the strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of nonappropriation"); (e) the
legal recourse in the event of failure to appropriate; and (f) such other
factors concerning credit quality as the Manager may deem relevant. The Fund
will not invest more than 15% of the value of its net assets in lease
obligations that are illiquid and in other illiquid securities. See
"Investment Restriction No. 11" below.
The Fund will purchase tender option bonds only when it is satisfied that
the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax exempt status of the
underlying Municipal Obligations and that payment of any tender fees will not
have the effect of creating taxable income for the Fund. Based on the tender
option bond agreement, the Fund expects to be able to value the tender option
bond at par; however, the value of the instrument will be monitored to assure
that it is valued at fair value.
Illiquid Securities. If a substantial market of qualified institutional
buyers develops pursuant to Rule 144A under the Securities Act of 1933, as
amended, for certain restricted securities held by the fund, the Fund intends
to treat such securities as liquid securities in accordance with procedures
approved by the Fund's Board. Because it is not possible to predict with
assurance how the market for restricted securities pursuant to Rule 144A will
develop, the Fund's Board has directed the Manager to monitor carefully the
Fund's investments in such securities with particular regard to trading
activity, availability of reliable price information and other relevant
information. To the extent that, for a period of time, qualified
institutional buyers cease purchasing restricted securities pursuant to Rule
144A, the Fund's investing in such securities may have the effect of
increasing the level of illiquidy in the Fund's portfolio during such period.
Ratings of Municipal Obligations. Subsequent to its purchase by the
Fund, an issue of rated Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require the sale of such Municipal Obligations by the Fund,
but the Manager will consider such event in determining whether the Fund
should continue to hold the Municipal Obligations. To the extent that the
ratings given by Moody's, S&P or Fitch for Municipal Obligations may change
as a result of changes in such organizations or their rating systems, the Fund
will attempt to use comparable ratings as standards for its investments in
accordance with the investment policies contained in the Fund's Prospectus and
this Statement of Additional Information. The ratings of Moody's, S&P and
Fitch represent their opinions as to the quality of the Municipal Obligations
which they undertake to rate. It should be emphasized, however, that ratings
are relative and subjective and are not absolute standards of quality.
Although these ratings may be an initial criterion for selection of portfolio
investments, the Manager also will evaluate these securities.
Futures Contracts and Options on Futures Contracts. Upon exercise of an
option on a futures contract, the writer of the option delivers to the holder
of the option the futures position and the accumulated balance in the writer's
futures margin account, which represents the amount by which the market price
of the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures contract.
The potential loss related to the purchase of an option on futures contracts
is limited to the premium paid for the option (plus transaction costs).
Because the value of the option is fixed at the time of sale, there are no
daily cash payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset value of the Fund.
Lending Portfolio Securities. To a limited extent, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided it receives cash collateral which at all times is maintained in an
amount equal to at least 100% of the current market value of the securities
loaned. By lending its portfolio securities, the Fund can increase its income
through the investment of the cash collateral. For purposes of this policy,
the Fund considers collateral consisting of U.S. Government securities or
irrevocable letters of credit issued by banks whose securities meet the
standards for investment by the Fund to be the equivalent of cash. From time
to time, the Fund may return to the borrower or a third party which is
unaffiliated with the Fund, and which is acting as a "placing broker," a part
of the interest earned from the investment of collateral received for
securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned:
(1) the Fund must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Fund must be able
to terminate the loan at any time; (4) the Fund must receive reasonable
interest on the loan, as well as any interest or other distributions payable
on the loaned securities, and any increase in market value; and (5) the Fund
may pay only reasonable custodian fees in connection with the loan. These
conditions may be subject to future modification.
Taxable Investments. Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury
securities, which differ in their interest rates, maturities and times of
issuance. Treasury Bills have initial maturities of one year or less;
Treasury Notes have initial maturities of one to ten years; and Treasury Bonds
generally have initial maturities of greater than ten years. Some obligations
issued or guaranteed by U.S. Government agencies and instrumentalities, for
example, Government National Mortgage Association pass-through certificates,
are supported by the full faith and credit of the U.S. Treasury; others, such
as those of the Federal Home Loan Banks, by the right of the issuer to borrow
from the U.S. Treasury; others, such as those issued by the Federal National
Mortgage Association, by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others,
such as those issued by the Student Loan Marketing Association, only by the
credit of the agency or instrumentality. These securities bear fixed,
floating or variable rates of interest. Principal and interest may fluctuate
based on generally recognized reference rates or the relationship of rates.
While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Fund will
invest in such securities only when it is satisfied that the credit risk with
respect to the issuer is minimal.
Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs.
Certificates of deposit are negotiable certificates representing the
obligation of a bank to repay funds deposited with it for a specified period
of time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate.
Investments in time deposits generally are limited to London branches of
domestic banks that have total assets in excess of one billion dollars. Time
deposits which may be held by the Fund will not benefit from insurance from
the Bank Insurance Fund or the Savings Association Insurance Fund administered
by the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of
a bank to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the face amount of
the instrument upon maturity. Other short-term bank obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Repurchase agreements involve the acquisition by the Fund of an
underlying debt instrument, subject to an obligation of the seller to
repurchase, and the Fund to resell, the instrument at a fixed price, usually
not more than one week after its purchase. The Fund's custodian or sub-
custodian will have custody of, and will hold in a segregated account,
securities acquired by the Fund under a repurchase agreement. Repurchase
agreements are considered by the staff of the Securities and Exchange
Commission to be loans by the Fund. In an attempt to reduce the risk of
incurring a loss on a repurchase agreement, the Fund will enter into
repurchase agreements only with domestic banks with total assets in excess of
one billion dollars or primary government securities dealers reporting to the
Federal Reserve Bank of New York, with respect to securities of the type in
which the Fund may invest, and will require that additional securities be
deposited with it if the value of the securities purchased should decrease
below resale price. The Manager will monitor on an ongoing basis the value
of the collateral to assure that it always equals or exceeds the repurchase
price. Certain costs may be incurred by the Fund in connection with the sale
of the securities if the seller does not repurchase them in accordance with
the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Fund may be delayed or limited. The Fund will consider on
an ongoing basis the creditworthiness of the institutions with which it enters
into repurchase agreements.
Risk Factors
Investing in California Municipal Obligations. Investors should consider
carefully the special risks inherent in the Fund's investment in California
Municipal Obligations. These risks result from certain amendments to the
California Constitution and other statutes that limit the taxing and spending
authority of California governmental entities, as well as from the general
financial condition of the State of California. Since the start of the
State's 1990-91 fiscal year, the State has experienced the worst economic,
fiscal and budget conditions since the 1930s. As a result, the State has
experienced recurring budget deficits for four of the five fiscal years ended
with 1991-92. Revenues and expenditures were essentially equal in 1992-93,
but the original budget for that year projected revenues exceeding
expenditures by $2.6 billion. The excess of revenues and expenditures for the
State's 1993-94 fiscal year is expected to have been $500 million, after
originally being estimated to $2.0 billion. By June 30, 1994, according to
California's Department of Finance, the State's Reserve for Economic
Uncertainties had an accumulated deficit, on a budget basis, of approximately
$2.0 billion. A further consequence of the large budget imbalances has been
that the State depleted its available cash resources and has had to use a
series of external borrowings to meet its cash needs. To meet its cash flow
in the 1994-95 fiscal year, the State issued, in July and August 1994, $4.0
billion of revenue anticipation warrants and $3.0 billion of revenue
anticipation notes. As a result of the deterioration in the State's budget
and cash situation between October 1991 and July 1994 the rating on the
State's general obligation bonds was reduced by S&P from AAA to A, by Moody's
from Aaa to A1 and by Fitch from AAA to A. These and other factors may have
the effect of impairing the ability of the issuers of California Municipal
Obligations to pay interest on, or repay principal of, such California
Municipal Obligations. Investors should review Appendix A which more fully
sets forth these and other risk factors relating to investing in California
Municipal Obligations.
Lower Rated Bonds. The Fund is permitted to invest in securities rated
below Baa by Moody's and below BBB by S&P and Fitch. Such bonds, though
higher yielding, are characterized by risk. See "Description of the Fund--
Risk Factors--Lower Rated Bonds" in the Prospectus for a discussion of certain
risks and "Appendix B" for a general description of Moody's, S&P and Fitch
ratings of Municipal Obligations. Although ratings may be useful in
evaluating the safety of interest and principal payments, they do not evaluate
the market value risk of these bonds. The Fund will rely on the Manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the Manager will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, the quality of the issuer's management and regulatory
matters. It also is possible that a rating agency might not timely change the
rating on a particular issue to reflect subsequent events. As stated above,
once the rating of a bond in the Fund's portfolio has been changed, the
Manager will consider all circumstances deemed relevant in determining whether
the Fund should continue to hold the bond.
Investors should be aware that the market values of many of these bonds
tend to be more sensitive to economic conditions than are higher rated
securities. These bonds generally are considered by Moody's, S&P and Fitch
to be predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation and generally
will involve more credit risk than securities in the higher rating categories.
Because there is no established retail secondary market for many of these
securities, the Fund anticipates that such securities could be sold only to
a limited number of dealers or institutional investors. To the extent a
secondary trading market for these bonds does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a
liquid secondary market may have an adverse impact on market price and yield
and the Fund's ability to dispose of particular issues when necessary to meet
the Fund's liquidity needs or in response to a specific economic event such
as a deterioration in the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities also may make it more difficult
for the Fund to obtain accurate market quotations for purposes of valuing the
Fund's portfolio and calculating its net asset value. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of these securities. In such cases,
judgment may play a greater role in valuation because less reliable, objective
data may be available.
These bonds may be particularly susceptible to economic downturns. It
is likely that any economic recession could disrupt severely the market for
such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
The Fund may acquire these bonds during an initial offering. Such
securities may involve special risks because they are new issues. The Fund
has no arrangement with the Distributor or any other persons concerning the
acquisition of such securities, and the Manager will review carefully the
credit and other characteristics pertinent to such new issues.
Lower rated zero coupon securities and pay-in-kind bonds, in which the
Fund may invest up to 5% of its net assets, involve special considerations.
The credit risk factors pertaining to lower rated securities also apply to
lower rated zero coupon bonds and pay-in-kind bonds. Such zero coupon, pay-
in-kind or delayed interest bonds, carry an additional risk in that, unlike
bonds which pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment date unless a portion of such
securities are sold and, if the issuer defaults, the Fund may obtain no return
at all on its investment. See "Dividends, Distributions and Taxes."
Investment Restrictions. The Fund has adopted investment restrictions
numbered 1 through 9 as fundamental policies. These restrictions cannot be
changed without approval by the holders of a majority (as defined in the
Investment Company Act of 1940, as amended (the "Act")) of the Fund's
outstanding voting shares. Investment restrictions numbered 10 and 11 are not
fundamental policies and may be changed by a vote of a majority of the Fund's
Directors at any time. The Fund may not:
1. Purchase securities other than Municipal Obligations and Taxable
Investments and those arising out of transactions in futures and options or
as otherwise provided in the Fund's Prospectus.
2. Borrow money, except to the extent permitted under the Act (which
currently limits borrowing to no more than 33 1/3% of the Fund's total
assets). Transactions in futures and options do not involve any borrowings
for purposes of this restriction.
3. Sell securities short or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of transactions,
but the Fund may make margin deposits in connection with transactions in
futures, including those related to indexes, and options on futures contracts
or indexes.
4. Underwrite the securities of other issuers, except that the Fund may
bid separately or as part of a group for the purchase of Municipal Obligations
directly from an issuer for its own portfolio to take advantage of the lower
purchase price available.
5. Purchase, hold or deal in real estate, real estate investment trust
securities or oil and gas interests, but the Fund may invest in Municipal
Obligations secured by real estate or interests therein.
6. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to indexes, and options on futures
contracts or indexes, as described in the Fund's Prospectus.
7. Lend any funds or other assets, except through the purchase of
qualified debt obligations and the entry into repurchase agreements referred
to above and in the Fund's Prospectus; however, the Fund may lend its
portfolio securities in an amount not to exceed 33-1/3% of the value of its
total assets. Any loans of portfolio securities will be made according to
guidelines established by the Securities and Exchange Commission and the
Fund's Board of Directors.
8. Invest more than 25% of its total assets in the securities of
issuers in any single industry; provided that there shall be no such
limitation on the purchase of Municipal Obligations and, for temporary
defensive purposes, obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
9. Purchase securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of assets.
10. Pledge, mortgage, hypothecate, or otherwise encumber its assets,
except to the extent necessary to secure permitted borrowings, and except to
the extent related to the deposit of assets in escrow in connection with the
purchase of securities on a when-issued or delayed-delivery basis and
collateral and initial or variation margin arrangements with respect to
futures contracts, including those relating to indexes, and options on futures
contracts or indexes.
11. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid if, in
the aggregate, more than 15% of the value of the Fund's net assets would be
so invested.
In addition, the Fund will not issue any senior security (as such term
is defined in Section 18(f) of the Act), except to the extent the activities
permitted in Investment Restriction Nos. 2, 3, 6 and 10 may be deemed to give
rise to a senior security.
For purposes of Investment Restriction No. 8, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as
an "industry."
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Fund shares in certain states.
Should the Fund determine that a commitment is no longer in the best interests
of the Fund and its shareholders, the Fund reserves the right to revoke the
commitment by terminating the sale of Fund shares in the state involved.
MANAGEMENT OF THE FUND
Directors and officers of the Fund, together with information as to their
principal business occupations during at least the last five years, are shown
below.
Directors of the Fund
CLIFFORD L. ALEXANDER, JR., Director. President of Alexander & Associates,
Inc., a management consulting firm. From 1977 to 1981, Mr. Alexander
served as Secretary of the Army and Chairman of the Board of the Panama
Canal Company, and from 1975 to 1977, he was a member of the Washington,
D.C. law firm of Verner, Liipfert, Bernhard, McPherson and Alexander.
He is a director of American Home Products Corporation, The Dun &
Bradstreet Corporation, Equitable Resources, Inc., a producer and
distributor of natural gas and crude petroleum, MCI Communications
Corporation and Mutual of America Life Insurance Company. His address
is 400 C Street, N.E., Washington, D.C. 20002.
PEGGY C. DAVIS, Director. Professor of Law, New York University School of
Law. Professor Davis has been a member of the New York University law
faculty since 1983. Prior to that time, she served for three years as
a judge in the courts of New York State; was engaged for eight years in
the practice of law, working in both corporate and non-profit sectors;
and served for two years as a criminal justice administrator in the
government of the City of New York. She writes and teaches in the fields
of evidence, constitutional theory, family law, social sciences and the
law, legal process and professional methodology and training. Her
address is c/o New York University School of Law, 249 Sullivan Street,
New York, New York 10011.
