DISCUSSION OF FUND PERFORMANCE
For the period of September 1, 2012, through August 31, 2013, as provided by Steven Harvey and Daniel Rabasco, Primary Portfolio Managers
Fund and Market Performance Overview
For the 12-month period ended August 31, 2013, Dreyfus AMT-Free Municipal Bond Fund’s Class A shares achieved a total return of –4.30%, Class C shares returned –5.02%, Class I shares returned –4.15%, ClassY shares returned –2.86%, and Class Z shares returned –4.12%.
1
In comparison, the fund’s benchmark, the Barclays Municipal Bond Index (the “Index”), produced a total return of –3.70%.
2
Selling pressure stemming from investors’ changing interest-rate expectations during the final months of the reporting period sent the Index into negative territory for the reporting period overall.The fund produced lower returns than its benchmark, primarily due to overweighted exposure during the market downturn to higher quality revenue bonds with strong liquidity characteristics.
The Fund’s Investment Approach
The fund seeks as high a level of current income exempt from federal income tax as is consistent with the preservation of capital.
To pursue its goal, the fund normally invests substantially all of its assets in municipal bonds that provide income exempt from federal income tax.The fund also seeks to provide income exempt from the federal alternative minimum tax.
The fund invests at least 65% of its assets in municipal bonds with an A or higher credit rating, or the unrated equivalent as determined by Dreyfus. The fund may invest the remaining 35% of its assets in municipal bonds with a credit rating lower than A, including municipal bonds rated below investment grade (“high yield” or “junk” bonds), or the unrated equivalent as determined by Dreyfus.
The fund’s portfolio managers focus on identifying undervalued sectors and securities and minimize the use of interest rate forecasting. The portfolio managers select municipal bonds for the fund’s portfolio by:
The Fund
3
DISCUSSION OF FUND PERFORMANCE
(continued)
-
Actively trading among various sectors, such as pre-refunded, general obligation,
and revenue, based on their apparent relative values.The fund seeks to invest in
several of these sectors.
Selling Pressure Intensified Late in Reporting Period
After an extended period of market support, municipal bonds encountered heightened volatility over the first eight months of 2013. The robust investor demand that had characterized much of 2012 failed to rematerialize, sending municipal bond yields higher despite a relatively meager supply of newly issued securities. Yields of U.S. Treasury securities also generally climbed in response to improved economic trends, putting additional pressure on municipal bond prices.
In late May, remarks by Federal Reserve Board Chairman Ben Bernanke were widely interpreted as a signal that the central bank would back away from its ongoing quantitative easing program sooner than expected.This development sent longer term interest rates higher, further eroding returns from municipal bonds.
In July, decades of economic decay and subsequent population loss culminated in a bankruptcy filing by the city of Detroit. Despite this bankruptcy filing, credit conditions improved for most states and municipalities in the recovering economy. For example, the State of California received credit-rating upgrades after voters approved a measure to raise certain taxes, and many issuers of revenue-backed bonds reported solid revenue growth.
Fund Strategies Produced Mixed Results
When prices of lower rated, higher yielding securities climbed to relatively rich levels toward the end of 2012, we increased the fund’s focus on higher grade securities with more attractive valuations.The fund’s relative performance over the reporting period was initially dampened by a more conservative credit bias with its emphasis on higher quality bonds backed by revenues from essential municipal services. We also shifted the fund’s emphasis from long-term securities to bonds with maturities below 15 years, effectively reducing the fund’s sensitivity to changing interest rates. This positioning helped cushion the full brunt of the market downturn later in the reporting period. In addition, the fund received strong contributions to relative performance from revenue bonds issued to finance hospitals and airports.
4
Finding More Attractive Values
Municipal bonds generally ended the reporting period with attractive valuations compared to U.S.Treasury securities, suggesting that they may have been punished more severely than was warranted by underlying fundamentals. Indeed, in our judgment, recent bouts of market volatility have provided compelling opportunities to purchase higher yielding, lower rated municipal bonds at relatively low prices, which we expect to rise as investors refocus on underlying market and issuer fundamentals. Therefore, we recently have increased the fund’s exposure to lower rated and longer term revenue bonds.
September 16, 2013
Bond funds are subject generally to interest rate, credit, liquidity and market risks, to varying degrees, all of which are more fully described in the fund’s prospectus. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes, and rate increases can cause price declines.
|
|
|
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 C shares. Had these charges been reflected, returns would have been lower.
|
|
Neither Class Z, Class I nor ClassY shares are subject to any initial or deferred sales charge. 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. Income may be subject to state and local taxes. Capital gains, if
|
|
any, are fully taxable.The total return figures presented for ClassY shares of the fund reflect the performance since
|
|
7/1/13 (the inception date for ClassY shares).The Dreyfus Corporation has contractually agreed to waive receipt of
|
|
its fees and/or assume the expenses of the fund so that total annual fund operating expenses of Class A, C, I and Z
|
|
shares (excluding Rule 12b-1 fees, shareholder services fees for Class A, C, I and Z shares, taxes, brokerage
|
|
commissions, extraordinary expenses, interest expenses, and commitment fees on borrowings) do not exceed 0.45%.
|
|
Dreyfus may terminate this agreement upon at least 90 days’ prior notice to investors but has committed not to do so
|
|
until at least July 31, 2014.Without this absorption returns would have been lower.
|
|
The use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly
|
|
in the underlying assets. Derivatives can be highly volatile, illiquid, and difficult to value and there is the risk that
|
|
changes in the value of a derivative held by the fund will not correlate with the underlying instruments or the fund’s
|
|
other investments.
|
|
2 SOURCE: LIPPER INC. — Reflects reinvestment of dividends and, where applicable, capital gain distributions.
|
|
The Barclays Municipal Bond Index is a widely accepted, unmanaged total return performance benchmark for the
|
|
long-term, investment-grade, tax-exempt bond market. Index returns do not reflect fees and expenses associated with
|
|
operating a mutual fund. Investors cannot invest directly in any index.
|
The Fund
5
FUND PERFORMANCE
|
|
|
|
†
|
Source: Lipper Inc.
|
|
††
|
The total return figures presented for Class I shares of the fund reflect the performance of the fund’s Class Z shares
|
|
|
for the period prior to 12/15/08 (the inception date for Class I shares).
|
|
|
The total return figures presented for ClassY shares of the fund reflect the performance of the fund’s Class Z shares
|
|
|
for the period prior to 7/1/13 (the inception date for ClassY shares).
|
Past performance is not predictive of future performance.
The above graph compares a $10,000 investment made in each of the Class A, Class C, Class I, ClassY and Class Z shares of Dreyfus AMT-Free Municipal Bond Fund on 8/31/03 to a $10,000 investment made in the Barclays Municipal Bond Index (the “Index”) on that date.All dividends and capital gain distributions are reinvested.
On April 29, 2013, the Board authorized the fund to offer ClassY shares, as a new class of shares, to certain investors, including certain institutional investors. On July 1, 2013, ClassY shares were offered at net asset value and are not subject to certain fees, including Distribution Plan and Shareholder Services Plan fees.
The fund’s performance shown in the line graph above takes into account the maximum initial sales charge on Class A shares and all other applicable fees and expenses on all classes.The fund invests primarily in municipal securities and its performance shown in the line graph takes into account fees and expenses.The Index is an unmanaged total return performance benchmark for the long-term, investment-grade, tax-exempt bond market. Unlike a mutual fund, the Index is not subject to charges, fees and other expenses. Investors cannot invest directly in any index. 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 8/31/13
|
|
|
|
|
|
|
|
Inception
|
|
|
Date
|
1
|
Year
|
5 Years
|
|
10 Years
|
|
|
Class A shares
|
|
|
|
|
|
|
|
|
with maximum sales charge (4.5%)
|
3/31/03
|
–8.59
|
%
|
3.20
|
%
|
3.53
|
%
|
|
without sales charge
|
3/31/03
|
–4.30
|
%
|
4.15
|
%
|
4.00
|
%
|
|
Class C shares
|
|
|
|
|
|
|
|
|
with applicable redemption charge
†
|
3/31/03
|
–5.95
|
%
|
3.37
|
%
|
3.23
|
%
|
|
without redemption
|
3/31/03
|
–5.02
|
%
|
3.37
|
%
|
3.23
|
%
|
|
Class I shares
|
12/15/08
|
–4.15
|
%
|
4.41
|
%
††
|
4.27
|
%
††
|
|
Class Y shares
|
7/1/13
|
–4.09
|
%
††
|
4.39
|
%
††
|
4.26
|
%
††
|
|
Class Z shares
|
5/6/94
|
–4.12
|
%
|
4.39
|
%
|
4.26
|
%
|
|
Barclays Municipal Bond Index
|
|
–3.70
|
%
|
4.52
|
%
|
4.48
|
%
|
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 C shares is 1% for shares redeemed within one year of the
|
|
|
date of purchase.
|
|
††
|
The total return performance figures presented for Class I shares of the fund reflect the performance of the fund’s
|
|
|
Class Z shares for the period prior to 12/15/08 (the inception date for Class I shares).
|
|
|
The total return performance figures presented for ClassY shares of the fund reflect the performance of the fund’s
|
|
|
Class Z shares for the period prior to 7/1/13 (the inception date for ClassY shares).
|
The Fund
7
UNDERSTANDING YOUR FUND’S EXPENSES
(Unaudited)
As a mutual fund investor, you pay ongoing expenses, such as management fees and other expenses. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds.You also may pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund’s prospectus or talk to your financial adviser.
Review your fund’s expenses
The table below shows the expenses you would have paid on a $1,000 investment in Dreyfus AMT-Free Municipal Bond Fund from March 1, 2013 to August 31, 2013. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.
Expenses and Value of a $1,000 Investment
assuming actual returns for the six months ended August 31, 2013
†
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
Class C
|
|
Class I
|
|
Class Y
|
|
Class Z
|
|
Expenses paid per $1,000
††
|
$
|
3.41
|
$
|
7.06
|
$
|
2.20
|
$
|
.74
|
$
|
2.39
|
|
Ending value (after expenses)
|
$
|
934.90
|
$
|
931.30
|
$
|
935.30
|
$
|
971.40
|
$
|
935.80
|
COMPARING YOUR FUND’S EXPENSES
WITH THOSE OF OTHER FUNDS
(Unaudited)
Using the SEC’s method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the table below shows your fund’s expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total cost) of investing in the fund with those of other funds.All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period.
Expenses and Value of a $1,000 Investment
assuming a hypothetical 5% annualized return for the six months ended August 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
Class C
|
|
Class I
|
|
Class Y
|
|
Class Z
|
|
Expenses paid per $1,000
††††
|
$
|
3.57
|
$
|
7.37
|
$
|
2.29
|
$
|
2.29
|
$
|
2.50
|
|
Ending value (after expenses)
|
$
|
1,021.68
|
$
|
1,017.90
|
$
|
1,022.94
|
$
|
1,022.94
|
$
|
1,022.74
|
|
|
|
|
†
|
From July 1, 2013 (commencement of initial offering) to August 31, 2013 for ClassY shares.
|
|
††
|
Expenses are equal to the fund’s annualized expense ratio of .70% for Class A, 1.45% for Class C, .45% for Class
|
|
|
I and .49% for Class Z, multiplied by the average account value over the period, multiplied by 184/365 (to reflect
|
|
|
the one-half year period). Expenses are equal to the fund’s annualized expense ratio of .45% for Class Y shares,
|
|
|
multiplied by the average account value over the period, multiplied by 61/365 (to reflect the actual days in the period).
|
|
†††
|
Please note that while ClassY shares commenced operations on July 1, 2013, the hypothetical expenses paid during
|
|
|
the period reflect projected activity for the full six month period for purposes of comparability.This projection assumes
|
|
|
that annualized expense ratios were in effect during the period March 1, 2013 to August 31, 2013.
|
|
††††
Expenses are equal to the fund’s annualized expense ratio of .70% for Class A, 1.45% for Class C, .45% for Class
|
|
|
I, .45% for Class Y and .49% for Class Z, multiplied by the average account value over the period, multiplied by
|
|
|
184/365 (to reflect the one-half year period).
