-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BhaW9QLKGwj33qmgDfV7POeCkM1z78rC6dEKRKtJ+ugeQTSYKQ7i6H/6Rz+/mhtZ dkR47EJbbHCN+wOL2nvzNQ== 0000890341-02-000008.txt : 20021031 0000890341-02-000008.hdr.sgml : 20021031 20021031160126 ACCESSION NUMBER: 0000890341-02-000008 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020831 FILED AS OF DATE: 20021031 EFFECTIVENESS DATE: 20021031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DREYFUS BALANCED FUND INC CENTRAL INDEX KEY: 0000890341 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-07068 FILM NUMBER: 02805067 BUSINESS ADDRESS: STREET 1: 200 PARK AVENUE, 8TH FLOOR STREET 2: C/O DREYFUS CORP CITY: NEW YORK STATE: NY ZIP: 10166 BUSINESS PHONE: 2129226838 MAIL ADDRESS: STREET 1: THE DREYFUS CORPORATION STREET 2: 200 PARK AVENUE, 8TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10166 N-30D 1 pn30d222.txt ANNUAL REPORT Dreyfus Balanced Fund, Inc. ANNUAL REPORT August 31, 2002 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 17 Statement of Financial Futures 18 Statement of Assets and Liabilities 19 Statement of Operations 20 Statement of Changes in Net Assets 21 Financial Highlights 22 Notes to Financial Statements 29 Report of Independent Auditors 30 Important Tax Information 31 Board Members Information 33 Officers of the Fund FOR MORE INFORMATION - --------------------------------------------------------------------------- Back Cover The Fund Dreyfus Balanced Fund, Inc. LETTER FROM THE CHAIRMAN Dear Shareholder: We present this annual report for Dreyfus Balanced Fund, Inc., covering the 12-month period from September 1, 2001 through August 31, 2002. Inside, you'll find valuable information about how the fund was managed during the reporting period, including a discussion with Douglas D. Ramos, CFA, who manages the equity component of the fund, and Gerald E. Thunelius, Director of the Dreyfus Taxable Fixed Income Team that manages the fixed-income component of the fund. Stock markets in the United States and around the world confronted a number of formidable challenges during the reporting period. In addition to lackluster corporate earnings and the war on terrorism, investors have recently contended with questions regarding the accuracy of companies' financial statements. These and other influences drove most major domestic stock market indices lower, including those that measure large-, mid- and small-cap stock performance. Despite widespread pessimism among investors, we are generally optimistic about the future. The economy has begun to recover, showing signs of growth that have already begun to have a positive effect on corporate earnings. Recent market declines may have created attractive values in some stocks. At the same time, we believe that the recent accounting scandals will likely lead to higher standards and stronger oversight of corporate behavior, which should give investors greater confidence. One key to success during turbulent times such as these is an investment horizon that is measured in years, not weeks or months. Remember, over the long term stocks have historically produced higher returns than other types of investments. For investors with a long-term perspective, we believe that stocks should continue to provide considerable potential for growth. If you have questions or are worried about current market conditions, we encourage you to talk with your financial advisor who can help you view current events from the perspective of long-term market trends. In the meantime, we at The Dreyfus Corporation intend to continue basing our investment decisions on an objective, long-term view of the financial markets. Thank you for your continued confidence and support. Sincerely, /s/Stephen E. Canter Stephen E. Canter Chairman and Chief Executive Officer The Dreyfus Corporation September 16, 2002 DISCUSSION OF FUND PERFORMANCE Douglas D. Ramos, CFA, Portfolio Manager Gerald E. Thunelius, Director, Dreyfus Taxable Fixed Income Team How did Dreyfus Balanced Fund, Inc. perform relative to its benchmark? For the 12-month period ended August 31, 2002, the fund produced a total return of -14.21% .(1) This compares with the performance of the fund's Customized Blended Index that produced a total return of -7.55%. The Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index") that comprised 60% of our blended index provided a total return of -17.99% for the 12 months ended August 31, 2002.(2) The Lehman Brothers Aggregate Bond Index that comprised 40% of our blended index produced a total return of 8.11% for the same period.(3) We attribute these results primarily to a generally negative environment for stocks during a reporting period in which the fund emphasized stocks over bonds. Performance relative to the benchmark also suffered because of the fund's emphasis on corporate fixed-income instruments at a time when government bonds proved stronger. What is the fund's investment approach? The fund seeks long-term capital growth and current income. To pursue this goal, the fund invests in equity and fixed-income securities of U.S. and foreign issuers. The proportion of the fund's assets invested in each type of security will vary from time to time in accordance with Dreyfus' assessment of economic conditions and investment opportunities. However, under normal market conditions the fund's equity investments will range from 40% to 75% of its portfolio, with a benchmark allocation of 60%. Fixed-income investments (including cash and cash equivalents) will range from 25% to 60%, with a benchmark allocation of 40%. In allocating assets between stocks and bonds, we assess the relative returns and risks of each asset class using a model that analyzes several factors, including interest-rate-adjusted price/earnings ratio, the valuation and volatility levels of stocks relative to bonds, and other economic factors such as interest rates. The Fund 3 DISCUSSION OF FUND PERFORMANCE (CONTINUED) In selecting stocks, we use a valuation model to identify and rank stocks within an industry or sector based on: * VALUE, or how a stock is priced relative to its perceived intrinsic worth; * GROWTH, in this case the sustainability or growth of earnings or cash flow; and * FINANCIAL PROFILE, which measures the financial health of the company. Next, based on fundamental analysis, we generally select the most attractive of the higher ranked securities. While we employ a value-tilted approach, the fund can invest in a mix of value and growth companies. Dreyfus manages risk by diversifying across companies and industries. To select fixed-income investments for the fund, we review the terms of the instruments and evaluate the creditworthiness of the issuers, considering all factors that we deem relevant, including, as applicable, a review of the issuer's cash flow; the level of short-term debt; leverage; capitalization; the quality and depth of management; profitability; return on assets; and economic factors relative to the issuer's industry. Up to 20% of the fund's fixed-income portfolio may be invested in securities rated below investment grade (BB/Ba and lower), but no lower than B, or the unrated equivalent as determined by Dreyfus (commonly referred to as "high yield" or "junk" bonds). What other factors influenced the fund's performance? An improving U.S. economy in late 2001 and attractive valuations led us to concentrate a higher percentage of the fund's assets in stocks relative to the benchmark. However, while the economy emerged from recession, economic growth remained weaker than forecast. In addition, stocks suffered due to a series of accounting scandals that raised questions about the general reliability of corporate reporting practices. Concerns regarding global stability and the impact of the war on terrorism on global trade also weighed on stock prices. Among stocks, the fund delivered relatively strong returns in the areas of telecommunications, health care and utilities. However, these positive developments were outweighed by disappointments in the information technology, consumer discretionary, auto transports and industrials groups. On the fixed-income side, our positive outlook on the U.S. economy led us to emphasize corporate bonds. However, the political and economic shocks that occurred during the reporting period created more favorable conditions for low-risk bonds such as U.S. Treasuries and government agencies. Although returns benefited to a degree from the strength in this area, the fund's relatively large percentage of corporate holdings caused overall bond performance to lag that of the Lehman Brothers Aggregate Bond Index. What is the fund's current strategy? We believe that current conditions and trends favor steady, albeit modest, economic growth. Accordingly, as of the end of the reporting period the fund continued to emphasize equities over fixed-income investments. Among stocks, we found a relatively large percentage of what we believe are attractive investments in the energy and information technology areas and relatively few in telecommunications services, industrials, utilities and health care. On the fixed-income side, we maintain a slightly overweighted exposure to corporate bonds that we believe are well positioned to benefit from a slow growth environment. September 16, 2002 (1) TOTAL RETURN INCLUDES REINVESTMENT OF DIVIDENDS AND ANY CAPITAL GAINS PAID. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT RETURN FLUCTUATE SUCH THAT UPON REDEMPTION, FUND SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PART OF THE FUND'S RECENT PERFORMANCE IS ATTRIBUTABLE TO ITS INITIAL PUBLIC OFFERING (IPO) INVESTMENTS. THERE CAN BE NO GUARANTEE THAT IPOS WILL HAVE OR CONTINUE TO HAVE A POSITIVE EFFECT ON THE FUND'S PERFORMANCE. (2) SOURCE: LIPPER, INC. -- REFLECTS REINVESTMENT OF DIVIDENDS AND, WHERE APPLICABLE, CAPITAL GAIN DISTRIBUTIONS. THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX IS A WIDELY ACCEPTED, UNMANAGED INDEX OF U.S. STOCK MARKET PERFORMANCE. (3) 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. The Fund 5 FUND PERFORMANCE Comparison of change in value of $10,000 investment in Dreyfus Balanced Fund, Inc. with the Standard & Poor's 500 Composite Stock Price Index, the Lehman Brothers Aggregate Bond Index, and the Customized Blended Index - -------------------------------------------------------------------------------- Average Annual Total Returns AS OF 8/31/02 Inception From Date 1 Year 5 Years Inception - ------------------------------------------------------------------------------------------------------------------------------------ FUND 9/30/92 (14.21)% 0.61% 6.90%
((+)) 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. PART OF THE FUND'S RECENT PERFORMANCE IS ATTRIBUTABLE TO POSITIVE RETURNS FROM ITS INITIAL PUBLIC OFFERING (IPO) INVESTMENTS. THERE CAN BE NO GUARANTEE THAT IPOS WILL HAVE OR CONTINUE TO HAVE A POSITIVE EFFECT ON THE FUND'S PERFORMANCE. THE ABOVE GRAPH COMPARES A $10,000 INVESTMENT MADE IN DREYFUS BALANCED FUND, INC. ON 9/30/92 (INCEPTION DATE) TO A $10,000 INVESTMENT MADE ON THAT DATE IN THREE DIFFERENT INDICES: (1) THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX (THE "S&P 500 INDEX"), (2) THE LEHMAN BROTHERS AGGREGATE BOND INDEX (THE "AGGREGATE BOND INDEX"), AND (3) THE CUSTOMIZED BLENDED INDEX. THE CUSTOMIZED BLENDED INDEX IS CALCULATED ON A YEAR-TO-YEAR BASIS. ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS ARE REINVESTED. THE FUND'S PERFORMANCE SHOWN IN THE LINE GRAPH TAKES INTO ACCOUNT ALL APPLICABLE FEES AND EXPENSES. THE S&P 500 INDEX IS A WIDELY ACCEPTED, UNMANAGED INDEX OF U.S. STOCK MARKET PERFORMANCE. THE AGGREGATE BOND INDEX IS A WIDELY ACCEPTED, UNMANAGED INDEX OF CORPORATE, U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY DEBT INSTRUMENTS, MORTGAGE-BACKED SECURITIES, AND ASSET-BACKED SECURITIES WITH AN AVERAGE MATURITY OF 1-10 YEARS. THE INDICES DO NOT TAKE INTO ACCOUNT CHARGES, FEES AND OTHER EXPENSES. THE CUSTOMIZED BLENDED INDEX IS COMPOSED OF S&P 500 INDEX, 60%, AND AGGREGATE BOND INDEX, 40%. FURTHER INFORMATION RELATING TO FUND PERFORMANCE, INCLUDING EXPENSE REIMBURSEMENTS, IF APPLICABLE, IS CONTAINED IN THE FINANCIAL HIGHLIGHTS SECTION OF THE PROSPECTUS AND ELSEWHERE IN THIS REPORT 6 STATEMENT OF INVESTMENTS August 31, 2002 COMMON STOCKS--61.2% Shares Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL SEVICES--1.6% CDW Computer Centers 11,000 (a) 472,120 Lamar Advertising 11,500 (a) 367,540 McGraw-Hill Cos. 28,000 1,775,480 2,615,140 CONSUMER DURABLES--.5% Ford Motor 27,000 317,790 Goodyear Tire & Rubber 29,500 398,840 716,630 CONSUMER NON-DURABLES--5.7% Coca-Cola 16,000 816,000 Colgate-Palmolive 7,000 381,850 Kimberly-Clark 8,400 502,656 Kraft Foods, Cl. A 58,200 2,314,614 PepsiCo 28,000 1,107,400 Philip Morris Cos. 33,000 1,650,000 Procter & Gamble 19,100 1,693,215 UST 18,000 624,780 9,090,515 CONSUMER SEVICES--2.4% Carnival 36,000 880,920 Clear Channel Communications 20,520 (a) 701,374 USA Interactive 28,200 (a) 604,044 Viacom, Cl. B 41,365 (a) 1,683,555 3,869,893 ELECTRONIC TECHNOLOGY--7.3% Altera 18,000 (a) 192,780 Analog Devices 21,000 (a) 506,100 Applied Materials 18,000 (a,b) 240,480 Boeing 16,000 593,120 Dell Computer 30,000 (a) 798,600 Gateway 39,400 (a) 137,900 General Dynamics 6,000 471,840 Hewlett-Packard 46,868 629,437 Intel 88,200 1,470,294 International Business Machines 28,000 2,110,640 Jabil Circuit 33,000 (a) 617,430 KLA-Tencor 14,000 460,180 The Fund STATEMENT OF INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) Shares Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ ELECTRONIC TECHNOLOGY (CONTINUED) Lam Research 21,100 (a) 245,393 Micron Technology 32,000 (a) 552,000 Motorola 52,800 633,600 National Semiconductor 14,400 230,256 Raytheon 15,000 525,000 Teradyne 25,000 (a) 316,250 Texas Instruments 18,000 354,600 United Technologies 8,400 498,876 11,584,776 ENERGY MINERALS--4.8% Anadarko Petroleum 39,000 1,740,960 ChevronTexaco 6,855 525,299 Conoco 23,000 564,650 Exxon Mobil 79,576 2,820,969 Ocean Energy 48,000 1,006,080 XTO Energy 45,000 911,250 7,569,208 FINANCE--13.3% Allstate 43,000 1,600,460 American Express 17,900 645,474 American International Group 44,351 2,785,243 Bank of America 15,300 1,072,224 Bank of New York 28,000 984,200 Citigroup 68,733 2,251,006 Federal Home Loan Mortgage 23,000 1,474,300 Federal National Mortgage Association 18,600 1,409,508 FleetBoston Financial 26,600 641,858 Goldman Sachs Group 8,200 633,860 Household International 18,900 682,479 J.P. Morgan Chase & Co. 24,920 657,888 MBNA 30,000 606,000 Marsh & McLennan Cos. 14,000 681,100 Morgan Stanley 26,600 1,136,352 St. Paul Cos. 4,800 146,016 Travelers Property Casualty, Cl. A 37,970 (a) 596,881 Travelers Property Casualty, Cl. B 6,101 (a) 99,387 COMMON STOCKS (CONTINUED) Shares Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCE (CONTINUED) Wells Fargo 47,000 2,452,930 XL Capital, Cl. A 9,000 662,490 21,219,656 FOREIGN GOVERNMENTAL--.0% United Mexican States, Cl. B (Rights) 250,000 450 United Mexican States, Cl. C (Rights) 250,000 188 United Mexican States, Cl. D (Rights) 250,000 125 United Mexican States, Cl. E (Rights) 250,000 0 763 HEALTH SERVICES--1.7% HCA 33,300 1,550,115 Quest Diagnostics 2,900 (a) 162,545 WellPoint Health Networks 14,000 (a) 1,041,180 2,753,840 HEALTH TECHNOLOGY--6.4% Abbott Laboratories 20,000 800,600 Amgen 13,000 (a) 585,390 Bard (C.R.) 8,000 437,920 Bristol-Myers Squibb 18,900 471,555 IDEC Pharmaceuticals 18,000 (a) 723,240 Johnson & Johnson 25,200 1,368,612 Merck & Co. 12,400 626,448 Pfizer 86,000 2,844,880 Pharmacia 25,000 1,092,500 Teva Pharmaceutical Industries, ADR 8,000 530,400 Wyeth 16,500 706,200 10,187,745 INDUSTRIAL SERVICES--.9% Schlumberger 25,000 1,080,250 Transocean Sedco Forex 17,000 416,500 1,496,750 NON-ENERGY MINERALS--.6% Alcoa 17,000 426,530 Weyerhaeuser 10,000 545,100 971,630 The Fund 9 STATEMENT OF INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) Shares Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ PROCESS INDUSTRIES--.9% Dow Chemical 23,000 695,060 International Paper 18,000 677,700 1,372,760 PRODUCER MANUFACTURING--4.2% Danaher 10,000 601,500 Emerson Electric 7,000 341,460 General Electric 136,000 4,100,400 Honeywell International 14,000 419,300 Masco 27,200 657,152 3M 5,000 624,750 6,744,562 RETAIL TRADE--3.9% Home Depot 20,000 658,600 Lowe's Cos. 14,200 587,596 May Department Stores 20,600 604,198 Safeway 17,000 (a) 438,940 Staples 35,000 486,500 TJX Cos. 70,800 1,400,424 Target 46,600 1,593,720 Tiffany & Co. 17,000 421,600 6,191,578 TECHNOLOGY SERVICES--4.2% AOL Time Warner 59,500 (a) 752,675 Accenture, Cl. A 31,500 (a) 518,175 Anthem 5,200 (a) 328,172 Computer Sciences 13,600 (a) 500,888 First Data 18,000 625,500 Microsoft 62,000 (a) 3,042,960 Oracle 88,000 (a) 843,920 6,612,290 TRANSPORTATION--.4% Norfolk Southern 26,400 552,552 Southwest Airlines 10,000 142,100 694,652 10 COMMON STOCKS (CONTINUED) Shares Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ UTILITIES--2.4% AT&T 36,400 444,808 BellSouth 19,000 443,080 Duke Energy 10,000 268,300 Exelon 10,000 468,200 Liberty Media, Cl. A 60,000 (a) 501,600 SBC Communications 36,400 900,536 TXU 18,000 870,480 3,897,004 TOTAL COMMON STOCKS (cost $108,676,989) 97,589,392 PREFERRED STOCKS--.2% - ------------------------------------------------------------------------------------------------------------------------------------ OIL AND GAS; EXCO Resources, Cum. Conv., $1.05 (cost $304,055) 14,465 243,012 Principal BONDS AND NOTES--34.2% Amount ($) Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ AEROSPACE & DEFENCE--.4% Boeing Capital, Sr. Notes, 5.75%, 2/15/2007 339,000 (b) 348,428 Goodrich (B.F.), Notes, 7%, 4/15/2038 399,000 362,017 710,445 AIRLINES--1.1% America West Airlines Pass-Through Trust, Pass-Through Ctfs., Ser.1997-1, Cl.C, 7.53%, 1/2/2004 1,214,993 1,009,284 American Airlines, Pass-Through Ctfs., Ser. 2001-1, Cl. A2, 6.817%, 5/23/2011 250,000 225,911 Continental Airlines, Pass-Through Ctfs., Ser. 1999-1, Cl. A, 6.545%, 2/2/2019 134,527 121,369 The Fund 11 STATEMENT OF INVESTMENTS (CONTINUED) Principal BONDS AND NOTES (CONTINUED) Amount ($) Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ AIRLINES (CONTINUED) Continental Airlines, Pass-Through Ctfs., Ser. 2000-2, Cl. A1, 7.707%, 4/2/2021 331,783 296,344 U.S. Airways, Enhanced Equipment Notes, Ser. C, 8.93%, 10/15/2009 114,798 (c) 28,699 1,681,607 ASSET-BACKED CERTIFICATES--2.0% Countrywide Home Loan, Ser. K, 5.625%, 5/15/2007 600,000 619,874 IMPAC Secured Assets CMN Owner Trust, Ser. 2002-1, Cl. AI3, 5.57%, 3/25/2023 1,900,000 1,945,125 MBNA Credit Card Master Note Trust, Ser. 2002-C1, Cl. C1, 6.8%, 7/15/2014 523,000 554,707 3,119,706 AUTO LOANS--1.1% Ford Motor Credit, Global Landmark Securities, 6.5%, 1/25/2007 336,000 331,284 GMAC: Notes, 6.125%, 9/15/2006 368,000 371,625 Notes, 7%, 2/1/2012 250,000 (b) 251,040 Bonds, 8%, 11/1/2031 731,000 751,462 1,705,411 CABLE AND MEDIA--.3% TCI Communication Financing III Bonds, Capital Securities, 9.65%, 3/31/2027 287,000 264,155 Viacom, Gtd Sr. Notes, 6.625%, 5/15/2011 251,000 (b) 271,092 535,247 COMMERCIAL MORTGAGE PASS-THROUGH CTFS.--4.5% CS First Boston Mortgage Securities: Ser. 1998-C1, Cl. A1A, 6.26%, 5/17/2040 1,103,604 1,180,043 Ser. 1998-C1, Cl. C, 6.78%, 5/17/2009 1,471,000 1,591,665 Chase Commercial Mortgage Securities, Ser. 2001-245, Cl. A1, 6.173%, 2/12/2016 570,000 (d,e) 606,788 GS Mortgage Securities II, Ser. 2001-LIBA, Cl. A2, 6.615%, 2/10/2016 1,342,000 1,432,591 Morgan (J.P.) Commercial Mortgage, Finance Ser. 2000-C10, Cl. C, 7.535%, 8/15/2032 1,370,000 1,577,521 12 Principal BONDS AND NOTES (CONTINUED) Amount ($) Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL MORTGAGE PASS-THROUGH CTFS. (CONTINUED) TIAA CMBS I Trust Commercial Mortgage, Ser. 1999-1, Cl. A, 7.17%, 1/15/2032 729,066 (d) 797,759 7,186,367 ELECTRIC UTILITIES--.7% Long Island Lighting, Deb., 8.2%, 3/15/2023 438,000 453,955 Nisource Finance, Gtd. Notes, 7.875%, 11/15/2010 352,000 346,115 Southern Co. Capital Funding, Gtd. Sr. Notes, Ser. A, 5.3%, 2/1/2007 283,000 (e,f) 294,943 1,095,013 ELECTRONICS--.2% Hewlett-Packard, Notes, 5.75%, 12/15/2006 330,000 340,358 FINANCE--1.0% Bank of New York, Sr. Sub Notes, 4.25%,9/4/2012 300,000 301,005 Goldman Sachs Group, Notes, 5.7%, 9/1/2012 700,000 700,756 Household Finance, Notes, 6.75%, 5/15/2011 359,000 356,702 USA Education, Notes, Ser. A, 5.625%, 4/10/2007 227,000 (b) 242,696 1,601,159 FOOD PROCESSING--.2% Tyson Foods, Notes, 8.25%, 10/1/2011 340,000 (d) 389,872 INSURANCE--.6% Ace Capital Trust II Bonds, Gtd. Capital Securities, 9.7%,4/1/2030 521,000 625,156 Mercury General, Sr. Notes, 7.25%, 8/15/2011 284,000 317,985 943,141 LEASING--.4% International Lease Finance, Notes, 6.375%, 3/15/2009 635,000 663,197 The Fund 13 MINING AND METALS--.9% Alcoa, Notes, 6%, 11/15/2012 951,000 1,017,299 INCO, Notes, 7.75%, 5/15/2012 350,000 384,885 Owens-Brockway Glass Container, Sr. Secured Notes, 8.875%, 2/15/2009 77,000 (b) 79,503 1,481,687 OTHER SECURITIES--1.2% Abbey National Capital Trust I, Gtd. Non-Cumulative Trust Preferred Securities, 6.7%, 6/15/2008 599,000 (e,f) 630,252 Royal Bank of Scotland Group, Conv.Non-Cumaltive Dollar Preference Shares, 9.118%, 3/31/2010 347,000 (f) 421,217 Sun Life of Canada Capital Trust I, Gtd. Capital Securities, 8.526%, 5/6/2007 395,000 (f) 412,439 UBS Preferred Funding Trust I, Gtd. Non-Cumulative Capital Trust Securities, 8.622%, 10/1/2010 336,000 (e,f) 397,839 1,861,747 PUBLISHING--.1% Thomson, Bonds, 5.75%, 2/1/2008 125,000 130,613 RESIDENTIAL MORTGAGE PASS-THROUGH CTFS.--.7% Norwest Asset Securities: Ser. 1997-11, Cl. B2, 7%, 8/25/2027 326,138 330,809 Ser. 1998-2, Cl. B2, 6.5%, 2/25/2028 710,128 739,598 1,070,407 RETAIL--.4% Sears Roebuck Acceptance, Notes, 6.75%, 8/15/2011 685,000 (b) 715,613 SERVICES--.1% Computer Sciences, Notes, 6.75%, 6/15/2006 202,000 217,427 STRUCTURED INDEX--1.9% Morgan Stanley Tracers: Notes, 7.201%, 9/15/2011 768,000 (d,g) 820,642 Notes, 7.193%, 9/15/2011 2,016,000 (d,g) 2,154,184 Notes, 6.766%, 6/15/2012 90,000 (d,g) 95,321 3,070,147 14 Principal BONDS AND NOTES (CONTINUED) Amount ($) Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ TELECOMMUNICATIONS--.7% ALLTElL, Sr. Notes, 7%, 7/1/2012 200,000 211,833 British Telecommunications, Notes, 8.125%, 12/15/2010 366,000 419,180 Dow Chemical, Notes, 6%, 10/1/2012 235,000 240,233 France Telecom, Notes, 7.75%, 3/1/2011 215,000 223,164 Nextel Communications, Conv. Sub. Deb., 5.25%, 11/15/2010 60,000 38,700 1,133,110 TOBACCO--.8% Philip Morris Cos.: Notes, 7.65%, 7/1/2008 595,000 678,537 Notes, 7.75%, 11/15/2027 121,000 134,496 UST, Notes, 6.625%, 7/15/2012 414,000 433,795 1,246,828 U.S. GOVERNMENT AGENCIES/MORTGAGE-BACKED--14.9% Federal Home Loan Mortgage Corp., 6.5% 196,000 (h) 202,552 Federal National Mortgage Association, Mortgage-Backed: 6.2%, 1/1/2011 1,328,923 1,463,450 6% 2,950,000 (h) 3,007,142 6.88%, 2/1/2028 951,915 1,069,714 Notes, 4.9%, 6/13/2007 5,000,000 5,269,605 Sub Notes, 8%, 1/1/2030-11/1/2030 1,613,545 1,720,813 Real Estate Mortgage Investment Conduit, Ser. 1497, Cl. FF, 6.5%, 8/15/2021 1,650,000 1,689,650 Government National Mortgage Association I, 7%, 9/15/2031 1,022,000 (h) 1,069,268 Tennessee Valley Authority, Valley Indexed Principal Securities, 3.375%, 1/15/2007 2,477,000 (I) 2,949,466 U.S. Treasury Notes: 5.75%, 10/31/2002 2,500,000 2,516,775 2.125%, 8/31/2004 2,275,000 2,274,290 The Fund 15 STATEMENT OF INVESTMENTS (CONTINUED) Principal BONDS AND NOTES (CONTINUED) Amount ($) Value ($) - ------------------------------------------------------------------------------------------------------------------------------------ U.S. GOVERNMENT AGENCIES/MORTGAGE-BACKED (CONTINUED) U.S Treasury Principal Strips, Zero Coupon, 10/15/2020 1,234,000 443,095 23,675,820 TOTAL BONDS AND NOTES (cost $52,903,416) 54,574,922 SHORT-TERM INVESTMENTS--7.1% - ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL PAPER--3.4% Becton Dickinson & Co., 1.87%, 9/3/2002 2,670,000 2,669,722 San Paolo U.S. Financial, 1.88%, 9/3/2002 2,670,000 2,669,721 5,339,443 U.S. TREASURY BILLS--3.7% 1.66%, 9/5/2002 4,800,000 4,799,218 1.59%, 10/24/2002 365,000 (j) 364,157 1.63%, 10/31/2002 800,000 (j) 797,880 5,961,255 TOTAL SHORT-TERM INVESTMENTS (cost $11,300,534) 11,300,698 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT (cost $173,184,994) 102.7% 163,708,024 LIABILITIES, LESS CASH AND RECEIVABLES (2.7%) (4,228,337) NET ASSETS 100.0% 159,479,687 (A) NON-INCOME PRODUCING. (B) ALL OR A PORTION OF THESE SECURITIES ARE ON LOAN. AT AUGUST 31, 2002, THE TOTAL MARKET VALUE OF THE FUND'S SECURITIES ON LOAN IS $2,148,848 AND THE TOTAL MARKET VALUE OF THE COLLATERAL HELD BY THE FUND IS $2,212,340. (C) NON-INCOME PRODUCING--SECURITY IN DEFAULT. (D) SECURITIES EXEMPT FROM REGISTRATION UNDER RULE 144A OF THE SECURITIES ACT OF 1993. THESE SECURITIES MAY BE SOLD IN TRANSACTIONS EXEMPT FROM REGISTRATION, NORMALLY TO QUALIFIED INSTITUTIONAL BUYERS. AT AUGUST 31, 2002, THESE SECURITIES AMOUNT TO $4,864,566 OR 3.1% OF THE NET ASSETS. (E) VARIABLE RATE SECURITY--INTEREST RATE SUBJECT TO PERIODIC CHANGE. (F) DUE DATE SHOWN REPRESENTS EARLIEST DATE THE ISSUER MAY REDEEM THE SECURITY. (G) SECURITY LINKED TO A PORTFOLIO OF INVESTMENT GRADE DEBT SECURITIES. (H) PURCHASED ON A FORWARD COMMITMENT BASIS. (I) PRINCIPAL AMOUNT FOR ACCRUAL PURPOSE IS PERIODICALLY ADJUSTED BASED ON CHANGES TO THE CONSUMER PRICE INDEX. (J) PARTIALLY HELD BY THE BROKER IN A SEGREGATED ACCOUNT AS A COLLATERAL FOR OPEN FINANCIAL FUTURES POSITIONS. SEE NOTES TO FINANCIAL STATEMENTS. 16 STATEMENT OF FINANCIAL FUTURES August 31, 2002 Market Value Unrealized Covered Appreciation Contracts by Contracts ($) Expiration at 8/31/2002 ($) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL FUTURES LONG: Standard & Poor's 500 43 9,848,075 September 2002 59,853 SEE NOTES TO FINANCIAL STATEMENTS.
The Fund 17 STATEMENT OF ASSETS AND LIABILITIES August 31, 2002 Cost Value - -------------------------------------------------------------------------------- ASSETS ($): Investments in securities--See Statement of Investments 173,184,994 163,708,024 Cash 68,038 Receivable for investment securities sold 3,482,644 Collateral for securities loaned--Note 1(c) 2,212,340 Interest and dividends receivable 686,363 Receivable for shares of Common Stock subscribed 2,972 Receivable for futures variation margin--Note 4 1,075 Prepaid expenses 12,564 170,174,020 - -------------------------------------------------------------------------------- LIABILITIES ($): Due to The Dreyfus Corporation and affiliates 93,938 Payable for investment securities purchased 8,156,192 Liabilities for securities loaned--Note 1(c) 2,212,340 Payable for shares of Common Stock redeemed 110,382 Accrued expenses 121,481 10,694,333 - -------------------------------------------------------------------------------- NET ASSETS ($) 159,479,687 - -------------------------------------------------------------------------------- COMPOSITION OF NET ASSETS ($): Paid-in capital 186,493,285 Accumulated undistributed investment income--net 576,469 Accumulated net realized gain (loss) on investments (18,172,950) Accumulated net unrealized appreciation (depreciation) on investments (including $59,853 net unrealized apprecition on financial futures) (9,417,117) - -------------------------------------------------------------------------------- NET ASSETS ($) 159,479,687 - -------------------------------------------------------------------------------- SHARES OUTSTANDING (300 million shares of $.001 par value Common Stock authorized) 13,433,079 NET ASSET VALUE, offering and redemption price per share ($) 11.87 SEE NOTES TO FINANCIAL STATEMENTS. 18 STATEMENT OF OPERATIONS Year Ended August 31, 2002 - -------------------------------------------------------------------------------- INVESTMENT INCOME ($): INCOME: Interest 3,885,225 Cash dividends (net of $2,154 foreign taxes withheld at source) 1,622,299 TOTAL INCOME 5,507,524 EXPENSES: Management fee--Note 3(a) 1,092,863 Shareholder servicing costs--Note 3(b) 598,821 Custodian fees--Note 3(b) 35,443 Professional fees 24,419 Registration fees 23,719 Prospectus and shareholders' reports 21,369 Directors' fees and expenses--Note 3(c) 17,120 Dividends on securities sold short 2,420 Loan commitment fees--Note 2 2,367 Miscellaneous 14,652 TOTAL EXPENSES 1,833,193 INVESTMENT INCOME--NET 3,674,331 - -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NOTE 4 ($): Net realized gain (loss) on investments and foreign currency transactions: Long transactions (12,599,379) Short sale transactions 34,257 Net realized gain (loss) on financial futures (4,809,719) NET REALIZED GAIN (LOSS) (17,374,841) Net unrealized appreciation (depreciation) on investments (including $2,191,300 net unrealized appreciation on financial futures) (13,978,042) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (31,352,883) NET (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (27,678,552) SEE NOTES TO FINANCIAL STATEMENTS. The Fund 19 STATEMENT OF CHANGES IN NET ASSETS Year Ended August 31, ----------------------------------- 2002 2001 - -------------------------------------------------------------------------------- OPERATIONS ($): Investment income--net 3,674,331 5,204,135 Net realized gain (loss) on investments (17,374,841) (346,861) Net unrealized appreciation (depreciation) on investments (13,978,042) (21,071,047) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (27,678,552) (16,213,773) - -------------------------------------------------------------------------------- DIVIDENDS TO SHAREHOLDERS FROM ($): Investment income--net (4,288,934) (5,064,960) Net realized gain on investments -- (7,548,675) TOTAL DIVIDENDS (4,288,934) (12,613,635) - -------------------------------------------------------------------------------- CAPITAL STOCK TRANSACTIONS ($): Net proceeds from shares sold 39,508,604 62,126,555 Dividends reinvested 4,182,745 12,263,493 Cost of shares redeemed (47,253,705) (49,131,132) INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL STOCK TRANSACTIONS (3,562,356) 25,258,916 TOTAL INCREASE (DECREASE) IN NET ASSETS (35,529,842) (3,568,492) - -------------------------------------------------------------------------------- NET ASSETS ($): Beginning of Period 195,009,529 198,578,021 END OF PERIOD 159,479,687 195,009,529 Undistributed investment income--net 576,469 1,642,825 - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (SHARES): Shares sold 2,965,005 4,103,430 Shares issued for dividends reinvested 311,891 828,740 Shares redeemed (3,615,624) (3,254,969) NET INCREASE (DECREASE) IN SHARES OUTSTANDING (338,728) 1,677,201 SEE NOTES TO FINANCIAL STATEMENTS. 