ERNEST KAFKA, Director. A physician engaged in private practice specializing
in the psychoanalysis of adults and adolescents. Since 1981, he has
served as an Instructor at the New York Psychoanalytic Institute and,
prior thereto, held other teaching positions. For more than the past
five years, Dr. Kafka has held numerous administrative positions and has
published many articles on subjects in the field of psychoanalysis. His
address is 23 East 92nd Street, New York, New York 10128.
SAUL B. KLAMAN, Director. Chairman and Chief Executive Officer of SBK
Associates, which provides research and consulting services to financial
institutions. Dr. Klaman was President of the National Association of
Mutual Savings Banks until November 1983, President of the National
Council of Savings Institutions until June 1985, Vice Chairman of Golembe
Associates and BEI Golembe, Inc. until 1989 and Chairman Emeritus of BEI
Golembe, Inc. until November 1992. He also served as an Economist to the
Board of Governors of the Federal Reserve System and on several
Presidential Commissions, and has held numerous consulting and advisory
positions in the fields of economics and housing finance. His address
is 431-B Dedham Street, The Gables, Newton Center, Massachusetts 02159.
NATHAN LEVENTHAL, Director. President of Lincoln Center for the Performing
Arts, Inc. Mr. Leventhal was Deputy Mayor for Operations of New York
City from September 1979 until March 1984 and Commissioner of the
Department of Housing Preservation and Development of New York City from
February 1978 to September 1979. Mr. Leventhal was an associate and then
a member of the New York law firm of Poletti Freidin Prashker Feldman and
Gartner from 1974 to 1978. He was Commissioner of Rent and Housing
Maintenance for New York City from 1972 to 1973. Mr. Leventhal serves
as Chairman of Citizens Union, an organization which strives to reform
and modernize city and state government. His address is 70 Lincoln
Center Plaza, New York, New York 10023-6583.
For so long as the Fund's plans described in the sections captioned
"Service Plan" and "Shareholder Services Plan" remain in effect, the Directors
of the Fund who are not "interested persons" of the Fund, as defined in the
Act, will be selected and nominated by the Directors who are not "interested
persons" of the Fund.
Each Director is also a director of Dreyfus Appreciation Fund, Inc.,
General Government Securities Money Market Fund, Inc., General Money Market
Fund, Inc., General Municipal Bond Fund, Inc., General Municipal Money Market
Fund, Inc., General New York Municipal Bond Fund, Inc. and Premier Growth
Fund, Inc. and a trustee of General California Municipal Money Market Fund,
General New York Municipal Money Market Fund, Premier Insured Municipal Bond
Fund, Premier California Municipal Bond Fund, Premier GNMA Fund, Premier
Limited Term Municipal Bond Fund, Premier Municipal Bond Fund, Premier New
York Municipal Bond Fund and Premier State Municipal Bond Fund. Mr. Alexander
is also a director of The Dreyfus Socially Responsible Growth Fund, Inc. and
The Dreyfus Third Century Fund, Inc.
The Fund does not pay any remuneration to its officers and Directors
other than fees and expenses to Directors who are not "interested persons" of
the Fund, which totalled $22,635 for the fiscal year ended September 30, 1994
for such Directors as a group.
Officers of the Fund
MARIE E. CONNOLLY, President and Treasurer. President and Chief Operating
Officer of the Distributor and an officer of other investment companies
advised or administered by the Manager. From December 1991 to July 1994,
she was President and Chief Compliance Officer of Funds Distributor,
Inc., a wholly-owned subsidiary of The Boston Company, Inc. Prior to
December 1991, she served as Vice President and Controller, and later as
Senior Vice President, of The Boston Company Advisors, Inc.
JOHN E. PELLETIER, Vice President and Secretary. Senior Vice President and
General Counsel of the Distributor and an officer of other investment
companies advised or administered by the Manager. From February 1992 to
July 1994, he served as Counsel for The Boston Company Advisors, Inc.
From August 1990 to February 1992, he was employed as an Associate at
Ropes & Gray, and prior thereto, he was employed as an Associate at
Sidley & Austin.
FREDERICK C. DEY, Vice President and Assistant Treasurer. Senior Vice
President of the Distributor and an officer of other investment companies
advised or administered by the Manager. From 1988 to August 1994, he was
Manager of the High Performance Fabric Division of Springs Industries
Inc.
ERIC B. FISCHMAN, Vice President and Assistant Secretary. Associate General
Counsel of the Distributor and an officer of other investment companies
advised or administered by the Manager. From September 1992 to August
1994, he was an attorney with the Board of Governors of the Federal
Reserve System.
JOSEPH S. TOWER,III, Assistant Treasurer. Senior Vice President, Treasurer
and Chief Financial Officer of the Distributor and an officer of other
investment companies advised or administered by the Manager. From July
1988 to August 1994, he was employed by The Boston Company, Inc. where
he held various management positions in the Corporate Finance and
Treasury areas.
JOHN J. PYBURN, Assistant Treasurer. Vice President of the Distributor and
an officer of other investment companies advised or administered by the
Manager. From 1984 to July 1994, he was Assistant Vice President in the
Mutual Fund Accounting Department of the Manager.
PAUL FURCINITO, Assistant Secretary. Assistant Vice President of the
Distributor and an officer of other investment companies advised or
administered by the Manager. From January 1992 to July 1994, he was a
Senior Legal Product Manager for The Boston Company Advisors, Inc., and,
from January 1990 to January 1992, a mutual fund accountant for The
Boston Company Advisors, Inc.
RUTH D. LEIBERT, Assistant Secretary. Assistant Vice President of the
Distributor and an officer of other investment companies advised or
administered by the Manager. From March 1992 to July 1994, she was a
Compliance Officer for The Managers Funds, a registered investment
company. From March 1990 until September 1991, she was Development
Director of The Rockland Center for the Arts and, prior thereto, was
employed as a Research Assistant for the Bureau of National Affairs.
The address of each officer of the Fund is 200 Park Avenue, New York, New
York 10166.
Directors and officers of the Fund, as a group, owned less than 1% of the
Fund's Common Stock outstanding on November 21, 1994,
MANAGEMENT AGREEMENT
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Management of the Fund."
The Manager provides management services pursuant to the Management
Agreement (the "Agreement") dated August 24, 1994 with the Fund, which is
subject to annual approval by (i) the Fund's Board of Directors or (ii) vote
of a majority (as defined in the Act) of the outstanding voting securities of
the Fund, provided that in either event the continuance also is approved by
a majority of the Directors who are not "interested persons" (as defined in
the Act) of the Fund or the Manager, by vote cast in person at a meeting
called for the purpose of voting on such approval. The Agreement was approved
by shareholders at a meeting held on August 4, 1994, and was last approved by
the Fund's Board of Directors, including a majority of the Directors who are
not "interested persons" of any party to the Agreement, at a meeting held on
September 28, 1994. The Agreement is terminable without penalty, on 60 days'
notice, by the Fund's Board of Directors or by vote of the holders of a
majority of the Fund's shares, or, on not less than 90 days' notice, by the
Manager. The Agreement will terminate automatically in the event of its
assignment (as defined in the Act).
The following persons are officers and/or directors of the Manager:
Howard Stein, Chairman of the Board and Chief Executive Officer; Julian M.
Smerling, Vice Chairman of the Board; Joseph S. DiMartino, President and
director; Lawrence S. Kash, Vice Chairman-Distribution; W. Keith Smith, Chief
Operating Officer and director; Philip L. Toia, Vice Chairman-Operations and
Administration; Paul H. Snyder, Vice President-Finance and Chief Financial
Officer; Barbara E. Casey, Vice President-Dreyfus Retirement Services; Diane
M. Coffey, Vice President-Corporate Communications; Jay R. DeMartine, Vice
President-Retail Marketing; Elie M. Genadry, Vice President-Institutional
Sales; Henry D. Gottmann, Vice President-Retail Sales and Service; Mark N.
Jacobs, Vice President-Legal and Secretary; Daniel C. Maclean, Vice President
and General Counsel; Jeffrey N. Nachman, Vice President-Mutual Fund
Accounting; Peter A. Santoriello, Vice President; Katherine C. Wickham, Vice
President-Human Resources; Maurice Bendrihem, Controller; Christine Pavalos,
Assistant Secretary; and Mandell L. Berman, Frank V. Cahouet, Alvin E.
Friedman, Lawrence M. Greene and David B. Truman, directors.
The Manager manages the Fund's portfolio of investments in accordance
with the stated policies of the Fund, subject to the approval of the Fund's
Board of Directors. The Manager is responsible for investment decisions, and
provides the Fund with portfolio managers who are authorized by the Board of
Directors to execute purchases and sales of securities. The Fund's portfolio
managers are Joseph P. Darcy, A. Paul Disdier, Karen M. Hand, Stephen C. Kris,
Richard J. Moynihan, Jill C. Shaffro, L. Lawrence Troutman, Samuel J.
Weinstock and Monica S. Wieboldt. The Manager also maintains a research
department with a professional staff of portfolio managers and securities
analysts who provide research services for the Fund as well as for other funds
advised by the Manager. All purchases and sales are reported for the
Directors' review at the meeting subsequent to such transactions.
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by the Manager. The expenses borne
by the Fund include, without limitation: organizational costs, taxes,
interest, loan commitment fees, interest and distributions paid on securities
sold short, brokerage fees and commissions, if any, fees of certain Board
members, Securities and Exchange Commission fees, state Blue Sky qualification
fees, advisory fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, industry association fees, outside
auditing and legal expenses, costs of maintaining corporate existence, costs
of independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
preparing and printing prospectuses and statements of additional information
for regulatory purposes and for distribution to existing shareholders, costs
of shareholders' reports and meetings, and any extraordinary expenses.
The Manager maintains office facilities on behalf of the Fund, and
furnishes statistical and research data, clerical help, accounting, data
processing, bookkeeping and internal auditing and certain other required
services. The Manager also may make such advertising and promotional
expenditures, using its own resources, as it from time to time deems
appropriate.
As compensation for the Manager's services, the Fund has agreed to pay
the Manager a monthly management fee at the annual rate of .60 of 1% of the
value of the Fund's average daily net assets. For the fiscal years ended
September 30, 1992, 1993 and 1994, the management fees payable amounted to
$1,942,936, $2,487,070 and 2,351,917, respectively, which amounts were reduced
by $1,255,920 in fiscal 1992 and $457,057 in fiscal 1993, pursuant to
undertakings in effect, resulting in net fees paid to the Manager of $687,016
in fiscal 1992 and $2,030,013 in fiscal 1993.
The Manager has agreed that if in any fiscal year the aggregate expenses
of the Fund, exclusive of taxes, brokerage, interest on borrowings and (with
the prior written consent of the necessary state securities commissions)
extraordinary expenses, but including the management fee, exceed the expense
limitation of any state having jurisdiction over the Fund, the Fund may deduct
from the payment to be made to the Manager under the Agreement, or the Manager
will bear, such excess expense to the extent required by state law. Such
deduction or payment, if any, will be estimated daily, and reconciled and
effected or paid, as the case may be, on a monthly basis.
The aggregate of the fees payable to the Manager is not subject to
reduction as the value of the Fund's net assets increases.
PURCHASE OF FUND SHARES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "How to Buy Fund Shares."
The Distributor. The Distributor serves as the Fund's distributor
pursuant to an agreement dated August 24, 1994. The Distributor also acts as
distributor for the other funds in the Dreyfus Family of Funds and for certain
other investment companies.
Dreyfus TeleTransfer Privilege. Dreyfus TeleTransfer purchase orders may
be made between the hours of 8:00 a.m. and 4:00 p.m., New York time, on any
business day that The Shareholder Services Group, Inc., the Fund's transfer
and dividend disbursing agent (the "Transfer Agent"), and the New York Stock
Exchange are open. Such purchases will be credited to the shareholder's Fund
account on the next bank business day. To qualify to use the Dreyfus
TeleTransfer Privilege, the initial payment for purchase of Fund shares must
be drawn on, and redemption proceeds paid to, the same bank and account as are
designated on the Account Application or Shareholder Services Form on file.
If the proceeds of a particular redemption are to be wired to an account at
any other bank, the request must be in writing and signature-guaranteed. See
"Redemption of Fund Shares--Dreyfus TeleTransfer Privilege."
Reopening an Account. An investor may reopen an account with a minimum
investment of $100 without filing a new Account Application during the
calendar year the account is closed or during the following calendar year,
provided the information on the old Account Application is still applicable.
SERVICE PLAN
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Service Plan."
Rule 12b-1 (the "Rule") adopted by the Securities and Exchange Commission
under the Act provides, among other things, that an investment company may
bear expenses of distributing its shares only pursuant to a plan adopted in
accordance with the Rule. Because some or all of the fees that may be paid
by the Fund for advertising or marketing the Fund's shares and the fees
payable to certain financial institutions (which may include banks),
securities dealers and other financial industry professionals (collectively,
"Service Agents") could be deemed to be payment of distribution expenses, the
Fund's Board of Directors has adopted such a plan (the "Plan"). The Fund's
Board of Directors believes that there is a reasonable likelihood that the
Plan may benefit the Fund and its shareholders. In some states, certain
financial institutions effecting transactions in Fund shares may be required
to register as dealers pursuant to state law.
A quarterly report of the amounts expended under the Plan, and the
purposes for which such expenditures were incurred, must be made to the
Directors for their review. In addition, the Plan provides that it may not
be amended to increase materially the costs which the Fund may bear for
distribution pursuant to the Plan without shareholder approval and that other
material amendments of the Plan must be approved by the Board of Directors,
and by the Directors who are neither "interested persons" (as defined in the
Act) of the Fund or the Manager nor have any direct or indirect financial
interest in the operation of the Plan or in the related service agreements,
by vote cast in person at a meeting called for the purpose of considering such
amendments. The Plan and the related service agreements are subject to annual
approval by such vote of the Directors cast in person at a meeting called for
the purpose of voting on the Plan. The Plan was so approved at a meeting held
on September 28, 1994. The Plan is terminable 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 any of the
related service agreements or by vote of a majority of the Fund's shares. Any
service agreement is terminable without penalty, at any time, by such vote of
the Directors or, upon not more than 60 days' written notice to the Service
Agent, by vote of the holders of a majority of the Fund's shares, or, upon 15
days' notice, by the Distributor. Each service agreement will terminate
automatically in the event of its assignment (as defined in the Act).
Management of the Fund currently does not intend to implement the Service
Plan and will only do so if prior written notice is given to shareholders.
SHAREHOLDER SERVICES PLAN
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Shareholder Services
Plan."
