Dreyfus Pennsylvania Intermediate Municipal Bond Fund
Investing for income that is exempt from federal and Pennsylvania state income
taxes
PROSPECTUS April 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.
<PAGE>
Contents
THE FUND
- ----------------------------------------------------
2 Goal/Approach
3 Main Risks
4 Past Performance
5 Expenses
6 Management
7 Financial Highlights
YOUR INVESTMENT
- --------------------------------------------------------------------
8 Account Policies
11 Distributions and Taxes
12 Services for Fund Investors
14 Instructions for Regular Accounts
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Back Cover
What every investor should know about the fund
Information for managing your fund account
Where to learn more about this and other Dreyfus funds
<PAGE>
The Fund
Dreyfus Pennsylvania Intermediate Municipal Bond Fund
- ------------------------------
Ticker Symbol: DPABX
GOAL/APPROACH
The fund seeks as high a level of income exempt from federal and Pennsylvania
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, the interest from which is exempt from federal and Pennsylvania state
personal income taxes. The fund generally maintains a dollar-weighted average
portfolio maturity between three and ten years. While the fund currently intends
to invest only in investment grade securities (at the time of purchase), it does
have the ability to invest up to 20% of net assets in bonds rated below BBB/Baa
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
* Pennsylvania's economy and revenues underlying
municipal bonds may decline, meaning that the ability of the issuer to make
timely interest payments may be reduced
* 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
Pennsylvania state 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 taxable bonds and/or municipal bonds that are exempt
only from federal personal income taxes.
Other potential risks
The fund may invest in certain derivatives, such as futures, options and inverse
floaters. Derivatives can be illiquid and highly sensitive to changes in their
underlying security, interest rate or index, and as a result can be highly
volatile. Some derivatives, such as inverse floaters, may be inversely related
to their underlying security, interest rate or index. A small investment in
certain derivatives could have a potentially large impact on the fund's
performance.
The Fund
<PAGE 3>
PAST PERFORMANCE
The two tables below show the fund's annual returns and its long-term
performance. The first table shows you how the fund's performance has varied
from year to year. The second compares the fund's 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 and
distributions. As with all mutual funds, the past is not a prediction of the
future.
<TABLE>
<CAPTION>
--------------------------------------------------------
Year-by-year total return AS OF 12/31 EACH YEAR (%)
N/A N/A N/A N/A N/A -1.50 15.22 4.19 8.13 5.52
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
BEST QUARTER: Q1 '95 +6.41%
WORST QUARTER: Q1 '94 -1.86%
--------------------------------------------------------
Average annual total return AS OF 12/31/98
Inception
<S> <C> <C>
1 Year 5 Years (12/16/93)
-----------------------------------------------------------------------------------------
FUND 5.52% 6.21% 6.74%
LEHMAN BROTHERS
10-YEAR MUNICIPAL
BOND INDEX 6.76% 6.35% 6.35%*
</TABLE>
* FOR COMPARATIVE PURPOSES, THE VALUE OF THE INDEX ON 12/31/93
IS USED AS THE BEGINNING VALUE ON 12/16/93. UNLIKE THE FUND,
THIS INDEX IS NOT GEOGRAPHICALLY LIMITED.
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 fees 0.60%
Shareholder services fee 0.10%
Other expenses 0.23%
- ----------------------------------------------------------------------
TOTAL 0.93%
<TABLE>
<CAPTION>
Expense example
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------------
$95 $296 $515 $1,143
</TABLE>
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.
For the fiscal year ended November 30, 1998, a portion of the fee was reduced
and the effective fee paid by the fund was 0.47%, reducing total expenses from
0.93% to 0.80%. This waiver is voluntary and currently in effect and may be
terminated at any time.
SHAREHOLDER SERVICES FEE: a fee 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 one of the nation's
leading mutual fund complexes, with more than $121 billion in more than 160
mutual fund portfolios. 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. Its mutual fund companies place Mellon as the leading bank
manager of mutual funds. Mellon is headquartered in Pittsburgh, Pennsylvania.
The Dreyfus asset management philosophy is based on the belief that discipline
and consistency are important to investment success. For each fund, the firm
seeks to establish clear guidelines for portfolio management and to be
systematic in making decisions. This approach is designed to provide each fund
with a distinct, stable identity.
Douglas Gaylor has managed the fund since February 1996. Prior to joining
Dreyfus in January 1996, Mr. Gaylor was a portfolio manager with PNC Bank and,
from 1990 to 1993, he was a Senior Municipal Investment Officer with Wilmington
Trust Company.
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>
<CAPTION>
YEAR ENDED NOVEMBER 30,
<S> <C> <C> <C> <C>
1998 1997 1996 1995 1994(1)
- ---------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
Net asset value, beginning of period 13.44 13.18 13.12 11.84 12.50
Investment operations:
Investment income -- net .60 .60 .59 .63 .61
Net realized and unrealized
gain (loss) on investments .30 .26 .06 1.28 (.66)
Total from investment operations .90 .86 .65 1.91 (.05)
Distributions:
Dividends from investment
income -- net (.60) (.60) (.59) (.63) (.61)
Dividends from net realized
gain on investments (.01) -- -- -- --
Total distributions (.61) (.60) (.59) (.63) (.61)
Net asset value, end of period 13.73 13.44 13.18 13.12 11.84
Total return (%) 6.76 6.67 5.10 16.47 (.60)(2)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to
average net assets (%) .80 .80 .80 .48 --
Ratio of net investment income
to average net assets (%) 4.35 4.52 4.52 4.93 5.19(2)
Decrease reflected in above expense ratios
due to actions by Dreyfus (%) .13 .13 .31 .62 1.39(2)
Portfolio turnover rate (%) 26.03 23.94 53.83 5.07 20.13(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ x 1,000) 73,963 64,928 50,372 40,079 22,599
</TABLE>
(1) FROM DECEMBER 16, 1993 (COMMENCEMENT OF OPERATIONS) TO NOVEMBER 30, 1994.
(2) ANNUALIZED.
(3) NOT ANNUALIZED.
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 valued by an independent
pricing service approved and supervised by the fund's 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 Pennsylvania state personal income tax and from the
Philadelphia School District investment income tax. However, any dividends and
capital gains from taxable investments are taxable as ordinary income, 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.
<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 BUILDER((reg.tm)) 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.
Our 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.
The Dreyfus Touch((reg.tm))
FOR 24-HOUR AUTOMATED ACCOUNT ACCESS, use Dreyfus Touch. With a touch-tone
phone, you can easily manage your Dreyfus accounts, obtain information on other
Dreyfus mutual funds and get current stock market quotes.
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,
401(k) plans, 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
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
By Telephone
WIRE Have your bank send your
investment to The Bank of New York, with these instructions:
* ABA# 021000018
* DDA# 8900118393
* 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.
WIRE Have your bank send your investment to The Bank of New York, with these
instructions:
* ABA# 021000018
* DDA# 8900118393
* 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.
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.
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.
Via the Internet
COMPUTER Visit the Dreyfus Web site http://www.dreyfus.com and follow the
instructions to download an account application.
<PAGE 14>
TO SELL SHARES
Write a redemption check OR 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 16>
<PAGE 17>
For More Information
Dreyfus Pennsylvania Intermediate Municipal Bond Fund
-----------------------------
SEC file number: 811-7089
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.
(c) 1999, Dreyfus Service Corporation 105P0499
<PAGE>
DREYFUS PENNSYLVANIA INTERMEDIATE MUNICIPAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 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 Pennsylvania Intermediate Municipal Bond Fund (the
"Fund"), dated April 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-17
Management Arrangements B-22
How to Buy Shares B-24
Shareholder Services Plan B-26
How to Redeem Shares B-27
Shareholder Services B-30
Determination of Net Asset Value B-33
Portfolio Transactions B-33
Dividends, Distributions and Taxes B-34
Performance Information B-37
Information About the Fund B-39
Counsel and Independent Auditors B-40
Appendix A B-42
Appendix B B-51
DESCRIPTION OF THE FUND
The Fund is a Massachusetts business trust that commenced
operations on December 16, 1993. The Fund is an open-end management
investment company, known as a municipal bond 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 the debt
securities of the Commonwealth of Pennsylvania, 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 Pennsylvania income taxes (collectively, "Pennsylvania
Municipal Obligations"). To the extent acceptable Pennsylvania 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
Pennsylvania, 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 cancelled; (b) what
assurance there is that the assets represented by the lease can be sold; (c)
the strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of nonappropriation"); (e)
the legal recourse in the event of failure to appropriate; and (f) such
other factors concerning credit quality as the Manager may deem relevant.
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 Obligation, of any custodian and of the third
party provider of the tender option. In certain instances and for certain
tender option bonds, the option may be terminable in the event of a default
in payment of principal or interest on the underlying Municipal Obligation
and for other reasons.
The Fund will 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. Gains realized in connection with stand-
by commitments will be taxable. 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 the 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 ratings
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 November
30, 1998, computed on a monthly basis, was as follows:
Percentage
Fitch or Moody's or S&P of Value
AAA Aaa AAA 55.4%
AA Aa AA 12.3%
A A A 13.2%
BBB Baa BBB 13.1%
F-1, F-1+ MIG 1, P- SP-1, A- 2.7%()1
1 1
Not Rated Not Rated Not 3.3%
Rated (2)
100.0%
_______________________________
(1) Includes tax exempt notes rated in one of the two highest rating
categories by the Rating Agencies. These securities, together with
Municipal Obligations rated A or better by the Rating Agencies, are
taken into account at the time of a purchase for purposes of
determining that the Fund's portfolio meets the 80% minimum quality
standard discussed above.
(1) Included in the Not Rated category are securities comprising 3.3% 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: Baa/BBB (3.1%), Ba/BB (0.2%).
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.
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) and pay-in-kind bonds (bonds which pay interest through the issuance
of additional bonds). The amount of the discount varies depending on the
time remaining until maturity or cash payment date, prevailing interest
rates, liquidity of the security and perceived credit quality of the issuer.
Zero coupon securities also may take the form of debt securities that have
been stripped of their unmatured interest coupons, the coupons themselves
and receipts or certificates representing interest in such stripped debt
obligations and coupons. The market prices of zero coupon securities
generally are more volatile than the market prices of 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. Federal income tax law requires the holder
of a zero coupon security or of certain pay-in-kind bonds to accrue income
with respect to these securities prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and avoid
liability for Federal income taxes, the Fund may be required to distribute
such income accrued with respect to these securities and may have to dispose
of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
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-2 by Moody's, A-2 by S&P or F-2 by Fitch;
certificates of deposit of U.S. domestic banks, including foreign branches
of domestic banks, with assets of one billion dollars or more; time
deposits; bankers' acceptances and other short-term bank obligations; and
repurchase agreements in respect of any of the foregoing. Dividends paid by
the Fund that are attributable to income earned by the Fund from Taxable
Investments will be taxable to investors. See "Dividends Distributions and
Taxes." Except for temporary defensive purposes, at no time will more than
20% of the value of the Fund's net assets be invested in Taxable
Investments. When the Fund has adopted a temporary defensive position
including when acceptable Pennsylvania 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 Pennsylvania 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.
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.
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 Fund 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 Fund 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.
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 from securities loaned.
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.
Forward Commitments. The Fund may purchase Municipal Obligations
and other securities on a forward commitment or when-issued 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 Pennsylvania Municipal Obligations. You should
consider carefully the special risks inherent in the Fund's investment in
Pennsylvania Municipal Obligations. These risks result from the financial
condition of the Commonwealth of Pennsylvania (the "Commonwealth"). If
there should be a default or other financial crisis relating to the
Commonwealth or an agency or municipality thereof, the market value and
marketability of Pennsylvania Municipal Obligations held by the Fund and the
interest income to the Fund could be adversely affected. The Commonwealth
has been historically identified as a heavy industry state although that
reputation has recently changed as the coal, steel and railroad industries
declined. A more diversified economy has developed in the Commonwealth as a
long-term shift in jobs, investment and workers away from the northeast part
of the nation took place. The major new sources of growth currently are in
the service sector, including trade, medical and health services, education
and financial institutions. The Commonwealth is highly urbanized, with
almost 44% of its total population contained in the metropolitan areas which
include the cities of Philadelphia and Pittsburgh. The Commonwealth's
adopted fiscal 1998-99 General Fund Budget provided for a decrease in taxes
of over $240 million. You should review "Appendix A" which sets forth
additional information relating to investing in Pennsylvania 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 greater
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 Ratings 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 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 persons 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 net assets. Zero coupon, pay-in-kind or
delayed interest bonds carry an additional risk in that, unlike bonds which
pay interest throughout the period to maturity, the Fund will realize no
cash until the cash payment date unless a portion of such securities are
sold and, if the issuer defaults, the Fund may obtain no return at all on
its investment. See "Dividends, Distributions and Taxes."
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 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 borrowing to no more than 33-1/3% of the
value of the Fund's total assets). For purposes of this investment
restriction, the entry into options, forward contracts, futures
contracts, including those relating to indices, and options on futures
contracts or indices shall not constitute borrowing.
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 options, forward contracts,
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 options, forward contracts,
futures, including those relating to indices, and options on futures
contracts or indices.
9. Invest in securities of other investment companies, except to
the extent permitted under the 1940 Act.
10. Pledge, hypothecate, mortgage or otherwise encumber its
assets, except to the extent necessary to secure permitted borrowings and to
the extent related to the deposit of assets in escrow in connection with the
purchase of securities on a when-issued or delayed-delivery basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with
respect to options, forward contracts, 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) and floating and variable rate demand obligations
as to which the Fund cannot exercise the demand feature as described in the
Fund's Prospectus on less than seven days notice and as to which there is no
secondary market), if, in the aggregate, more than 15% of its net assets
would be so invested.
12. Invest in companies for the purpose of exercising control.
For purposes of Investment Restriction No. 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., 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. Chairman of the Broadcasting Board of
Governors, an independent board within the United States Information
Agency, since August 1995. From August 1994 through December 31, 1994,
Mr. Burke was a Consultant to the Manager, and from October 1990 to
August 1994, he was Vice President and Chief Administrative Officer of
the Manager. From 1977 to 1990, Mr. Burke was involved in the
management of national television news, as Vice President and Executive
Vice President of ABC News, and subsequently as President of CBS News.
He is 62 years old and his address is Box 654, Eastham, 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 Merchandising & Marketing of
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 of Medicine at Cornell Medical College; a
Consultant in Medicine at Memorial Sloan Kettering Cancer Center. He
teaches in the section on Society and Medicine and he supervises a
group of medical ethics Fellows. He writes a monthly commentary on
medical officers 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 of Rose Associates, Inc., a New
York based real estate development and management firm. Pursuant to a
Presidential appointment in July 1994, Mr. Rose serves 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
of 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 trustee of Boston College. He also is a
member of the President's Foreign Intelligence Advisory Board (as Vice
Chairman through February, 1998 and currently, as Chairman). Mr.
Rudman also serves as a member of the Senior Advisory Board of the
Institute of Politics of the Kennedy School of Government at Harvard
University. 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. He is 68 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 and from January 1994 to May 1995, he served as Visiting
Professional Scholar at the Freedom Forum First Amendment Center at
Vanderbilt University. From November 1989 to November 1995, he served
as 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
November 30, 1998, and by all funds in the Dreyfus Family of Funds for which
such person was a Board member (the number of which is set forth in
parenthesis next to each Board member's total compensation)* during 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 $3,125 $619,660 (187)
David W. Burke $2,500 $233,500 (62)
Diane Dunst $2,500 $ 37,750 (16)
Rosalind Gersten $2,250 $ 84,000 (44)
Jacobs
Jay I. Meltzer $2,250 $ 34,000 (16)
Daniel Rose $2,250 $ 76,250 (30)
Warren B. Rudman $2,250 $ 82,000 (25)
Sander Vanocur $2,500 $ 76,250 (30)
_______________________
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $620 for all board members as a group.
** Represents the number of separate portfolios comprising the investment
companies in the Fund complex, including the Fund, for which the Board
member serves.
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.
STEPHANIE D. PIERCE, Vice President, Assistant Secretary and Assistant
Treasurer. Vice President and Client Development Manager of 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.
MARY A. NELSON, Vice President and Assistant Treasurer. Vice President of
the Distributor and Funds Distributor, Inc., and an officer of other
investment companies advised or administered by the Manager. From
September 1989 to July 1994, she was an Assistant Vice President and
Client Manager for The Boston Company, Inc. She is 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. From September 1983 to May 1994, he was Senior Vice
President and Manager of Client Services and Director of Internal Audit
at The Boston Company, Inc. 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 36 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.
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. 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 outstanding shares on March 18, 1999.
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 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" (as defined in the 1940 Act) of any party to
the Agreement, at a meeting held on May 6, 1998. 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, on not less than
90 days' notice, by the Manager. The Agreement will terminate automatically
in the event of its assignment (as defined in the 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; Thomas F. Eggers, Vice Chairman-
Institutional; Lawrence S. Kash, Vice Chairman and a director; J. David
Officer, Vice Chairman 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. Elliott, 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 P. Darcy, A. Paul Disdier, Douglas
Gaylor, Karen M. Hand, Stephen C. Kris, W. Michael Petty, Jill C. Shaffro,
Samuel J. Weinstock, and Monica S. Wieboldt. The Manager also maintains a
research department with a professional staff of portfolio managers and
securities analysts who provide research services for the Fund and for other
funds advised by the Manager.
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.
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, 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.
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 November 30, 1996, 1997 and 1998,
the management fees payable by the Fund amounted to $266,371, $339,956 and
$414,435, respectively, which amounts were reduced by $139,719, $74,725 and
$88,741, respectively, pursuant to undertakings in effect by the Manager,
resulting in $126,652 being paid by the Fund for fiscal 1996, $265,231 being
paid by the Fund for fiscal 1997, and $325,694 being paid by the Fund for
fiscal 1998.
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.
Management understands that some securities dealers, banks or
other financial institutions may impose certain conditions on their clients
which are different from those described in the Fund's prospectus and this
Statement of Additional Information and to the extent permitted by
applicable regulatory authority, may charge their clients direct fees.
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
each business day 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 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 day the Transfer Agent and the New York Stock Exchange are
open for business, or orders made on Saturday, Sunday or any Fund holiday
(e.g., when the New York Stock Exchange is not open for business), will be
credited to the shareholder's Fund account on the second bank business day
following such purchase order. To qualify to use the Dreyfus TeleTransfer
Privilege, the initial payment for purchase of Fund shares must be drawn on,
and redemption proceeds paid to, the same bank and account as are designated
on the Account Application or Shareholder Services Form on file. If the
proceeds of a particular redemption are to be wired to an account at any
other bank, the request must be in writing and signature-guaranteed. See
"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 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 Shareholder
Services Plan, and the purposes for which such expenditures were incurred,
must be made to the Fund's Board for its review. In addition, the
Shareholder Services Plan provides that material amendments of the Plan must
be approved by the Fund's Board and by the Board members who are not
"interested persons" (as defined in the 1940 Act) of the Fund and have no
direct or indirect financial interest in the operation of the Shareholder
Services Plan, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Shareholder Services Plan is subject to
annual approval by such vote of the Board members cast in person at a
meeting called for the purpose of voting on the Plan. The Shareholder
Services Plan was last so approved on November 4, 1998. The Shareholder
Services 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 Shareholder Services Plan.
For the fiscal year ended November 30, 1998, the Fund was charged
$68,800 pursuant to the Shareholder Services Plan.
HOW TO REDEEM SHARES
Redemption Fee. The Fund will deduct a redemption fee equal to
1.00% 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
November 30, 1998, the Fund retained $12 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
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 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 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 1.00% 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 s 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"), but 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 Touchr 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 1-800-782-6620.
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
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 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.
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Management believes that the Fund has qualified for the fiscal
year ended November 30, 1998 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 dividends or distributions 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.
Dividends paid by the Fund will not be subject to the Pennsylvania
personal income tax or to the Philadelphia School District investment net
income tax to the extent that the dividends are attributable to interest
received by the Fund from its investment in Pennsylvania Municipal
Obligations and U.S. Government obligations, including obligations issued by
U.S. possessions. Dividends or distributions by the Fund to a Pennsylvania
resident that are attributable to most other sources may be subject to the
Pennsylvania personal income tax and (for residents of Philadelphia) to the
Philadelphia School District investment net income tax.
Dividends paid by the Fund which are considered "exempt-interest
dividends" for Federal tax purposes are not subject to the Pennsylvania
corporate net income tax. An additional deduction from Pennsylvania taxable
income is permitted for dividends or distributions paid by the Fund
attributable to interest received by the Fund from its investments in
Pennsylvania Municipal Obligations and U.S. Government obligations, to the
extent included in Federal taxable income, but such a deduction is reduced
by any interest on indebtedness incurred to carry the securities and other
expenses incurred in the production of such interest income, including
expenses deducted on the Federal income tax return that would not have been
allowed under the Code if the interest were exempt from Federal income tax.
It is the current position of the Pennsylvania Department of Revenue that
Fund shares are considered exempt assets (with a pro rata exclusion based on
the value of the Fund attributable to its investments in Pennsylvania
Municipal Obligations and U.S. Government obligations) for purposes of
determining a corporation's capital stock value subject to the Pennsylvania
Capital Stock/Franchise Tax.
Shares of the Fund are exempt from Pennsylvania county personal
property taxes to the extent that the Fund's portfolio consists of
Pennsylvania Municipal Obligations and U.S. Government obligations,
including obligations issued by U.S. possessions.
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 as described above.
Offsetting positions held by the Fund involving certain 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, overrides or modifies the provisions of Section 1256
of the Code. As such, all or a portion of any short or long-term capital
gain from certain straddle and/or conversion transactions may be
recharacterized as ordinary income.
If the Fund were treated as entering into straddles by reason of
its engaging in futures contracts, forward contracts, or options
transactions, such straddles would be characterized as "mixed straddles" if
the futures or forward contracts or options transactions comprising a part
of such straddles were governed by Section 1256 of the Code. The Fund may
make one or more elections with respect to mixed straddles. Depending on
which election is made, if any, the results to the Fund may differ. If no
election is made, and the straddle rules apply to positions established by
the Fund, losses realized by the Fund will be deferred to the extent of
unrealized gain in the offsetting position. Moreover, as a result of the
straddle and conversion transaction rules, short-term capital loss on
straddle positions may be recharacterized as long-term capital loss, and
long-term capital gain on straddle positions may be recharacterized as short-
term capital gain 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") with respect to 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 that case, the Fund may have to dispose of
securities which it might otherwise have continued to hold in order to
generate cash to satisfy these distribution requirements.
PERFORMANCE INFORMATION
For the 30-day period ended November 30, 1998, the Fund's yield
was 3.74%. The Fund's yield reflects the waiver of a portion of the
management fee, without which the Fund's yield for the 30-day period ended
November 30, 1998 would have been 3.66%. Current yield is computed pursuant
to a formula which operates as follows: The amount of the Fund's expenses
accrued for the 30-day period (net of reimbursements) is subtracted from the
amount of the dividends and interest earned (computed in accordance with
regulatory requirements) by the Fund during the period. That result is then
divided by the product of: (a) the average daily number of shares
outstanding during the period that were entitled to receive dividends and
(b) the net asset value per share on the last day of the period less any
undistributed earned income per share reasonably expected to be declared as
a dividend shortly thereafter. The quotient is then added to 1, and that
sum is raised to the 6th power, after which 1 is subtracted. The current
yield is then arrived at by multiplying the result by 2.
Based upon a combined 1998 Federal and Pennsylvania personal
income tax rate of 41.29%, the Fund's tax equivalent yield for the 30-day
period ended November 30, 1998 was 6.37%. Without the waiver of a portion
of the management fee referred to above, the Fund's tax equivalent yield for
the 30-day period ended November 30, 1998 would have been 6.20%. Tax
equivalent yield is computed by dividing that portion of the yield or
effective yield (calculated as described above) which is tax exempt by 1
minus a stated tax rate and adding the quotient to that portion, if any, of
the yield of the Fund that is not tax exempt.
The tax equivalent yield noted above represents the application of
the highest Federal and Commonwealth of Pennsylvania marginal personal
income tax rates in effect during 1998. For Federal income tax purposes, a
39.60% tax rate has been used and, for Pennsylvania personal income tax
purposes, a 2.80% tax rate has been used. The tax equivalent figure,
however, does not reflect the potential effect of any local (including, but
not limited to, county, district or city) taxes, including applicable
surcharges. In addition, there may be pending legislation which could
affect such stated tax rates or yield. Each investor should consult its tax
adviser, and consider its own factual circumstances and applicable tax laws,
in order to ascertain the relevant tax equivalent yield.
The Fund's average annual total return for the one year period
ended November 30, 1998, and for the period December 16, 1993 (commencement
of operations) through November 30, 1998, was 6.76% and 6.80%, respectively.
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased with a hypothetical $1,000
payment made at the beginning of the period (assuming the reinvestment of
dividends and distributions), dividing by the amount of the initial
investment, taking the "n"th root of the quotient (where "n" is the number
of years in the period) and subtracting 1 from the result.
The Fund's total return for the period December 16, 1993
(commencement of operations) through November 30, 1998, was 38.59%. Without
the waiver of certain fees and expenses during such period, 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
period), and dividing the result by the net asset value per share at the
beginning of the period.
From time to time, the Fund may use hypothetical tax equivalent
yields or charts in its advertising. These hypothetical yields or charts
will be used for illustrative purposes only and are not indicative of the
Fund's past or future performance.
Advertising materials for the Fund may also refer to or discuss
then current or past economic conditions, developments and/or events,
including those relating to actual or proposed tax legislation. From time
to time, advertising materials for the Fund also may refer to statistical or
other information concerning trends relating to investment companies, as
compiled by industry associations such as the Investment Company Institute,
and to Morningstar, Inc. ratings and related analyses supporting the
ratings. Comparative performance information may be used from time to time
in advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Moody's Bond Survey Bond Index, Lehman Brothers
Municipal Bond Index, Morningstar, Inc. and other industry publications.
The Fund's yield should generally be higher than money market funds (the
Fund, however, does not seek to maintain a stabilized price per share and
may not be able to return an investor's principal), and its price per share
should fluctuate less than long-term bond funds (which generally have
somewhat higher yields).
From time to time, advertising material for the Fund may include
biographical information relating to its portfolio managers and may refer
to, or include commentary by, a portfolio manager relating to investment
strategy, asset growth, current or past business, political, economic or
financial conditions and other matters of general interest to investors.
INFORMATION ABOUT THE FUND
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 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
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, have been selected as independent auditors of the
Fund.
APPENDIX A
Risk Factors--Investing
In Pennsylvania Municipal Obligations
The following information constitutes only a brief summary, does not
purport to be a complete description, and is based on information drawn from
official statements relating to securities offerings of the Commonwealth of
Pennsylvania (the "Commonwealth") and various local agencies, available as
of the date of this Statement of Additional Information. While the Fund has
not independently verified such information, it has no reason to believe
that such information is not correct in all material respects.
General. Pennsylvania historically has been dependent on heavy
industry although recent declines in the coal, steel and railroad industries
have led to diversification of the Commonwealth's economy. Recent sources
of economic growth in Pennsylvania are in the service sector, including
trade, medical and health services, education and financial institutions.
Agriculture continues to be an important component of the Commonwealth's
economic structure, with nearly one-fourth of the Commonwealth's total land
area devoted to cropland, pasture and farm woodlands.
In 1997, the population of Pennsylvania was 12.02 million people,
ranking fifth in the nation. According to the U.S. Bureau of the Census,
Pennsylvania experienced a slight increase in population from the 1988
population of 11.85 million. Pennsylvania has a high proportion of persons
65 or older, and is highly urbanized, with 79% of the 1990 census population
residing in metropolitan statistical areas. The cities of Philadelphia and
Pittsburgh, the Commonwealth's largest metropolitan statistical areas,
together comprise almost 44% of the Commonwealth's total population.
The State's workforce is estimated at 5.9 million people, ranking as
the sixth largest labor pool in the nation. Pennsylvania's average annual
unemployment rate remained below the national average between 1986 and 1990.
Slower economic growth caused the rate to rise to 6.9% in 1991 and 7.5% in
1992. The resumption of faster economic growth resulted in a decrease in
the Commonwealth's unemployment rate to 7.1% in 1993. Seasonally adjusted
as of December 1997 shows an unemployment rate of 4.8%, compared to an
unemployment rate of 4.9% for the United States as a whole.
Financial Accounting. Pennsylvania utilizes the fund method of
accounting and over 150 funds have been established for the purpose of
recording receipts and disbursements, of which the General Fund is the
largest. Most of the operating and administrative expenses are payable from
the General Fund. The Motor License Fund is a special revenue fund that
receives tax and fee revenues relating to motor fuels and vehicles (except
one-half cent per gallon of the liquid fuels tax which is deposited in the
Liquid Fuels Tax Fund for distribution to local municipalities) and all such
revenues are required to be used for highway purposes. Other special
revenue funds have been established to receive specified revenues
appropriated to specific departments, boards and/or commissions. Such funds
include the Game, Fish, Boat, Banking Department, Milk Marketing, State Farm
Products Show, State Racing and State Lottery Funds. The General Fund, all
special revenue funds, the Debt Service Funds and the Capital Project Funds
combine to form the Governmental Fund Types.
Enterprise funds are maintained for departments or programs operated
like private enterprises. The largest of the Enterprise funds is the State
Stores Fund, which is used for the receipts and disbursements of the
Commonwealth's liquor store system. Sale and distribution of all liquor
within Pennsylvania is a government enterprise.
Financial information for the funds is maintained on a budgetary basis
of accounting ("Budgetary"). Since 1984, the Commonwealth has also prepared
financial statements in accordance with generally accepted accounting
principles ("GAAP"). The GAAP statements have been audited jointly by the
Auditor General of the Commonwealth and an independent public accounting
firm. The Budgetary information is adjusted at fiscal year end to reflect
appropriate accruals for financial reporting in conformity with GAAP. The
Commonwealth maintains a June 30th fiscal year end.
The Constitution of Pennsylvania provides that operating budget
appropriations may not exceed the actual and estimated revenues and
available surplus in the fiscal year for which funds are appropriated.
Annual budgets are enacted for the General Fund and for certain special
revenue funds which represent the majority of expenditures of the
Commonwealth.
Revenues and Expenditures. Pennsylvania's Governmental Fund Types
receive over 57% of their revenues from taxes levied by the Commonwealth.
Interest earnings, licenses and fees, lottery ticket sales, liquor store
profits, miscellaneous revenues, augmentations and federal government grants
supply the balance of the receipts to these funds. Revenues not required to
be deposited in another fund are deposited in the General Fund. The major
tax sources for the General Fund are the 6% sales and use tax (34.9% of
General Fund revenues in fiscal 1997), the 2.8% personal income tax (33.2%
of General Fund revenues in fiscal 1997) and the 9.99% corporate net income
tax (19.8% of General Fund revenues in fiscal 1997). Tax and fee proceeds
relating to motor fuels and vehicles are constitutionally dedicated to
highway purposes and are deposited into the Motor License Fund. The major
sources of revenues for the Motor License Fund include the liquid fuels tax
and the oil company franchise tax. That Fund also receives revenues from
fees levied on heavy trucks and from taxes on fuels used for aviation
purposes. These latter revenues are restricted to the repair and
construction of highway bridges and aviation programs, respectively.
Revenues from lottery ticket sales are deposited in the State Lottery Fund
and are reserved by statute for programs to benefit senior citizens.
Pennsylvania's major expenditures include funding for education ($6.67
billion of fiscal 1995 expenditures, $6.99 billion of the fiscal 1996
expenditures and $7.0 billion of fiscal 1997 expenditures) and public health
and human services ($12.4 billion of fiscal 1995 expenditures, $12.9 billion
of fiscal 1996 expenditures and $13.4 billion of fiscal 1997 expenditures).
Governmental Fund Types: Financial Condition/Results of Operations
(GAAP Basis). The period from fiscal year 1993 through fiscal 1997 was a
time of steady, modest economic growth and low rates of inflation. These
economic conditions, together with tax reductions in the several years
following the tax rate increases and tax base expansions enacted in fiscal
1991 for the General Fund, produced tax revenue gains averaging 4.1% per
year during the period. Total revenues during this same period increased at
a 4.7% average rate. Intergovernmental revenue recorded the largest
percentage gain during this period, averaging 8.1%. A large portion of the
increase for intergovernmental revenue occurred in fiscal 1996 when an
accounting change in the General Fund resulted in food stamp coupon revenue
received from the federal government being recorded as income to the
Commonwealth. Expenditures and other uses during the fiscal 1993 through
fiscal 1997 period rose at a 3.8% rate, led by an average 13.8% annual
increase for protection of persons and property program costs. This high
rate of increase reflects the costs to acquire, staff and operate expanded
prison facilities to house a larger prison population. Public health and
welfare program costs expanded an average 5.4% annually during this period,
the second largest rate of increase for program categories. Assets for the
governmental fund types at the end of fiscal 1997 were $6,575.2 million, an
increase of $782.6 million over the previous fiscal year, while liabilities
declined by $132.0 million to $3,674.3 million. At the close of fiscal
1997, the fund balance for the governmental fund types totaled $2,900.9
million, an increase of $914.6 million.
General Fund: Financial Condition/Results of Operations.
Five Year Overview (GAAP Basis). For the five year period fiscal 1992
through fiscal 1997, total revenues and other sources rose at a 4.7% average
annual rate while total expenditures and other uses grew by 6.0% annually.
During the five year period from fiscal 1993 through fiscal 1997,
revenues and other sources increased by an average 4.7% annually. Tax
revenues during this same period increased by an annual average of 4.1%.
Intergovernmental revenues, at an 8.5% annual average rate of increase, were
the revenue source with the largest rate of growth over the five-year
period. An accounting change in fiscal 1996 that made food stamp coupon
revenue from the federal government an item of intergovernmental revenue is
largely responsible for this increase.
Expenditures and other uses during the fiscal 1993 through fiscal 1997
period rose at an average annual rate of 4.9%. Program costs for protection
of persons and property increased an average 13.8% annually, the largest
growth rate of all programs. Its high rate of increase reflects the costs
to acquire, staff and operate expanded prison facilities to house a larger
prison population. Public health and welfare program cost increased at a
5.7% annual average rate during the period. Efforts to control costs for
various social programs and the presence of favorable economic conditions
have helped restrain these costs.
Fiscal 1995 Financial Results (GAAP Basis). Revenues and other sources
totaled $23.772 billion, an increase of $1.135 billion (5.0%) over the prior
fiscal year. The greatest increase was $817.9 million in taxes which
represents a 5.6% increase over taxes in the prior fiscal year.
Expenditures and other uses rose by $1.364 billion to $23.821 billion, an
increase over the prior fiscal year of 6.1 percent. Consequently, an
operating deficit of $49.8 million was recorded for the fiscal year and led
to a decline in fund balance to $688.3 million at June 30, 1995. Two items
predominately contributed to the fund balance decline. First, a more
comprehensive procedure was used for fiscal 1995 to compute the liabilities
for certain public welfare programs leading to an increase for the year-end
accruals. Second, a change to the methodology used to calculate the year-
end accrual for corporate tax payables increased the tax refund liability by
$72 million for the 1995 fiscal year when compared to the previous fiscal
year.
Fiscal 1995 Financial Results (Budgetary Basis). Commonwealth revenues
for the 1995 fiscal year were above estimate and exceeded fiscal year
expenditures and encumbrances. Fiscal 1995 was the fourth consecutive fiscal
year the Commonwealth reported an increase in the fiscal year-end
unappropriated balance. Prior to reserves for transfer to the Tax
Stabilization Reserve Fund, the fiscal 1995 closing unappropriated surplus
was $540.0 million, an increase of $204.2 million over the fiscal 1994
closing unappropriated surplus prior to transfers. Commonwealth revenues
were $459.4 million, 2.9%, above the estimate of revenues used at the time
the budget was enacted. Corporation taxes contributed $329.4 million of the
additional receipts due largely to higher receipts from the corporate net
income tax. Sales and use tax revenues also showed strong year-over-year
growth that produced above-estimate revenue collections. Sales and use tax
revenues were $5.527 billion, $128.8 million above the enacted budget
estimate and 7.9% over fiscal 1994 collections. Personal income tax
receipts for fiscal 1995 were slightly above the budgeted estimate. The
higher than estimated revenues from tax sources were due to faster economic
growth in the national and state economy than had been projected when the
budget was adopted. The higher rate of economic growth for the nation and
the state gave rise to increases in employment, income and sales that were
higher than expected and translated into above-estimate tax revenues.
Fiscal 1996 Financial Results (GAAP Basis): For fiscal 1996 the fund
balance was drawn down $53.1 million from the balance at the end of fiscal
1995 to $635.2 million. A planned draw down of the budgetary unappropriated
surplus during fiscal 1996 contributed to expenditures and other uses
exceeding revenues and other sources by $28.0 million. Consequently, the
unreserved fund balance declined by $61.1 million, reducing the balance to
$381.8 million at the end of fiscal 1996. Total revenues and other sources
increased by 8.7% for the fiscal year led by a 24.2% increase in
intergovernmental revenues.
Fiscal 1996 Financial Results (Budgetary Basis): Commonwealth
revenues for the fiscal year were above estimate and exceeded fiscal year
expenditures and encumbrances. Prior to reserves for transfer to the Tax
Stabilization Reserve Fund, the fiscal 1996 closing unappropriated surplus
was $183.8 million, $65.5 million above estimate. Commonwealth revenues
(prior to tax refunds) for the fiscal year increased by $113.9 million over
the prior fiscal year to $16.339 billion representing a growth rate of 0.7%.
Tax rate reductions and other tax law changes substantially reduced the
amount and rate of revenue growth for the fiscal year. Sales and use tax
revenues were $5.682 billion or 2.8% over fiscal 1995 collections. Personal
income tax receipts for fiscal 1996 totaled $5.374 billion, or 5.7% over
collections for fiscal 1995. Included in that increase was $67 million in
net receipts from a tax amnesty program that was available for a portion of
the 1996 fiscal year. Some portion of the tax amnesty receipts represent
normal collections of delinquent taxes. The tax amnesty program is not
expected to be repeated.
Funds held in reserve at the end of fiscal 1995 for transfer to the Tax
Stabilization Reserve Fund totaled $111.0 million. The Tax Stabilization
Reserve Fund was anticipated to have an available balance of $182.8 million
at June 30, 1996, representing approximately 1.1% of general fund annual
commonwealth revenues.
Fiscal 1997 Financial Results (GAAP Basis): For fiscal 1997, assets
increased $563.4 million and liabilities declined $166.3 million to produce
a $729.7 million increase in fund balance at June 30, 1997. The fund
balance increase during fiscal 1997 has brought a restoration of an
undesignated-unreserved balance. The $187.3 million undesignated-unreserved
balance is the first recorded since fiscal 1994 and is the largest amount
since fiscal 1987. Total revenues and other sources rose 3.5% for fiscal
1997. An increase of 5.5% in tax revenue aided by an improving state
economy was partially offset by a $175.2 million decline in
intergovernmental revenues.
Expenditures and other uses increased by 1.0% for the fiscal year. As
in the past several fiscal years, expenditure increases were led by
protection of persons and property program costs. Fiscal 1997 costs for
this program rose by 4.7%, the largest increase for a program, but well
below the 17.1% average annual increase that occurred over the four fiscal
years prior to fiscal 1997. General government program costs for fiscal
1997 declined by 14.3% from the fiscal year earlier. A reduction in
estimated expenditures for maintaining the Commonwealth's self-insured
worker's compensation program is largely responsible for the decline.
Fiscal 1997 Financial Results (Budgetary Basis): The unappropriated
balance of commonwealth revenues increased during the 1997 fiscal year by
$432.9 million. Higher than estimated revenues and slightly lower
expenditures than budgeted caused the increase. The unappropriated balance
rose from an adjusted amount of $158.5 million at the beginning of fiscal
1997, to $591.4 million (prior to reserves for transfer to the Tax
Stabilization Reserve Fund) at the close of the fiscal year. Transfers to
the Tax Stabilization Reserve Fund for fiscal 1997 operations were $88.7
million, representing the normal 15% of the ending unappropriated balance,
plus an additional $100 million authorized by the General Assembly when it
enacted the fiscal 1998 budget.
Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $17,320.6 million, $576.1 million (3.4%) above the estimate made at
the time the budget was enacted. Revenue from taxes was the largest
contributor to higher than estimated receipts. Tax revenue in fiscal 1997
grew 6.1% over tax revenues in fiscal 1996. This rate of increase was not
adjusted for legislated tax reductions that affected receipts during both of
those fiscal years and therefor understates the actual underlying rate of
tax revenue for the fiscal year. Personal income collections were $236.3
million over estimate, representing a 6.9% increase over fiscal 1996
receipts. Receipts of the sales and use tax were $185.6 million over
estimate, representing a 6.2% increase. Collections of corporate taxes,,
led by the capital stock and franchise and the gross receipts taxes, also
exceeded their estimates for the fiscal year. Non-tax revenues were $19.8
million (5.8%) over estimate mostly due to higher than anticipated interest
earnings.
Expenditures from commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to
the estimate made in February 1997 with the presentation of the Governor's
fiscal 1998 budget request. Total expenditures represent an increase over
fiscal 1996 expenditures of 1.7%. Supplemental appropriations for fiscal
1997 totaled $169.3 million. The largest supplemental appropriations
included $100.1 million for medical assistance costs due to implementation
of managed medical care for a portion of the medical assistance caseload,
and an additional $50 million for bond debt service for potential use to
produce present value savings.
Fiscal 1998 Budget: The budget for fiscal 1998 was enacted in May
1997. Commonwealth revenues for the fiscal year at that time were estimated
to be $17.435 billion before reserves for tax refunds. That estimate
represented an increase over estimated fiscal 1997 commonwealth revenues of
1.0 percent. Although actual fiscal 1997 revenues exceeded the estimate,
the adopted fiscal 1998 budget revenue estimate was not changed and
represents a 0.7 percent increase over actual fiscal 1997 revenues.
Commonwealth Debt. Current constitutional provisions permit
Pennsylvania to issue the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster, (ii) electorate
approved debt, (iii) debt for capital projects subject to an aggregate debt
limit of 1.75 times the annual average tax revenues of the preceding five
fiscal years, (iv) tax anticipation notes payable in the fiscal year of
issuance. All debt except tax anticipation notes must be amortized in
substantial and regular amounts.
General obligation for non-highway purposes debt totaled $4.047 billion
at June 30, 1997. Over the 10-year period ended June 30, 1997, total
outstanding general obligation debt for non-highway purposes increased at an
annual rate of 3.3%. All outstanding general obligation bonds of the
Commonwealth are rated AA- by Standard and Poor's Ratings Group, A1 by
Moody's Investors Service Inc., and AA- by Fitch IBCA, Inc. Ratings Group.
The ratings reflect only the views of the rating agencies.
Pennsylvania engages in short-term borrowing to fund expenses within a
fiscal year through the sale of tax anticipation notes which must mature
within the fiscal year of issuance. The principal amount issued, when added
to that already outstanding, may not exceed an aggregate 20% of the revenues
estimated to accrue to the appropriate fund in the fiscal year. The
Commonwealth is not permitted to fund deficits between fiscal years with any
form of debt. All year-end deficit balances must be funded within the
succeeding fiscal year's budget. Pennsylvania issued a total of $550.0
million of tax anticipation notes for the account of the General Fund in
fiscal 1997, all of which matured on June 30, 1997, to be paid from fiscal
1997 General Fund receipts.
Pending the issuance of bonds, Pennsylvania may issue bond anticipation
notes subject to the applicable statutory and constitutional limitations
generally imposed on bonds. The term of such borrowings may not exceed
three years. As of December 31, 1997, there were $46.4 million of bond
anticipation notes outstanding.
State-related Obligations. Certain state-created agencies have
statutory authorization to incur debt for which no legislation providing for
state appropriations to pay debt service thereon is required. The debt of
these agencies is supported by assets of, or revenues derived from, the
various projects financed, and the debt of such agencies is not an
obligation of Pennsylvania although some of the agencies are indirectly
dependent on Commonwealth appropriations. The following agencies had debt
currently outstanding as of December 31, 1997: Delaware River Joint Toll
Bridge Commission ($52.7 million), Delaware River Port Authority ($512.3
million), Pennsylvania Economic Development Financing Authority ($1.081
billion), Pennsylvania Energy Development Authority ($72.8 million),
Pennsylvania Higher Education Assistance Agency ($1.584 billion),
Pennsylvania Higher Educational Facilities Authority ($2.777 billion),
Pennsylvania Industrial Development Authority ($402.1 million), Pennsylvania
Infrastructure Investment Authority ($196.4 million), Pennsylvania Turnpike
Commission ($1.178 billion), Philadelphia Regional Port Authority ($59.5
million), and the State Public School Building Authority ($310.5 million).
In addition, the Governor is statutorily required to place in the budget of
the Commonwealth an amount sufficient to make up any deficiency in the
capital reserve fund created for, or to avoid default on, bonds issued by
the Pennsylvania Housing Finance Agency ($2.631 billion of revenue bonds as
of December 31, 1997), and an amount of funds sufficient to alleviate any
deficiency that may arise in the debt service reserve fund for bonds issued
by The Hospitals and Higher Education Facilities Authority of Philadelphia
($1.19 million of the loan principal was outstanding as of June 30, 1997).
Litigation. Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt service
on its obligations, including suits relating to the following matters: (a)
Approximately 3,500 tort suits are pending against the Commonwealth pursuant
to the General Assembly's 1978 approval of a limited waiver of sovereign
immunity which permits recovery of damages for any loss up to $250,000 per
person and $1,000,000 per accident ($27 million was appropriated from the
Motor License Fund for fiscal 1998); (b) The ACLU filed suit in April 1990
in federal court demanding additional funding for child welfare services (no
estimates of potential liability are available), which the Commonwealth is
seeking to have dismissed based on, among other things, the settlement in a
similar Commonwealth Court action that provided for more funding in fiscal
1991 as well as a commitment to pay to counties $30.0 million over 5 years.
In January 1992, the district court denied the ACLU's motion for class
certification, but that ruling was overturned by the Third Circuit and the
parties have resumed discovery; (c) In 1987, the Supreme Court of
Pennsylvania held that the statutory scheme for county funding of the
judicial system was in conflict with the Pennsylvania Constitution but
stayed judgment pending enactment by the legislature of funding consistent
with the opinion. The legislature has yet to consider legislation
implementing the judgment; (d) In November 1990, the ACLU brought a class
action suit on behalf of the inmates in thirteen Commonwealth correctional
institutions challenging confinement conditions and including a variety of
other allegations. In 1995, the parties agreed to a three-year court
monitored settlement which will expire in January 1998; (e) Actions have
been filed in both state and federal court by an association of rural and
small schools and several individual school districts and parents
challenging the constitutionality of the Commonwealth's system for funding
local school districts. The federal case has been stayed pending resolution
of the state case. The state trial was held in January 1997, and the record
remains open. There is no available estimate of potential liability; and
(f) Several banks have filed suit against the Commonwealth contesting the
constitutionality of a 1989 law imposing a bank shares tax on banking
institutions. After the Commonwealth Court ruled in favor of the
Commonwealth, finding no constitutional deficiencies, Fidelity Bank, the
Commonwealth, and certain intervenor banks filed Notices of Appeal to the
Pennsylvania Supreme Court on August 5, 1994. Pursuant to a Settlement
Agreement, dated as of April 21, 1995, the Commonwealth agreed to enter a
credit in favor of Fidelity in the amount of $4,100,000 in settlement of the
constitutional and non-constitutional issues including interest. Pursuant
to a separate Settlement Agreement, dated as of April 21, 1995, the
Commonwealth settled with the intervening banks, referred to as "New Banks."
As part of the settlement, the Commonwealth agreed neither to assesses nor
attempt to recoup any new bank tax credits which had been granted or taken
by any of the intervening banks. Although the described settlements have
quantified the Commonwealth's exposure to Fidelity and the intervening
banks, other banks have filed protective Petitions, and one or more of these
banks may pursue new constitutional challenges in the Commonwealth Court;
however, the Commonwealth Court has previously examined and confirmed the
Act's constitutionality; (g) On November 11, 1993, the Commonwealth of
Pennsylvania, Department of Transportation and Envirotest/Synterra Partners
("Envirotest"), a partnership, entered into a "Contract for Centralized
Emissions Inspection Facilities." Thereafter, Envirotest acquired certain
land and constructed approximately 85 automobile emissions inspection
facilities throughout various regions of the Commonwealth. By Act of the
General Assembly in October 1994 (Act No. 1994-95), the program was
suspended and the Department of Transportation was prohibited from expending
funds to implement the program. Envirotest sued, and on December 15, 1995,
Envirotest Systems Corporation, Envirotest Partners (successor to
Envirotest/Synterra Partners) and the Commonwealth of Pennsylvania entered
into a Settlement Agreement pursuant to which Envirotest will receive $145
million by installment payments through 1998; and (h) In November 1995, the
Commonwealth and the Governor, along with the City of Philadelphia and its
Mayor, were joined as additional respondents in an enforcement action
commenced in Commonwealth Court in 1973 by the Pennsylvania Human Relations
Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The enforcement action was pursued to
remedy unintentional conditions of segregation in the public schools of
Philadelphia. The Commonwealth and the City were joined in the "remedial
phase" of the proceeding to determine their liability, if any, and to pay
additional costs necessary to remedy the unlawful conditions found to exist
in the Philadelphia public schools. After trial, Judge Smith issued an
Opinion and Order, granting in relevant part, judgement in favor of the
School District of Philadelphia and ASPIRA and against the Commonwealth and
Governor. The Commonwealth appealed and requested the Supreme Court to
enter judgements in favor of the Commonwealth and the Governor on all
claims. Briefs have been filed, and the matter is awaiting argument before
the Supreme Court.
Philadelphia. The City of Philadelphia is the largest city in the
Commonwealth, with an estimated population of 1,585,577 people according to
the 1990 Census. Philadelphia functions both as a city of the first class
and as a county for the purpose of administering various governmental
programs.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class
cities in remedying fiscal emergencies was enacted by the General Assembly
and approved by the Governor in June 1991. PICA is designed to provide
assistance through the issuance of funding debt to liquidate budget deficits
and to make factual findings and recommendations to the assisted city
concerning its budgetary and fiscal affairs. An intergovernmental
cooperation agreement between Philadelphia and PICA was approved by City
Council and the PICA Board and signed by the Mayor in January, 1992. At
this time, Philadelphia is operating under a five year fiscal plan approved
by PICA on May 20, 1997.
PICA has issued $1,761,710,000 of its Special Tax Revenue Bonds. This
financial assistance has included the refunding of certain general
obligation bonds to fund capital projects and to liquidate the Cumulative
General Fund balance deficit as of June 30, 1992, of $224.9 million. The
audited General Fund balance as of June 30, 1997, showed a surplus of
approximately $128.8 million.
APPENDIX B
Description of S&P, Moody's and Fitch ratings:
S&P
Municipal Bond Ratings
An S&P municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A
Principal and interest payments on bonds in this category are regarded
as safe. This rating describes the third strongest capacity for payment of
debt service. It differs from the two higher ratings because:
General Obligation Bonds -- There is some weakness in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer
to meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Of the investment grade, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several
of the above factors could contribute to a lesser capacity for payment of
debt service. The difference between "A" and "BBB" rating is that the
latter shows more than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC, CC, C
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB
Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payment.
B
Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC
Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to
meet timely payments of principal. In the event of adverse business,
financial or economic conditions, it is not likely to have the capacity to
pay interest and repay principal.
CC
The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C
The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
D
Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the
major ratings categories.
Municipal Note Ratings
SP-1
The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus sign (+) designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days.
A
Issues assigned this rating 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.
A-1
This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus sign (+)
designation.
A-2
Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.
Moody's
Municipal Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca
Bonds which are rated Ca present obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Generally, Moody's provides either a generic rating or a rating with a
numerical modifier of 1 for bonds in each of the generic rating categories
Aa, A, Baa, Ba and B. Moody's also provides numerical modifiers of 2 and 3
in each of these categories 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 its generic rating category; the
modifier 2 indicates that the issue is in the mid-range of the generic
category; and the modifier 3 indicates that the issue is in the low end of
the 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 Ratings
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 will normally be
evidenced by leading market positions in well established industries, high
rates of return on funds employed, conservative capitalization structures
with moderate reliance on debt and ample asset protection, broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Fitch
Municipal Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to
other obligations of the issuer, the current financial condition and
operative performance of the issuer and of any guarantor, as well as the
political and economic environment that might affect the issuer's future
financial strength and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have an adverse
impact on these bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirements.
B
Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if
not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC
Bonds rated CC are minimally protected. Default payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or
principal.
DDD, DD and D
Bonds rated DDD, DD and D are in actual or imminent default of interest
and/or principal payments. Such bonds are extremely speculative and should
be valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery on these bonds and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36 months
or the DDD, DD or D categories.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