20 FINANCIAL HIGHLIGHTS The following table describes the performance for the fiscal periods indicated. Total return shows how much your investment in the fund would have increased (or decreased) during each period, assuming you had reinvested all dividends and distributions. These figures have been derived from the fund's financial statements. Year Ended August 31, -------------------------------------------- 2002(a) 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE DATA ($): Net asset value, beginning of period 14.16 16.42 16.51 15.19 18.15 Investment Operations: Investment income--net .27(b) .39(b) .41(b) .42(b) .47 Net realized and unrealized gain (loss) on investments (2.25) (1.65) 1.54 2.43 (.88) Total from Investment Operations (1.98) (1.26) 1.95 2.85 (.41) Distributions: Dividends from investment income--net (.31) (.39) (.43) (.45) (.46) Dividends from net realized gain on investments -- (.61) (1.61) (1.08) (2.09) Total Distributions (.31) (1.00) (2.04) (1.53) (2.55) Net asset value, end of period 11.87 14.16 16.42 16.51 15.19 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%) (14.21) (7.87) 12.62 19.37 (2.99) - ------------------------------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA (%): Ratio of operating expenses to average net assets 1.01 .81 .96 .94 .91 Ratio of interest expense and loan commitment fees to average net assets .00(c) -- .00(c) .03 -- Ratio of net investment income to average net assets 2.02 2.60 2.54 2.62 2.76 Portfolio Turnover Rate 200.50 295.43 160.38 162.40 177.85 - ------------------------------------------------------------------------------------------------------------------------------------ Net Assets, end of period ($ x 1,000) 159,480 195,010 198,578 188,215 359,521 (A) AS REQUIRED, EFFECTIVE SEPTEMBER 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 AUGUST 31, 2002 WAS TO DECREASE NET INVESTMENT INCOME PER SHARE BY $.01, INCREASE NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS PER SHARE BY $.01, AND DECREASE THE RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS FROM 2.13% TO 2.02%. PER SHARE DATA AND RATIOS/SUPPLEMENTAL DATA FOR PERIODS PRIOR TO SEPTEMBER 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 21 NOTES TO FINANCIAL STATEMENTS NOTE 1--Significant Accounting Policies: Dreyfus Balanced Fund, Inc. (the "fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a non-diversified open-end management investment company. The fund's investment objective is to provide investors with long-term capital growth and current income. The Dreyfus Corporation (the "Manager") serves as the fund's investment adviser. The Manager is a direct 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. 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: Most debt securities are valued each business day by an independent pricing service (the "Service") approved by the Board of Directors. Debt securities 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 debt 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. Other securities (including financial futures) are valued at the average of the most recent bid and asked prices in the market in which such securities are primarily traded, or at the last sales price for securities traded primarily on an exchange or the national securities market. In the absence of reported sales of securities traded primarily on an exchange or national securities market, the average of the most recent bid and asked prices is used, except for open short positions, where the asked price is used for valuation purposes. Bid price is used when no asked price is available. 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. 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 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, 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 $8,145 during the period ended August 31, 2002 based on available cash balances left on deposit. Income earned under this arrangement is included in interest income. The Fund 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) The fund may lend securities to qualified institutions. At origination, all loans are secured by cash 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 money market mutual funds managed by the Manager. The fund will be entitled to receive all income on securities loaned, in addition to income earned as a result of the lending transaction. Such income earned is included in interest income. 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: Dividends are recorded on the ex-dividend date. Dividends from investment income-net are declared and paid quarterly. 