|
8
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2013
|
|
|
|
|
|
|
Cost
|
Value
|
|
|
Assets ($):
|
|
|
|
|
Investments in securities—See Statement of Investments
|
825,704,722
|
823,559,953
|
|
|
Cash
|
|
613,031
|
|
|
Interest receivable
|
|
9,511,301
|
|
|
Receivable for shares of Common Stock subscribed
|
|
24,562
|
|
|
Prepaid expenses
|
|
54,611
|
|
|
|
|
833,763,458
|
|
|
Liabilities ($):
|
|
|
|
|
Due to The Dreyfus Corporation and affiliates—Note 3(c)
|
|
504,610
|
|
|
Payable for floating rate notes issued—Note 4
|
|
7,500,000
|
|
|
Payable for shares of Common Stock redeemed
|
|
1,180,533
|
|
|
Interest and expense payable related to
|
|
|
|
|
floating rate notes issued—Note 4
|
|
8,234
|
|
|
Accrued expenses
|
|
153,877
|
|
|
|
|
9,347,254
|
|
|
Net Assets ($)
|
|
824,416,204
|
|
|
Composition of Net Assets ($):
|
|
|
|
|
Paid-in capital
|
|
838,968,564
|
|
|
Accumulated undistributed investment income—net
|
|
86,651
|
|
|
Accumulated net realized gain (loss) on investments
|
|
(12,494,242
|
)
|
|
Accumulated net unrealized appreciation
|
|
|
|
|
(depreciation) on investments
|
|
(2,144,769
|
)
|
|
Net Assets ($)
|
|
824,416,204
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share
|
|
|
|
|
|
|
Class A
|
Class C
|
Class I
|
Class Y
|
Class Z
|
|
Net Assets ($)
|
579,727,736
|
29,450,255
|
13,365,157
|
965
|
201,872,091
|
|
Shares Outstanding
|
43,883,651
|
2,229,171
|
1,011,299
|
73
|
15,272,241
|
|
Net Asset Value
|
|
|
|
|
|
|
Per Share ($)
|
13.21
|
13.21
|
13.22
|
13.22
|
13.22
|
See notes to financial statements.
The Fund
43
STATEMENT OF OPERATIONS
Year Ended August 31, 2013
|
|
|
|
|
Investment Income ($):
|
|
|
|
Interest Income
|
27,566,307
|
|
|
Expenses:
|
|
|
|
Management fee—Note 3(a)
|
4,077,756
|
|
|
Shareholder servicing costs—Note 3(c)
|
1,414,950
|
|
|
Distribution fees—Note 3(b)
|
207,431
|
|
|
Registration fees
|
115,978
|
|
|
Professional fees
|
105,148
|
|
|
Custodian fees—Note 3(c)
|
79,900
|
|
|
Directors’ fees and expenses—Note 3(d)
|
47,422
|
|
|
Prospectus and shareholders’ reports
|
42,692
|
|
|
Interest and expense related to floating rate notes issued—Note 4
|
8,234
|
|
|
Loan commitment fees—Note 2
|
6,595
|
|
|
Interest expense—Note 2
|
44
|
|
|
Miscellaneous
|
81,616
|
|
|
Total Expenses
|
6,187,766
|
|
|
Less—reduction in expenses due to undertaking—Note 3(a)
|
(1,724,360
|
)
|
|
Less—reduction in fees due to earnings credits—Note 3(c)
|
(540
|
)
|
|
Net Expenses
|
4,462,866
|
|
|
Investment Income—Net
|
23,103,441
|
|
|
Realized and Unrealized Gain (Loss) on Investments—Note 4 ($):
|
|
|
|
Net realized gain (loss) on investments
|
2,807,207
|
|
|
Net realized gain (loss) on swap transactions
|
(114,165
|
)
|
|
Net Realized Gain (Loss)
|
2,693,042
|
|
|
Net unrealized appreciation (depreciation) on investments
|
(74,377,837
|
)
|
|
Net unrealized appreciation (depreciation) on swap transactions
|
79,531
|
|
|
Net Unrealized Appreciation (Depreciation)
|
(74,298,306
|
)
|
|
Net Realized and Unrealized Gain (Loss) on Investments
|
(71,605,264
|
)
|
|
Net (Decrease) in Net Assets Resulting from Operations
|
(48,501,823
|
)
|
|
|
|
See notes to financial statements.
|
|
|
44
STATEMENT OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2013
|
a
|
2012
|
b
|
|
|
|
Operations ($):
|
|
|
|
|
|
Investment income—net
|
23,103,441
|
|
20,217,038
|
|
|
Net realized gain (loss) on investments
|
2,693,042
|
|
5,206,275
|
|
|
Net unrealized appreciation
|
|
|
|
|
|
(depreciation) on investments
|
(74,298,306
|
)
|
26,361,265
|
|
|
Net Increase (Decrease) in Net Assets
|
|
|
|
|
|
Resulting from Operations
|
(48,501,823
|
)
|
51,784,578
|
|
|
Dividends to Shareholders from ($):
|
|
|
|
|
|
Investment income—net:
|
|
|
|
|
|
Class A
|
(13,545,238
|
)
|
(9,947,551
|
)
|
|
Class B
|
—
|
|
(8,157
|
)
|
|
Class C
|
(709,507
|
)
|
(634,799
|
)
|
|
Class I
|
(495,884
|
)
|
(302,417
|
)
|
|
Class Y
|
(6
|
)
|
(9,247,325
|
)
|
|
Class Z
|
(8,111,283
|
)
|
—
|
|
|
Total Dividends
|
(22,861,918
|
)
|
(20,140,249
|
)
|
|
Capital Stock Transactions ($):
|
|
|
|
|
|
Net proceeds from shares sold:
|
|
|
|
|
|
Class A
|
78,198,445
|
|
29,258,906
|
|
|
Class B
|
—
|
|
15,185
|
|
|
Class C
|
3,160,592
|
|
4,780,717
|
|
|
Class I
|
14,486,047
|
|
8,661,196
|
|
|
Class Y
|
1,000
|
|
—
|
|
|
Class Z
|
5,246,240
|
|
8,939,231
|
|
|
Net assets received in connection
|
|
|
|
|
|
with reorganizations—Note 1
|
386,139,382
|
|
—
|
|
|
Dividends reinvested:
|
|
|
|
|
|
Class A
|
10,706,854
|
|
7,252,115
|
|
|
Class B
|
—
|
|
7,169
|
|
|
Class C
|
462,460
|
|
410,998
|
|
|
Class I
|
299,404
|
|
136,419
|
|
|
Class Z
|
5,713,174
|
|
6,490,695
|
|
|
Cost of shares redeemed:
|
|
|
|
|
|
Class A
|
(98,337,307
|
)
|
(37,544,231
|
)
|
|
Class B
|
—
|
|
(711,572
|
)
|
|
Class C
|
(12,467,712
|
)
|
(2,476,517
|
)
|
|
Class I
|
(12,504,104
|
)
|
(2,369,629
|
)
|
|
Class Z
|
(30,635,419
|
)
|
(16,682,990
|
)
|
|
Increase (Decrease) in Net Assets
|
|
|
|
|
|
from Capital Stock Transactions
|
350,469,056
|
|
6,167,692
|
|
|
Total Increase (Decrease) in Net Assets
|
279,105,315
|
|
37,812,021
|
|
|
Net Assets ($):
|
|
|
|
|
|
Beginning of Period
|
545,310,889
|
|
507,498,868
|
|
|
End of Period
|
824,416,204
|
|
545,310,889
|
|
|
Undistributed investment income—net
|
86,651
|
|
—
|
|
The Fund
45
STATEMENT OF CHANGES IN NET ASSETS
(continued)
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2013
|
a
|
2012
|
b
|
|
Capital Share Transactions:
|
|
|
|
|
|
Class A
c,d
|
|
|
|
|
|
Shares sold
|
5,499,209
|
|
2,102,113
|
|
|
Shares issued in connection
|
|
|
|
|
|
with reorganizations—Note 1
|
25,661,345
|
|
—
|
|
|
Shares issued for dividends reinvested
|
767,433
|
|
520,876
|
|
|
Shares redeemed
|
(7,041,687
|
)
|
(2,693,937
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
24,886,300
|
|
(70,948
|
)
|
|
Class B
d
|
|
|
|
|
|
Shares sold
|
—
|
|
1,112
|
|
|
Shares issued for dividends reinvested
|
—
|
|
524
|
|
|
Shares redeemed
|
—
|
|
(51,594
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
—
|
|
(49,958
|
)
|
|
Class C
c
|
|
|
|
|
|
Shares sold
|
220,212
|
|
341,982
|
|
|
Shares issued in connection
|
|
|
|
|
|
with reorganizations—Note 1
|
1,217,209
|
|
—
|
|
|
Shares issued for dividends reinvested
|
32,954
|
|
29,519
|
|
|
Shares redeemed
|
(890,189
|
)
|
(179,150
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
580,186
|
|
192,351
|
|
|
Class I
|
|
|
|
|
|
Shares sold
|
1,014,792
|
|
617,077
|
|
|
Shares issued for dividends reinvested
|
21,330
|
|
9,771
|
|
|
Shares redeemed
|
(889,237
|
)
|
(171,307
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
146,885
|
|
455,541
|
|
|
Class Y
|
|
|
|
|
|
Shares sold
|
73
|
|
—
|
|
|
Class Z
|
|
|
|
|
|
Shares sold
|
368,014
|
|
643,659
|
|
|
Shares issued for dividends reinvested
|
404,335
|
|
465,927
|
|
|
Shares redeemed
|
(2,192,803
|
)
|
(1,200,330
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
(1,420,454
|
)
|
(90,744
|
)
|
|
|
|
a Effective July 1, 2013, the fund commenced offering ClassY shares.
|
|
b Effective as of the close of business on March 13, 2012, the fund no longer offers Class B shares.
|
|
c During the period ended August 31, 2013, 139,900 Class C shares representing $2,005,331 were exchanged for
|
|
140,037 Class A shares.
|
|
d During the period ended August 31, 2012, 25,747 Class B shares representing $356,988 were automatically
|
|
converted to 25,749 Class A shares.
|
See notes to financial statements.
46
FINANCIAL HIGHLIGHTS
The following tables describe the performance for each share class for the fiscal periods indicated.All information (except portfolio turnover rate) reflects financial results for a single fund share.Total return shows how much your investment in the fund would have increased (or decreased) during each period, assuming you had reinvested all dividends and distributions.These figures have been derived from the fund’s financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
Class A Shares
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
14.27
|
|
13.43
|
|
13.81
|
|
13.10
|
|
13.23
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
a
|
.47
|
|
.53
|
|
.58
|
|
.58
|
|
.59
|
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
(1.06
|
)
|
.83
|
|
(.38
|
)
|
.71
|
|
(.13
|
)
|
|
Total from Investment Operations
|
(.59
|
)
|
1.36
|
|
.20
|
|
1.29
|
|
.46
|
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.47
|
)
|
(.52
|
)
|
(.58
|
)
|
(.58
|
)
|
(.59
|
)
|
|
Net asset value, end of period
|
13.21
|
|
14.27
|
|
13.43
|
|
13.81
|
|
13.10
|
|
|
Total Return (%)
b
|
(4.30
|
)
|
10.32
|
|
1.60
|
|
10.10
|
|
3.78
|
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.97
|
|
.97
|
|
.97
|
|
.97
|
|
.99
|
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.70
|
|
.70
|
|
.70
|
|
.70
|
|
.70
|
|
|
Ratio of interest and expense related
|
|
|
|
|
|
|
|
|
|
|
|
to floating rate notes issued
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
c
|
—
|
|
—
|
|
.00
|
c
|
—
|
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
3.37
|
|
3.78
|
|
4.40
|
|
4.37
|
|
4.70
|
|
|
Portfolio Turnover Rate
|
34.19
|
|
22.11
|
|
22.31
|
|
20.53
|
|
31.77
|
|
|
Net Assets, end of period ($ x 1,000)
|
579,728
|
|
271,110
|
|
256,180
|
|
295,189
|
|
95,477
|
|
|
|
|
|
a
|
Based on average shares outstanding at each month end.
|
|
b
|
Exclusive of sales charge.
|
|
c
|
Amount represents less than .01%.
|
See notes to financial statements.
The Fund
47
FINANCIAL HIGHLIGHTS
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
Class C Shares
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
14.27
|
|
13.43
|
|
13.81
|
|
13.10
|
|
13.23
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
a
|
.37
|
|
.42
|
|
.48
|
|
.48
|
|
.50
|
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
(1.07
|
)
|
.84
|
|
(.38
|
)
|
.71
|
|
(.13
|
)
|
|
Total from Investment Operations
|
(.70
|
)
|
1.26
|
|
.10
|
|
1.19
|
|
.37
|
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.36
|
)
|
(.42
|
)
|
(.48
|
)
|
(.48
|
)
|
(.50
|
)
|
|
Net asset value, end of period
|
13.21
|
|
14.27
|
|
13.43
|
|
13.81
|
|
13.10
|
|
|
Total Return (%)
b
|
(5.02
|
)
|
9.50
|
|
.85
|
|
9.27
|
|
3.00
|
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
1.72
|
|
1.73
|
|
1.71
|
|
1.72
|
|
1.74
|
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
1.45
|
|
1.45
|
|
1.45
|
|
1.45
|
|
1.45
|
|
|
Ratio of interest and expense related
|
|
|
|
|
|
|
|
|
|
|
|
to floating rate notes issued
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
c
|
—
|
|
—
|
|
.00
|
c
|
—
|
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
2.60
|
|
3.02
|
|
3.65
|
|
3.62
|
|
3.93
|
|
|
Portfolio Turnover Rate
|
34.19
|
|
22.11
|
|
22.31
|
|
20.53
|
|
31.77
|
|
|
Net Assets, end of period ($ x 1,000)
|
29,450
|
|
23,532
|
|
19,569
|
|
25,610
|
|
13,220
|
|
|
|
|
|
a
|
Based on average shares outstanding at each month end.
|
|
b
|
Exclusive of sales charge.
|
|
c
|
Amount represents less than .01%.
|
See notes to financial statements.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
Class I Shares
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
a
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
14.28
|
|
13.44
|
|
13.81
|
|
13.10
|
|
11.65
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
b
|
.50
|
|
.55
|
|
.61
|
|
.61
|
|
.45
|
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
(1.06
|
)
|
.85
|
|
(.37
|
)
|
.72
|
|
1.45
|
|
|
Total from Investment Operations
|
(.56
|
)
|
1.40
|
|
.24
|
|
1.33
|
|
1.90
|
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.50
|
)
|
(.56
|
)
|
(.61
|
)
|
(.62
|
)
|
(.45
|
)
|
|
Net asset value, end of period
|
13.22
|
|
14.28
|
|
13.44
|
|
13.81
|
|
13.10
|
|
|
Total Return (%)
|
(4.15
|
)
|
10.59
|
|
1.93
|
|
10.35
|
|
16.46
|
c
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.72
|
|
.73
|
|
.71
|
|
.71
|
|
.96
|
d
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.45
|
|
.45
|
|
.45
|
|
.46
|
|
.45
|
d
|
|
Ratio of interest and expense related
|
|
|
|
|
|
|
|
|
|
|
|
to floating rate notes issued
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
e
|
—
|
|
—
|
|
.00
|
e
|
—
|
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
3.57
|
|
3.97
|
|
4.63
|
|
4.56
|
|
4.91
|
d
|
|
Portfolio Turnover Rate
|
34.19
|
|
22.11
|
|
22.31
|
|
20.53
|
|
31.77
|
|
|
Net Assets, end of period ($ x 1,000)
|
13,365
|
|
12,340
|
|
5,495
|
|
8,146
|
|
86
|
|
|
|
|
|
a
|
From December 15, 2008 (commencement of initial offering) to August 31, 2009.
|
|
b
|
Based on average shares outstanding at each month end.
|
|
c
|
Not annualized.
|
|
d
|
Annualized.
|
|
e
|
Amount represents less than .01%.
|
See notes to financial statements.
The Fund
49
FINANCIAL HIGHLIGHTS
(continued)
|
|
|
|
|
|
Period Ended
|
|
|
Class Y Shares
|
August 31, 2013
a
|
|
|
Per Share Data ($):
|
|
|
|
Net asset value, beginning of period
|
13.70
|
|
|
Investment Operations:
|
|
|
|
Investment income—net
b
|
.09
|
|
|
Net realized and unrealized
|
|
|
|
gain (loss) on investments
|
(.48
|
)
|
|
Total from Investment Operations
|
(.39
|
)
|
|
Distributions:
|
|
|
|
Dividends from investment income—net
|
(.09
|
)
|
|
Net asset value, end of period
|
13.22
|
|
|
Total Return (%)
c
|
(2.86
|
)
|
|
Ratios/Supplemental Data (%):
|
|
|
|
Ratio of total expenses to average net assets
d
|
.74
|
|
|
Ratio of net expenses to average net assets
d
|
.45
|
|
|
Ratio of interest and expense related to
|
|
|
|
floating rate notes issued to average net assets
d
|
.00
|
e
|
|
Ratio of net investment income to average net assets
d
|
4.13
|
|
|
Portfolio Turnover Rate
|
34.19
|
|
|
Net Assets, end of period ($ x 1,000)
|
1
|
|
|
|
|
|
a
|
From July 1, 2013 (commencement of initial offering) to August 31, 2013.
|
|
b
|
Based on average shares outstanding.
|
|
c
|
Not annualized.
|
|
d
|
Annualized.
|
|
e
|
Amount represents less than .01%.
|
See notes to financial statements.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
Class Z Shares
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
14.28
|
|
13.44
|
|
13.82
|
|
13.11
|
|
13.23
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
a
|
.50
|
|
.55
|
|
.61
|
|
.62
|
|
.62
|
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
(1.06
|
)
|
.84
|
|
(.39
|
)
|
.70
|
|
(.12
|
)
|
|
Total from Investment Operations
|
(.56
|
)
|
1.39
|
|
.22
|
|
1.32
|
|
.50
|
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.50
|
)
|
(.55
|
)
|
(.60
|
)
|
(.61
|
)
|
(.62
|
)
|
|
Net asset value, end of period
|
13.22
|
|
14.28
|
|
13.44
|
|
13.82
|
|
13.11
|
|
|
Total Return (%)
|
(4.12
|
)
|
10.54
|
|
1.80
|
|
10.34
|
|
4.12
|
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.72
|
|
.76
|
|
.75
|
|
.74
|
|
.77
|
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.49
|
|
.50
|
|
.50
|
|
.48
|
|
.45
|
|
|
Ratio of interest and expense related
|
|
|
|
|
|
|
|
|
|
|
|
to floating rate notes issued
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
b
|
—
|
|
—
|
|
.00
|
b
|
—
|
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
3.53
|
|
3.98
|
|
4.60
|
|
4.60
|
|
4.97
|
|
|
Portfolio Turnover Rate
|
34.19
|
|
22.11
|
|
22.31
|
|
20.53
|
|
31.77
|
|
|
Net Assets, end of period ($ x 1,000)
|
201,872
|
|
238,329
|
|
225,584
|
|
246,699
|
|
232,390
|
|
|
|
|
|
a
|
Based on average shares outstanding at each month end.
|
|
b
|
Amount represents less than .01%.
|
See notes to financial statements.
The Fund
51
NOTES TO FINANCIAL STATEMENTS
NOTE 1—Significant Accounting Policies:
Dreyfus AMT-Free Municipal Bond Fund (the “fund”) is a separate non-diversified series of Dreyfus Municipal 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 four series, including the fund.The fund’s investment objective is to seek as high a level of current income exempt from federal income tax as is consistent with the preservation of capital.The Dreyfus Corporation (the “Manager” or “Dreyfus”), a wholly-owned subsidiary ofThe Bank of NewYork Mellon Corporation (“BNY Mellon”), serves as the fund’s investment adviser.
As of the close of business on April 12, 2013, pursuant to an Agreement and Plan of Reorganization previously approved by the Company’s Board of Directors (the “Board”), all of the assets, subject to the liabilities, of Dreyfus State Municipal Bond Funds, Dreyfus Maryland Fund (“Maryland Fund”) were transferred to the fund in exchange for corresponding classes of shares of Common Stock of the fund of equal value.The purpose of the transaction was to combine two funds with comparable investment objectives and strategies. Shareholders of Class A and Class C shares of Maryland Fund received Class A and Class C shares of the fund, respectively, in each case in an amount equal to the aggregate net asset value of their investment in Maryland Fund at the time of the exchange.The exchange ratio for each class of shares was as follows: Class A—.87 to 1 and Class C—.87 to 1.The net asset value of the fund’s shares on the close of business April 12, 2013, after the reorganization was $14.36 for Class A and $14.36 for Class C, and a total of 10,157,666 Class A and 383,790 Class C shares were issued to shareholders of Maryland Fund in the exchange
The net unrealized appreciation on investments and net assets prior to the acquisition as of the merger date for Maryland Fund and the fund were as follows:
|
|
|
|
|
|
Unrealized
|
|
|
|
Appreciation ($)
|
Net Assets ($)
|
|
Maryland Fund
|
5,998,446
|
151,375,304
|
|
Dreyfus AMT-Free Municipal Bond Fund
|
51,012,639
|
564,282,963
|
|
Total
|
57,011,085
|
715,658,267
|
52
As of the close of business on April 19, 2013, pursuant to an Agreement and Plan of Reorganization previously approved by the Board, all of the assets, subject to the liabilities, of Dreyfus State Municipal Bond Funds, Dreyfus Minnesota Fund (“Minnesota Fund”) were transferred to the fund in exchange for corresponding classes of shares of Common Stock of the fund of equal value.The purpose of the transaction was to combine two funds with comparable investment objectives and strategies. Shareholders of Class A and Class C shares of Minnesota Fund received Class A and Class C shares of the fund, respectively, in each case in an amount equal to the aggregate net asset value of their investment in Minnesota Fund at the time of the exchange. The exchange ratio for each class of shares was as follows: Class A—1.06 to 1 and Class C—1.07 to 1.The net asset value of the fund’s shares on the close of business April 19, 2013, after the reorganization was $14.37 for Class A and $14.37 for Class C, and a total of 6,701,400 Class A and 390,610 Class C shares were issued to shareholders of Minnesota Fund in the exchange
The net unrealized appreciation on investments and net assets prior to the acquisition as of the merger date for Minnesota Fund and the fund were as follows:
|
|
|
|
|
|
Unrealized
|
|
|
|
Appreciation ($)
|
Net Assets ($)
|
|
Minnesota Fund
|
6,874,964
|
101,912,174
|
|
Dreyfus AMT-Free Municipal Bond Fund
|
57,653,293
|
715,768,906
|
|
Total
|
64,528,257
|
817,681,080
|
As of the close of business on April 26, 2013, pursuant to an Agreement and Plan of Reorganization previously approved by the Board, all of the assets, subject to the liabilities, of Dreyfus State Municipal Bond Funds, Dreyfus Ohio Fund (“Ohio Fund”) were transferred to the fund in exchange for corresponding classes of shares of Common Stock of the fund of equal value.The purpose of the transaction was to combine two funds with comparable investment objectives and strategies. Shareholders of Class A and Class C shares of Ohio Fund received Class A and Class C shares of the fund, respectively, in each case in an amount equal to the aggregate net asset value of their investment in Ohio Fund at the time of the exchange.The exchange ratio for each class of shares
The Fund
53
NOTES TO FINANCIAL STATEMENTS
(continued)
was as follows: Class A—.89 to 1 and Class C—.89 to 1.The net asset value of the fund’s shares on the close of business April 26, 2013, after the reorganization was $14.37 for Class A and $14.37 for Class C, and a total of 8,802,279 Class A and 442,809 Class C shares were issued to shareholders of Ohio Fund in the exchange.
The net unrealized appreciation on investments and net assets prior to the acquisition as of the merger date for Ohio Fund and the fund were as follows:
|
|
|
|
|
|
Unrealized
|
|
|
|
Appreciation ($)
|
Net Assets ($)
|
|
Ohio Fund
|
10,356,593
|
132,851,904
|
|
Dreyfus AMT-Free Municipal Bond Fund
|
64,723,786
|
816,476,259
|
|
Total
|
75,080,379
|
949,328,163
|
Assuming the mergers of Maryland Fund, Minnesota Fund and Ohio Fund had been completed on September 1, 2012, the fund’s pro forma results in the Statement of Operations during the period ended August 31, 2013 would have been as follows:
|
|
|
|
|
|
Net investment income
|
|
$30,938,466
1
|
|
|
Net realized and unrealized
|
|
|
|
|
gain (loss) on investments
|
|
$(71,968,148
|
)
2
|
|
Net increase (decrease) in net assets
|
|
|
|
|
resulting from operations
|
|
$(41,029,682
|
)
|
|
|
|
|
1
|
$23,103,441 as reported in the Statement of Operations plus $2,980,453 Maryland Fund,
|
|
|
$2,088,801 Minnesota Fund and $2,765,771 Ohio Fund pre-merger.
|
|
2
|
$(71,605,264) as reported in the Statement of Operations plus $(389,656) Maryland Fund,
|
|
|
$(276,631) Minnesota Fund and $303,403 Ohio Fund pre-merger.
|
Because the combined funds have been managed as a single integrated fund since the mergers were completed, it is not practicable to separate the amounts of revenue and earnings of Maryland Fund, Minnesota Fund and Ohio Fund that have been included in the fund’s Statement of Operations during the period ended August 31, 2013.
At a meeting held on April 29, 2013, the Board approved, effective July 1, 2013: (a) for the fund to offer Class Y shares; and, (b) an increase in the authorized shares of the fund from 900 million to 1 billion and authorized 100 million Class Y shares.
54
MBSC Securities Corporation (the “Distributor”), a wholly-owned subsidiary of the Manager, is the distributor of the fund’s shares.The fund is authorized to issue one billion shares of $.001 par value Common Stock.The fund currently offers five classes of shares: Class A (200 million shares authorized), Class C (200 million shares authorized), Class I (100 million shares authorized), Class Y (100 million shares authorized) and Class Z (400 million shares authorized). Class A shares generally are subject to a sales charge imposed at the time of purchase. Class C shares are subject to a contingent deferred sales charge (“CDSC”) imposed on Class C shares redeemed within one year of purchase. Class I shares are sold at net asset value per share only to institutional investors. Class Y shares are sold at net asset value per share to certain investors. Class Z shares are closed to new investors. Other differences between the classes include the services offered to and the expenses borne by each class, the allocation of certain transfer agency costs and certain voting rights. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains or losses on investments are allocated to each class of shares based on its relative net assets.
The sales charge may be reduced or waived for certain purchases of Class A shares. Effective April 1, 2013, pursuant to new/modified front-end sales charge waivers, Class A shares of the fund may be purchased at net asset value without payment of a sales charge by (a) investors who participate in a self-directed investment brokerage account program offered by financial intermediaries that have entered into an agreement with the fund’s Distributor (financial intermediaries offering self-directed investment brokerage accounts may or may not charge their customers a transaction fee) and (b) investors who purchase Class A shares directly through the fund’s Distributor, and either (i) have, or whose spouse or minor children have, beneficially owned shares and continuously maintained an open account with the Distributor in a Dreyfus-managed fund since on or before February 28, 2006, or (ii) such purchase is for a self-directed investment account that may or may not be subject to a transaction fee.
The Fund
55
NOTES TO FINANCIAL STATEMENTS
(continued)
As of August 31, 2013, MBC Investments Corp., an indirect subsidiary of BNY Mellon held all of the Class Y shares of the fund.
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification is the exclusive reference of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal laws are also sources of authoritative GAAP for SEC registrants. The fund’s financial statements are prepared in accordance with GAAP, which may require the use of management estimates and assumptions.Actual results could differ from those estimates.
The Company enters into contracts that contain a variety of indemnifications.The fund’s maximum exposure under these arrangements is unknown.The fund does not anticipate recognizing any loss related to these arrangements.
(a) Portfolio valuation:
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). GAAP establishes a fair value hierarchy that pri-oritizes the inputs of valuation techniques used to measure fair value.This hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Additionally, GAAP provides guidance on determining whether the volume and activity in a market has decreased significantly and whether such a decrease in activity results in transactions that are not orderly. GAAP requires enhanced disclosures around valuation inputs and techniques used during annual and interim periods.
56
Various inputs are used in determining the value of the fund’s investments relating to fair value measurements.These inputs are summarized in the three broad levels listed below:
Level 1
—unadjusted quoted prices in active markets for identical investments.
Level 2
—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.).
Level 3
—significant unobservable inputs (including the fund’s own assumptions in determining the fair value of investments).
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques used to value the fund’s investments are as follows:
Investments in securities are valued each business day by an independent pricing service (the “Service”) approved by the Board. 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 the following: yields or prices of municipal securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. All of the preceding securities are categorized within Level 2 of the fair value hierarchy. Investments in swap transactions are valued each business day by the Service. Swaps are valued by the Service by using a swap pricing model which incor-
The Fund
57
NOTES TO FINANCIAL STATEMENTS
(continued)
porates among other factors, default probabilities, recovery rates, credit curves of the underlying issuer and swap spreads on interest rates and are generally categorized within Level 2 of the fair value hierarchy.
The Service’s procedures are reviewed by Dreyfus under the general supervision of the Board.
When market quotations or official closing prices are not readily available, or are determined not to reflect accurately fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the fund calculates its net asset value, the fund may value these investments at fair value as determined in accordance with the procedures approved by the Board. Certain factors may be considered when fair valuing investments such as: fundamental analytical data, the nature and duration of restrictions on disposition, an evaluation of the forces that influence the market in which the securities are purchased and sold, and public trading in similar securities of the issuer or comparable issuers.These securities are either categorized within Level 2 or 3 depending on the relevant inputs used.
For restricted securities where observable inputs are limited, assumptions about market activity and risk are used and are categorized within Level 3 of the fair value hierarchy.
The following is a summary of the inputs used as of August 31, 2013 in valuing the fund’s investments:
|
|
|
|
|
|
|
|
|
|
|
Level 2—Other
|
|
Level 3—
|
|
|
|
|
Level 1—
|
Significant
|
|
Significant
|
|
|
|
|
Unadjusted
|
Observable
|
|
Unobservable
|
|
|
|
Quoted Prices
|
Inputs
|
|
Inputs
|
Total
|
|
|
Assets ($)
|
|
|
|
|
|
|
|
Investments in Securities:
|
|
|
|
|
|
|
Municipal Bonds
|
—
|
822,429,707
|
|
1,130,246
|
823,559,953
|
|
|
Liabilities ($)
|
|
|
|
|
|
|
|
Floating Rate Notes
†
|
—
|
(7,500,000
|
)
|
-
|
(7,500,000
|
)
|
|
|
|
|
†
|
Certain of the fund’s liabilities are held at carrying amount, which approximates fair value for
|
|
|
financial reporting purposes.
|
58
At August 31, 2013, there were no transfers between Level 1 and Level 2 of the fair value hierarchy.
The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value:
|
|
|
|
|
|
Municipal Bonds ($)
|
|
|
Balance as of 8/31/2012
|
—
|
|
|
Purchases
|
—
|
|
|
Sales
|
—
|
|
|
Realized gain (loss)
|
—
|
|
|
Change in unrealized appreciation (depreciation)
|
(283,754
|
)
|
|
Transfers into Level 3
†
|
1,414,000
|
|
|
Transfers out of Level 3
|
—
|
|
|
Balance as of 8/31/2013
|
1,130,246
|
|
|
The amount of total gains (losses) for the period
|
|
|
|
included in earnings attributable to the change in
|
|
|
|
unrealized gains (losses) relating to investments
|
|
|
|
still held at 8/31/2013
|
(283,754
|
)
|
|
|
|
|
†
|
Transfers into or out of Level 3 represent the value at the date of transfer.The transfer into Level
|
|
|
3 for the current period was due to the lack of observable inputs following the issuer’s default.
|
(b) Securities transactions and investment income:
Securities transactions are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the identified cost basis. Interest income, adjusted for accretion of discount and amortization of premium on investments, is earned from settlement date and recognized on the accrual basis. Securities purchased or sold on a when issued or delayed delivery basis may be settled a month or more after the trade date.
(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 gains, 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 gains can be offset by capital loss carry-
The Fund
59
NOTES TO FINANCIAL STATEMENTS
(continued)
overs, it is the policy of the fund not to distribute such gains. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP.
(d) Federal income taxes:
It is the policy of the fund to continue to qualify as a regulated investment company, which can distribute tax-exempt dividends, by complying with the applicable provisions of the Code, and to make distributions of income and net realized capital gain sufficient to relieve it from substantially all federal income and excise taxes.
As of and during the period ended August 31, 2013, the fund did not have any liabilities for any uncertain tax positions.The fund recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense in the Statement of Operations. During the period, the fund did not incur any interest or penalties.
Each tax year in the four-year period ended August 31, 2013 remains subject to examination by the Internal Revenue Service and state taxing authorities.
At August 31, 2013, the components of accumulated earnings on a tax basis were as follows: undistributed tax-exempt income $639,255, accumulated capital losses $10,802,160 and unrealized depreciation $1,934,547. In addition, the fund had $1,902,304 of capital losses realized after October 31, 2012, which were deferred for tax purposes to the first day of the following fiscal year.
Under the Regulated Investment Company Modernization Act of 2010 (the “2010 Act”), the fund is permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 (“post-enactment losses”) for an unlimited period. Furthermore, post-enactment capital loss carryovers retain their character as either short-term or long-term capital losses rather than short-term as they were under previous statute.The 2010 Act requires post-enactment losses to be utilized before the utilization of losses incurred in taxable years prior to the effective date of the 2010 Act (“pre-enactment losses”).As a result of this ordering rule, pre-enactment losses may be more likely to expire unused.
60
The accumulated capital loss carryover is available for federal income tax purposes to be applied against future net realized capital gains, if any, realized subsequent to August 31, 2013. If not applied, $3,176,230 of the carryover expires in fiscal year 2017, $5,287,194 expires in fiscal year 2018 and $2,338,736 expires in fiscal year 2019.
The tax character of distributions paid to shareholders during the fiscal periods ended August 31, 2013 and August 31, 2012 were as follows: tax-exempt income $22,811,873 and $20,061,039, and ordinary income $50,045 and $79,210, respectively.
During the period ended August 31, 2013, as a result of permanent book to tax differences, primarily due to the tax treatment for amortization adjustments, dividend reclassification and a capital loss carryover from fund mergers, the fund decreased accumulated undistributed investment income-net by $154,872, decreased accumulated net realized gain (loss) on investments by $4,282,014 and increased paid-in capital by $4,436,886. Net assets and net asset value per share were not affected by this reclassification.
(e) Accounting Pronouncement:
In January 2013, FASB issued Accounting Standards Update No. 2013-01 (“ASU 2013-01”), “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”, which replaced Accounting Standards Update No. 2011-11 (“ASU 2011-11”), “Disclosures about Offsetting Assets and Liabilities”. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 was intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. ASU 2013-01 limits the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to enforceable master netting arrangements (“MNA”) or similar agreements. Management is currently evaluating the application of ASU 2013-01 and its impact on the fund’s financial statements.
The Fund
61
NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 2—Bank Lines of Credit:
The fund participates with other Dreyfus-managed funds in a $210 million unsecured credit facility led by Citibank, N.A. and a $300 million unsecured credit facility provided by The Bank of New York Mellon, a subsidiary of BNY Mellon and an affiliate of Dreyfus (each, a “Facility”), each to be utilized primarily for temporary or emergency purposes, including the financing of redemptions. Prior to October 10, 2012, the unsecured credit facility with Citibank, N.A. was $225 million. In connection therewith, the fund has agreed to pay its pro rata portion of commitment fees for each Facility. Interest is charged to the fund based on rates determined pursuant to the terms of the respective Facility at the time of borrowing.
The average amount of borrowings outstanding under the Facilities during the period ended August 31, 2013, was approximately $3,900 with a related weighted average annualized interest rate of 1.14%.
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 the value of the fund’s average daily net assets and is payable monthly. The Manager has contractually agreed, from September 1, 2012 through July 1, 2014, to waive receipt of its fees and/or assume the direct expenses of the fund, so that the expenses of none of the classes (excluding Rule 12b-1 Distribution Plan fees, Shareholder Services Plan fees, taxes, interest expense, brokerage commissions, commitment fees on borrowings and extraordinary expenses) exceed .45% of the value of the average daily net assets of their class.The Manager may terminate this agreement upon at least 90 days prior notice to shareholders, but has committed not to do so until at least July 1, 2014.The reduction in expenses, pursuant to the agreement, amounted to $1,724,360 during the period ended August 31, 2013.
62
During the period ended August 31, 2013, the Distributor retained $40,198 from commissions earned on sales of the fund’s Class A shares and $6,476 from CDSCs on redemptions of the fund’s Class C shares.
(b)
Under the Distribution Plan adopted pursuant to Rule 12b-1 under the Act, Class C shares pay the Distributor for distributing its shares at an annual rate of .75% of the value of its average daily net assets. During the period ended August 31, 2013, Class C shares were charged $207,431 pursuant to the Distribution Plan.
(c)
Under the Shareholder Services Plan, Class A and Class C shares pay the Distributor at an annual rate of .25% 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 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 (securities dealers, financial institutions or other industry professionals) with respect to these services. The Distributor determines the amounts to be paid to Service Agents. During the period ended August 31, 2013, Class A and Class C shares were charged $1,014,955 and $69,144, respectively, pursuant to the Shareholder Services Plan.
Under the Shareholder Services Plan with respect to Class Z (“Class Z Shareholder Services Plan”), Class Z shares reimburse the Distributor an amount not to exceed an annual rate of .25% of the value of Class Z shares’ 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 Class Z shares, providing reports and other information, and services related to the maintenance of Class Z shareholder accounts. During the period ended August 31, 2013, Class Z shares were charged $98,125 pursuant to the Class Z Shareholder Services Plan.
The Fund
63
NOTES TO FINANCIAL STATEMENTS
(continued)
The fund has arrangements with the transfer agent and the custodian whereby the fund may receive earnings credits when positive cash balances are maintained, which are used to offset transfer agency and custody fees. For financial reporting purposes, the fund includes net earnings credits as an expense offset in the Statement of Operations.
The fund compensates DreyfusTransfer, Inc., a wholly-owned subsidiary of the Manager, under a transfer agency agreement for providing transfer agency services for the fund and cash management services related to fund subscriptions and redemptions. During the period ended August 31, 2013, the fund was charged $164,772 for transfer agency services and $4,615 for cash management services. These fees are included in Shareholder servicing costs in the Statement of Operations. Cash management fees were partially offset by earnings credits of $529.
The fund compensatesThe Bank of NewYork Mellon under a custody agreement for providing custodial services for the fund. During the period ended August 31, 2013, the fund was charged $79,900 pursuant to the custody agreement.
The fund compensates The Bank of New York Mellon under a cash management agreement for performing certain cash management services related to fund subscriptions and redemptions.The Bank of New York Mellon also provides shareholder redemption draft processing services. During the period ended August 31, 2013, the fund was charged $2,275 pursuant to the cash management agreement, which is included in Shareholder servicing costs in the Statement of Operations. These fees were partially offset by earnings credits of $11.
During the period ended August 31, 2013, the fund was charged $8,973 for services performed by the Chief Compliance Officer and his staff.
The components of “Due to The Dreyfus Corporation and affiliates” in the Statement of Assets and Liabilities consist of: management fees $430,003, Distribution Plan fees $19,518, