Dreyfus California
Intermediate Municipal
Bond Fund
Investing for income that is exempt from
federal and California state income taxes
Prospectus August 1, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus.
Any representation to the contrary is a criminal offense.
Contents
The Fund
2 Goal/Approach
3 Main Risks
4 Past Performance
5 Expenses
6 Management
7 Financial Highlights
Your Investment
What every investor
should know about
the fund
8 Account Policies
11 Distributions and Taxes
12 Services for Fund Investors
14 Instructions for Regular Accounts
For More Information
Information
for managing your
fund account
Back Cover
Where to learn more
about this and other
Dreyfus funds
[Page]
The Fund
Dreyfus California Intermediate
Municipal Bond Fund
Ticker Symbol: DCIMX
Goal/Approach
The fund seeks as high a level of income exempt from federal and California
state income taxes as is consistent with the preservation of capital. To
pursue its goal, the fund normally invests substantially all of its assets in
municipal bonds that provide income exempt from federal and California personal
income taxes. The fund's dollar-weighted average portfolio maturity ranges
between three and ten years. Although the fund currently intends to invest only
in investment grade municipal bonds, or the unrated equivalent as determined by
Dreyfus, it has the ability to invest up to 20% of net assets in bonds of below
investment grade credit quality.
Municipal bonds are typically divided into two types:
* general obligation bonds, which are secured by the
full faith and credit of the issuer and its taxing power
* revenue bonds, which are payable from the revenues
derived from a specific revenue source, such as charges for water and
sewer service or highway tolls
The fund is non-diversified, which means that a relatively high percentage of
the fund's assets may be invested in a limited number of issuers. Therefore,
its performance may be more vulnerable to changes in the market value of a
single issuer or a group of issuers.
Information on the fund's recent strategies and holdings can be found in the
current annual/semiannual report (see back cover).
Concepts to understand
Average maturity: an average of the stated maturities of the bonds held in
the fund, based on their dollar-weighted proportions in the fund.
Investment grade bonds: independent rating organizations analyze and evaluate a
bond issuer's credit history and ability to repay debts. Based on their
assessment, they assign letter grades that reflect the issuer's
creditworthiness. AAA or Aaa represents the highest credit rating, AA/Aa the
second highest, and so on down to D, for defaulted debt. Bonds rated BBB or Baa
and above are considered investment grade.
[Page 2]
Main Risks
Prices of bonds tend to move inversely with changes in interest rates. While
a rise in rates may allow the fund to invest for higher yields, the most
immediate effect is usually a drop in bond prices and, therefore, in the
fund's share price as well. As a result, the value of your investment in the
fund could go up and down, which means that you could lose money.
Other risk factors could have an effect on the fund's performance:
* if an issuer fails to make timely interest or
principal payments, or there is a decline in the credit
quality of a bond, or perception of a decline, the
bond's value could fall, potentially lowering the fund's
share price
* California's economy and revenues underlying its
municipal bonds may decline
* investing primarily in a single state may make the
fund's portfolio securities more sensitive to risks
specific to the state
Although the fund's objective is to generate income exempt from federal and
California personal income taxes, interest from some of its holdings may be
subject to the federal alternative minimum tax. In addition, the fund
occasionally may invest in municipal bonds that are exempt only from federal
personal income tax.
Other potential risks
The fund may invest in certain derivatives, such as futures, options and
inverse floaters. Derivatives can be highly sensitive to changes in their
underlying security, interest rate or index and as a result can be highly
volatile. A small investment in certain derivatives could have a potentially
large impact on the fund's performance. The fund may use derivatives to:
* increase yield
* hedge against a decline in principal value
* invest with greater efficiency and lower cost than is
possible through direct investment
* adjust the funds duration
* provide daily liquidity
The Fund
[Page 3]
Past Performance
The tables below show some of the risks of investing in the fund. The first
table shows the changes in the fund's performance from year to year. The
second table compares the funds performance over time to that of the Lehman
Brothers 10-Year Municipal Bond Index, an unmanaged total-return performance
benchmark. Both tables assume reinvestment of dividends. Of course, past
performance is no guarantee of future results.
Year-by-year total return as of 12/31 each year (%)
<TABLE>
14.44 13.42 3.66 7.63 5.79
-5.50
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
</TABLE>
Best Quarter: Q1 '95 +5.13%
Worst Quarter: Q1 '94 -5.17%
Average annual total return as of 12/31/98
Since
inception
1 Year 5 Years (4/20/92)
- --------------------------------------------------------------------------
Fund 5.79% 4.81% 6.80%
Lehman Brothers
10-Year Municipal
Bond Index 6.76% 6.35% 7.86%*
The fund's year-to-date total return as of 6/30/99 was -1.24%.
* For comparative purposes, the value of the index on 4/30/92
is used as the beginning value on 4/20/92. Unlike the fund, the Lehman
Index is not composed of bonds of a single state.
What this fund is -
and isn't
This fund is a mutual fund:
a pooled investment that is professionally managed and gives you the
opportunity to participate in financial markets. It strives to reach its
stated goal, although as with all mutual funds, it cannot offer guaranteed
results.
An investment in this fund is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency. It is not a complete
investment program. You could lose money in this fund, but you also have the
potential to make money.
[Page 4]
Expenses
As an investor, you pay certain fees and expenses in connection with the
fund, which are described in the table below. Shareholder transaction fees
are paid from your account. Annual fund operating expenses are paid out of
fund assets, so their effect is included in the share price. The fund has no
sales charge (load) or Rule 12b-1 distribution fees.
Fee table
Shareholder transaction fees
% of transaction amount
Maximum redemption fee 1.00%
charged only when selling shares you
have owned for less than 15 days
Annual fund operating expenses
% of average daily net assets
Management fee 0.60%
Shareholder Services fee 0.09%
Other expenses 0.13%
Total 0.82%
Expense example
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------
$84 $262 $455 $1,014
This example shows what you could pay in expenses
over time. It uses the same hypothetical conditions other
funds use in their prospectuses: $10,000 initial
investment, 5% total return each year and no changes in
expenses. The figures shown would be the same whether you
sold your shares at the end of a period or kept them.
Because actual return and expenses will be different, the
example is for comparison only.
Concepts to understand
Management fee: the fee paid to the investment adviser for managing the
fund's portfolio and assisting in all aspects of the fund's operations.
During the past fiscal year, Dreyfus waived a portion of its fee so that the
effective management fee paid by the fund was 0.58%, reducing total expenses
to 0.80%. This waiver was voluntary and subject to termination at any time.
Shareholder services fee: a fee of up to 0.25% used to reimburse Dreyfus Service
Corporation for shareholder account service and maintenance.
Other expenses: fees paid by the fund for miscellaneous items such as
transfer agency, custody, professional and registration fees.
The Fund [Page 5]
Management
The investment adviser for the fund is The Dreyfus Corporation,
200 Park Avenue, New York, New York 10166. Founded in 1947, Dreyfus manages
more than $120 billion in over 160 mutual fund portfolios. For the past
fiscal year, the fund paid Dreyfus a management fee at the annual rate of
0.58% of the fund's average daily net assets. Dreyfus is the primary mutual
fund business of Mellon Bank Corporation, a broad-based financial services
company with a bank at its core. With more than $389 billion of assets under
management, and $1.9 trillion of assets under administration and custody,
Mellon provides a full range of banking, investment and trust products and
services to individuals, businesses and institutions. Mellon is headquartered
in Pittsburgh, Pennsylvania.
Monica Wiebolt has managed the fund since October 1996 and has been a
portfolio manager at Dreyfus since 1983.
Dreyfus has a personal securities trading policy (the "Policy") which
restricts the personal securities transactions of its employees. Its primary
purpose is to ensure that personal trading by Dreyfus employees does not
disadvantage any Dreyfus-managed fund. Dreyfus portfolio managers and other
investment personnel who comply with the Policy's preclearance and disclosure
procedures may be permitted to purchase, sell or hold certain types of
securities which also may be or are held in the fund(s) they advise.
Concepts to understand
Year 2000 issues: the fund could be adversely affected if the computer
systems used by Dreyfus and the fund's other service providers do not
properly process and calculate date-related information from and after
January 1, 2000.
Dreyfus is working to avoid year 2000-related problems in its systems and to
obtain assurances from other service providers that they are taking similar
steps. In addition, issuers of securities in which the fund invests may be
adversely affected by year 2000-related problems. This could have an impact
on the value of the fund's investments and its share price.
[Page 6]
Financial Highlights
This table describes the fund's performance for the fiscal periods indicated.
"Total return" shows how much your investment in the fund would have
increased (or decreased) during each period, assuming you had reinvested all
dividends and distributions. These figures have been independently audited by
Ernst & Young LLP, whose report, along with the fund's financial statements,
is included in the annual report.
<TABLE>
Year Ended March 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per-Share Data ($)
Net asset value, beginning of period 13.82 13.27 13.27 13.02 13.08
Investment operations:
Investment income - net .58 .59 .60 .62 .66
Net realized and unrealized gain
(loss) on investments .17 .55 - .25 (.06)
Total from Investment operations .75 1.14 .60 .87 .60
Distributions:
Dividends from investment
income - net (.58) (.59) (.60) (.62) (.66)
Net asset value, end of period 13.99 13.82 13.27 13.27 13.02
Total return (%) 5.55 8.77 4.60 6.75 4.76
Ratios/Supplemental Data
Ratio of expenses
to average net assets (%) .80 .79 .78 .65 .32
Ratio of net investment income
to average net assets (%) 4.19 4.35 4.48 4.66 5.13
Decrease reflected in above expense ratios
due to actions by Dreyfus (%) .02 .01 .04 .14 .47
Portfolio turnover rate (%) 26.29 44.77 35.79 41.42 17.28
Net assets, end of period ($ x 1,000) 202,436 202,997 210,790 230,357 239,948
</TABLE>
The Fund [Page 7]
Your Investment
Account Policies
Buying shares
You pay no sales charges to invest in this fund. Your price for fund shares
is the fund's net asset value per share (NAV), which is generally calculated
as of the close of trading on the New York Stock Exchange (usually 4:00 p.m.
Eastern time) every day the exchange is open.
Your order will be priced at the next NAV calculated after your order is
accepted by the fund's transfer agent or other authorized entity. Because the
fund seeks tax-exempt income, it is not recommended for purchase in IRAs or
other qualified retirement plans.
Minimum investments
Initial Additional
- -----------------------------------------------------------------------------
Regular accounts $2,500 $100
$500 for
TeleTransfer investments
Dreyfus automatic $100 $100
investment plans
All investments must be in U.S.
dollars. Third-party checks cannot be accepted. You may
be charged a fee for any check that does not
clear. Maximum TeleTransfer purchase is $150,000 per
day.
Concepts to understand
Net asset value (NAV): a mutual fund's share price on a given day. A fund's
NAV is calculated by dividing the value of its net assets by the number of
existing shares.
When calculating its NAV, the fund's investments are priced at fair value by
an independent pricing service approved by the fund's board. The pricing
service's procedures are reviewed under the general supervision of the board.
[Page 8]
Selling shares
You may sell (redeem) shares at any time. Your shares will be sold at the
next NAV calculated after your order is accepted by the fund's transfer agent
or other authorized entity. Any certificates representing fund shares being
sold must be returned with your redemption request. Your order will be
processed promptly, and you will generally receive the proceeds within a
week.
Before selling recently purchased shares, please note that:
* if the fund has not yet collected payment for the
shares you are selling, it may delay sending the proceeds
for up to eight business days or until it has collected payment
* if you are selling or exchanging shares
you have owned for less than 15 days, the fund may deduct a
1% redemption fee (not charged on shares sold through the
Automatic Withdrawal Plan or Dreyfus Auto-Exchange Privilege,
or on shares acquired through dividend reinvestment)
Limitations on selling shares by phone
Proceeds
sent by Minimum Maximum
- -------------------------------------------------------------------------
Check no minimum $150,000 per day
Wire $1,000 $250,000 for joint accounts
every 30 days
TeleTransfer $500 $250,000 for joint accounts
every 30 days
Written sell orders
Some circumstances require written sell orders along with signature
guarantees.
These include:
* amounts of $1,000 or more on accounts whose address
has been changed within the last 30 days
* requests to send the proceeds to a different payee
or address
Written sell orders of $100,000 or more must also be signature guaranteed.
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public. For joint
accounts, each signature must be guaranteed. Please call us to ensure that your
signature guarantee will be processed correctly.
Your Investment [Page 9]
Account Policies (continued)
General policies
Unless you decline telephone privileges on your application, you may be
responsible for any fraudulent telephone order as long as Dreyfus takes
reasonable measures to verify the order.
The fund reserves the right to:
* refuse any purchase or
exchange request that could adversely affect the fund
or its operations, including those from any individual
or group who, in the fund's view, is likely to engage
in excessive trading (usually defined as more than four
exchanges out of the fund within a calendar year)
* refuse any purchase or exchange request in excess
of 1% of the fund's total assets
* change or discontinue its exchange privilege, or
temporarily suspend this privilege during unusual market
conditions
* change its minimum investment amounts
* delay sending out redemption proceeds for up to
seven days (generally applies only in cases of very large
redemptions, excessive trading or during unusual market conditions)
The fund also reserves the right to make a "redemption in kind" - payment in
portfolio securities rather than cash - if the amount you are redeeming is
large enough to affect fund operations (for example, if it represents more
than 1% of the fund's assets).
Small account policies
To offset the relatively higher costs of servicing smaller accounts, the fund
charges regular accounts with balances below $2,000 an annual fee of $12. The
fee will be imposed during the fourth quarter of each calendar year.
The fee will be waived for: any investor whose aggregate Dreyfus mutual fund
investments total at least $25,000; IRA accounts; accounts participating in
automatic investment programs; and accounts opened through a financial
institution.
If your account falls below $500, the fund may ask you to increase your
balance. If it is still below $500 after 30 days, the fund may close your
account and send you the proceeds.
[Page 10]
Distributions and Taxes
The fund usually pays its shareholders dividends from its net investment
income once a month, and distributes any net capital gains it has realized
once a year. Your distributions will be reinvested in the fund unless you
instruct the fund otherwise. There are no fees or sales charges on
reinvestments.
The fund anticipates that virtually all of its income dividends will be
exempt from federal and California personal income taxes. However, any
dividends from taxable investments, and any capital gain distributions, are
taxable as ordinary income or as capital gains, whether or not you reinvested
them. The tax status of any distribution is the same regardless of how long
you have been in the fund and whether you reinvest your distributions or take
them in cash. In general, distributions are federally taxable as follows:
Taxability of distributions
Type of Tax rate for Tax rate for
distribution 15% bracket 28% bracket or above
- ----------------------------------------------------------------------
Income Generally Generally
dividends tax exempt tax exempt
Short-term Ordinary Ordinary
capital gains income rate income rate
Long-term
capital gains 10% 20%
The tax status of your dividends and distributions will be detailed in your
annual tax statement from the fund.
Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences.
Taxes on transactions
Any sale or exchange of fund shares, including through the checkwriting
privilege, may generate a tax liability.
The table at right also can provide a guide for your potential tax liability
when selling or exchanging fund shares. "Short-term capital gains" applies to
fund shares sold or exchanged up to 12 months after buying them. "Long-term
capital gains" applies to shares sold or exchanged after 12 months.
Your Investment [Page 11]
Services for fund Investors
Automatic services
Buying or selling shares automatically is easy with the services described
below. With each service, you select a schedule and amount, subject to
certain restrictions. You can set up most of these services with your
application or by calling 1-800-645-6561.
For investing
Dreyfus Automatic For making automatic investments
Asset BuilderRegistration Mark from a designated bank account.
Dreyfus Payroll For making automatic investments
Savings Plan through a payroll deduction.
Dreyfus Government For making automatic investments
Direct Deposit from your federal employment,
Privilege Social Security or other regular
federal government check.
Dreyfus Dividend For automatically reinvesting the
Sweep dividends and distributions from
one Dreyfus fund into another
(not available for IRAs).
For exchanging shares
Dreyfus Auto- For making regular exchanges
Exchange Privilege from one Dreyfus fund into
another.
For selling shares
Dreyfus Automatic For making regular withdrawals
Withdrawal Plan from most Dreyfus funds.
Dreyfus Financial Centers
Through a nationwide network of Dreyfus Financial Centers, Dreyfus offers a
full array of investment services and products. This includes information on
mutual funds, brokerage services, tax-advantaged products and retirement
planning.
Experienced financial consultants can help you make informed choices and provide
you with personalized attention in handling account transactions. The Financial
Centers also offer informative seminars and events. To find the Financial Center
nearest you, call 1-800-499-3327.
[Page 12]
Checkwriting privilege
You may write redemption checks against your account in amounts of $500 or
more. These checks are free; however, a fee may be charged if you request a
stop payment or if the transfer agent cannot honor a redemption check due to
insufficient funds or another valid reason. Please do not postdate your
checks or use them to close your account.
Exchange privilege
You can exchange $500 or more from one Dreyfus fund into another. You can
request your exchange in writing or by phone. Be sure to read the current
prospectus for any fund into which you are exchanging. Any new account
established through an exchange will have the same privileges as your
original account (as long as they are available). There is currently no fee
for exchanges, although you may be charged a sales load when exchanging into
any fund that has one.
Dreyfus TeleTransfer privilege
To move money between your bank account and your Dreyfus fund account with a
phone call, use the Dreyfus TeleTransfer privilege. You can set up
TeleTransfer on your account by providing bank account information and
following the instructions on your application.
24-hour automated account access
You can easily manage your Dreyfus accounts, check your account balances,
transfer money between your Dreyfus funds, get price and yield information
and much more - when it's convenient for you.
Third-party investments
If you invest through a third party (rather than directly with Dreyfus), the
policies and fees may be different than those described here. Banks, brokers,
financial advisers and financial supermarkets may charge transaction fees and
may set different minimum investments or limitations on buying or selling
shares. Consult a representative of your plan or financial institution if in
doubt.
Your Investment [Page 13]
Instructions for regular accounts
TO OPEN AN ACCOUNT
In Writing
Complete the application.
Mail your application and a check to:
The Dreyfus Family of Funds
P.O. Box 9387, Providence, RI 02940-9387
By Telephone
Wire Have your bank send your
investment to The Bank of New York,
with these instructions:
* ABA# 021000018
* DDA# 8900204400
* the fund name
* your Social Security or tax ID number
* name(s) of investor(s)
Call us to obtain an account number.
Return your application.
Automatically
With an initial investment Indicate on
your application which automatic
service(s) you want. Return your
application with your investment.
Without any initial investment Check
the Dreyfus Step Program option on your
application. Return your application, then
complete the additional materials when
they are sent to you.
Via the Internet
Computer Visit the Dreyfus Web site
http://www.dreyfus.com and follow the
instructions to download an account
application.
TO ADD TO AN ACCOUNT
Fill out an investment slip, and write your
account number on your check.
Mail the slip and the check to:
The Dreyfus Family of Funds
P.O. Box 105, Newark, NJ 07101-0105
Wire Have your bank send your
investment to The Bank of New York,
with these instructions:
* ABA# 021000018
* DDA# 8900204400
* the fund name
* your account number
* name(s) of investor(s)
Electronic check Same as wire, but insert
"1111" before your account number.
TeleTransfer Request TeleTransfer on your
application. Call us to request your transaction.
All services Call us to request a form to
add any automatic investing service (see
"Services for Fund Investors"). Complete
and return the forms along with any other
required materials.
[Page 14]
TO SELL SHARES
Write a redemption check or write a letter of
instruction that includes:
* your name(s) and signature(s)
* your account number
* the fund name
* the dollar amount you want to sell
* how and where to send the proceeds
Obtain a signature guarantee or other documentation,
if required (see "Account Policies - Selling Shares").
Mail your request to:
The Dreyfus Family of Funds
P.O. Box 9671, Providence, RI 02940-9671
Wire Be sure the fund has your bank account
information on file. Call us to request your
transaction. Proceeds will be wired to your bank.
TeleTransfer Be sure the fund has your bank
account information on file. Call us to request
your transaction. Proceeds will be sent to your
bank by electronic check.
Check Call us to request your transaction.
A check will be sent to the address of record.
Dreyfus Automatic Withdrawal Plan Call us
to request a form to add the plan. Complete the
form, specifying the amount and frequency of
withdrawals you would like.
Be sure to maintain an account balance of
$5,000 or more.
To reach Dreyfus, call
toll free in the U.S.
1-800-645-6561
Outside the U.S. 516-794-5452
Make checks payable to:
The Dreyfus Family of Funds
You also can deliver requests
to any Dreyfus Financial
Center. Because processing
time may vary, please ask
the representative when your
account will be credited
or debited.
Concepts to understand
Wire transfer: for transferring money from one financial institution to
another. Wiring is the fastest way to move money, although your bank
may charge a fee to send or receive wire transfers. Wire redemptions from the
fund are subject to a $1,000 minimum.
Electronic check: for transferring money out of a bank account. Your
transaction is entered electronically, but may take up to eight business days
to clear. Electronic checks usually are available without a fee at all
Automated Clearing House (ACH) banks.
Your Investment [Page 15]
NOTES
[Page]
[Page]
For More Information
Dreyfus California
Intermediate Municipal Bond Fund
SEC file number: 811-6610
More information on this fund is available free
upon request, including the following:
Annual/Semiannual Report
Describes the fund's performance, lists portfolio
holdings and contains a letter from the fund's
manager discussing recent market conditions,
economic trends and fund strategies that significantly
affected the fund's performance during the last fiscal
year.
Statement of Additional Information (SAI)
Provides more details about the fund and its
policies. A current SAI is on file with the
Securities and Exchange Commission (SEC)
and is incorporated by reference (is legally
considered part of this prospectus).
To obtain information:
By telephone
Call 1-800-645-6561
By mail Write to:
The Dreyfus Family of Funds
144 Glenn Curtiss Boulevard
Uniondale, NY 11556-0144
By E-mail Send your request to [email protected]
On the Internet Text-only versions of fund
documents can be viewed online or
downloaded from:
SEC
http://www.sec.gov
Dreyfus
http://www.dreyfus.com
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC (phone 1-800-SEC-0330) or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, DC
20549-6009.
Copy Rights 1999 Dreyfus Service Corporation 902P0899
DREYFUS CALIFORNIA INTERMEDIATE MUNICIPAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus of
Dreyfus California Intermediate Municipal Bond Fund (the "Fund"), dated
August 1, 1999, 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 one of the following
numbers:
Call Toll Free -- 1-800-645-6561
In New York City -- Call 1-718-895-1206
Outside the U.S. -- Call 516-794-5452
The Fund's most recent Annual Report and Semi-Annual Report to
Shareholders are separate documents supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing in the Annual Report are
incorporated by reference into this Statement of Additional Information.
TABLE OF CONTENTS
Page
Description of the Fund B-2
Management of the Fund B-16
Management Arrangements B-21
How to Buy Shares B-23
Shareholder Services Plan B-24
How to Redeem Shares B-25
Shareholder Services B-27
Determination of Net Asset Value B-30
Dividends, Distributions and Taxes B-31
Portfolio Transactions B-33
Performance Information B-34
Information About the Fund B-35
Counsel and Independent Auditors B-37
Appendix A B-38
Appendix B B-56
DESCRIPTION OF THE FUND
The Fund is a Massachusetts business trust that commenced operations on
April 20, 1992. The Fund is an open-end, management investment company,
known as a mutual fund.
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.
Certain Portfolio Securities
The following information supplements and should be read in conjunction
with the Fund's Prospectus.
Municipal Obligations. The Fund will invest primarily in debt
securities of the State of California, its political subdivisions,
authorities and corporations, and certain other specified securities, 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 will invest at
least 80% of the value of its net assets (except when maintaining a
temporary defensive position) in Municipal Obligations. Municipal
Obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multistate
agencies or authorities, the interest from which, in the opinion of bond
counsel to the issuer, is exempt from Federal income tax. Municipal
Obligations generally include debt 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.
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.
Certain Tax Exempt Obligations. 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
amount borrowed. 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.
Tax Exempt Participation Interests. 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 Fund's Board
has determined meets prescribed quality standards for banks, 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.
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 canceled; (b) what
assurance there is that the assets represented by the lease can be sold; (c)
the strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of nonappropriation"); (e)
the legal recourse in the event of failure to appropriate; and (f) such
other factors concerning credit quality as the Manager may deem relevant.
Tender Option Bonds. 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 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 Manager, on behalf of the
Fund, will consider on an ongoing basis the creditworthiness of the issuer
of the underlying Municipal Obligations, 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 Obligations
and for other reasons.
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.
Custodial Receipts. 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. 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 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.
Stand-By Commitments. 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.
Ratings of Municipal Obligations. The Fund will invest at least 80% of
the value of its net assets in 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 Ratings Group ("S&P") or Fitch IBCA,
Inc. ("Fitch" and, together with Moody's and S&P, the "Rating Agencies").
The Fund may invest up to 20% 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 the
Rating Agencies, but it currently is the intention of the Fund that this
portion of the Fund's portfolio be invested primarily in Municipal
Obligations rated no lower than Baa by Moody's or BBB by S&P or Fitch. The
Fund also may invest in securities which, while not rated, are determined by
the Manager to be of comparable quality to the rated securities in which the
Fund may invest; for purposes of the 80% requirement described in this
paragraph, such unrated securities will be considered to have the rating so
determined.
The average distribution of investments (at value) in Municipal
Obligations (including notes) by ratings for the fiscal year ended March 31,
1999, computed on a monthly basis, was as follows:
Percentage of
Fitch or Moody's or S&P Value
AAA Aaa AAA 58.6%
AA Aa AA 16.8%
A A A 12.3%
BBB Baa BBB 7.3%
F-1+/F-1 VMIG1/MIG1, P-1 SP-1+/SP-1, A-1 0.9%
Not Rated Not Rated Not Rated 4.1%*
100.0%
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 the
Rating Agencies for Municipal Obligations may change as a result of changes
in such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for its investments in accordance with the
investment policies contained in the Prospectus and this Statement of
Additional Information. The ratings of the Rating Agencies represent their
opinions as to the quality of the Municipal Obligations which they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these
ratings may be an initial criterion for selection of portfolio investments,
the Manager also will evaluate these securities and the creditworthiness of
the issuers of such securities.
Taxable Investments. 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 the Rating Agencies; obligations of the
U.S. Government, its agencies or instrumentalities; commercial paper rated
not lower than P-1 by Moody's, A-1 by S&P or F-1 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.
Zero Coupon Securities. 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 interests in such stripped debt obligations and coupons. The
market prices of zero coupon securities generally are more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to a greater degree to changes in interest rates than non-zero
coupon securities having similar maturities and credit qualities.
Illiquid Securities. 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. These 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.
Investment Techniques
The following information supplements and should be read in conjunction
with the Fund's Prospectus. The Fund's use of certain of the investment
techniques described below may give rise to taxable income.
Borrowing Money. The Fund is permitted to borrow to the extent
permitted under the Investment Company Act of 1940, as amended (the "1940
Act"), which permits an investment company to borrow in an amount up to 33-
1/3% of the value of its total assets. 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 its 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.
Lending Portfolio Securities. The Fund may lend securities from its
portfolio to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. The Fund continues to
be entitled to payments in amounts equal to the interest or other
distributions payable on the loaned securities which affords the Fund an
opportunity to earn interest on the amount of the loan and on the loaned
securities' collateral. Loans of portfolio securities may not exceed 33-
1/3% of the value of the Fund's total assets, and 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. Such
loans are terminable by the Fund 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. In connection with its securities lending transactions, the Fund may
return to the borrower or a third party which is unaffiliated with the Fund,
and which is acting as a "placing broker," a part of the interest earned
from the investment of collateral received for securities loaned.
Short-Selling. In these transactions, the Fund sells a security it
does not own in anticipation of a decline in the market value of the
security. To complete the transaction, the Fund must borrow the security to
make delivery to the buyer. The Fund is obligated to replace the security
borrowed by purchasing it subsequently at the market price at the time of
replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund, which would result in a loss or
gain, respectively.
Securities will not be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed
25% of the value of the Fund's net assets. The Fund may not sell short the
securities of any single issuer listed on a national securities exchange to
the extent of more than 5% of the value of the Fund's net assets. The Fund
may not make short sale which results in the Fund having sold short in the
aggregate more than 5% of the outstanding securities of any class of an
issuer.
The Fund also may make short sales "against the box," in which the Fund
enters into a short sale of a security it owns. At no time will more than
15% of the value of the Fund's net assets be in deposits on short sales
against the box.
Until the Fund closes its short position or replaces the borrowed
security, it will: (a) segregate permissible liquid assets in an amount
that, together with the amount deposited with the broker as collateral
always equals the current value of the security sold short; or (b) otherwise
cover its short position.
Derivatives. The Fund may invest in, or enter into, derivatives, such
as options and futures, for a variety of reasons, including to hedge certain
market risks, to provide a substitute for purchasing or selling particular
securities or to increase potential income gain. Derivatives may provide a
cheaper, quicker or more specifically focused way for the Fund to invest
than "traditional" securities would.
Derivatives can be volatile and involve various types and degrees of
risk, depending upon the characteristics of the particular derivative and
the portfolio as a whole. Derivatives permit the Fund to increase or
decrease the level of risk, or change the character of the risk, to which
its portfolio is exposed in much the same way as the Fund can increase or
decrease the level of risk, or change the character of the risk, of its
portfolio by making investments in specific securities. However,
derivatives may entail investment exposures that are greater than their cost
would suggest, meaning that a small investment in derivatives could have a
large potential impact on the Fund's performance.
If the Fund invests in derivatives at inopportune times or judges
market conditions incorrectly, such investments may lower the Fund's return
or result in a loss. The Fund also could experience losses if its
derivatives were poorly correlated with its other investments, or if the
Fund were unable to liquidate its position because of an illiquid secondary
market. The market for many derivatives is, or suddenly can become,
illiquid. Changes in liquidity may result in significant, rapid and
unpredictable changes in the prices for derivatives.
Although the Fund will not be a commodity pool, certain derivatives
subject the Fund to the rules of the Commodity Futures Trading Commission
which limit the extent to which the Fund can invest in such derivatives.
The Fund may invest in futures contracts and options with respect thereto
for hedging purposes without limit. However, the Fund may not invest in
such contracts and options for other purposes if the sum of the amount of
initial margin deposits and premiums paid for unexpired options with respect
to such contracts, other than for bona fide hedging purposes, exceeds 5% of
the liquidation value of the Fund's assets, after taking into account
unrealized profits and unrealized losses on such contracts and options;
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% limitation.
Derivatives may be purchased on established exchanges or through
privately negotiated transactions referred to as over-the-counter
derivatives. Exchange-traded derivatives generally are guaranteed by the
clearing agency which is the issuer or counterparty to such derivatives.
This guarantee usually is supported by a daily payment system (i.e.,
variation margin requirements) operated by the clearing agency in order to
reduce overall credit risk. As a result, unless the clearing agency
defaults, there is relatively little counterparty credit risk associated
with derivatives purchased on an exchange. By contrast, no clearing agency
guarantees over-the-counter derivatives. Therefore, each party to an over-
the-counter derivative bears the risk that the counterparty will default.
Accordingly, the Manager will consider the creditworthiness of
counterparties to over-the-counter derivatives in the same manner as it
would review the credit quality of a security to be purchased by the Fund.
Over-the-counter derivatives are less liquid than exchange-traded
derivatives since the other party to the transaction may be the only
investor with sufficient understanding of the derivative to be interested in
bidding for it.
Futures Transactions--In General. The Fund may enter into futures contracts
in U.S. domestic markets, such as the Chicago Board of Trade. Engaging in
these transactions involves risk of loss to the Fund which could adversely
affect the value of the Fund's net assets. Although the Fund intends to
purchase or sell futures contracts only if there is an active market for
such contracts, no assurance can be given that a liquid market will exist
for any particular contract at any particular time. Many futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during
the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and potentially
subjecting the Fund to substantial losses.
Successful use of futures by the Fund also is subject to the Manager's
ability to predict correctly movements in the direction of the relevant
market, and, to the extent the transaction is entered into for hedging
purposes, to ascertain the appropriate correlation between the securities
being hedged and the price movements of the futures contract. For example,
if the Fund uses futures to hedge against the possibility of a decline in
the market value of securities held in its portfolio and the prices of such
securities instead increase, the Fund will lose part or all of the benefit
of the increased value of securities which it has hedged because it will
have offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities
and Exchange Commission, the Fund may be required to segregate permissible
liquid assets to cover its obligations relating to its transactions in
derivatives. To maintain this required cover, the Fund may have to sell
portfolio securities at disadvantageous prices or times since it may not be
possible to liquidate a derivative position at a reasonable price. In
addition, the segregation of such assets will have the effect of limiting
the Fund's ability otherwise to invest those assets.
Specific Futures Transactions. The Fund may purchase and sell interest rate
futures contracts. An interest rate future obligates the Fund to purchase
or sell an amount of a specific debt security at a future date at a specific
price.
Options--In General. The Fund may invest up to 5% of its assets,
represented by the premium paid, in the purchase of call and put options.
The Fund may write (i.e., sell) covered call and put option contracts to the
extent of 20% of the value of its net assets at the time such option
contracts are written. A call option gives the purchaser of the option the
right to buy, and obligates the writer to sell, the underlying security or
securities at the exercise price at any time during the option period, or at
a specific date. Conversely, a put option gives the purchaser of the option
the right to sell, and obligates the writer to buy, the underlying security
or securities at the exercise price at any time during the option period, or
at a specific date.
A covered call option written by the Fund is a call option with respect
to which the Fund owns the underlying security or otherwise covers the
transaction by segregating cash or other securities. A put option written
by the Fund is covered when, among other things, the Fund segregates cash or
liquid securities having a value equal to or greater than the exercise price
of the option to fulfill the obligation undertaken. The principal reason
for writing covered call and put options is to realize, through the receipt
of premiums, a greater return than would be realized on the underlying
securities alone. The Fund receives a premium from writing covered call or
put options which it retains whether or not the option is exercised.
There is no assurance that sufficient trading interest to create a
liquid secondary market on a securities exchange will exist for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may
cease to exist for a variety of reasons. In the past, for example, higher
than anticipated trading activity or order flow, or other unforeseen events,
at times have rendered certain of the clearing facilities inadequate and
resulted in the institution of special procedures, such as trading
rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible
to effect closing transactions in particular options. If, as a covered call
option writer, the Fund is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Successful use by the Fund of options will be subject to the Manager's
ability to predict correctly movements in interest rates. To the extent the
Manager's predictions are incorrect, the Fund may incur losses.
Future Developments. The Fund may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts
and any other derivatives which are not presently contemplated for use by
the Fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the Fund's investment
objective and legally permissible for the Fund. Before entering into such
transactions or making any such investment the Fund will provide appropriate
disclosure in its Prospectus or Statement of Additional Information.
Forward Commitments. The Fund may purchase or sell Municipal
Obligations and other securities on a forward commitment, when-issued or
delayed delivery basis, which means that delivery and payment take place a
number of days after the date of the commitment to purchase. The payment
obligation and the interest rate receivable on a forward commitment or when-
issued security are fixed when the Fund enters into the commitment, but the
Fund does not make payment until it receives delivery from the counterparty.
The Fund will commit to purchase such securities 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. The Fund will
segregate permissible liquid assets at least equal at all times to the
amount of the Fund's purchase commitments.
Municipal Obligations and other securities purchased on a forward
commitment or when-issued basis are subject to changes in value (generally
changing in the same way, i.e. appreciating when interest rates decline and
depreciating when interest rates rise) based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Securities purchased on a forward commitment or
when-issued basis may expose the Fund to risks because they may experience
such fluctuations prior to their actual delivery. Purchasing securities on
a forward commitment or when-issued basis can involve the additional risk
that the yield available in the market when the delivery takes place
actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the
Fund is fully or almost fully invested may result in greater potential
fluctuation in the value of the Fund's net assets and its net asset value
per share.
Investment Considerations and Risks
Investing in Municipal Obligations. 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.
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 Manager 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 Internal Revenue Code of 1986, as amended
(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.
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 statues that limit the taxing and spending
authority of California governmental entities, as well as from the general
financial condition of the State of California. A severe recession from 1990
through fiscal 1994 reduced revenues and increased expenditures for social
welfare programs, resulting in a period of budget imbalance. During this
period, expenditures exceeded revenues in four out of six years, and the
State accumulated and sustained a budget deficit in its budget reserve, the
Special Fund for Economic Uncertainties, approaching $2.8 billion at its
peak at June 30, 1993. By the 1993-94 fiscal year, the accumulated budget
deficit was so large that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently, a second two-
year plan was implemented in 1994-95, again using cross-fiscal year revenue
anticipation warrants to partly finance the deficit into the 1995-96 fiscal
year. As a consequence of the accumulated budget deficits, the State's cash
resources available to pay its ongoing obligations were significantly
reduced causing the State to rely increasingly on external debt markets to
meet its cash needs. The last and largest of these borrowings was $4.0
billion of revenue anticipation warrants which were issued in July 1994 and
matured on April 25, 1996. Future budget problems or a deterioration in
California's general financial condition may have the effect of impairing
the ability of the issuers of California Municipal Obligations to pay
interest on, or repay the principal of, such California Municipal
Obligations. You should review "Appendix A" which sets forth additional
information relating to investing in California Municipal Obligations.
Lower Rated Bonds. The Fund may invest up to 20% of the value of its
net assets in higher yielding (and, therefore, higher risk) debt securities
such as those rated below investment grade by the Rating Agencies (commonly
known as junk bonds). They may be subject to certain risks with respect to
the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated Municipal Obligations. See "Appendix B" for a
general description of the Rating Agencies' 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.
You should be aware that the market values of many of these bonds tend
to be more sensitive to economic conditions than are higher rated securities
and will fluctuate over time. These bonds generally are considered by the
Rating Agencies to be, on balance, predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of
the obligation and generally will involve more credit risk than securities
in the higher rating categories.
Because there is no established retail secondary market for many of
these securities, the Fund anticipates that such securities could be sold
only to a limited number of dealers or institutional investors. To the
extent a secondary trading market for these bonds does exist, it generally
is not as liquid as the secondary market for higher rated securities. The
lack of a liquid secondary market may have an adverse impact on market price
and yield and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the
issuer. The lack of a liquid secondary market for certain securities also
may make it more difficult for the Fund to obtain accurate market quotations
for purposes of valuing the Fund's portfolio and calculating its net asset
value. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of these
securities. In such cases, judgment may play a greater role in valuation
because less reliable objective data may be available.
These bonds may be particularly susceptible to economic downturns. It
is likely that any economic recession would disrupt severely the market for
such securities and may have an adverse impact on the value of such
securities, and could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon which would increase
the incidence of default for such securities.
The Fund may acquire these bonds during an initial offering. Such
securities may involve special risks because they are new issues. The Fund
has no arrangement with any person concerning the acquisition of such
securities, and the Manager will review carefully the credit and other
characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also apply
to lower rated zero coupon bonds and pay-in-kind bonds, in which the Fund
may invest up to 5% of its total assets. Zero coupon bonds and pay-in-kind
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."
Simultaneous Investments. Investment decisions for the Fund are made
independently from those of other investment companies advised by the
Manager. If, however, such other investment companies desire to invest in,
or dispose of, the same securities 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.
Investment Restrictions
The Fund's investment objective is a fundamental policy, which cannot
be changed without approval by the holders of a majority (as defined in the
1940 Act) of the Fund's outstanding voting shares. In addition, the Fund
has adopted investment restrictions numbered 1 through 6 as fundamental
policies. Investment restrictions numbered 7 through 12 are not fundamental
policies and may be changed by vote of a majority of the Fund's Board
members at any time. The Fund may not:
1. Borrow money, except to the extent permitted under the 1940
Act (which currently limits borrowings to no more than 33-1/3% of the Fund's
total assets). For purposes of this investment restriction, the entry into
options, forward contracts, including those relating to indices, and options
on futures contracts or indices shall not constitute borrowing.
2. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests,
but this shall not prevent the Fund from investing in Municipal Obligations
secured by real estate or interests therein, or prevent the Fund from
purchasing and selling futures contracts, including those relating to
indices, and options on futures contracts or indices.
3. Underwrite the securities of other issuers, except that the
Fund may bid separately or as part of a group for the purchase of Municipal
Obligations directly from an issuer for its own portfolio to take advantage
of the lower purchase price available, and except to the extent the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, by
virtue of disposing of portfolio securities.
4. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements; however, the Fund may
lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange
Commission and the Fund's Board.
5. 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.
6. Issue any senior security (as such term is defined in Section
18(f) of the 1940 Act), except to the extent that the activities permitted
in Investment Restriction Nos. 1, 2, 8 and 10 may be deemed to give rise to
a senior security.
7. 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.
8. Purchase securities on margin, but the Fund may make margin
deposits in connection with transactions in futures, including those
relating to indices, and options on futures or indices.
9. Invest in securities of other investment companies, except as
they may be acquired as part of a merger, consolidation or acquisition of
assets.
10. Pledge, hypothecate, mortgage or otherwise encumber its
assets, except to the extent necessary to secure permitted borrowings, and
to the extent related to the deposit of assets in escrow in connection with
the purchase of securities on a when-issued or delayed-delivery basis and
collateral arrangements with respect to futures contracts, including those
related to indices, and options on futures contracts or indices and
collateral arrangements with respect to initial or variation margin for
futures contracts, including those relating to indices, and options on
futures contracts or indices.
11. Enter into repurchase agreements providing for settlement in
more than seven days after notice or purchase securities which are illiquid
(which securities could include participation interests (including municipal
lease/purchase agreements) that are not subject to the demand feature
described in the Fund's Prospectus or the Statement of Additional
Information, and floating and variable rate demand obligations as to which
the Fund cannot exercise the demand feature described in the Fund's
Prospectus or the Statement of Additional Information on less than seven
days' notice and as to which there is no secondary market), if, in the
aggregate, more than 15% of its net assets would be so invested.
12. Invest in companies for the purpose of exercising control.
For purposes of Investment Restriction No. 5, 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.
MANAGEMENT OF THE FUND
The Fund's Board is responsible for the management and supervision of
the Fund. The Board approves all significant agreements between the Fund
and those companies that furnish services to the Fund. These companies are
as follows:
The Dreyfus Corporation Investment Adviser
Premier Mutual Fund Services, Inc. Distributor
Dreyfus Transfer, Inc. Transfer Agent
The Bank of New York Custodian
Board members and officers of the Fund, together with information as to
their principal business occupations during at least the last five years,
are shown below.
Board Members of the Fund
JOSEPH S. DiMARTINO, Chairman of the Board. Since January 1995, Chairman of
the Board of various funds in the Dreyfus Family of Funds. He also is
a director of The Noel Group, Inc., a venture capital company (for
which, from February 1995 until November 1997, he was Chairman of the
Board), The Muscular Dystrophy Association, HealthPlan Services
Corporation, a provider of marketing, administrative and risk
management services to health and other benefit programs, Carlyle
Industries, Inc. (formerly, Belding Heminway, Inc.), a button packager
and distributor, Career Blazers, Inc. (formerly, Staffing Resources,
Inc.), a temporary placement agency, and Century Business Services,
Inc., (formerly, International Alliance Services, Inc.), a provider of
various outsourcing functions for small and medium sized companies.
For more than five years prior to January 1995, he was President, a
director and, until August 1994, Chief Operating Officer of the Manager
and Executive Vice President and a director of Dreyfus Service
Corporation, a wholly-owned subsidiary of the Manager and, until August
24, 1994, the Fund's distributor. From August 1994 until December 31,
1994, he was a director of Mellon Bank Corporation. He is 55 years old
and his address is 200 Park Avenue, New York, New York 10166.
DAVID W. BURKE, Board Member. Board member of various funds in the Dreyfus
Family of Funds. Chairman of the Broadcasting Board of Governors, an
independent board within the United States Information Agency, from
August 1994 to November 1998. From August 1994 to December 31, 1994,
Mr. Burke was a Consultant to the Manager and, from October 1990 to
August 1994, he was Vice President and Chief Administrative Officer of
the Manager. From 1977 to October 1990, Mr. Burke was involved in the
management of national television news, as Vice President and Executive
Vice President of ABC News, and subsequently as President of CBS News.
He is 63 years old and his address is 197 Eighth Street, Charleston,
Massachusetts 02642.
DIANE DUNST, Board Member. Since January 1992, President of Diane Dunst
Promotion, Inc., a full service promotion agency. From January 1989 to
January 1992, Director of Promotion Services, Lear's Magazine. From
1985 to January 1989, she was Sales Promotion Manager of ELLE Magazine.
She is 59 years old and her address is 1172 Park Avenue, New York, New
York 10128.
ROSALIND GERSTEN JACOBS, Board Member. Merchandise and Marketing
Consultant. From 1977 to 1998, director of Merchandise and Marketing
for Corporate Property Investors, a real estate investment company.
From 1974 to 1976, she was owner and manager of a merchandise and
marketing consulting firm. Prior to 1974, she was a Vice President of
Macy's, New York. She is 73 years old and her address is c/o Corporate
Property Investors, 305 East 47th Street, New York, New York 10017.
JAY I. MELTZER, Board Member. Physician engaged in private practice
specializing in internal medicine. He is a Clinical Professor of
Medicine at Columbia University, College of Physicians and Surgeons,
an Adjunct Clinical Professor at Cornell Medical College, a Consultant
in Medicine at Memorial Sloan-Kettering Hospital. He teaches in the
Section on Society and Medicine and supervises a group of medical
Fellows. He also writes a monthly commentary on medical affairs for
the Medical Herald. He is 70 years old and his address is 903 Park
Avenue, New York, New York 10021.