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. (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 August 31, 2002, the components of accumulated earnings on a tax basis were as follows: undistributed ordinary income $634,213, accumulated capital losses $4,176,001 and unrealized depreciation $9,795,205. In addition, the fund had $13,731,619 of capital losses realized after October 31, 2001, which were deferred for tax purposes to the first day of the following fiscal year. 24 The accumulated capital losses are available to be applied against future net securities profits, if any, realized subsequent to August 31, 2002. If not applied, $89,710 of the carryover expires in fiscal 2009 and $4,086,291 expires in fiscal 2010. The tax character of distributions paid to shareholders during the fiscal years ended August 31, 2002 and August 31, 2001, respectively, were as follows: ordinary income $4,288,934 and $9,972,859 and long-term capital gains $0 and $2,640,776. During the year ended August 31, 2002, as a result of permanent book to tax differences, the fund decreased accumulated undistributed investment income-net by $424,202, increased net realized gain (loss) on investments by $520,875 and decreased paid-in capital by $96,673. 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 August 31, 2002, the fund did not borrow under the Facility. 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 .60 of 1% of the value of the fund's average daily net assets and is payable monthly. The Fund 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (b) Under the Shareholder Services Plan, the fund reimburses the Distributor an amount not to exceed an annual rate of .25 of 1% of the value of the fund's average daily net assets for certain allocated expenses of providing personal services and/or maintaining shareholder accounts. The services provided may include personal services relating to shareholder accounts, such as answering shareholder inquiries regarding the fund and providing reports and other information, and services related to the maintenance of shareholder accounts. During the period ended August 31, 2002, the fund was charged $107,819 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 August 31, 2002, the fund was charged $56,173 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 August 31, 2002, the fund was charged $35,443 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"). Each Board member who is not an "affiliated person" as defined in the Act receives an annual fee of $40,000 and an attendance fee of $6,000 for each in person meeting and $500 for telephone meetings. These fees are allocated among the funds in the Fund Group. The Chairman of the Board receives an additional 25% of such compensation. Subject to the fund'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) During the period ended August 31, 2002, the fund incurred total brokerage commissions of $173,972, of which $640 was paid to Dreyfus Brokerage Services. Dreyfus Brokerage Services was a wholly-owned subsidiary of Mellon Financial Corporation until January 31, 2002. 26 NOTE 4--Securities Transactions: The following summarizes the aggregate amount of purchases and sales (including paydowns) of investment securities and securities sold short, excluding short-term securities and financial futures, during the period ended August 31, 2002: Purchases ($) Sales ($) - -------------------------------------------------------------------------------- Long transactions 354,617,967 366,299,072 Short sale transactions 1,287,762 181,169 TOTAL 355,905,729 366,480,241 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. Until the fund replaces the borrowed security, the fund will maintain daily, a segregated account with a broker or custodian of permissable liquid assets sufficient to cover its short position. At August 31, 2002, there were no securities sold short outstanding. 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. 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 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 The Fund 27 NOTES TO FINANCIAL STATEMENTS (CONTINUED) which the contract is traded and is subject to change. Contracts open at August 31, 2002 are set forth in the Statement of Financial Futures. At August 31, 2002, the cost of investments for federal income tax purposes was $173,503,228; accordingly, accumulated net unrealized depreciation on investments was $9,795,204, consisting of $11,492,841 gross unrealized appreciation and $21,288,045 gross unrealized depreciation. NOTE 5--Change in Accounting Principle: As required, effective September 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies (the "Guide") and began amortizing discount or premium on fixed income securities on a scientific basis. In addition, the Guide now requires paydown gains and losses to be included in interest income. Prior to September 1, 2001, the portfolio did not amortize premiums on fixed income securities and amortized discount on a straight line basis. The cumulative effect of this accounting change had no impact on total net assets of the fund, but resulted in a $27,641 reduction in accumulated undistributed investment income-net and a corresponding $27,641 increase in accumulated net unrealized appreciation (depreciation), based on securities held by the fund on August 31, 2001. The effect of this change for the year ended August 31, 2002 was to decrease net investment income by $170,741 increase net unrealized appreciation (depreciation) by $27,461 and increase net realized gains (losses) by $143,280. The statement of changes in net assets and financial highlights for the prior periods have not been restated to reflect this change in presentation. 28 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Dreyfus Balanced Fund, Inc. We have audited the accompanying statement of assets and liabilities of Dreyfus Balanced Fund, Inc., including the statements of investments and financial futures as of August 31, 2002, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and financial highlights for each of the years indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with 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 August 31, 2002 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 Balanced Fund, Inc. at August 31, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the indicated years, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York October 17, 2002 The Fund 29 IMPORTANT TAX INFORMATION (Unaudited) The fund designates 37.45% of the ordinary dividends paid during the fiscal year ended August 31, 2002 as qualifying for the corporate dividends received deduction. Shareholders will receive notification in January 2003 of the percentage applicable to the preparation of their 2002 income tax returns. 