The Fund has adopted a Shareholder Service Plan pursuant to which the
Fund reimburses Dreyfus Service Corporation, a wholly-owned subsidiary of the
Manager, for certain allocated expenses of providing personal services and/or
maintaining shareholder accounts. The services provided may include personal
services relating to shareholder accounts, such as answering shareholder
inquiries regarding the Fund and providing reports and other information, and
services related to the maintenance of shareholder accounts.
A quarterly report of the amounts expended under the Shareholder Services
Plan, and the purposes for which such expenditures were incurred, must be made
to the Directors for their review. In addition, the Shareholder Services Plan
provides that material amendments of the Shareholder Services Plan must be
approved by the Board of Directors, and by the Directors who are not
"interested persons" (as defined in the Act) of the Fund and have no direct
or indirect financial interest in the operation of the Shareholder Services
Plan by vote cast in person at a meeting called for the purpose of considering
such amendments. The Shareholder Services Plan is subject to annual approval
by such vote of the Directors cast in person at a meeting called for the
purpose of voting on the Shareholder Services Plan. The Shareholder Services
Plan is terminable 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 Shareholder Services Plan.
During the fiscal year ended September 30, 1994, the Fund was charged an
aggregate $173,410 pursuant to the Shareholder Services Plan.
REDEMPTION OF FUND SHARES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "How to Redeem Fund
Shares."
Check Redemption Privilege. An investor may indicate on the Account
Application or by later written request that the Fund provide Redemption
Checks ("Checks") drawn on the Fund's account. Checks will be sent only to
the registered owner(s) of the account and only to the address of record. The
Account Application or later written request must be manually signed by the
registered owner(s). Checks may be made payable to the order of any person
in an amount of $500 or more. When a Check is presented to the Transfer Agent
for payment, the Transfer Agent, as the investor's agent, will cause the Fund
to redeem a sufficient number of full or fractional shares in the investor's
account to cover the amount of the Check. Dividends are earned until the
Check clears. After clearance, a copy of the Check will be returned to the
investor. Investors generally will be subject to the same rules and
regulations that apply to checking accounts, although election of this
Privilege creates only a shareholder-transfer agent relationship with the
Transfer Agent.
If the amount of the Check is greater than the value of the shares in an
investor's account, the Check will be returned marked insufficient funds.
Checks should not be used to close an account.
Wire Redemption Privilege. By using this Privilege, the investor
authorizes the Transfer Agent to act on wire or telephone redemption
instructions from any person representing himself or herself to be the
investor, or a representative of the investor's Service Agent, and reasonably
believed by the Transfer Agent to be genuine. Ordinarily, the Fund will
initiate payment for shares redeemed pursuant to this Privilege on the next
business day after receipt by the Transfer Agent of a redemption request in
proper form. Redemption proceeds will be transferred by Federal Reserve wire
only to the commercial bank account specified by the investor on the Account
Application or Shareholder Services Form. Redemption proceeds, if wired, must
be in the amount of $1,000 or more and will be wired to the investor's account
at the bank of record designated in the investor's file at the Transfer Agent,
if the investor's bank is a member of the Federal Reserve System, or to a
correspondent bank if the investor's bank is not a member. Fees ordinarily
are imposed by such bank and are borne by the investor. Immediate
notification by the correspondent bank to the investor's bank is necessary to
avoid a delay in crediting the funds to the investor's bank account.
Investors with access to telegraphic equipment may wire redemption
requests to the Transfer Agent by employing the following transmittal code
which may be used for domestic or overseas transmission:
Transfer Agent's
Transmittal Code Answer Back Sign
---------------- ----------------
144295 144295 TSSG PREP
Investors who do not have direct access to telegraphic equipment may have
the wire transmitted by contacting a TRT Cables operator at 1-800-654-7171,
toll free. Investors should advise the operator that the above transmittal
code must be used and should also inform the operator of the Transfer Agent's
answer back sign.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Transfer Agent. This request
must be signed by each shareholder, with each signature guaranteed as
described below under "Stock Certificates; Signatures."
Dreyfus TeleTransfer Privilege. Investors should be aware that if they
have selected the Dreyfus TeleTransfer Privilege, any request for a wire
redemption will be effected as a Dreyfus TeleTransfer transaction through the
Automated Clearing House ("ACH") system unless more prompt transmittal
specifically is requested. Redemption proceeds will be on deposit in the
investor's account at an ACH member bank ordinarily two business days after
receipt of the redemption request. See "Purchase of Fund Shares--Dreyfus
TeleTransfer Privilege."
Stock Certificates; Signatures. Any certificates representing Fund
shares to be redeemed must be submitted with the redemption request. Written
redemption requests must be signed by each shareholder, including each holder
of a joint account, and each signature must be guaranteed. Signatures on
endorsed certificates submitted for redemption also must be guaranteed. The
Transfer Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations, as well as from participants in the New York Stock Exchange
Medallion Program, the Securities Transfer Agents Medallion Program ("STAMP"),
and the Stock Exchanges Medallion Program. Guarantees must be signed by an
authorized signatory of the guarantor and "Signature-Guaranteed" must appear
with the signature. The Transfer Agent may request additional documentation
from corporations, executors, administrators, trustees or guardians, and may
accept other suitable verification arrangements from foreign investors, such
as consular verification. For more information with respect to signature-
guarantees, please call the telephone number listed on the cover.
Redemption Commitment. The Fund has committed itself to pay in cash all
redemption requests by any shareholder of record, limited in amount during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable
without the prior approval of the Securities and Exchange Commission. In the
case of requests for redemption in excess of such amount, the Board of
Directors reserves the right to make payments in whole or in part in
securities or other assets of the Fund in case of an emergency or any time a
cash distribution would impair the liquidity of the Fund to the detriment of
the existing shareholders. In such event, the securities would be valued in
the same manner as the portfolio of the Fund is valued. If the recipient sold
such securities, brokerage charges would be incurred.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b)
when trading in the markets the Fund ordinarily utilizes is restricted, or
when an emergency exists as determined by the Securities and Exchange
Commission so that disposal of the Fund's investments or determination of its
net asset value is not reasonably practicable, or (c) for such other periods
as the Securities and Exchange Commission by order may permit to protect the
Fund's shareholders.
SHAREHOLDER SERVICES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Shareholder Services."
Fund Exchanges. Shares of other funds purchased by exchange will be
purchased on the basis of relative net asset value per share as follows:
A. Exchanges for shares of funds that are offered without a sales load
will be made without a sales load.
B. Shares of funds purchased without a sales load may be exchanged for
shares of other funds sold with a sales load, and the applicable
sales load will be deducted.
C. Shares of funds purchased with a sales load may be exchanged without
a sales load for shares of other funds sold without a sales load.
D. Shares of funds purchased with a sales load, shares of funds acquired
by a previous exchange from shares purchased with a sales load and
additional shares acquired through reinvestment of dividends or
distributions of any such funds (collectively referred to herein as
"Purchased Shares") may be exchanged for shares of other funds sold
with a sales load (referred to herein as "Offered Shares"), provided
that, if the sales load applicable to the Offered Shares exceeds the
maximum sales load that could have been imposed in connection with
the Purchased Shares (at the time the Purchased Shares were
acquired), without giving effect to any reduced loads, the difference
will be deducted.
To accomplish an exchange under item D above, shareholders must notify
the Transfer Agent of their prior ownership of fund shares and their account
number.
To request an exchange, an investor, or the investor's Service Agent
acting on the investor's behalf, must give exchange instructions to the
Transfer Agent in writing or by telephone. The ability to issue exchange
instructions by telephone is given to all Fund shareholders automatically,
unless the investor checks the relevant "No" box on the Account Application
indicating that the investor specifically refuses this Privilege. By using
the Telephone Exchange Privilege, the investor authorizes the Transfer Agent
to act on telephonic instructions from any person representing himself or
herself to be the investor or a representative of the investor's Service
Agent, and reasonably believed by the Transfer Agent to be genuine. Telephone
exchanges may be subject to limitations as to the amount involved or the
number of telephone exchanges permitted. Shares issued in certificate form
are not eligible for telephone exchanges.
To establish a Personal Retirement Plan by exchange, shares of the fund
being exchanged must have a value of at least the minimum initial investment
required for the fund into which the exchange is being made. For Dreyfus-
sponsored Keogh Plans, IRAs and IRAs set up under a Simplified Employee
Pension ("SEP-IRAs") with only one participant, the minimum initial investment
is $750. To exchange shares held in corporate plans, 403(b)(7) Plans and SEP-
IRAs with more than one participant, the minimum initial investment is $100
if the plan has at least $2,500 invested among the funds in the Dreyfus Family
of Funds. To exchange shares held in Personal Retirement Plans, the shares
exchanged must have a current value of at least $100.
Dreyfus Auto-Exchange Privilege. Dreyfus Auto-Exchange Privilege permits
an investor to purchase, in exchange for shares of the Fund, shares of another
fund in the Dreyfus Family of Funds. This Privilege is available only for
existing accounts. Shares will be exchanged on the basis of relative net
asset value as described above under "Fund Exchanges." Enrollment in or
modification or cancellation of this Privilege is effective three business
days following notification by the investor. An investor will be notified if
his account falls below the amount designated to be exchanged under this
Privilege. In this case, an investor's account will fall to zero unless
additional investments are made in excess of the designated amount prior to
the next Auto-Exchange transaction. Shares held under IRA and other
retirement plans are eligible for this Privilege. Exchanges of IRA shares may
be made between IRA accounts and from regular accounts to the IRA accounts,
but not from IRA accounts to regular accounts. With respect to all other
retirement accounts, exchanges may be made only among those accounts.
Fund exchanges and Dreyfus Auto-Exchange Privilege are available to
shareholders resident in any state in which shares of the fund being acquired
may legally be sold. Shares may be exchanged only between accounts having
identical names and other identifying designations.
Shareholder Services Forms and prospectuses of the other funds may be
obtained by calling 1-800-645-6561. The Fund reserves the right to reject any
exchange request in whole or in part. The Fund Exchanges service or Dreyfus
Auto-Exchange Privilege may be modified or terminated at any time upon notice
to shareholders.
Automatic Withdrawal Plan. The Automatic Withdrawal Plan permits an
investor with a $5,000 minimum account to request withdrawal of a specified
dollar amount (minimum of $50) on either a monthly or quarterly basis.
Withdrawal payments are the proceeds from sales of Fund shares, not the yield
on the shares. If withdrawal payments exceed reinvested dividends and
distributions, the investor's shares will be reduced and eventually may be
depleted. There is a service charge of $.50 for each withdrawal check.
Automatic Withdrawal may be terminated at any time by the investor, the Fund
or the Transfer Agent. Shares for which certificates have been issued may not
be redeemed through the Automatic Withdrawal Plan.
Dreyfus Dividend Sweep. Dreyfus Dividend Sweep allows investors to
invest on the payment date their dividends or dividends and capital gain
distributions, if any, from the Fund in shares of another fund in the Dreyfus
Family of Funds of which the investor is a shareholder. Shares of other funds
purchased pursuant to this privilege will be purchased on the basis of
relative net asset value per share as follows:
A. Dividends and distributions paid by a fund may be invested without
imposition of a sales load in shares of other funds that are offered
without a sales load.
B. Dividends and distributions paid by a fund which does not charge a
sales load may be invested in shares of other funds sold with a sales
load, and the applicable sales load will be deducted.
C. Dividends and distributions paid by a fund which charges a sales load
may be invested in shares of other funds sold with a sales load
(referred to herein as "Offered Shares"), provided that, if the sales
load applicable to the Offered Shares exceeds the maximum sales load
charged by the fund from which dividends or distributions are being
swept, without giving effect to any reduced loads, the difference
will be deducted.
D. Dividend and distributions paid by a fund may be invested in shares
of other funds that impose a contingent deferred sales charge
("CDSC") and the applicable CDSC, if any, will be imposed upon
redemption of such shares.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "How to Buy Fund Shares."
Valuation of Portfolio Securities. The Fund's investments are valued by
an independent pricing service (the "Service") approved by the Board of
Directors. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of
the market, these investments are valued at the mean between the quoted bid
prices (as obtained by the Service from dealers in such securities) and asked
prices (as calculated by the Service based upon its evaluation of the market
for such securities). Other investments (which constitute a majority of the
portfolio securities) are carried at fair value as determined by the Service,
based on methods which include consideration of: yields or prices of
municipal bonds of comparable quality, coupon, maturity and type; indications
as to values from dealers; and general market conditions. The Service may
employ electronic data processing techniques and/or a matrix system to
determine valuations. The Service's procedures are reviewed by the Fund's
officers under the general supervision of the Board of Directors. Expenses
and fees, including the management fee (reduced by the expense limitation, if
any) and fees pursuant to the Service Plan and Shareholder Services Plan, are
accrued daily and are taken into account for the purpose of determining the
net asset value of Fund shares.
New York Stock Exchange Closings. The holidays (as observed) on which
the New York Stock Exchange is closed currently are: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
PORTFOLIO TRANSACTIONS
Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly-issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases and
sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions,
as such, are paid by the Fund for such purchases and sales, although the price
paid usually includes an undisclosed compensation to the dealer acting as
agent. The prices paid to underwriters of newly-issued securities usually
include a concession paid by the issuer to the underwriter, and purchases of
after-market securities from dealers ordinarily are executed at a price
between the bid and asked price. No brokerage commissions have been paid by
the Fund to date.
Transactions are allocated to various dealers by the Fund's portfolio
managers in their best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for research, statistical or
other services to enable the Manager to supplement its own research and
analysis with the views and information of other securities firms.
Research services furnished by brokers through which the Fund effects
securities transactions may be used by the Manager in advising other funds it
advises and, conversely, research services furnished to the Manager by brokers
in connection with other funds the Manager advises may be used by the Manager
in advising the Fund. Although it is not possible to place a dollar value on
these services, it is the opinion of the Manager that the receipt and study
of such services should not reduce the overall expenses of its research
department.
The Fund's portfolio turnover rate for the fiscal years ended
September 30, 1993 and 1994 was 30.20% and 29.74%, respectively. The Fund
anticipates that its annual portfolio turnover rate generally will not exceed
100%, but the turnover rate will not be a limiting factor when the Fund deems
it desirable to sell or purchase securities. Therefore, depending upon market
conditions, the Fund's annual portfolio turnover rate may exceed 100% in
particular years.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Dividends, Distributions
and Taxes."
Management believes that the Fund has qualified as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), for the fiscal year ended September 30, 1994 and the Fund intends to
continue to so qualify, if such qualification is in the best interests of its
shareholders. As a regulated investment company, the Fund will pay no Federal
income tax on net investment income and net realized capital gains to the
extent that such income and gains are distributed to shareholders in
accordance with applicable provisions of the Code. To qualify as a regulated
investment company, the Fund must distribute to its shareholders at least 90%
of its net income (consisting of net investment income from tax exempt
obligations and taxable income other than net capital gains) must derive less
than 30% of its annual gross income from gain on the sale of securities held
for less than three months and must meet certain asset diversification and
other requirements. Accordingly, the Fund may be restricted in the selling
of securities held for less than three months and in the utilization of
certain of the investment techniques described in the Prospectus under
"Description of the Fund--Investment Techniques." The Code, however, allows
the Fund to net certain offsetting positions, making it easier for the Fund
to satisfy the 30% test. The term "regulated investment company" does not
imply the supervision of management or investment practices or policies by any
government agency.
If, at the close of each quarter of its taxable year, at least 50% of the
value of the Fund's total assets consists of Federal tax exempt obligations,
then the Fund may designate and pay Federal exempt-interest dividends from
interest earned on all such tax exempt obligations. Such exempt-interest
dividends may be excluded by shareholders of the Fund from their gross income
for Federal income tax purposes. Dividends derived from taxable investments,
together with distributions from any net realized short-term securities gains,
generally are taxable as ordinary income for Federal income tax purposes
whether or not reinvested. Distributions from net realized long-term
securities gains generally are taxable as long-term capital gains to a
shareholder who is a citizen or resident of the United States, whether or not
reinvested and regardless of the length of time the shareholder has held his
shares.
If, at the close of each quarter of its taxable year, at least 50% of the
value of the Fund's total assets consists of obligations which, when held by
an individual, the interest therefrom is exempt from California personal
income tax, and if the Fund qualifies as a management company under the
California Revenue and Taxation Code, the Fund will be qualified to pay
dividends to its shareholders that are exempt from California personal income
tax (but not from California franchise tax) ("California exempt-interest
dividends"). However, the total amount of California exempt-interest
dividends paid by the Fund to a non-corporate shareholder with respect to any
taxable year cannot exceed such shareholder's pro rata share of interest
received by the Fund during such year that is exempt from California taxation
less any expenses and expenditures deemed to have been paid from such
interest.
For shareholders subject to the California personal income tax,
exempt-interest dividends derived from California Municipal Obligations will
not be subject to the California personal income tax. Distributions from net
realized short-term capital gains to California resident shareholders will be
subject to the California personal income tax as ordinary income.
Distributions from net realized long-term capital gains may constitute
long-term capital gains for individual California resident shareholders.
Unlike under Federal tax law, the Fund's shareholders will not be subject to
California personal income tax, or receive a credit for California taxes paid
by the Fund, on undistributed capital gains. In addition, California tax law
does not consider any portion of the exempt-interest dividends paid an item
of tax preference for the purposes of computing the California alternative
minimum tax.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the net asset value of his shares below the
cost of his investment. Such a distribution would be a return on the
investment in an economic sense although taxable as stated in "Dividends,
Distributions and Taxes" in the Prospectus. In addition, the Code provides
that if a shareholder has not held his Fund shares for more than six months
(or such shorter period as the Internal Revenue Service may prescribe by
regulation) and has received an exempt-interest dividend with respect to such
shares, any loss incurred on the sale of such shares will be disallowed to the
extent of the exempt-interest dividend received.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gain or loss. However, all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds
will be treated as ordinary income under Section 1276 of the Code. In
addition, all or a portion of the gain realized from engaging in "conversion
transactions" may be treated as ordinary income under Section 1258 of the
Code. "Conversion transactions" are defined to include certain forward,
futures, option and "straddle" transactions, transactions marketed or sold to
produce capital gains, or transactions described in Treasury regulations to
be issued in the future.
Under Section 1256 of the Code, gain or loss the Fund realizes from
certain futures and options transactions will be treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. Gain or loss
will arise upon exercise or lapse of such futures and options as well as from
closing transactions. In addition, such futures or options remaining
unexercised at the end of the Fund's taxable year will be treated as sold for
their then fair market value, resulting in additional gain or loss to the Fund
characterized in the manner described above.
Offsetting positions held by the Fund involving certain futures and
options transactions may constitute "straddles." "Straddles" are defined to
include "offsetting positions" in actively traded personal property. The tax
treatment of "straddles" is governed by Sections 1092 and 1258 of the Code,
which, in certain circumstances, overrides or modifies the provisions of
Section 1256. As such, all or a portion of any short or long-term capital
gain from certain "straddle" transactions may be recharacterized to ordinary
income.
If the Fund were treated as entering into "straddles" by reason of its
engaging in certain futures or options transactions, such "straddles" would
be characterized as "mixed straddles" if the futures or options transactions
comprising a part of such "straddles" were governed by Section 1256 of the
Code. The Fund may make one or more elections with respect to "mixed
straddles." Depending on which election is made, if any, the results to the
Fund may differ. If no election is made to the extent the "straddle" rules
apply to positions established by the Fund, losses realized by the Fund will
be deferred to the extent of unrealized gain in the offsetting position.
Moreover, as a result of the "straddle" and conversion transaction rules,
short-term capital losses on "straddle" positions may be recharacterized as
long-term capital losses, and long-term capital gains may be treated as
short-term capital gains.
Investment by the Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to shareholders. For example, the Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such portion
in order to maintain its qualification as a regulated investment company. In
such case, the Fund may have to dispose of securities which it might otherwise
have continued to hold in order to generate cash to satisfy these distribution
requirements.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "Performance Information."
The Fund's current yield for the 30-day period ended September 30, 1994
was 5.79%. Current yield is computed pursuant to a formula which operates as
follows: the amount of the Fund's expenses accrued for the 30-day period (net
of reimbursements) is subtracted from the amount of the dividends and interest
earned (computed in accordance with regulatory requirements) by the Fund
during the period. That result is then divided by the product of: (a) the
average daily number of shares outstanding during the period that were
entitled to receive dividends, and (b) the net asset value per share on the
last day of the period less any undistributed earned income per share
reasonably expected to be declared as a dividend shortly thereafter. The
quotient is then added to 1, and that sum is raised to the 6th power, after
which 1 is subtracted. The current yield is then arrived at by multiplying
the result by 2.
Based upon a combined 1994 Federal and State of California effective tax
rate of 46.24%, the Fund's tax equivalent yield for the 30-day period ended
September 30, 1994 was 10.77%. Tax equivalent yield is computed by dividing
that portion of the current yield (calculated as described above) which is tax
exempt by 1 minus a stated tax rate and adding the quotient to that portion,
if any, of the yield of the Fund that is not tax exempt.
The tax equivalent yield noted above represents the application of the
highest Federal and State of California marginal personal income tax rates
presently in effect. For Federal personal income tax purposes, a 39.60% tax
rate has been used. For California personal income tax purposes, an 11.00%
tax rate has been used. The tax equivalent figure, however, does not include
the potential effect of any local (including, but not limited to, county,
district or city) taxes, including applicable surcharges. In addition, there
may be pending legislation which could affect such stated tax rates or yields.
Each investor should consult its tax adviser, and consider its own factual
circumstances and applicable tax laws, in order to ascertain the relevant tax
equivalent yield.
The Fund's average annual total return for the 1 and 4.975 year periods
ended September 30, 1994 was (4.43)% and 7.63%, respectively. Average annual
total return is calculated by determining the ending redeemable value of an
investment purchased with a hypothetical $1,000 payment made at the beginning
of the period (assuming the reinvestment of dividends and distributions),
dividing by the amount of the initial investment, taking the "n"th root of the
quotient (where "n" is the number of years in the period) and subtracting 1
from the result.
The Fund's total return for the period October 10, 1989 to September 30,
1994 was
44.18%. Total return is calculated by subtracting the amount of the Fund's
net asset value per share at the beginning of a stated period from the net
asset value per share at the end of the period (after giving effect to the
reinvestment of dividends and distributions during the period), and dividing
the result by the net asset value per share at the beginning of the period.
From time to time, the Fund may use hypothetical tax equivalent yields
or charts in its advertising. These hypothetical yields or charts will be
used for illustrative purposes only and not as representative of the Fund's
past or future performance.
From time to time, advertising materials for the Fund may refer to or
discuss then-current or past economic conditions, developments and/or events,
including those relating to or arising from actual or proposed tax
legislation. From time to time, advertising materials for the Fund also may
refer to statistical or other information concerning trends relating to
investment companies, as compiled by industry associations such as the
Investment Company Institute. From time to time, advertising materials for
the Fund also may refer to Morningstar ratings and related analysis supporting
the rating.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "General Information."
Each Fund share has one vote and, when issued and paid for in accordance
with the terms of the offering, is fully paid and non-assessable. Fund shares
are of one class and have equal rights as to dividends and liquidation.
Shares have no preemptive, subscription or conversion rights and are freely
transferable.
The Fund sends annual and semi-annual financial statements to all its
shareholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 110 Washington Street, New York, New York 10286,
is the Fund's custodian. The Shareholder Services Group, Inc., a subsidiary
of First Data Corporation, P.O. Box 9671, Providence, Rhode Island 02940-9671,
is the Fund's transfer and dividend disbursing agent. Neither The Bank of New
York nor The Shareholder Services Group, Inc. has any part in determining the
investment policies of the Fund or which securities are to be purchased or
sold by the Fund.
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York
10004-2696, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to the Fund's Prospectus.
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
independent auditors, have been selected as auditors of the Fund.
APPENDIX A
Certain California (the "State") constitutional amendments,
legislative measures, executive orders, civil actions and voter
initiatives, as well as the general financial condition of the State, could
adversely affect the ability of issuers of California Municipal Obligations
to pay interest and principal on such obligations. The following
information constitutes only a brief summary, does not purport to be a
complete description, and is based on information drawn from official
statements relating to securities offerings of the State and various local
agencies, available as of the date of this Statement of Additional
Information. While the Fund has not independently verified such
information, it has no reason to believe that such information is not
correct in all materials respects.
Recent Developments. Since the start of the State's 1990-91 fiscal
year, the State has faced the worst economic, fiscal and budget conditions
since the 1930s. Construction, manufacturing (especially aerospace),
exports and financial services, among others, have all been severely
affected. Job loses have been the worst of any post-war recession.
Unemployment reached 9.2% in 1993 and is expected to remain well above 9%
through 1994. According to the State's Department of Finance, recovery
from the recession in California is not expected in meaningful terms until
late 1994, notwithstanding signs of recovery elsewhere in the nation.
The recession has seriously affected State tax revenues, which
basically mirror economic conditions. It has also caused increased
expenditures for health and welfare programs. The State has also been
facing a structural imbalance in its budget with the largest programs
supported by the General Fund (K-12 schools and community colleges, health
and welfare, and corrections) growing at rates higher than the growth rates
for the principal revenue sources of the General Fund. As a result, the
State has experienced recurring budget deficits. The Controller reports
that expenditures exceeded revenues for four of the five fiscal years
ending with 1991-92. Revenues and expenditures were essentially equal in
1992-93, but the original budget for that year projected revenues exceeding
expenditures by $2.6 billion. By June 30, 1993, according to the
Department of Finance, the State's Special Fund for Economic Uncertainties
("SFEU") had a deficit, on a budget basis, of approximately $2.8 billion.
The 1993-94 Budget Act incorporated a Deficit Retirement Plan to repay this
deficit over two fiscal years. The original budget for 1993-94 reflected
revenues which exceeded expenditures by approximately $2.0 billion. As a
result of the continuing recession, the excess of revenues over
expenditures for the fiscal year is now expected to be only about $500
million. Thus the accumulated budget deficit at June 30, 1994 was
estimated by the Department of Finance to have been approximately $2.0
billion, and the deficit will not be retired by June 30, 1995 as planned.
A further consequence of the large budget imbalances over the last
three fiscal years has been that the State depleted its available cash
resources and has had to use a series of external borrowings to meet its
cash needs. To meet its cash flow needs in the 1994-95 fiscal year the
State issued, in July and August 1994, $4.0 billion of revenue anticipation
warrants which mature on April 25, 1996, and $3.0 billion of revenue
anticipation notes maturing on June 28, 1995.
The 1994-95 Budget Act is projected to have $41.9 billion of General
Fund revenues and transfers and $40.9 billion of budgeted expenditures. In
addition, the 1994-95 Budget Act anticipates deferring retirement of about
$1 billion of the accumulated budget deficit to the 1995-96 fiscal year
when it is intended to be fully retired by June 30, 1996.
As a result of the deterioration in the State's budget and cash
situation, the rating agencies reduced the State's credit ratings. Between
October 1991 and July 1994, the rating on the State's general obligation
bonds was reduced by S&P from "AAA" to "A," by Moody's from "Aaa" to "A1"
and by Fitch from "AAA" to "A."
On January 17, 1994, an earthquake of the magnitude of an estimated
6.8 on the Richter Scale struck Los Angeles causing significant damage to
public and private structures and facilities. Although some individuals
and businesses suffered losses totaling in the billions of dollars, the
overall effect of the earthquake on the regional and State economy is not
expected to be serious.
State Finances. State moneys are segregated into the General Fund and
approximately 600 Special Funds. The General Fund consists of the revenues
received into the State Treasury and earnings from State investments, which
are not required by law to be credited to any other fund. The General Fund
is the principal operating fund for the majority of governmental activities
and is the depository of most major State revenue sources.
The SFEU is funded with General Fund revenues and was established to
protect the State from unforeseen reduced levels of revenues and/or
unanticipated expenditure increases. Amounts in the SFEU may be
transferred by the Controller as necessary to meet cash needs of the
General Fund. The Controller is required to return moneys so transferred
without payment of interest as soon as there are sufficient moneys in the
General Fund. For budgeting and accounting purposes, any appropriation
made from the SFEU is deemed an appropriation from the General Fund. For
year-end reporting purposes, the Controller is required to add the balance
in the SFEU to the balance in the General Fund so as to show the total
monies then available for General Fund purposes.
Inter-fund borrowing has been used for many years to meet temporary
imbalances of receipts and disbursements in the General Fund. As of June
30, 1994, the General Fund had outstanding loans in the aggregate principal
amount of $5.2 billion, which consisted of $4.0 billion of internal loans
to the General Fund from the SFEU and other Special Funds and $1.2 billion
of external loans represented by the 1994 revenue anticipation warrants.
Articles XIIIA and XIIIB to the State Constitution and Other Revenue
Law Changes. Prior to 1977, revenues of the State government experienced
significant growth primarily as a result of inflation and continuous
expansion of the tax base of the State. In 1978, State voters approved an
amendment to the State Constitution known as Proposition 13, which added
Article XIIIA to the State Constitution, reducing ad valorem local property
taxes by more than 50%. In addition, Article XIIIA provides that
additional taxes may be levied by cities, counties and special districts
only upon approval of not less than a two-thirds vote of the "qualified
electors" of such district, and requires not less than a two-thirds vote of
each of the two houses of the State Legislature to enact any changes in
State taxes for the purpose of increasing revenues, whether by increased
rate or changes in methods of computation.
Primarily as a result of the reductions in local property tax revenues
received by local governments following the passage of Proposition 13, the
Legislature undertook to provide assistance to such governments by
substantially increasing expenditures from the General Fund for that
purpose beginning in the 1978-79 fiscal year. In recent years, in addition
to such increased expenditures, the indexing of personal income tax rates
(to adjust such rates for the effects of inflation), the elimination of
certain inheritance and gift taxes and the increase of exemption levels for
certain other such taxes had a moderating impact on the growth in State
revenues. In addition, the State has increased expenditures by providing a
variety of tax credits, including renters' and senior citizens' credits and
energy credits.
The State is subject to an annual "appropriations limit" imposed by
Article XIIIB of the State Constitution adopted in 1979. Article XIIIB
prohibits the State from spending "appropriations subject to limitation" in
excess of the appropriations limit imposed. "Appropriations subject to
limitations" are authorizations to spend "proceeds of taxes," which consist
of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such
proceeds exceed "the cost reasonably borne by such entity in providing the
regulation, product or service." One of the exclusions from these
limitations is "debt service" (defined as "appropriations required to pay
the cost of interest and redemption charges, including the funding of any
reserve or sinking fund required in connection therewith, on indebtedness
existing or legally authorized as of January 1, 1979 or on bonded
indebtedness thereafter approved" by the voters). In addition,
appropriations required to comply with mandates of courts or the Federal
government and, pursuant to Proposition 111 enacted in June 1990,
appropriations for qualified capital outlay projects and appropriations of
revenues derived from any increase in gasoline taxes and motor vehicle
weight fees above January 1, 1990 levels are not included as appropriations
subject to limitation. In addition, a number of recent initiatives were
structured or proposed to create new tax revenues dedicated to certain
specific uses, with such new taxes expressly exempted from the Article
XIIIB limits (e.g., increased cigarette and tobacco taxes enacted by
Proposition 99 in 1988). The appropriations limit also may be exceeded in
cases of emergency. However, unless the emergency arises from civil
disturbance or natural disaster declared by the Governor, and the
appropriations are approved by two-thirds of the Legislature, the
appropriations limit for the next three years must be reduced by the amount
of the excess.
The State's appropriations limit in each year is based on the limit
for the prior year, adjusted annually for changes in California per capita
personal income and changes in population, and adjusted, when applicable,
for any transfer of financial responsibility of providing services to or
from another unit of government. The measurement of change in population
is a blended average of statewide overall population growth, and change in
attendance at local school and community college ("K-14") districts. As
amended by Proposition 111, the appropriations limit is tested over
consecutive two-year periods. Any excess of the aggregate "proceeds of
taxes" received over such two-year periods above the combined
appropriations limits for those two years is divided equally between
transfers to K-14 districts and refunds to taxpayers.
As originally enacted in 1979, the State's appropriations limit was
based on its 1978-79 fiscal year authorizations to expend proceeds of taxes
and was adjusted annually to reflect changes in cost of living and
population (using different definitions, which were modified by Proposition
111). Commencing with the 1991-92 fiscal year, the State's appropriations
limit is adjusted annually based on the actual 1986-87 limit, and as if
Proposition 111 had been in effect. The State Legislature has enacted
legislation to implement Article XIIIB which defines certain terms used in
Article XIIIB and sets forth the methods for determining the State's
appropriations limit. Government Code Section 7912 requires an estimate of
the State's appropriations limit to be included in the Governor's Budget,
and thereafter to be subject to the budget process and established in the
Budget Act.
For the 1990-91 fiscal year, the State appropriations limit was $32.7
billion, and appropriations subject to limitation were $7.51 billion under
the limit. The limit for the 1991-92 fiscal year was $34.2 billion, and
appropriations subject to limitations were $3.8 billion under the limit.
The limit for the 1992-93 fiscal year was $35.01 billion, and the
appropriations subject to limitation were $4.2 billion under the limit.
The estimated limits for the 1993-94 and 1994-95 fiscal years are $36.60
billion and $36.61 billion, respectively, and the estimated appropriations
subject to limitation are $3.77 billion and $5.49 billion, respectively,
under the limit.
In November 1988, State voters approved Proposition 98, which changed
State funding of public education below the university level and the
operation of the State's appropriations limit, primarily by guaranteeing K-
14 schools a minimum share of General Fund revenues. Under Proposition 98
(as modified by Proposition 111, which was enacted in June 1990), K-14
schools are guaranteed the greater of (a) 40.3% of General Fund revenues
("Test 1"), (b) the amount appropriated to K-14 schools in the prior year,
adjusted for changes in the cost of living (measured as in Article XIIIB by
reference to California per capita personal income) and enrollment ("Test
2"), or (c) a third test, which would replace the second test in any year
when the percentage growth in per capita General Fund revenues from the
prior year plus .5% is less than the percentage growth in California per
capita personal income ("Test 3"). Under "Test 3," schools would receive
the amount appropriated in the prior year adjusted for changes in
enrollment and per capita General Fund revenues, plus an additional small
adjustment factor. If "Test 3" is used in any year, the difference between
"Test 3" and "Test 2" would become a "credit" to schools which would be the
basis of payments in future years when per capita General Fund revenue
growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature by two-thirds vote of both
houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period. In the fall of 1989, the
Legislature and the Governor utilized this provision to avoid having 40.3%
of revenues generated by a special supplemental sales tax enacted for
earthquake relief go to K-14 schools. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIIIB limit to K-14 schools.
The 1991-92 Budget Act, applying "Test 2" of Proposition 98,
appropriated approximately $18.4 billion for K-14 schools pursuant to
Proposition 98. During the course of the fiscal year, revenues proved to
be substantially below expectations. By the time the Governor's Budget was
introduced in January 1992, it became clear that per capita growth in
General Fund revenues for 1991-92 would be far smaller than the growth in
California per capita personal income and the Governor's Budget therefore
reflected a reduction in Proposition 98 funding in 1991-92 by applying
"Test 3" rather than "Test 2."
In response to the changing revenue situation and to fully fund the
Proposition 98 guarantee in both the 1991-92 and 1992-93 fiscal years
without exceeding it, the Legislature enacted several bills as part of the
1992-93 budget package which responded to the fiscal crisis in education
funding. Fiscal year 1991-92 Proposition 98 appropriations for K-14
schools were reduced by $1.083 billion. In order to not adversely impact
cash received by school districts, however, a short-term loan was
appropriated from the non-Proposition 98 State General Fund. The
Legislature then appropriated $16.6 billion to K-14 schools for 1992-93
(the minimum guaranteed by Proposition 98), but designated $1.083 billion
of this amount to "repay" the prior year loan, thereby reducing cash
outlays in 1992-93 by that amount. In addition to reducing the 1991-92
fiscal year appropriations for K-14 schools by $1.083 billion and
converting the amount to a loan (the "inter-year adjustment"), Chapter 703,
Statutes of 1992 also made an adjustment to "Test 1," based on the
additional $1.2 billion of local property taxes that were shifted to
schools and community colleges. The "Test 1" percentage changed from 40%
to 37%. Additionally, Chapter 703 contained a provision that if an
appellate court should determine that the "Test 1" recalculation or the
inter-year adjustment is unconstitutional, unenforceable or invalid,
Proposition 98 would be suspended for the 1992-93 fiscal year, with the
result that K-14 schools would receive the amount intended by the 1992-93
Budget Act compromise.
The State Controller stated in October 1992 that, because of a
drafting error in Chapter 703, he could not implement the $1.083 billion
reduction of the 1991-92 school funding appropriation, which was part of
the inter-year adjustment. The Legislature untimely enacted corrective
legislation as part of the 1993-94 Budget package to implement the $1.083
billion inter-year adjustment as originally intended.
In the 1992-93 Budget Act, a new loan of $732 million was made to K-12
schools in order to maintain per-average daily attendance ("ADA") funding
at the same level as 1991-92, at $4,187. An additional loan of $241
million was made to community college districts. These loans are to be
repaid from future Proposition 98 entitlements. (The teachers'
organization lawsuit discussed above also seeks to declare invalid the
provision making the $732 million a loan "repayable" from future years'
Proposition 98 funds). Including both State and local funds, and adjusting
for the loans and repayments, on a cash basis, total Proposition 98 K-12
funding in 1992-93 increased to $21.5 billion, 2.4% more than the amount in
1992-93 ($21.0 billion).
Based on revised State tax revenues and estimated decreased reported
pupil enrollment, the 1993-94 Budget Act projects that the 1992-93
Proposition 98 Budget Act appropriations of $16.6 billion exceed a revised
minimum guarantee by $313 million. As a result, the 1993-94 Budget Act
reverts $25 million in 1992-93 appropriations to the General Fund.
Limiting the reversion to this amount ensures that per ADA funding for
general purposes will remain at the prior year level of $4,217 per pupil.
The 1994-95 Governor's Budget subsequently proposed deficiency funding of
$121 million for school apportionments and special education, increasing
funding per pupil in 1992-93 to $4,244. The 1993-94 Budget Act also
designates $98 million in 1992-93 appropriations toward satisfying prior
years' guarantee levels, an obligation that resulted primarily from
updating State tax revenues for 1991-92, and designates $190 million as a
loan repayable from 1993-94 funding.
The 1993-94 Budget Act projects the Proposition 98 minimum funding
level at $13.5 billion based on the "Test 3" calculation where the
guarantee is determined by the change in per capita growth in General Fund
revenues, which are projected to decrease on a year-over-year basis. This
amount also takes into account increased property taxes transferred to
school districts from other local governments.
Legislation accompanying the 1993-94 Budget Act (Chapter 66/93)
provides a new loan of $609 million to K-12 schools in order to maintain
per ADA funding at $4,187 and a loan of $178 million to community colleges.
These loans have been combined with the K-14 1992-93 loans into one loan
totalling $1.760 billion. Repayment of this loan would be from future
years' Proposition 98 entitlements, and would be conditioned on maintaining
current funding levels per pupil for K-12 schools. Chapter 66 also reduced
the "Test 1" percentage to 34% to reflect the property tax shift among
local government agencies.
The 1994-95 Budget Act appropriated $14.4 billion of Proposition 98
funds for K14 schools based on Test 2. This exceeds the minimum
Proposition 98 guarantee by $8 million to maintain K-12 funding per pupil
at $4,217. Based upon updated State revenues, growth rates and inflation
factors, the 1994-95 Budget Act appropriated an additional $286 million
within Proposition 98 for the 1993-94 fiscal year, to reflect a need in
appropriations for school districts and county offices of education, as
well as an anticipated deficiency in special education funding. These
appropriations increase the 1993-94 Proposition 98 guarantee to $13.8
billion, which exceeds the minimum guarantee in that year by $272 million
and provides per pupil funding of $4,225.
Sources of Tax Revenue. The California personal income tax, which in
1991-92 contributed about 42% of General Fund revenues, is closely modeled
after the Federal income tax law. It is imposed on net taxable income
(gross income less exclusions and deductions). The tax is progressive with
rates ranging from 1% to 11%. Personal, dependent, and other credits are
allowed against the gross tax liability. In addition, taxpayers may be
subject to an alternative minimum tax ("AMT") which is much like the
Federal AMT. This is designed to ensure that excessive use of tax
preferences does not reduce taxpayers' liabilities below some minimum
level. Legislation enacted in July 1991 added two new marginal tax rates,
at 10% and 11%, effective for tax years 1991 through 1995. After 1995, the
maximum personal income tax rate is scheduled to return to 9.3%, and the
AMT rate is scheduled to drop from 8.5% to 7%.
The personal income tax is adjusted annually by the change in the
consumer price index to prevent taxpayers from being pushed into higher tax
brackets without a real increase in income.
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas,
electricity and water. Sales tax accounted for about 38% of General Fund
revenue in 1992-93. Bank and corporation tax revenues comprised about 12%
of General Fund revenue in 1992-93. In 1989, Proposition 99 added a 25
cents per pack excise tax on cigarettes, and a new equivalent excise tax on
other tobacco products. Legislation enacted in 1993 added an additional 2
cents per pack for the purpose of funding breast cancer research.
General Financial Condition of the State. Revenues in the most recent
fiscal years have been unusually difficult to forecast with a high degree
of accuracy due in major part to the volatility in the personal income tax.
The 1986-87 through 1989-90 fiscal years were affected by both the Federal
Tax Reform Act of 1986 and subsequent conforming State legislation. The
difficulty with recent forecasts has occurred because taxpayers have
changed their behavior as a result of these events. Capital gains are now
fully taxed. This revenue component is subject to taxpayer discretion and
is very sensitive to change in tax law, market conditions and individual
circumstances. Capital gains have always been a volatile item and since it
is contributing a greater percentage of total revenue, it makes these
collections subject to greater variance.
The State entered the 1988-89 fiscal year with essentially no budget
reserve. The 1988-89 Budget Act called for significant spending cuts to
balance expected revenues and expenditures and to provide an estimated
balance of approximately $600 million in the SFEU at year-end.
Revenues for the 1989-90 fiscal year were approximately $517.7 million
less than presented in the Governor's Budget in January 1990 and $1.021
billion less than estimated in July 1989, primarily owing to lower than
estimated receipts from individual and corporate taxes. The shortfall in
revenues was made up through the transfer of moneys from the SFEU and a
variety of expenditure reduction actions initiated by the Administration.
As a result, the SFEU was fully depleted by June 30, 1990.
The California State Controller reported that the State's General Fund
ended the 1990-91 fiscal year with a negative budgetary basis balance of
$1.316 billion. In order to pay necessary cash expenses through June 1991,
including payment of $4.1 billion of 1990 Revenue Anticipation Notes which
were due June 28, 1991, the General Fund borrowed $1.390 billion from the
SFEU and $3.266 billion from other Special Funds as of the end of the
fiscal year. Data on General Fund revenues for the 1990-91 fiscal year
show that revenues in all major categories (except insurance taxes) were
lower than receipts in 1989-90, the first time this has happened on a year-
over-year basis since the 1930s.
The 1991-92 Budget Act projected General Fund expenditures of $43.4
billion and Special Fund expenditures of $10.6 billion. The Department of
Finance estimated that there would be a balance in the SFEU on June 30,
1992 of $1.2 billion. An estimated $14.3 billion "budget gap" was closed
through a combination of temporary and permanent changes in laws and one-
time budget adjustments. The major features of the budget compromise were:
program funding reductions totaling $5.1 billion; a total of $5.1 billion
of increased State tax revenues; savings of $2.1 billion by returning
certain health and welfare programs to counties; and additional
miscellaneous savings or revenue gains and one-time accounting charges
totaling $2.0 billion.
The 1991-92 Budget Act was based on economic forecasts showing
recovery from the recession would begin in summer or fall of 1991, but
revenues lagged behind projections from the start of the 1991-92 fiscal
year. By the time the Governor's Budget for 1992-93 was prepared in late
1991, it was evident that the recession had been much more severe in the
State than was thought earlier, and that it was continuing longer than
anticipated. As a result, revenues for the 1991-92 fiscal year were much
lower than originally estimated and expenditures were higher, particularly
in health and welfare programs.
As a result of the revenue shortfalls accumulating for the previous
two fiscal years, the Controller in April 1992 indicated that cash
resources (including borrowing from Special Funds) would not be sufficient
to meet all General Fund obligations due on June 30 and July 1, 1992. On
June 25, 1992, the State issued $475 million of 1992 Revenue Anticipation
Warrants (the "1992 Warrants") in order to provide funds to cover all
necessary payments from the General Fund at the end of the 1991-92 fiscal
year and on July 1, 1992. The 1992 Warrants were paid on July 24, 1992.
In addition to the 1992 Warrants the Controller reported that as of June
30, 1992, the General Fund had borrowed $1.336 billion from the SFEU and
$4.699 billion from other Special Funds, using all but about $183 million
of borrowable cash resources.
To balance the 1992-93 Governor's Budget, program reductions totalling
$4.365 billion and revenue and transfer increase of $872 million were
proposed for the 1991-92 and 1992-93 fiscal years. Economic performance in
the State continued to be sluggish after the 1992-93 Governor's Budget was
prepared. By the time of the "May Revision," issued on May 20, 1992, the
Administration estimated that the 1992-93 Budget needed to address a gap of
about $7.9 billion, much of which was needed to repay the accumulated
budget deficits of the previous two years.
In early 1992, the Director of Finance acknowledged that actual
economic conditions were worse than the projections in the Governor's
Budget. Because the State had accumulated a significant budget deficit
over two consecutive years, and the continuing recession depressed revenue
estimates for the coming year, the State faced a major challenge to enact a
balanced budget. The State also began the 1992-93 fiscal year with
essentially no cash reserves. By June 1992, it was estimated that
approximately $7.9 billion of budget actions would be required to end the
1992-93 fiscal year without a budget deficit. The severity of the budget
actions needed led to a long delay in adopting the budget.
With the failure to enact a budget by July 1, 1992, the State had no
legal authority to pay many of its vendors until the budget was passed.
Starting on July 1, 1992, the Controller was required to issue "registered
warrants" in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations, such as debt service on bonds and revenue
anticipation warrants. Between July 1 and September 4, 1992, the
Controller issued an aggregate of approximately $3.8 billion of registered
warrants payable from the General Fund, all of which were called for
redemption by September 4, 1992 following enactment of the 1992-93 Budget
Act and issuance by the State of $3.3 billion of interim notes.
The Legislature enacted the 1992-93 Budget Bill on August 29, 1992,
and it was signed by the Governor on September 2, 1992. The 1992-93 Budget
Act provides for expenditures of $57.4 billion and consists of General Fund
expenditures of $40.8 billion and Special Fund and Bond Fund expenditures
of $16.6 billion. The Department of Finance estimates there will be a
balance in the Special Fund for Economic Uncertainties of $28 million on
June 30, 1993.
The $7.9 billion budget gap was closed through a combination of
increased revenues and transfers and expenditure cuts such as:
1. General Fund savings in health and welfare programs totaling
$1.6 billion.
2. General Fund reductions of $1.9 billion for K-12 schools and
community colleges. This was accomplished by requiring
schools to repay $1.1 billion in excess appropriations from
1991-92.
3. Redirecting property taxes from cities ($200 million) and
counties ($525 million) to schools. These shifts are
permanent and will reduce the State General Funds obligation
for schools. The State will also redirect property taxes
from special districts ($375 million) and redevelopment
agencies ($200 million) to schools. The shift from
redevelopment agencies is a one-time shift.
4. Program cuts for higher education totaling $415 million ($246
million for The University of California, $143 million for
California State University, and $26 million for the Student
Aid Commission). These reductions are partially offset by
$141 million in increased student fees.
5. A total of $1.6 billion of transfers and accelerated
collections of State revenues by conforming State schedules
for estimated payments for personal income and bank and
corporate taxes with federal schedules ($105 million),
accelerating settlement of outstanding tax disputes ($300
million), reaching an agreement with the Federal government
to repay federal contractors over a ten-year period beginning
in 1992-93, rather than making a lump sum payment in 1992-93
($580 million), accelerating liquidation of unclaimed
properties through the sale of all unclaimed securities
received prior to July 1, 1992, rather than maintaining them
for three years ($70 million), transfers from Special Funds
($423 million), and other miscellaneous actions ($122
million).
6. Approximately $1.0 billion from various additional program
reductions.
In May 1993, the Department of Finance projected that the General Fund
would end the fiscal year on June 30, 1993 with an accumulated budget
deficit of about $2.8 billion, and a negative fund balance of about $2.2
billion (the difference being certain reserves for encumbrances and school
funding costs). As a result, the State issued $5 billion of revenue
anticipation notes and warrants.
The Governor's 1993-94 Budget, introduced on January 8, 1993, proposed
General Fund expenditures of $37.3 billion, with projected revenues of
$39.9 billion. It also proposed Special Fund expenditures of $12.4 billion
and Special Fund revenues of $12.1 billion. The 1993-94 fiscal year
represents the third consecutive year the Governor and the Legislature were
faced with a very difficult budget environment, requiring revenue actions
and expenditure cuts totaling billions of dollars to produce a balanced
budget. To balance the budget in the face of declining revenues, the
Governor proposed a series of revenue shifts from local government,
reliance on increased federal aid and reductions in state spending.
The "May Revision" of the Governor's Budget, released on May 20, 1993,
indicated that the revenue projections of the January Budget Proposal were
tracking well, with the full year 1992-93 about $80 million higher than the
January projection. Personal income tax revenue was higher than projected,
sales tax was close to target, and bank and corporation taxes were lagging
behind projections. The May Revision projected the State would have an
accumulated deficit of about $2.75 billion by June 30, 1993. The Governor
proposed to eliminate this deficit over an 18-month period. He also agreed
to retain the 0.5% sales tax scheduled to expire June 30 for a six-month
period, dedicated to local public safety purposes, with a November election
to determine a permanent extension. Unlike previous years, the Governor's
Budget and May Revision did not calculate a "gap" to be closed, but rather
set forth revenue and expenditure forecasts and proposals designed to
produce a balanced budget.
The 1993-94 Budget Act was signed by the Governor on June 30, 1993,
along with implementing legislation. The Governor vetoed about $71 million
in spending. With enactment of the Budget Act, the State carried out its
regular cash flow borrowing program for the fiscal year, which included the
issuance of approximately $2 billion of revenue anticipation notes that
matured on June 28, 1994.
The 1993-94 Budget Act was predicated on General Fund revenues and
transfers estimated at $40.6 billion, about $700 million higher than the
January Governor's Budget, but still about $400 million below 1992-93 (and
the second consecutive year of actual decline). The principal reasons for
declining revenues are the continued weak economy and the expiration (or
repeal) of three fiscal steps taken in 1991 -- a half cent temporary sales
tax, a deferral of operating loss carry forwards, and repeal by initiative
of a sales tax on candy and snack foods.
The 1993-94 Budget Act also assumed Special Fund revenues of $11.9
billion, an increase of 2.9% over 1992-93.
The 1993-94 Budget Act included General Fund expenditures of $38.5
billion (a 6.3% reduction from projected 1992-93 expenditures of $41.1
billion), in order to keep a balanced budget within the available revenues.
The Budget also included Special Fund expenditures of $12.1 billion, a 4.2%
increase.
The 1993-94 Budget Act contained no General Fund tax/revenue increases
other than a two year suspension of the renters' tax credit.
Administration reports during the course of the 1993-94 fiscal year
indicated that while economic recovery appeared to have started in the
second half of the fiscal year, recessionary conditions continued longer
than had been anticipated when the 1993-94 Budget Act was adopted.
Overall, revenues for the 1993-94 fiscal year were about $800 million lower
than original projections, and expenditures were about $780 million higher,
primarily because of higher health and welfare caseloads, lower property
taxes which require greater State support for K-14 education to make up to
shortfall, and lower than anticipated Federal government payments for
immigration-related costs. The reports in May and June 1994, indicated that
revenues in the second half of the 1993-94 fiscal year have been very close
to the projections made in the Governor's Budget of January 10, 1994, which
is consistent with a slow turn around in the economy.
The Department of Finance's July 1994 Bulletin, which included final
June receipts, reported that June revenues were $114 million (2.5%) above
projection, with final end-of-year results at $377 million (about 1%) above
the May Revision projections. Part of this result was due to the end-of-
year adjustments and reconciliations. Personal income tax and sales tax
continued to track projections. The largest factor in the higher than
anticipated revenues was from bank and corporation taxes, which were $140
million (18.4%) above projection in June.
During the 1993-94 fiscal year, the State implemented the Deficit
Retirement Plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 that matured
December 21, 1994. This borrowing reduced the cash deficit at the end of
the 1993-94 fiscal year. Nevertheless, because of the $1.5 billion
variance from the original 1993-94 Budget Act assumptions, the General Fund
ended the fiscal year at June 30, 1994 carrying forward an accumulated
deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the Deficit Retirement Plan, the
State issued an addition $2.0 billion of revenue anticipation warrants that
matured July 26, 1994, which were needed to fund the State's obligations
and expenses through the end of the 1993-94 fiscal year.
The 1994-95 fiscal year represents the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget
environment to produce a balanced budget. Many program cost and budgetary
adjustments have already been made in the last three years. The Governor's
Budget Proposal, as updated in May and June 1994, recognized that the
accumulated deficit could not be repaid in one year, and proposed a two-
year solution. The budget proposal set forth revenue and expenditure
forecasts and revenue and expenditure proposals which estimated operating
surpluses for the budget for both 1994-95 and 1995-96, and lead to the
elimination of the accumulated budget deficit, estimated at about $2.0
billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projects revenues and transfers of $41.9 billion, $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of an
improving economy.
The 1994-95 Budget Act projects Special Fund revenues of $12.1
billion, a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of $40.9
billion, an increase of $1.6 billion over the 1993-94 fiscal year. The
1994-95 Budget Act also projects Special Fund expenditures of $13.7
billion, a 5.4% increase over 1993-94 fiscal year estimated expenditures.
The 1994-95 Budget Act contains no tax increases. Under legislation
enacted for the 1993-94 Budget Act, the renters' tax credit was suspended
for two years (1993 and 1994). A ballot proposition to permanently restore
the renters' tax credit after this year failed at the June 1994 election.
The Legislature enacted a further one-year suspension of the renters' tax
credit, for 1995, saving about $390 million in the 1995-96 fiscal year.
The 1994-95 Budget Act assumes that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of the warrants allows the
State to defer repayment of approximately $1.0 billion of its accumulated
budget deficit into the 1995-96 fiscal year. The Budget Adjustment Law,
described above, enacted along with the 1994-95 Budget Act is designed to
ensure that the warrants will be repaid in the 1995-96 fiscal year.
Recent Economic Trends. The State's tax revenue experience clearly
reflects sharp declines in employment, income and retail sales on a scale
not seen in over 50 years. The May 1994 Revision to the 1994-95 Governor's
Budget, released May 20, 1994 (the "May 1994 Revision"), assumed the State
would start to recover from recessionary conditions in 1994, with a modest
upturn beginning in 1994 and continuing in 1995, a year later than
predicted in the May 1993 Department of Finance economic projection. Pre-
recession job levels are not expected to be reached until 1997. The
following are excerpts from the May 1994 Revision discussion of economic
conditions.
There is growing evidence that California is showing signs of an
economic turn around, and the May 1994 Revision forecast is revised up from
the 1994-95 Governor's Budget forecast. Since the 1994-95 Governor's
Budget forecast, 1993 nonfarm employment has been revised upward by 31,000.
Employment in the early months of 1994 has shown encouraging signs of
growth, several months sooner than was contemplated in the 1994-95
Governor's Budget forecast. Between December and April, payrolls are up by
50,000 jobs. The Northridge Earthquake may have dampened economic activity
briefly during late January and February, but the rebuilding effects are
now adding a small measure of stimulus.
Sectors which are contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services and management consulting. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. These trends are expected to continue, and by next
year, much of the restructuring in the finance and utilities industries
should be nearly completed. Thus, the State's recovery should gain
momentum over the next two years.
As a result of these factors, average 1994 nonfarm employment is now
forecast to maintain 1993 levels compared to a projected 0.6% decline in
the 1994-95 Governor's Budget. Employment in 1995 is expected to be up
1.6%, compared to 0.7% in the 1994-95 Governor's Budget.
The housing forecast remains essentially unchanged. Although existing
home sales have strengthened and subdivision surveys indicated increased
new home sales, building permits are up only slightly from recession lows.
Gains are expected in the months ahead, but higher mortgage interest rates
will dampen the upturn. Essentially, the earthquake adds a few thousand
units to the forecast, but this effect is offset by higher interest rates.
Interest rates represent one of several downside risks to the
forecast. The rise in interest rates has occurred more rapidly than
contemplated in the 1994-95 Governor's Budget forecast. In addition to
affecting housing, higher rates may also dampen consumer spending, given
the high proportion of California homeowners with adjustable-rate
mortgages. The May 1994 Revision forecast includes a further rise in the
Federal Funds rate to nearly 5% by the beginning of 1995. Should rates
rise more steeply, housing and consumer spending would be adversely
affected.
The employment upturn is still tenuous. The Employment Development
Department revised down February's employment gain and March was revised to
a small decline. Unemployment rates in California have historically been
volatile.
The July 1994 Bulletin of the Department of Finance reports that the
economy continued to who signs of recovery, although several labor market
indicators were weak in June. Based on a survey of employers, nonfarm
employment fell 12,000 in June, although it was still up over 17,000 since
December 1993. The Bulletin noted, however, that data from payroll tax
records and income tax withholding receipts for late 1993 and the first
part of 1994 were stronger than the employer survey results would indicate,
suggesting steady job gains thus far in 1994. The unemployment rate, which
is volatile, remained unchanged in June at 8.3%, still much higher than the
national average. The trend in the first six months of 1994, however,
appeared to be downward, and was below the 10.1% peak in March.
Housing permits were reported rising slowly, to a 93,000 annual rate
in May, continuing a modest recovery evident since late 1993. Retail sales
for January-April 1994 were up 4.3% over the same period a year earlier.
Sales had grown less than 1% in both 1992 and 1993.
APPENDIX B
Description of S&P, Moody's and Fitch ratings:
S&P
Municipal Bond Ratings
An S&P municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A
Principal and interest payments on bonds in this category are regarded
as safe. This rating describes the third strongest capacity for payment of
debt service. It differs from the two higher ratings because:
General Obligation Bonds -- There is some weakness in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at
some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Of the investment grade, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of debt
service. The difference between "A" and "BBB" rating is that the latter shows
more than one fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the factors
considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC, CC, C
Debt rated BB, B, CCC, CC or C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB
Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B
Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC
Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to
meet timely payments of principal. In the event of adverse business,
financial or economic conditions, it is not likely to have the capacity to pay
interest and repay principal.
CC
The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C
The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
D
Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Municipal Note Ratings
SP-1
The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to pay
principal and interest.
Commercial Paper Ratings
The designation A-1 by S&P 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. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
Moody's
Municipal Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca
Bonds which are rated Ca present obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and
in the categories below B. The modifier 1 indicates a ranking for the
security in the higher end of a rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
a rating category.
Municipal Note Ratings
Moody's ratings for state municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over
the short run.
A short-term rating may also be assigned on an issue having a demand
feature. Such ratings will be designated as VMIG or, if the demand feature
is not rated, as NR. Short-term ratings on issues with demand features are
differentiated by the use of the VMIG symbol to reflect such characteristics
as payment upon periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Additionally, investors should be alert to the
fact that the source of payment may be limited to the external liquidity with
no or limited legal recourse to the issuer in the event the demand is not met.
Moody's short-term ratings are designated Moody's Investment Grade as MIG
1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1
This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2
This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating assigned
by Moody's. Issuers of P-1 paper must have a superior capacity for repayment
of short-term promissory obligations, and ordinarily will be evidenced by
leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate
reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well established access to a wide range of financial markets and assured
sources of alternative liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Fitch
Municipal Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds
and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B
Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC
Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or
principal.
DDD, DD and D
Bonds rated DDD, DD and D are in actual or imminent default of interest
and/or principal payments. Such bonds are extremely speculative and should
be valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery on these bonds and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA category covering 12-36 months or the
DDD, DD or D categories.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
<TABLE>
<CAPTION>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS SEPTEMBER 30, 1994
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS-99.5% AMOUNT VALUE
-------------- -------------
<S> <C> <C>
CALIFORNIA-92.9%
ABAG Finance Corp., COP (ABAG XXIV) 6.90%, 4/1/2012......................... $ 3,500,000 $ 3,530,135
Alameda Housing Authority, MFHR (Independence Apartments Projects)
7.50%, 2/20/2031 (Collateralized; GNMA)................................. 3,595,000 3,760,298
Allan Hancock Joint Community College District, COP, Refunding 7.625%, 10/1/2005 1,055,000 1,118,173
Anaheim Public Financing Authority, Tax Allocation Revenue 9.32%, 12/28/2018 (a) 3,000,000 2,981,250
Beaumont Unified School District, COP (Capital Improvement Project) 7.70%, 1/1/2021 1,100,000 1,129,194
Berkeley, HR (Alta Bates Project) 7.65%, 12/1/2015 (Prerefunded 8/1/2000) (b) 465,000 521,302
California:
6.125%, 10/1/2011....................................................... 8,000,000 7,954,000
5.15%, 10/1/2019........................................................ 4,000,000 3,265,160
California Department of Water Resources, Revenue (Central Valley Project)
8.956%, 12/1/2026 (a,c)................................................. 6,300,000 5,961,375
California Educational Facilities Authority, Revenue:
(Chapman College) 7.50%, 1/1/2018....................................... 1,760,000 1,824,205
(Refunding-Pooled College and University Financings) 6.125%, 6/1/2009... 3,000,000 2,888,820
(University of San Francisco) 6.30%, 10/1/2007.......................... 2,470,000 2,469,975
California Health Facilities Authority, Revenue (Pacific Presbyterian Hospital)
7.60%, 6/1/2015......................................................... 910,000 1,000,800
California Health Facilities Financing Authority, Revenue:
(Childrens' Hospital of Los Angeles) 7.125%, 6/1/2021 (Prerefunded 6/1/2001) (b) 2,000,000 2,246,200
(Help Group) 7%, 8/1/2021
(Insured; California Health Facilities Construction Loan Program)..... 1,800,000 1,827,414
(Pomona Valley Hospital Medical Center) 7.375%, 1/1/2014................ 750,000 791,715
(Refunding - Health Dimensions) 7%,5/1/2020............................. 6,000,000 5,853,240
(Walden House) 6.85%, 3/1/2022.......................................... 3,225,000 3,222,065
California Housing Finance Agency, Home Mortgage Revenue:
Zero Coupon, 8/1/2023................................................... 6,380,000 692,804
7.50%, 8/1/2029......................................................... 1,570,000 1,612,704
7.65%, 8/1/2029......................................................... 900,000 928,764
7.60%, 8/1/2030......................................................... 1,855,000 1,879,226
7.70%, 8/1/2030......................................................... 1,540,000 1,578,654
California Pollution Control Financing Authority:
PCR (Southern California Edison Co.) 6.40%, 12/1/2024................... 5,000,000 4,793,700
SWDR (North County Recycling Center) 6.75%, 7/1/2011
(LOC; Union Bank of Switzerland) (d).................................. 3,500,000 3,526,810
California Public Works Board, LR:
(Department of Correction - Madera State Prison) 6%, 6/1/2010........... 3,000,000 2,916,690
(Department of Correction - Susanville State Prison)
5.375%, 6/1/2018 (Insured; MBIA)...................................... 11,000,000 9,443,060
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1994
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS (CONTINUED) AMOUNT VALUE
-------------- -------------
CALIFORNIA (CONTINUED)
California Public Works Board, LR (continued):
(Library and Courts Annex Building) 6%, 5/1/2013........................ $ 4,500,000 $ 4,208,400
(University of California Projects) 5.55%, 6/1/2010..................... 3,195,000 2,910,805
California Statewide Communities Development Authority, COP, Revenue,
Refunding:
Health Facilities (Barton Memorial Hospital)
6.50%, 12/1/2009 (LOC; Banque Nationale de Paris) (d)................. 1,600,000 1,600,976
(Triad Healthcare):
6.25%, 8/1/2006....................................................... 4,570,000 4,363,345
6.50%, 8/1/2022....................................................... 3,000,000 2,785,770
California Statewide Communities Development Corp., COP (Pacific Homes)
5.90%, 4/1/2009......................................................... 7,000,000 6,865,670
Campbell, COP, Refunding (Civic Center Project) 6.90%, 10/1/2018
(Prerefunded 10/1/2001) (b)............................................. 3,760,000 4,186,008
Chico Public Finance Authority, Revenue
(Chico Municipal Airport and Central Chico Redevelopment Project) 7.40%, 4/1/2021 2,410,000 2,481,505
Commerce Joint Powers Financing Authority, Revenue, Multiple Project Loans
8%, 3/1/2022............................................................ 2,495,000 2,645,748
Compton, COP, Refunding 7.50%, 8/1/2005 (LOC; Mitsui Trust and Banking) (d). 2,680,000 2,798,161
Dry Creek Joint School District, Special Tax
(Community Facilities District Number 1) 7.25%, 9/1/2011................ 2,500,000 2,536,850
East Bay Municipal Utility District, Water Systems Revenue
7.60%, 6/1/2020 (Insured; MBIA, Prerefunded 6/1/2000) (b)............... 3,000,000 3,411,600
Folsom Public Financing Authority, Local Agency Revenue 7.70%, 10/1/2020.... 1,200,000 1,237,980
Fontana Public Financing Authority, Tax Allocation Revenue
(North Fontana Redevelopment Project) 7.25%, 9/1/2020................... 2,000,000 2,053,820
Fontana Redevelopment Agency, Multi-Family Housing Mortgage Revenue,
Refunding
(Village Drive Apartments) 7.15%, 5/1/2028.............................. 3,070,000 3,164,464
Fresno, Health Facility Revenue
(Holy Cross Health Systems-Saint Agnes Medical Center) 6.625%, 6/1/2021. 2,000,000 1,952,120
Fresno Unified School District, COP (Project Phase VI) 7.20%, 5/1/2011...... 4,250,000 4,381,070
Glendora Public Finance Authority, Tax Allocation Revenue 7.625%, 9/1/1999
(Prerefunded 6/1/1999) (b).............................................. 1,145,000 1,289,774
Hollister Redevelopment Agency, Tax Allocation
(Hollister Community Development Project) 7.55%, 10/1/2013.............. 1,000,000 1,044,670
Inglewood, HR (Daniel Freeman Hospital) 6.75%, 5/1/2013..................... 2,000,000 2,022,440
Irvine Ranch Water District, Joint Powers Agency, Local Pool Revenue
8.25%, 8/15/2023........................................................ 3,000,000 3,157,680
La Mirada Redevelopment Agency (Tax Allocation-Industrial Commercial
Redevelopment)
6.80%, 8/15/2021........................................................ 3,950,000 3,915,161
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1994
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS (CONTINUED) AMOUNT VALUE
-------------- -------------
CALIFORNIA (CONTINUED)
Lake Elsinore Public Financing Authority, Local Agency Revenue 8%, 10/1/2020 $ 3,390,000 $ 3,443,020
Los Alamitos Union Free School District, Special Tax
(Community Facilities District Number 1) 7.15%, 8/15/2021............... 2,000,000 2,003,000
Los Angeles, Wastewater Systems Revenue:
6.70%, 12/1/2021 (Insured; MBIA, Prerefunded 12/1/2000) (b)............. 3,750,000 4,120,875
Refunding 7.10%, 6/1/2018............................................... 6,980,000 7,298,707
Los Angeles Building Authority, LR, Refunding
(Department of General Services):
5.375%, 5/1/2006...................................................... 4,060,000 3,843,561
5.60%, 5/1/2008....................................................... 8,000,000 7,535,040
Los Angeles County Metropolitan Transportation Authority, Sales Tax Revenue,
Refunding 5.50%, 7/1/2013............................................... 3,250,000 2,893,833
Los Angeles Department of Water and Power:
Electric Pilot Revenue:
4.75%, 10/15/2020..................................................... 4,700,000 3,587,228
7.10%, 1/15/2031...................................................... 2,750,000 3,038,695
Waterworks Revenue 7.625%, 8/1/2027..................................... 2,000,000 2,200,400
Mountain View, Shoreline Regional Park Community, Tax Allocation 5.75%, 8/1/2018 5,000,000 4,432,450
Newhall Elementary and Castaic Union School District, COP
(School Improvement Project) 7.70%, 3/1/2011............................ 2,695,000 2,784,420
Northern California Power Agency, Public Power Revenue, Refunding:
(Geothermal Project Number 3) 5.80%, 7/1/2009........................... 5,500,000 5,237,650
(Hydroelectric Project Number 1):
9.045%, 7/1/2018 (Insured; MBIA) (a,c)................................ 13,200,000 12,870,000
7.15%, 7/1/2024....................................................... 5,410,000 5,576,303
Orange County:
Airport Revenue, Refunding (John Wayne Airport) 5.50%, 7/1/2013 (Insured; MBIA) 1,750,000 1,553,038
COP 7.625%, 6/1/2019 (Prerefunded 6/1/1999) (b)......................... 2,500,000 2,814,375
Special Tax (Community Facilities District Number 87) 7.80%, 8/15/2015
(Prerefunded 8/15/2000) (b)........................................... 1,500,000 1,726,380
Otay Municipal Water District (Improvement District Number 27) 6.70%, 9/1/2022 2,000,000 1,947,840
Palm Dessert (Assessment District Number 94-1) 7.625%, 9/2/2019............. 3,305,000 3,326,185
Port Oakland, Special Facility Revenue (Mitsui O.S.K. Lines Limited)
6.80%, 1/1/2019 (LOC; Industrial Bank of Japan) (d)..................... 3,000,000 2,999,550
Richmond Joint Powers Financing Authority, Revenue 7.25%, 5/15/2013......... 2,000,000 2,031,060
Sacramento County, Special Tax (Community Facilities District Number 1)
8.25%, 12/1/2020........................................................ 5,610,000 5,963,093
Sacramento Municipal Utility District, Electric Revenue
9.224%, 8/15/2018 (Insured; FGIC) (a)................................... 4,000,000 3,870,000
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1994
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS (CONTINUED) AMOUNT VALUE
-------------- -------------
CALIFORNIA (CONTINUED)
Sacramento Schools Insurance Authority, Revenue (Workers Compensation
Program)
5.75%, 6/1/2003......................................................... $ 6,935,000 $ 6,898,661
San Bernardino, Health Care Systems Revenue (Sisters of Charity) 7%, 7/1/2021 2,000,000 2,061,640
San Bernardino County, Central School District 7.05%, 5/1/2016.............. 1,825,000 2,000,675
San Marcos Public Facilities Authority, Revenue, Refunding
(Public Improvement-Civic Center) 6.15%, 8/1/2013....................... 4,500,000 4,201,470
Simi Valley, Single Family Residential Mortgage Revenue 7.625%, 8/1/2022 (e) 3,000,000 1,650,000
Southern California Home Finance Authority, SFMR:
7.625%, 10/1/2023 (Collateralized; GNMA)................................ 1,100,000 1,129,865
6.90%, 10/1/2024 (Collateralized: FNMA and GNMA)........................ 2,000,000 1,996,920
Southern California Public Power Authority, Power Project Revenue:
(Multiple Projects) 6.75%, 7/1/2011..................................... 3,750,000 3,875,362
(Refunding - Mead Adelanto Project) 5%, 7/1/2017 (Insured; AMBAC)....... 5,000,000 4,089,300
Stanislaus Waste-to-Energy Financing Agency,
Solid Waste Facility Revenue Certificates, Refunding
(Ogden Martin Systems, Inc. Project) 7.625%, 1/1/2010................... 3,000,000 3,142,800
Tehachapi Unified School District, COP (Tompkins Elementary School Project)
7.80%, 2/1/2021 (Prerefunded 2/1/2001) (b).............................. 1,000,000 1,142,040
Torrance, HR (Little Co. of Mary Hospital) 7.10%, 12/1/2015
(Prerefunded 12/1/2005) (b)............................................. 930,000 981,848
University of California, COP:
Revenue, Refunding (Multiple Purpose Projects) 5%, 9/1/2023............. 6,000,000 4,767,540
(UCLA Central Chiller/Cogeneration) 7%, 11/1/2018 (Prerefunded 11/1/1999) (b) 3,400,000 3,747,888
Upland, HR, COP (San Antonio Community Hospital) 7.125%, 1/1/2011........... 745,000 768,594
Vista, MFHR, Refunding (Vista Hacienda Project) 6.95%, 4/1/2017............. 3,000,000 3,063,030
Waterford Public Financing Authority, Revenue 8.20%, 9/15/2020.............. 3,700,000 3,778,440
Watsonville Mammouth Lakes, COP 7.875%, 6/1/2011............................ 1,770,000 1,897,086
West Basin Municipal Water District, COP (Water Reclamation Project)
6.85%, 8/1/2016 (Insured; AMBAC, Prerefunded 8/1/2000) (b).............. 2,000,000 2,200,120
Yolo County Housing Authority, Mortgage Revenue (Walnut Park Apartments)
7.20%, 8/1/2033 (Insured; FHA).......................................... 4,150,000 4,174,194
U. S. RELATED-6.6%
Puerto Rico Electric Power Authority, Power Revenue:
7.125%, Series N, 7/1/1999.............................................. 960,000 1,060,781
7.125%, Series O, 7/1/1999.............................................. 1,590,000 1,757,713
7.125%, Series N, 7/1/2014.............................................. 540,000 576,153
7.125%, Series O, 7/1/2014.............................................. 910,000 975,629
7%, 7/1/2021............................................................ 4,000,000 4,155,680
Virgin Islands Port Authority, Airport Revenue (Cyril E. King Airport
Project)
8.10%, 10/1/2005........................................................ 4,135,000 4,545,606
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1994
PRINCIPAL
LONG-TERM MUNICIPAL INVESTMENTS (CONTINUED) AMOUNT VALUE
-------------- -------------
U. S. RELATED (CONTINUED)
Virgin Islands Territory (Hugo Insurance Claims Funds Program) 7.75%, 10/1/2006 $ 1,845,000 $ 1,994,334
Virgin Islands Water and Power Authority, Electric Systems Revenue 7.40%, 7/1/2011 6,000,000 6,183,420
--------------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS(cost $317,928,436).................... $320,645,242
==============
SHORT-TERM MUNICIPAL INVESTMENTS-.5%
CALIFORNIA-.2%
Los Angeles, Multi-Family Revenue, VRDN (Loans To Lender Program) 3.85% (f). $ 700,000 $ 700,000
U. S. RELATED-.3%
Puerto Rico Electric Power Authority, Power Revenue, 3.10% (a).............. 1,000,000 1,000,000
--------------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS (cost $1,700,000).................... $ 1,700,000
==============
TOTAL INVESTMENTS-100.0%
(cost $319,628,436)..................................................... $322,345,242
==============
</TABLE>
<TABLE>
SUMMARY OF ABBREVIATIONS
<S> <C> <C> <C>
AMBAC American Municipal Bond Assurance Corporation LR Lease Revenue
COP Certificate of Participation MBIA Municipal Bond Investors Assurance
FGIC Financial Guaranty Insurance Company MFHR Multi-Family Housing Revenue
FHA Federal Housing Administration PCR Pollution Control Revenue
FNMA Federal National Mortgage Association SFMR Single Family Mortgage Revenue
GNMA Government National Mortgage Association SWDR Solid Waste Disposal Revenue
HR Hospital Revenue VRDN Variable Rate Demand Notes
LOC Letter of Credit
</TABLE>
<TABLE>
SUMMARY OF COMBINED RATINGS (UNAUDITED)
FITCH (G) OR MOODY'S OR STANDARD & POOR'S PERCENTAGE OF VALUE
- --------- --------- -------------------- -----------------------
<S> <C> <C> <C>
AAA Aaa AAA 23.5%
AA Aa AA 16.4
A A A 34.5
BBB Baa BBB 16.4
D N/A D .5
F1 & F1+ VMIGI, MIG1 & P1 SP1 & A1 .5
Not Rated Not Rated Not Rated 8.2
------
100.0%
======
</TABLE>
NOTES TO STATEMENT OF INVESTMENTS:
(a) Inverse floater security - the interest rate is subject to change
periodically.
(b) Bonds which are prerefunded are collateralized by U.S. Government
securities which are held in escrow and are used to pay principal and
interest on the tax-exempt issue and to retire the bonds in full at the
earliest refunding date.
(c) Security exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At September
30, 1994, these securities amounted to $18,831,375 or 5.4% of net assets.
(d) Secured by letters of credit.
(e) Non-income producing security; interest payment in default.
(f) Securities payable on demand. The interest rate, which is subject to
change, is based upon bank prime rates or an index of market interest
rates.
(g) Fitch currently provides creditworthiness information for a limited
number of investments.
See notes to financial statements.
<TABLE>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1994
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $319,628,436)-see statement..................................... $322,345,242
Cash.................................................................... 3,516,900
Receivable for investment securities sold............................... 18,768,022
Interest receivable..................................................... 6,407,019
Prepaid expenses........................................................ 6,831
--------------
351,044,014
LIABILITIES:
Due to The Dreyfus Corporation.......................................... $ 175,963
Payable for investment securities purchased............................. 3,696,967
Accrued expenses and other liabilities.................................. 107,610 3,980,540
------------ --------------
NET ASSETS ................................................................ $347,063,474
==============
REPRESENTED BY:
Paid-in capital......................................................... $342,248,480
Accumulated undistributed net realized gain on investments.............. 2,098,188
Accumulated net unrealized appreciation on investments-Note 3(b)........ 2,716,806
--------------
NET ASSETS at value applicable to 26,907,697 shares outstanding
(500 million shares of $.001 par value Common Stock authorized)......... $347,063,474
==============
NET ASSET VALUE, offering and redemption price per share
($347,063,474 / 26,907,697 shares)...................................... $12.90
=======
See notes to financial statements.
</TABLE>
<TABLE>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1994
<S> <C> <C>
INVESTMENT INCOME:
INTEREST INCOME......................................................... $ 25,396,853
EXPENSES:
Management fee-Note 2(a).............................................. $2,351,917
Shareholder servicing costs-Note 2(b)................................. 400,339
Custodian fees........................................................ 62,342
Professional fees..................................................... 49,662
Directors' fees and expenses-Note 2(c)................................ 22,635
Prospectus and shareholders' reports.................................. 20,152
Registration fees..................................................... 14,129
Miscellaneous......................................................... 48,433
------------
TOTAL EXPENSES.................................................... 2,969,609
--------------
INVESTMENT INCOME-NET............................................. 22,427,244
--------------
REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS:
Net realized gain on investments-Note 3(a).............................. $2,409,198
Net realized (loss) on financial futures-Note 3(a)...................... (300,236)
------------
NET REALIZED GAIN..................................................... 2,108,962
Net unrealized (depreciation) on investments............................ (43,545,566)
--------------
NET REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS................. (41,436,604)
--------------
NET (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS...................... $ (19,009,360)
==============
See notes to financial statements.
</TABLE>
<TABLE>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30,
---------------------------------
1993 1994
-------------- ---------------
<S> <C> <C>
OPERATIONS:
Investment income-net................................................... $ 24,692,309 $ 22,427,244
Net realized gain on investments........................................ 2,427,493 2,108,962
Net unrealized appreciation (depreciation) on investments for the year.. 32,104,152 (43,545,566)
-------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS....... 59,223,954 (19,009,360)
-------------- ---------------
DIVIDENDS TO SHAREHOLDERS FROM:
Investment income-net................................................... (24,692,309) (22,427,244)
Net realized gain on investments........................................ (2,306,090) (1,957,211)
-------------- ---------------
TOTAL DIVIDENDS....................................................... (26,998,399) (24,384,455)
-------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Net proceeds from shares sold........................................... 238,178,901 143,167,610
Dividends reinvested.................................................... 19,599,176 17,051,843
Cost of shares redeemed................................................. (207,773,095) (226,190,833)
-------------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL STOCK TRANSACTIONS..... 50,004,982 (65,971,380)
-------------- ---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS........................... 82,230,537 (109,365,195)
NET ASSETS:
Beginning of year....................................................... 374,198,132 456,428,669
-------------- ---------------
End of year............................................................. $ 456,428,669 $ 347,063,474
============== ===============
SHARES SHARES
-------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Shares sold............................................................. 17,486,285 10,562,987
Shares issued for dividends reinvested.................................. 1,435,772 1,251,353
Shares redeemed......................................................... (15,218,045) (16,686,997)
-------------- ---------------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING......................... 3,704,012 (4,872,657)
============== ===============
See notes to financial statements.
</TABLE>
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
Reference is made to Page 2 of the Fund's Prospectus dated January 30, 1995.
See notes to financial statements.
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES:
The Fund is registered under the Investment Company Act of 1940 ("Act")
as a non-diversified open-end management investment company. Dreyfus Service
Corporation, until August 24, 1994, acted as the exclusive distributor of the
Fund's shares, which are sold to the public without a sales charge. Dreyfus
Service Corporation is a wholly-owned subsidiary of The Dreyfus Corporation
("Manager"). Effective August 24, 1994, the Manager became a direct
subsidiary of Mellon Bank, N.A.
On August 24, 1994, Premier Mutual Fund Services, Inc. (the
"Distributor") was engaged as the Fund's distributor. The Distributor,
located at One Exchange Place, Boston, Massachusetts 02109, 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.
(A) PORTFOLIO VALUATION: The Fund's investments (excluding options and
financial futures on municipal and U.S. treasury securities) are valued each
business day by an independent pricing service ("Service") approved by the
Board of Directors. Investments for which quoted bid prices are readily
available and are representative of the bid side of the market in the
judgment of the Service are valued at the mean between the quoted bid prices
(as obtained by the Service from dealers in such securities) and asked prices
(as calculated by the Service based upon its evaluation of the market for
such securities). Other investments (which constitute a majority of the
portfolio securities) are carried at fair value as determined by the Service,
based on methods which include consideration of: yields or prices of
municipal securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Options
and financial futures on municipal and U.S. treasury securities are valued at
the last sales price on the securities exchange on which such securities are
primarily traded or at the last sales price on the national securities market
on each business day. Investments not listed on an exchange or the national
securities market, or securities for which there were no transactions, are
valued at the average of the most recent bid and asked prices. Bid price is
used when no asked price is available.
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities
transactions are recorded on a trade date basis. Realized gain and loss from
securities transactions are recorded on the identified cost basis. Interest
income, adjusted for amortization of premiums and original issue discounts on
investments, is earned from settlement date and recognized on the accrual
basis. Securities purchased or sold on a when-issued or delayed-delivery
basis may be settled a month or more after the trade date.
The Fund follows an investment policy of investing primarily in municipal
obligations of one state. Economic changes affecting the state and certain of
its public bodies and municipalities may affect the ability of issuers within
the state to pay interest on, or repay principal of, municipal obligations
held by the Fund.
(C) DIVIDENDS TO SHAREHOLDERS: It is the policy of the Fund to declare
dividends daily from investment income-net. Such dividends are paid monthly.
Dividends from net realized capital gain are normally declared and paid
annually, but the Fund may make distributions on a more frequent basis to
comply with the distribution requirements of the Internal Revenue Code. To
the extent that net realized capital gain can be offset by capital loss
carryovers, if any, it is the policy of the Fund not to distribute such gain.
(D) FEDERAL INCOME TAXES: It is the policy of the Fund to continue to
qualify as a regulated investment company, which can distribute tax exempt
dividends, by complying with the applicable provisions of the Internal
Revenue Code, and to make distributions of income and net realized capital
gain sufficient to relieve it from substantially all Federal income and
excise taxes.
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2-MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) Pursuant to a management agreement ("Agreement") with the Manager,
the management fee is computed at the annual rate of .60 of 1% of the average
daily value of the Fund's net assets and is payable monthly. The Agreement
provides for an expense reimbursement from the Manager should the Fund's
aggregate expenses, exclusive of taxes, brokerage, interest on borrowings and
extraordinary expenses, exceed the expense limitation of any state having
jurisdiction over the Fund. The most stringent state expense limitation
applicable to the Fund presently requires reimbursement of expenses in any
full fiscal year that such expenses (exclusive of certain expenses as
described above) exceed 2 1/2% of the first $30 million, 2% of the next $70
million and 1 1/2% of the excess over $100 million of the average value of
the Fund's net assets in accordance with California "blue sky" regulations.
There was no expense reimbursement for the year ended September 30, 1994.
(B) Pursuant to the Fund's Shareholder Services Plan, the Fund reimburses
Dreyfus Service Corporation an amount not to exceed an annual rate of .25 of
1% of the value of the Fund's average daily net assets for servicing
shareholder accounts. The services provided may include personal services
relating to shareholder accounts, such as answering shareholder inquiries
regarding the Fund and providing reports and other information, and services
related to the maintenance of shareholder accounts. During the year ended
September 30, 1994, the Fund was charged an aggregate of $173,410 pursuant to
the Shareholder Services Plan.
(C) Prior to August 24, 1994 certain officers and directors of the Fund
were "affiliated persons," as defined in the Act, of the Manager and/or
Dreyfus Service Corporation. Each director who is not an "affiliated person"
receives an annual fee of $2,500 and an attendance fee of $250 per meeting.
NOTE 3-SECURITIES TRANSACTIONS:
(A) The aggregate amount of purchases and sales of investment securities
amounted to $210,196,883 and $296,749,476, respectively, for the year ended
September 30, 1994, and consisted entirely of long-term and short-term
municipal investments.
The Fund is engaged in trading financial futures contracts. The Fund is
exposed to market risk as a result of changes in the value of the underlying
financial instruments. Investments in financial futures require the Fund to
"mark to market" on a daily basis, which reflects the change in the market
value of the contract at the close of each day's trading. Accordingly,
variation margin payments are made or received to reflect daily unrealized
gains or losses. When the contracts are closed, the Fund recognizes a
realized gain or loss. These investments require initial margin deposits with
a custodian, which consist of cash or cash equivalents, up to approximately
10% of the contract amount. The amount of these deposits is determined by the
exchange or Board of Trade on which the contract is traded and is subject to
change. At September 30, 1994, there were no financial futures contracts
outstanding.
(B) At September 30, 1994, accumulated net unrealized appreciation on
investments was $2,716,806, consisting of $8,754,999 gross unrealized
appreciation and $6,038,193 gross unrealized depreciation.
At September 30, 1994, the cost of investments for Federal income tax
purposes was substantially the same as the cost for financial reporting
purposes (see the Statement of Investments).
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
GENERAL CALIFORNIA MUNICIPAL BOND FUND, INC.
We have audited the accompanying statement of assets and liabilities of
General California Municipal Bond Fund, Inc., including the statement of
investments, as of September 30, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and financial highlights
for each of the years indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1994 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of General California Municipal Bond Fund, Inc. at September 30,
1994, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the indicated years, in conformity with
generally accepted accounting principles.
(Ernst & Young Signature Logo)
New York, New York
November 3, 1994
