UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-6718
DREYFUS INVESTMENT GRADE FUNDS, INC.
(Exact name of Registrant as specified in charter)
c/o The Dreyfus Corporation
200 Park Avenue
New York, New York 10166
(Address of principal executive offices) (Zip code)
Mark N. Jacobs, Esq.
200 Park Avenue
New York, New York 10166
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 922-6000
Date of fiscal year end: 7/31
Date of reporting period: 7/31/03
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
Dreyfus
Institutional Yield
Advantage Fund
ANNUAL REPORT July 31, 2003
YOU, YOUR ADVISOR AND
DREYFUS
A MELLON FINANCIAL COMPANY(TM)
The views expressed in this report reflect those of the portfolio manager only
through the end of the period covered and do not necessarily represent the views
of Dreyfus or any other person in the Dreyfus organization. Any such views are
subject to change at any time based upon market or other conditions and Dreyfus
disclaims any responsibility to update such views. These views may not be relied
on as investment advice and, because investment decisions for a Dreyfus fund are
based on numerous factors, may not be relied on as an indication of trading
intent on behalf of any Dreyfus fund.
Not FDIC-Insured * Not Bank-Guaranteed * May Lose Value
Contents
THE FUND
- --------------------------------------------------
2 Letter from the Chairman
3 Discussion of Fund Performance
6 Fund Performance
7 Statement of Investments
14 Statement of Financial Futures
15 Statement of Assets and Liabilities
16 Statement of Operations
17 Statement of Changes in Net Assets
19 Financial Highlights
21 Notes to Financial Statements
27 Report of Independent Auditors
28 Board Members Information
30 Officers of the Fund
FOR MORE INFORMATION
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Back Cover
The Fund
Dreyfus Institutional
Yield Advantage Fund
LETTER FROM THE CHAIRMAN
Dear Shareholder:
This annual report for Dreyfus Institutional Yield Advantage Fund covers the
12-month period from August 1, 2002, through July 31, 2003. Inside, you'll find
valuable information about how the fund was managed during the reporting period,
including a discussion with Michael Hoeh, portfolio manager and a member of the
Dreyfus Taxable Fixed Income Team that manages the fund.
Bonds generally continued to rally during most of the reporting period, driven
higher by a combination of declining interest rates and improving investor
sentiment. Corporate bonds in particular rose sharply as companies paid down
debt, trimmed expenses and adopted more rigorous standards of corporate
governance in the wake of last year's high-profile accounting scandals. However,
some of the more interest-rate-sensitive sectors of the bond market began to
give back a significant amount of their gains over the last several weeks of the
reporting period, triggered by strong interest-rate volatility and a sharp
sell-off in certain areas of the bond market.
With yields on some types of bonds near historical lows, maintaining a steady
stream of current income has been a challenge for many investors. What should an
income-oriented investor do now? While we believe that bonds continue to
represent an important component of a well-balanced investment portfolio, your
financial advisor may be in the best position to recommend the income strategies
that are right for you in today's market environment.
Thank you for your continued confidence and support.
Sincerely,
/s/ STEPHEN E. CANTER
Stephen E. Canter
Chairman and Chief Executive Officer
The Dreyfus Corporation
August 15, 2003
2
DISCUSSION OF FUND PERFORMANCE
Michael Hoeh, Portfolio Manager Dreyfus Taxable Fixed Income Team
How did Dreyfus Institutional Yield Advantage Fund perform relative to its
benchmark?
For the 12-month period ended July 31, 2003, the fund's Institutional shares
achieved a total return of 1.37% and its Investor shares achieved a total return
of 1.12% .(1) In comparison, the Salomon Smith Barney 1-Year Treasury
Benchmark-on-the-Run Index, the fund' s benchmark, achieved a total return of
2.00% for the same period.(2)
We attribute the fund and market's overall performance during the reporting
period to declining interest rates in a struggling economy. The fund produced
lower returns than its benchmark, primarily because of rising credit concerns in
the corporate bond and asset-backed securities markets and a surge of
prepayments in the mortgage-backed securities market during the first half of
the reporting period. Better performance during the reporting period's second
half offset most, but not all, of the fund's lagging relative returns.
WHAT IS THE FUND'S INVESTMENT APPROACH?
The fund seeks as high a level of current income as is consistent with the
preservation of capital, with minimal changes in share price. To pursue its
goal, the fund invests only in investment-grade fixed-income securities of U.S.
and foreign issuers or the unrated equivalent as determined by Dreyfus. These
securities may include U.S. government bonds and notes, corporate bonds,
asset-backed securities and mortgage-related securities.
To help reduce share price fluctuations, the fund seeks to keep the average
effective duration -- a measure of sensitivity to changing interest rates -- of
its overall portfolio at one year or less. Although we expect the fund's average
effective duration and its average effective maturity -- the amount of time
until the fund' s holdings mature or
The Fund 3
DISCUSSION OF FUND PERFORMANCE (CONTINUED)
are redeemed, on average -- to follow each other closely, we may invest in
securities with effective final maturities of any length.
When choosing securities for the fund, we analyze many factors in various
fixed-income market sectors. We then decide how to allocate the fund's assets
across these sectors and in which securities to invest.
What other factors influenced the fund's performance?
When the reporting period began, investors were generally pessimistic about the
prospects for the U.S. economy as the stock market hit new lows, corporations
refrained from spending and the unemployment rate rose. These factors were
intensified by corporate scandals and rising tensions between the United States
and Iraq.
Because investment-grade corporate bond prices had retreated to levels we
believed to be attractive, the fund began the reporting period with relatively
heavy exposure to corporate securities. However, prices for these investments
continued to fall over the remainder of 2002 amid persistent credit-quality
concerns. The fund' s performance was also hindered when mortgage-backed
securities lost value amid a surge in mortgage refinancing activity, and
asset-backed securities suffered when two major issuers declared bankruptcy.
Nonetheless, our emphasis on investment-grade corporate securities positioned
the fund well for the sharp rally that ensued in 2003. Even before the war in
Iraq began, investors began to look forward to stronger economic growth, and
they apparently recognized that corporate bond prices were low compared to
historical averages. Finally, the fund benefited from its holdings of Treasury
Inflation Protected Securities, which rallied strongly during the first half of
2003.
In addition, the fund's performance during the reporting period's second half
was helped by our duration management strategy. Because we believed toward the
end of May that bond yields were more likely to rise than fall, we generally
held the fund' s overall average duration to approximately 0.351 years. This
position enabled the fund to avoid the brunt of the market's declines when bond
yields rose sharply in July.
4
WHAT IS THE FUND'S CURRENT STRATEGY?
We continue to position the fund's average duration for moderately stronger
economic growth. However, after their strong rally, we recently reduced the
fund' s emphasis on corporate securities to a smaller percentage of the overall
portfolio. We have also reduced the fund's mortgage-backed exposure and modestly
increased the fund's holdings of U.S. government agency debentures, which were
under pressure and, in our opinion, presented a buying opportunity. In general
we are pursuing a more "sector-neutral" stance that we believe is prudent given
the current uncertainty that still exists in the marketplace.
August 15, 2003
(1) TOTAL RETURN INCLUDES REINVESTMENT OF DIVIDENDS AND ANY CAPITAL GAINS PAID.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE, YIELD AND
INVESTMENT RETURN FLUCTUATE SUCH THAT UPON REDEMPTION, FUND SHARES MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. RETURN FIGURES PROVIDED
REFLECT THE ABSORPTION OF FUND EXPENSES BY THE DREYFUS CORPORATION PURSUANT
TO AN UNDERTAKING IN EFFECT THAT MAY BE EXTENDED, TERMINATED OR MODIFIED AT
ANY TIME. HAD THESE EXPENSES NOT BEEN ABSORBED, THE FUND'S RETURN WOULD
HAVE BEEN LOWER.
(2) SOURCE: BLOOMBERG L.P. -- REFLECTS REINVESTMENT OF DIVIDENDS AND, WHERE
APPLICABLE, CAPITAL GAIN DISTRIBUTIONS. THE SALOMON SMITH BARNEY 1-YEAR
TREASURY BENCHMARK-ON-THE-RUN INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE AVERAGE YIELD ON 1-YEAR U.S. TREASURY BILLS. THE
INDEX DOES NOT TAKE INTO ACCOUNT CHARGES, FEES AND OTHER EXPENSES. TOTAL
RETURN IS CALCULATED ON A MONTH-END BASIS.
The Fund 5
FUND PERFORMANCE
Dreyfus Institutional Dreyfus Institutional Citigroup
Yield Advantage Yield Advantage 1-Year Treasury
PERIOD Fund Fund Benchmark-on-the-Run
( Institutional shares) ( Investor shares) Index *
11/15/01 10,000 10,000 10,000
1/31/02 10,093 10,087 10,027
4/30/02 10,187 10,176 10,107
7/31/02 10,301 10,282 10,230
10/31/02 10,351 10,327 10,308
1/31/03 10,332 10,302 10,359
4/30/03 10,366 10,329 10,409
7/31/03 10,441 10,397 10,434
Comparison of change in value of $10,000 investment in Dreyfus Institutional
Yield Advantage Fund Institutional shares and Investor shares and the Citigroup
1-Year Treasury Benchmark-on-the-Run Index
- --------------------------------------------------------------------------------
Average Annual Total Returns AS OF 7/31/03
Inception From
Date 1 Year Inception
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INSTITUTIONAL SHARES 11/15/01 1.37% 2.56%
INVESTOR SHARES 11/15/01 1.12% 2.30%
((+)) SOURCE: BLOOMBERG L.P.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE FUND'S PERFORMANCE
SHOWN IN THE GRAPH AND TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
THE ABOVE GRAPH COMPARES A $10,000 INVESTMENT MADE IN INSTITUTIONAL AND INVESTOR
SHARES OF DREYFUS INSTITUTIONAL YIELD ADVANTAGE FUND ON 11/15/01 (INCEPTION
DATE) TO A $10,000 INVESTMENT MADE IN THE CITIGROUP 1-YEAR TREASURY
BENCHMARK-ON-THE-RUN INDEX (THE "INDEX") ON THAT DATE. FOR COMPARATIVE PURPOSES,
THE VALUE OF THE INDEX ON 11/30/01 IS USED AS THE BEGINNING VALUE ON 11/15/01.
THE FUND'S INSTITUTIONAL SHARES ARE NOT SUBJECT TO A RULE 12B-1 FEE. THE FUND'S
INVESTOR SHARES ARE SUBJECT TO A 0.25% ANNUAL RULE 12B-1 FEE. ALL DIVIDENDS AND
CAPITAL GAIN DISTRIBUTIONS ARE REINVESTED.
THE FUND INVESTS PRIMARILY IN INVESTMENT-GRADE FIXED-INCOME SECURITIES OF U.S.
AND FOREIGN ISSUERS AND SEEKS TO MAINTAIN A DOLLAR-WEIGHTED AVERAGE MATURITY OF
ONE YEAR OR LESS. THE FUND'S PERFORMANCE SHOWN IN THE LINE GRAPH TAKES INTO
ACCOUNT ALL APPLICABLE FEES AND EXPENSES. THE INDEX IS AN UNMANAGED INDEX
GENERALLY REPRESENTATIVE OF THE AVERAGE YIELD ON 1-YEAR U.S. TREASURY BILLS. THE
INDEX DOES NOT TAKE INTO ACCOUNT CHARGES, FEES AND OTHER EXPENSES. FURTHER
INFORMATION RELATING TO FUND PERFORMANCE, INCLUDING EXPENSE REIMBURSEMENTS, IF
APPLICABLE, IS CONTAINED IN THE FINANCIAL HIGHLIGHTS SECTION OF THE PROSPECTUS
AND ELSEWHERE IN THIS REPORT.
6
STATEMENT OF INVESTMENTS
July 31, 2003
Principal
BONDS AND NOTES--99.5% Amount ($) Value ($)
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AIRCRAFT & AEROSPACE--1.0%
Boeing Capital,
Medium-Term Notes, Ser. XI, 6.68%, 2003 2,000,000 2,035,050
ASSET-BACKED CTFS./BUSINESS--2.5%
ACAS Business Loan Trust:
Ser. 2002-1A, Cl. B, 2.6%, 2012 1,300,000 (a,b) 1,286,870
Ser. 2002-2A, Cl. B, 2.7%, 2015 2,500,000 (a,b) 2,475,000
CapitalSource Commercial Loan Trust,
Ser. 2003-1A, Cl. B, 2.25%, 2012 1,250,000 (a,b) 1,250,000
5,011,870
ASSET-BACKED CTFS./CREDIT CARDS--1.0%
Fingerhut Master Trust,
Ser. 1998-2, Cl. A, 6.23%, 2007 257,582 259,759
MBNA Master Credit Card Trust,
Ser. 1999-H, Cl. C, 7.45%, 2006 1,700,000 (a) 1,756,313
2,016,072
ASSET-BACKED CTFS./HEALTH CARE--.7%
NPF XII,
Ser. 1999-1, Cl. A, 6.36%, 2005 6,000,000 (a,c,d) 1,291,200
ASSET-BACKED CTFS./HOME EQUITY LOANS--9.6%
AAMES Mortgage Trust,
Ser. 1998-C, Cl. A2A, 5.912%, 2028 1,067,050 1,067,127
American Business Financial Services,
Ser. 1997-2, Cl. A5, 7.125%, 2029 1,799,831 1,906,673
Centex Home Equity,
Ser. 2001-B, Cl. A2, 5.35%, 2022 2,126 2,125
Conseco Finance Securitizations:
Ser. 2000-D, Cl. A3, 7.89%, 2018 178,681 179,703
Ser. 2001-B, Cl. 2A1A, 6.428%, 2032 2,932,792 3,062,401
Ser. 2001-C, Cl. A3, 5.39%, 2025 563,784 568,876
Equivantage Home Equity Loan Trust,
Ser. 1996-2, Cl. A4, 8.05%, 2027 3,450,130 3,449,102
Long Beach Mortgage Loan Trust,
Ser. 2003-3, Cl. A, 1.42%, 2033 1,983,884 (b) 1,983,884
The Money Store Home Equity Trust,
Ser. 1998-B, Cl. AF8, 6.11%, 2010 2,955,374 3,047,318
Residential Asset Mortgage Products,
Ser. 2002-RZ2, Cl. A2, 4.35%, 2024 3,117,130 3,118,543
Residential Asset Securities,
Ser. 1998-KS3, Cl. AI7, 5.98%, 2029 434,562 458,459
18,844,211
The Fund 7
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
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ASSET-BACKED CTFS./MANUFACTURED HOUSING--1.9%
Bombardier Capital Mortgage Securitization,
Ser. 2000-A, Cl. A2, 7.575%, 2030 4,395,568 3,695,024
AUTOMOTIVE--2.3%
DaimlerChrysler,
Gtd. Medium-Term Notes, Ser. C, 1.51%, 2003 675,000 (b) 675,037
GMAC,
Medium-Term Notes, 6.38%, 2004 3,700,000 3,784,094
4,459,131
BANKING--4.9%
Deutsche Bank NY,
Notes, 2.19%, 2005 5,000,000 (b) 5,000,000
MBNA,
Medium-Term Notes, 6.15%, 2003 2,840,000 2,861,078
Washington Mutual,
Sr. Notes, 7.25%, 2005 1,600,000 1,752,386
9,613,464
CABLE/MEDIA--.4%
Comcast Cable Communications,
Notes, 8.125%, 2004 750,000 780,060
CHEMICALS--3.8%
Dow Chemical,
Notes, 5.25%, 2004 770,000 788,498
du Pont (E.I.) de Nemours,
Notes, 6.75%, 2004 2,833,000 3,007,045
Eastman Chemical,
Notes, 6.375%, 2004 1,300,000 1,326,361
Rohm & Haas,
Sr. Notes, 6.95%, 2004 2,330,000 2,439,247
7,561,151
COMMERCIAL MORTGAGE PASS-THROUGH CTFS.--7.8%
Banc of America Large Loan:
Ser. 2002-FL1A, Cl. E, 2.52%, 2014 900,000 (a,b) 897,046
Ser. 2002-FL2A, Cl. H, 2.47%, 2014 2,000,000 (a,b) 1,980,000
Ser. 2002-FL2A, Cl. L1, 4.12%, 2014 2,000,000 (a,b) 1,952,500
Banc of America Structured Notes,
Ser. 2002-1A, Cl. B, 5.62%, 2014 1,100,000 (a,b) 999,625
COMM:
Ser. 2000-FL2A, Cl. E, 2.10%, 2011 4,336,000 (a,b) 4,286,579
Ser. 2001-FL5A, Cl. G, 2.26%, 2013 2,000,000 (a,b) 1,970,937
8
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
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COMMERCIAL MORTGAGE PASS-THROUGH CTFS. (CONTINUED)
CS First Boston Mortgage Securities,
Ser. 2001-CK3, Cl. A1, 5.26%, 2034 618,881 645,229
Morgan Stanley Dean Witter Capital I,
Ser. 2001-XLF, Cl. F, 3.06%, 2013 1,816,219 (a,b) 1,806,655
Ventas Specialty I,
Ser. 2001-VENA, Cl. D, 3.06%, 2012 850,000 (a,b) 850,000
15,388,571
CONSUMER--.1%
Procter & Gamble,
Notes, 5.25%, 2003 135,000 135,650
DRUGS & PHARMACEUTICALS--1.1%
Abbott Laboratories,
Notes, 5.125%, 2004 2,075,000 2,146,658
ENTERTAINMENT/MEDIA--1.1%
Walt Disney,
Notes, 4.5%, 2004 2,000,000 2,065,428
FINANCIAL SERVICES--2.7%
American General Finance,
Medium-Term Notes, Ser. E, 6.85%, 2004 1,000,000 1,051,703
Caterpillar Financial Services,
Medium-Term Notes, Ser. F, 7.59%, 2003 1,600,000 1,635,826
International Lease Finance:
Medium-Term Notes, Ser. J, 5.5%, 2003 600,000 603,878
Notes, 8.375%, 2004 425,000 462,128
John Deere Capital,
Medium-Term Notes, Ser. D, 1.69%, 2004 1,286,000 (b) 1,292,749
Textron Financial,
Medium-Term Notes, Ser. D, 7.37%, 2003 300,000 (a) 303,500
5,349,784
FOOD & BEVERAGES--2.2%
Pepsi Bottling,
Gtd. Notes, 5.375%, 2004 2,700,000 (a) 2,760,218
Tyson Foods,
Notes, 6.625%, 2004 1,485,000 1,535,395
4,295,613
FOREIGN/GOVERNMENTAL--9.7%
Export Development of Canada,
Notes, 2.375%, 2006 4,520,000 4,537,786
The Fund 9
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
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FOREIGN/GOVERNMENTAL (CONTINUED)
Kingdom of Denmark,
Medium-Term Notes, Ser. 110-1, 6.375%, 2003 5,602,000 5,618,806
New Zealand Government,
Medium-Term Notes, Ser. 2082-1, 6.25%, 2004 2,000,000 2,107,000
Province of Quebec,
Deb., Ser. NS, 8.625%, 2005 1,770,000 1,935,647
Republic of Finland,
Deb., 7.875%, 2004 4,602,000 4,904,669
19,103,908
HEALTH CARE--1.1%
American Home Products,
Notes, 5.875%, 2004 750,000 770,316
United Healthcare,
Sr. Notes, 1.88%, 2004 1,345,000 (a,b) 1,346,328
2,116,644
INSURANCE--4.2%
ACE INA,
Gtd. Sr. Notes, 8.2%, 2004 960,000 1,019,080
ASIF Global Financing,
Notes, 1.37%, 2006 4,866,000 (a,b) 4,896,413
MetLife,
Deb., 3.911%, 2005 1,500,000 1,549,714
Nationwide Mutual Insurance,
Notes, 6.5%, 2004 745,000 (a) 764,294
8,229,501
OIL & GAS--2.6%
Baker Hughes,
Notes, 8%, 2004 1,500,000 1,573,912
Conoco,
Sr. Notes, 5.9%, 2004 3,445,000 3,557,421
5,131,333
REAL ESTATE INVESTMENT TRUSTS--2.7%
Developers Diversified Realty,
Medium-Term Notes, 6.94%, 2004 700,000 730,642
EOP Operating,
Notes, 7.375%, 2003 1,250,000 1,269,852
Evans Withycombe Residential,
Notes, 7.5%, 2004 1,422,000 1,478,389
Excel Realty Trust,
Sr. Notes, 6.875%, 2004 165,000 173,697
10
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
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REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
Highwoods Realty,
Notes, 8%, 2003 935,000 952,006
Liberty Property,
Medium-Term Notes, 6.97%, 2003 500,000 509,902
ProLogis Trust,
Sr. Notes, 7%, 2003 90,000 90,856
5,205,344
RESIDENTIAL MORTGAGE PASS-THROUGH CTFS.--2.7%
Countrywide Mortgage Backed Securities,
Ser. 1994-H, Cl. B1, 6.75%, 2024 148,183 153,579
PNC Mortgage Securities,
Ser. 1997-3, Cl. 1B4, 7%, 2027 192,026 191,916
Residential Funding Mortgage Securities I:
Ser. 2001-S4, Cl. M1, 7.25%, 2031 1,498,366 1,584,839
Ser. 2001-S13, Cl. A1, 6.5%, 2016 278,898 284,626
Structured Asset Securities,
Ser. 2001-5, Cl.1A3, 6%, 2031 3,000,000 3,033,285
5,248,245
RETAIL--1.3%
Home Depot,
Sr. Notes, 6.5%, 2004 1,550,000 1,633,822
Sears Roebuck & Co.,
Notes, 6.25%, 2004 962,000 974,939
2,608,761
STRUCTURED INDEX--1.2%
HSBC TIGERS:
Medium-Term Notes, Ser. 2003-3, 3.915%, 2008 1,370,000 (a,b,e) 1,369,828
Medium-Term Notes, Ser. 2003-4, 4.36%, 2008 1,000,000 (a,b,e) 1,000,000
2,369,828
TECHNOLOGY--4.1%
Fondo LatinoAmericano,
Notes, 3%, 2006 1,215,000 (a) 1,209,082
Hewlett-Packard Finance,
Deb., 7.9%, 2003 1,500,000 (a) 1,528,209
Meridian Funding,
Notes, 1.58%, 2009 5,300,000 (a,b) 5,301,002
8,038,293
TELECOMMUNICATIONS--1.1%
TCI Communications,
Sr. Notes, 8%, 2005 2,000,000 2,194,584
The Fund 11
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
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U.S. GOVERNMENT--13.3%
U.S. Treasury Notes:
2%, 5/15/2006 7,915,000 (f) 7,868,009
3.625%, 5/15/2013 19,491,000 18,199,721
26,067,730
U.S. GOVERNMENT AGENCIES--8.8%
SLM,
Conv. Bonds, 1.06%, 2035 12,000,000 (a,b) 11,838,480
Tennessee Valley Authority,
Valley Indexed-Principal Securities,
3.375%, 1/15/2007 5,038,431 (g) 5,371,949
17,210,429
U.S. GOVERNMENT AGENCIES/MORTGAGE-BACKED--3.2%
Federal Home Loan Mortgage Corp.:
REMIC Trust, Gtd. Multiclass Mortgage Participation Ctfs.:
Ser. 2416, Cl. PB, 5.5%, 8/15/2012 590,708 592,789
Ser. 2538, Cl. AQ, 5%, 12/15/2017 1,912,154 1,923,189
Ser. 2603, Cl. AC, 2%, 12/15/2008 3,218,264 3,216,171
Federal National Mortgage Association,
Grantor Trust,
Ser. 1999-T1, Cl. A6, 6%, 1/25/2039 516,513 520,307
6,252,456
UTILITIES/GAS & ELECTRIC--.4%
CommonWealth Edison,
Notes, 7.375%, 2004 100,000 102,593
Niagara Mohawk Power,
First Mortgage, 7.375%, 2003 655,000 655,000
757,593
TOTAL BONDS AND NOTES
(cost $201,037,853) 195,223,586
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OTHER INVESTMENTS--12.7% Shares Value ($)
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REGISTERED INVESTMENT COMPANIES:
Dreyfus Institutional Cash Advantage Fund 8,324,666 (h) 8,324,666
Dreyfus Institutional Cash Advantage Plus Fund 8,324,667 (h) 8,324,667
Dreyfus Institutional Preferred Plus Money Market Fund 8,324,667 (h) 8,324,667
TOTAL OTHER INVESTMENTS
(cost $24,974,000) 24,974,000
12
Principal
SHORT-TERM INVESTMENTS--.1% Amount ($) Value ($)
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U.S. TREASURY BILL;
.93%, 12/26/2003
(cost $249,051) 250,000 (f) 248,998
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TOTAL INVESTMENTS (cost $226,260,904) 112.3% 220,446,584
LIABILITIES, LESS CASH AND RECEIVABLES (12.3%) (24,057,964)
NET ASSETS 100.0% 196,388,620
(A) SECURITIES EXEMPT FROM REGISTRATION UNDER RULE 144A OF THE SECURITIES ACT
OF 1933. THESE SECURITIES MAY BE RESOLD IN TRANSACTIONS EXEMPT FROM
REGISTRATION, NORMALLY TO QUALIFIED INSTITUTIONAL BUYERS. AT JULY 31, 2003,
THESE SECURITIES AMOUNTED TO $55,120,079 OR 28.1% OF NET ASSETS.
(B) VARIABLE RATE SECURITY--INTEREST RATE SUBJECT TO PERIODIC CHANGE.
(C) NON-INCOME PRODUCING--SECURITY IN DEFAULT.
(D) THE VALUE OF THIS SECURITY HAS BEEN DETERMINED IN GOOD FAITH UNDER THE
DIRECTION OF THE BOARD OF DIRECTORS.
(E) SECURITIES LINKED TO A PORTFOLIO OF DEBT SECURITIES.
(F) HELD BY A BROKER AS COLLATERAL FOR OPEN FINANCIAL FUTURES POSITIONS.
(G) PRINCIPAL AMOUNT FOR ACCRUAL PURPOSES IS PERIODICALLY ADJUSTED BASED ON
CHANGES IN THE CONSUMER PRICE INDEX.
(H) INVESTMENTS IN AFFILIATED MONEY MARKET MUTUAL FUNDS--SEE NOTE 3(D).
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 13
STATEMENT OF FINANCIAL FUTURES
July 31, 2003
Unrealized
Market Value Appreciation
Covered by (Depreciation)
Contracts Contracts ($) Expiration at 7/31/2003 ($)
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FINANCIAL FUTURES LONG
U.S. Treasury 10 Year Notes 53 5,863,125 September 2003 (69,695)
FINANCIAL FUTURES SHORT
U.S. Agency 10 Year Notes 46 4,856,594 September 2003 470,063
400,368
SEE NOTES TO FINANCIAL STATEMENTS.
14
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2003
Cost Value
- --------------------------------------------------------------------------------
ASSETS ($):
Investments in securities--See Statement of
Investments 226,260,904 220,446,584
Interest receivable 1,959,444
Receivable for investment securities sold 1,744,804
Receivable for futures variation margin--Note 4 204,670
Prepaid expenses 20,494
224,375,996
- --------------------------------------------------------------------------------
LIABILITIES ($):
Due to The Dreyfus Corporation and affiliates 23,356
Cash overdraft due to Custodian 1,661,488
Payable for investment securities purchased 21,183,131
Payable for shares of Common Stock redeemed 5,072,408
Accrued expenses 46,993
27,987,376
- --------------------------------------------------------------------------------
NET ASSETS ($) 196,388,620
- --------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS ($):
Paid-in capital 204,345,904
Accumulated undistributed investment income--net 193,599
Accumulated net realized gain (loss) on investments (2,736,931)
Accumulated net unrealized appreciation (depreciation)
on investments (including $400,368 net unrealized
appreciation on financial futures) (5,413,952)
- --------------------------------------------------------------------------------
NET ASSETS ($) 196,388,620
NET ASSET VALUE PER SHARE
Investor Shares Institutional Shares
- --------------------------------------------------------------------------------
Net Assets ($) 30,368,364 166,020,256
Shares Outstanding 15,490,438 84,731,906
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE ($) 1.96 1.96
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 15
STATEMENT OF OPERATIONS
Year Ended July 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME ($):
Interest 10,819,329
Cash dividends 165,046
TOTAL INCOME 10,984,375
EXPENSES:
Management fee--Note 3(a) 717,081
Service fees (Investor Shares)--Note 3(b) 157,045
Registration fees 76,247
Custodian fees--Note 3(b) 39,868
Professional fees 38,914
Shareholder servicing costs--Note 3(b) 16,679
Directors' fees and expenses--Note 3(c) 12,891
Prospectus and shareholders' reports 12,126
Miscellaneous 22,623
TOTAL EXPENSES 1,093,474
Less--reduction in management fee due to
undertaking--Note 3(a) (219,348)
NET EXPENSES 874,126
INVESTMENT INCOME--NET 10,110,249
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NOTE 4 ($):
Net realized gain (loss) on investments 2,438,242
Net realized gain (loss) on financial futures (1,075,853)
Net realized gain (loss) on options transactions 84,238
NET REALIZED GAIN (LOSS) 1,446,627
Net unrealized appreciation (depreciation) on investments
(including $763,290 net unrealized appreciation on financial futures)
(7,131,772)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (5,685,145)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 4,425,104
SEE NOTES TO FINANCIAL STATEMENTS.
16
STATEMENT OF CHANGES IN NET ASSETS
Year Ended July 31,
-----------------------------------
2003 2002(a)
- --------------------------------------------------------------------------------
OPERATIONS ($):
Investment income--net 10,110,249 2,733,148
Net realized gain (loss) on investments 1,446,627 (1,944,893)
Net unrealized appreciation
(depreciation) on investments (7,131,772) 1,717,820
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 4,425,104 2,506,075
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM ($):
Investment income--net:
Investor Shares (1,933,626) (145,016)
Institutional Shares (10,067,831) (2,743,332)
TOTAL DIVIDENDS (12,001,457) (2,888,348)
- --------------------------------------------------------------------------------
CAPITAL STOCK TRANSACTIONS ($):
Net proceeds from shares sold:
Investor Shares 124,158,647 19,897,513
Institutional Shares 339,518,910 298,991,247
Dividends reinvested:
Investor Shares 1,796,515 134,294
Institutional Shares 1,750,406 749,707
Cost of shares redeemed:
Investor Shares (108,947,482) (5,189,134)
Institutional Shares (422,398,938) (46,114,439)
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL STOCK TRANSACTIONS (64,121,942) 268,469,188
TOTAL INCREASE (DECREASE) IN NET ASSETS (71,698,295) 268,086,915
- --------------------------------------------------------------------------------
NET ASSETS ($):
Beginning of Period 268,086,915 --
END OF PERIOD 196,388,620 268,086,915
Undistributed investment income--net 193,599 168,080
The Fund 17
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
Year Ended July 31,
-----------------------------------
2003 2002(a)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
INVESTOR SHARES
Shares sold 62,409,279 9,948,757
Shares issued for dividends reinvested 909,366 67,126
Shares redeemed (55,249,523) (2,594,567)
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 8,069,122 7,421,316
- --------------------------------------------------------------------------------
INSTITUTIONAL SHARES
Shares sold 171,170,592 149,495,584
Shares issued for dividends reinvested 886,754 374,831
Shares redeemed (214,138,637) (23,057,218)
NET INCREASE (DECREASE) IN SHARES OUTSTANDING (42,081,291) 126,813,197
(A) FROM NOVEMBER 15, 2001 (COMMENCEMENT OF OPERATIONS) TO JULY 31, 2002.
SEE NOTES TO FINANCIAL STATEMENTS.
18
FINANCIAL HIGHLIGHTS
The following tables describe the performance for each share class for the
fiscal periods indicated. All information (except portfolio turnover rate)
reflects financial results for a single fund share. Total return shows how much
your investment in the fund would have increased (or decreased) during each
period, assuming you had reinvested all dividends and distributions. These
figures have been derived from the fund's financial statements.
Year Ended July 31,
----------------------
INVESTOR SHARES 2003 2002(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 2.00 2.00
Investment Operations:
Investment income--net .05(b) .05(b)
Net realized and unrealized
gain (loss) on investments (.03) .01
Total from Investment Operations .02 .06
Distributions:
Dividends from investment income--net (.06) (.06)
Net asset value, end of period 1.96 2.00
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 1.12 2.82(c)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .45 .45(d)
Ratio of net investment income
to average net assets 2.55 3.71(d)
Decrease reflected in above expense ratios due
to undertakings by The Dreyfus Corporation .06 .44(d)
Portfolio Turnover Rate 441.13 98.01(c)
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 30,368 14,833
(A) FROM NOVEMBER 15, 2001 (COMMENCEMENT OF OPERATIONS) TO JULY 31, 2002.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) NOT ANNUALIZED.
(D) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 19
FINANCIAL HIGHLIGHTS (CONTINUED)
Year Ended July 31,
-----------------------
INSTITUTIONAL SHARES 2003 2002(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 2.00 2.00
Investment Operations:
Investment income--net .06(b) .06(b)
Net realized and unrealized
gain (loss) on investments (.03) --
Total from Investment Operations .03 .06
Distributions:
Dividends from investment income--net (.07) (.06)
Net asset value, end of period 1.96 2.00
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 1.37 3.00(c)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .20 .20(d)
Ratio of net investment income
to average net assets 2.77 4.10(d)
Decrease reflected in above expense ratios due
to undertakings by The Dreyfus Corporation .06 .17(d)
Portfolio Turnover Rate 441.13 98.01(c)
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 166,020 253,254
(A) FROM NOVEMBER 15, 2001 (COMMENCEMENT OF OPERATIONS) TO JULY 31, 2002.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) NOT ANNUALIZED.
(D) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
20
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Dreyfus Institutional Yield Advantage Fund (the "fund" ) is a separate
diversified series of Dreyfus Investment Grade Funds, Inc. (the "Company") which
is registered under the Investment Company Act of 1940, as amended (the "Act"),
as an open-end management investment company and operates as a series company
currently offering five series, including the fund. The fund's investment
objective is to provide investors with as high a level of current income as is
consistent with the preservation of capital with minimal changes in share price.
The Dreyfus Corporation (the "Manager") serves as the fund's investment adviser.
The Manager is a wholly-owned subsidiary of Mellon Bank, N.A. ("Mellon"), which
is a wholly-owned subsidiary of Mellon Financial Corporation. Dreyfus Service
Corporation (the "Distributor" ), a wholly-owned subsidiary of the Manager, is
the distributor of the fund' s shares which are sold to the public without a
sales charge.
On July 17, 2003, the fund's Board of Directors approved, effective July 18,
2003, a change of the Company's name from "Dreyfus Investment Grade Bond Funds,
Inc." to "Dreyfus Investment Grade Funds, Inc."
The fund is authorized to issue 500 million shares of $.001 par value Common
Stock in each of the following classes of shares: Investor and Institutional.
Investor shares are subject to a Service Plan adopted pursuant to Rule 12b-1
under the Act. Other differences between the classes include the services
offered to and the expenses borne by each class, the minimum initial investment
and certain voting rights.
The Company accounts separately for the assets, liabilities and operations of
each series. Expenses directly attributable to each series are charged to that
series' operations; expenses which are applicable to all series are allocated
among them on a pro rata basis.
The fund' s financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which may require the use of
management estimates and assumptions. Actual results could differ from those
estimates.
The Fund 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(A) PORTFOLIO VALUATION: Investments in securities (excluding short-term
investments, other than U.S. Treasury Bills, financial futures and options) are
valued each business day by an independent pricing service (the "Service")
approved by the Board of Directors. Investments for which quoted bid prices are
readily available and are representative of the bid side of the market in the
judgment of the Service are valued at the mean between the quoted bid prices (as
obtained by the Service from dealers in such securities) and asked prices (as
calculated by the Service based upon its evaluation of the market for such
securities) . Other investments (which constitute a majority of the portfolio
securities) are carried at fair value as determined by the Service, based on
methods which include consideration of: yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. Securities for which there are no such
valuations are valued at fair value as determined in good faith under the
direction of the Board of Directors. Short-term investments, excluding U.S.
Treasury Bills, are carried at amortized cost, which approximates value.