DANIEL ROSE, Board Member. Vice Chairman and Chief Executive Officer of
Rose Associates, Inc., a New York based real estate development and
management firm. In July 1994, Mr. Rose received a Presidential
appointment to serve as a Director of the Baltic-American Enterprise
Fund, which makes equity investments and loans and provides technical
business assistance to new business concerns in the Baltic states. He
is also Chairman of the Housing Committee of The Real Estate Board of
New York, Inc. He is 69 years old and his address is c/o Rose
Associates, Inc., 200 Madison Avenue, New York, New York 10016.
WARREN B. RUDMAN, Board Member. Since January 1993, Partner in the law firm
Paul, Weiss, Rifkind, Wharton & Garrison and since May 1995, a director
of Collins & Aikman Corporation. Also, since January 1993, Mr. Rudman
has served as a director of Chubb Corporation and of the Raytheon
Company, and as a member of the President's Foreign Intelligence
Advisory Board (Vice Chairman, through February, 1998 and, currently,
Chairman). From January 1981 to January 1993, Mr. Rudman served as a
United States Senator from the State of New Hampshire. From January
1993 to December 1994, Mr. Rudman served as Chairman of the Federal
Reserve Bank of Boston. Since 1988, Mr. Rudman has served as a trustee
of Boston College and since 1986 as a member of the Senior Advisory
Board of the Institute of Politics of the Kennedy School of Government
at Harvard University. He is 69 years old and his address is c/o Paul,
Weiss, Rifkind, Wharton & Garrison, 1615 L Street, N.W., Suite 1300,
Washington D.C. 20036.
SANDER VANOCUR, Board Member. Since January 1992, President of Old Owl
Communications, a full-service communications firm. From May 1995 to
June 1996, he was a Professional in Residence at the Freedom Forum in
Arlington, VA; from January 1994 to May 1995, he served as Visiting
Professional Scholar at the Freedom Forum Amendment Center at
Vanderbilt University; and from November 1989 to November 1995, he was
a director of the Damon Runyon-Walter Winchell Cancer Research Fund.
From June 1977 to December 1991, he was a Senior Correspondent of ABC
News and, from October 1986 to December 1991, he was Anchor of the ABC
News program "Business World," a weekly business program on the ABC
television network. He is 71 years old and his address is 2626
Sycamore Canyon, Santa Barbara, California, 93108.
For so long as the Fund's plan described in the section captioned
"Shareholder Services Plan" remains in effect, the Board members of the Fund
who are not "interested persons" of the Fund, as defined in the 1940 Act,
will be selected and nominated by the Board members who are not "interested
persons" of the Fund.
The Fund typically pays its Board members an annual retainer and a per
meeting fee and reimburses them for their expenses. The Chairman of the
Board receives an additional 25% of such compensation. Emeritus Board
members are entitled to receive an annual retainer and a per meeting fee of
one-half the amount paid to them as Board members. The aggregate amount of
compensation paid to each Board member by the Fund for the fiscal year ended
March 31, 1999, and by all other funds in the Dreyfus Family of Funds for
which such person is a Board member (the number of which is set forth in
parenthesis next to each Board member's total compensation)* for the year
ended December 31, 1998, were as follows:
Total
Compensation From
Aggregate Fund and Fund
Name of Board Compensation from Complex Paid to
Member Fund** Board Member
Joseph S. DiMartino $ 5,625 $ 619,660 (187)
David W. Burke $ 4,500 $ 233,500 (62)
Diane Dunst $ 4,500 $ 37,750 (16)
Rosalind Gersten Jacobs $ 4,000 $ 84,000 (44)
Jay I. Meltzer $ 4,000 $ 34,000 (16)
Daniel Rose $ 4,500 $ 76,250 (30)
Warren B. Rudman $ 4,000 $ 82,000 (25)
Sander Vanocur $ 4,500 $ 76,250 (30)
_____________________
* Represents the number of separate portfolios comprising the investment
companies in the Fund Complex, including the Fund, for which the Board
member serves.
** Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $1,100 for all Board members as a group.
Officers of the Fund
MARIE E. CONNOLLY, President and Treasurer. President, Chief Executive
Officer, Chief Compliance Officer and a director of the Distributor and
Funds Distributor, Inc., the ultimate parent of which is Boston
Institutional Group, Inc., and an officer of other investment companies
advised or administered by the Manager. She is 41 years old.
MARGARET W. CHAMBERS, Vice President and Secretary. Senior Vice President
and General Counsel of Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. From
August 1996 to March 1998, she was Vice President and Assistant General
Counsel for Loomis, Sayles & Company, L.P. From January 1986 to July
1996, she was an associate with the law firm of Ropes & Gray. She is
39 years old.
FREDERICK C. DEY, Vice President, Assistant Treasurer, and Assistant
Secretary. Vice President of New Business Development for Funds
Distributor, Inc., since September 1994, and an officer of other
investment companies advised or administered by the Manager. He is 37
years old.
STEPHANIE D. PIERCE, Vice President, Assistant Secretary and Assistant
Treasurer. Vice President of the Distributor and Funds Distributor,
Inc., and an officer of other investment companies advised or
administered by the Manager. From April 1997 to March 1998, she was
employed as a Relationship Manager with Citibank, N.A. From August
1995 to April 1997, she was an Assistant Vice President with Hudson
Valley Bank, and from September 1990 to August 1995, she was Second
Vice President with Chase Manhattan Bank. She is 30 years old.
JOHN P. COVINO, Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of
Funds Distributor, Inc. since December 1998. From December 1995 to
November 1998, he was employed by Fidelity Investments where he held
multiple positions in its Institutional Brokerage Group. Prior to
joining Fidelity, he was employed by SunGard Brokerage Systems where he
was responsible for the technology and development of the accounting
product group. He is 35 years old.
MARY A. NELSON, Vice President and Assistant Treasurer. Vice President of
the Distributor and Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. She is 34
years old.
GEORGE A. RIO, Vice President and Assistant Treasurer. Executive Vice
President and Client Service Director of Funds Distributor, Inc., and
an officer of other investment companies advised or administered by the
Manager. From June 1995 to March 1998, he was Senior Vice President
and Senior Key Account Manager for Putnam Mutual Funds. From May 1994
to June 1995, he was Director of Business Development for First Data
Corporation. He is 44 years old.
JOSEPH F. TOWER, III, Vice President and Assistant Treasurer. Senior Vice
President, Treasurer, Chief Financial Officer and a director of the
Distributor and Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. From July
1988 to August 1994, he was employed by The Boston Company, Inc. where
he held various management positions in the Corporate Finance and
Treasury areas. He is 37 years old.
DOUGLAS C. CONROY, Vice President and Assistant Secretary. Assistant Vice
President of Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. From
April 1993 to January 1995, he was a Senior Fund Accountant for
Investors Bank & Trust Company. He is 30 years old.
KAREN JACOPPO-WOOD, Vice President and Assistant Secretary. Vice President
and Senior Counsel of Funds Distributor, Inc. since February 1997, and
an officer of other investment companies advised or administered by the
Manager. From June 1994 to January 1996, she was Manager of SEC
Registration at Scudder, Stevens & Clark, Inc. She is 32 years old.
CHRISTOPHER J. KELLEY, Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of Funds Distributor,
Inc., and an officer of other investment companies advised or
administered by the Manager. From April 1994 to July 1996, he was
Assistant Counsel at Forum Financial Group. From October 1992 to March
1994, he was employed by Putnam Investments in legal and compliance
capacities. He is 34 years old.
KATHLEEN K. MORRISEY, Vice President and Assistant Secretary. Manager of
Treasury Services Administration of Funds Distributor, Inc., and an
officer of other investment companies advised or administered by the
Manager. From July 1994 to November 1995, she was a Fund Accountant
for Investors Bank & Trust Company. She is 26 years old.
ELBA VASQUEZ, Vice President and Assistant Secretary. Assistant Vice
President of Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. From
March 1990 to May 1996, she was employed by U.S. Trust Company of New
York where she held various sales and marketing positions. She is 37
years old.
The address of each officer of the Fund is 200 Park Avenue, New York,
New York 10166.
The Fund's Board members and officers, as a group, owned less than 1%
of the Fund's shares outstanding on July 12, 1999.
As of July 12, 1999, the following shareholders were known by the Fund
to own 5% or more of the outstanding voting securities of the Fund: Charles
Schwab & Company, Inc., Reinvest Account, 101 Montgomery Street, San
Francisco, California 94101, 11.6072%.
MANAGEMENT ARRANGEMENTS
Investment Adviser. The Manager is a wholly-owned subsidiary of Mellon
Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank Corporation
("Mellon"). 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.
The Manager provides management services pursuant to the Management
Agreement (the "Agreement") dated August 24, 1994 with the Fund, which is
subject to annual approval by (i) the Fund's Board or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities
of the Fund, provided that in either event the continuance also is approved
by a majority of the Board members who are not "interested persons" (as
defined in the 1940 Act) of the Fund or the Manager, by vote cast in person
at a meeting called for the purpose of voting on such approval. The
Agreement was approved by shareholders of the Fund on August 3, 1994, and
was last approved by the Fund's Board, including a majority of the Board
members who are not "interested persons" of any party to the Agreement, at a
meeting held on May 5, 1999 . The Agreement is terminable without penalty,
on 60 days' notice, by the Fund's Board or by vote of the holders of a
majority of the Fund's shares, or, upon not less than 90 days' notice, by
the Manager. The Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
The following persons are officers and/or directors of the Manager:
Christopher M. Condron, Chairman of the Board and Chief Executive Officer;
Stephen E. Canter, President, Chief Operating Officer, Chief Investment
Officer and a director; Lawrence S. Kash, Vice Chairman and a director; J.
David Officer, Vice Chairman and a director; Thomas F. Eggers, Vice Chairman-
- -Institutional and a director; Ronald P. O'Hanley III, Vice Chairman;
William T. Sandalls, Jr., Executive Vice President; Mark N. Jacobs, Vice
President, General Counsel and Secretary; Diane P. Durnin, Vice President--
Product Development; Patrice M. Kozlowski, Vice President--Corporate
Communications; Mary Beth Leibig, Vice President--Human Resources; Andrew S.
Wasser, Vice President--Information Systems; Theodore A. Schachar, Vice
President; Wendy Strutt, Vice President; Richard Terres, Vice President;
William H. Maresca, Controller; James Bitetto, Assistant Secretary; Steven
F. Newman, Assistant Secretary; and Mandell L. Berman, Burton C. Borgelt,
Steven G. Elliot, Martin C. McGuinn, Richard W. Sabo and Richard F. Syron,
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. The Manager is responsible for investment decisions, and provides
the Fund with portfolio managers who are authorized by the Fund's Board to
execute purchases and sales of securities. The Fund's portfolio managers
are Richard J. Moynihan, Joseph A. Darcy, A. Paul Disdier, Douglas Gaylor,
Karen M. Hand, Stephen C. Kris, Michael Petty, Jill C. Shaffro, Samuel J.
Weinstock and Monica S. Wieboldt. The Manager also maintains a research
department with a professional staff of portfolio managers and securities
analysts who provide research services for the Fund and for other funds
advised by the Manager.
All expenses incurred in the operation of the Fund are borne by the
Fund, except to the extent specifically assumed by the Manager. The
expenses borne by the Fund include: taxes, interest, interest on securities
sold short, brokerage fees and commissions, if any, fees of Board members
who are not officers, directors, employees or holders of 5% or more of the
outstanding voting securities of the Manager, Securities and Exchange
Commission fees, state Blue Sky qualification fees, advisory fees, charges
of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, outside auditing and legal
expenses, costs of maintaining the Fund's existence, costs of independent
pricing services, costs attributable to investor services (including,
without limitation, telephone and personnel expenses), costs of
shareholders' reports and meetings, costs of preparing and printing
prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, and any
extraordinary expenses.
The Manager maintains office facilities on behalf of the Fund, and
furnishes statistical and research data, clerical help, accounting, data
processing, bookkeeping and internal auditing and certain other required
services to the Fund. The Manager may pay the Distributor for shareholder
services from the Manager's own assets, including past profits but not
including the management fee paid by the Fund. The Distributor may use part
or all of such payments to pay securities dealers, banks or other financial
institutions in respect of these 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 the value
of the Fund's average daily net assets. All fees and expenses are accrued
daily and deducted before the declaration of dividends to shareholders. For
the fiscal years ended March 31, 1997, 1998 and 1999, the management fees
payable by the Fund amounted to $1,331,246, $1,230,454 and $1,211,464,
respectively, which amounts were reduced by $80,535, $23,713 and $31,832,
respectively, pursuant to undertakings by the Manager then in effect,
resulting in net fees paid to the Manager of $1,250,711 in fiscal 1997,
$1,206,741 in fiscal 1998 and $1,179,632 in fiscal 1999.
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.
Distributor. The Distributor, located at 60 State Street, Boston,
Massachusetts 02109, serves as the Fund's distributor on a best efforts
basis pursuant to an agreement which is renewable annually.
Transfer and Dividend Disbursing Agent and Custodian. Dreyfus
Transfer, Inc. (the "Transfer Agent"), a wholly-owned subsidiary of the
Manager, P.O. Box 9671, Providence, Rhode Island 02940-9671, is the Fund's
transfer and dividend disbursing agent. Under a transfer agency agreement
with the Fund, the Transfer Agent arranges for the maintenance of
shareholder account records for the Fund, the handling of certain
communications between shareholders and the Fund and the payment of
dividends and distributions payable by the Fund. For these services, the
Transfer Agent receives a monthly fee computed on the basis of the number of
shareholder accounts it maintains for the Fund during the month, and is
reimbursed for certain out-of-pocket expenses.
The Bank of New York (the "Custodian"), 90 Washington Street, New York,
New York 10286, is the Fund's custodian. The Custodian has no part in
determining the investment policies of the Fund or which securities are to
be purchased or sold by the Fund. Under a custody agreement with the Fund,
the Custodian holds the Fund's securities and keeps all necessary accounts
and records. For its custody services, the Custodian receives a monthly fee
based on the market value of the Fund's assets held in custody and receives
certain securities transactions charges.
HOW TO BUY SHARES
General. Fund shares are sold without a sales charge. You may be
charged a fee if you effect transactions in Fund shares through a securities
dealer, bank or other financial institution. Share 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 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 securities dealer, bank or other financial institution which maintains
an omnibus account in the Fund and 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 Account
Application. For full-time or part-time employees of the Manager or any of
its affiliates or subsidiaries, directors of the Manager, Board members of a
fund advised by the Manager, 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 Manager
or any of its affiliates or subsidiaries who elect to have a portion of
their pay directly deposited into their Fund accounts, the minimum initial
investment is $50. The Fund reserves the right to vary the initial and
subsequent investment minimum requirements at any time.
Fund shares also are offered without regard to the minimum initial
investment requirements through Dreyfus-Automatic Asset Builderr, Dreyfus
Government Direct Deposit Privilege or Dreyfus Payroll Savings Plan pursuant
to the Dreyfus Step Program described under "Shareholder Services." These
services enable you to make regularly scheduled investments and may provide
you with a convenient way to invest for long-term financial goals. You
should be aware, however, that periodic investment plans do not guarantee a
profit and will not protect an investor against loss in a declining market.
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 or other entity authorized to receive orders on behalf of the Fund.
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
computing 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 Fund's Board 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
Fund's Board. For further information regarding the methods employed in
valuing the Fund's investments, see "Determination of Net Asset Value."
Dreyfus TeleTransfer Privilege. You may purchase shares by telephone
if you have checked the appropriate box and supplied the necessary
information on the 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 ("ACH") member may be so designated.
Dreyfus TeleTransfer purchase orders may be made at any time. Purchase
orders received by 4:00 p.m., New York time, on any business day that the
Transfer Agent and the New York Stock Exchange are open for business will be
credited to the shareholder's Fund account on the next bank business day
following such purchase order. Purchase orders made after 4:00 p.m., New
York time, on any business day the Transfer Agent and the New York Stock
Exchange are open for business, or orders made on Saturday, Sunday or any
Federal holiday (e.g., when the New York Stock Exchange is not open for
business), will be credited to the shareholder's Fund account on the second
bank business day following such purchase order. To qualify to use the
Dreyfus TeleTransfer Privilege, the initial payment for purchase of Fund
shares must be drawn on, and redemption proceeds paid to, the same bank and
account as are designated in 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 "How to Redeem Shares--Dreyfus TeleTransfer Privilege."
Reopening an Account. You 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.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the "Plan") pursuant
to which the Fund reimburses Dreyfus Service Corporation an amount not to
exceed an annual rate of .25% 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.
A quarterly report of the amounts expended under the Plan, and the
purposes for which such expenditures were incurred, must be made to the
Fund's Board for its review. In addition, the Plan provides that material
amendments of the Plan must be approved by the Board members who are not
"interested persons" (as defined in the 1940 Act) of the Fund and have no
direct or indirect financial interest in the operation of the Plan by vote
cast in person at a meeting called for the purpose of considering such
amendments. The Plan is subject to annual approval by such vote of the
Board members cast in person at a meeting called for the purpose of voting
on the Plan. The Plan is terminable at any time by vote of a majority of
the Board members who are not "interested persons" and have no direct or
indirect financial interest in the operation of the Plan.
For the fiscal year ended March 31, 1999, $187,936 was chargeable to
the Fund under the Plan.
HOW TO REDEEM SHARES
Redemption Fee. The Fund will deduct a redemption fee equal to 1% of
the net asset value of Fund shares redeemed (including redemptions through
the use of the Fund Exchanges service) less than 15 days following the
issuance of such shares. The redemption fee will be deducted from the
redemption proceeds and retained by the Fund. For the fiscal year ended
March 31, 1999, the Fund retained $204 in redemption fees.
No redemption fee will be charged on the redemption or exchange of
shares (1) through the Fund's Check Redemption Privilege, Automatic
Withdrawal Plan or Dreyfus Auto-Exchange Privilege, (2) through accounts
that are reflected on the records of the Transfer Agent as omnibus accounts
approved by Dreyfus Service Corporation, (3) through accounts established by
securities dealers, banks or other financial institutions approved by
Dreyfus Service Corporation that utilize the National Securities Clearing
Corporation's networking system, or (4) acquired through the reinvestment of
dividends or distributions. The redemption fee may be waived, modified or
terminated at any time.
Check Redemption Privilege. The Fund provides Redemption Checks
("Checks") automatically upon opening an account, unless you specifically
refuse the Check Redemption Privilege by checking the applicable "No" box on
the Account Application. The Check Redemption Privilege may be established
for an existing account by a separate signed Shareholder Services Form.
Checks will be sent only to the registered owner(s) of the account and only
to the address of record. The Account Application or Shareholder Services
Form 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
your agent, will cause the Fund to redeem a sufficient number of shares in
your 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
you. You generally will be subject to the same rules and regulations that
apply to checking accounts, although the election of this Privilege creates
only a shareholder-transfer agent relationship with the Transfer Agent.
You should date your Checks with the current date when you write them.
Please do not postdate your Checks. If you do, the Transfer Agent will
honor, upon presentment, even if presented before the date of the Check, all
postdated Checks which are dated within six months of presentment for
payment, if they are otherwise in good order.
Checks are free, but the Transfer Agent will impose a fee for stopping
payment of a Check upon your request or if the Transfer Agent cannot honor a
Check due to insufficient funds or other valid reason. If the amount of the
Check is greater than the value of the shares in your account, the Check
will be returned marked insufficient funds. Checks should not be used to
close an account.
This Privilege will be terminated immediately, without notice, with
respect to any account which is, or becomes, subject to backup withholding
on redemptions. Any Redemption Check written on an account which has become
subject to backup withholding on redemptions will not be honored by the
Transfer Agent.
Wire Redemption Privilege. By using this Privilege, you authorize the
Transfer Agent to act on wire, telephone or letter redemption instructions
from any person representing himself or herself to be you 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 ($1,000 minimum) will be transferred by
Federal Reserve wire only to the commercial bank account specified by you on
the Account Application or Shareholder Services Form, or to a correspondent
bank if your bank is not a member of the Federal Reserve System. Fees
ordinarily are imposed by such bank and borne by the investor. Immediate
notification by the correspondent bank to your bank is necessary to avoid a
delay in crediting the funds to your bank account.
If you have access to telegraphic equipment, you may wire redemption
requests to the Transfer Agent by employing the following transmittal code
which may be used for domestic or overseas transmissions:
Transfer Agent's
Transmittal Code Answer Back Sign
144295 144295 TSSG PREP
If you do not have direct access to telegraphic equipment, you may have
the wire transmitted by contacting a TRT Cables operator at 1-800-654-7171,
toll free. You should advise the operator that the above transmittal code
must be used and should also inform the operator of the Transfer Agent's
answer back sign.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Transfer Agent.
This request must be signed by each shareholder, with each signature
guaranteed as described below under "Share Certificates; Signatures."
Dreyfus TeleTransfer Privilege. You may request by telephone that
redemption proceeds be transferred between your Fund account and your bank
account. Only a bank account maintained in a domestic financial institution
which is an ACH member may be designated. 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. You should be aware that if you have selected the Dreyfus
TeleTransfer Privilege, any request for a wire redemption will be effected
as a Dreyfus TeleTransfer transaction through the ACH system unless more
prompt transmittal specifically is requested. Redemption proceeds will be
on deposit in the your account at an ACH member bank ordinarily two business
days after receipt of the redemption request. See "How to Buy Shares--
Dreyfus TeleTransfer Privilege."
Share Certificates; Signatures. Any certificates representing Fund
shares to be redeemed must be submitted with the redemption request.
Written redemption requests must be signed by each shareholder, including
each holder of a joint account, and each signature must be guaranteed.
Signatures on endorsed certificates submitted for redemption also must be
guaranteed. The Transfer Agent has adopted standards and procedures
pursuant to which signature-guarantees in proper form generally will be
accepted from domestic banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations, as well as from participants in the New York Stock
Exchange Medallion Signature Program, the Securities Transfer Agents
Medallion Program ("STAMP") and the Stock Exchanges Medallion Program.
Guarantees must be signed by an authorized signatory of the guarantor, and
"Signature-Guaranteed" must appear with the signature. The Transfer Agent
may request additional documentation from corporations, executors,
administrators, trustees or guardians, and may accept other suitable
verification arrangements from foreign investors, such as consular
verification. For more information with respect to signature-guarantees,
please call one of the telephone numbers listed on the cover.
Redemption Commitment. The Fund has committed itself to pay in cash
all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the value of the
Fund's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission and is a fundamental policy of the Fund which may not be changed
without shareholder approval. In the case of requests for redemption in
excess of such amount, the Fund's Board reserves the right to make payments
in whole or in part in securities or other assets of the Fund in case of an
emergency or any time a cash distribution would impair the liquidity of the
Fund to the detriment of the existing shareholders. In such event, the
securities would be valued in the same manner as the Fund's portfolio is
valued. If the recipient sells such securities, brokerage charges might be
incurred.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b)
when trading in the markets the Fund ordinarily utilizes is restricted, or
when an emergency exists as determined by the Securities and Exchange
Commission so that disposal of the Fund's investments or determination of
its net asset value is not reasonably practicable, or (c) for such other
periods as the Securities and Exchange Commission by order may permit to
protect the Fund's shareholders.
SHAREHOLDER SERVICES
Fund Exchanges. You may purchase, in exchange for shares of the Fund,
shares of certain other funds managed or administered by the Manager, to the
extent such shares are offered for sale in your state of residence. The
Fund will deduct a redemption fee equal to 1% of the net asset value of Fund
shares exchanged where the exchange is made less than 15 days after the
issuance of such shares. Shares of other funds purchased by exchange will
be purchased on the basis of relative net asset value per share as follows:
A. Exchanges for shares of funds that are offered without a
sales load will be made without a sales load.
B. Shares of funds purchased without a sales load may be
exchanged for shares of other funds sold with a sales load,
and the applicable sales load will be deducted.
C. Shares of funds purchased with a sales load may be exchanged
without a sales load for shares of other funds sold without a
sales load.
D. Shares of funds purchased with a sales load, shares of funds
acquired by a previous exchange from shares purchased with a
sales load and additional shares acquired through reinvestment
of dividends or distributions of any such funds (collectively
referred to herein as "Purchased Shares") may be exchanged for
shares of other funds sold with a sales load (referred to
herein as "Offered Shares"), provided that, if the sales load
applicable to the Offered Shares exceeds the maximum sales
load that could have been imposed in connection with the
Purchased Shares (at the time the Purchased Shares were
acquired), without giving effect to any reduced loads, the
difference will be deducted.
To accomplish an exchange under item D above, you must notify the
Transfer Agent of your prior ownership of fund shares and your account
number.
To request an exchange, you 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 you check the applicable "No" box on the Account Application,
indicating that you specifically refuse this Privilege. By using the
Telephone Exchange Privilege, you authorize the Transfer Agent to act on
telephonic instructions (including over The Dreyfus Touch automated
telephone system) from any person representing himself or herself to be you
and reasonably believed by the Transfer Agent to be genuine. Telephone
exchanges may be subject to limitations as to the amount involved or the
number of telephone exchanges permitted. Shares issued in certificate form
are not eligible for telephone exchange. 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 administrative fee in accordance with rules
promulgated by the Securities and Exchange Commission.
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.
Dreyfus Auto-Exchange Privilege. Dreyfus Auto-Exchange Privilege
permits you to purchase, in exchange for shares of the Fund, shares of
another fund in the Dreyfus Family of Funds of which you are a shareholder.
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. You will be notified if your account falls below the amount
designated to be exchanged under this Privilege. In this case, your 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 from regular
accounts to IRA accounts, but not from IRA accounts to regular accounts.
With respect to all other retirement accounts, exchanges may be made only
among those accounts.
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. Shares may be exchanged only
between accounts having identical names and other identifying designations.
The Fund Exchanges service or the Dreyfus Auto-Exchange Privilege may be
modified or terminated at any time upon notice to shareholders.
Dreyfus-Automatic Asset Builderr. 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.
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 U.S.
Government automatically deposited into your Fund account. You may deposit
as much of such payments as you elect.
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 ACH 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. It is the sole
responsibility of your employer, not the Distributor, the Manager, the Fund,
the Transfer Agent or any other person, to arrange for transactions under
the Dreyfus Payroll Savings Plan.
Dreyfus Step Program. The Dreyfus Step Program enables you to purchase
Fund shares without regard to the Fund's minimum initial investment
requirements through Dreyfus-Automatic Asset Builderr, Dreyfus Government
Direct Deposit Privilege or Dreyfus Payroll Savings Plan. To establish a
Dreyfus Step Program account, you must supply the necessary information on
the Account Application and file the required authorization form(s) with the
Transfer Agent. For more information concerning this Program, or to request
the necessary authorization form(s), please call toll free 1-800-645-6561.
You may terminate your participation in this Program at any time by
discontinuing your participation in Dreyfus-Automatic Asset Builder, Dreyfus
Government Direct Deposit Privilege or Dreyfus Payroll Savings Plan, as the
case may be, as provided under the terms of such Privilege(s). The Fund may
modify or terminate this Program at any time.
Dreyfus Dividend Options. Dreyfus Dividend Sweep allows you to invest
automatically your 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 you are 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 that
charges a sales load may be invested in shares of
other funds sold with a sales load (referred to
herein as "Offered Shares"), but if the sales load
applicable to the Offered Shares exceeds the maximum
sales load charged by the fund from which dividends
or distributions are being swept (without giving
effect to any reduced loads), the difference will be
deducted.
D. Dividends and distributions paid by a fund may be
invested in shares of other funds that impose a
contingent deferred sales charge ("CDSC") and the
applicable CDSC, if any, will be imposed upon
redemption of such shares.
Dreyfus Dividend ACH permits you to transfer electronically dividends
or dividends and capital gain distributions, if any, from the Fund to a
designated bank account. Only an account maintained at a domestic financial
institution which is an ACH member may be so designated. Banks may charge a
fee for this service.
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.
Withdrawal payments are the proceeds from sales of Fund shares, not the
yield on the shares. If withdrawal payments exceed reinvested dividends and
distributions, your shares will be reduced and eventually may be depleted.
Automatic Withdrawal may be terminated 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.
DETERMINATION OF NET ASSET VALUE
Valuation of Portfolio Securities. The Fund's investments are valued
each business day by an independent pricing service (the "Service") approved
by the Fund's Board. When, in the judgment of the Service, quoted bid
prices for investments are readily available and are representative of the
bid side of the market, these investments are valued at the mean between the
quoted bid prices (as obtained by the Service from dealers in such
securities) and asked prices (as calculated by the Service based upon its
evaluation of the market for such securities). Other investments (which
constitute a majority of the portfolio securities) are carried at fair value
as determined by the Service, based on methods which include consideration
of: yields or prices of municipal bonds of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. The Service's procedures
are reviewed by the Fund's officers under the general supervision of the
Fund's Board. Expenses and fees, including the management fee (reduced by
the expense limitation, if any), are accrued daily and are taken into
account for the purpose of determining the net asset value of Fund shares.
New York Stock Exchange Closings. The holidays (as observed) on which
the New York Stock Exchange is closed currently are: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Management believes that the Fund has qualified for the fiscal year
ended March 31, 1999 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. If the
Fund did not qualify as a regulated investment company, it would be treated
for tax purposes as an ordinary corporation subject to Federal income tax.
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.
The Fund's earnings for Saturdays, Sundays and holidays are declared as
dividends on the next business day. 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. 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. If you are an omnibus accountholder and
indicate in a partial redemption request that a portion of any accrued
dividends to which such account is entitled belongs to an underlying
accountholder who has redeemed all shares in his or her account, such
portion of the accrued dividends will be paid to you along with the proceeds
of the redemption.
If you elect to receive dividends and distributions in cash, and your
dividend or distribution check is returned to the Fund as undeliverable or
remains uncashed for six months, the Fund reserves the right to reinvest
such dividend or distribution and all future dividends and distributions
payable to you in additional Fund shares at net asset value. No interest
will accrue on amounts represented by uncashed distribution or redemption
checks.
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 should be a return on the
investment in an economic sense although taxable as stated under "Dividends,
Distributions and Taxes" in the Prospectus. In addition, the Code provides
that if a shareholder has not held his Fund shares for more than six months
(or such shorter period as the Internal Revenue Service may prescribe by
regulation) and has received an exempt-interest dividend with respect to
such shares, any loss incurred on the sale of such shares shall be
disallowed to the extent of the exempt-interest dividend received.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the Fund's total assets consists of 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, then 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). 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. In addition,
California tax law does not consider any portion of the exempt-interest
dividends paid, an item of tax preference for the purpose of computing the
California alternative minimum tax.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gain or loss. However, all or a portion of any gain
realized from the sale or other disposition of certain market discount bonds
will be treated as ordinary income under Section 1276 of the Code. In
addition, all or a portion of the gain realized from engaging in "conversion
transactions" may be treated as ordinary income under Section 1258 of the
Code. "Conversion transactions" are defined to include certain forward,
futures, option and "straddle" transactions, transactions marketed or sold
to produce capital gains, or transactions described in Treasury regulations
to be issued in the future.
Under Section 1256 of the Code, gain or loss realized by the Fund from
certain financial futures and options transactions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss.
Gain or loss will arise upon exercise or lapse of such futures and options
as well as from closing transactions. In addition, any such futures or
options remaining unexercised at the end of the Fund's taxable year will be
treated as sold for their then fair market value, resulting in additional
gain or loss to the Fund characterized as described above.
Offsetting positions held by the Fund involving certain financial
futures contracts or options transactions may be considered, for tax
purposes, to constitute "straddles." "Straddles" are defined to include
"offsetting positions" in actively traded personal property. The tax
treatment of "straddles" is governed by Sections 1092 and 1258 of the Code,
which, in certain circumstances, override or modify the provisions of
Sections 1256 and 988 of the Code. As such, all or a portion of any short or
long-term capital gain from certain "straddle" and/or conversion
transactions may be recharacterized as ordinary income.
If the Fund were treated as entering into "straddles" by reason of its
engaging in financial futures contracts or options transactions, such
"straddles" would be characterized as "mixed straddles" if the futures or
options comprising a part of such "straddles" were governed by Section 1256
of the Code. The Fund may make one or more elections with respect to "mixed
straddles." 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 and
conversion transaction rules apply to positions established by the Fund,
losses realized by the Fund will be deferred to the extent of unrealized
gain in the offsetting position. Moreover, as a result of the straddle and
the conversion transaction rules, short-term capital loss on straddle
positions may be recharacterized as long-term capital loss, and long-term
capital gains on straddle positions may be recharacterized as short-term
capital gains or ordinary income.
The Taxpayer Relief Act of 1997 included constructive sale provisions
that generally apply if the Fund either (1) holds an appreciated financial
position with respect to stock, certain debt obligations, or partnership
interests ("appreciated financial position") and then enters into a short
sale, futures, forward, or offsetting notional principal contract
(collectively, a "Contract") respecting the same or substantially identical
property or (2) holds an appreciated financial position that is a Contract
and then acquires property that is the same as, or substantially identical
to, the underlying property. In each instance, with certain exceptions, the
Fund generally will be taxed as if the appreciated financial position were
sold at its fair market value on the date the Fund enters into the financial
position or acquires the property, respectively. Transactions that are
identified as hedging or straddle transactions under other provisions of the
Code can be subject to the constructive sale provisions.
Investment by the Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to shareholders. For example, the Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such
portion in order to maintain its qualification as a regulated investment
company. In such case, the Fund may have to dispose of securities which it
might otherwise have continued to hold in order to generate cash to satisfy
these distribution requirements.
PORTFOLIO TRANSACTIONS
Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly-issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that
the best price or execution will be obtained. Usually no brokerage
commissions, as such, are paid by the Fund for such purchases and sales,
although the price paid usually includes an undisclosed compensation to the
dealer acting as agent. The prices paid to underwriters of newly-issued
securities usually include a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers
ordinarily are executed at a price between the bid and asked price. No
brokerage commissions have been paid by the Fund to date.
Transactions are allocated to various dealers by the Fund's portfolio
managers in their best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for research, statistical or
other services to enable the Manager to supplement its own research and
analysis with the views and information of other securities firms and may be
selected based upon their sales of shares of the Fund or other funds advised
by the Manager or its affiliates.
Research services furnished by brokers through which the Fund effects
securities transactions may be used by the Manager in advising other funds
it advises and, conversely, research services furnished to the Manager by
brokers in connection with other funds the Manager advises may be used by
the Manager in advising the Fund. Although it is not possible to place a
dollar value on these services, it is the opinion of the Manager that the
receipt and study of such services should not reduce the overall expenses of
its research department.
PERFORMANCE INFORMATION
The Fund's current yield for the 30-day period ended March 31, 1999 was
3.57%. 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 distributions, and (b) the net asset value
per share on the last day of the period less any undistributed earned income
per share reasonably expected to be declared as a dividend shortly
thereafter. The quotient is then added to 1, and that sum is raised to the
6th power, after which 1 is subtracted. The current yield is then arrived
at by multiplying the result by 2.
Based upon a combined 1999 Federal and California income tax rate of
45.22%, the Fund's tax equivalent yield for the 30-day period ended March
31, 1999 was 6.52%. 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 quoted 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 39.6% tax
rate has been used. For California personal income tax purposes, an 9.30%
tax rate has been used. The tax equivalent figure, however, does not
include the potential effect of any local (including, but not limited to,
county, district or city) taxes, including applicable surcharges. In
addition, there may be pending legislation which could affect such stated
tax rates or yield. Each investor should consult its tax adviser, and
consider its own factual circumstances and applicable tax laws, in order to
ascertain the relevant tax equivalent yield.
For the one-and five-year periods ended March 31, 1999, and for the
period April 20, 1992 (commencement of operations) through March 31, 1999,
the Fund's average annual total returns were 5.55%, 6.07%, and 6.65%,
respectively. Absent any expense absorption and/or fee waiver then in
effect, the Fund's total return would have been lower. 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.
For the period April 20, 1992 (commencement of operations) through
March 31, 1999, the Fund's total return was 56.41%. Absent any expense
absorption and/or fee waiver then in effect, the Fund's total return would
have been lower. 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
periods), and dividing the result by the net asset value per share at the
beginning of the period.
From time to time, the Fund may use hypothetical tax equivalent yields
or charts in its advertising. These hypothetical yields or charts will be
used for illustrative purposes only and are not indicative of the Fund's
past or future performance.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from CDA
Investment Technologies, Inc., Lipper Analytical Services, Inc., Moody's
Bond Survey Bond Index, Lehman Brothers Municipal Bond Index, Morningstar,
Inc. and other industry publications. From time to time, advertising
materials for the Fund may refer to or discuss then-current or past economic
conditions, developments and/or events, actual or proposed tax legislation,
or to statistical or other information concerning trends relating to
investment companies, as compiled by industry associations such as the
Investment Company Institute. From time to time, advertising materials for
the Fund also may refer to Morningstar ratings and related analyses
supporting such ratings. From time to time, advertising materials may refer
to studies performed by The Dreyfus Corporation or its affiliates, such as
"The Dreyfus Tax Informed Investing Study" of The Dreyfus Gender Investment
Comparison Study (1996 & 1997) or other such studies.
INFORMATION ABOUT THE FUND
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 in
liquidation. Shares have no preemptive, subscription or conversion rights
and are freely transferable.
The Fund is organized as an unincorporated business trust under the
laws of the Commonwealth of Massachusetts. Under Massachusetts law,
shareholders could, under certain circumstances, be held personally liable
for the obligations of the Fund. However, the Fund's Agreement and
Declaration of Trust ("Trust Agreement") disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or
executed by the Fund or a Board Member. The Trust Agreement provides for
indemnification from the Fund's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund. Thus,
the risk of a shareholder incurring financial loss on account of a
shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by the Fund, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of the Fund. The Fund intends to conduct its operations in a
way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Fund.
Unless otherwise required by the 1940 Act, 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 Board
members or the appointment of auditors. However, 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 Board
member from office. Fund shareholders may remove a Board member by the
affirmative vote of two-thirds of the Fund's outstanding voting shares. In
addition, the Board will call a meeting of shareholders for the purpose of
electing Board members if, at any time, less than a majority of the Board
members then holding office have been elected by shareholders.
The Fund is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
market movements. A pattern of frequent purchases and exchanges can be
disruptive to efficient portfolio management and, consequently, can be
detrimental to the Fund's performance and its shareholders. Accordingly, if
the Fund's management determines that an investor is following a market-
timing strategy or is otherwise engaging in excessive trading, the Fund,
with or without prior notice, may temporarily or permanently terminate the
availability of Fund Exchanges, or reject in whole or part any purchase or
exchange request, with respect to such investor's account. Such investors
also may be barred from purchasing other funds in the Dreyfus Family of
Funds. Generally, an investor who makes more than four exchanges out of the
Fund during any calendar year or who makes exchanges that appear to coincide
with a market-timing strategy may be deemed to be engaged in excessive
trading. Accounts under common ownership or control will be considered as
one account for purposes of determining a pattern of excessive trading. In
addition, the Fund may refuse or restrict purchase or exchange requests by
any person or group if, in the judgment of the Fund's management, the Fund
would be unable to invest the money effectively in accordance with its
investment objective and policies or could otherwise be adversely affected
or if the Fund receives or anticipates receiving simultaneous orders that
may significantly affect the Fund (e.g., amounts equal to 1% or more of the
Fund's total assets). If an exchange request is refused, the Fund will take
no other action with respect to the shares until it receives further
instructions from the investor. The Fund may delay forwarding redemption
proceeds for up to seven days if the investor redeeming shares is engaged in
excessive trading or if the amount of the redemption request otherwise would
be disruptive to efficient portfolio management or would adversely affect
the Fund. The Fund's policy on excessive trading applies to investors who
invest in the Fund directly or through financial intermediaries, but does
not apply to the Dreyfus Auto-Exchange Privilege, to any automatic
investment or withdrawal privilege described herein, or to participants in
employer-sponsored retirement plans.
During times of drastic economic or market conditions, the Fund may
suspend Fund Exchanges temporarily without notice and treat exchange
requests based on their separate components -- redemption orders with a
simultaneous request to purchase the other fund's shares. In such a case,
the redemption request would be processed at the Fund's next determined net
asset value but the purchase order would be effective only at the net asset
value next determined after the fund being purchased receives the proceeds
of the redemption, which may result in the purchase being delayed.
To offset the relatively higher costs of servicing smaller accounts,
the Fund will charge regular accounts with balances below $2,000 an annual
fee of $12. The valuation of accounts and the deductions are expected to
take place during the last four months of each year. The fee will be waived
for any investor whose aggregate Dreyfus mutual fund investments total at
least $25,000, and will not apply to IRA accounts or to accounts
participating in automatic investment programs or opened through a
securities dealer, bank or other financial institution, or to other
fiduciary accounts.
The Fund sends annual and semi-annual financial statements to all its
shareholders.
COUNSEL AND INDEPENDENT AUDITORS
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982, as counsel for the Fund, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the
shares being sold pursuant to the Fund's Prospectus.
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
independent auditors, has been selected as independent auditors of the Fund.
APPENDIX A
INVESTING IN CALIFORNIA MUNICIPAL OBLIGATIONS
RISK FACTORS--INVESTING IN CALIFORNIA MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in California Municipal Securities and is drawn from the
Official Statement issued by the State for its public bond issue on December
9, 1998. The sources of payment for such obligations and the marketability
thereof may be affected by financial or other difficulties experienced by
the State of California and certain of its municipalities and public
authorities. It does not purport to be a complete description and is based
on information from official statements relating to securities offerings of
California issuers.
State Finances
The Budget Process
The State's fiscal year begins on July 1 and ends on June 30. The
State operates on a budget basis, using a modified accrual system of
accounting, with revenues credited in the period in which they are
measurable and available and expenditures debited in the period in which the
corresponding liabilities are incurred.
The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law,
the annual proposed Governor's Budget cannot provide for projected
expenditures in excess of projected revenues and balances available from
prior fiscal years. Following the submission of the Governor's Budget, the
Legislature takes up the proposal.
Under the State Constitution, money may be drawn from the Treasury only
through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature
and signed by the Governor. The Budget Act must be approved by a two-thirds
majority vote of each House of the Legislature. The Governor may reduce or
eliminate specific line items in the Budget Act or any other appropriations
bill without vetoing the entire bill. Such individual line-item vetoes are
subject to override by a two-thirds majority vote of each House of the
Legislature.
Appropriations also may be included in legislation other than the
Budget Act (except for K-14 education) must be approved by a two-thirds
majority vote in each House of the Legislature and be signed by the
Governor. Bills containing K-14 education appropriations only require a
simple majority vote. Continuing appropriations, available without regard
to fiscal year, may also be provided by statute or the State Constitution.
Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be
appropriated in anticipation of their receipt.
The General Fund
The moneys of the State are segregated into the General Fund and over
900 Special Funds, including Bond, Trust and Pension Funds. The General
Fund consists of revenues received by the State Treasury and not required by
law to be credited to any other fund, as well as earnings from the
investment of State moneys not allocable to another fund. The General Fund
is the principal operating fund for the majority of governmental activities
and is the depository of most of the major revenue sources of the State.
The General Fund may be expended as a consequence of appropriation measures
enacted by the Legislature and approved by the Governor, as well as
appropriations pursuant to various constitutional authorizations and
initiative statutes.
The Special Fund for Economic Uncertainties
The Special Fund for Economic Uncertainties ("SFEU") is funded with
General Fund revenues and was established to protect the State from
unforeseen revenue reductions and/or unanticipated expenditure increases.
Amounts in the SFEU may be transferred by the State Controller as necessary
to meet cash needs of the General Fund. The State Controller is required to
return moneys so transferred without payment of interest as soon as there
are sufficient moneys in the General Fund.
The legislation creating the SFEU contains a continuous appropriation
from the General Fund authorizing the State Controller to transfer to the
SFEU, as of the end of each fiscal year, the lesser of (i) the unencumbered
balance in the General Fund and (ii) the difference between the State's
"appropriations subject to limitation" for the fiscal year then ended and
its "appropriations limit" as defined in Section 8 of Article XIII B of the
State Constitution and established in the Budget Act for that fiscal year,
as jointly estimated by the State's Legislative Analyst's Office and the
Department of Finance. In certain circumstances, moneys in the SFEU may be
used in connection with disaster relief.
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 State Controller is required to add the balance in
the SFEU to the balance in the General Fund so as to show the total moneys
then available for General Fund purposes.
The SFEU projection reflects the enactment of the Budget Act on August
21, 1998. This figure contains the latest revenue projections and
expenditure amounts appropriated in the Budget Act and trailer bills at that
point in time. As in any year, the Budget Act and related trailer bills are
not the only pieces of legislation which appropriate funds. Other factors
including re-estimates of revenues and expenditures, existing statutory
requirements, and additional legislation introduced and passed by the
Legislature may impact the reserve amount.
In the Budget Act for Fiscal Year 1998-99, signed on August 21, 1998,
the Department of Finance projects the SFEU will have a balance of about
$1.255 billion at June 30, 1999.
Prior Fiscal Years' Financial Results
Fiscal Years Prior to 1995-96
Pressures on the State's budget in the late 1980's and early 1990's
were caused by a combination of external economic conditions (including a
recession which began in 1990) and growth of the largest General Fund
Programs - K-14 education, health, welfare and corrections - at rates faster
than the revenue base. During this period, expenditures exceeded revenues
in four out of six years up to 1992-93, and the State accumulated and
sustained a budget deficit approaching $2.8 billion at its peak at June 30,
1993. Between the 1991-92 and 1994-95 Fiscal Years, each budget required
multibillion dollar actions to bring projected revenues and expenditures
into balance, including significant cuts in health and welfare program
expenditures; transfers of program responsibilities and funding from the
State to local governments, transfer of about $3.6 billion in annual local
property tax revenues from other local governments to local school
districts, thereby reducing State funding for schools under Proposition 98;
and revenue increases (particularly in the 1991-92 Fiscal Year Budget), most
of which were for a short duration.
Despite these budget actions, the effects of the recession led to
large, unanticipated budget deficits. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to budget to retire
it in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end
of the fiscal year. When the economy failed to recover sufficiently in 1993-
94, a second two-year plan was implemented in 1994-95, again using cross-
fiscal year revenue anticipation warrants to partly finance the deficit into
the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to
pay its ongoing obligations. When the Legislature and the Governor failed
to adopt a budget for the 1992-93 Fiscal Year by July 1, 1992, which would
have allowed the State to carry out its normal annual cash flow borrowing to
replenish its cash reserves, the State Controller issued registered warrants
to pay a variety of obligations representing prior years' or continuing
appropriations, and mandates from court orders. Available funds were used
to make constitutionally-mandated payments, such as debt service on bonds
and warrants. Between July 1 and September 4, 1992, when the budget was
adopted, the State Controller issued a total of approximately $3.8 billion
of registered warrants.
For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of
notes and revenue anticipation warrants were issued in the period from June
1992 to July 1994, often needed to pay previously maturing notes or
warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of a fiscal year,
as noted earlier. The last and largest of these borrowings was $4.0 billion
of revenue anticipation warrants which were issued in July, 1994 and matured
on April 25, 1996.
1995-96 and 1996-97 Fiscal Years
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued
spending restraint based on the actions taken in earlier years. The State's
cash position also improved, and no external deficit borrowing has occurred
over the end of these three fiscal years.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2
billion in 1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98)
than were initially planned when the budgets were enacted. These additional
funds were largely directed to school spending as mandated by Proposition
98, and to make up shortfalls from reduced federal health and welfare aid in
1995-96 and 1996-97. The accumulated budget deficit from the recession
years was finally eliminated. The Department of Finance estimates that the
State's budget reserve (the SFEU) totaled $639.8 million as of June 30, 1997
and $1.782 billion at June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large
increase in funding for K-14 education under Proposition 98,
reflecting strong revenues which exceeded initial budgeted
amounts. Part of the nearly $1.75 billion in increased spending
was allocated to prior fiscal years. Funds were provided to fully
pay for the cost-of-living-increase component of Proposition 98,
and to extend the class size reduction and reduction and reading
initiatives.
2. The Budget Act reflected the $1.228 billion pension case judgment
payment, and brought funding of the State's pension contribution
back to the quarterly basis which existed prior to the deferral
actions which were invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121
million and $107 million, respectively), and there was no increase
in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload
changes.
5. Health and welfare costs were contained, continuing generally the
grant levels from prior years, as part of the initial
implementation of the new CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in federal funds,
already included in the federal FY 1997 and 1998 budgets, was
included in the Budget Act, to offset incarceration costs for
illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving
approximately $500 million.
The Department of Finance released updated estimates for the 1997-98
Fiscal Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year
Budget Proposal. Total revenues and transfers are projected at $52.9
billion, up approximately $360 million from the Budget Act projection.
Expenditures for the fiscal year are expected to rise approximately $200
million above the original Budget Act, to $53.0 billion. The balance in the
budget reserve, the SFEU, is projected to be $329 million at June 30, 1998,
compared to $461 million at June 30, 1997.
Current State Budget
1998-99 Fiscal Year Budget
When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal
Year of $55.4 billion, and proposed expenditures in the same amount. By
the time the Governor released the May Revision to the 1998-99 Budget ("May
Revision") on May 14, 1998, the Administration projected that revenues for
the 1997-98 and 1998-99 Fiscal Years combined would be more than $4.2
billion higher than was projected in January. The Governor proposed that
most of this increased revenue be dedicated to fund a 75% cut in the Vehicle
License Fee ("VLF").
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and
the Governor signed it on August 21, 1998. Some 33 companion bills necessary
to implement the budget were also signed. In signing the Budget Bill, the
Governor used his line-item veto power to reduce expenditures by $1.360
billion from the General Fund, and $160 million from Special Funds. Of this
total, the Governor indicated that about $250 million of vetoed funds were
"set aside" to fund programs for education. Vetoed items included education
funds, salary increases and many individual resources and capital projects.
The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion. The revenue
projections were based on the May Revision. Economic problems overseas since
that time may affect the May Revision projections. See "Economic
Assumptions" below.
After giving effect to the Governor's vetoes, the Budget Act provides
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion
from bond funds. The Budget Act projects a balance in the SFEU at June 30,
1999 (but without including the "set aside" veto amount) of $1.255 billion,
a little more than 2% of General Fund revenues. The Budget Act assumes the
State will carry out its normal intra-year cash flow borrowing in the amount
of $1.7 billion of revenue anticipation notes, which were issued on October
1, 1998.
The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which
provides for a phased-in reduction of the VLF. Since the VLF is currently
transferred to cities and counties, the bill provides for the General Fund
to replace the lost revenues. Starting on January 1, 1999, the VLF will be
reduced by 25%, at a cost to the General Fund of approximately $500 million
in the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both
temporary and permanent increase in the personal income tax dependent credit
($612 million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted
business tax credits ($106 million).
Other significant elements of the 1998-99 Budget Act are as follows:
1. Proposition 98 funding for K-12 schools is increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, about $300
million higher than the minimum Proposition 98 guaranty. An additional $600
million was appropriated to "settle up" prior years' Proposition 98
entitlements, and was primarily devoted to one-time uses such as block
grants, deferred maintenance, and computer and laboratory equipment. Of the
1998-99 funds, major new programs include money for instructional and
library materials, deferred maintenance, support for increasing the school
year to 180 days and reduction of class sizes in Grade 9. The Governor held
$250 million of education funds which were vetoed as set-aside for enactment
of additional reforms. Overall, per-pupil spending for K-12 schools under
Proposition 98 is increased to $5,695, more than one-third higher than the
level in the last recession year of 1993-94. The Budget also includes $250
million as repayment of prior years' loans to schools, as part of the
settlement of the CTA v. Gould lawsuit.
2. Funding for higher education increased substantially above the
level called for in the Governor's four-year compact. General Fund support
was increased by $340 million (15.6%) for the University of California and
$267 million (14.1%) for the California State University system. In
addition, Community Colleges received a $300 million (6.6%) increase under
Proposition 98.
3. The Budget includes increased funding for health, welfare and
social services programs. A 4.9% grant increase was included in the basic
welfare grants, the first increase in those grants in 9 years. Future
increases will depend on sufficient General Fund revenue to trigger the
phased cuts in VLF described above.
4. Funding for the judiciary and criminal justice programs increased
by about 11% over 1997-98, primarily to reflect increased State support for
local trial courts and rising prison population.
5. Various other highlights of the Budget included new funding for
resources projects, dedication of $376 million of General Fund moneys for
capital outlay projects, funding of a 3% State employee salary increase,
funding of 2,000 new Department of Transportation positions to accelerate
transportation construction projects, and funding of the Infrastructure and
Economic Development Bank ($50 million).
6. The State of California received approximately $167 million of
federal reimbursements to offset costs related to the incarceration of
undocumented alien felons for federal fiscal year 1997. The State
anticipates receiving approximately $195 million in federal reimbursements
for federal fiscal year 1998.
After the Budget Act was signed, and prior to the close of the
Legislative session on August 31, 1998, the Legislature passed a variety of
fiscal bills. The Governor had until September 30, 1998 to sign or veto
these bills. The bills with the most significant fiscal impact which the
Governor signed include $235 million for certain water system improvements
in Southern California, $243 million for the State's share of the purchase
of environmentally sensitive forest lands, $178 million for state prisons,
$160 million for housing assistance ($40 million of which was included in
the 1998-99 Budget Act and an additional $120 million reflected in
Proposition IA), and $125 million for juvenile facilities. The Governor also
signed bills totaling $223 million for education programs which were part of
the Governor's $250 million veto "set aside," and $32 million for local
governments fiscal relief. In addition, he signed a bill reducing by $577
million the State's obligation to contribute to the State Teachers'
Retirement System in the 1998-99 Fiscal Year.
Based solely on the legislation enacted, on a net basis, the reserve
for June 30, 1999, was reduced by $256 million. On the other hand, 1997-98
revenues have been increased by $160 million. The revised June 30, 1999,
reserve is projected to be $1,159 million or $96 million below the level
projected at the Budget Act. The reserve projected in the Budget Act was
$1,255 million. It is important to emphasize that the new reserve level is
based on 1998-99 revenue and expenditure assumptions as of the Budget Act
except to augment for legislation signed after the budget enactment. These
assumptions will not be updated until the 1999-00 Governor's Budget is
released on January 10, 1999. In November, 1998, the Legislative Analyst's
Office released a report predicting that General Fund revenues for 1998-99
would be somewhat lower, and expenditures somewhat higher, than the Budget
Act forecasts, but the net variance would be within the projected $1.2
billion year-end reserve amount.
Local Governments
The primary units of local government in California are the counties,
ranging in population from 1,200 in Alpine County to almost 9,600,000 in Los
Angeles County. Counties are responsible for the provision of many basic
services, including indigent health care, welfare, jails and public safety
in unincorporated areas. There are also about 480 incorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained
since the enactment of "Proposition 13" in 1978, which reduced and limited
the future growth of property taxes, and limited the ability of local
governments to impose "special taxes" (those devoted to a specific purpose)
without two-thirds voter approval. Counties, in particular, have had fewer
options to raise revenues than many other local government entities, and
have been required to maintain many services.
Historically, funding for the State's trial court system was divided
between the State and the counties. However, Chapter 850, Statutes of 1997,
implemented a restructuring of the State's trial court funding system.
Funding for the courts, with the exception of costs for facilities, local
judicial benefits, and revenue collection, was consolidated at the State
level. The county contribution for both their general fund and fine and
penalty amounts is capped at the 1994-95 level and becomes part of the Trial
Court Trust Fund, which supports all trial court operations. The State
assumed responsibility for future growth in trial court funding. The
consolidation of funding is intended to streamline the operation of the
courts, provide a dedicated revenue source, and relieve fiscal pressure on
the counties. Beginning in 1998-99, the county general fund contribution
for court operations is reduced by $300 million, including $10.7 million to
buy out the contribution of the 20 smallest counties, and cities will retain
$62 million in fine and penalty revenue previously remitted to the state;
the General Fund backfilled the $362 million revenue loss to the Trial Court
Trust Fund. In addition to this general fund backfill, a $50 million
augmentation is included in the 1998 Budget Act for the trial courts to fund
workload increases and high priority issues such as court security. In
1999-2000, the county general fund contribution will be further reduced by
an additional $92 million to buy out the next 17 smallest counties and
reduce by 10 percent of the general fund contribution of the remaining 21
counties.
The entire statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996 (see "Welfare Reform" above).
Under the CalWORKs program, counties are given flexibility to develop their
own plans, consistent with state law, to implement the program and to
administer many of its elements, and their costs for administrative and
supportive services are capped at the 1996-97 levels. Counties are also
given financial incentives if, at the individual county level or statewide,
the CalWORKs program produces savings associated with specified standards.
Counties will still be required to provide "general assistance" aid to
certain persons who cannot obtain welfare from other programs.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding K-12 schools and
community colleges. During the recession, the Legislature eliminated most of
the remaining components of post-Proposition 13 aid to local government
entities other than K-14 education districts, although it has also provided
additional funding sources (such as sales taxes) and reduced certain
mandates for local services. Since then the State has also provided
additional funding to counties and cities through such programs as health
and welfare realignment, welfare reform, trial court restructuring, the COPs
program supporting local public safety departments, and various other
measures.
In 1996, voters approved Proposition 218, entitled the "Right to Vote
on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions place limitations on the
ability of local government agencies to impose or raise various taxes, fees,
charges and assessments without voter approval. Certain "general taxes"
imposed after January 1, 1995 must be approved by voters in order to remain
in effect. In addition, Article XIIIC clarifies the right of local voters
to reduce taxes, fees, assessments or charges through local initiatives.
There are a number of ambiguities concerning the Proposition and its impact
on local governments and their bonded debt which will require interpretation
by the courts or the Legislature. Proposition 218 does not affect the State
or its ability to levy or collect taxes.
On December 23, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to the
Educational Revenue Augmentation Fund, which is a funding source for
schools, is a reimbursable state mandated cost. On August 11, 1998, the
State Department of Justice, on behalf of the State Department of Finance,
filed a rebuttal in opposition to the counties' claim. The issue is
currently scheduled to be heard by the Commission on October 22, 1998. The
fiscal impact to the State General fund if the Commission determines that
the property tax shifts created a reimbursable state mandate could total
approximately $8 billion for the 1996-97 ($2.5 billion), 1997-98 ($2.6
billion) and 1998-99 ($2.7 billion) property tax shifts. Ongoing costs to
the State General Fund would be approximately $2.7 billion annually. Any
Commission decision adverse to the State can be appealed to the courts.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by
Article XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
the Bonds or other voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit.
"Appropriations subject to limitation," with respect to the State, 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 that entity in providing the regulation, product or
service," but "proceeds of taxes" exclude most state subventions to local
governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply
with mandates of courts or the federal government, appropriations for
qualified capital outlay projects, appropriations of revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January
1, 1990 levels, and appropriation of certain special taxes imposed by
initiative (e.g., cigarette and tobacco taxes). The Appropriations Limit
may also be exceeded in cases of emergency.
The State's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in State 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. The
Appropriations Limit is tested over consecutive two-year periods. Any
excess of the aggregate "proceeds of taxes" received over such two-year
transfers to K-14 districts and refunds to taxpayers.
The Legislature has enacted legislation to implement Article XIII B
which defines certain terms used in Article XIII B and sets forth the
methods for determining the Appropriations Limit. California Government
Code Section 7912 requires an estimate of the 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.
In the Budget Act for Fiscal Year 1998-99 enacted August 21, 1998, the
Department of Finance projects the State's Appropriations Subject to
Limitations will be $6.3 billion under the State's Appropriations Limit in
Fiscal Year 1998-99.
Proposition 98
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State 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 on June 5, 1990), K-14
schools are guaranteed the greater of (a) in general, a fixed percent 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 XIII B by reference to State per capita personal
income) and enrollment ("Test 2"), or (c) a third test, which would replace
Test 2 in any year when the percentage growth in per capita General Fund
revenues from the prior year plus one half of one percent is less than the
percentage growth in State 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. Legislation
adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee under Test 1
to be 40.3 percent of the General Fund tax revenues, based on 1986-87
appropriations. However, that percent has been adjusted to approximately 35
percent to account for a subsequent redirection of local property taxes,
since such redirection directly affects the share of General Fund revenues
to schools.
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. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIII B limit to K-14 schools.
During the recent recession, General Fund revenues for several years
were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided
in the law. The Legislature responded to these developments by designating
the "extra" Proposition 98 payments in one year as a "loan" from future
years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. By implementing these actions, per-pupil
funding from Proposition 98 sources stayed almost constant at approximately
$4,200 from Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. The
settlement of this case, finalized in July, 1996, provides, among other
things, that both the State and K-14 schools share in the repayment of prior
years' emergency loans to schools. Of the total $1.76 billion in loans, the
State will repay $935 million by forgiveness of the amount owed, while
schools will repay $825 million. The State share of the repayment will be
reflected as an appropriation above the current Proposition 98 base
calculation. The schools' share of the repayment will count as
appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year
period of 1994-95 through 2001-02 to mitigate any adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 and thereafter have resulted or
will result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets. Because of the State's increasing
revenues, per-pupil funding at the K-12 level has increased by about 36%
from the level in place from 1991-92 through 1993-94, and is estimated at
about $5,695 per ADA in 1998-99. A significant amount of the "extra"
Proposition 98 monies in the last few years have been allocated to special
programs, most particularly an initiative to allow each classroom from
grades K-3 to have no more than 20 pupils by the end of the 1997-98 school
year. There are also new initiatives increasing instructional time, for
purchasing new instructional and library materials, and expanding teacher
preparation and support.
ECONOMY AND POPULATION
Introduction
California's economy, the largest among the 50 states and one of the
largest in the world, has major components in high technology, trade,
entertainment, agriculture, manufacturing, tourism, construction and
services. Since 1994, California's economy has been performing strongly
after suffering a deep recession between 1990-94.
Population and Labor Force
The State's July 1, 1997 population of over 32.9 million represented
over 12 percent of the total United States population.
California's population is concentrated in metropolitan areas. As of
the April 1, 1990 census, 96 percent resided in the 23 Metropolitan
Statistical Areas in the State. As of July 1, 1997, the 5-county Los
Angeles area accounted for 49 percent of the State's population, with 16.0
million residents, and the 10-county San Francisco Bay Area represented 21
percent, with a population of 6.9 million.
The following table shows California's population data for 1992 through
1997.
<TABLE>
<CAPTION>
Population 1992-97
% %
Increase United Increase California
California Over States Over as % of
Year Population(a) Preceding Year Population(a) Preceding Year United States
____ _____________ ______________ _____________ ______________ _____________
<S> <C> <C> <C> <C> <C>
1992 31,188,000 2.0 255,011,000 1.2 12.2
1993 31,517,000 1.1 257,795,000 1.1 12.2
1994 31,790,000 0.9 260,372,000 1.0 12.2
1995 32,063,000 0.9 262,890,000 1.0 12.2
1996 32,383,000 1.0 265,284,000 0.9 12.2
1997 32,957,000 1.8 267,575,000 0.9 12.3
________________________
(a)Population as of July 1.
</TABLE>
SOURCE: U.S. Department of Commerce, Bureau of the Census; State of
California, Department of Finance.
The following table presents civilian labor force data for the resident
population, age 16 and over, for the years 1992 to 1997.
Labor Force
1992-97
Labor Force Trends (Thousands) Unemployment Rate(%)
Year Labor Employment California United States
Force
1992 15,404 13,973 9.3 7.5
1993 15,359 13,918 9.4 6.9
1994 15,450 14,122 8.6 6.1
1995 15,412 14,203 7.8 5.6
1996 15,568 14,444 7.2 5.4
1997 15,971 14,965 6.3 4.9
____________________
SOURCE: State of California, Employment Development Department.
Employment, Income, Construction and Retail Sales
The following table shows California's nonagricultural employment
distribution and growth for 1990 and 1997.
Payroll Employment By Major Sector
1990 and 1997
Employment % Distribution
(Thousands) of Employment
Industry Sector 1990 1997 1990 1997
Mining 39 29 0.3 0.2
Construction 605 554 4.8 4.2
Manufacturing
Nondurable goods 721 728 5.7 5.5
High Technology 686 517 5.4 3.9
Other Durable goods 690 669 5.4 5.1
Transportation and 624 663 4.9 5.1
Utilities
Wholesale and Retail 3,002 3,057 23.7 23.2
Trade
Finance, Insurance
and Real Estate 825 756 6.5 5.7
Services 3,395 4,051 26.8 30.8
Government
Federal 362 285 2.9 2.2
State and Local 1,713 1,858 13.5 14.1
TOTAL
AGRICULTURAL 12,662 13,167 100 100
___________________
SOURCE: State of California, Employment Development Department and State of
California, Department of Finance.
The following tables show California's total and per capita income
patterns for selected years.
Total Personal Income 1992-97
California
Year Millions %Change California % of
U.S.
1992 684,674 4.8(*) 13.1
1993 698,130 2.0 12.8
1994(a) 718,321 2.9 12.5
1995 754,269 5.0 12.4
1996 798,020 5.8 12.5
1997 846,017 6.0 12.5
_____________________
(*)Change from prior year.
(a)Reflects Northridge earthquake, which caused an estimated $15 billion
drop in personal income.
Note: Omits income for government employees overseas.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
Per Capita Personal Income 1992-97
% United California
Year California Change States % Change % of U.S.
____ __________ ______ ______ ________ ___________
1992 22,163 3.2(*) 20,546 4.7(*) 107.9
1993 22,388 1.0 21,220 3.3 105.5
1994(a) 23,899 2.3 22,056 3.9 103.8
1995 23,901 4.4 23,063 4.6 103.6
1996 25,050 4.8 24,169 4.8 103.6
1997 26,218 4.7 25,298 4.7 103.6
________________________
(*)Change from prior year.
(a)Reflects Northridge earthquake, which caused an estimated $15 billion
drop in personal income.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
LITIGATION
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of
the State's employer contribution to the Public Employees' Retirement System
beginning in Fiscal Year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State
defendants to disregard the provisions of the legislation, to implement the
statute governing employer contributions that existed before the changes in
the legislation found to be unconstitutional, and to transfer to PERS the
contributions that were unpaid to date. On February 19, 1997, the State
Court of Appeal affirmed the decision of the Superior Court, and the Supreme
Court subsequently refused to hear the case, making the Court of Appeals'
ruling final.
On July 30, 1997, the Controller transferred $1.228 billion from the
General Fund to PERS in repayment of the principal amount determined to have
been improperly deferred. Subsequent State payments to PERS will be made on
a quarterly basis. On July 7, 1998, pursuant to Chapter 94, Statutes of
1998, the State paid PERS $332.7 million for the accrued interest on the
judgment and interest on the unpaid accrued interest amount. See "CURRENT
STATE BUDGET - 1998-99 Fiscal Year Budget" above.
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et
al. v. Kathleen Connell filed a complaint for certain declaratory and
injunctive relief challenging the authority of the State Controller to make
payments from the State Treasury in the absence of a state budget. On July
21, 1998, the trial court issued a preliminary injunction prohibiting the
State Controller from paying moneys from the State Treasury for fiscal year
1998-99, with certain limited exceptions, in the absence of a state budget.
The preliminary injunction, among other things, prohibited the State
Controller from making any payments pursuant to any continuing
appropriation.
On July 22 and 27, 1998, various employee unions which had intervened
in the case appealed the trial court's preliminary injunction and asked the
Court of Appeal to stay the preliminary injunction. On July 28, 1998, the
Court of Appeal granted the unions' requests and stayed the preliminary
injunction pending the Court of Appeal's decision on the merits of the
appeal. On August 5, 1998, the Court of Appeal denied the plaintiffs'
request to reconsider the stay. Also on July 22, 1998, the State Controller
asked the California Supreme Court to immediately stay the trial court's
preliminary injunction and to overrule the order granting the preliminary
injunction on the merits. On July 29, 1998, the Supreme Court transferred
the State Controller's request to the Court of Appeal. The matters are now
pending before the Court of Appeal.
In Jordan v. Department of Motor Vehicles, plaintiff challenged the
validity and constitutionality of the State's smog impact fee and requested
a refund of the fee. In October 1997, the trial court ruled in favor of
plaintiff and, in addition, ordered the State to provide refunds to all
persons who paid the smog impact fee from three years before the filing of
the lawsuit in 1995 to the present. Plaintiff asserts that the total amount
required to be refunded will exceed $350 million. The State has appealed.
A judgment was entered for plaintiffs in California Ambulance
Association v. Shalala et al., described at page 63 of Exhibit I to this
Appendix. The Ninth Circuit Court of Appeals, however, reversed the trial
court's decision. Plaintiffs filed a petition for certiorari at the United
States Supreme Court, which the State opposed. The petition is currently
pending at the Supreme Court.
A judgment was entered for plaintiff in August 1998 in the case of
Ceridian Corporation v. Franchise Tax Board, described at pages 63-64 of
Exhibit 1. The State will appeal.
In Hathaway, et al. v. Wilson, et al., described at page 65 of Exhibit
1, the plaintiffs and the State reached a settlement which resolved all the
issues presented in the case. Pursuant to the settlement, judgment was
entered in August 1998, requiring the State to return $19,427,000 from the
General Fund to one special fund.
In Thomas Hayes v. Commission on State Mandates, described at page 64
of Exhibit 1, the Commission on State Mandates is now expected to issue a
final consolidated decision in late 1998.
In February 1998, the Court of Appeal in California State Employees
Association v. Wilson, described at page 64 of Exhibit 1, modified, then
affirmed, a judgment in favor of the plaintiffs invalidating the transfer of
$12,290,000 from the State Highway Account to the General Fund.
In July 1998, the parties in Beno v. Sullivan and Welch v. Anderson,
described at page 65 of Exhibit 1, entered into a settlement agreement in
which the State agreed to pay $42 million in return for plaintiffs'
agreement to dismiss both actions.
Information Technology
The State's reliance on information technology in every aspect of its
operations has made Year 2000-related ("Y2K") information technology ("IT")
issues a high priority for the State. The Department of Information
Technology ("DOIT"), an independent office reporting directly to the
Governor, is responsible for ensuring the State's information technology
processes are fully functional before the year 2000. The DOIT has created a
Year 2000 Task Force and a California 2000 Office to establish statewide
policy requirements; to gather, coordinate, and share information; and to
monitor statewide progress. In December 1996, the DOIT began requiring
departments to report on Y2K activities and currently requires departmental
monthly reporting of Y2K status. The DOIT has emphasized to departments that
efforts should be focused on applications that support mission-critical
business practices.
The risks posed by Y2K information technology related issues are not
confined to computer systems, but also include problems presented by
embedded microchips (products or systems that contain microchips to perform
functions such as traffic control, instruments used in hospitals or medical
laboratories, and California Aqueduct monitoring). To address these
problems, the Governor issued Executive Order W-163-97, broadening the
responsibilities of the DOIT to resolve these issues as well as legal
questions associated with Y2K issues. The executive order also required
that mission critical systems be remediated by December 31, 1998, that
purchases of new systems, hardware, software and equipment be Year 2000
compliant and further limited new computer projects to those required by law
until a department's Y2K problems are resolved. The DOIT has also more
recently required departments to address interfacing of State IT systems
with external IT systems, and to report on contingency planning status for
problems which might occur if IT systems are not fully remediated by the end
of 1999.
In its quarterly report for the period ending June 30, 1998 (the "July
Quarterly Report"), the DOIT reported that departments under its supervision
had identified 642 mission critical IT systems out of a total of 2,432
systems. Of the mission-critical systems, 87 were reported as already Y2K
compliant. Of the remaining 555 mission critical systems requiring
remediation, 128 were reported as completed. While the DOIT does not
oversee certain independent State entities, such as the judiciary, the
Legislature, the University of California and California State University
System, it believes these other agencies are well under way with their own
Y2K remediation plans.
In its quarterly report for the period ending September 30, 1998 (the
"October Quarterly Report"), the DOIT updated its survey of State
departments, and reported that the number of mission-critical systems
needing remediation was reduced to 532, and 220 of them had been remediated.
However, the DOIT reported that fewer projects were completed by September
30, 1998 than had been planned by departments, and more projects were
falling into fourth quarter 1998 and first quarter 1999. Thus, some
mission-critical systems (less than 10%) would not meet the Governor's
Executive Order target to be remediated by December 31, 1998.
In late August, 1998, the State Auditor ("BSA") released a report on
"Year 2000 Computer Problems." The BSA surveyed 39 State departments and
compared their status to the March 31, 1998 DOIT quarterly report. (The
work for BSA's report was done before the DOIT July Quarterly Report was
ready.) The BSA Report concluded that some agencies had fallen behind
schedule by as much as 1-3 months compared to their March expectations. The
BSA Report also noted concern that departments were not making adequate
plans to test remediated systems, were not focusing sufficiently on problems
associated with data interface with other governmental and private bodies,
and were not far enough along in developing "business continuation plans" to
ensure continued operations after January 1, 2000 in the event of IT
problems. The DOIT responded in some detail to the BSA report, generally
agreeing with its identification of issue areas, and stating that it was
following up on all areas with the departments.
In the July Quarterly Report, the DOIT estimates total Y2K costs
identified by the departments under its supervision at about $239 million,
of which more than $100 million was projected to be expended in fiscal years
1998-99 and 1999-2000. The October Quarterly Report indicated the total
costs were now estimated to be at least $290 million, and the estimate would
likely increase in the future. These costs are part of much larger overall
IT costs incurred annually by State departments and do not include costs for
remediation for embedded technology, desktop systems and additional costs
resulting from discoveries in the testing process. For fiscal year 1998-99,
the Legislature created a $20 million fund for unanticipated Y2K costs,
which can be increased if necessary.
Although the DOIT reports that State departments are making substantial
progress overall toward the goal of Y2K compliance, the task is very large
and will likely encounter unexpected difficulties. The State cannot predict
whether all mission critical systems will be ready and tested by late 1999
or what impact failure of any particular IT system(s) or of outside
interfaces with State IT systems might have. The State Treasurer's Office
and the State Controller's Office report that they are both on schedule to
complete their Y2K remediation projects by December 31, 1998, allowing full
testing during 1999. These systems include debt service payments on State
debt and the State fiscal and accounting system.
APPENDIX B
Description of certain S&P, Moody's and Fitch ratings:
S&P
Municipal Bond Ratings
An S&P municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of 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.
The AA rating may be modified by the addition of a plus or minus sign to
show relative standing within the category.
Municipal Note Ratings
SP-1
The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
Commercial Paper Ratings
The rating A is the highest rating and is assigned by S&P to issues
that are regarded as having the greatest capacity for timely payment.
Issues in this category are delineated with the numbers 1, 2 and 3 to
indicate the relative degree of safety. Paper rated A-1 indicates that the
degree of safety regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
Moody's
Municipal Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities. Generally, Moody's provides either a generic
rating or a rating with a numerical modifier of 1 for bonds in the generic
rating category Aa. Moody's also provides numerical modifiers of 2 and 3 in
this category for bond issues in the health care, higher education and other
not-for-profit sectors; the modifier 1 indicates that the issue ranks in the
higher end of that generic rating category; the modifier 2 indicates that
the issue is in the mid-range of that generic category; and the modifier 3
indicates that the issue is in the low end of that generic category.
Municipal Note Ratings
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). Such ratings recognize
the 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 alternate liquidity.
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 issuer, 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 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.
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 satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
_______________________________
* Included in the Not Rated category are securities comprising 4.1% 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: BBB/Baa (2.7%) and Ba/Baa (1.4%).