30 BOARD MEMBERS INFORMATION (Unaudited) JOSEPH S. DIMARTINO (58) CHAIRMAN OF THE BOARD (1995) PRINCIPAL OCCUPATION DURING PAST 5 YEARS: * Corporate Director and Trustee OTHER DIRECTORSHIPS AND AFFILIATIONS: * The Muscular Dystrophy Association, Director * Carlyle Industries, Inc., a button packager and distributor, 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 * QuikCAT.com, a developer of high speed movement, routing, storage and encryption of data, Director NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 190 -------------- DAVID P. FELDMAN (62) BOARD MEMBER (1994) PRINCIPAL OCCUPATION DURING PAST 5 YEARS: * Corporate Director and Trustee OTHER DIRECTORSHIPS AND AFFILIATIONS: * 59 Wall Street Mutual Funds Group (11 Funds), Director * The Jeffrey Company, a private investment company, Director * QMED, a medical device company, Director NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 54 -------------- JAMES F. HENRY (71) BOARD MEMBER (1992) PRINCIPAL OCCUPATION DURING PAST 5 YEARS: * President, CPR Institute for Dispute Resolution, a non-profit organization principally engaged in the development of alternatives to business litigation (Retired 2001). NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 25 -------------- ROSALIND GERSTEN JACOBS (76) BOARD MEMBER (1992) PRINCIPAL OCCUPATION DURING PAST 5 YEARS: * Merchandise and marketing consultant NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 37 The Fund 31 BOARD MEMBERS INFORMATION (Unaudited) (CONTINUED) DR. PAUL A. MARKS (75) BOARD MEMBER (1992) PRINCIPAL OCCUPATION DURING PAST 5 YEARS: * President and Chief Executive Officer of Memorial Sloan-Kettering Cancer Center (Retired 1999) OTHER DIRECTORSHIPS AND AFFILIATIONS: * Pfizer, Inc., a pharmaceutical company, Director-Emeritus NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 25 -------------- DR. MARTIN PERETZ (62) BOARD MEMBER (1992) PRINCIPAL OCCUPATION DURING PAST 5 YEARS: * Editor-in-Chief of The New Republic Magazine * Lecturer in Social Studies at Harvard University * Co-Chairman of TheStreet.com, a financial daily on the web OTHER DIRECTORSHIPS AND AFFILIATIONS: * Academy for Liberal Education, an accrediting agency for colleges and universities certified by the U.S. Department of Education, Director * Digital Learning Group, LLC., an online publisher of college textbooks, Director NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 25 -------------- BERT W. WASSERMAN (69) BOARD MEMBER (1993) PRINCIPAL OCCUPATION DURING PAST 5 YEARS: * Financial Consultant OTHER DIRECTORSHIPS AND AFFILIATIONS: * Malibu Entertainment International, Inc., Director * Lillian Vernon Corporation, Director * PSC, Inc., a leading provider of mobile and wireless systems, retail automation solutions and automated data collection products, Director NO. OF PORTFOLIOS FOR WHICH BOARD MEMBER SERVES: 25 -------------- 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. JOHN M. FRASER, JR., EMERITUS BOARD MEMBER IRVING KRISTOL, EMERITUS BOARD MEMBER 32 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 94 investment companies (comprised of 188 portfolios) managed by the Manager. Mr. Canter also is a Director or 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 56 years old, and has been an employee of the Manager since May 1995. MARK N. JACOBS, VICE PRESIDENT SINCE MARCH 2000. Executive Vice President, Secretary and General Counsel of the Manager, and an officer of 95 investment companies (comprised of 202 portfolios) managed by the Manager. He is 56 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 198 portfolios) managed by the Manager. He is 42 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 95 investment companies (comprised of 202 portfolios) managed by the Manager. He is 52 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 19 investment companies (comprised of 39 portfolios) managed by the Manager. He is 50 years old, and has been an employee of the Manager since May 1986. JAMES WINDELS, TREASURER SINCE NOVEMBER 2001. Director of Mutual Fund Treasury Accounting of the Manager, and an officer of 9 investment companies (comprised of 202 portfolios) managed by the Manager. He is 43 years old, and has been an employee of the Manager since April 1985. KENNETH SANDGREN, ASSISTANT TREASURER SINCE NOVEMBER 2001. Mutual Funds Tax Director of the Manager, and an officer of 95 investment companies (comprised of 202 portfolios) managed by the Manager. He is 48 years old, and has been an employee of the Manager since June 1993. The Fund 33 For More Information Dreyfus Balanced Fund, Inc. 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. P.O. Box 9263 Boston, MA 02205-8501 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) 2002 Dreyfus Service Corporation 222AR0802 EX-99.A 3 graph-222.txt GRAPH IN THE PRESIDENT'S LETTER OF THE AN. REPORT Comparison of change in value of $10,000 investment in Dreyfus Balanced Fund, Inc. with the Standard & Poor's 500 Composite Stock Price Index, the Lehman Brothers Aggregate Bond Index, and the Customized Blended Index EXHIBIT A: Standard & Dreyfus Poor's 500 Lehman Brothers Customized PERIOD Balanced Composite Stock Aggregate Blended Fund, Inc. Price Index * Bond Index * Index * 9/30/92 10,000 10,000 10,000 10,000 8/31/93 10,888 11,384 10,967 11,217 8/31/94 11,730 12,006 10,801 11,517 8/31/95 13,961 14,577 12,022 13,518 8/31/96 14,686 17,306 12,516 15,258 8/31/97 18,808 24,336 13,768 19,587 8/31/98 18,245 26,312 15,223 21,370 8/31/99 21,779 36,786 15,345 26,542 8/31/00 24,528 42,786 16,505 29,943 8/31/01 22,597 32,355 18,543 27,042 8/31/02 19,386 26,536 20,047 25,000 * Source: Lipper Inc. -----END PRIVACY-ENHANCED MESSAGE-----