Financial futures and options, which are traded on an exchange, are valued at
the last sales price on the securities exchange on which such securities are
primarily traded or at the last sales price on the national securities market on
each business day. Options traded over-the-counter are priced at the mean
between the bid prices and the asked prices.
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount and premium on investments, is recognized
on the accrual basis. Under the terms of the custody agreement, the fund
received net earnings credits of $11,561 during the period ended July 31, 2003,
based on available cash balances left on deposit. Income earned under this
arrangement is included in interest income.
(C) DIVIDENDS TO SHAREHOLDERS: It is the policy of the fund to declare dividends
daily from investment income-net. Such dividends are paid monthly. Dividends
from net realized capital gain, if any, are normally
22
declared and paid annually, but the fund may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). To the extent that net realized
capital gain can be offset by capital loss carryovers, it is the policy of the
fund not to distribute such gain. Income and capital gain distributions are
determined in accordance with income tax regulations, which may differ from
accounting principles generally accepted in the United States.
(D) FEDERAL INCOME TAXES: It is the policy of the fund to continue to qualify as
a regulated investment company, if such qualification is in the best interests
of its shareholders, by complying with the applicable provisions of the Code,
and to make distributions of taxable income sufficient to relieve it from
substantially all federal income and excise taxes.
At July 31, 2003, the components of accumulated earnings on a tax basis were as
follows: undistributed ordinary income $186,334, accumulated capital losses
$2,281,578 and unrealized depreciation $5,862,040.
The accumulated capital loss carryover of $2,281,578 is available to be applied
against future net securities profits, if any, realized subsequent to July 31,
2003. If not applied, the carryover expires in fiscal 2011.
The tax character of distributions paid to shareholders during the fiscal
periods ended July 31, 2003 and July 31, 2002, were as follows: ordinary income
$12,001,457 and $2,888,348, respectively.
During the period ended July 31, 2003, as a result of permanent book to tax
differences, the fund increased accumulated undistributed investment income-net
by $1,916,727, decreased net realized gain (loss) on investments by $1,910,612
and decreased paid-in capital by $6,115. Net assets were not affected by this
reclassification.
NOTE 2--BANK LINE OF CREDIT:
The fund participates with other Dreyfus-managed funds in a $100 million
unsecured line of credit primarily to be utilized for temporary or emergency
purposes, including the financing of redemptions. Interest is charged to the
fund based on prevailing market rates in
The Fund 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
effect at the time of borrowings. During the period ended July 31, 2003, the
fund did not borrow under the line of credit.
NOTE 3--MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) Pursuant to a management agreement ("Agreement") with the Manager, the
management fee is computed at the annual rate of .20 of 1% of the value of the
fund's average daily net assets and is payable monthly. The Manager has
undertaken from August 1, 2002 through July 31, 2003, to reduce the management
fee paid by the fund, if the fund's aggregate expenses, exclusive of taxes,
brokerage fees, interest on borrowings, service plan fees and extraordinary
expenses, exceed an annual rate of .20 of 1% of the value of the fund's average
daily net assets. The reduction in management fee, pursuant to the undertaking,
amounted to $219,348 during the period ended July 31, 2003.
(B) Under the Investor Shares Service Plan (the "Plan") adopted pursuant to Rule
12b-1 under the Act, the fund pays the Distributor for distributing the fund's
Investor Shares, for servicing shareholder accounts (" Servicing") and for
advertising and marketing relating to the fund's Investor Shares. The Plan
provides for payments to be made at an annual rate of .25 of 1% of the value of
the average daily net assets of Investor Shares. The Distributor determines the
amounts, if any, to be paid to Service Agents (a securities dealer, financial
institutional or other industry professional) under the Plan and the basis on
which such payments are made. The fees payable under the Plan are payable
without regard to actual expenses incurred. During the period ended July 31,
2003, Investor Shares was charged $157,045 pursuant to the Plan.
The fund compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of the
Manager, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the fund. During the period
ended July 31, 2003, the fund was charged $3,651 pursuant to the transfer agency
agreement.
The fund compensates Mellon under a custody agreement for providing custodial
services for the fund. During the period ended July 31, 2003, the fund was
charged $39,868 pursuant to the custody agreement.
24
(C) Each Board member also serves as a Board member of other funds within the
Dreyfus complex (collectively, the "Fund Group"). Through December 31, 2002,
each Board member who was not an "affiliated person" as defined in the Act
received an annual fee of $45,000 and an attendance fee of $5,000 for each
in-person meeting and $500 for telephone meetings. Effective January 1, 2003,
the Fund Group increased in size, and the annual fee was increased to $60,000
while the attendance fee was increased to $7,500 for each in-person meeting.
These fees are allocated among the funds in the Fund Group in proportion to each
fund's relative net assets. The Chairman of the Board receives an additional 25%
of such compensation. Subject to the Company's Emeritus Program Guidelines,
Emeritus Board members, if any, receive 50% of the annual retainer fee and per
meeting fee paid at the time the Board member achieves emeritus status.
(D) Commencing September 10, 2002, pursuant to an exemptive order from the
Securities and Exchange Commission, the fund may invest its available cash
balances in affiliated money market mutual funds as shown in the fund's
Statement of Investments. Management fees are not charged to these accounts.
During the period ended July 31, 2003, the fund derived $165,046 in income from
these investments, which is included in dividend income in the fund's Statement
of Operations.
NOTE 4--SECURITIES TRANSACTIONS:
The aggregate amount of purchases and sales (including paydowns) of investment
securities, excluding short-term securities, options and financial futures,
during the period ended July 31, 2003, amounted to $1,443,241,305 and
$1,492,884,635, respectively.
The fund may invest in financial futures contracts in order to gain exposure to
or protect against changes in the market. The fund is exposed to market risk as
a result of changes in the value of the underlying financial instruments.
Investments in financial futures require the fund to "mark to market" on a daily
basis, which reflects the change in market value of the contracts at the close
of each day's trading. Accordingly, variation margin payments are received or
made to reflect
The Fund 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
daily unrealized gains and losses. When the contracts are closed, the fund
recognizes a realized gain or loss. These investments require initial margin
deposits with a broker, which consist of cash or cash equivalents, up to
approximately 10% of the contract amount. The amount of these deposits is
determined by the exchange or Board of Trade on which the contract is traded and
is subject to change. Contracts open at July 31, 2003, are set forth in the
Statement of Financial Futures.
The fund may purchase and write (sell) call/put options in order to gain
exposure to or protect against changes in the market.
As a writer of call options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instruments underlying the options. Generally, the fund would incur a gain, to
the extent of the premium, if the price of the underlying financial instrument
decreases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument increases between those dates. At July 31, 2003, there
were no call options written outstanding.
As a writer of put options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instruments underlying the options. Generally, the fund would incur a gain, to
the extent of the premium, if the price of the underlying financial instrument
increases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument decreases between those dates. At July 31, 2003, there
were no put options written outstanding.
At July 31, 2003, the cost of investments for federal income tax purposes was
$226,308,624; accordingly, accumulated net unrealized depreciation on
investments was $5,862,040, consisting of $928,421 gross unrealized appreciation
and $6,790,461 gross unrealized depreciation.
26
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors Dreyfus Institutional Yield Advantage Fund
We have audited the accompanying statement of assets and liabilities, including
the statements of investments and financial futures, of Dreyfus Institutional
Yield Advantage Fund (one of the funds comprising Dreyfus Investment Grade
Funds, Inc.) , as of July 31, 2003, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund' s management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
verification by examination of securities held by the custodian as of July 31,
2003 and confirmation of securities not held by the custodian by correspondence
with others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Dreyfus Institutional Yield Advantage Fund at July 31, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
New York, New York
September 18, 2003
The Fund 27
BOARD MEMBERS INFORMATION (Unaudited)
JOSEPH S. DIMARTINO (59)
CHAIRMAN OF THE BOARD (1995)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The Muscular Dystrophy Association, Director
* Levcor International, Inc., an apparel fabric processor, Director
* Century Business Services, Inc., a provider of outsourcing functions for small
and medium size companies, Director
* The Newark Group, a provider of a national market of paper recovery
facilities, paperboard mills and paperboard converting plants, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 191
--------------
CLIFFORD L. ALEXANDER, JR. (69)
BOARD MEMBER (2003)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Alexander & Associates, Inc., a management consulting firm
(January 1981-present)
* Chairman of the Board of Moody's Corporation (October 2000-present)
* Chairman of the Board and Chief Executive Officer of The Dun and Bradstreet
Corporation (October 1999-September 2000)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* Wyeth (formerly, American Home Products Corporation), a global leader in
pharmaceuticals, consumer healthcare products and animal health products,
Director
* Mutual of America Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 70
--------------
LUCY WILSON BENSON (76)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Benson and Associates, consultants to business and government
(1980-present)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The International Executive Services Corps., Director
* Citizens Network for Foreign Affairs, Vice Chairperson
* Council on Foreign Relations, Member
* Lafayette College Board of Trustees, Vice Chairperson Emeritus
* Atlantic Council of the U.S., Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 44
28
DAVID W. BURKE (67)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* John F. Kennedy Library Foundation, Director
* U.S.S. Constitution Museum, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 87
--------------
WHITNEY I. GERARD (68)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Partner of Chadbourne & Parke LLP
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
ARTHUR A. HARTMAN (77)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Chairman of First NIS Regional Fund (ING/Barings Management) and New Russia
Fund
* Advisory Council Member to Barings-Vostok
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* APCO Associates, Inc., Senior Consultant
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
GEORGE L. PERRY (69)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Economist and Senior Fellow at Brookings Institution
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* State Farm Mutual Automobile Association, Director
* State Farm Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
ONCE ELECTED ALL BOARD MEMBERS SERVE FOR AN INDEFINITE TERM. ADDITIONAL
INFORMATION ABOUT THE BOARD MEMBERS, INCLUDING THEIR ADDRESS IS AVAILABLE IN THE
FUND'S STATEMENT OF ADDITIONAL INFORMATION WHICH CAN BE OBTAINED FROM DREYFUS
FREE OF CHARGE BY CALLING THIS TOLL FREE NUMBER: 1-800-554-4611.
The Fund 29
OFFICERS OF THE FUND (Unaudited)
STEPHEN E. CANTER, PRESIDENT SINCE MARCH 2000.
Chairman of the Board, Chief Executive Officer and Chief Operating Officer
of the Manager, and an officer of 95 investment companies (comprised of 188
portfolios) managed by the Manager. Mr. Canter also is a Board member and, where
applicable, an Executive Committee Member of the other investment management
subsidiaries of Mellon Financial Corporation, each of which is an affiliate of
the Manager. He is 58 years old and has been an employee of the Manager since
May 1995.
STEPHEN R. BYERS, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2002.
Chief Investment Officer, Vice Chairman and a director of the Manager, and
an officer of 95 investment companies (comprised of 188 portfolios) managed by
the Manager. Mr. Byers also is an officer, director or an Executive Committee
Member of certain other investment management subsidiaries of Mellon Financial
Corporation, each of which is an affiliate of the Manager. He is 49 years old
and has been an employee of the Manager since January 2000. Prior to joining the
Manager, he served as an Executive Vice President-Capital Markets, Chief
Financial Officer and Treasurer at Gruntal & Co., L.L.C.
CHARLES CARDONA, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2001.
Vice Chairman and a Director of the Manager, Executive Vice President of
the Distributor, President of Dreyfus Institutional Services Division, and an
officer of 12 investment companies (comprised of 16 portfolios) managed by the
Manager. He is 47 years old and has been an employee of the Manager since
February 1981.
MARK N. JACOBS, VICE PRESIDENT SINCE MARCH 2000.
Executive Vice President, Secretary and General Counsel of the Manager, and
an officer of 96 investment companies (comprised of 204 portfolios) managed by
the Manager. He is 57 years old and has been an employee of the Manager since
June 1977.
MICHAEL A. ROSENBERG, SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 93 investment
companies (comprised of 197 portfolios) managed by the Manager. He is 43 years
old and has been an employee of the Manager since October 1991.
STEVEN F. NEWMAN, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel and Assistant Secretary of the Manager, and an
officer of 96 investment companies (comprised of 204 portfolios) managed by the
Manager. He is 53 years old and has been an employee of the Manager since July
1980.
ROBERT R. MULLERY, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 26 investment
companies (comprised of 61 portfolios) managed by the Manager. He is 51 years
old and has been an employee of the Manager since May 1986.
JAMES WINDELS, TREASURER SINCE NOVEMBER 2001.
Director - Mutual Fund Accounting of the Manager, and an officer of 96
investment companies (comprised of 204 portfolios) managed by the Manager. He is
44 years old and has been an employee of the Manager since April 1985.
30
ERIK D. NAVILOFF, ASSISTANT TREASURER SINCE DECEMBER 2002.
Senior Accounting Manager - Taxable Fixed Income Funds of the Manager, and
an officer of 18 investment companies (comprised of 76 portfolios) managed by
the Manager. He is 35 years old and has been an employee of the Manager since
November 1992.
KENNETH J. SANDGREN, ASSISTANT TREASURER SINCE NOVEMBER 2001.
Mutual Funds Tax Director of the Manager, and an officer of 96 investment
companies (comprised of 204 portfolios) managed by the Manager. He is 48 years
old and has been an employee of the Manager since June 1993.
WILLIAM GERMENIS, ANTI-MONEY LAUNDERING COMPLIANCE OFFICER SINCE SEPTEMBER 2002
Vice President and Anti-Money Laundering Compliance Officer of the
Distributor, and the Anti-Money Laundering Compliance Officer of 91 investment
companies (comprised of 199 portfolios) managed by the Manager. He is 32 years
old and has been an employee of the Distributor since October 1998. Prior to
joining the Distributor, he was a Vice President of Compliance Data Center, Inc.
The Fund 31
NOTES
For More Information
Dreyfus
Institutional Yield
Advantage Fund
200 Park Avenue
New York, NY 10166
Manager
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
Custodian
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Transfer Agent &
Dividend Disbursing Agent
Dreyfus Transfer, Inc.
200 Park Avenue
New York, NY 10166
Distributor
Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
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 info@dreyfus.com
ON THE INTERNET Information can be viewed online or downloaded from:
http://www.dreyfus.com
(c) 2003 Dreyfus Service Corporation 049AR0703
Dreyfus Premier
Yield Advantage Fund
ANNUAL REPORT July 31, 2003
YOU, YOUR ADVISOR AND
DREYFUS
A MELLON FINANCIAL COMPANY(TM)
The views expressed in this report reflect those of the portfolio manager only
through the end of the period covered and do not necessarily represent the views
of Dreyfus or any other person in the Dreyfus organization. Any such views are
subject to change at any time based upon market or other conditions and Dreyfus
disclaims any responsibility to update such views. These views may not be relied
on as investment advice and, because investment decisions for a Dreyfus fund are
based on numerous factors, may not be relied on as an indication of trading
intent on behalf of any Dreyfus fund.
Not FDIC-Insured * Not Bank-Guaranteed * May Lose Value
Contents
THE FUND
- --------------------------------------------------
2 Letter from the Chairman
3 Discussion of Fund Performance
6 Fund Performance
8 Statement of Investments
16 Statement of Financial Futures
17 Statement of Assets and Liabilities
18 Statement of Operations
19 Statement of Changes in Net Assets
22 Financial Highlights
27 Notes to Financial Statements
34 Report of Independent Auditors
35 Board Members Information
37 Officers of the Fund
FOR MORE INFORMATION
- ---------------------------------------------------------------------------
Back Cover
The Fund
Dreyfus Premier
Yield Advantage Fund
LETTER FROM THE CHAIRMAN
Dear Shareholder:
This annual report for Dreyfus Premier Yield Advantage Fund covers the 12-month
period from August 1, 2002, through July 31, 2003. Inside, you'll find valuable
information about how the fund was managed during the reporting period,
including a discussion with Michael Hoeh, portfolio manager and a member of the
Dreyfus Taxable Fixed Income Team that manages the fund.
Bonds generally continued to rally during most of the reporting period, driven
higher by a combination of declining interest rates and improving investor
sentiment. Corporate bonds in particular rose sharply as companies paid down
debt, trimmed expenses and adopted more rigorous standards of corporate
governance in the wake of last year's high-profile accounting scandals. However,
some of the more interest-rate-sensitive sectors of the bond market began to
give back a significant amount of their gains over the last several weeks of the
reporting period, triggered by strong interest-rate volatility and a sharp
sell-off in certain areas of the bond market.
With yields on some types of bonds near historical lows, maintaining a steady
stream of current income has been a challenge for many investors. What should an
income-oriented investor do now? While we believe that bonds continue to
represent an important component of a well-balanced investment portfolio, your
financial advisor may be in the best position to recommend the income strategies
that are right for you in today's market environment.
Thank you for your continued confidence and support.
Sincerely,
/S/ STEPHEN E. CANTER
Stephen E. Canter
Chairman and Chief Executive Officer
The Dreyfus Corporation
August 15, 2003
2
DISCUSSION OF FUND PERFORMANCE
Michael Hoeh, Portfolio Manager
Dreyfus Taxable Fixed Income Team
How did Dreyfus Premier Yield Advantage Fund perform relative to its benchmark?
For the 12-month period ended July 31, 2003, the fund's Class D shares achieved
a total return of 1.16%.(1) From their inception on November 1, 2002, through
July 31, 2003, the fund achieved total returns of 1.88% for Class A shares,
0.29% for Class B shares, 0.85% for Class P shares and 0.65% for Class S shares.
In comparison, the Salomon Smith Barney 1-Year Treasury Benchmark-on-the-Run
Index, the fund' s benchmark, achieved total returns of 2.00% for the 12-month
period and 1.22% for the period between November 1, 2002, and July 31, 2003.(2)
We attribute the fund and market's overall performance during the reporting
period to declining interest rates in a struggling economy. The fund produced
lower returns than its benchmark, primarily because of rising credit concerns in
the corporate bond and asset-backed securities markets and a surge of
prepayments in the mortgage-backed securities market during the first half of
the reporting period. Better performance during the reporting period's second
half offset most, but not all, of the fund's lagging relative returns.
WHAT IS THE FUND'S INVESTMENT APPROACH?
The fund seeks as high a level of current income as is consistent with the
preservation of capital, with minimal changes in share price. To pursue its
goal, the fund invests only in investment-grade fixed-income securities of U.S.
and foreign issuers or the unrated equivalent as determined by Dreyfus. These
securities may include U.S. government bonds and notes, corporate bonds,
asset-backed securities and mortgage-related securities.
The Fund 3
DISCUSSION OF FUND PERFORMANCE (CONTINUED)
To help reduce share price fluctuations, the fund seeks to keep the average
effective duration -- a measure of sensitivity to changing interest rates -- of
its overall portfolio at one year or less. Although we expect the fund's average
effective duration and its average effective maturity -- the amount of time
until the fund' s holdings mature or are redeemed, on average -- to follow one
another closely, we may invest in securities with effective final maturities of
any length.
When choosing securities for the fund, we analyze many factors in various
fixed-income market sectors. We then decide how to allocate the fund's assets
across these sectors and in which securities to invest.
WHAT OTHER FACTORS INFLUENCED THE FUND'S PERFORMANCE?
When the reporting period began, investors were generally pessimistic about the
prospects for the U.S. economy as the stock market hit new lows, corporations
refrained from spending and the unemployment rate rose. These factors were
intensified by corporate scandals and rising tensions between the United States
and Iraq.
Because investment-grade corporate bond prices had retreated to levels we
believed to be attractive, the fund began the reporting period with relatively
heavy exposure to corporate securities. However, prices for these investments
continued to fall over the remainder of 2002 amid persistent credit-quality
concerns. The fund' s performance was also hindered when mortgage-backed
securities lost value amid a surge in mortgage refinancing activity, and
asset-backed securities suffered when two major issuers declared bankruptcy.
Nonetheless, our emphasis on investment-grade corporate securities positioned
the fund well for the sharp rally that ensued in 2003. Even before the war in
Iraq began, investors began to look forward to stronger economic growth, and
they apparently recognized that corporate bond prices were low compared to
historical averages. Finally, the fund benefited from its holdings of Treasury
Inflation Protected Securities, which rallied strongly during the first half of
2003.
4
In addition, the fund's performance during the reporting period's second half
was helped by our duration management strategy. Because we believed toward the
end of May that bond yields were more likely to rise than fall, we reduced the
fund' s average duration to approximately 0.351 years. This position enabled the
fund to avoid the brunt of the market's declines when bond yields rose sharply
in July.
WHAT IS THE FUND'S CURRENT STRATEGY?
We continue to position the fund's average duration for moderately stronger
economic growth. However, after their strong rally, we recently reduced the
fund's emphasis on corporate securities to a smaller percentage of the overall
portfolio. We have also reduced the fund's mortgage-backed exposure and modestly
increased the fund's holdings of U.S. government agency debentures, which were
under pressure and, in our opinion, presented a buying opportunity. In general
we are pursuing a more "sector-neutral" stance that we believe is prudent given
the current uncertainty that still exists in the marketplace.
August 15, 2003
(1) TOTAL RETURN INCLUDES REINVESTMENT OF DIVIDENDS AND ANY CAPITAL GAINS PAID,
AND DOES NOT TAKE INTO CONSIDERATION THE MAXIMUM INITIAL SALES CHARGE IN
THE CASE OF CLASS A SHARES, OR THE APPLICABLE CONTINGENT DEFERRED SALES
CHARGES IMPOSED ON REDEMPTIONS IN THE CASE OF CLASS B AND CLASS S SHARES.
HAD THESE CHARGES BEEN REFLECTED, RETURNS WOULD HAVE BEEN LOWER. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE, YIELD AND
INVESTMENT RETURN FLUCTUATE SUCH THAT UPON REDEMPTION, FUND SHARES MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. RETURN FIGURES PROVIDED
REFLECT THE ABSORPTION OF FUND EXPENSES BY THE DREYFUS CORPORATION PURSUANT
TO AN AGREEMENT IN EFFECT THROUGH JULY 31, 2003, AT WHICH TIME IT MAY BE
EXTENDED, TERMINATED OR MODIFIED. HAD THESE EXPENSES NOT BEEN ABSORBED, THE
FUND'S RETURNS WOULD HAVE BEEN LOWER.
(2) SOURCE: BLOOMBERG L.P. -- REFLECTS REINVESTMENT OF DIVIDENDS AND, WHERE
APPLICABLE, CAPITAL GAIN DISTRIBUTIONS. THE SALOMON SMITH BARNEY 1-YEAR
TREASURY BENCHMARK-ON-THE-RUN INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE AVERAGE YIELD ON 1-YEAR U.S. TREASURY BILLS. THE
INDEX DOES NOT TAKE INTO ACCOUNT CHARGES, FEES AND OTHER EXPENSES. TOTAL
RETURN IS CALCULATED ON A MONTH-END BASIS.
The Fund 5
FUND PERFORMANCE
Citigroup
Dreyfus Premier 1-Year Treasury
PERIOD Yield Advantage Fund Benchmark-on-the-Run
(Class D shares) Index *
11/15/01 10,000 10,000
1/31/02 10,119 10,027
4/30/02 10,206 10,107
7/31/02 10,301 10,230
10/31/02 10,332 10,308
1/31/03 10,356 10,359
4/30/03 10,361 10,409
7/31/03 10,420 10,434
Comparison of change in value of $10,000 investment in Dreyfus Premier Yield
Advantage Fund Class D shares and the Citigroup 1-Year Treasury
Benchmark-on-the-Run Index
((+)) SOURCE: BLOOMBERG L.P.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE ABOVE GRAPH COMPARES A $10,000 INVESTMENT MADE IN CLASS D SHARES OF DREYFUS
PREMIER YIELD ADVANTAGE FUND ON 11/15/01 (INCEPTION DATE) TO A $10,000
INVESTMENT MADE IN THE CITIGROUP 1-YEAR TREASURY BENCHMARK-ON-THE-RUN INDEX (THE
"INDEX") ON THAT DATE. FOR COMPARATIVE PURPOSES, THE VALUE OF THE INDEX ON
11/30/01 IS USED AS THE BEGINNING VALUE ON 11/15/01. ALL DIVIDENDS AND CAPITAL
GAIN DISTRIBUTIONS ARE REINVESTED.
EFFECTIVE NOVEMBER 1, 2002, DREYFUS YIELD ADVANTAGE FUND WAS RENAMED DREYFUS
PREMIER YIELD ADVANTAGE FUND. EXISTING SHARES WERE REDESIGNATED AS CLASS D
SHARES AND THE FUND BEGAN OFFERING CLASS A, CLASS B, CLASS P AND CLASS S
SHARES.
THE FUND INVESTS PRIMARILY IN INVESTMENT-GRADE FIXED-INCOME SECURITIES OF U.S.
AND FOREIGN ISSUERS AND SEEKS TO MAINTAIN A DOLLAR-WEIGHTED AVERAGE MATURITY OF
ONE YEAR OR LESS. THE FUND'S PERFORMANCE SHOWN IN THE LINE GRAPH TAKES INTO
ACCOUNT ALL APPLICABLE FEES AND EXPENSES. THE INDEX IS AN UNMANAGED INDEX
GENERALLY REPRESENTATIVE OF THE AVERAGE YIELD ON 1-YEAR U.S. TREASURY BILLS. THE
INDEX DOES NOT TAKE INTO ACCOUNT CHARGES, FEES AND OTHER EXPENSES. FURTHER
INFORMATION RELATING TO FUND PERFORMANCE, INCLUDING EXPENSE REIMBURSEMENTS, IF
APPLICABLE, IS CONTAINED IN THE FINANCIAL HIGHLIGHTS SECTION OF THE PROSPECTUS
AND ELSEWHERE IN THIS REPORT.
6
Average Annual Total Returns AS OF 7/31/03
Inception From
Date 1 Year Inception
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS D SHARES 11/15/01 1.16% 2.44%
Actual Aggregate Total Returns AS OF 7/31/03
Inception From
Date 1 Year Inception
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
WITH MAXIMUM SALES CHARGE (2.0%) 11/1/02 -- (0.12%)
WITHOUT SALES CHARGE 11/1/02 -- 1.88%
CLASS B SHARES
WITH APPLICABLE REDEMPTION CHARGE ((+)) 11/1/02 -- (3.67%)
WITHOUT REDEMPTION 11/1/02 -- 0.29%
CLASS P SHARES 11/1/02 -- 0.85%
CLASS S SHARES
WITH APPLICABLE REDEMPTION CHARGE ((+)(+)) 11/1/02 -- (1.83%)
WITHOUT REDEMPTION 11/1/02 -- 0.65%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE FUND'S PERFORMANCE
SHOWN IN THE GRAPH AND TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
((+)) THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS B SHARES IS 4%.
AFTER SIX YEARS CLASS B SHARES CONVERT TO CLASS A SHARES.
((+)(+)) THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS S SHARES IS
2.50%. AFTER SIX YEARS CLASS S SHARES CONVERT TO CLASS A SHARES.
The Fund 7
July 31, 2003
STATEMENT OF INVESTMENTS
Principal
BONDS AND NOTES--92.7% Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
AIRCRAFT & AEROSPACE--.5%
United Technologies,
Notes, 6.625%, 2004 2,000,000 2,124,666
ASSET-BACKED CTFS./AUTO LOANS--.1%
Navistar Financial Owner Trust,
Ser. 2001-A, Cl. B, 5.59%, 2008 388,117 401,720
ASSET-BACKED CTFS./BUSINESS--1.5%
ACAS Business Loan Trust:
Ser. 2002-1A, Cl. B, 2.6%, 2012 2,700,000 (a,b) 2,672,730
Ser. 2002-2A, Cl. B, 2.7%, 2015 1,500,000 (a,b) 1,485,000
CapitalSource Commercial Loan Trust,
Ser. 2003-1A, Cl. B, 2.25%, 2012 2,750,000 (a,b) 2,750,000
6,907,730
ASSET-BACKED CTFS./CREDIT CARDS--.8%
Fingerhut Master Trust,
Ser. 1998-2, Cl. A, 6.23%, 2007 202,820 204,534
MBNA Master Credit Card Trust,
Ser. 1999-H, Cl. C, 7.45%, 2006 3,500,000 (a) 3,615,938
3,820,472
ASSET-BACKED CTFS./EQUIPMENT--.1%
Xerox Equipment Lease Owner Trust,
Ser. 2001-1, Cl. A, 3.11%, 2008 307,338 (a,b) 307,763
ASSET-BACKED CTFS./HEALTH CARE--.2%
NPF XII,
Ser. 1999-1, Cl. A, 6.36%, 2005 4,905,000 (a,c,d) 1,055,556
ASSET-BACKED CTFS./HOME EQUITY LOANS--5.9%
AAMES Mortgage Trust,
Ser. 1998-C, Cl. A2A, 5.912%, 2028 666,117 666,165
American Business Financial Services,
Ser. 1997-2, Cl. A5, 7.125%, 2029 1,232,885 1,306,071
Centex Home Equity,
Ser. 2001-B, Cl. A2, 5.35%, 2022 531 531
Conseco Finance Securitizations:
Ser. 2000-D, Cl. A3, 7.89%, 2018 16,579 16,674
Ser. 2001-B, Cl. 2A1A, 6.428%, 2032 3,391,278 3,541,149
Ser. 2001-C, Cl. A3, 5.39%, 2025 1,558,921 1,573,000
Ser. 2001-D, Cl. A4, 5.53%, 2032 11,000,000 11,209,436
IMC Home Equity Loan Trust,
Ser. 1997-5, Cl. A8, 7.14%, 2025 141,318 146,995
Long Beach Mortgage Loan Trust,
Ser. 2003-3, Cl. A, 1.42%, 2033 4,959,711 (b) 4,959,711
8
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED CTFS./HOME EQUITY LOANS (CONTINUED)
Residential Asset Mortgage Products,
Ser. 2002-RZ2, Cl. A2, 4.35%, 2024 3,636,651 3,638,300
27,058,032
ASSET-BACKED CTFS./MANUFACTURED HOUSING--.1%
Conseco Finance Securitizations,
Ser. 2000-1, Cl. A3, 7.3%, 2031 419,181 422,237
AUTOMOTIVE--1.5%
DaimlerChrysler,
Gtd. Medium-Term Notes, Ser. C, 1.51%, 2003 1,325,000 (b) 1,325,073
Ford Motor Credit,
Notes, 7.5%, 2005 1,425,000 1,507,906
GMAC,
Medium-Term Notes, 6.38%, 2004 4,000,000 4,090,912
6,923,891
BANKING--5.2%
Abbey National,
Medium-Term Notes, 6.69%, 2005 4,000,000 4,372,908
Deutsche Bank NY,
Notes, 2.19%, 2005 12,500,000 (b) 12,500,000
MBNA,
Medium-Term Notes, 6.15%, 2003 4,160,000 4,190,876
Washington Mutual,
Sr. Notes, 7.25%, 2005 2,500,000 2,738,103
23,801,887
CABLE/MEDIA--.7%
Comcast Cable Communications,
Notes, 8.125%, 2004 1,250,000 1,300,100
Turner Broadcasting,
Sr. Notes, 7.4%, 2004 1,850,000 1,898,629
3,198,729
CHEMICALS--1.9%
Dow Chemical,
Notes, 5.25%, 2004 1,230,000 1,259,548
du Pont (E.I.) de Nemours,
Notes, 6.75%, 2004 3,000,000 3,184,305
Eastman Chemical,
Notes, 6.375%, 2004 2,010,000 2,050,759
Rohm & Haas,
Sr. Notes, 6.95%, 2004 2,335,000 2,444,481
8,939,093
The Fund 9
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE PASS-THROUGH CTFS.--14.6%
Banc of America Large Loan:
Ser. 2002-FL1A, Cl. D, 2.27%, 2014 7,102,606 (a,b) 7,095,755
Ser. 2002-FL1A, Cl. E, 2.52%, 2014 2,370,000 (a,b) 2,362,221
Ser. 2002-FL1A, Cl. G, 3.12%, 2014 4,000,000 (a,b) 3,952,360
Ser. 2002-FL2A, Cl. H, 2.47%, 2014 2,204,005 (a,b) 2,181,965
Ser. 2002-FL2A, Cl. K1, 3.62%, 2014 1,037,575 (a,b) 1,003,854
Ser. 2002-FL2A, Cl. L1, 4.12%, 2014 3,839,535 (a,b) 3,748,346
Banc of America Structured Notes,
Ser. 2002-1A, Cl. B, 5.62%, 2014 2,200,000 (a,b) 1,999,250
Bear Stearns Commercial Mortgage Securities,
Ser. 2003-BA1A, Cl. G, 2.7%, 2015 6,966,000 (a,b) 6,934,435
COMM:
Ser. 2000-FL2A, Cl. E, 2.10%, 2011 4,479,000 (a,b) 4,427,949
Ser. 2001-FL5A, Cl. G, 2.26%, 2013 3,700,000 (a,b) 3,646,234
Ser. 2002-FL7, Cl. G, 2.96%, 2014 9,000,000 (a,b) 8,901,226
CS First Boston Mortgage Securities:
Ser. 2001-CK3, Cl. A1, 5.26%, 2034 278,643 290,506
Ser. 2001-TFLA, Cl. G, 2.86%, 2011 3,500,000 (a,b) 3,417,155
Morgan Stanley Dean Witter Capital I,
Ser. 2001-XLF, Cl. F, 3.06%, 2013 4,247,158 (a,b) 4,224,794
Ventas Specialty l,
Ser. 2001-VENA, Cl. D, 3.06%, 2012 1,800,000 (a,b) 1,800,000
Wachovia Bank Commercial Mortgage Trust:
Ser. 2002-WHL, Cl. L, 4.11%, 2015 6,000,000 (a,b) 5,919,816
Ser. 2003-WHL2, Cl. J, 3.61%, 2013 5,000,000 (a,b) 4,928,500
66,834,366
CONSUMER--.6%
Gillette,
Notes, 3.75%, 2004 2,500,000 (a) 2,571,947
FINANCIAL SERVICES--3.4%
Caterpillar Financial Services,
Medium-Term Notes, Ser. F, 7.59%, 2003 3,400,000 3,476,129
Countrywide Home Loan:
Gtd. Medium-Term Notes, Ser. E, 7.45%, 2003 335,000 337,395
Gtd. Medium-Term Notes, Ser. F, 6.7%, 2005 4,000,000 4,290,464
General Electric Capital Corp.,
Medium-Term Notes, Ser. A, 2.85%, 2006 2,500,000 2,524,807
Household Netherlands,
Gtd. Sr. Notes, 6.2%, 2003 2,500,000 2,537,382
International Lease Finance:
Medium-Term Notes, Ser. J, 5.5%, 2003 700,000 704,525
Notes, 8.375%, 2004 850,000 924,255
10
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES (CONTINUED)
John Deere Capital,
Medium-Term Notes, Ser. D, 1.69%, 2004 714,000 (b) 717,747
15,512,704
FOOD & BEVERAGES--3.3%
Earthgrains,
Sr. Notes, 8.375%, 2003 2,215,000 2,215,000
McDonald's,
Medium-Term Notes, Ser. G, 5.15%, 2004 1,000,000 1,030,803
Pepsi Bottling,
Gtd. Notes, 5.375%, 2004 4,950,000 (a) 5,060,400
Safeway,
Sr. Notes, 3.625%, 2003 1,500,000 1,503,795
Tyson Foods,
Notes, 6.625%, 2004 2,605,000 2,693,403
Unilever Capital,
Gtd. Sr. Notes, 6.75%, 2003 2,500,000 2,532,802
15,036,203
FOREIGN/GOVERNMENTAL--5.9%
Export Development of Canada,
Notes, 2.375%, 2006 7,700,000 7,730,299
Kingdom of Denmark,
Medium-Term Notes, Ser. 110-1,
6.375%, 2003 5,870,000 5,887,610
Kingdom of Spain,
Medium-Term Notes, Ser. 73, 5.25%, 2004 350,000 367,850
New Zealand Government,
Medium-Term Notes, Ser. 2082-1,
6.25%, 2004 2,800,000 2,949,800
Province of Quebec,
Deb., Ser. NS, 8.625%, 2005 2,500,000 2,733,965
Republic of Finland,
Deb., 7.875%, 2004 6,748,000 7,191,809
26,861,333
HEALTH CARE--2.2%
American Home Products,
Notes, 5.875%, 2004 4,575,000 4,698,928
Cardinal Health,
Notes, 6.5%, 2004 2,500,000 2,567,795
United Healthcare,
Sr. Notes, 1.88%, 2004 2,655,000 (a,b) 2,657,620
9,924,343
The Fund 11
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
INSURANCE--3.6%
ACE INA,
Gtd. Sr. Notes, 8.2%, 2004 2,040,000 2,165,546
ASIF Global Financing,
Notes, 1.37%, 2006 8,183,000 (a,b) 8,234,144
Marsh & McLennan,
Sr. Notes, 6.625%, 2004 1,450,000 1,514,263
MetLife:
Deb., 3.911%, 2005 2,000,000 2,066,286
Notes, 6.3%, 2003 865,000 (a) 875,425
Nationwide Mutual Insurance,
Notes, 6.5%, 2004 1,455,000 (a) 1,492,682
16,348,346
OIL & GAS--3.2%
Baker Hughes,
Notes, 8%, 2004 1,500,000 1,573,912
Chevron,
Notes, 6.625%, 2004 3,000,000 3,159,573
Conoco,
Sr. Notes, 5.9%, 2004 5,305,000 5,478,118
Occidental Petroleum,
Sr. Notes, 6.5%, 2005 4,000,000 4,280,688
14,492,291
PAPER & FOREST PRODUCTS--.2%
International Paper,
Notes, 6.125%, 2003 1,000,000 1,011,428
REAL ESTATE INVESTMENT TRUSTS--2.6%
Colonial Realty,
Medium-Term Notes, 7.05%, 2003 300,000 305,571
EOP Operating,
Notes, 7.375%, 2003 1,500,000 1,523,823
Evans Withycombe Residential,
Notes, 7.5%, 2004 2,228,000 2,316,351
Highwoods Realty:
Notes, 6.75%, 2003 1,000,000 1,014,206
Notes, 8%, 2003 1,200,000 1,221,826
New Plan Excel Realty Trust,
Sr. Notes, 7.75%, 2005 1,120,000 1,205,354
ProLogis Trust,
Sr. Notes, 7%, 2003 175,000 176,665
12
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
Summit Properties Partnerships,
Notes, 6.95%, 2004 4,250,000 4,403,875
12,167,671
RESIDENTIAL MORTGAGE PASS-THROUGH CTFS.--3.2%
Countrywide Mortgage Backed Securities,
Ser. 1994-H, Cl. B1, 6.75%, 2024 345,761 358,352
Residential Asset Mortgage Products,
Ser. 2002-SL1, Cl. AI1, 7%, 2032 1,200,800 1,239,560
Residential Funding Mortgage Securities I:
Ser. 2001-S4, Cl. M1, 7.25%, 2031 1,956,730 2,069,655
Ser. 2001-S13, Cl. A1, 6.5%, 2016 755,699 771,221
Structured Asset Securities:
Ser. 2000-3, Cl. 2A6, 8%, 2030 4,238,413 4,292,945
Ser. 2001-5, Cl. 1A3, 6%, 2031 4,100,000 4,145,490
Wells Fargo Mortgage Backed Securities,
Ser. 2001-22, Cl. B2, 6%, 2031 1,765,838 1,806,796
14,684,019
RETAIL--2.2%
CVS,
Notes, 5.5%, 2004 3,000,000 3,064,668
Home Depot,
Sr. Notes, 6.5%, 2004 3,000,000 3,162,237
May Department Stores,
Notes, 7.15%, 2004 1,500,000 1,586,140
Sears Roebuck Acceptance,
Medium-Term Notes, Ser. IV, 6.71%, 2003 1,400,000 1,409,594
Sears Roebuck & Co.,
Notes, 6.25%, 2004 838,000 849,271
10,071,910
STRUCTURED INDEX--1.2%
HSBC TIGERS:
Medium-Term Notes, Ser. 2003-3, 3.915%, 2008 2,193,000 (a,b,e) 2,192,724
Medium-Term Notes, Ser. 2003-4, 4.36%, 2008 3,400,000 (a,b,e) 3,400,000
5,592,724
TECHNOLOGY--3.4%
Fondo LatinoAmericano,
Notes, 3%, 2006 2,865,000 (a) 2,851,045
Hewlett-Packard Finance,
Deb., 7.9%, 2003 1,500,000 (a) 1,528,209
The Fund 13
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY (CONTINUED)
Meridian Funding,
Notes, 1.58%, 2009 11,000,000 (a,b) 11,002,079
15,381,333
TELECOMMUNICATIONS--2.4%
British Telecommunications,
Notes, 7.625%, 2005 4,000,000 4,479,596
GTE Hawaiian Telephone,
First Mortgage, Ser. BB, 6.75%, 2005 2,750,000 2,930,997
TCI Communications,
Sr. Notes, 8%, 2005 3,145,000 3,450,983
10,861,576
TEXTILES & APPAREL--1.0%
Jones Apparel,
Sr. Notes, 7.5%, 2004 4,300,000 4,488,813
U.S. GOVERNMENT--7.1%
U.S. Treasury Notes:
2%, 5/15/2006 23,485,000 23,345,570
3.625%, 5/15/2013 10,000,000 9,337,500
32,683,070
U.S. GOVERNMENT AGENCIES--4.1%
SLM,
Conv. Bonds, 1.06%, 2035 19,000,000 (a,b) 18,744,260
U.S. GOVERNMENT AGENCIES/MORTGAGE-BACKED--7.8%
Federal Home Loan Mortgage Corp.,
REMIC Trust, Gtd. Multiclass Mortgage Participation Ctfs.:
Ser. 2143, Cl. CU, 5.75%, 12/15/2024 5,000,000 5,102,508
Ser. 2416, Cl. PB, 5.5%, 8/15/2012 632,449 634,678
Ser. 2438, Cl. LG, 5.5%, 11/15/2013 2,792,463 2,838,566
Ser. 2500, Cl. GB, 5%, 2/15/2012 1,150,000 1,153,282
Ser. 2538, Cl. AQ, 5%, 12/15/2017 2,910,432 2,927,228
Ser. 2603, Cl. AC, 2%, 12/15/2008 4,516,862 4,513,924
Federal National Mortgage Association:
Grantor Trust,
Ser. 1999-T1, Cl. A6, 6%, 1/25/2039 1,859,449 1,873,104
REMIC Trust, Gtd. Pass-Through Ctfs.:
Ser. 2003-24, Cl. PG, 3.5%, 11/25/2009 9,008,899 9,075,949
Ser. 2003-49, Cl. JE, 3%, 4/25/2033 5,893,335 5,790,201
Whole Loan,
Ser. 2001-W2, Cl. AF3, 5.258%, 5/25/2029 1,870,589 1,873,900
35,783,340
14
Principal
BONDS AND NOTES (CONTINUED) Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
UTILITIES/GAS & ELECTRIC--2.2%
CommonWealth Edison,
Notes, 7.375%, 2004 2,100,000 2,154,453
Dominion Resources,
Notes, 3.875%, 2004 2,200,000 2,222,840
KeySpan,
Sr. Notes, 7.25%, 2005 4,081,000 4,518,320
Niagara Mohawk Power,
First Mortgage, 7.375%, 2003 1,345,000 1,345,000
10,240,613
TOTAL BONDS AND NOTES
(cost $427,670,284) 424,254,066
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS--4.2% Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT COMPANIES:
Dreyfus Institutional Cash Advantage Fund 6,401,000 (g) 6,401,000
Dreyfus Institutional Cash Advantage Plus Fund 6,401,000 (g) 6,401,000
Dreyfus Institutional Preferred Plus Money Market Fund 6,401,000 (g) 6,401,000
TOTAL OTHER INVESTMENTS
(cost $19,203,000) 19,203,000
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
SHORT-TERM INVESTMENTS--5.2% Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS:
.84%, 9/25/2003 1,600,000 (f) 1,597,872
.95%, 1/15/2004 22,160,000 22,058,507
TOTAL SHORT-TERM INVESTMENTS
(cost $23,660,803) 23,656,379
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $470,534,087) 102.1% 467,113,445
LIABILITIES, LESS CASH AND RECEIVABLES (2.1%) (9,565,367)
NET ASSETS 100.0% 457,548,078
(A) SECURITIES EXEMPT FROM REGISTRATION UNDER RULE 144A OF THE SECURITIES ACT
OF 1933. THESE SECURITIES MAY BE RESOLD IN TRANSACTIONS EXEMPT FROM
REGISTRATION, NORMALLY TO QUALIFIED INSTITUTIONAL BUYERS. AT JULY 31, 2003,
THESE SECURITIES AMOUNTED TO $139,041,382 OR 30.4% OF NET ASSETS.
(B) VARIABLE RATE SECURITY--INTEREST RATE SUBJECT TO PERIODIC CHANGE.
(C) NON-INCOME PRODUCING--SECURITY IN DEFAULT.
(D) THE VALUE OF THIS SECURITY HAS BEEN DETERMINED IN GOOD FAITH UNDER THE
DIRECTION OF THE BOARD OF DIRECTORS.
(E) SECURITIES LINKED TO A PORTFOLIO OF DEBT SECURITIES.
(F) PARTIALLY HELD BY A BROKER AS COLLATERAL FOR OPEN FINANCIAL FUTURES
POSITIONS.
(G) INVESTMENTS IN AFFILIATED MONEY MARKET MUTUAL FUNDS--SEE NOTE 3(E).
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 15
STATEMENT OF FINANCIAL FUTURES
July 31, 2003
Unrealized
Market Value Appreciation
Covered by (Depreciation)
Contracts Contracts ($) Expiration at 7/31/2003 ($)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL FUTURES LONG
U.S. Treasury 2 Year Notes 27 5,795,297 September 2003 (27,000)
U.S. Treasury 10 Year Notes 115 12,721,875 September 2003 (151,163)
FINANCIAL FUTURES SHORT
U.S. Agency 10 Year Notes 74 7,812,781 September 2003 756,187
578,024
SEE NOTES TO FINANCIAL STATEMENTS.
16
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2003
Cost Value
- --------------------------------------------------------------------------------
ASSETS ($):
Investments in securities--See Statement of
Investments 470,534,087 467,113,445
Cash 2,806,348
Receivable for investment securities sold 56,627,073
Interest receivable 4,022,249
Receivable for shares of Common Stock subscribed 1,152,830
Receivable for futures variation margin--Note 4 125,408
Prepaid expenses 39,746
531,887,099
- --------------------------------------------------------------------------------
LIABILITIES ($):
Due to The Dreyfus Corporation and affiliates 303,042
Payable for investment securities purchased 69,937,667
Payable for shares of Common Stock redeemed 4,016,133
Accrued expenses 82,179
74,339,021
- --------------------------------------------------------------------------------
NET ASSETS ($) 457,548,078
- --------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS ($):
Paid-in capital 464,772,810
Accumulated undistributed investment income--net 49,232
Accumulated net realized gain (loss) on investments (4,431,346)
Accumulated net unrealized appreciation (depreciation)
on investments (including $578,024 net unrealized
appreciation on financial futures) (2,842,618)
- --------------------------------------------------------------------------------
NET ASSETS ($) 457,548,078
NET ASSET VALUE PER SHARE
Class A Class B Class D Class P Class S
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets ($) 11,801,837 5,289,795 313,643,754 125,292,461 1,520,231
Shares Outstanding 5,907,038 2,665,359 158,537,451 63,159,444 766,282
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
PER SHARE ($) 2.00 1.98 1.98 1.98 1.98
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 17
STATEMENT OF OPERATIONS
Year Ended July 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME ($):
Interest 13,386,772
Cash dividends 186,199
TOTAL INCOME 13,572,971
EXPENSES:
Management fee--Note 3(a) 2,424,209
Shareholder servicing costs--Note 3(c) 1,366,245
Registration fees 173,049
Professional fees 94,325
Custodian fees--Note 3(c) 45,188
Distribution fees--Note 3(b) 22,120
Prospectus and shareholders' reports 21,942
Directors' fees and expenses--Note 3(d) 18,062
Miscellaneous 34,921
TOTAL EXPENSES 4,200,061
Less--reduction in management fee due to
undertaking--Note 3(a) (280,343)
NET EXPENSES 3,919,718
INVESTMENT INCOME--NET 9,653,253
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NOTE 4 ($):
Net realized gain (loss) on investments 3,033,250
Net realized gain (loss) on financial futures (1,644,954)
Net realized gain (loss) on options transactions 139,922
NET REALIZED GAIN (LOSS) 1,528,218
Net unrealized appreciation (depreciation) on investments
(including $612,461 net unrealized appreciation on financial futures)
(5,457,634)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (3,929,416)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 5,723,837
SEE NOTES TO FINANCIAL STATEMENTS.
18
STATEMENT OF CHANGES IN NET ASSETS
Year Ended July 31,
-----------------------------------
2003(a) 2002(b)
- --------------------------------------------------------------------------------
OPERATIONS ($):
Investment income--net 9,653,253 3,095,966
Net realized gain (loss) on investments 1,528,218 (2,815,459)
Net unrealized appreciation (depreciation)
on investments (5,457,634) 2,615,016
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 5,723,837 2,895,523
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM ($):
Investment income--net:
Class A (152,563) --
Class B (39,740) --
Class D (10,872,139) (3,311,438)
Class P (1,478,188) --
Class S (20,036) --
TOTAL DIVIDENDS (12,562,666) (3,311,438)
- --------------------------------------------------------------------------------
CAPITAL STOCK TRANSACTIONS ($):
Net proceeds from shares sold:
Class A 21,802,281 --
Class B 9,466,309 --
Class D 352,218,739 384,868,207
Class P 215,788,350 --
Class S 4,335,681 --
Dividends reinvested:
Class A 114,190 --
Class B 33,986 --
Class D 9,693,475 3,059,147
Class P 1,250,597 --
Class S 19,554 --
The Fund 19
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
Year Ended July 31,
-----------------------------------
2003(a) 2002(b)
- --------------------------------------------------------------------------------
CAPITAL STOCK TRANSACTIONS ($) (CONTINUED):
Cost of shares redeemed:
Class A (10,034,432) --
Class B (4,189,483) --
Class D (384,741,553) (45,012,363)
Class P (91,052,922) --
Class S (2,816,941) --
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL STOCK TRANSACTIONS 121,887,831 342,914,991
TOTAL INCREASE (DECREASE) IN NET ASSETS 115,049,002 342,499,076
- --------------------------------------------------------------------------------
NET ASSETS ($):
Beginning of Period 342,499,076 --
END OF PERIOD 457,548,078 342,499,076
Undistributed investment income--net 49,232 --
20
Year Ended July 31,
-----------------------------------
2003(a) 2002(b)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
CLASS A SHARES
Shares sold 10,867,599 --
Shares issued for dividends reinvested 57,092 --
Shares redeemed (5,017,653) --
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 5,907,038 --
- --------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 4,753,561 --
Shares issued for dividends reinvested 17,104 --
Shares redeemed (2,105,306) --
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 2,665,359 --
- --------------------------------------------------------------------------------
CLASS D SHARES
Shares sold 176,389,077 191,539,280
Shares issued for dividends reinvested 4,867,872 1,522,625
Shares redeemed (193,378,919) (22,402,484)
NET INCREASE (DECREASE) IN SHARES OUTSTANDING (12,121,970) 170,659,421
- --------------------------------------------------------------------------------
CLASS P SHARES
Shares sold 108,396,967 --
Shares issued for dividends reinvested 630,204 --
Shares redeemed (45,867,727) --
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 63,159,444 --
- --------------------------------------------------------------------------------
CLASS S SHARES
Shares sold 2,178,964 --
Shares issued for dividends reinvested 9,859 --
Shares redeemed (1,422,541) --
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 766,282 --
(A) THE FUND CHANGED TO A FIVE CLASS FUND ON NOVEMBER 1, 2002. THE EXISTING
SHARES WERE REDESIGNATED CLASS D SHARES AND THE FUND COMMENCED OFFERING
CLASS A, CLASS B, CLASS P AND CLASS S SHARES.
(B) FROM NOVEMBER 15, 2001 (COMMENCEMENT OF OPERATIONS) TO JULY 31, 2002.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 21
FINANCIAL HIGHLIGHTS
The following tables describe the performance for each share class for the
fiscal periods indicated. All information (except portfolio turnover rate)
reflects financial results for a single fund share. 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 derived from the fund's financial statements.
Period Ended
CLASS A SHARES July 31, 2003(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 2.00
Investment Operations:
Investment income--net .03(b)
Net realized and unrealized
gain (loss) on investments .01
Total from Investment Operations .04
Distributions:
Dividends from investment income--net (.04)
Net asset value, end of period 2.00
- --------------------------------------------------------------------------------
TOTAL RETURN (%)(C) 1.88(d)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .80(e)
Ratio of net investment income to average net assets 1.48(e)
Decrease reflected in above expense ratio due to
undertaking by The Dreyfus Corporation .21(e)
Portfolio Turnover Rate 371.43
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 11,802
(A) FROM NOVEMBER 1, 2002 (COMMENCEMENT OF INITIAL OFFERING) TO JULY 31, 2003.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) EXCLUSIVE OF SALES CHARGE.
(D) NOT ANNUALIZED.
(E) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
22
Period Ended
CLASS B SHARES July 31, 2003(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 2.00
Investment Operations:
Investment income--net .01(b)
Net realized and unrealized
gain (loss) on investments .00(c)
Total from Investment Operations .01
Distributions:
Dividends from investment income--net (.03)
Net asset value, end of period 1.98
- --------------------------------------------------------------------------------
TOTAL RETURN (%)(D) .29(e)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets 1.55(f)
Ratio of net investment income to average net assets .74(f)
Decrease reflected in above expense ratio due to
undertaking by The Dreyfus Corporation .19(f)
Portfolio Turnover Rate 371.43
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 5,290
(A) FROM NOVEMBER 1, 2002 (COMMENCEMENT OF INITIAL OFFERING) TO JULY 31, 2003.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) AMOUNT REPRESENTS LESS THAN $.01 PER SHARE.
(D) EXCLUSIVE OF SALES CHARGE.
(E) NOT ANNUALIZED.
(F) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 23
FINANCIAL HIGHLIGHTS (CONTINUED)
Year Ended July 31,
-----------------------
CLASS D SHARES 2003(a) 2002(b)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 2.01 2.00
Investment Operations:
Investment income--net .04(c) .05(c)
Net realized and unrealized
gain (loss) on investments (.02) .01
Total from Investment Operations .02 .06
Distributions:
Dividends from investment income--net (.05) (.05)
Net asset value, end of period 1.98 2.01
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 1.16 3.01(d)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .80 .75(e)
Ratio of net investment income
to average net assets 2.10 3.37(e)
Decrease reflected in above expense ratios due to
undertakings by The Dreyfus Corporation .05 .17(e)
Portfolio Turnover Rate 371.43 96.09(d)
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 313,644 342,499
(A) THE FUND COMMENCED OFFERING FIVE CLASSES OF SHARES ON NOVEMBER 1, 2002. THE
EXISTING SHARES WERE REDESIGNATED CLASS D SHARES.
(B) FROM NOVEMBER 15, 2001 (COMMENCEMENT OF OPERATIONS) TO JULY 31, 2002.
(C) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(D) NOT ANNUALIZED.
(E) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
24
Period Ended
CLASS P SHARES July 31, 2003(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 2.00
Investment Operations:
Investment income--net .03(b)
Net realized and unrealized
gain (loss) on investments (.01)
Total from Investment Operations .02
Distributions:
Dividends from investment income--net (.04)
Net asset value, end of period 1.98
- --------------------------------------------------------------------------------
TOTAL RETURN (%) .85(c)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .80(d)
Ratio of net investment income to average net assets 1.43(d)
Decrease reflected in above expense ratio due to
undertaking by The Dreyfus Corporation .06(d)
Portfolio Turnover Rate 371.43
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 125,292
(A) FROM NOVEMBER 1, 2002 (COMMENCEMENT OF INITIAL OFFERING) TO JULY 31, 2003.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) NOT ANNUALIZED.
(D) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 25
FINANCIAL HIGHLIGHTS (CONTINUED)
Period Ended
CLASS S SHARES July 31, 2003(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 2.00
Investment Operations:
Investment income--net .02(b)
Net realized and unrealized
gain (loss) on investments (.01)
Total from Investment Operations .01
Distributions:
Dividends from investment income--net (.03)
Net asset value, end of period 1.98
- --------------------------------------------------------------------------------
TOTAL RETURN (%)(C) .65(d)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets 1.05(e)
Ratio of net investment income to average net assets 1.05(e)
Decrease reflected in above expense ratio due to
undertaking by The Dreyfus Corporation .18(e)
Portfolio Turnover Rate 371.43
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 1,520
(A) FROM NOVEMBER 1, 2002 (COMMENCEMENT OF INITIAL OFFERING) TO JULY 31, 2003.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) EXCLUSIVE OF SALES CHARGE.
(D) NOT ANNUALIZED.
(E) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
26
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Dreyfus Premier Yield Advantage Fund (the "fund") is a separate non-diversified
series of Dreyfus Investment Grade Funds, Inc. (the "Company" ) which is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
an open-end management investment company and operates as a series company
currently offering five series, including the fund. The fund's investment
objective is to provide investors with as high a level of current income as is
consistent with the preservation of capital with minimal changes in share price.
The Dreyfus Corporation (the "Manager") serves as the fund's investment adviser.
The Manager is a wholly-owned subsidiary of Mellon Bank, N.A. ("Mellon"), which
is a wholly-owned subsidiary of Mellon Financial Corporation.
On July 17, 2003, the fund's Board of Directors approved, effective July 18,
2003, a change of the Company's name from "Dreyfus Investment Grade Bond Funds,
Inc." to "Dreyfus Investment Grade Funds, Inc." On September 10, 2002, the
fund' s Board of Directors approved, effective November 1, 2002, a change of the
fund' s name from "Dreyfus Yield Advantage Fund" to "Dreyfus Premier Yield
Advantage Fund" coinciding with the fund implementing a multiple class
structure. Shareholders, on November 1, 2002, were classified as Class D
shareholders and the fund added Class A, Class B, Class P and Class S shares.
Dreyfus Service Corporation (the "Distributor"), a wholly-owned subsidiary of
the Manager, is the distributor of the fund's shares. The fund is authorized to
issue 900 million shares of $.001 par value Common Stock. The fund currently
offers five classes of shares: Class A (100 million shares authorized), Class B
(50 million shares authorized), Class D (500 million shares authorized), Class P
(200 million shares authorized) and Class S (50 million shares authorized).
Class A shares are subject to a sales charge imposed at the time of purchase,
Class B shares and Class S shares are subject to a contingent deferred sales
charge (" CDSC" ) imposed on Class B share and Class S share redemptions made
within six years of purchase and automatically convert to Class A shares after
six years. Class D and Class P shares are sold at net asset value per share only
The Fund 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to institutional investors. Class A shares purchased at net asset value (an
investment of $250,000 or more) will have a CDSC imposed on redemptions made
within eighteen months of purchase. Other differences between the classes
include the services offered to and the expenses borne by each class and certain
voting rights.
The Company accounts separately for the assets, liabilities and operations of
each series. Expenses directly attributable to each series are charged to that
series' operations; expenses which are applicable to all series are allocated
among them on a pro rata basis.
The fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which may require the use of
management estimates and assumptions. Actual results could differ from those
estimates.
(A) PORTFOLIO VALUATION: Investments in securities (excluding short-term
investments, other than U.S. Treasury Bills, financial futures and options) are
valued each business day by an independent pricing service (the "Service")
approved by the Board of Directors. Investments for which quoted bid prices are
readily available and are representative of the bid side of the market in the
judgment of the Service are valued at the mean between the quoted bid prices (as
obtained by the Service from dealers in such securities) and asked prices (as
calculated by the Service based upon its evaluation of the market for such
securities) . Other investments (which constitute a majority of the portfolio
securities) are carried at fair value as determined by the Service, based on
methods which include consideration of: yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. Securities for which there are no such
valuations are valued at fair value as determined in good faith under the
direction of the Board of Directors. Short-term investments, excluding U.S.
Treasury Bills, are carried at amortized cost, which approximates value.
Financial futures are valued at the last sales price on the securities exchange
on which such securities are primarily traded or at the last sales price on the
national securities market on each business day. Options traded over-the-counter
are priced at the mean between the bid prices and the asked prices.
28
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount and premium on investments, is recognized
on the accrual basis. Under the terms of the custody agreement, the fund
received net earnings credits of $25,148 during the period ended July 31, 2003,
based on available cash balances left on deposit. Income earned under this
arrangement is included in interest income.
(C) DIVIDENDS TO SHAREHOLDERS: It is the policy of the fund to declare dividends
daily from investment income-net. Such dividends are paid monthly. Dividends
from net realized capital gain, if any, are normally declared and paid annually,
but the fund may make distributions on a more frequent basis to comply with the
distribution requirements of the Internal Revenue Code of 1986, as amended (the
" Code" ). To the extent that net realized capital gain can be offset by capital
loss carryovers, it is the policy of the fund not to distribute such gain.
Income and capital gain distributions are determined in accordance with income
tax regulations, which may differ from accounting principles generally accepted
in the United States.
(D) FEDERAL INCOME TAXES: It is the policy of the fund to continue to qualify as
a regulated investment company, if such qualification is in the best interests
of its shareholders, by complying with the applicable provisions of the Code,
and to make distributions of taxable income sufficient to relieve it from
substantially all federal income and excise taxes.
At July 31, 2003, the components of accumulated earnings on a tax basis were as
follows: undistributed ordinary income $49,232, accumulated capital losses
$3,308,447 and unrealized depreciation $3,542,310. In addition, the fund had
$423,207 of capital losses realized after October 31, 2002 which were deferred
for tax purposes to the first day of the following fiscal year.
The Fund 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The accumulated capital loss carryover of $3,308,447 is available to be applied
against future net securities profits, if any, realized subsequent to July 31,
2003. If not applied, the carryover expires in fiscal 2011.
The tax character of distributions paid to shareholders during the fiscal
periods ended July 31, 2003 and July 31, 2002, were as follows: ordinary income
$12,562,666 and $3,311,438, respectively.
During the period ended July 31, 2003, as a result of permanent book to tax
differences, the fund increased accumulated undistributed investment income-net
by $2,958,645, decreased net realized gain (loss) on investments by $2,940,898
and decreased paid-in capital by $17,747. Net assets were not affected by this
reclassification.
NOTE 2--BANK LINE OF CREDIT:
The fund participates with other Dreyfus-managed funds in a $100 million
unsecured line of credit primarily to be utilized for temporary or emergency
purposes, including the financing of redemptions. Interest is charged to the
fund based on prevailing market rates in effect at the time of borrowings.
During the period ended July 31, 2003, the fund did not borrow under the line of
credit.
NOTE 3--MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) Pursuant to a management agreement ("Agreement") with the Manager, the
management fee is computed at the annual rate of .50 of 1% of the value of the
fund's average daily net assets and is payable monthly. The Manager has
undertaken from August 1, 2002 through July 31, 2004, that if the aggregated
expenses of the fund, exclusive of taxes, brokerage fees, 12b-1 distribution
plan fees, shareholder services plan fees and extraordinary expenses, exceed an
annual rate of .55 of 1% of the value of the fund's average daily net assets,
the fund may deduct from the payment to be made to the Manager under the
Agreement, or the Manager will bear, such excess expense. The reduction in
management fee, pursuant to the undertaking, amounted to $280,343 during the
period ended July 31, 2003.
30
During the period ended July 31, 2003, the Distributor retained $11,089 from
commissions earned on sales of the fund' s Class A shares and $3,372 from
contingent deferred sales charges on redemptions of the fund's Class S shares.
(B) Under the Distribution Plan (the "Plan") adopted pursuant to Rule 12b-1
under the Act, Class B and Class S shares pay the Distributor for distributing
their shares at an annual rate of .75 of 1% of the value of the average daily
net assets of Class B shares and .25 of 1% of the value of the average daily net
assets of Class S shares. During the period ended July 31, 2003, Class B and
Class S shares were charged $19,554 and $2,566, respectively, pursuant to the
Plan.
(C) Under the Shareholder Services Plan, Class A, Class B, Class D, Class P and
Class S shares pay the Distributor at an annual rate of .25 of 1% of the value
of their average daily net assets for the provision of certain services. The
services provided may include personal services relating to shareholder
accounts, such as answering shareholder inquiries regarding Class A, Class B,
Class D, Class P and Class S shares and providing reports and other information,
and services related to the maintenance of shareholder accounts. The Distributor
may make payments to Service Agents (a securities dealer, financial institution
or other industry professional) in respect of these services. The Distributor
determines the amounts to be paid to Service Agents. During the period ended
July 31, 2003, Class A, Class B, Class D, Class P and Class S shares were
charged, $16,661, $6,518, $1,021,664, $164,696 and $2,566, respectively,
pursuant to the Shareholder Services Plan.
The fund compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of the
Manager, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the fund. During the period
ended July 31, 2003, the fund was charged $76,716 pursuant to the transfer
agency agreement.
The fund compensates Mellon under a custody agreement for providing custodial
services for the fund. During the period ended July 31, 2003, the fund was
charged $45,188 pursuant to the custody agreement.
The Fund 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(D) Each Board member also serves as a Board member of other funds within the
Dreyfus complex (collectively, the "Fund Group"). Through December 31, 2002,
each Board member who was not an "affiliated person" as defined in the Act
received an annual fee of $45,000, an attendance fee of $5,000 for each
in-person meeting and $500 for telephone meetings. Effective January 1, 2003,
the Fund Group increased in size, and the annual fee was increased to $60,000
while the attendance fee was increased to $7,500 for each in-person meeting.
These fees are allocated among the funds in the Fund Group in proportion to each
fund's relative net assets. The Chairman of the Board receives an additional 25%
of such compensation. Subject to the Company's Emeritus Program Guidelines,
Emeritus Board members, if any, receive 50% of the annual retainer fee and per
meeting fee paid at the time the Board member achieves emeritus status.
(E) Commencing September 10, 2002, pursuant to an exemptive order from the
Securities and Exchange Commission, the fund may invest its available cash
balances in affiliated money market mutual funds as shown in the fund's
Statement of Investments. Management fees are not charged to these accounts.
During the period ended July 31, 2003, the fund derived $186,199 in income from
these investments, which is included in dividend income in the fund's Statement
of Operations.
NOTE 4--SECURITIES TRANSACTIONS:
The aggregate amount of purchases and sales (including paydowns) of investment
securities, excluding short-term securities, options and financial futures,
during the period ended July 31, 2003, amounted to $1,775,789,784 and
$1,661,077,369, respectively.
The fund may invest in financial futures contracts in order to gain exposure to
or protect against changes in the market. The fund is exposed to market risk as
a result of changes in the value of the underlying financial instruments.
Investments in financial futures require the fund to "mark to market" on a daily
basis, which reflects the change in market value of the contracts at the close
of each day's trading.
32
Accordingly, variation margin payments are received or made to reflect daily
unrealized gains and losses. When the contracts are closed, the fund recognizes
a realized gain or loss. These investments require initial margin deposits with
a broker, which consist of cash or cash equivalents, up to approximately 10% of
the contract amount. The amount of these deposits is determined by the exchange
or Board of Trade on which the contract is traded and is subject to change.
Contracts open at July 31, 2003, are set forth in the Statement of Financial
Futures.
The fund may purchase and write (sell) call/put options in order to gain
exposure to or protect against changes in the market.
As a writer of call options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instruments underlying the options. Generally, the fund would incur a gain, to
the extent of the premium, if the price of the underlying financial instrument
decreases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument increases between those dates. At July 31, 2003, there
were no call options written outstanding.
As a writer of put options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instruments underlying the options. Generally, the fund would incur a gain, to
the extent of the premium, if the price of the underlying financial instrument
increases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument decreases between those dates. At July 31, 2003, there
were no put options written outstanding.
At July 31, 2003, the cost of investments for federal income tax purposes was
$470,655,755; accordingly, accumulated net unrealized depreciation on
investments was $3,542,310, consisting of $2,009,413 gross unrealized
appreciation and $5,551,723 gross unrealized depreciation.
The Fund 33
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors Dreyfus Premier Yield Advantage Fund
We have audited the accompanying statement of assets and liabilities, including
the statements of investments and financial futures, of Dreyfus Premier Yield
Advantage Fund (one of the funds comprising Dreyfus Investment Grade Funds,
Inc.), as of July 31, 2003, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund' s management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
verification by examination of securities held by the custodian as of July 31,
2003 and confirmation of securities not held by the custodian by correspondence
with others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Dreyfus Premier Yield Advantage Fund at July 31, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
New York, New York
September 18, 2003
34
BOARD MEMBERS INFORMATION (Unaudited)
JOSEPH S. DIMARTINO (59)
CHAIRMAN OF THE BOARD (1995)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The Muscular Dystrophy Association, Director
* Levcor International, Inc., an apparel fabric processor, Director
* Century Business Services, Inc., a provider of outsourcing functions for small
and medium size companies, Director
* The Newark Group, a provider of a national market of paper recovery
facilities, paperboard mills and paperboard converting plants, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 191
--------------
CLIFFORD L. ALEXANDER, JR. (69)
BOARD MEMBER (2003)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Alexander & Associates, Inc., a management consulting firm
(January 1981-present)
* Chairman of the Board of Moody's Corporation (October 2000-present)
* Chairman of the Board and Chief Executive Officer of The Dun and Bradstreet
Corporation (October 1999-September 2000)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* Wyeth (formerly, American Home Products Corporation), a global leader in
pharmaceuticals, consumer healthcare products and animal health products,
Director
* Mutual of America Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 70
--------------
LUCY WILSON BENSON (76)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Benson and Associates, consultants to business and government
(1980-present)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The International Executive Services Corps., Director
* Citizens Network for Foreign Affairs, Vice Chairperson
* Council on Foreign Relations, Member
* Lafayette College Board of Trustees, Vice Chairperson Emeritus
* Atlantic Council of the U.S., Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 44
The Fund 35
BOARD MEMBERS INFORMATION (Unaudited) (CONTINUED)
DAVID W. BURKE (67)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* John F. Kennedy Library Foundation, Director
* U.S.S. Constitution Museum, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 87
--------------
WHITNEY I. GERARD (68)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Partner of Chadbourne & Parke LLP
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
ARTHUR A. HARTMAN (77)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Chairman of First NIS Regional Fund (ING/Barings Management) and New Russia
Fund
* Advisory Council Member to Barings-Vostok
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* APCO Associates, Inc., Senior Consultant
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
GEORGE L. PERRY (69)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Economist and Senior Fellow at Brookings Institution
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* State Farm Mutual Automobile Association, Director
* State Farm Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
ONCE ELECTED ALL BOARD MEMBERS SERVE FOR AN INDEFINITE TERM. ADDITIONAL
INFORMATION ABOUT THE BOARD MEMBERS, INCLUDING THEIR ADDRESS IS AVAILABLE IN THE
FUND'S STATEMENT OF ADDITIONAL INFORMATION WHICH CAN BE OBTAINED FROM DREYFUS
FREE OF CHARGE BY CALLING THIS TOLL FREE NUMBER: 1-800-554-4611.
36
OFFICERS OF THE FUND (Unaudited)
STEPHEN E. CANTER, PRESIDENT SINCE MARCH 2000.
Chairman of the Board, Chief Executive Officer and Chief Operating Officer
of the Manager, and an officer of 95 investment companies (comprised of 188
portfolios) managed by the Manager. Mr. Canter also is a Board member and, where
applicable, an Executive Committee Member of the other investment management
subsidiaries of Mellon Financial Corporation, each of which is an affiliate of
the Manager. He is 58 years old and has been an employee of the Manager since
May 1995.
STEPHEN R. BYERS, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2002.
Chief Investment Officer, Vice Chairman and a director of the Manager, and
an officer of 95 investment companies (comprised of 188 portfolios) managed by
the Manager. Mr. Byers also is an officer, director or an Executive Committee
Member of certain other investment management subsidiaries of Mellon Financial
Corporation, each of which is an affiliate of the Manager. He is 50 years old
and has been an employee of the Manager since January 2000. Prior to joining the
Manager, he served as an Executive Vice President-Capital Markets, Chief
Financial Officer and Treasurer at Gruntal & Co., L.L.C.
CHARLES CARDONA, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2001.
Vice Chairman and a Director of the Manager, Executive Vice President of
the Distributor, President of Dreyfus Institutional Services Division, and an
officer of 12 investment companies (comprised of 16 portfolios) managed by the
Manager. He is 47 years old and has been an employee of the Manager since
February 1981.
MARK N. JACOBS, VICE PRESIDENT SINCE MARCH 2000.
Executive Vice President, Secretary and General Counsel of the Manager, and
an officer of 96 investment companies (comprised of 204 portfolios) managed by
the Manager. He is 57 years old and has been an employee of the Manager since
June 1977.
MICHAEL A. ROSENBERG, SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 93 investment
companies (comprised of 197 portfolios) managed by the Manager. He is 43 years
old and has been an employee of the Manager since October 1991.
STEVEN F. NEWMAN, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel and Assistant Secretary of the Manager, and an
officer of 96 investment companies (comprised of 204 portfolios) managed by the
Manager. He is 54 years old and has been an employee of the Manager since July
1980.
ROBERT R. MULLERY, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 26 investment
companies (comprised of 61 portfolios) managed by the Manager. He is 51 years
old and has been an employee of the Manager since May 1986.
JAMES WINDELS, TREASURER SINCE NOVEMBER 2001.
Director - Mutual Fund Accounting of the Manager, and an officer of 96
investment companies (comprised of 204 portfolios) managed by the Manager. He is
44 years old and has been an employee of the Manager since April 1985.
The Fund 37
OFFICERS OF THE FUND (Unaudited) (CONTINUED)
ERIK D. NAVILOFF, ASSISTANT TREASURER SINCE DECEMBER 2002.
Senior Accounting Manager - Taxable Fixed Income Funds of the Manager, and
an officer of 18 investment companies (comprised of 76 portfolios) managed by
the Manager. He is 35 years old and has been an employee of the Manager since
November 1992.
KENNETH J. SANDGREN, ASSISTANT TREASURER SINCE NOVEMBER 2001.
Mutual Funds Tax Director of the Manager, and an officer of 96 investment
companies (comprised of 204 portfolios) managed by the Manager. He is 49 years
old and has been an employee of the Manager since June 1993.
WILLIAM GERMENIS, ANTI-MONEY LAUNDERING COMPLIANCE OFFICER SINCE SEPTEMBER 2002
Vice President and Anti-Money Laundering Compliance Officer of the
Distributor, and the Anti-Money Laundering Compliance Officer of 91 investment
companies (comprised of 199 portfolios) managed by the Manager. He is 33 years
old and has been an employee of the Distributor since October 1998. Prior to
joining the Distributor, he was a Vice President of Compliance Data Center, Inc.
38
NOTES
For More Information
Dreyfus Premier
Yield Advantage Fund
200 Park Avenue
New York, NY 10166
Manager
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
Custodian
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Transfer Agent &
Dividend Disbursing Agent
Dreyfus Transfer, Inc.
200 Park Avenue
New York, NY 10166
Distributor
Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
To obtain information:
BY TELEPHONE Call your
financial representative or 1-800-554-4611
BY MAIL Write to:
The Dreyfus Premier Family of Funds
144 Glenn Curtiss
Boulevard Uniondale, NY 11556-0144
(c) 2003 Dreyfus Service Corporation 056AR0703
Dreyfus
Inflation Adjusted
Securities Fund
ANNUAL REPORT July 31, 2003
YOU, YOUR ADVISOR AND
DREYFUS
A MELLON FINANCIAL COMPANY(TM)
The views expressed in this report reflect those of the portfolio manager only
through the end of the period covered and do not necessarily represent the views
of Dreyfus or any other person in the Dreyfus organization. Any such views are
subject to change at any time based upon market or other conditions and Dreyfus
disclaims any responsibility to update such views. These views may not be relied
on as investment advice and, because investment decisions for a Dreyfus fund are
based on numerous factors, may not be relied on as an indication of trading
intent on behalf of any Dreyfus fund.
Not FDIC-Insured * Not Bank-Guaranteed * May Lose Value
Contents
THE FUND
- --------------------------------------------------
2 Letter from the Chairman
3 Discussion of Fund Performance
6 Fund Performance
7 Statement of Investments
8 Statement of Assets and Liabilities
9 Statement of Operations
10 Statement of Changes in Net Assets
12 Financial Highlights
13 Notes to Financial Statements
20 Report of Independent Auditors
21 Important Tax Information
22 Board Members Information
24 Officers of the Fund
FOR MORE INFORMATION
- ---------------------------------------------------------------------------
Back Cover
The Fund
Dreyfus
Inflation Adjusted
Securities Fund
LETTER FROM THE CHAIRMAN
Dear Shareholder:
This annual report for Dreyfus Inflation Adjusted Securities Fund covers the
period from commencement of the fund's operations on October 31, 2002, through
July 31, 2003. Inside, you'll find valuable information about how the fund was
managed during the reporting period, including a discussion with Gerald E.
Thunelius, portfolio manager and a Director of the Dreyfus Taxable Fixed Income
Team that manages the fund.
Bonds generally continued to rally during most of the reporting period, driven
higher by a combination of declining interest rates and improving investor
sentiment. Corporate bonds in particular rose sharply as companies paid down
debt, trimmed expenses and adopted more rigorous standards of corporate
governance in the wake of last year's high-profile accounting scandals. However,
some of the more interest-rate-sensitive sectors of the bond market began to
give back a significant amount of their gains over the last several weeks of the
reporting period, triggered by strong interest-rate volatility and a sharp
sell-off in certain areas of the bond market.
With yields on some types of bonds near historical lows, maintaining a steady
stream of current income has been a challenge for many investors. What should an
income-oriented investor do now? While we believe that bonds continue to
represent an important component of a well-balanced investment portfolio, your
financial advisor may be in the best position to recommend the income strategies
that are right for you in today's market environment.
Thank you for your continued confidence and support.
Sincerely,
/S/ STEPHEN E. CANTER
Stephen E. Canter
Chairman and Chief Executive Officer
The Dreyfus Corporation
August 15, 2003
2
DISCUSSION OF FUND PERFORMANCE
Gerald E. Thunelius, Portfolio Manager Dreyfus Taxable Fixed Income Team
How did Dreyfus Inflation Adjusted Securities Fund perform relative to its
benchmark?
Between the commencement of the fund's operations on October 31, 2002, and the
end of its annual reporting period on July 31, 2003, the fund's Institutional
shares achieved a total return of 4.82% and its Investor shares achieved a total
return of 4.63% .(1) In comparison, the fund's benchmark, the Lehman Brothers
U.S. Treasury Inflation Protected Securities Index, achieved a total return of
4.76% for the same period.(2) Additionally, the fund is reported in the Lipper
Intermediate U.S. Treasury Funds category. Between October 31, 2002, through
July 31, 2003, the average total return for all funds reported in the category
was 3.58% .(3)
We attribute the market and fund's overall performance to the beneficial effects
of declining interest rates for most of the reporting period and the belief that
efforts to "re-flate" the economy would start to take effect. The fund's
Institutional shares achieved a higher total return than that of the benchmark,
primarily because we maintained more diverse exposure to various
inflation-protected securities than the benchmark, while the fund's benchmark is
limited to U.S. Treasury securities.
WHAT IS THE FUND'S INVESTMENT APPROACH?
The fund seeks returns that exceed the rate of inflation. To pursue this goal,
the fund normally invests at least 80% of its assets in inflation-indexed
securities, which are designed to protect investors from a loss of value due to
inflation.
The fund invests primarily in high-quality, U.S. dollar-denominated,
inflation-indexed securities. To a limited extent, the fund may invest in
foreign currency-denominated, inflation-protected securities and other
fixed-income securities not adjusted for inflation, including U.S.
The Fund 3
DISCUSSION OF FUND PERFORMANCE (CONTINUED)
government bonds and notes, corporate bonds, mortgage-related securities and
asset-backed securities.
While the fund seeks to keep its average effective duration -- a measure of
sensitivity to changing interest rates -- between two and 10 years, it may
invest in securities with effective or final maturities of any length.
Generally, we will adjust the fund's holdings or its average duration based on
actual or anticipated changes in interest rates or credit quality.
WHAT OTHER FACTORS INFLUENCED THE FUND'S PERFORMANCE?
The fund was influenced by changes in investor sentiment regarding the prospects
for the U.S. economy. When the reporting period began, investors were generally
pessimistic amid low levels of corporate spending and a rising unemployment
rate. Despite a 50-basis-point reduction of short-term interest rates to 1.25%
in early November 2002, the U.S. economy continued to struggle.
During the first quarter of 2003, the economy expanded at a relatively anemic
1.4% annualized rate while geopolitical tensions mounted, culminating in the
start of the war in Iraq. After the war began to wind down in April, however,
many analysts began to detect signs that the U.S. economy might be poised for a
more robust rebound. Improvements in manufacturing activity, greater consumer
confidence, a stock market rally, rising productivity and new tax cuts
contributed to greater optimism. In addition, many investors anticipated further
interest-rate reductions from the Federal Reserve Board (the "Fed") in its
efforts to forestall potential deflationary pressures. The Fed did not
disappoint, reducing short-term interest rates to 1% in late June.
During most of the reporting period, U.S. Treasury securities, including
Treasury Inflation Protected Securities ("TIPS"), rallied; as market
participants fully believed that the effort to re-flate the economy would be
successful. This belief in re-flation efforts by the marketplace and our
positioning in various inflation-protected securities contributed positively to
the fund's total return. The nominal (non-inflation protection) U.S. Treasury
securities market came under pressure as the fear of future inflation concerns
grew. In July alone, the nominal
4
Treasury market gave up virtually all of the gains it had posted since the start
of 2003 as investors looked forward to a more robust economy. Although this was
a negative development for nominal Treasuries, it was a positive development for
inflation-protected securities.
The fund was fully invested in inflation-protected securities for most of the
reporting period. We focused primarily on securities with maturities in the
intermediate-term range, in the beginning of the year. We later focused on the
longer maturities as fears of re-flation that would lead to inflation grew.
Overall, we maintained the fund's average duration at approximately 3.5 years,
which we considered to be neutral relative to the fund's peer group. The
positioning benefited performance as shorter maturity inflation-protected
securities at first outperformed longer maturity.
WHAT IS THE FUND'S CURRENT STRATEGY?
By the reporting period' s end, we began to employ a "barbell" strategy that
balances bonds with 30-year maturities with short-term securities. In our view,
TIPS at the longer end of the maturity spectrum should benefit more than
shorter-term securities as fears that the economy will gain momentum grow in the
bond market.
August 15, 2003
(1) TOTAL RETURN INCLUDES REINVESTMENT OF DIVIDENDS AND ANY CAPITAL GAINS PAID.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE, YIELD AND
INVESTMENT RETURN FLUCTUATE SUCH THAT UPON REDEMPTION, FUND SHARES MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
(2) SOURCE: LEHMAN BROTHERS INC. -- REFLECTS REINVESTMENT OF DIVIDENDS AND,
WHERE APPLICABLE, CAPITAL GAIN DISTRIBUTIONS. THE LEHMAN BROTHERS U.S.
TREASURY INFLATION PROTECTED SECURITIES INDEX IS A SUB-INDEX OF THE U.S.
TREASURY COMPONENT OF THE LEHMAN BROTHERS U.S. GOVERNMENT INDEX. SECURITIES
IN THE LEHMAN BROTHERS U.S. TREASURY INFLATION PROTECTED SECURITIES INDEX
ARE DOLLAR-DENOMINATED, NON-CONVERTIBLE, PUBLICLY-ISSUED, FIXED-RATE,
INVESTMENT-GRADE (MOODY'S BAA3 OR BETTER) U.S. TREASURY INFLATION NOTES,
WITH AT LEAST ONE YEAR TO FINAL MATURITY AND AT LEAST $100 MILLION PAR
AMOUNT OUTSTANDING.
(3) LIPPER INC. -- CATEGORY AVERAGE RETURNS REFLECT THE FEES AND EXPENSES OF
THE FUNDS COMPRISING THE AVERAGE.
The Fund 5
FUND PERFORMANCE
Dreyfus Dreyfus Lehman Brothers
Inflation Adjusted Inflation Adjuste U.S. Treasury
PERIOD Securities Fund Securities Fund Inflation Protected
(Investor shares) (Institutional shares) Securities Index *
10/31/02 10,000 10,000 10,000
1/31/03 10,258 10,264 10,407
4/30/03 10,432 10,445 10,594
7/31/03 10,463 10,482 10,476
Comparison of change in value of $10,000 investment in Dreyfus Inflation
Adjusted Securities Fund Investor shares and Institutional shares and the Lehman
Brothers U.S. Treasury Inflation Protected Securities Index
- --------------------------------------------------------------------------------
Actual Aggregate Total Returns AS OF 7/31/03
Inception From
Date Inception
- --------------------------------------------------------------------------------
INVESTOR SHARES 10/31/02 4.63%
INSTITUTIONAL SHARES 10/31/02 4.82%
((+)) SOURCE: LEHMAN BROTHERS INC.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE FUND'S PERFORMANCE
SHOWN IN THE GRAPH AND TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
THE ABOVE GRAPH COMPARES A $10,000 INVESTMENT MADE IN INVESTOR AND INSTITUTIONAL
SHARES OF DREYFUS INFLATION ADJUSTED SECURITIES FUND ON 10/31/02 (INCEPTION
DATE) TO A $10,000 INVESTMENT MADE IN THE LEHMAN BROTHERS U.S. TREASURY
INFLATION PROTECTED SECURITIES INDEX (THE "INDEX") ON THAT DATE. ALL DIVIDENDS
AND CAPITAL GAIN DISTRIBUTIONS ARE REINVESTED.
THE FUND'S PERFORMANCE SHOWN IN THE LINE GRAPH TAKES INTO ACCOUNT ALL APPLICABLE
FEES AND EXPENSES. THE INDEX IS A SUB-INDEX OF THE U.S. TREASURY COMPONENT OF
THE LEHMAN BROTHERS U.S. GOVERNMENT INDEX. SECURITIES IN THE INDEX ARE
DOLLAR-DENOMINATED, NON-CONVERTIBLE, PUBLICLY-ISSUED, FIXED-RATE,
INVESTMENT-GRADE (MOODY'S BAA3 OR BETTER) U.S. TREASURY INFLATION NOTES, WITH AT
LEAST ONE YEAR TO FINAL MATURITY AND AT LEAST $100 MILLION PAR AMOUNT
OUTSTANDING. THE INDEX DOES NOT TAKE INTO ACCOUNT CHARGES, FEES AND OTHER
EXPENSES. FURTHER INFORMATION RELATING TO FUND PERFORMANCE, INCLUDING EXPENSE
REIMBURSEMENTS, IF APPLICABLE, IS CONTAINED IN THE FINANCIAL HIGHLIGHTS SECTION
OF THE PROSPECTUS AND ELSEWHERE IN THIS REPORT.
6
STATEMENT OF INVESTMENTS
July 31, 2003
Principal
BONDS AND NOTES--97.9% Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES--4.2%
Tennessee Valley Authority,
Valley Indexed Principal Securities,
3.375%, 1/15/2007 205,012 (a) 218,583
U.S. TREASURY INFLATION PROTECTION SECURITIES--93.7%
3%, 7/15/2012 2,404,604 (a) 2,534,479
3.5%, 1/15/2011 790,785 (a) 865,613
3.625%, 4/15/2028 567,300 (a) 640,217
3.875%, 4/15/2029 680,931 (a) 803,037
Coupon Strips:
0%, 10/15/2028 10,000 (a,b) 8,761
0%, 4/15/2029 10,000 (a,b) 8,744
Principal Strips,
0%, 4/15/2029 150,000 (a,b) 80,187
4,941,038
TOTAL BONDS AND NOTES
(cost $5,416,968) 5,159,621
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--2.2%
- --------------------------------------------------------------------------------
U.S. TREASURY BILL;
.92%, 12/18/2003
(cost $118,575 ) 119,000 118,554
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $5,535,543) 100.1% 5,278,175
LIABILITIES, LESS CASH AND RECEIVABLES (.1%) (7,050)
NET ASSETS 100.0% 5,271,125
(A) PRINCIPAL AMOUNT FOR ACCRUAL PURPOSES IS PERIODICALLY ADJUSTED BASED ON
CHANGES IN THE CONSUMER PRICE INDEX.
(B) NOTIONAL FACE AMOUNT SHOWN.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 7
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2003
Cost Value
- --------------------------------------------------------------------------------
ASSETS ($):
Investments in securities--See Statement of Investments 5,535,543 5,278,175
Interest receivable 18,366
Prepaid expenses 8,695
Due from The Dreyfus Corporation 19,432
5,324,668
- --------------------------------------------------------------------------------
LIABILITIES ($):
Cash overdraft due to Custodian 26,573
Accrued expenses 26,970
53,543
- --------------------------------------------------------------------------------
NET ASSETS ($) 5,271,125
- --------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS ($):
Paid-in capital 5,198,196
Accumulated undistributed investment income--net 6,368
Accumulated net realized gain (loss) on investments 323,929
Accumulated net unrealized appreciation
(depreciation) on investments (257,368)
- --------------------------------------------------------------------------------
NET ASSETS ($) 5,271,125
NET ASSET VALUE PER SHARE
Investor Shares Institutional Shares
- --------------------------------------------------------------------------------
Net Assets ($) 2,650,182 2,620,943
Shares Outstanding 208,819 206,515
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE ($) 12.69 12.69
SEE NOTES TO FINANCIAL STATEMENTS.
8
STATEMENT OF OPERATIONS
From October 31, 2002 (commencement of operations) to July 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME ($):
Interest 110,924
Cash dividends 2,267
TOTAL INCOME 113,191
EXPENSES:
Management fee--Note 3(a) 11,805
Registration fees 33,966
Legal fees 31,300
Auditing fees 27,369
Shareholder servicing costs--Note 3(b) 7,041
Prospectus and shareholders' reports 6,439
Custodian fees--Note 3(b) 3,875
Directors' fees and expenses--Note 3(c) 291
Miscellaneous 3,016
TOTAL EXPENSES 125,102
Less--expense reimbursement from The Dreyfus Corporation
due to undertaking--Note 3(a) (108,360)
NET EXPENSES 16,742
INVESTMENT INCOME--NET 96,449
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NOTE 4 ($):
Net realized gain (loss) on investments and foreign currency
transactions 404,231
Net realized gain (loss) on forward currency exchange contracts (11,342)
Net realized gain (loss) on financial futures 3,513
Net realized gain (loss) on options transactions 1,349
NET REALIZED GAIN (LOSS) 397,751
Net unrealized appreciation (depreciation) on investments (257,368)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 140,383
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 236,832
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 9
STATEMENT OF CHANGES IN NET ASSETS
From October 31, 2002 (commencement of operations) to July 31, 2003
- --------------------------------------------------------------------------------
OPERATIONS ($):
Investment income--net 96,449
Net realized gain (loss) on investments 397,751
Net unrealized appreciation (depreciation)
on investments (257,368)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 236,832
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM ($):
Investment income--net:
Investor Shares (79,822)
Institutional Shares (84,081)
TOTAL DIVIDENDS (163,903)
- --------------------------------------------------------------------------------
CAPITAL STOCK TRANSACTIONS ($):
Net proceeds from shares sold:
Investor Shares 2,534,293
Institutional Shares 2,500,000
Dividends reinvested:
Investor Shares 79,822
Institutional Shares 84,081
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL STOCK TRANSACTIONS 5,198,196
TOTAL INCREASE (DECREASE) IN NET ASSETS 5,271,125
- --------------------------------------------------------------------------------
NET ASSETS ($):
Beginning of Period --
END OF PERIOD 5,271,125
10
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
INVESTOR SHARES
Shares sold 202,636
Shares issued for dividends reinvested 6,183
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 208,819
- --------------------------------------------------------------------------------
INSTITUTIONAL SHARES
Shares sold 200,000
Shares issued for dividends reinvested 6,515
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 206,515
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 11
FINANCIAL HIGHLIGHTS
The following table describes the performance for each share class for the
fiscal period from October 31, 2002 (commencement of operations) to July 31,
2003. All information (except portfolio turnover rate) reflects financial
results for a single fund share. 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 derived
from the fund's financial statements.
Investor Shares Institutional Shares
Period Ended Period Ended
July 31, 2003 July 31, 2003
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 12.50 12.50
Investment Operations:
Investment income--net .23(a) .25(a)
Net realized and unrealized
gain (loss) on investments .35 .35
Total from Investment Operations .58 .60
Distributions:
Dividends from investment income--net (.39) (.41)
Net asset value, end of period 12.69 12.69
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 4.63(b) 4.82(b)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .55(c) .30(c)
Ratio of net investment income
to average net assets 2.33(c) 2.58(c)
Decrease reflected in above expense
ratios due to undertakings by
The Dreyfus Corporation 2.75(c) 2.76(c)
Portfolio Turnover Rate 1,306.72(b) 1,306.72(b)
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 2,650 2,621
(A) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(B) NOT ANNUALIZED.
(C) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
12
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Dreyfus Inflation Adjusted Securities Fund (the "fund") is a separate
diversified series of Dreyfus Investment Grade Funds, Inc. (the "Company") which
is registered under the Investment Company Act of 1940, as amended (the "Act"),
as an open-end management investment company and operates as a series company
currently offering five series, including the fund, which commenced operations
on October 31, 2002. The fund's investment objective is to seek returns that
exceed the rate of inflation. The Dreyfus Corporation (the "Manager") serves as
the fund's investment adviser. The Manager is a wholly-owned subsidiary of
Mellon Bank, N.A. ("Mellon"), which is a wholly-owned subsidiary of Mellon
Financial Corporation. Dreyfus Service Corporation (the "Distributor"), a
wholly-owned subsidiary of the Manager, is the distributor of the fund's shares
which are sold to the public without a sales charge.
On July 17, 2003, the fund's Board of Directors approved, effective July 18,
2003, a change of the Company's name from "Dreyfus Investment Grade Bond Funds,
Inc." to "Dreyfus Investment Grade Funds, Inc."
The fund is authorized to issue 500 million shares of $.001 par value Common
Stock in each of the following classes of shares: Investor and Institutional.
Investor shares are subject to a shareholder services plan. Other differences
between the classes include the services offered to and the expenses borne by
each class, the minimum initial investment and certain voting rights.
As of July 31, 2003, MBC Investments Corp., an indirect subsidiary of Mellon
Financial Corporation, held 206,128 Investor shares and 206,515 Institutional
shares.
The Company accounts separately for the assets, liabilities and operations of
each series. Expenses directly attributable to each series are charged to that
series' operations; expenses which are applicable to all series are allocated
among them on a pro rata basis.
The fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which may require the use of
management estimates and assumptions. Actual results could differ from those
estimates.
The Fund 13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(A) PORTFOLIO VALUATION: Investments in securities (excluding short-term
investments, other than U.S. Treasury Bills, financial futures and options) are
valued each business day by an independent pricing service (the "Service")
approved by the Board of Directors. Investments for which quoted bid prices are
readily available and are representative of the bid side of the market in the
judgment of the Service are valued at the mean between the quoted bid prices (as
obtained by the Service from dealers in such securities) and asked prices (as
calculated by the Service based upon its evaluation of the market for such
securities) . Other investments (which constitute a majority of the portfolio
securities) are carried at fair value as determined by the Service, based on
methods which include consideration of: yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. Securities for which there are no such
valuations are valued at fair value as determined in good faith under the
direction of the Board of Directors. Short-term investments, excluding U.S.
Treasury Bills, are carried at amortized cost, which approximates value.
Financial futures and options, which are traded on an exchange, are valued at
the last sales price on the securities exchange on which such securities are
primarily traded or at the last sales price on the national securities market on
each business day. Options traded over-the-counter are priced at the mean
between the bid prices and asked prices. Investments denominated in foreign
currencies are translated to U.S. dollars at the prevailing rates of exchange.
Forward currency exchange contracts are valued at the forward rate.
(B) FOREIGN CURRENCY TRANSACTIONS: The fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in the market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Net realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, currency gains or losses
realized on securities transactions and the difference between the amount of
dividends, interest and foreign withholding taxes recorded on the fund's books
and the U.S. dollar equivalent of the
14
amounts actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in the value of assets and liabilities other than
investments in securities at fiscal year end, resulting from changes in exchange
rates. Such gains and losses are included with net realized and unrealized gain
or loss on investments.
(C) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount and premium on investments, is recognized
on the accrual basis. Under the terms of the custody agreement, the fund
received net earnings credits of $70 during the period ended July 31, 2003 based
on available cash balances left on deposit. Income earned under this arrangement
is included in interest income.
(D) DIVIDENDS TO SHAREHOLDERS: It is the policy of the fund to declare dividends
daily from investment income-net. Such dividends are paid monthly. Dividends
from net realized capital gain, if any, are normally declared and paid annually,
but the fund may make distributions on a more frequent basis to comply with the
distribution requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). To the extent that net realized capital gain can be offset by capital
loss carryovers, if any, it is the policy of the fund not to distribute such
gain. Income and capital gain distributions are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States.
(E) FEDERAL INCOME TAXES: It is the policy of the fund to continue to qualify as
a regulated investment company, if such qualification is in the best interests
of its shareholders, by complying with the applicable provisions of the Code,
and to make distributions of taxable income sufficient to relieve it from
substantially all federal income and excise taxes.
At July 31, 2003, the components of accumulated earnings on a tax basis were as
follows: undistributed ordinary income $5,208, accumulated capital gains
$361,387 and unrealized depreciation $288,968. In
The Fund 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
addition, the fund had $4,698 of capital losses realized after October 31, 2002,
which were deferred for tax purposes to the first day of the following fiscal
year.
The tax character of distributions paid to shareholders during the fiscal period
ended July 31, 2003 was as follows: ordinary income of $163,903.
During the period ended July 31, 2003, as a result of permanent book to tax
differences, the fund increased accumulated undistributed investment income-net
by $73,822 and decreased net realized gain (loss) on investments by the same
amount. Net assets were not affected by this reclassification.
NOTE 2--BANK LINE OF CREDIT:
The fund participates with other Dreyfus-managed funds in a $500 million
redemption credit facility (the "Facility" ) to be utilized for temporary or
emergency purposes, including the financing of redemptions. In connection
therewith, the fund has agreed to pay commitment fees on its pro rata portion of
the Facility. Interest is charged to the fund based on prevailing market rates
in effect at the time of borrowings. During the period ended July 31, 2003, the
fund did not borrow under the Facility.
NOTE 3--MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) Pursuant to a management agreement ("Agreement") with the Manager, the
management fee is computed at the annual rate of .30 of 1% of the value of the
fund' s average daily net assets and is payable monthly. The Manager has
undertaken from October 31, 2002 through July 31, 2004, that if the aggregated
expenses of the fund, exclusive of taxes, brokerage fees, shareholder services
plan fees and extraordinary expenses, exceed an annual rate of .30 of 1% of the
value of the fund' s average daily net assets, the fund may deduct from the
payment to be made to the Manager under the Agreement, or the Manager will bear,
such excess expense. The expense reimbursement, pursuant to the undertaking,
amounted to $108,360 during the period ended July 31, 2003.
16
(B) Under the Investor Shares Shareholder Services Plan, the fund pays the
Distributor at an annual rate of .25 of 1% of the value of Investor Shares
average daily net assets for the provision of certain services. 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. The Distributor may make payments to Service Agents (a securities
dealer, financial institution or other industry professional) in respect of
these services. The Distributor determines the amounts to be paid to Service
Agents. During the period ended July 31, 2003, Investor Shares were charged
$4,935 pursuant to the Shareholder Services Plan.
The fund compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of the
Manager, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the fund. During the period
ended July 31, 2003, the fund was charged $38 pursuant to the transfer agency
agreement.
The fund compensates Mellon under a custody agreement for providing custodial
services for the fund. During the period ended July 31, 2003, the fund was
charged $3,875 pursuant to the custody agreement.
(C) Each Board member also serves as a Board member of other funds within the
Dreyfus complex (collectively, the "Fund Group"). Through December 31, 2002,
each Board member who was not an "affiliated person" as defined in the Act
received an annual fee of $45,000, an attendance fee of $5,000 for each
in-person meeting and $500 for telephone meetings. Effective January 1, 2003,
the Fund Group increased in size, and the annual fee was increased to $60,000
while the attendance fee was increased to $7,500 for each in-person meeting.
These fees are allocated among the funds in the Fund Group in proportion to each
fund's relative net assets. The Chairman of the Board receives an additional 25%
of such compensation. Subject to the Company's Emeritus Program Guidelines,
Emeritus Board members, if any, receive 50% of the annual retainer fee and per
meeting fee paid at the time the Board member achieves emeritus status.
The Fund 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(D) Pursuant to an exemptive order from the Securities and Exchange Commission,
the fund may invest its available cash balances in affiliated money market
funds. Management fees are not charged to these accounts. During the period
ended July 31, 2003, the fund derived $2,267 in income from these investments,
which is included in dividend income in the fund's Statement of Operations.
NOTE 4--SECURITIES TRANSACTIONS:
The aggregate amount of purchases and sales (including paydowns) of investment
securities, excluding short-term securities, forward currency exchange
contracts, financial futures and options, during the period ended July 31, 2003,
amounted to $65,144,318 and $60,130,450, respectively.
The fund enters into forward currency exchange contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings and to settle foreign currency transactions. When executing forward
currency exchange contracts, the fund is obligated to buy or sell a foreign
currency at a specified rate on a certain date in the future. With respect to
sales of forward currency exchange contracts, the fund would incur a loss if the
value of the contract increases between the date the forward contract is opened
and the date the forward contract is closed. The fund realizes a gain if the
value of the contract decreases between those dates. With respect to purchases
of forward currency exchange contracts, the fund would incur a loss if the value
of the contract decreases between the date the forward contract is opened and
the date the forward contract is closed. The fund realizes a gain if the value
of the contract increases between those dates. The fund is also exposed to
credit risk associated with counterparty nonperformance on these forward
currency exchange contracts which is typically limited to the unrealized gain on
each open contract. At July 31, 2003, there were no open forward currency
exchange contracts.
The fund may invest in financial futures contracts in order to gain exposure to
or protect against changes in the market. The fund is exposed to market risk as
a result of changes in the value of the underlying financial instruments.
Investments in financial futures require the
18
fund to "mark to market" on a daily basis, which reflects the change in the
market value of the contracts at the close of each day's trading. Accordingly,
variation margin payments are received or made to reflect daily unrealized gains
or losses. When the contracts are closed, the fund recognizes a realized gain or
loss. These investments require initial margin deposits with a broker, which
consist of cash or cash equivalents, up to approximately 10% of the contract
amount. The amount of these deposits is determined by the exchange or Board of
Trade on which the contract is traded and is subject to change. At July 31,
2003, there were no financial futures contracts outstanding.
The fund may purchase and write (sell) call/put options in order to gain
exposure to or protect against changes in the market.
As a writer of call options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instruments underlying the options. Generally, the fund would incur a gain, to
the extent of the premium, if the price of the underlying financial instrument
decreases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument increases between those dates. At July 31, 2003, there
were no call options written outstanding.
As a writer of put options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instruments underlying the options. Generally, the fund would incur a gain, to
the extent of the premium, if the price of the underlying financial instrument
increases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument decreases between those dates. At July 31, 2003, there
were no put options written outstanding.
At July 31, 2003, the cost of investments for federal income tax purposes was
$5,567,143; accordingly, accumulated net unrealized depreciation on investments
was $288,968, consisting of $8,761 gross unrealized appreciation and $297,729
gross unrealized depreciation.
The Fund 19
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors Dreyfus Inflation Adjusted Securities Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Dreyfus Inflation Adjusted Securities Fund (one
of the funds comprising Dreyfus Investment Grade Funds, Inc.), as of July 31,
2003, and the related statements of operations and changes in net assets and
financial highlights for the period from October 31, 2002 (commencement of
operations) to July 31, 2003. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
verification by examination of securities held by the custodian as of July 31,
2003 and confirmation of securities not held by the custodian by correspondence
with others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Dreyfus Inflation Adjusted Securities Fund at July 31, 2003, and the results of
its operations, the changes in its net assets and the financial highlights for
the period from October 31, 2002 to July 31, 2003, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
New York, New York
September 18, 2003
20
IMPORTANT TAX INFORMATION (Unaudited)
For state individual income tax purposes, the fund hereby designates 92.53% of
the ordinary income dividends paid during the fiscal year ended July 31, 2003 as
attributable to interest income from direct obligations of the United States.
Such dividends are currently exempt from taxation for individual income tax
purposes in most states, including New York, California and the District of
Columbia.
The Fund 21
BOARD MEMBERS INFORMATION (Unaudited)
Joseph S. DiMartino (59)
Chairman of the Board (1995)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The Muscular Dystrophy Association, Director
* Levcor International, Inc., an apparel fabric processor, Director
* Century Business Services, Inc., a provider of outsourcing functions for small
and medium size companies, Director
* The Newark Group, a provider of a national market of paper recovery
facilities, paperboard mills and paperboard converting plants, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 191
--------------
Clifford L. Alexander, Jr. (69)
Board Member (2003)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Alexander & Associates, Inc., a management consulting firm
(January 1981-present)
* Chairman of the Board of Moody's Corporation (October 2000-present)
* Chairman of the Board and Chief Executive Officer of The Dun and Bradstreet
Corporation (October 1999-September 2000)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* Wyeth (formerly, American Home Products Corporation), a global leader in
pharmaceuticals, consumer healthcare products and animal health products,
Director
* Mutual of America Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 70
--------------
Lucy Wilson Benson (76)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Benson and Associates, consultants to business and government
(1980-present)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The International Executive Services Corps., Director
* Citizens Network for Foreign Affairs, Vice Chairperson
* Council on Foreign Relations, Member
* Lafayette College Board of Trustees, Vice Chairperson Emeritus
* Atlantic Council of the U.S., Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 44
22
David W. Burke (67)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* John F. Kennedy Library Foundation, Director
* U.S.S. Constitution Museum, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 87
--------------
Whitney I. Gerard (68)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Partner of Chadbourne & Parke LLP
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
Arthur A. Hartman (77)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Chairman of First NIS Regional Fund (ING/Barings Management) and New Russia
Fund
* Advisory Council Member to Barings-Vostok
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* APCO Associates, Inc., Senior Consultant
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
George L. Perry (69)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Economist and Senior Fellow at Brookings Institution
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* State Farm Mutual Automobile Association, Director
* State Farm Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
ONCE ELECTED ALL BOARD MEMBERS SERVE FOR AN INDEFINITE TERM. ADDITIONAL
INFORMATION ABOUT THE BOARD MEMBERS, INCLUDING THEIR ADDRESS IS AVAILABLE IN THE
FUND'S STATEMENT OF ADDITIONAL INFORMATION WHICH CAN BE OBTAINED FROM DREYFUS
FREE OF CHARGE BY CALLING THIS TOLL FREE NUMBER: 1-800-554-4611.
The Fund 23
OFFICERS OF THE FUND (Unaudited)
STEPHEN E. CANTER, PRESIDENT SINCE MARCH 2000.
Chairman of the Board, Chief Executive Officer and Chief Operating Officer
of the Manager, and an officer of 95 investment companies (comprised of 188
portfolios) managed by the Manager. Mr. Canter also is a Board member and, where
applicable, an Executive Committee Member of the other investment management
subsidiaries of Mellon Financial Corporation, each of which is an affiliate of
the Manager. He is 58 years old and has been an employee of the Manager since
May 1995.
STEPHEN R. BYERS, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2002.
Chief Investment Officer, Vice Chairman and a director of the Manager, and
an officer of 95 investment companies (comprised of 188 portfolios) managed by
the Manager. Mr. Byers also is an officer, director or an Executive Committee
Member of certain other investment management subsidiaries of Mellon Financial
Corporation, each of which is an affiliate of the Manager. He is 50 years old
and has been an employee of the Manager since January 2000. Prior to joining the
Manager, he served as an Executive Vice President-Capital Markets, Chief
Financial Officer and Treasurer at Gruntal & Co., L.L.C.
CHARLES CARDONA, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2001.
Vice Chairman and a Director of the Manager, Executive Vice President of
the Distributor, President of Dreyfus Institutional Services Division, and an
officer of 12 other investment companies (comprised of 16 portfolios) managed by
the Manager. He is 47 years old and has been an employee of the Manager since
February 1981.
MARK N. JACOBS, VICE PRESIDENT SINCE MARCH 2000.
Executive Vice President, Secretary and General Counsel of the Manager, and
an officer of 96 investment companies (comprised of 204 portfolios) managed by
the Manager. He is 57 years old and has been an employee of the Manager since
June 1977.
MICHAEL A. ROSENBERG, SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 93 investment
companies (comprised of 197 portfolios) managed by the Manager. He is 43 years
old and has been an employee of the Manager since October 1991.
STEVEN F. NEWMAN, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel and Assistant Secretary of the Manager, and an
officer of 96 investment companies (comprised of 204 portfolios) managed by the
Manager. He is 54 years old and has been an employee of the Manager since July
1980.
ROBERT R. MULLERY, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 26 investment
companies (comprised of 61 portfolios) managed by the Manager. He is 51 years
old and has been an employee of the Manager since May 1986.
JAMES WINDELS, TREASURER SINCE NOVEMBER 2001.
Director - Mutual Fund Accounting of the Manager, and an officer of 96
investment companies (comprised of 204 portfolios) managed by the Manager. He is
44 years old and has been an employee of the Manager since April 1985.
24
ERIK D. NAVILOFF, ASSISTANT TREASURER SINCE DECEMBER 2002.
Senior Accounting Manager - Taxable Fixed Income Funds of the Manager, and
an officer of 18 investment companies (comprised of 76 portfolios) managed by
the Manager. He is 35 years old and has been an employee of the Manager since
November 1992.
KENNETH J. SANDGREN, ASSISTANT TREASURER SINCE NOVEMBER 2001.
Mutual Funds Tax Director of the Manager, and an officer of 96 investment
companies (comprised of 204 portfolios) managed by the Manager. He is 49 years
old and has been an employee of the Manager since June 1993.
WILLIAM GERMENIS, ANTI-MONEY LAUNDERING COMPLIANCE OFFICER SINCE SEPTEMBER 2002
Vice President and Anti-Money Laundering Compliance Officer of the
Distributor, and the Anti-Money Laundering Compliance Officer of 91 investment
companies (comprised of 199 portfolios) managed by the Manager. He is 33 years
old and has been an employee of the Distributor since October 1998. Prior to
joining the Distributor, he was a Vice President of Compliance Data Center, Inc.
The Fund 25
For More Information
Dreyfus
Inflation Adjusted
Securities Fund
200 Park Avenue
New York, NY 10166
Investment Adviser
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
Custodian
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Transfer Agent &
Dividend Disbursing Agent
Dreyfus Transfer, Inc.
200 Park Avenue
New York, NY 10166
Distributor
Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
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 info@dreyfus.com
ON THE INTERNET Information can be viewed online or downloaded from:
http://www.dreyfus.com
(c) 2003 Dreyfus Service Corporation 588AR0703
Dreyfus Premier
Short Term
Income Fund
ANNUAL REPORT July 31, 2003
YOU, YOUR ADVISOR AND
DREYFUS
A MELLON FINANCIAL COMPANY(TM)
The views expressed in this report reflect those of the portfolio manager only
through the end of the period covered and do not necessarily represent the views
of Dreyfus or any other person in the Dreyfus organization. Any such views are
subject to change at any time based upon market or other conditions and Dreyfus
disclaims any responsibility to update such views. These views may not be relied
on as investment advice and, because investment decisions for a Dreyfus fund are
based on numerous factors, may not be relied on as an indication of trading
intent on behalf of any Dreyfus fund.
Not FDIC-Insured * Not Bank-Guaranteed * May Lose Value
Contents
THE FUND
- --------------------------------------------------
2 Letter from the Chairman
3 Discussion of Fund Performance
6 Fund Performance
8 Statement of Investments
17 Statement of Assets and Liabilities
18 Statement of Operations
19 Statement of Changes in Net Assets
21 Financial Highlights
25 Notes to Financial Statements
37 Report of Independent Auditors
38 Important Tax Information
39 Proxy Results
40 Board Members Information
42 Officers of the Fund
FOR MORE INFORMATION
- ---------------------------------------------------------------------------
Back Cover
The Fund
Dreyfus Premier
Short Term Income Fund
LETTER FROM THE CHAIRMAN
Dear Shareholder:
This annual report for Dreyfus Premier Short Term Income Fund covers the
12-month period from August 1, 2002, through July 31, 2003. Inside, you'll find
valuable information about how the fund was managed during the reporting period,
including a discussion with Michael Hoeh, portfolio manager and a member of the
Dreyfus Taxable Fixed Income Team that manages the fund.
Bonds generally continued to rally during most of the reporting period, driven
higher by a combination of declining interest rates and improving investor
sentiment. Corporate bonds in particular rose sharply as companies paid down
debt, trimmed expenses and adopted more rigorous standards of corporate
governance in the wake of last year's high-profile accounting scandals. However,
some of the more interest-rate-sensitive sectors of the bond market began to
give back a significant amount of their gains over the last several weeks of the
reporting period, triggered by strong interest-rate volatility and a sharp
sell-off in certain areas of the bond market.
With yields on some types of bonds near historical lows, maintaining a steady
stream of current income has been a challenge for many investors. What should an
income-oriented investor do now? While we believe that bonds continue to
represent an important component of a well-balanced investment portfolio, your
financial advisor may be in the best position to recommend the income strategies
that are right for you in today's market environment.
Thank you for your continued confidence and support.
Sincerely,
/S/ STEPHEN E. CANTER
Stephen E. Canter
Chairman and Chief Executive Officer
The Dreyfus Corporation
August 15, 2003
2
DISCUSSION OF FUND PERFORMANCE
Michael Hoeh, Portfolio Manager Dreyfus Taxable Fixed Income Team
How did Dreyfus Premier Short Term Income Fund perform relative to its
benchmark?
For the 12-month period ended July 31, 2003, the fund's Class D shares achieved
a total return of 2.69%.(1) From their inception on November 1, 2002, through
July 31, 2003, the fund achieved a total return of 2.52% for Class A shares,
2.11% for Class B shares and 2.53% for Class P shares. In comparison, the fund's
benchmark, the Merrill Lynch Corporate and Government (1-5 years) Index (the
"Index"), achieved total returns of 5.05% for the 12-month period ended July 31,
2003, and 2.86% for the period between November 1, 2002, through July 31,
2003.(2)
The fund' s emphasis on corporate bonds, inflation-protected securities and a
slightly longer duration relative to its peer group for most of the reporting
period helped to produce generally attractive returns. The fund's returns
trailed those of its benchmark, primarily because the fund's maximum average
effective maturity is limited by prospectus to three years, while that of the
Index can range up to five years. As of the end of the reporting period, the
duration of the Index was 2.389 years and the estimated duration of the fund's
peer group was approximately 1.3 years.
WHAT IS THE FUND'S INVESTMENT APPROACH?
On December 18, 2002, fund shareholders voted to change the fund's investment
objective. Effective January 20, 2003, the fund's investment objective changed
to seeking to maximize total return consisting of capital appreciation and
current income. The fund' s prior investment objective was to seek as high a
level of current income as is consistent with the preservation of capital.
At least 80% of the fund must be invested in investment-grade bonds, including
U.S. government and agency securities, corporate bonds and mortgage- and
asset-backed securities. Up to 20% of the fund may be
The Fund 3
DISCUSSION OF FUND PERFORMANCE (CONTINUED)
invested in securities rated below investment grade, including emerging market
securities. Average effective maturity and average effective duration are kept
at three years or less.
When choosing investments for the fund, we evaluate four primary factors:
* The direction in which interest rates are likely to move under prevailing
economic conditions. If interest rates appear to be rising, we generally
reduce the fund's average duration to capture higher-yielding securities as
they become available. If interest rates appear to be declining, we may
increase the fund's average duration to lock in prevailing yields.
* The difference in yields -- or spreads -- between fixed-income securities
of varying maturities.
* The mix of security types within the fund, including relative exposure to
government securities, corporate securities and high-yield bonds.
* Credit and cash flow characteristics of individual securities, including
the financial health of the issuer and the callability of the security.
WHAT OTHER FACTORS INFLUENCED THE FUND'S PERFORMANCE?
During the reporting period, the fund was positively influenced by an improving
outlook for the U.S. economy after a prolonged period of pessimism. In fact,
when the reporting period began, revelations of corporate malfeasance and rising
international tensions continued to cause pessimism. Interest rates continued to
decline in this environment, as the Federal Reserve Board reduced short-term
interest rates by 50 basis points in November 2002 and 25 basis points in June
2003.
While lower interest rates help boost returns of the overall bond market,
renewed confidence that the economy would start to "re-flate" and that companies
had their balance sheets under control helped the sector of the bond market in
which the fund was invested. Corporate bonds, which were hurt in late 2002 by
mounting credit-quality concerns, and corporate governance issues, have turned
out to be one of the best performing sectors in the bond market so far for 2003.
On the
4
other hand, mortgage-backed securities suffered when low mortgage rates
caused a record number of homeowners to refinance, effectively returning
principal to bondholders.
During the second half of the reporting period, however, the fund's relatively
heavier exposure to corporate securities helped boost performance.
Investment-grade corporate bonds rallied strongly when investors put last year's
scandals behind them and looked forward to an economic rebound. Even when
expectations of a stronger economy caused prices of U.S. Treasury securities to
fall sharply in July 2003, corporate bonds generally maintained their gains.
Similarly, the fund's exposure to the mortgage-backed securities sector hurt its
performance, as homeowners refinanced mortgages at a record pace, causing
prepayment of mortgage securities.
WHAT IS THE FUND'S CURRENT STRATEGY?
As the economic outlook improved and corporate bonds rebounded, we have started
to gradually reduce the fund's corporate bond holdings, as we believe they have
been fully priced in the marketplace. In general we are using a more
"sector-neutral" stance that we believe is prudent given the current uncertainty
that still exists in the marketplace.
August 15, 2003
(1) TOTAL RETURN INCLUDES REINVESTMENT OF DIVIDENDS AND ANY CAPITAL GAINS PAID,
AND DOES NOT TAKE INTO CONSIDERATION THE MAXIMUM INITIAL SALES CHARGE IN
THE CASE OF CLASS A SHARES, OR THE APPLICABLE CONTINGENT DEFERRED SALES
CHARGE IMPOSED ON REDEMPTIONS IN THE CASE OF CLASS B SHARES. HAD THESE
CHARGES BEEN REFLECTED, RETURNS WOULD HAVE BEEN LOWER. PAST PERFORMANCE IS
NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE, YIELD AND INVESTMENT RETURN
FLUCTUATE SUCH THAT UPON REDEMPTION, FUND SHARES MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST
(2) SOURCE: LIPPER INC. -- REFLECTS REINVESTMENT OF DIVIDENDS AND, WHERE
APPLICABLE, CAPITAL GAIN DISTRIBUTIONS. THE MERRILL LYNCH CORPORATE AND
GOVERNMENT (1-5 YEARS) INDEX IS AN UNMANAGED PERFORMANCE BENCHMARK
INCLUDING U.S. GOVERNMENT AND FIXED-COUPON DOMESTIC INVESTMENT-GRADE
CORPORATE BONDS WITH MATURITIES GREATER THAN OR EQUAL TO ONE YEAR AND LESS
THAN FIVE YEARS.
The Fund 5
FUND PERFORMANCE
Merrill Lynch
Dreyfus Premier Corporate and
Short Term Government
PERIOD Income Fund (1-5 Years)
(Class D shares) Index *
7/31/93 10,000 10,000
7/31/94 10,247 10,178
7/31/95 10,970 10,993
7/31/96 11,674 11,589
7/31/97 12,719 12,520
7/31/98 13,725 13,326
7/31/99 14,071 13,942
7/31/00 15,128 14,665
7/31/01 16,817 16,305
7/31/02 17,062 17,492
7/31/03 17,521 18,375
Comparison of change in value of $10,000 investment in Dreyfus Premier Short
Term Income Fund Class D shares and the Merrill Lynch Corporate and Government
(1-5 Years) Index
((+)) SOURCE: LIPPER INC.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE ABOVE GRAPH COMPARES A $10,000 INVESTMENT MADE IN CLASS D SHARES OF DREYFUS
PREMIER SHORT TERM INCOME FUND ON 7/31/93 TO A $10,000 INVESTMENT MADE IN THE
MERRILL LYNCH CORPORATE AND GOVERNMENT (1-5 YEARS) INDEX (THE "INDEX") ON THAT
DATE. ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS ARE REINVESTED.
EFFECTIVE NOVEMBER 1, 2002, DREYFUS SHORT TERM INCOME FUND WAS RENAMED DREYFUS
PREMIER SHORT TERM INCOME FUND. EXISTING SHARES WERE REDESIGNATED AS CLASS D
SHARES AND THE FUND BEGAN OFFERING CLASS A, CLASS B AND CLASS P SHARES.
THE FUND INVESTS PRIMARILY IN DEBT SECURITIES AND SECURITIES WITH DEBT-LIKE
CHARACTERISTICS OF DOMESTIC AND FOREIGN ISSUERS AND MAINTAINS AN AVERAGE
EFFECTIVE MATURITY OF THREE YEARS OR LESS. THE FUND'S PERFORMANCE SHOWN IN THE
LINE GRAPH TAKES INTO ACCOUNT ALL APPLICABLE FEES AND EXPENSES. THE INDEX IS AN
UNMANAGED PERFORMANCE BENCHMARK INCLUDING U.S. GOVERNMENT AND FIXED-COUPON
DOMESTIC INVESTMENT-GRADE CORPORATE BONDS WITH MATURITIES GREATER THAN OR EQUAL
TO ONE YEAR AND LESS THAN FIVE YEARS. THE INDEX DOES NOT TAKE INTO ACCOUNT
CHARGES, FEES AND OTHER EXPENSES. FURTHER INFORMATION RELATING TO FUND
PERFORMANCE, INCLUDING EXPENSE REIMBURSEMENTS, IF APPLICABLE, IS CONTAINED IN
THE FINANCIAL HIGHLIGHTS SECTION OF THE PROSPECTUS AND ELSEWHERE IN THIS REPORT.
6
Average Annual Total Returns AS OF 7/31/03
1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS D SHARES 2.69% 5.00% 5.77%
Actual Aggregate Total Returns AS OF 7/31/03
Inception From
Date 1 Year 5 Years 10 Years Inception
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
WITH MAXIMUM SALES CHARGE (3.0%) 11/1/02 -- -- (0.57%)
WITHOUT SALES CHARGE 11/1/02 -- -- -- 2.52%
CLASS B SHARES
WITH APPLICABLE REDEMPTION CHARGE ((+)) 11/1/02 -- -- -- (1.86%)
WITHOUT REDEMPTION 11/1/02 -- -- -- 2.11%
CLASS P SHARES 11/1/02 -- -- -- 2.53%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE FUND'S PERFORMANCE
SHOWN IN THE GRAPH AND TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
((+)) THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS B SHARES IS 4%.
AFTER SIX YEARS CLASS B SHARES CONVERT TO CLASS A SHARES.
The Fund 7
July 31, 2003
STATEMENT OF INVESTMENTS
Principal
BONDS AND NOTES--97.7% Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
AIRLINES--.3%
American Airlines,
Notes, 3.857%, 2010 2,364,000 2,298,990
US Airways,
Enhanced Equipment Notes, Ser. C, 8.93%, 2009 1,092,319 (b) 218,464
2,517,454
ASSET-BACKED CTFS.--AUTOMOBILE RECEIVABLES--.4%
Navistar Financial Corp. Owner Trust,
Ser. 2001-A, Cl. B, 5.59%, 2008 3,735,629 3,866,556
ASSET-BACKED CTFS.--CREDIT CARDS--1.3%
Fingerhut Master Trust,
Ser. 1998-2, Cl. A. 6.23%, 2007 1,567,801 1,581,050
MBNA Master Credit Card Trust,
Ser. 1999-H, Cl. C, 7.45%, 2006 9,800,000 (c) 10,124,625
11,705,675
ASSET-BACKED CTFS.--EQUIPMENT--.0%
Aircraft Lease Portfolio Securitization 96-1,
Pass-Through Trust, Ctfs.,
Cl. D, 12.75%, 2006 3,656,077 (b) 36,561
ASSET-BACKED CTFS.--HOME EQUITY LOANS--2.1%
Conseco Finance Securitizations:
Ser. 2000-D, Cl. A3, 7.89%, 2018 299,336 301,049
Ser. 2000-E, Cl. A5, 8.02%, 2031 8,000,000 8,586,480
Ser. 2000-1, Cl. A3, 7.3%, 2031 1,397,269 1,407,455
The Money Store Home Equity Trust,
Ser. 1997-B, Cl. A8, 6.9%, 2038 8,659,041 8,735,604
19,030,588
ASSET-BACKED CTFS.--OTHER--1.5%
ACAS Business Loan Trust,
Ser. 2002-1A, Cl. B, 2.6%, 2012 6,000,000 (c,d) 5,939,400
Green Tree Home Improvement Loan Trust:
Ser. 1999-B, Cl. A1, 7.11%, 2026 280,786 291,680
Ser. 1999-B, Cl. A2, 7.11%, 2026 209,242 216,180
NPF XII,
Ser. 1999-1, Cl. A, 6.36%, 2005 9,700,000 (b,c,e) 2,087,440
NYCTL Trust,
Tax Lien Collateralized Bonds,
Ser. 2000-AA, Cl. C, 8.11%, 2008 858,024 (c) 858,024
Pegasus Aviation Lease Securitization,
Ser. 2001-1, Cl. A1, 1.725%, 2015 6,595,215 (c,d) 3,932,941
13,325,665
8
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
BANKING--2.9%
Abbey National,
Capital Notes, 7.35%, 2049 4,403,000 4,930,664
Corp Andina de Fomento,
Notes, 5.2%, 2013 4,210,000 (f) 3,986,744
Deutsche Bank:
Deposit Notes, 2.19%, 2005 7,500,000 (d) 7,500,000
Deposit Notes, 4.85%, 2006 10,000,000 9,962,500
26,379,908
COMMERCIAL MORTGAGE PASS-THROUGH CTFS.--12.0%
Bank of America Large Loan:
Ser. 2001-FMA, Cl. A2, 6.49%, 2016 4,000,000 (c) 4,254,099
Ser. 2002-FL1A, Cl. E, 2.517%, 2014 11,730,000 (c,d) 11,691,497
Bank of America Structured Notes,
Ser. 2002-1A, Cl. B, 5.617%, 2014 12,700,000 (c,d) 11,541,125
COMM,
Ser. 2000-FL2A, Cl. E, 2.097%, 2011 10,150,000 (c,d) 10,034,312
CS First Boston Mortgage Securities:
Ser. 1998-C1, Cl. A1A, 6.26%, 2040 13,943,845 14,738,651
Ser. 2001-TFLA, Cl. G, 2.857%, 2011 16,500,000 (c,d) 16,109,445
Chase Commerical Mortgage Securities,
Ser. 2001-245, Cl. A1, 5.974%, 2016 5,529,034 (c,d) 5,893,895
Commerical Mortgage Pass-Through Ctfs.,
Ser. 2001-ZC1A, Cl. A, 6.355%, 2006 9,769,059 (c) 10,318,568
Morgan Stanley Dean Witter Capital I,
Ser. 2001-XLF, Cl. F, 3.058%, 2013 5,081,395 (c,d) 5,054,637
Office Portfolio Trust,
Ser. 2001-HRPA, Cl. A1, 6.151%, 2016 11,079,050 (c) 11,915,492
Trizechahn Office Properties Trust,
Ser. 2001-TZHA, Cl. A3, 6.211%, 2013 2,900,000 (c) 3,115,782
Wachovia Bank Commercial Mortgage Trust,
Ser. 2002-WHL, Cl. L, 4.107%, 2015 2,900,000 (c,d) 2,861,244
107,528,747
DIVERSIFIED FINANCIAL SERVICES--5.3%
Capital One Financial,
Sr. Notes, 7.25%, 2003 1,456,000 1,476,106
Fondo LatinoAmericano De Reservas,
Notes, 3%, 2006 5,345,000 (c) 5,318,965
Ford Motor Credit,
Global Landmark Securities, 6.5%, 2007 5,988,000 (f) 6,154,131
The Fund 9
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
GMAC:
Notes, 4.75%, 2003 7,500,000 (d) 7,506,848
Notes, 6.125%, 2006 5,000,000 5,229,955
Meridian Funding,
Notes, 1.576%, 2009 15,000,000 (c,d) 15,002,835
SLM,
Notes, 3.625%, 2008 6,875,000 6,795,470
Toyota Motor Credit,
Medium-Term Notes, 2.8%, 2006 500,000 505,621
47,989,931
ELECTRIC UTILITIES--3.4%
Allegheny Generating,
Deb., 5.625%, 2003 700,000 693,000
Entergy Gulf States,
First Mortgage, 3.6%, 2008 7,500,000 (c) 7,198,500
Florida Power & Light,
First Mortgage, 6.875%, 2005 3,000,000 3,316,080
Monongahela Power,
First Mortgage, 5%, 2006 2,950,000 2,883,625
PP&L Capital Funding,
Medium-Term Notes, Ser. A, 6.79%, 2004 6,000,000 6,357,186
Power Contract Financing,
Pass-Through Ctfs., 5.2%, 2006 5,000,000 (c) 4,997,755
TXU,
Sr. Notes, Ser. D, 5.52%, 2003 4,900,000 4,900,000
30,346,146
FOOD & BEVERAGES--1.4%
Brown-Forman,
Notes, 2.125%, 2006 2,425,000 2,399,588
Diageo Capital,
Notes, 3.375%, 2008 5,000,000 4,931,790
Tyson Foods,
Notes, 7.25%, 2006 4,835,000 5,305,794
12,637,172
FOREIGN/GOVERNMENTAL--8.3%
Canadian Government,
Bonds, 4.5%, 2007 CAD 18,550,000 13,493,784
Export Development Canada,
Notes, 2.375%, 2006 13,120,000 13,171,627
10
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN/GOVERNMENTAL (CONTINUED)
Finland Government International Bond,
Deb., 7.875%, 2004 12,725,000 13,561,911
Mexico Government International Bond,
Notes, 4.625%, 2008 12,500,000 12,437,500
Philippine Government International Bond,
Bonds, 8.875%, 2008 12,500,000 13,437,500
Province of Quebec:
Deb., 3.3%, 2013 CAD 545,000 396,429
Deb., Ser. NS, 8.625%, 2005 4,230,000 4,625,869
Republic of Argentina,
Deb., 11.25%, 2004 500 (b) 144
Spain Government International Bond,
Sr. Notes, 5.25%, 2004 3,500,000 3,678,500
74,803,264
HEALTH CARE--.3%
American Home Products,
Notes, 5.875%, 2004 925,000 950,056
HCA,
Notes, 7.15%, 2004 1,610,000 1,645,971
2,596,027
HOTELS & MOTELS--.2%
Park Place Entertainment,
Sr. Notes, 7%, 2004 1,400,000 1,447,250
MANUFACTURING--.2%
Tyco International,
Notes, 6.375%, 2006 1,975,000 (f) 2,044,125
MEDIA--1.5%
America Online,
Conv. Sub. Notes, 0%, 2019 6,500,000 3,989,375
British Sky Broadcasting,
Notes, 7.3%, 2006 4,880,000 (f) 5,355,800
Grupo Televisa,
Sr. Notes, 8.625%, 2005 4,000,000 4,470,000
13,815,175
MINING & METALS--.5%
Noranda,
Deb., 7%, 2005 4,550,000 4,764,887
The Fund 11
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS--5.1%
Duke Capital,
Sr. Notes, 7.25%, 2004 3,500,000 (f) 3,642,261
Petrobras International Finance,
Sr. Notes, 9.875%, 2008 22,780,000 24,659,350
Sempra Energy,
Notes, 6.925%, 2004 5,000,000 5,220,855
Transocean Sedco Forex,
Notes, 6.75%, 2005 7,000,000 7,492,639
Triton Energy,
Sr. Notes, 9.25%, 2005 4,507,000 (f) 4,993,603
46,008,708
PAPER & FOREST PRODUCTS--.6%
Weyerhaeuser,
Notes, 5.5%, 2005 4,750,000 4,984,740
PROPERTY-CASUALTY INSURANCE--3.7%
ACE INA,
Gtd. Notes, 8.2%, 2004 4,000,000 4,246,168
ASIF Global Financing,
Notes, 1.369%, 2006 13,255,000 (c,d) 13,337,844
CNA Financial,
Notes, 6.5%, 2005 5,129,000 5,330,898
Monumental Global Funding II,
Notes, 6.95%, 2003 8,000,000 (c) 8,071,896
Nationwide Mutual Insurance,
Surplus Notes, 6.5%, 2004 1,800,000 (c) 1,846,616
32,833,422
REAL ESTATE INVESTMENT TRUST--3.7%
Highwoods:
Exercisable Put Option Securities,
7.19%, 2004 7,500,000 (c) 7,639,028
Notes, 6.75%, 2003 4,870,000 4,939,183
Notes, 8%, 2003 5,000,000 5,090,940
New Plan Excel Realty Trust,
Sr. Notes, 6.875%, 2004 11,575,000 12,185,118
Rouse,
Notes, 8.43%, 2005 2,700,000 2,933,226
Summit Properties Partnership,
Notes, 6.95%, 2004 750,000 777,155
33,564,650
12
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE PASS--THROUGH CTFS.--1.9%
IMPAC Secured Asset Owner Trust:
Ser. 2000-4, Cl. A4, 7.43%, 2030 7,000,000 7,212,740
Ser. 2000-5, Cl. A6, 6.92%, 2030 9,680,000 9,947,869
17,160,609
RETAIL--.2%
Dillard's,
Notes, 6.43%, 2004 1,950,000 1,969,500
STRUCTURED INDEX--2.0%
AB Svensk Exportkredit,
GSCI-ER Indexed Notes, 0%, 2008 11,690,000 (c,d,g) 10,983,924
HSBC TIGERS,
Medium-Term Notes,
Ser. 2003-4, 4.36%, 2008 5,000,000 (c,d,h) 5,000,000
JP Morgan HYDI-100:
Linked Ctf. of Deposit, 6.4%, 2008 2,000,000 (c,f,h) 1,907,000
17,890,924
TELECOMMUNICATIONS--3.0%
AT&T,
Sr. Notes, 6.5%, 2006 5,082,000 (c,f) 5,621,830
British Telecommunications,
Notes, 7.625%, 2005 6,500,000 7,279,344
Deutsche Telekom International Finance,
Notes, 3.875%, 2008 5,000,000 4,885,975
France Telecom,
Notes, 7.2%, 2006 4,000,000 4,469,160
SBC Communications,
Notes, 5.75%, 2006 4,000,000 (f) 4,329,840
26,586,149
U.S. GOVERNMENT--16.6%
U.S. Treasury Bonds,
5.375%, 2/15/2031 8,479,000 (f) 8,439,233
U.S. Treasury Inflation Protection Securities,
3%, 7/15/2012 39,257,512 (f,i) 41,377,846
U.S. Treasury Notes:
1.25%, 5/31/2005 15,720,000 (f) 15,602,100
2%, 5/15/2006 12,735,000 (f) 12,659,392
3%, 1/31/2004 10,200,000 (f) 10,301,592
3.625%, 5/15/2013 65,053,000 60,743,239
149,123,402
The Fund 13
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES--4.0%
Student Loan Marketing Association,
Bonds, 1.06%, 7/25/2035 34,000,000 (c,d) 33,542,360
Tennessee Valley Authority,
Valley Indexed Principal Securities,
3.375%, 1/15/2007 2,213,435 (i) 2,359,953
35,902,313
U.S. GOVERNMENT AGENCIES/MORTGAGE-BACKED--15.3%
Federal Home Loan Mortgage Corp.:
5.465%, 9/1/2030 63,232 (d) 65,636
6.5%, 3/1/2032-6/1/2032 4,498,595 4,629,294
REMIC Gtd. Multiclass Mortgage Participation Ctfs.:
Ser. 2143, Cl. CU, 5.75%, 12/15/2024 10,000,000 10,205,016
Ser. 2603, Cl. AC, 5.5%, 12/15/2008 5,646,077 5,642,405
(Interest Only Obligation):
Ser. 1987, Cl. PI, 7%, 9/15/2012 603,063 (j) 78,103
Ser. 1999, Cl. PW, 7%, 8/15/2026 934,357 (j) 13,174
Ser. 2048, Cl. PJ, 7%, 4/15/2028 1,150,355 (j) 176,131
Ser. 2108, Cl. TI, 6.5%, 6/15/2025 911,586 (j) 3,183
Ser. 2114, Cl. JH, 6%, 6/15/2021 368,058 (j) 289
Ser. 2116, Cl. JI, 6.5%, 6/15/2025 45,622 (j) 36
Ser. 2407, Cl. DI, 6%, 12/15/2021 3,437,889 (j) 18,565
Ser. 2510, Cl. PI, 5.5%, 9/15/2020 4,587,681 (j) 187,622
Ser. 2550, Cl. IO, 5.5%, 6/15/2027 19,586,487 (j) 2,551,651
Federal National Mortgage Association,
5.5%, 5/1/2033 1,190,865 1,177,625
5.688%, 2/1/2029 647,790 (d) 659,684
REMIC Trust, Gtd. Pass-Through Ctfs.:
Ser. 2039-49, Cl. JE, 3%, 4/25/2033 2,946,667 2,895,101
(Interest Only Obligation):
Ser. 1997-56, Cl. PM, 7%, 6/28/2026 228,926 (j) 3,061
Ser. 2001-10, Cl. IO, 6%, 5/25/2025 689,873 (j) 4,622
Ser. 2001-27, Cl. BI, 6.5%, 8/25/2029 863,135 (j) 12,291
Ser. 2001-63, Cl. CI, 6%, 11/25/2024 4,308,166 (j) 74,938
Ser. 2001-72, Cl. IA, 6%, 3/25/2030 1,124,961 (j) 45,010
Ser. 2002-55, Cl. IJ, 6%, 4/25/2028 9,625,698 (j) 365,560
Whole Loan,
Ser. 2001-W4, Cl. AF3, 4.034%, 8/25/2029 7,487,514 7,552,745
14
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES/MORTGAGE-BACKED (CONTINUED)
Government National Mortgage Association I:
5.5% 72,890,000 (k) 72,046,663
6% 23,000,000 (k) 23,366,620
6.5%, 6/15/2032 3,229,602 (f) 3,344,640
Project Loan,
8%, 9/15/2008 994,964 1,054,970
Government National Mortgage Association II:
3.25%, 4/20/2030 1,290,496 1,318,590
7%, 12/20/2030-4/20/2031 240,800 251,560
7.5%, 11/20/2029-12/20/2030 237,369 250,353
137,995,138
TOTAL BONDS AND NOTES
(cost $900,453,209) 878,854,686
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS--7.1% Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT COMPANIES:
Dreyfus Institutional Cash Advantage Fund 21,490,000 (l) 21,490,000
Dreyfus Institutional Cash Advantage Plus Fund 21,490,000 (l) 21,490,000
Dreyfus Institutional Preferred Plus Money Market Fund 21,490,000 (l) 21,490,000
TOTAL OTHER INVESTMENTS
(cost $64,470,000) 64,470,000
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
SHORT-TERM INVESTMENTS--13.0% Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS:
.75%, 8/28/2003 7,650,000 7,645,028
.81%, 9/18/2003 12,050,000 12,036,142
.78%, 9/25/2003 17,520,000 17,496,698
.78%, 10/23/2003 30,617,000 30,540,458
.80%, 11/20/2003 37,017,000 36,924,457
.80%, 12/18/2003 12,300,000 12,253,875
TOTAL SHORT-TERM INVESTMENTS
(cost $116,930,872) 116,896,658
The Fund 15
STATEMENT OF INVESTMENTS (CONTINUED)
INVESTMENT OF CASH COLLATERAL
FOR SECURITIES LOANED--8.8% Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT COMPANY;
Dreyfus Institutional Preferred Money Market Fund
(cost $79,400,867) 79,400,867 79,400,867
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $1,161,254,948) 126.6% 1,139,622,211
LIABILITIES, LESS CASH AND RECEIVABLES (26.6%) (239,725,672)
NET ASSETS 100.0% 899,896,539
(A) PRINCIPAL AMOUNT STATED IN U.S DOLLARS UNLESS OTHERWISE NOTED.
CAD--CANADIAN DOLLARS
(B) NON-INCOME PRODUCING--SECURITY IN DEFAULT.
(C) SECURITIES EXEMPT FROM REGISTRATION UNDER RULE 144A OF THE SECURITIES ACT
OF 1933. THESE SECURITIES MAY BE RESOLD IN TRANSACTIONS EXEMPT FROM
REGISTRATION, NORMALLY TO QUALIFIED INSTITUTIONAL BUYERS. AT JULY 31, 2003,
THESE SECURITIES AMOUNTED TO $236,111,079 OR 26.2% OF NET ASSETS.
(D) VARIABLE RATE SECURITY--INTEREST RATE SUBJECT TO PERIODIC CHANGE.
(E) THE VALUE OF THESE SECURITIES HAS BEEN DETERMINED IN GOOD FAITH UNDER THE
DIRECTION OF THE BOARD OF TRUSTEES.
(F) ALL OR A PORTION OF THESE SECURITIES ARE ON LOAN. AT JULY 31, 2003, THE
TOTAL MARKET VALUE OF THE FUND'S SECURITIES ON LOAN IS $103,966,469 AND THE
TOTAL MARKET VALUE OF THE COLLATERAL HELD BY THE FUND IS $107,305,679,
CONSISTING OF CASH COLLATERAL OF $79,400,867 AND U.S. GOVERNMENT AND AGENCY
SECURITIES VALUED AT $27,904,812.
(G) SECURITY LINKED TO THE GOLDMAN SACHS COMMODITY INDEX.
(H) SECURITY LINKED TO A PORTFOLIO OF DEBT SECURITIES.
(I) PRINCIPAL AMOUNT FOR ACCRUAL PURPOSES IS PERIODICALLY ADJUSTED BASED ON
CHANGES IN THE CONSUMER PRICE INDEX.
(J) NOTIONAL FACE AMOUNT SHOWN.
(K) PURCHASED ON A FORWARD COMMITMENT BASIS.
(L) INVESTMENTS IN AFFILIATED MONEY MARKET MUTUAL FUNDS--SEE NOTE 3(D).
SEE NOTES TO FINANCIAL STATEMENTS.
16
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2003
Cost Value
- --------------------------------------------------------------------------------
ASSETS ($):
Investments in securities--See Statement
of Investments (including securities
loaned valued at $103,966,469) 1,161,254,948 1,139,622,211
Receivable for investment securities sold 198,921,463
Dividends and interest receivable 7,152,587
Receivable for shares of Common Stock subscribed 2,009,397
Receivable for futures variation margin--Note 4 1,017,700
Net unrealized appreciation on forward
currency exchange contracts--Note 4 124,562
Prepaid expenses 68,895
1,348,916,815
- --------------------------------------------------------------------------------
LIABILITIES ($):
Due to The Dreyfus Corporation and affiliates 675,518
Cash overdraft due to Custodian 2,338,329
Payable for investment securities purchased 362,163,491
Liability for securities loaned--Note 1(c) 79,400,867
Payable for shares of Common Stock redeemed 3,919,463
Unrealized depreciation on swaps--Note 4 134,161
Accrued expenses and other liabilities 388,447
449,020,276
- --------------------------------------------------------------------------------
NET ASSETS ($) 899,896,539
- --------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS ($):
Paid-in capital 958,314,040
Accumulated undistributed investment income--net 833,799
Accumulated net realized gain (loss) on investments (37,598,072)
Accumulated net unrealized appreciation (depreciation)
on investments and foreign currency transactions
[including ($134,161) net unrealized (depreciation)
on swap transactions] (21,653,228)
- --------------------------------------------------------------------------------
NET ASSETS ($) 899,896,539
NET ASSET VALUE PER SHARE
Class A Class B Class D Class P
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets ($) 18,578,078 11,366,965 850,188,791 19,762,705
Shares Outstanding 1,614,223 988,128 73,916,936 1,716,798
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE ($) 11.51 11.50 11.50 11.51
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 17
STATEMENT OF OPERATIONS
Year Ended July 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME ($):
Interest 41,215,397
Cash dividends 878,098
Income from securities lending 72,287
TOTAL INCOME 42,165,782
EXPENSES:
Management fee--Note 3(a) 4,893,068
Shareholder servicing costs--Note 3(c) 3,101,836
Prospectus and shareholders' reports 207,534
Professional fees 126,819
Custodian fees--Note 3(c) 116,030
Registration fees 85,858
Directors' fees and expenses--Note 3(d) 70,297
Distribution fees--Note 3(b) 18,763
Interest expense--Note 2 5,441
Miscellaneous 34,525
TOTAL EXPENSES 8,660,171
INVESTMENT INCOME--NET 33,505,611
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NOTE 4 ($):
Net realized gain (loss) on investments and foreign currency
transactions 4,809,738
Net realized gain (loss) on forward currency exchange contracts (307,002)
Net realized gain (loss) on financial futures (9,934,713)
Net realized gain (loss) on swaps 796,922
Net realized gain (loss) on options transactions 413,711
NET REALIZED GAIN (LOSS) (4,221,344)
Net unrealized appreciation (depreciation) on investments
and foreign currency transactions [including $6,437,859
net unrealized appreciation on financial futures and ($134,161)
net unrealized (depreciation) on swap transactions] (3,643,809)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (7,865,153)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 25,640,458
SEE NOTES TO FINANCIAL STATEMENTS.
18
STATEMENT OF CHANGES IN NET ASSETS
Year Ended July 31,
----------------------------------
2003(a) 2002
- --------------------------------------------------------------------------------
OPERATIONS ($):
Investment income--net 33,505,611 55,173,720
Net realized gain (loss) on investments (4,221,344) (11,364,860)
Net unrealized appreciation
(depreciation) on investments (3,643,809) (29,570,177)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 25,640,458 14,238,683
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM ($):
Investment income--net:
Class A (203,422) --
Class B (118,792) --
Class D (41,586,189) (58,434,746)
Class P (272,614) --
TOTAL DIVIDENDS (42,181,017) (58,434,746)
- --------------------------------------------------------------------------------
CAPITAL STOCK TRANSACTIONS ($):
Net proceeds from shares sold:
Class A 21,978,408 --
Class B 12,172,638 --
Class D 482,638,456 1,039,502,675
Class P 27,651,185 --
Dividends reinvested:
Class A 132,906 --
Class B 93,896 --
Class D 34,036,463 48,797,786
Class P 199,621 --
Cost of shares redeemed:
Class A (3,393,628) --
Class B (808,446) --
Class D (772,025,338) (728,965,030)
Class P (7,923,279) --
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL STOCK TRANSACTIONS (205,247,118) 359,335,431
TOTAL INCREASE (DECREASE) IN NET ASSETS (221,787,677) 315,139,368
- --------------------------------------------------------------------------------
NET ASSETS ($):
Beginning of Period 1,121,684,216 806,544,848
END OF PERIOD 899,896,539 1,121,684,216
Undistributed investment income--net 833,799 488,421
The Fund 19
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
Year Ended July 31,
----------------------------------
2003(a) 2002
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
CLASS A(B)
Shares sold 1,894,466 --
Shares issued for dividends reinvested 11,451 --
Shares redeemed (291,694) --
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 1,614,223 --
- --------------------------------------------------------------------------------
CLASS B(B)
Shares sold 1,049,644 --
Shares issued for dividends reinvested 8,093 --
Shares redeemed (69,609) --
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 988,128 --
- --------------------------------------------------------------------------------
CLASS D
Shares sold 41,519,397 86,809,184
Shares issued for dividends reinvested 2,931,135 4,092,630
Shares redeemed (66,474,665) (61,142,910)
NET INCREASE (DECREASE) IN SHARES OUTSTANDING (22,024,133) 29,758,904
- --------------------------------------------------------------------------------
CLASS P
Shares sold 2,383,149 --
Shares issued for dividends reinvested 17,202 --
Shares redeemed (683,553) --
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 1,716,798 --
(A) THE FUND CHANGED TO A FOUR CLASS FUND ON NOVEMBER 1,2002. THE EXISTING
SHARES WERE REDESIGNATED CLASS D SHARES AND THE FUND COMMENCED OFFERING
CLASS A, CLASS B AND CLASS P SHARES.
(B) DURING THE PERIOD ENDED JULY 31, 2003, 461 CLASS B SHARES REPRESENTING
$5,343 WERE AUTOMATICALLY CONVERTED TO 461 CLASS A SHARES.
SEE NOTES TO FINANCIAL STATEMENTS.
20
FINANCIAL HIGHLIGHTS
The following tables describe the performance for each share class for the
fiscal periods indicated. All information (except portfolio turnover rate)
reflects financial results for a single fund share. Total return shows how much
your investment in the fund would have increased (or decreased) during each
period, assuming you had reinvested all dividends and distributions. These
figures have been derived from the fund's financial statements.
Period Ended
CLASS A SHARES July 31, 2003(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 11.59
Investment Operations:
Investment income--net .17(b)
Net realized and unrealized
gain (loss) on investments .12
Total from Investment Operations .29
Distributions:
Dividends from investment income--net (.37)
Net asset value, end of period 11.51
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 2.52(c)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .89(d)
Ratio of net investment income
to average net assets 2.09(d)
Portfolio Turnover Rate 460.89
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 18,578
(A) FROM NOVEMBER 1, 2002 (COMMENCEMENT OF INITIAL OFFERING) TO JULY 31, 2003.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) NOT ANNUALIZED.
(D) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 21
FINANCIAL HIGHLIGHTS (CONTINUED)
Period Ended
CLASS B SHARES July 31, 2003(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 11.59
Investment Operations:
Investment income--net .14(b)
Net realized and unrealized
gain (loss) on investments .10
Total from Investment Operations .24
Distributions:
Dividends from investment income--net (.33)
Net asset value, end of period 11.50
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 2.11(c)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets 1.43(d)
Ratio of net investment income
to average net assets 1.67(d)
Portfolio Turnover Rate 460.89
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 11,367
(A) FROM NOVEMBER 1, 2002 (COMMENCEMENT OF INITIAL OFFERING) TO JULY 31, 2003.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) NOT ANNUALIZED.
(D) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
22
Year Ended July 31,
----------------------------------------------
CLASS D SHARES 2003(a) 2002(b) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 11.69 12.19 11.70 11.63 12.12
Investment Operations:
Investment income--net .40(c) .64(c) .77 .71 .76
Net realized and unrealized
gain (loss) on investments (.09) (.47) .50 .07 (.47)
Total from Investment Operations .31 .17 1.27 .78 .29
Distributions:
Dividends from investment income--net (.50) (.67) (.78) (.71) (.78)
Net asset value, end of period 11.50 11.69 12.19 11.70 11.63
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 2.69 1.46 11.17 7.50 2.52
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .88 .80 .84 .84 .87
Ratio of net investment income
to average net assets 3.45 5.31 6.46 6.64 6.54
Portfolio Turnover Rate 460.89 220.23 322.69 272.46 204.98
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 850,189 1,121,684 806,545 428,093 358,444
(A) THE FUND COMMENCED OFFERING FOUR CLASSES OF SHARES ON NOVEMBER 1,2002. THE
EXISTING SHARES WERE REDESIGNATED CLASS D SHARES.
(B) AS REQUIRED, EFFECTIVE AUGUST 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS
OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES AND BEGAN
AMORTIZING DISCOUNT OR PREMIUM ON FIXED INCOME SECURITIES ON A SCIENTIFIC
BASIS AND INCLUDING PAYDOWN GAINS AND LOSSES IN INTEREST INCOME. THE EFFECT
OF THIS CHANGE FOR THE PERIOD ENDED JULY 31, 2002 WAS TO DECREASE NET
INVESTMENT INCOME PER SHARE BY $.04, INCREASE NET REALIZED AND UNEALIZED
GAIN (LOSS) ON INVESTMENTS PER SHARE BY $.04 AND DECREASE THE RATIO OF NET
INVESTMENT INCOME TO AVERAGE NET ASSETS FROM 5.62% TO 5.31%. PER SHARE DATA
AND RATIOS/SUPPLEMENTAL DATA FOR PERIODS PRIOR TO AUGUST 1, 2001 HAVE NOT
BEEN RESTATED TO REFLECT THESE CHANGES IN PRESENTATION.
(C) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 23
FINANCIAL HIGHLIGHTS (CONTINUED)
Period Ended
CLASS P SHARES July 31, 2003(a)
- --------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 11.59
Investment Operations:
Investment income--net .20(b)
Net realized and unrealized
gain (loss) on investments .09
Total from Investment Operations .29
Distributions:
Dividends from investment income--net (.37)
Net asset value, end of period 11.51
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 2.53(c)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of expenses to average net assets .85(d)
Ratio of net investment income
to average net assets 2.33(d)
Portfolio Turnover Rate 460.89
- --------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 19,763
(A) FROM NOVEMBER 1, 2002 (COMMENCEMENT OF INITIAL OFFERING) TO JULY 31, 2003.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) NOT ANNUALIZED.
(D) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
24
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Dreyfus Premier Short Term Income Fund (the "fund" ) is a separate
non-diversified series of Dreyfus Investment Grade Funds, Inc. (the "Company")
which is registered under the Investment Company Act of 1940, as amended (the
"Act"), as an open-end management investment company and operates as a series
company currently offering five series, including the fund. The fund' s
investment objective was to provide investors with as high a level of current
income as is consistent with the preservation of capital. On December 18, 2002,
fund shareholders approved changing the fund's investment objective. Effective
January 20, 2003, the fund's objective is to seek to maximize total return,
consisting of capital appreciation and current income. The Dreyfus Corporation
(the "Manager" ) serves as the fund' s investment adviser. The Manager is a
wholly-owned subsidiary of Mellon Bank, N.A. ("Mellon"), which is a direct
subsidiary of Mellon Financial Corporation.
On July 17, 2003, the fund's Board of Directors approved, effective July 18,
2003, a change of the Company's name from "Dreyfus Investment Grade Bond Funds,
Inc." to "Dreyfus Investment Grade Funds, Inc.". On September 10, 2002, the
fund' s Board of Directors approved, effective November 1, 2002, a change of the
fund's name from "Dreyfus Short Term Income Fund" to "Dreyfus Premier Short Term
Income Fund" coinciding with the fund implementing a multiple class structure.
Shareholders, on November 1, 2002, were classified as Class D shareholders and
the fund added Class A, Class B and Class P shares.
Dreyfus Service Corporation (the "Distributor"), a wholly-owned subsidiary of
the Manager, is the distributor of the fund's shares. The fund is authorized to
issue 800 million shares of $.001 par value Common Stock. The fund currently
offers four classes of shares: Class A (100 million shares authorized), Class B
(100 million shares authorized) , Class D (500 million shares authorized) and
Class P (100 million shares authorized). Class A shares are subject to a sales
charge imposed at the time of purchase, Class B shares are subject to a
contingent deferred sales charge ("CDSC") imposed on Class B share redemptions
made within
The Fund 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
six years of purchase and automatically convert to Class A shares after six
years. Class D and Class P shares are sold at net asset value per share only to
institutional investors. Class A shares purchased at net asset value (an
investment of $250,000 or more) will have a CDSC imposed on redemptions made
within eighteen months of purchase. Other differences between the classes
include the services offered to and the expenses borne by each class and certain
voting rights.
The Company accounts separately for the assets, liabilities and operations of
each series. Expenses directly attributable to each series are charged to that
series' operations; expenses which are applicable to all series are allocated
among them on a pro rata basis.
The fund' s financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which may require the use of
management estimates and assumptions. Actual results could differ from those
estimates.
(A) PORTFOLIO VALUATION: Investments in securities (excluding short-term
investments, other than U.S. Treasury Bills, financial futures, options and swap
transactions) are valued each business day by an independent pricing service
(the "Service") approved by the Board of Directors. Investments for which quoted
bid prices are readily available and are representative of the bid side of the
market in the judgment of the Service are valued at the mean between the quoted
bid prices (as obtained by the Service from dealers in such securities) and
asked prices (as calculated by the Service based upon its evaluation of the
market for such securities). Other investments (which constitute a majority of
the portfolio securities) are carried at fair value as determined by the
Service, based on methods which include consideration of: yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Securities for which there
are no such valuations are valued at fair value as determined in good faith
under the direction of the Board of Directors. Short-term investments, excluding
U.S. Treasury Bills, are carried at amortized cost, which approximates value.
Financial futures, and
26
options, which are traded on an exchange, are valued at the last sales price on
the securities exchange on which such securities are primarily traded or at the
last sales price on the national securities market on each business day. Options
traded over-the-counter are priced at the mean between the bid prices and asked
prices. Investments denominated in foreign currencies are translated to U.S.
dollars at the prevailing rates of exchange. Swap transactions are valued based
on future cash flows and other factors, such as interest rates and underlying
securities.
(B) FOREIGN CURRENCY TRANSACTIONS: The fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Net realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, currency gains or losses
realized on securities transactions and the difference between the amounts of
dividends, interest, and foreign withholding taxes recorded on the fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities, resulting from
changes in exchange rates. Such gains and losses are included with net realized
and unrealized gain or loss on investments.
(C) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount and premium on investments, is recognized
on the accrual basis. Under the terms of the custody agreement, the fund
receives net earnings credits based on available cash balances left on deposit.
The Fund 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The fund may lend securities to qualified institutions. At origination, all
loans are secured by collateral of at least 102% of the value of U.S. securities
loaned and 105% of the value of foreign securities loaned. Collateral equivalent
to at least 100% of the market value of securities on loan will be maintained at
all times. Cash collateral is invested in certain other money market mutual
funds managed by the Manager as shown in the fund's Statement of Investments.
The fund will be entitled to receive all income on securities loaned, in
addition to income earned as a result of the lending transaction. Although each
security loaned is fully collateralized, the fund would bear the risk of delay
in recovery of, or loss of rights in, the securities loaned should a borrower
fail to return the securities in a timely manner.
(D) DIVIDENDS TO SHAREHOLDERS: It is the policy of the fund to declare dividends
daily from investment income-net. Such dividends are paid monthly. Dividends
from net realized capital gain, if any, are normally declared and paid annually,
but the fund may make distributions on a more frequent basis to comply with the
distribution requirements of the Internal Revenue Code of 1986, as amended (the
" Code" ). To the extent that net realized capital gain can be offset by capital
loss carryovers, it is the policy of the fund not to distribute such gain.
Income and capital gain distributions are determined in accordance with income
tax regulations, which may differ from accounting principles generally accepted
in the United States.
(E) FEDERAL INCOME TAXES: It is the policy of the fund to continue to qualify as
a regulated investment company, if such qualification is in the best interests
of its shareholders, by complying with the applicable provisions of the Code,
and to make distributions of taxable income sufficient to relieve it from
substantially all federal income and excise taxes.
At July 31, 2003, the components of accumulated earnings on a tax basis were as
follows: undistributed ordinary income $893,629, accumulated capital losses
$36,488,131 and unrealized depreciation $25,441,169.
The accumulated capital losses are available to be applied against future net
securities profits, if any, realized subsequent to July 31, 2003. If not
applied, $1,643,654 of the carryover expires in fiscal 2004, $1,314,223
28
expires in fiscal 2005, $1,818,379 expires in fiscal 2007, $5,887,866 expires in
fiscal 2008, $4,403,293 expires in fiscal 2010 and $21,420,716 expires in fiscal
2011.
The tax character of distributions paid to shareholders during the fiscal years
ended July 31, 2003 and July 31, 2002, were as follows: ordinary income
$42,181,017 and $58,434,746, respectively.
During the period ended July 31, 2003, as a result of permanent book to tax
differences, the fund increased accumulated undistributed investment income-net
by $9,020,784, decreased accumulated net realized gain (loss) on investments by
$7,339,501 and decreased paid-in capital by $1,681,283. Net assets were not
affected by this reclassification.
NOTE 2--BANK LINES OF CREDIT:
The fund may borrow up to $10 million for leveraging purposes under a short-term
unsecured line of credit and participates with other Dreyfus-managed funds in a
$100 million unsecured line of credit primarily to be utilized for temporary or
emergency purposes, including the financing of redemptions. Interest is charged
to the fund based on prevailing market rates in effect at the time of
borrowings.
The average daily amount of borrowings outstanding under the leveraging
arrangement during the period ended July 31, 2003 was approximately $278,900,
with a relative weighted average annualized interest rate of 1.95%.
NOTE 3--MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) Pursuant to a management agreement with the Manager, the management fee is
computed at the annual rate of .50 of 1% of the value of the fund's average
daily net assets and is payable monthly.
During the period ended July 31, 2003, the Distributor retained $22,392 from
commissions earned on sales of the fund' s Class A shares and $7,819 from
contingent deferred sales charges on redemptions of the fund's Class B shares.
The Fund 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(B) Under the Distribution Plan (the "Plan") adopted pursuant to Rule 12b-1
under the Act, Class B shares pay the Distributor for distributing their shares
at an annual rate of .50 of 1% of the value of the average daily net assets of
Class B shares. During the period ended July 31, 2003, Class B shares were
charged $18,763, pursuant to the Plan.
(C) Under the Shareholder Services Plan, Class A, Class B and Class P shares pay
the Distributor at an annual rate of .25 of 1% of the value of the average daily
net assets of Class A, Class B and Class P shares and .20 of 1% of the value of
the average daily net assets of Class D shares, for the provision of certain
services. The services provided may include personal services relating to
shareholder accounts, such as answering shareholder inquiries regarding Class A,
Class B, Class D and Class P shares and providing reports and other information,
and services related to the maintenance of shareholder accounts. The Distributor
may make payments to Service Agents (a securities dealer, financial institution
or other industry professional) in respect of these services. The Distributor
determines the amounts to be paid to Service Agents. During the period ended
July 31, 2003, Class A, Class B, Class D and Class P shares were charged,
$13,929, $9,382, $1,924,020 and $18,198, respectively, pursuant to the
Shareholder Services Plan.
The fund compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of the
Manager, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the fund. During the period
ended July 31, 2003, the fund was charged $354,109 pursuant to the transfer
agency agreement.
The fund compensates Mellon under a custody agreement for providing custodial
services for the fund. During the period ended July 31, 2003, the fund was
charged $116,030 pursuant to the custody agreement.
(D) Each Board member also serves as a Board member of other funds within the
Dreyfus complex (collectively, the "Fund Group"). Through December 31, 2002,
each Board member who was not an "affiliated person" as defined in the Act
received an annual fee of $45,000, an attendance fee of $5,000 for each
in-person meeting and $500 for
30
telephone meetings. Effective January 1, 2003, the Fund Group increased in size,
and the annual fee was increased to $60,000 while the attendance fee was
increased to $7,500 for each in-person meeting. These fees are allocated among
the funds in the Fund Group in proportion to each fund's relative net assets.
The Chairman of the Board receives an additional 25% of such compensation.
Subject to the Company's Emeritus Program Guidelines, Emeritus Board members, if
any, receive 50% of the annual retainer fee and per meeting fee paid at the time
the Board member achieves emeritus status.
(E) Commencing September 10, 2002, pursuant to an exemptive order from the
Securities and Exchange Commission, the fund may invest its available cash
balances in affiliated money market mutual funds as shown in the portfolio's
Statement of Investments. Management fees are not charged to these accounts.
During the period ended July 31, 2003, the fund derived $702,598 in income from
these investments, which is included in dividend income in the fund's Statement
of Operations.
NOTE 4--SECURITIES TRANSACTIONS:
The aggregate amount of purchases and sales (including paydowns) of investment
securities, excluding short-term securities, forward currency exchange
contracts, financial futures, options transactions and swap transactions, during
the period ended July 31, 2003, amounted to $4,593,414,412 and $4,915,001,990,
respectively.
The following summarizes the fund' s call/put options written for the period
ended July 31, 2003:
Face Amount Options Terminated
-----------------------------------------
Covered by Premiums Net Realized
Options Written: Contracts ($) Received ($) Cost ($) Gain ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Contracts outstanding
July 31, 2002 -- --
Contracts written 129,000,000 234,316
Contracts terminated:
Closed 129,000,000 234,316 70,547 163,769
CONTRACTS OUTSTANDING
JULY 31, 2003 -- --
The Fund 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The fund may purchase and write (sell) put and call options in order to gain
exposure to or to protect against changes in the market.
As a writer of call options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instrument underlying the option. Generally, the fund would incur a gain, to the
extent of the premium, if the price of the underlying financial instrument
decreases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument increases between those dates.
As a writer of put options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instrument underlying the option. Generally, the fund would incur a gain, to the
extent of the premium, if the price of the underlying financial instrument
increases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument decreases between those dates.
The fund may invest in financial futures contracts in order to gain exposure to
or protect against changes in the market. The fund is exposed to market risk as
a result of changes in the value of the underlying financial instruments.
Investments in financial futures require the fund to "mark to market" on a daily
basis, which reflects the change in market value of the contracts at the close
of each day' s trading. Accordingly, variation margin payments are received or
made to reflect daily unrealized gains and losses. When the contracts are
closed, the fund recognizes a realized gain or loss. These investments require
initial margin deposits with a custodian, which consist of cash or cash
equivalents, up to approximately 10% of the contract amount. The amount of these
deposits is determined by the exchange or Board of Trade on which the contract
is traded and is subject to change. At July 31, 2003, there were no financial
futures contracts outstanding.
32
The fund enters into forward currency exchange contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings and to settle foreign currency transactions. When executing forward
currency exchange contracts, the fund is obligated to buy or sell a foreign
currency at a specified rate on a certain date in the future. With respect to
sales of forward currency exchange contracts, the fund would incur a loss if the
value of the contract increases between the date the forward contract is opened
and the date the forward contract is closed. The fund realizes a gain if the
value of the contract decreases between those dates. With respect to purchases
of forward currency exchange contracts, the fund would incur a loss if the value
of the contract decreases between the date the forward contract is opened and
the date the forward contract is closed. The fund realizes a gain if the value
of the contract increases between those dates. The fund is also exposed to
credit risk associated with counter party nonperformance on these forward
currency exchange contracts which is typically limited to the unrealized gain on
each open contract. The following summarizes open forward currency exchange
contracts at July 31, 2003:
Foreign
Forward Currency Currency Unrealized
Exchange Contracts Amounts Proceeds ($) Value ($) Appreciation ($)
- -----------------------------------------------------------------------------------------------------------------------------
SALES:
Canadian Dollar,
expiring 10/16/2003 19,095,000 13,636,259 13,511,697 124,562
The fund may enter into swap agreements to exchange the interest rate on, or
return generated by, one nominal instrument for the return generated by another
nominal instrument.
The fund enters into credit default swaps to hedge its exposure to or to gain
exposure to changes in the market on debt securities. Credit default swaps
involve commitments to pay a fixed rate in exchange for payment if a credit
event affecting a third party (the referenced company) occurs. Credit events may
include a failure to pay interest or
The Fund 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
principal, bankruptcy or restructuring. Net periodic interest payments to be
received or paid are accrued daily and are recorded in the Statement of
Operations as an adjustment to interest income. Credit default swaps are
marked-to-market daily and the change, if any, is recorded as unrealized
appreciation or depreciation in the Statement of Operations. The following
summarizes open credit default swaps entered into by the fund at July 31, 2003:
Unrealized
Appreciation
Notional Amount ($) Description (Depreciation) ($)
- --------------------------------------------------------------------------------
3,400,000 Agreement with Merrill Lynch terminating 1,549
June 20, 2008 to pay a fixed rate of .34%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Bear Stearns, 7.625%, 12/7/2009
3,400,000 Agreement with Merrill Lynch terminating (1,540)
June 20, 2008 to pay a fixed rate of .36%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Bear Stearns, 7.625%, 12/7/2009
4,500,000 Agreement with Merrill Lynch terminating (6,402)
September 20, 2008 to pay a fixed rate of .38%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Bear Stearns, 7.625%, 12/7/2009
11,300,000 Agreement with Merrill Lynch terminating (12,700)
June 20, 2008 to pay a fixed rate of .29%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Bank of America, 6.25%, 4/15/2012
9,070,000 Agreement with Merrill Lynch terminating (94,358)
July 20, 2004 to pay a fixed rate of 3.85%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000 on
Federative Republic of Brazil, 8%, 4/15/2014
9,070,000 Agreement with Merrill Lynch terminating (54,927)
July 20, 2004 to pay a fixed rate of 3.4%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000 on
Federative Republic of Brazil, 8%, 4/15/2014
34
Unrealized
Appreciation
Notional Amount ($) Description (Depreciation) ($)
- --------------------------------------------------------------------------------
6,800,000 Agreement with Merrill Lynch terminating 41,326
June 20, 2008 to pay a fixed rate of .51%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000 on
Countrywide Home Loans, 5.625%, 7/15/2009
4,500,000 Agreement with Merrill Lynch terminating 13,829
September 20, 2008 to pay a fixed rate of .59%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000 on
Countrywide Home Loans, 5.625%, 7/15/2009
2,270,000 Agreement with Merrill Lynch terminating (2,294)
June 20, 2008 to pay a fixed rate of .42%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Goldman Sachs, 6.6%, 1/15/2012
9,070,000 Agreement with Merrill Lynch terminating (13,279)
June 20, 2008 to pay a fixed rate of .43%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Goldman Sachs, 6.6%, 1/15/2012
6,800,000 Agreement with Merrill Lynch terminating 3,062
June 20, 2008 to pay a fixed rate of .54%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Washington Mutual, 5.625%, 1/15/2007
4,500,000 Agreement with Merrill Lynch terminating (8,427)
September 20, 2008 to pay a fixed rate of .59%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Washington Mutual, 5.625%, 1/15/2007
TOTAL (134,161)
Realized gains or losses on maturity or termination of swaps are presented in
the Statement of Operations. Risks may arise upon entering into these agreements
from the potential inability of the counterparties to meet the terms of the
agreement and are generally limited to the amount of net payments to be
received, if any, at the date of default.
The Fund 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At July 31, 2003, the cost of investments for federal income tax purposes was
$1,164,918,326; accordingly, accumulated net unrealized depreciation on
investments was $25,296,115, consisting of $7,279,203 gross unrealized
appreciation and $32,575,318 gross unrealized depreciation.
36
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors Dreyfus Premier Short Term Income Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Dreyfus Premier Short Term Income Fund (one of
the funds comprising Dreyfus Investment Grade Funds, Inc.), as of July 31, 2003,
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended, and
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
verification by examination of securities held by the custodian as of July 31,
2003 and confirmation of securities not held by the custodian by correspondence
with others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Dreyfus Premier Short Term Income Fund at July 31, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
New York, New York
September 18, 2003
The Fund 37
IMPORTANT TAX INFORMATION (Unaudited)
The fund hereby designates .02% of the ordinary dividends paid during the fiscal
year ended July 31, 2003 as qualifying for the corporate dividends received
deduction. Shareholders will receive notification in January 2004 of the
percentage applicable to the preparation of their 2003 income tax returns.
38
PROXY RESULTS (Unaudited)
The fund held a special meeting of shareholders on December 18, 2002. The
proposal considered at the meeting, and the results, are as follows:
Shares
----------------------------------------------------------------------
For Against Abstained
----------------------------------------------------------------------------------
To change the fund's
investment objective 40,350,883 5,311,887 1,968,744
The Fund 39
BOARD MEMBERS INFORMATION (Unaudited)
Joseph S. DiMartino (59)
Chairman of the Board (1995)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The Muscular Dystrophy Association, Director
* Levcor International, Inc., an apparel fabric processor, Director
* Century Business Services, Inc., a provider of outsourcing functions for small
and medium size companies, Director
* The Newark Group, a provider of a national market of paper recovery
facilities, paperboard mills and paperboard converting plants, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 191
--------------
Clifford L. Alexander, Jr. (69)
Board Member (2003)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Alexander & Associates, Inc., a management consulting firm
(January 1981-present)
* Chairman of the Board of Moody's Corporation (October 2000-present)
* Chairman of the Board and Chief Executive Officer of The Dun and Bradstreet
Corporation (October 1999-September 2000)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* Wyeth (formerly, American Home Products Corporation), a global leader in
pharmaceuticals, consumer healthcare products and animal health products,
Director
* Mutual of America Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 70
--------------
Lucy Wilson Benson (76)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Benson and Associates, consultants to business and government
(1980-present)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The International Executive Services Corps., Director
* Citizens Network for Foreign Affairs, Vice Chairperson
* Council on Foreign Relations, Member
* Lafayette College Board of Trustees, Vice Chairperson Emeritus
* Atlantic Council of the U.S., Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 44
40
David W. Burke (67)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* John F. Kennedy Library Foundation, Director
* U.S.S. Constitution Museum, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 87
--------------
Whitney I. Gerard (68)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Partner of Chadbourne & Parke LLP
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
Arthur A. Hartman (77)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Chairman of First NIS Regional Fund (ING/Barings Management) and New Russia
Fund
* Advisory Council Member to Barings-Vostok
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* APCO Associates, Inc., Senior Consultant
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
George L. Perry (69)
Board Member (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Economist and Senior Fellow at Brookings Institution
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* State Farm Mutual Automobile Association, Director
* State Farm Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
ONCE ELECTED ALL BOARD MEMBERS SERVE FOR AN INDEFINITE TERM. ADDITIONAL
INFORMATION ABOUT THE BOARD MEMBERS, INCLUDING THEIR ADDRESS IS AVAILABLE IN THE
FUND'S STATEMENT OF ADDITIONAL INFORMATION WHICH CAN BE OBTAINED FROM DREYFUS
FREE OF CHARGE BY CALLING THIS TOLL FREE NUMBER: 1-800-554-4611.
The Fund 41
OFFICERS OF THE FUND (Unaudited)
STEPHEN E. CANTER, PRESIDENT SINCE MARCH 2000.
Chairman of the Board, Chief Executive Officer and Chief Operating Officer
of the Manager, and an officer of 95 investment companies (comprised of 188
portfolios) managed by the Manager. Mr. Canter also is a Board member and, where
applicable, an Executive Committee Member of the other investment management
subsidiaries of Mellon Financial Corporation, each of which is an affiliate of
the Manager. He is 58 years old and has been an employee of the Manager since
May 1995.
STEPHEN R. BYERS, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2002.
Chief Investment Officer, Vice Chairman and a director of the Manager, and
an officer of 95 investment companies (comprised of 188 portfolios) managed by
the Manager. Mr. Byers also is an officer, director or an Executive Committee
Member of certain other investment management subsidiaries of Mellon Financial
Corporation, each of which is an affiliate of the Manager. He is 50 years old
and has been an employee of the Manager since January 2000. Prior to joining the
Manager, he served as an Executive Vice President-Capital Markets, Chief
Financial Officer and Treasurer at Gruntal & Co., L.L.C.
CHARLES CARDONA, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2001.
Vice Chairman and a Director of the Manager, Executive Vice President of
the Distributor, President of Dreyfus Institutional Services Division, and an
officer of 12 investment companies (comprised of 16 portfolios) managed by the
Manager. He is 47 years old and has been an employee of the Manager since
February 1981.
MARK N. JACOBS, VICE PRESIDENT SINCE MARCH 2000.
Executive Vice President, Secretary and General Counsel of the Manager, and
an officer of 96 investment companies (comprised of 204 portfolios) managed by
the Manager. He is 57 years old and has been an employee of the Manager since
June 1977.
MICHAEL A. ROSENBERG, SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 93 investment
companies (comprised of 197 portfolios) managed by the Manager. He is 43 years
old and has been an employee of the Manager since October 1991.
STEVEN F. NEWMAN, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel and Assistant Secretary of the Manager, and an
officer of 96 investment companies (comprised of 204 portfolios) managed by the
Manager. He is 54 years old and has been an employee of the Manager since July
1980.
ROBERT R. MULLERY, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 26 investment
companies (comprised of 61 portfolios) managed by the Manager. He is 51 years
old and has been an employee of the Manager since May 1986.
JAMES WINDELS, TREASURER SINCE NOVEMBER 2001.
Director - Mutual Fund Accounting of the Manager, and an officer of 96
investment companies (comprised of 204 portfolios) managed by the Manager. He is
44 years old and has been an employee of the Manager since April 1985.
42
ERIK D. NAVILOFF, ASSISTANT TREASURER SINCE DECEMBER 2002.
Senior Accounting Manager - Taxable Fixed Income Funds of the Manager, and
an officer of 18 investment companies (comprised of 76 portfolios) managed by
the Manager. He is 35 years old and has been an employee of the Manager since
November 1992.
KENNETH J. SANDGREN, ASSISTANT TREASURER SINCE NOVEMBER 2001.
Mutual Funds Tax Director of the Manager, and an officer of 96 investment
companies (comprised of 204 portfolios) managed by the Manager. He is 49 years
old and has been an employee of the Manager since June 1993.
WILLIAM GERMENIS, ANTI-MONEY LAUNDERING COMPLIANCE OFFICER SINCE SEPTEMBER 2002
Vice President and Anti-Money Laundering Compliance Officer of the
Distributor, and the Anti-Money Laundering Compliance Officer of 91 investment
companies (comprised of 199 portfolios) managed by the Manager. He is 33 years
old and has been an employee of the Distributor since October 1998. Prior to
joining the Distributor, he was a Vice President of Compliance Data Center, Inc.
The Fund 43
NOTES
For More Information
Dreyfus Premier
Short Term Income Fund
200 Park Avenue
New York, NY 10166
Manager
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
Custodian
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Transfer Agent &
Dividend Disbursing Agent
Dreyfus Transfer, Inc.
200 Park Avenue
New York, NY 10166
Distributor
Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
To obtain information:
BY TELEPHONE Call
your financial
representative or 1-800-554-4611
BY MAIL Write to:
The Dreyfus Premier Family of Funds
144 Glenn Curtiss
Boulevard Uniondale, NY 11556-0144
(c) 2003 Dreyfus Service Corporation 083AR0703
Dreyfus
Intermediate
Term Income Fund
ANNUAL REPORT July 31, 2003
YOU, YOUR ADVISOR AND
DREYFUS
A MELLON FINANCIAL COMPANY(TM)
The views expressed in this report reflect those of the portfolio manager only
through the end of the period covered and do not necessarily represent the views
of Dreyfus or any other person in the Dreyfus organization. Any such views are
subject to change at any time based upon market or other conditions and Dreyfus
disclaims any responsibility to update such views. These views may not be relied
on as investment advice and, because investment decisions for a Dreyfus fund are
based on numerous factors, may not be relied on as an indication of trading
intent on behalf of any Dreyfus fund.
Not FDIC-Insured * Not Bank-Guaranteed * May Lose Value
Contents
THE FUND
- --------------------------------------------------
2 Letter from the Chairman
3 Discussion of Fund Performance
6 Fund Performance
8 Statement of Investments
18 Statement of Financial Futures
19 Statement of Assets and Liabilities
20 Statement of Operations
21 Statement of Changes in Net Assets
23 Financial Highlights
25 Notes to Financial Statements
37 Report of Independent Auditors
38 Important Tax Information
39 Proxy Results
40 Board Members Information
42 Officers of the Fund
FOR MORE INFORMATION
- ---------------------------------------------------------------------------
Back Cover
The Fund
Dreyfus Intermediate Term Income Fund
LETTER FROM THE CHAIRMAN
Dear Shareholder:
This annual report for Dreyfus Intermediate Term Income Fund covers the 12-month
period from August 1, 2002, through July 31, 2003. Inside, you'll find valuable
information about how the fund was managed during the reporting period,
including a discussion with Michael Hoeh, portfolio manager and a member of the
Dreyfus Taxable Fixed Income Team that manages the fund.
Bonds generally continued to rally during most of the reporting period, driven
higher by a combination of declining interest rates and improving investor
sentiment. Corporate bonds in particular rose sharply as companies paid down
debt, trimmed expenses and adopted more rigorous standards of corporate
governance in the wake of last year's high-profile accounting scandals. However,
some of the more interest-rate-sensitive sectors of the bond market began to
give back a significant amount of their gains over the last several weeks of the
reporting period, triggered by strong interest-rate volatility and a sharp
sell-off in certain areas of the bond market.
With yields on some types of bonds near historical lows, maintaining a steady
stream of current income has been a challenge for many investors. What should an
income-oriented investor do now? While we believe that bonds continue to
represent an important component of a well-balanced investment portfolio, your
financial advisor may be in the best position to recommend the income strategies
that are right for you in today's market environment.
Thank you for your continued confidence and support.
Sincerely,
/S/STEPHEN E. CANTER
Stephen E. Canter
Chairman and Chief Executive Officer
The Dreyfus Corporation
August 15, 2003
2
DISCUSSION OF FUND PERFORMANCE
Michael Hoeh, Portfolio Manager
Dreyfus Taxable Fixed Income Team
HOW DID DREYFUS INTERMEDIATE TERM INCOME FUND PERFORM RELATIVE TO ITS BENCHMARK?
For the 12-month period ended July 31, 2003, the fund's Investor shares achieved
a total return of 8.64% and the fund's Institutional shares achieved a total
return of 9.07%.(1) In comparison, the fund's new benchmark, the Lehman Brothers
Aggregate Bond Index achieved a total return of 5.42% for the reporting
period.(2) The fund's former benchmark, the Merrill Lynch U.S. Domestic Master
Index, achieved a total return of 5.56% for the same period.(3)
We attribute the fund and bond market's strong overall performance to declining
interest rates and improving investor sentiment regarding corporate debt during
the reporting period. The fund's strong returns relative to its benchmark were
primarily the result of its sector allocation strategy, which emphasized
corporate bonds for much of the reporting period.
WHAT IS THE FUND'S INVESTMENT APPROACH?
On January 21, 2003, shareholders voted to change the fund's investment
objective. Effective February 21, 2003, the fund seeks to maximize total return
consisting of capital appreciation and current income. The fund' s prior
investment objective was to seek as high a level of current income as is
consistent with the preservation of capital.
At least 80% of the fund must be invested in investment-grade bonds, including
U.S. government and agency securities, corporate bonds and mortgage- and
asset-backed securities. Up to 20% of the fund may be invested in securities
rated below investment grade, including emerging market securities.
The Fund 3
DISCUSSION OF FUND PERFORMANCE (CONTINUED)
When choosing investments for the fund, we evaluate four primary factors:
* The direction in which interest rates are likely to move under prevailing
economic conditions. If interest rates appear to be rising, we generally
reduce the fund's average duration to capture higher-yielding securities
as they become available. If interest rates appear to be declining, we may
increase the fund's average duration to lock in prevailing yields.
* The differences in yields -- or spreads -- between fixed-income securities
of varying maturities.
* The mix of security types within the fund, including relative exposure to
government securities, corporate securities and high-yield bonds.
* Credit characteristics of individual securities, including the financial
health of the issuer and the callability of the security.
WHAT OTHER FACTORS INFLUENCED THE FUND'S PERFORMANCE?
The fund was primarily influenced by improving investor sentiment during the
reporting period. In August 2002, investors generally were pessimistic amid
corporate accounting and management scandals, a persistently weak U.S. economy
and mounting geopolitical tensions. By October, consumer sentiment had fallen to
its lowest level in years and the stock market reached new lows. To help
stimulate renewed economic growth, the Federal Reserve Board (the "Fed") stepped
in early November with a 50-basis point reduction of short-term interest rates.
Bonds that are generally more sensitive to interest rates, such as U.S.
government securities, benefited in this environment. However, bonds that are
generally more credit-sensitive continued to flounder, and the fund's relatively
heavy exposure to corporate securities hurt its performance during the reporting
period's first half.
The U.S. economy continued to struggle during the first quarter of 2003, when
consumers and corporations remained cautious in advance of the war in Iraq.
Nonetheless, corporate bonds began to rally as investors recognized that many
investment-grade issuers had taken steps to strengthen their balance sheets.
Investors also apparently were
4
attracted to low corporate bond prices compared to historical norms. Corporate
bonds rallied particularly strongly, contributing greatly to the fund' s
performance during the reporting period's second half.
Bonds generally continued to rally after the war wound down in April and
investors began to anticipate an additional interest-rate reduction. In late
June, the Fed reduced short-term rates by 25 basis points to 1%. However, yields
of longer-term U.S. Treasury securities rose sharply in July as investors
detected signs of stronger economic growth, erasing nearly all of their price
gains achieved since the start of 2003. Corporate bonds generally maintained
their gains.
The fund also received positive contributions from its holdings of Treasury
Inflation Protected Securities (" TIPS" ), which we purchased at what we
considered to be attractive prices and later sold after achieving gains.
WHAT IS THE FUND'S CURRENT STRATEGY?
We have started to gradually reduce the fund's holdings of investment-grade
corporate securities, as we believe they have been fully priced in the
marketplace. In general we are using a more "sector-neutral" stance that we
believe is prudent given the current uncertainty that still exists in the
marketplace.
August 15, 2003
(1) TOTAL RETURN INCLUDES REINVESTMENT OF DIVIDENDS AND ANY CAPITAL GAINS PAID.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE, YIELD AND
INVESTMENT RETURN FLUCTUATE SUCH THAT UPON REDEMPTION, FUND SHARES MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. RETURN FIGURES PROVIDED
REFLECT THE ABSORPTION OF FUND EXPENSES BY THE DREYFUS CORPORATION PURSUANT
TO AN UNDERTAKING IN EFFECT THAT MAY BE EXTENDED, TERMINATED OR MODIFIED AT
ANY TIME. HAD THESE EXPENSES NOT BEEN ABSORBED, THE FUND'S RETURNS WOULD
HAVE BEEN LOWER.
(2) SOURCE: LIPPER INC. -- REFLECTS REINVESTMENT OF DIVIDENDS AND, WHERE
APPLICABLE, CAPITAL GAIN DISTRIBUTIONS. THE LEHMAN BROTHERS AGGREGATE BOND
INDEX IS A WIDELY ACCEPTED, UNMANAGED TOTAL RETURN INDEX OF CORPORATE, U.S.
GOVERNMENT AND U.S. GOVERNMENT AGENCY DEBT INSTRUMENTS, MORTGAGE-BACKED
SECURITIES AND ASSET-BACKED SECURITIES WITH AN AVERAGE MATURITY OF 1-10
YEARS.
(3) SOURCE: LIPPER INC. -- REFLECTS REINVESTMENT OF DIVIDENDS AND, WHERE
APPLICABLE, CAPITAL GAIN DISTRIBUTIONS. THE MERRILL LYNCH U.S. DOMESTIC
MASTER INDEX IS AN UNMANAGED PERFORMANCE BENCHMARK COMPOSED OF U.S.
TREASURY AND AGENCY, AND MORTGAGE AND INVESTMENT-GRADE CORPORATE SECURITIES
WITH MATURITIES GREATER THAN OR EQUAL TO ONE YEAR.
The Fund 5
FUND PERFORMANCE
Dreyfus
Intermediate Term Merrill Lynch
PERIOD Income Fund Lehman Brothers Domestic
( Investor shares ) Aggregate Bond Index * Master Index *
2/2/96 10,000 10,000 10,000
7/31/96 10,151 9,840 9,834
7/31/97 11,846 10,899 10,895
7/31/98 13,141 11,757 11,765
7/31/99 13,690 12,049 12,053
7/31/00 14,929 12,769 12,767
7/31/01 16,890 14,389 14,383
7/31/02 16,999 15,472 15,474
7/31/03 18,467 16,311 16,335
Comparison of change in value of $10,000 investment in Dreyfus Intermediate Term
Income Fund Investor shares with the Lehman Brothers Aggregate Bond Index and
the Merrill Lynch Domestic Master Index
- --------------------------------------------------------------------------------
Average Annual Total Returns AS OF 7/31/03
Inception From
Date 1 Year 5 Years Inception
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTOR SHARES 2/2/96 8.64% 7.04% 8.53%
INSTITUTIONAL SHARES 5/31/01 9.07% -- 5.50%
((+)) SOURCE: LIPPER INC.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE FUND'S PERFORMANCE
SHOWN IN THE GRAPH AND TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
THE ABOVE GRAPH COMPARES A $10,000 INVESTMENT MADE IN INVESTOR SHARES OF DREYFUS
INTERMEDIATE TERM INCOME FUND ON 2/2/96 (INCEPTION DATE) TO A $10,000 INVESTMENT
MADE IN THE LEHMAN BROTHERS AGGREGATE BOND INDEX (THE "LEHMAN INDEX") AND THE
MERRILL LYNCH DOMESTIC MASTER INDEX (THE "MERRILL LYNCH INDEX") ON THAT DATE.
FOR COMPARATIVE PURPOSES, THE VALUES OF THE INDICES ON 1/31/96 ARE USED AS THE
BEGINNING VALUES ON 2/2/96. ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS ARE
REINVESTED.
THIS IS THE FIRST YEAR IN WHICH COMPARATIVE PERFORMANCE IS BEING SHOWN FOR THE
LEHMAN INDEX, WHICH HAS BEEN SELECTED AS THE PRIMARY INDEX FOR COMPARING THE
FUND'S PERFORMANCE. PERFORMANCE FOR THE MERRILL LYNCH INDEX WILL NOT BE PROVIDED
IN THE NEXT ANNUAL REPORT.
6
THE FUND INVESTS PRIMARILY IN DEBT SECURITIES AND SECURITIES WITH DEBT-LIKE
CHARACTERISTICS OF DOMESTIC AND FOREIGN ISSUERS AND MAINTAINS A DOLLAR-WEIGHTED
AVERAGE MATURITY RANGING BETWEEN FIVE AND TEN YEARS. THE FUND'S PERFORMANCE
SHOWN IN THE LINE GRAPH TAKES INTO ACCOUNT ALL APPLICABLE FEES AND EXPENSES. THE
LEHMAN INDEX IS A WIDELY ACCEPTED, UNMANAGED TOTAL RETURN INDEX OF CORPORATE,
U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY DEBT INSTRUMENTS, MORTGAGE-BACKED
SECURITIES AND ASSET-BACKED SECURITIES WITH AN AVERAGE MATURITY OF 1-10 YEARS.
THE MERRILL LYNCH INDEX IS AN UNMANAGED PERFORMANCE BENCHMARK COMPOSED OF U.S.
TREASURY AND AGENCY, AND MORTGAGE AND INVESTMENT-GRADE CORPORATE SECURITIES WITH
MATURITIES GREATER THAN OR EQUAL TO ONE YEAR. THE INDICES DO NOT TAKE INTO
ACCOUNT CHARGES, FEES AND OTHER EXPENSES. FURTHER INFORMATION RELATING TO FUND
PERFORMANCE, INCLUDING EXPENSE REIMBURSEMENTS, IF APPLICABLE, IS CONTAINED IN
THE FINANCIAL HIGHLIGHTS SECTION OF THE PROSPECTUS AND ELSEWHERE IN THIS REPORT
EFFECTIVE MAY 31, 2001, EXISTING FUND SHARES WERE DESIGNATED AS INVESTOR SHARES
AND THE FUND BEGAN OFFERING A SECOND CLASS OF SHARES DESIGNATED AS INSTITUTIONAL
SHARES. PERFORMANCE FOR INSTITUTIONAL SHARES WILL VARY FROM THE PERFORMANCE OF
INVESTOR SHARES BECAUSE OF THE DIFFERENCES IN CHARGES AND EXPENSES.
The Fund 7
STATEMENT OF INVESTMENTS
July 31, 2003
STATEMENT OF INVESTMENTS
Principal
BONDS AND NOTES--98.0% Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
AIRLINES--.1%
Continental Airlines,
Pass-Through Ctfs.,
Ser. 1998-1, Cl. A, 6.648%, 2017 1,307,222 1,227,400
USAir,
Enhanced Equipment Notes,
Ser. C, 8.93%, 2009 429,622 (b) 85,924
1,313,324
ASSET--BACKED CTFS.- CREDIT CARDS--.7%
MBNA Master Credit Card Note Trust,
Ser. 2002-C1, Cl. C1, 6.8%, 2014 5,268,000 5,437,029
ASSET--BACKED CTFS.--EQUIPMENT--.0%
Pegasus Aviation Lease Securitization,
Ser. 2001-1, Cl. A1, 1.725%, 2015 212,749 (c,d) 126,869
ASSET--BACKED CTFS.--HOME EQUITY LOANS--1.1%
Conseco Finance Securitizations:
Ser. 2000-1, Cl. A3, 7.3%, 2031 116,439 117,288
Ser. 2000-B, Cl. AF5, 8.15%, 2031 4,750,000 5,056,088
Ser. 2000-D, Cl. A3, 7.89%, 2018 101,314 101,894
Ser. 2000-E, Cl. A5, 8.02%, 2031 3,300,000 3,541,923
The Money Store Home Equity Trust,
Ser. 1998-B, Cl. AF8, 6.11%, 2010 218,917 225,727
9,042,920
AUTO MANUFACTURING--.6%
General Motors,
Notes, 8.375%, 2033 4,917,000 4,606,226
BANKING--1.8%
Deutsche Bank,
Deposit Notes, 4.85%, 2006 10,000,000 9,962,500
Dresdner Funding Trust I,
Bonds, 8.151%, 2031 5,270,000 (c) 5,338,420
15,300,920
CHEMICALS--.3%
Avecia,
Gtd. Sr. Notes, 11%, 2009 1,578,000 1,349,190
Lyondell Chemicals,
Sr. Notes, 10.5%, 2013 1,131,000 (c) 1,114,035
2,463,225
COMMERCIAL MORTGAGE PASS-THROUGH CTFS.--5.6%
1211 Finance,
Ser. 2000-1211, Cl. A, 7.745%, 2035 11,000,000 (c) 12,700,496
8
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE
PASS-THROUGH CTFS. (CONTINUED)
CS First Boston Mortgage Securities:
Ser. 1998-C1, Cl. A1A, 6.26%, 2040 1,333,978 1,410,015
Ser. 1998-C1, Cl. C, 6.78%, 2040 3,877,000 4,243,901
Chase Commerical Mortgage Securities,
Ser. 2001-245, Cl. A1, 5.974%, 2016 8,129,677 (c,d) 8,666,154
GS Mortgage Securities II:
Ser. 1998-C1, Cl. C, 6.91%, 2030 9,750,000 10,708,133
Ser. 2001-LIBA, Cl. C, 6.733%, 2016 3,140,000 (c) 3,245,545
Salomon Brothers Mortgage Securities VII,
Ser. 1997-TXH, Cl. B, 7.491%, 2025 4,000,000 (c) 4,338,058
Structured Asset Securities, REMIC,
Ser. 1996-CFL, Cl. H, 7.75%, 2028 1,000,000 1,099,764
46,412,066
COMMERCIAL SERVICES--.2%
Cendant,
Notes, 6.25%, 2010 1,887,000 1,990,915
DIVERSIFIED FINANCIAL SERVICES--2.5%
American Express,
Notes, 4.875%, 2013 3,836,000 3,756,894
Capital One Bank,
Sub. Notes, 6.5%, 2013 2,942,000 2,751,500
Capital One Financial,
Notes, 7.25%, 2003 1,550,000 1,571,404
Farmers Exchange Capital,
Trust Surplus Note Securities,
7.05%, 2028 5,990,000 (c) 5,119,803
Ford Motor Credit,
Global Landmark Securities,
6.5%, 2007 5,706,000 5,864,307
General Electric Capital,
Medium-Term Notes,
Ser. A, 6.75%, 2032 1,904,000 2,002,410
21,066,318
ELECTRIC UTILITIES--.5%
American Electric Power,
Sr. Notes, 5.25%, 2015 1,548,000 1,434,717
PPL Energy Supply,
Conv. Sr. Notes, 2.625%, 2023 2,530,000 (c) 2,476,238
3,910,955
The Fund 9
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENTAL--5.7%
Canadian Government:
Bonds, 3%, 2036 CAD 10,254,000 7,083,906
Bonds, 4%, 2031 CAD 7,165,000 (e) 6,595,358
Bonds, 4.5%, 2007 CAD 26,760,000 19,465,966
Philippine Government International Bond,
Bonds, 8.875%, 2008 4,500,000 4,837,500
Quebec Province,
Deb., 3.3%, 2013 CAD 9,560,000 (e) 6,953,879
Republic of Argentina,
Deb., 11.25%, 2004 33,100 (b) 9,516
United Mexican States,
Notes, 4.625%, 2008 2,500,000 2,487,500
47,433,625
HEALTH CARE--1.2%
Bristol-Myers Squibb,
Notes, 5.75%, 2011 2,575,000 2,716,084
HCA:
Notes, 6.25%, 2013 1,728,000 1,638,350
Notes, 6.75%, 2013 2,772,000 2,716,211
Manor Care,
Notes, 6.25%, 2013 2,932,000 (c) 2,844,040
9,914,685
MANUFACTURING--.8%
General Electric,
Notes, 5%, 2013 3,982,000 3,903,650
Tyco International,
Gtd. Notes, 5.8%, 2006 2,727,000 2,781,540
6,685,190
MEDIA--2.7%
America Online,
Conv. Sub. Notes, 0%, 2019 8,753,000 5,372,154
British Sky Broadcasting,
Gtd. Notes, 6.875%, 2009 3,575,000 3,914,625
Clear Channel Communications,
Notes, 4.25%, 2009 3,492,000 3,431,958
Comcast,
Sr. Notes, 6.5%, 2015 3,860,000 4,034,897
Cox Communications,
Notes, 6.75%, 2011 2,298,000 2,521,274
10
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
MEDIA (CONTINUED)
Interactive,
Notes, 7%, 2013 2,944,000 3,185,761
22,460,669
MINING & METALS--1.8%
Alcoa,
Notes, 6%, 2012 3,366,000 3,546,855
Carpenter Technology,
Notes, 6.625%, 2013 1,840,000 (c) 1,732,519
Freeport-McMoRan Copper & Gold,
Conv. Sr. Notes, 7%, 2011 2,980,000 (c) 3,631,875
Noranda,
Deb., 7%, 2005 2,405,000 2,518,583
Placer Dome,
Deb., Ser. B, 8.5%, 2045 3,600,000 3,872,088
15,301,920
OIL & GAS--1.7%
Petro-Canada,
Notes, 4%, 2013 1,238,000 1,119,444
Petrobras International Finance:
Sr. Notes, 9.75%, 2011 1,475,000 1,596,688
Sr. Notes, 9.875%, 2008 11,000,000 11,907,500
14,623,632
PAPER & FOREST PRODUCTS--.4%
Rock-Tenn,
Bonds, 5.625%, 2013 1,680,000 1,633,756
Weyerhaeuser,
Deb., 7.375%, 2032 1,610,000 1,671,536
3,305,292
PIPELINES--.2%
El Paso Production,
Gtd. Sr. Notes, 7.75%, 2013 1,842,000 (c) 1,699,245
PROPERTY-CASUALTY INSURANCE--1.3%
Ace Capital Trust II,
Gtd. Capital Securities, 9.7%, 2030 3,048,000 3,790,828
Fund American Cos.,
Notes, 5.875%, 2013 3,625,000 3,540,092
Markel,
Notes, 6.8%, 2013 2,340,000 2,448,726
The Fund 11
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE (CONTINUED)
Metlife,
Sr. Notes, 5.375%, 2012 935,000 937,236
10,716,882
RESIDENTIAL MORTGAGE PASS-THROUGH CTFS.--2.6%
Bank of America Mortgage Securities II:
Ser. 2001-4, Cl. B3, 6.75%, 2031 508,725 531,656
Ser. 2001-9, Cl. B4, 6.5%, 2016 115,510 (c) 120,479
Ser. 2001-10, Cl. B4, 6.25%, 2016 93,214 (c) 95,135
Ser. 2001-10, Cl. B5, 6.25%, 2016 93,214 (c) 90,113
Ser. 2001-10, Cl. B6, 6.25%, 2016 93,197 (c) 41,240
Bank of America Mortgage Securities III,
Ser. 2001-8, Cl. B3, 6.75%, 2031 428,783 447,304
Cendant Mortgage:
Ser. 1999-8, Cl. B3, 6.25%, 2029 354,916 (c) 372,836
Ser. 1999-8, Cl. B4, 6.25%, 2029 253,511 (c) 262,226
Chase Mortgage Finance:
Ser. 1999-S12, Cl. B1, 7.25%, 2029 1,146,795 1,221,256
Ser. 1999-S13, Cl. B3, 6.5%, 2014 430,052 446,554
Countrywide Funding,
Ser. 1994-8, Cl. B2, 6%, 2009 203,637 (c) 208,695
Countrywide Home Loans:
Ser. 2003-8, Cl. B3, 5%, 2018 296,075 253,709
Ser. 2003-15, Cl. B3, 4.8742%, 2018 900,317 (c) 782,432
Ser. 2003-18, Cl. B3, 5.5%, 2033 698,406 570,105
GMAC Mortgage Corp. Loan Trust:
Ser. 2003-J1, Cl. B1, 5.25%, 2018 441,785 (c) 397,054
Ser. 2003-J1, Cl. B2, 5.25%, 2018 441,785 (c) 345,973
Ser. 2003-J1, Cl. B3, 5.25%, 2018 441,787 (c) 150,208
IMPAC Secured Asset Owner Trust,
Ser. 2000-4, Cl. A4, 7.43%, 2030 3,000,000 (d) 3,091,174
MASTR Asset Securitization Trust:
Ser. 2003-1, Cl. 15B4, 5.25%, 2018 401,020 (c) 351,084
Ser. 2003-1, Cl. 15B5, 5.25%, 2018 201,488 (c) 146,976
Norwest Asset Securities:
Ser. 1998-13, Cl. B3, 6.25%, 2028 651,363 677,384
Ser. 1999-22, Cl. B4, 6.5%, 2014 327,126 344,041
Ser. 1999-24, Cl. B5, 7%, 2029 576,676 (c) 604,302
Ser. 1999-27, Cl. B4, 6.75%, 2014 251,067 (c) 263,577
Ocwen Residential MBS,
Ser. 1998-R1, Cl. B1, 7%, 2040 545,855 (c) 562,238
12
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE PASS-THROUGH CTFS. (CONTINUED)
PNC Mortgage Securities:
Ser. 2000-1, Cl. 1B4, 7.46%, 2030 984,763 1,026,465
Ser. 2002-2, Cl. B4, 7.63%, 2030 1,444,108 (c) 1,519,148
Residential Funding Mortgage Securities I, REMIC:
Ser. 1997-S10, Cl. B2, 7%, 2012 178,769 182,371
Ser. 1997-S16, Cl. M3, 6.75%, 2012 422,220 442,351
Ser. 1998-S1, Cl. M3, 6.5%, 2013 340,867 356,748
Ser. 1998-S7, Cl. B1, 6.5%, 2013 339,272 (c) 355,489
Ser. 1999-S16, Cl. A3, 6.75%, 2029 2,492,125 2,615,742
Ser. 1999-S16, Cl. B1, 6.5%, 2013 234,357 (c) 243,507
Ser. 2001-S13, Cl. B2, 6.5%, 2016 327,105 315,361
Ser. 2001-S19, Cl. M3, 6.5%, 2016 282,743 295,757
Ser. 2002-S11, Cl. B1, 5.75%, 2017 194,991 (c) 177,316
Ser. 2003-S3, Cl. B1, 5.25%, 2018 199,817 173,984
Washington Mutual,
Ser. 2002-S3, Cl. 2B4, 6%, 2017 235,753 (c) 237,418
Wells Fargo Mortgage Securities:
Ser. 2003-2, Cl. B4, 5.25%, 2018 687,953 (c) 601,178
Ser. 2003-3, Cl. 1B4, 5.75%, 2033 997,119 (c) 839,843
21,760,429
RETAIL--.0%
Toys R Us,
Notes, 7.875%, 2013 45,000 45,051
SOFTWARE--.3%
Veritas Software,
Conv. Sub. Notes, .25%, 2013 2,831,000 (c) 2,809,768
STRUCTURED INDEX--9.4%
AB Svensk Exportkredit,
GSCI-ER Indexed Notes, 0%, 2008 29,350,000 (c,f) 27,577,260
JP Morgan HYDI-100,
Linked Ctf. of Deposit, 6.4%, 2008 7,500,000 (c,f) 7,151,250
Morgan Stanley TRACERS,
Ser. 2002-5, 6.766%-6.77%, 2012 40,290,000 (c,f) 43,707,519
78,436,029
TECHNOLOGY--1.1%
Fisher Scientific,
Conv. Sr. Notes, 2.5%, 2023 2,799,000 (c) 2,924,955
IBM,
Notes, 4.75%, 2012 3,575,000 3,510,142
The Fund 13
STATEMENT OF INVESTMENTS (CONTINUED)
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY (CONTINUED)
International Rectifier,
Conv. Sub. Notes, 4.25%, 2007 2,887,000 2,822,043
9,257,140
TELECOMMUNICATIONS--3.9%
British Telecommunications,
Notes, 8.125%, 2010 1,720,000 2,058,678
Credit-Backed Steers Trust,
Ser. 2001 Trust Ctfs.,
Ser. VZ-1, 5.565%, 2005 4,750,000 (c) 5,106,250
Deutsche Telekom,
Notes, 5.25%, 2013 2,717,000 2,607,418
France Telecom,
Notes, 7.75%, 2011 1,506,000 1,792,848
Koninklijke KPN,
Sr. Notes, 8%, 2010 1,817,000 2,153,597
PCCW-HKTC,
Notes, 6%, 2013 8,500,000 (c) 8,173,847
Qwest:
Bank Note, Ser. A, 5.86%, 2007 4,829,000 (d) 4,830,509
Bank Note, Ser. B, 6.95%, 2007 2,786,000 (d) 2,652,794
Verizon Florida,
Deb., 6.125%, 2013 3,301,000 3,489,124
32,865,065
U.S. GOVERNMENT--23.9%
U.S. Treasury Bonds,
5.375%, 2/15/2031 3,002,000 2,987,920
U.S. Treasury Inflation Protection Securities,
3%, 7/15/2012 21,063,762 (g) 22,201,435
U.S. Treasury Notes:
1.25%, 5/31/2005 28,574,000 28,359,695
3.25%, 5/31/2004 11,095,000 11,286,500
3.625%, 5/15/2013 47,369,000 44,230,804
4.75%, 11/15/2008 39,000,000 41,400,840
6.5%, 2/15/2010 12,500,000 14,397,375
7%, 7/15/2006 30,500,000 34,523,255
199,387,824
U.S. GOVERNMENT AGENCIES--.7%
Tennessee Valley Authority, Valley Indexed
Principal Securities, 3.375%, 1/15/2007 5,384,751 (g) 5,741,193
14
Principal
BONDS AND NOTES (CONTINUED) Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES/
MORTGAGE-BACKED--26.9%
Federal Home Loan Mortgage Corp.:
6.5%, 10/1/2031-5/1/2032 5,414,666 5,573,617
REMIC, Multiclass Mortgage Participation Ctfs.
(Interest Only Obligation):
Ser. 1499, Cl. E, 7%, 4/15/2023 1,341,117 (h) 136,941
Ser. 1610, Cl. PW, 6.5%, 4/15/2022 916,424 (h) 37,812
Ser. 2417, Cl. CI, 6%, 4/15/2021 3,351,436 (h) 27,609
Ser. 2550, Cl. IO, 5.5%, 6/15/2027 6,009,666 (h) 782,916
Federal National Mortgage Association:
5%, 1/1/2018-5/1/2018 3,516,790 3,516,071
6.2%, 1/1/2011 10,544,539 11,608,837
6.5%, 11/1/2010 3,395 3,579
6.88%, 2/1/2028 1,033,997 1,099,583
REMIC Trust, Gtd. Pass-Through Ctfs.:
Ser. 1999-T1, Cl. A6, 6%, 1/25/2039 2,375,962 2,393,410
(Interest Only Obligation):
Ser. 2002-55, Cl. IJ,
6%, 4/25/2028 7,085,582 (h) 269,093
Ser. 2002-92, Cl. IA,
5.5%, 5/25/2031 12,000,000 (h) 971,550
Ser. 2003-13, Cl. PI,
5.5%, 2/25/2026 21,576,598 (h) 2,888,274
Government National Mortgage Association I:
5% 55,111,000 (i) 52,613,370
5.5% 62,691,000 (i) 61,965,665
5.5%, 4/15/2033 46,893,964 46,629,142
6%, 1/15/2033-3/15/2033 22,061,122 22,482,650
6.5%, 6/15/2032 1,561,235 1,616,846
Project Loan,
6.5%, 10/15/2033 2,881,617 3,131,224
(Interest Only Obligation)
Ser. 2001-24, Cl. CI, 7%, 11/20/2029 1,680,685 (h) 35,647
Government National Mortgage Association II:
4 %, 7/20/2030 354,243 (d) 364,010
6.5%, 1/20/2028--9/20/2031 3,483,305 3,586,691
7%, 1/20/2028--7/20/2031 1,214,289 1,268,588
7.5%, 10/20/2030--8/20/2031 1,734,220 1,829,046
224,832,171
TOTAL BONDS AND NOTES
(cost $827,617,420) 818,946,577
The Fund 15
STATEMENT OF INVESTMENTS (CONTINUED)
PREFERRED STOCKS--1.5% Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE--.4%
Raytheon,
Cum. Conv., $4.125 (units) 64,508 (j) 3,665,345
ELECTRIC UTILITIES--.6%
Ameren,
Cum. Conv., $2.4375 (units) 47,704 (k) 1,350,977
Cinergy,
Cum. Conv., $4.75 38,557 (l) 2,272,935
Keyspan,
Cum. Conv., $4.375 (units) 27,904 (m) 1,466,355
5,090,267
PROPERTY-CASUALTY INSURANCE--.4%
Travelers Property Casualty,
Cum. Conv., $1.125 133,390 3,213,365
TELECOMMUNICATIONS--.1%
Motorola,
Cum. Conv., $3.50 (units) 35,526 (n) 1,177,687
TOTAL PREFERRED STOCKS
(cost $14,169,588) 13,146,664
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS--7.4%
- ------------------------------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT COMPANIES:
Dreyfus Institutional Cash Advantage Fund 20,521,666 (o) 20,521,666
Dreyfus Institutional Cash Advantage Plus Fund 20,521,667 (o) 20,521,667
Dreyfus Institutional Preferred Plus Money Market Fund 20,521,667 (o) 20,521,667
TOTAL OTHER INVESTMENTS
(cost $61,565,000) 61,565,000
16
Principal
SHORT-TERM INVESTMENTS--11.7% Amount(a) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS:
1.035%, 9/25/2003 28,626,000 28,587,927
.7762%, 10/23/2003 24,722,000 24,660,195
.8052%, 11/20/2003 24,722,000 24,660,195
.8325%, 12/11/2003 8,713,000 8,682,156
.925%, 12/18/2003 11,500,000 (p) 11,456,875
TOTAL SHORT-TERM INVESTMENTS
(cost $98,064,996) 98,047,348
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $1,001,417,004) 118.6% 991,705,589
LIABILITIES, LESS CASH AND RECEIVABLES (18.6%) (155,417,215)
NET ASSETS 100.0% 836,288,374
(A) PRINCIPAL AMOUNT STATED IN U.S DOLLARS UNLESS OTHERWISE NOTED.
CAD--CANADIAN DOLLARS
(B) NON-INCOME PRODUCING--SECURITY IN DEFAULT.
(C) SECURITIES EXEMPT FROM REGISTRATION UNDER RULE 144A OF THE SECURITIES ACT
OF 1933. THESE SECURITIES MAY BE RESOLD IN TRANSACTIONS EXEMPT FROM
REGISTRATION, NORMALLY TO QUALIFIED INSTITUTIONAL BUYERS. AT JULY 31, 2003,
THESE SECURITIES AMOUNTED TO $124,524,103 OR 14.9% OF NET ASSETS.
(D) VARIABLE RATE SECURITY--INTEREST RATE SUBJECT TO PERIODIC CHANGE.
(E) PRINCIPAL AMOUNT FOR ACCRUAL PURPOSES IS PERIODICALLY ADJUSTED BASED ON
CHANGES IN THE CANADIAN CONSUMER PRICE INDEX.
(F) SECURITY LINKED TO A PORTFOLIO OF DEBT SECURITIES.
(G) PRINCIPAL AMOUNT FOR ACCRUAL PURPOSES IS PERIODICALLY ADJUSTED BASED ON
CHANGES IN THE CONSUMER PRICE INDEX.
(H) NOTIONAL FACE AMOUNT SHOWN.
(I) PURCHASED ON A FORWARD COMMITMENT BASIS.
(J) WITH WARRANTS ATTACHED.
(K) UNITS REPRESENT A CONTRACT TO PURCHASE SHARES OF COMMON STOCK FOR $50 ON
MAY 16, 2006 AND A SENIOR NOTE WITH A PRINCIPAL OF $50.
(L) UNITS REPRESENT A CONTRACT TO PURCHASE SHARES OF COMMON STOCK FOR $50 ON
FEBRUARY 16, 2005 AND A SENIOR NOTE WITH A PRINCIPAL OF $50.
(M) UNITS REPRESENT A CONTRACT TO PURCHASE SHARES OF COMMON STOCK FOR $25 ON
MAY 15, 2006 AND A SENIOR NOTE WITH A PRINCIPAL OF $25.
(N) UNITS REPRESENT A CONTRACT TO PURCHASE SHARES OF COMMON STOCK FOR $50 ON
NOVEMBER 16, 2004 AND A SENIOR NOTE WITH A PRINCIPAL OF $50.
(O) INVESTMENTS IN AFFILIATED MONEY MARKET MUTUAL FUNDS--SEE NOTE 3(D).
(P) PARTIALLY HELD BY A BROKER AS COLLATERAL FOR OPEN FINANCIAL FUTURES
POSITION.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 17
STATEMENT OF FINANCIAL FUTURES
July 31, 2003
Market Value Unrealized
Covered by (Depreciation)
Contracts Contracts ($) Expiration at 7/31/2003 ($)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL FUTURES LONG
U.S. Treasury 10 Year Notes 159 17,589,375 September 2003 (208,335)
SEE NOTES TO FINANCIAL STATEMENTS.
18
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2003
Cost Value
- --------------------------------------------------------------------------------
ASSETS ($):
Investments in securities--See Statement of
Investments 1,001,417,004 991,705,589
Receivable for investment securities sold 213,336,115
Dividends and interest receivable 6,454,560
Receivable for shares of Common Stock subscribed 671,350
Receivable for futures variation margin--Note 4 588,620
Net unrealized appreciation on forward currency
exchange contracts--Note 4 350,555
Paydowns receivable 6,436
Prepaid expenses 115,286
1,213,228,511
- --------------------------------------------------------------------------------
LIABILITIES ($):
Due to The Dreyfus Corporation and affiliates 477,325
Cash overdraft due to Custodian 8,070,870
Payable for investment securities purchased 363,476,668
Payable for shares of Common Stock redeemed 4,331,112
Unrealized depreciation on swaps--Note 4 234,109
Accrued expenses 350,053
376,940,137
- --------------------------------------------------------------------------------
NET ASSETS ($) 836,288,374
- --------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS ($):
Paid-in capital 836,517,397
Accumulated undistributed investment income--net 2,362,433
Accumulated net realized gain (loss) on investments 7,230,713
Accumulated net unrealized appreciation (depreciation) on
investments and foreign currency transactions [including
($208,335) net unrealized (depreciation) on financial futures
and ($234,109) net unrealized (depreciation) on swap
transactions] (9,822,169)
- --------------------------------------------------------------------------------
NET ASSETS ($) 836,288,374
NET ASSET VALUE PER SHARE
Investor Shares Institutional Shares
- --------------------------------------------------------------------------------
Net Assets ($) 831,817,992 4,470,382
Shares Outstanding 64,705,599 347,772
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE ($) 12.86 12.85
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 19
STATEMENT OF OPERATIONS
Year Ended July 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME ($):
Interest 41,089,752
Cash dividends 1,596,079
TOTAL INCOME 42,685,831
EXPENSES:
Management fee--Note 3(a) 3,721,208
Shareholder servicing costs--Note 3(b) 3,080,761
Prospectus and shareholders' reports 231,318
Custodian fees--Note 3(b) 130,876
Registration fees 81,376
Professional fees 68,964
Directors' fees and expenses--Note 3(c) 29,376
Interest expense--Note 2 5,669
Miscellaneous 28,101
TOTAL EXPENSES 7,377,649
Less-reduction in management fee due to
undertaking--Note 3(a) (618,228)
NET EXPENSES 6,759,421
INVESTMENT INCOME--NET 35,926,410
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NOTE 4 ($):
Net realized gain (loss) on investments and foreign currency transactions:
Long transactions 29,216,746
Short sale transactions 1,139,301
Net realized gain (loss) on forward currency exchange contracts 867,543
Net realized gain (loss) on financial futures (4,441,755)
Net realized gain (loss) on options transactions (459,985)
Net realized gain (loss) on swaps 742,509
NET REALIZED GAIN (LOSS) 27,064,359
Net unrealized appreciation (depreciation) on investments
and foreign currency transactions [including ($124,663)
net unrealized (depreciation) on financial futures and ($234,109)
net unreaized (depreciation) on swap transactions] 4,751,590
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 31,815,950
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 67,742,359
SEE NOTES TO FINANCIAL STATEMENTS.
20
STATEMENT OF CHANGES IN NET ASSETS
Year Ended July 31,
-----------------------------------
2003 2002
- --------------------------------------------------------------------------------
OPERATIONS ($):
Investment income--net 35,926,410 33,720,288
Net realized gain (loss) on investments 27,064,359 (10,627,624)
Net unrealized appreciation
(depreciation) on investments 4,751,590 (19,479,026)
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 67,742,359 3,613,638
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM ($):
Investment income--net:
Investor Shares (39,906,073) (35,325,474)
Institutional Shares (362,297) (352,849)
Net realized gain on investments:
lnvestor Shares -- (5,288,211)
Institutional Shares -- (52,800)
TOTAL DIVIDENDS (40,268,370) (41,019,334)
- --------------------------------------------------------------------------------
CAPITAL STOCK TRANSACTIONS ($):
Net proceeds from shares sold:
Investor Shares 334,357,115 665,540,210
Institutional Shares 962,752 9,388,217
Dividends reinvested:
Investor Shares 34,576,830 36,717,490
Institutional Shares 214,614 315,880
Cost of shares redeemed:
Investor Shares (302,883,485) (285,706,038)
Institutional Shares (5,007,209) (2,045,610)
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL STOCK TRANSACTIONS 62,220,617 424,210,149
TOTAL INCREASE (DECREASE) IN NET ASSETS 89,694,606 386,804,453
- --------------------------------------------------------------------------------
NET ASSETS ($):
Beginning of Period 746,593,768 359,789,315
END OF PERIOD 836,288,374 746,593,768
Undistributed investment income--net 2,362,433 70,697
The Fund 21
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
Year Ended July 31,
-----------------------------------
2003 2002
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
INVESTOR SHARES
Shares sold 26,134,890 51,898,894
Shares issued for dividends reinvested 2,690,708 2,880,669
Shares redeemed (23,608,118) (22,454,139)
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 5,217,480 32,325,424
- --------------------------------------------------------------------------------
INSTITUTIONAL SHARES
Shares sold 75,863 727,541
Shares issued for dividends reinvested 16,768 24,786
Shares redeemed (387,437) (160,875)
NET INCREASE (DECREASE) IN SHARES OUTSTANDING (294,806) 591,452
SEE NOTES TO FINANCIAL STATEMENTS.
22
FINANCIAL HIGHLIGHTS
The following tables describe the performance for each share class for the
fiscal periods indicated. All information (except portfolio turnover rate)
reflects financial results for a single fund share. Total return shows how much
your investment in the fund would have increased (or decreased) during each
period, assuming you had reinvested all dividends and distributions. These
figures have been derived from the fund's financial statements.
Year Ended July 31,
---------------------------------------------------------------------------
INVESTOR SHARES 2003 2002(a) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 12.42 13.22 12.50 12.43 13.38
Investment Operations:
Investment income--net .56(b) .72(b) .84 .86 .87
Net realized and unrealized
gain (loss) on investments .51 (.64) .75 .22 (.36)
Total from Investment Operations 1.07 .08 1.59 1.08 .51
Distributions:
Dividends from investment income--net (.63) (.76) (.84) (.87) (.88)
Dividends from net realized
gain on investments -- (.12) (.03) (.14) (.58)
Total Distributions (.63) (.88) (.87) (1.01) (1.46)
Net asset value, end of period 12.86 12.42 13.22 12.50 12.43
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 8.64 .64 13.14 9.05 4.18
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of operating expenses
to average net assets .82 .70 .67 .65 .65
Ratio of interest expense
to average net assets .00(c) .00(c) .00(c) .00(c) .08
Ratio of net investment income
to average net assets 4.34 5.58 6.44 6.95 6.79
Decrease reflected in above expense
ratios due to undertakings by
The Dreyfus Corporation .08 .16 .27 .48 .51
Portfolio Turnover Rate 838.50 474.20 555.90 566.57 166.80
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 831,818 738,618 359,114 60,541 37,831
(A) AS REQUIRED, EFFECTIVE AUGUST 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS
OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES AND BEGAN
AMORTIZING DISCOUNT OR PREMIUM ON FIXED INCOME SECURITIES ON A SCIENTIFIC
BASIS AND INCLUDING PAYDOWN GAINS AND LOSSES IN INTEREST INCOME. THE EFFECT
OF THIS CHANGE FOR THE PERIOD ENDED JULY 31, 2002 WAS TO DECREASE NET
INVESTMENT INCOME PER SHARE BY $.04, INCREASE NET REALIZED AND UNEALIZED
GAIN (LOSS) ON INVESTMENTS PER SHARE BY $.04 AND DECREASE THE RATIO OF NET
INVESTMENT INCOME TO AVERAGE NET ASSETS FROM 5.90% TO 5.58%. PER SHARE DATA
AND RATIOS/SUPPLEMENTAL DATA FOR PERIODS PRIOR TO AUGUST 1, 2001 HAVE NOT
BEEN RESTATED TO REFLECT THIS CHANGE IN PRESENTATION.
(B) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(C) AMOUNT REPRESENTS LESS THAN .01%.
SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 23
FINANCIAL HIGHLIGHTS (CONTINUED)
Year Ended July 31,
------------------------------------------------
INSTITUTIONAL SHARES 2003 2002(a) 2001(b)
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA ($):
Net asset value, beginning of period 12.41 13.22 13.08
Investment Operations:
Investment income--net .63(c) .76(c) .14
Net realized and unrealized
gain (loss) on investments .48 (.66) .14
Total from Investment Operations 1.11 .10 .28
Distributions:
Dividends from investment income--net (.67) (.79) (.14)
Dividends from net realized gain on investments -- (.12) --
Total Distributions (.67) (.91) (.14)
Net asset value, end of period 12.85 12.41 13.22
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 9.07 .81 12.86(d)
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of operating expenses to average net assets .50 .45 .45(d)
Ratio of interest expense to average net assets .00(e) .00(e) --
Ratio of net investment income
to average net assets 4.88 5.80 6.56(d)
Decrease reflected in above expense ratios due
to undertakings by The Dreyfus Corporation .03 .08 1.21(d)
Portfolio Turnover Rate 838.50 474.20 555.90
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, end of period ($ x 1,000) 4,470 7,976 676
(A) AS REQUIRED, EFFECTIVE AUGUST 1, 2001, THE FUND HAS ADOPTED THE PROVISIONS
OF THE AICPA AUDIT AND ACCOUNTING GUIDE FOR INVESTMENT COMPANIES AND BEGAN
AMORTIZING DISCOUNT OR PREMIUM ON FIXED INCOME SECURITIES ON A SCIENTIFIC
BASIS AND INCLUDING PAYDOWN GAINS AND LOSSES IN INTEREST INCOME. THE EFFECT
OF THIS CHANGE FOR THE PERIOD ENDED JULY 31, 2002 WAS TO DECREASE NET
INVESTMENT INCOME PER SHARE BY $.04, INCREASE NET REALIZED AND UNEALIZED
GAIN (LOSS) ON INVESTMENTS PER SHARE BY $.04 AND DECREASE THE RATIO OF NET
INVESTMENT INCOME TO AVERAGE NET ASSETS FROM 6.12% TO 5.80%. PER SHARE DATA
AND RATIOS/SUPPLEMENTAL DATA FOR PERIODS PRIOR TO AUGUST 1, 2001 HAVE NOT
BEEN RESTATED TO REFLECT THIS CHANGE IN PRESENTATION.
(B) THE FUND COMMENCED OFFERING INSTITUTIONAL SHARES ON MAY 31, 2001.
(C) BASED ON AVERAGE SHARES OUTSTANDING AT EACH MONTH END.
(D) ANNUALIZED.
(E) AMOUNT REPRESENTS LESS THAN .01%.
SEE NOTES TO FINANCIAL STATEMENTS.
24
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Dreyfus Intermediate Term Income Fund (the "fund") is a separate diversified
series of Dreyfus Investment Grade Funds, Inc. (the "Company" ) which is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
an open-end management investment company and operates as a series company
currently offering five series, including the fund. The fund's investment
objective was to provide investors with as high a level of current income as is
consistent with the preservation of capital. On January 21, 2003, fund
shareholders approved changing the fund's investment objective. Effective
February 21, 2003, the fund's objective is to seek to maximize total return,
consisting of capital appreciation and current income. The Dreyfus Corporation
(the "Manager" ) serves as the fund's investment adviser. The Manager is a
wholly-owned subsidiary of Mellon Bank, N.A. ("Mellon"), which is a wholly-owned
subsidiary of Mellon Financial Corporation. Dreyfus Service Corporation (the
" Distributor"), a wholly-owned subsidiary of the Manager, is the distributor of
the fund's shares which are sold to the public without a sales charge.
On July 17, 2003, the fund's Board of Directors approved, effective July 18,
2003, a change of the Company's name from "Dreyfus Investment Grade Bond Funds,
Inc." to "Dreyfus Investment Grade Funds, Inc."
The fund is authorized to issue 500 million shares of $.001 par value Common
Stock in each of the following classes of shares: Investor and Institutional.
Investor shares are subject to a shareholder services plan. Other differences
between the classes include the services offered to and the expenses borne by
each class, the minimum initial investment and certain voting rights.
The Company accounts separately for the assets, liabilities and operations of
each series. Expenses directly attributable to each series are charged to that
series' operations; expenses which are applicable to all series are allocated
among them on a pro rata basis.
The Fund 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which may require the use of
management estimates and assumptions. Actual results could differ from those
estimates.
(A) PORTFOLIO VALUATION: Investments in securities (excluding short-term
investments, other than U.S. Treasury Bills, financial futures, forward currency
exchange contracts, options and swaps) are valued each business day by an
independent pricing service (the "Service") approved by the Board of Directors.
Investments for which quoted bid prices are readily available and are
representative of the bid side of the market in the judgment of the Service are
valued at the mean between the quoted bid prices (as obtained by the Service
from dealers in such securities) and asked prices (as calculated by the Service
based upon its evaluation of the market for such securities). Other investments
(which constitute a majority of the portfolio securities) are carried at fair
value as determined by the Service, based on methods which include consideration
of: yields or prices of securities of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions.
Securities for which there are no such valuations are valued at fair value as
determined in good faith under the direction of the Board of Directors.
Short-term investments, excluding U.S. Treasury Bills, are carried at amortized
cost, which approximates value. Financial futures and options, which are traded
on an exchange, are valued at the last sales price on the securities exchange on
which such securities are primarily traded or at the last sales price on the
national securities market on each business day. Options traded over-the-counter
are priced at the mean between the bid prices and the asked prices. Investments
denominated in foreign currencies are translated to U.S. dollars at the
prevailing rates of exchange. Forward currency exchange contracts are valued at
the forward rate. Swap transactions are valued based on future cash flows and
other factors, such as interest rates and underlying securities.
(B) FOREIGN CURRENCY TRANSACTIONS: The fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes
26
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
Net realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, currency gains or losses
realized on securities transactions and the difference between the amounts of
dividends, interest, and foreign withholding taxes recorded on the fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities, resulting from
changes in exchange rates. Such gains and losses are included with net realized
and unrealized gain or loss on investments.
(C) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount and premium on investments, is recognized
on the accrual basis. Under the terms of the custody agreement, the fund
received net earnings credits of $8,351 during the period ended July 31, 2003
based on available cash balances left on deposit. Income earned under this
arrangement is included in interest income.
(D) DIVIDENDS TO SHAREHOLDERS: It is the policy of the fund to declare dividends
daily from investment income-net. Such dividends are paid monthly. Dividends
from net realized capital gain, if any, are normally declared and paid annually,
but the fund may make distributions on a more frequent basis to comply with the
distribution requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). To the extent that net realized capital gain can be offset by capital
loss carryovers, if any, it is the policy of the fund not to distribute such
gain. Income and capital gain distributions are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States.
(E) FEDERAL INCOME TAXES: It is the policy of the fund to continue to qualify as
a regulated investment company, if such qualification is in the
The Fund 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
best interests of its shareholders, by complying with the applicable provisions
of the Code, and to make distributions of taxable income sufficient to relieve
it from substantially all federal income and excise taxes.
At July 31, 2003, the components of accumulated earnings on a tax basis were as
follows: undistributed ordinary income $2,575,420, accumulated capital gains
$13,332,917 and unrealized depreciation $12,291,864. In addition the fund had
$4,483,267 of capital losses realized after October 31, 2002, which were
deferred for tax purposes to the first day of the following fiscal year.
The tax character of distributions paid to shareholders during the fiscal years
ended July 31, 2003 and July 31, 2002, were as follows: ordinary income
$40,268,370 and $41,019,334, respectively.
During the period ended July 31, 2003, as a result of permanent book to tax
differences, the fund increased accumulated undistributed investment income-net
by $6,633,696, decreased accumulated net realized gain (loss) on investments by
$6,584,068 and decreased paid-in capital by $49,628. Net assets were not
affected by this reclassification.
NOTE 2--BANK LINES OF CREDIT:
The fund may borrow up to $10 million for leveraging purposes under a short-term
unsecured line of credit and participates with other Dreyfus-managed funds in a
$100 million unsecured line of credit primarily to be utilized for temporary or
emergency purposes, including the financing of redemptions. Interest is charged
to the fund based on prevailing market rates in effect at the time of
borrowings.
The average daily amount of borrowings outstanding under the leveraging
arrangement during the period ended July 31, 2003 was approximately $283,800,
with a related weighted average annualized interest rate of 2.00%.
NOTE 3--Management Fee and Other Transactions With Affiliates:
(A) Pursuant to a management agreement ("Agreement") with the Manager, the
management fee is computed at the annual rate of .45 of
28
1% of the value of the fund's average daily net assets and is payable monthly.
The Manager has undertaken through July 31, 2003 to reduce the management fee
paid by the fund, if the fund' s aggregate expenses, exclusive of taxes,
brokerage fees, interest on borrowings, Shareholder Services Plan fees and
extraordinary expenses exceed .55 of 1% of the value of the fund's average daily
net assets. The reduction in management fee, pursuant to the undertaking,
amounted to $618,228 during the period ended July 31, 2003.
(B) Under the Investor Shares Shareholder Services Plan, the fund pays the
Distributor at an annual rate of .25 of 1% of the value of Investor Shares
average daily net assets for the provision of certain services. 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. The Distributor may make payments to Service Agents (a securities
dealer, financial institution or other industry professional) in respect of
these services. The Distributor determines the amounts to be paid to Service
Agents. During the period ended July 31, 2003, Investor Shares was charged
$2,050,352 pursuant to the Shareholder Services Plan.
The fund compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of the
Manager, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the fund. During the period
ended July 31, 2003, the fund was charged $212,168 pursuant to the transfer
agency agreement.
The fund compensates Mellon under a custody agreement for providing custodial
services for the fund. During the period ended July 31, 2003, the fund was
charged $130,876 pursuant to the custody agreement.
(C) Each Board member also serves as a Board member of other funds within the
Dreyfus complex (collectively, the "Fund Group"). Through December 31, 2002,
each Board member who was not an "affiliated person" as defined in the Act
received an annual fee of $45,000, an attendance fee of $5,000 for each
in-person meeting and $500 for
The Fund 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
telephone meetings. Effective January 1, 2003, the Fund Group increased in size,
and the annual fee was increased to $60,000 while the attendance fee was
increased to $7,500 for each in-person meeting. These fees are allocated among
the funds in the Fund Group in proportion to each fund's relative net assets.
The Chairman of the Board receives an additional 25% of such compensation.
Subject to the Company's Emeritus Program Guidelines, Emeritus Board members, if
any, receive 50% of the annual retainer fee and per meeting fee paid at the time
the Board member achieves emeritus status.
(D) Commencing September 10, 2002, pursuant to an exemptive order from the
Securities and Exchange Commission, the fund may invest its available cash
balances in affiliated money market mutual funds as shown in the fund's
Statement of Investments. Management fees are not charged to these accounts.
During the period ended July 31, 2003, the fund derived $836,653 in income from
these investments, which is included in dividend income in the fund's Statement
of Operations.
NOTE 4--Securities Transactions:
The following summarizes the aggregate amount of purchases and sales (including
paydowns) of investment securities and securities sold short, excluding
short-term securities, option transactions, financial futures, forward currency
exchange contracts and swap transactions, during the period ended July 31, 2003
Purchases ($) Sales ($)
- --------------------------------------------------------------------------------
Long transactions 6,972,561,005 6,921,286,852
Short sale transactions 133,468,150 134,607,451
TOTAL 7,106,029,155 7,055,894,303
The fund is engaged in short-selling which obligates the fund to replace the
security borrowed by purchasing the security at current market value. The fund
would incur a loss if the price of the security increases between the date of
the short sale and the date on which the fund replaces the borrowed security.
The fund would realize a gain if the price of the security declines between
those dates. The fund's long security positions serve as collateral for the open
short positions. At July 31, 2003, there were no securities sold short
outstanding.
30
The following summarizes the fund' s call/put options written for the period
ended July 31, 2003:
Face Amount Options Terminated
-----------------------------------------
Covered by Premiums Net Realized
Options Written: Contracts ($) Received ($) Cost ($) Gain ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Contracts outstanding
July 31, 2002 -- --
Contracts written 200,000,000 363,281
Contracts terminated:
Closed 200,000,000 363,281 109,375 253,906
CONTRACTS OUTSTANDING
JULY 31, 2003 -- --
The fund may purchase and write (sell) put and call options in order to gain
exposure to or to protect against changes in the market.
As a writer of call options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instrument underlying the option. Generally, the fund would incur a gain, to the
extent of the premium, if the price of the underlying financial instrument
decreases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument increases between those dates.
As a writer of put options, the fund receives a premium at the outset and then
bears the market risk of unfavorable changes in the price of the financial
instrument underlying the option. Generally, the fund would incur a gain, to the
extent of the premium, if the price of the underlying financial instrument
increases between the date the option is written and the date on which the
option is terminated. Generally, the fund would realize a loss, if the price of
the financial instrument decreases between those dates.
The fund may invest in financial futures contracts in order to gain exposure to
or protect against changes in the market. The fund is exposed to market risk as
a result of changes in the value of the underlying financial instruments.
Investments in financial futures require the fund to "mark to market" on a daily
basis, which reflects the change in the market value of the contracts at the
close of each day' s trading.
The Fund 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Typically, variation margin payments are received or made to reflect daily
unrealized gains or losses. When the contracts are closed, the fund recognizes a
realized gain or loss. These investments require initial margin deposits with a
broker, which consist of cash or cash equivalents, up to approximately 10% of
the contract amount. The amount of these deposits is determined by the exchange
or Board of Trade on which the contract is traded and is subject to change.
Contracts open at July 31, 2003 are set forth in the Statement of Financial
Futures.
The fund enters into forward currency exchange contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings and to settle foreign currency transactions. When executing forward
currency exchange contracts, the fund is obligated to buy or sell a foreign
currency at a specified rate on a certain date in the future. With respect to
sales of forward currency exchange contracts, the fund would incur a loss if the
value of the contract increases between the date the forward contract is opened
and the date the forward contract is closed. The fund realizes a gain if the
value of the contract decreases between those dates. With respect to purchases
of forward currency exchange contracts, the fund would incur a loss if the value
of the contract decreases between the date the forward contract is opened and
the date the forward contract is closed. The fund realizes a gain if the value
of the contract increases between those dates. The fund is also exposed to
credit risk associated with counter party nonperformance on these forward
currency exchange contracts which is typically limited to the unrealized gain on
each open contract. The following summarizes open forward currency exchange
contracts at July 31, 2003:
Foreign
Forward Currency Currency Unrealized
Exchange Contracts Amounts Proceeds ($) Value ($) Appreciation ($)
- ------------------------------------------------------------------------------------------------------------------------------------
SALES;
Canadian Dollar,
expiring 10/16/2003 53,739,000 38,376,481 38,025,926 350,555
The fund may enter into swap agreements to exchange the interest rate on, or
return generated by, one nominal instrument for the return generated by another
nominal instrument.
32
Total return swaps involve commitments to pay interest in exchange for a
market-linked return based on a notional amount. To the extent the total return
of the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily and the change, if any, is recorded as unrealized
appreciation or depreciation in the Statement of Operations. Periodic payments
received or made at the end of each measurement period, but prior to
termination, are recorded as realized gains or losses in the Statement of
Operations. There were no total return swaps open as of July 31, 2003.
The fund enters into credit default swaps to hedge its exposure to or to gain
exposure to changes in the market on debt securities. Credit default swaps
involve commitments to pay a fixed rate in exchange for payment if a credit
event affecting a third party (the referenced company) occurs. Credit events may
include a failure to pay interest or principal, bankruptcy or restructuring. Net
periodic interest payments to be received or paid are accrued daily and are
recorded in the Statement of Operations as an adjustment to interest income.
Credit default swaps are marked-to-market daily and the change, if any, is
recorded as unrealized appreciation or depreciation in the Statement of
Operations. The following summarizes open credit default swaps entered into by
the fund at July 31, 2003:
Unrealized
Appreciation
Notional Amount ($) Description (Depreciation) ($)
- --------------------------------------------------------------------------------
3,300,000 Agreement with Merrill Lynch terminating 1,503
June 20, 2008 to pay a fixed rate of .34%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
principal payment default of $10,000,000
on Bear Stearns, 7.625%, 12/7/2009
3,300,000 Agreement with Merrill Lynch terminating (1,494)
June 20, 2008 to pay a fixed rate of .36%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Bear Stearns, 7.625%, 12/7/2009
The Fund 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unrealized
Appreciation
Notional Amount ($) Description (Depreciation) ($)
- --------------------------------------------------------------------------------
4,400,000 Agreement with Merrill Lynch terminating (6,259)
September 20, 2008 to pay a fixed rate of .38%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Bear Stearns, 7.625%, 12/7/2009
11,000,000 Agreement with Merrill Lynch terminating (12,363)
June 20, 2008 to pay a fixed rate of .29%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Bank of America, 6.25%, 4/15/2012
4,985,000 Agreement with Merrill Lynch terminating (51,861)
July 20, 2004 to pay a fixed rate of 3.85%
and receive the notional amount as a result of
interest payment default totaling $1,000,000 or
principal payment default of $10,000,000 on
Federative Republic of Brazil, 8%, 4/15/2014
4,985,000 Agreement with Merrill Lynch terminating (30,188)
July 20, 2004 to pay a fixed rate of 3.4%
and receive the notional amount as a result of
interest payment default totaling $1,000,000 or
principal payment default of $10,000,000 on
Federative Republic of Brazil, 8%, 4/15/2014
6,600,000 Agreement with Merrill Lynch terminating 40,110
June 20, 2008 to pay a fixed rate of .51%
and receive the notional amount as a result of
interest payment default totaling $1,000,000 or
principal payment default of $10,000,000 on
Countrywide Home Loans, 5.625%, 7/15/2009
4,400,000 Agreement with Merrill Lynch terminating 13,522
September 20, 2008 to pay a fixed rate of .59%
and receive the notional amount as a result of
interest payment default totaling $1,000,000 or
principal payment default of $10,000,000 on
Countrywide Home Loans, 5.625%, 7/15/2009
2,200,000 Agreement with Merrill Lynch terminating (2,223)
June 20, 2008 to pay a fixed rate of .42%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Goldman Sachs, 6.6%, 1/15/2012
8,800,000 Agreement with Merrill Lynch terminating (12,883)
June 20, 2008 to pay a fixed rate of .43%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Goldman Sachs, 6.6%, 1/15/2012
34
Unrealized
Appreciation
Notional Amount ($) Description (Depreciation) ($)
- --------------------------------------------------------------------------------
2,855,335 Agreement with Merrill Lynch terminating (57,333)
June 20, 2008 to pay a fixed rate of 1.15%
and receive the notional amount as a result of
interest payment default totaling $1,000,000 or
principal payment default of $10,000,000
on Kroger Company, 5.5%, 2/1/2013
7,500,000 Agreement with Merrill Lynch terminating (48,682)
June 3, 2008 to pay a fixed rate of 2.68%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Russian Federation, 5%, 3/31/2030
2,855,335 Agreement with Merrill Lynch terminating (16,484)
June 20, 2008 to pay a fixed rate of .93%
and receive the notional amount as a result of
interest payment default totaling $1,000,000 or
principal payment default of $10,000,000
on Safeway, 5.8%, 8/15/2012
5,710,670 Agreement with Merrill Lynch terminating (44,206)
June 20, 2008 to pay a fixed rate of .57%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Target, 5.875%, 3/1/2012
6,600,000 Agreement with Merrill Lynch terminating 2,972
June 20, 2008 to pay a fixed rate of .54%
and receive the notional amount as a result of
interest payment default totaling $1,000,000
or principal payment default of $10,000,000
on Washington Mutual, 5.625%, 1/15/2007
4,400,000 Agreement with Merrill Lynch terminating (8,240)
September 20, 2008 to pay a fixed rate of .59%
and receive the notional amount as a result of
interest payment default totaling $1,000,000 or
principal payment default of $10,000,000 on
Washington Mutual, 5.625%, 1/15/2007
TOTAL (234,109)
Realized gains or losses on maturity or termination of swaps are presented in
the Statement of Operations. Risks may arise upon entering into these agreements
from the potential inability of the counterparties to meet the terms of the
agreement and are generally limited to the amount of net payments to be
received, if any, at the date of default.
The Fund 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At July 31, 2003, the cost of investments for federal income tax purposes was
$1,003,744,480; accordingly, accumulated net unrealized depreciation on
investments was $12,038,891, consisting of $11,782,869 gross unrealized
appreciation and $23,821,760 gross unrealized depreciation.
36
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors Dreyfus Intermediate Term Income Fund
We have audited the accompanying statement of assets and liabilities, including
the statements of investments and financial futures, of Dreyfus Intermediate
Term Income Fund (one of the funds comprising Dreyfus Investment Grade Funds,
Inc.), as of July 31, 2003, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund' s management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
verification by examination of securities held by the custodian as of July 31,
2003 and confirmation of securities not held by the custodian by correspondence
with others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Dreyfus Intermediate Term Income Fund at July 31, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
New York, New York
September 18, 2003
The Fund 37
IMPORTANT TAX INFORMATION (Unaudited)
The fund hereby designates 1.19% of the ordinary dividends paid during the
fiscal year ended July 31, 2003 as qualifying for the corporate dividends
received deduction. Shareholders will receive notification in January 2004 of
the percentage applicable to the preparation of their 2003 income tax returns.
38
PROXY RESULTS (Unaudited)
The fund held a special meeting of shareholders on January 21, 2003. The
proposal considered at the meeting, and the results, are as follows:
Shares
----------------------------------------------------------------------------------------
For Against Abstained
-----------------------------------------------------------------------------------------
To change the fund's
investment objective 27,623,268 3,560,498 1,489,982
The Fund 39
BOARD MEMBERS INFORMATION (Unaudited)
JOSEPH S. DIMARTINO (59)
CHAIRMAN OF THE BOARD (1995)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The Muscular Dystrophy Association, Director
* Levcor International, Inc., an apparel fabric processor, Director
* Century Business Services, Inc., a provider of outsourcing functions for small
and medium size companies, Director
* The Newark Group, a provider of a national market of paper recovery
facilities, paperboard mills and paperboard converting plants, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 191
--------------
CLIFFORD L. ALEXANDER, JR. (69)
BOARD MEMBER (2003)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Alexander & Associates, Inc., a management consulting firm
(January 1981-present)
* Chairman of the Board of Moody's Corporation (October 2000-present)
* Chairman of the Board and Chief Executive Officer of The Dun and Bradstreet
Corporation (October 1999-September 2000)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* Wyeth (formerly, American Home Products Corporation), a global leader in
pharmaceuticals, consumer healthcare products and animal health products,
Director
* Mutual of America Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 70
--------------
LUCY WILSON BENSON (76)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* President of Benson and Associates, consultants to business and government
(1980-present)
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* The International Executive Services Corps., Director
* Citizens Network for Foreign Affairs, Vice Chairperson
* Council on Foreign Relations, Member
* Lafayette College Board of Trustees, Vice Chairperson Emeritus
* Atlantic Council of the U.S., Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 44
40
DAVID W. BURKE (67)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Corporate Director and Trustee
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* John F. Kennedy Library Foundation, Director
* U.S.S. Constitution Museum, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 87
--------------
WHITNEY I. GERARD (68)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Partner of Chadbourne & Parke LLP
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
ARTHUR A. HARTMAN (77)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Chairman of First NIS Regional Fund (ING/Barings Management) and New Russia
Fund
* Advisory Council Member to Barings-Vostok
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* APCO Associates, Inc., Senior Consultant
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
GEORGE L. PERRY (69)
BOARD MEMBER (1994)
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
* Economist and Senior Fellow at Brookings Institution
OTHER BOARD MEMBERSHIPS AND AFFILIATIONS:
* State Farm Mutual Automobile Association, Director
* State Farm Life Insurance Company, Director
NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 16
--------------
ONCE ELECTED ALL BOARD MEMBERS SERVE FOR AN INDEFINITE TERM. ADDITIONAL
INFORMATION ABOUT THE BOARD MEMBERS, INCLUDING THEIR ADDRESS IS AVAILABLE IN THE
FUND'S STATEMENT OF ADDITIONAL INFORMATION WHICH CAN BE OBTAINED FROM DREYFUS
FREE OF CHARGE BY CALLING THIS TOLL FREE NUMBER: 1-800-554-4611.
The Fund 41
OFFICERS OF THE FUND (Unaudited)
STEPHEN E. CANTER, PRESIDENT SINCE MARCH 2000.
Chairman of the Board, Chief Executive Officer and Chief Operating Officer
of the Manager, and an officer of 95 investment companies (comprised of 188
portfolios) managed by the Manager. Mr. Canter also is a Board member and, where
applicable, an Executive Committee Member of the other investment management
subsidiaries of Mellon Financial Corporation, each of which is an affiliate of
the Manager. He is 58 years old and has been an employee of the Manager since
May 1995.
STEPHEN R. BYERS, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2002.
Chief Investment Officer, Vice Chairman and a director of the Manager, and
an officer of 95 investment companies (comprised of 188 portfolios) managed by
the Manager. Mr. Byers also is an officer, director or an Executive Committee
Member of certain other investment management subsidiaries of Mellon Financial
Corporation, each of which is an affiliate of the Manager. He is 50 years old
and has been an employee of the Manager since January 2000. Prior to joining the
Manager, he served as an Executive Vice President-Capital Markets, Chief
Financial Officer and Treasurer at Gruntal & Co., L.L.C.
CHARLES CARDONA, EXECUTIVE VICE PRESIDENT SINCE NOVEMBER 2001.
Vice Chairman and a Director of the Manager, Executive Vice President of
the Distributor, President of Dreyfus Institutional Services Division, and an
officer of 12 investment companies (comprised of 16 portfolios) managed by the
Manager. He is 47 years old and has been an employee of the Manager since
February 1981.
MARK N. JACOBS, VICE PRESIDENT SINCE MARCH 2000.
Executive Vice President, Secretary and General Counsel of the Manager, and
an officer of 96 investment companies (comprised of 204 portfolios) managed by
the Manager. He is 57 years old and has been an employee of the Manager since
June 1977.
MICHAEL A. ROSENBERG, SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 93 investment
companies (comprised of 197 portfolios) managed by the Manager. He is 43 years
old and has been an employee of the Manager since October 1991.
STEVEN F. NEWMAN, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel and Assistant Secretary of the Manager, and an
officer of 96 investment companies (comprised of 204 portfolios) managed by the
Manager. He is 54 years old and has been an employee of the Manager since July
1980.
ROBERT R. MULLERY, ASSISTANT SECRETARY SINCE MARCH 2000.
Associate General Counsel of the Manager, and an officer of 26 investment
companies (comprised of 61 portfolios) managed by the Manager. He is 51 years
old and has been an employee of the Manager since May 1986.
JAMES WINDELS, TREASURER SINCE NOVEMBER 2001.
Director - Mutual Fund Accounting of the Manager, and an officer of 96
investment companies (comprised of 204 portfolios) managed by the Manager. He is
44 years old and has been an employee of the Manager since April 1985.
42
ERIK D. NAVILOFF, ASSISTANT TREASURER SINCE DECEMBER 2002.
Senior Accounting Manager - Taxable Fixed Income Funds of the Manager, and
an officer of 18 investment companies (comprised of 76 portfolios) managed by
the Manager. He is 35 years old and has been an employee of the Manager since
November 1992.
KENNETH J. SANDGREN, ASSISTANT TREASURER SINCE NOVEMBER 2001.
Mutual Funds Tax Director of the Manager, and an officer of 96 investment
companies (comprised of 204 portfolios) managed by the Manager. He is 49 years
old and has been an employee of the Manager since June 1993.
WILLIAM GERMENIS, ANTI-MONEY LAUNDERING COMPLIANCE OFFICER SINCE SEPTEMBER 2002
Vice President and Anti-Money Laundering Compliance Officer of the
Distributor, and the Anti-Money Laundering Compliance Officer of 91 investment
companies (comprised of 199 portfolios) managed by the Manager. He is 33 years
old and has been an employee of the Distributor since October 1998. Prior to
joining the Distributor, he was a Vice President of Compliance Data Center, Inc.
The Fund 43
NOTES
For More Information
Dreyfus
Intermediate
Term Income Fund
200 Park Avenue
New York, NY 10166
Manager
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
Custodian
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Transfer Agent &
Dividend Disbursing Agent
Dreyfus Transfer, Inc.
200 Park Avenue
New York, NY 10166
Distributor
Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
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 info@dreyfus.com
ON THE INTERNET Information
can be viewed online or
downloaded from:
http://www.dreyfus.com
(c) 2003 Dreyfus Service Corporation 082AR0703
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a code of ethics that applies to the
Registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Registrant's Board has determined that Joseph S. DiMartino,
a member of the Audit Committee of the Board, is an audit committee
financial expert as defined by the Securities and Exchange
Commission (the "SEC"). Joseph S. DiMartino is "independent" as
defined by the SEC for purposes of audit committee financial expert
determinations.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive and principal financial officers
have concluded, based on their evaluation of the Registrant's disclosure
controls and procedures as of a date within 90 days of the filing date of
this report, that the Registrant's disclosure controls and procedures are
reasonably designed to ensure that information required to be disclosed by
the Registrant on Form N-CSR is recorded, processed, summarized and reported
within the required time periods and that information required to be
disclosed by the Registrant in the reports that it files or submits on Form
N-CSR is accumulated and communicated to the Registrant's management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes to the Registrant's internal controls over
financial reporting that occurred during the Registrant's most recently ended
fiscal half-year that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial
reporting.
ITEM 10. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications of principal executive and principal financial
officers as required by Rule 30a-2(a) under the Investment Company Act of
1940.
(b) Certification of principal executive and principal financial officers
as required by Rule 30a-2(b) under the Investment Company Act of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DREYFUS INVESTMENT GRADE FUNDS, INC.
By: /S/STEPHEN E. CANTER
Stephen E. Canter
President
Date: September 30, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /S/STEPHEN E. CANTER
Stephen E. Canter
Chief Executive Officer
Date: September 30, 2003
By: /S/JAMES WINDELS
James Windels
Chief Financial Officer
Date: September 26, 2003
EXHIBIT INDEX
(a)(1) Code of ethics referred to in Item 2.
(a)(2) Certifications of principal executive and principal
financial officers as required by Rule 30a-2(a) under the
Investment Company Act of 1940. (EX-99.CERT)
(b) Certification of principal executive and principal
financial officers as required by Rule 30a-2(b) under the
Investment Company Act of 1940. (EX-99.906CERT)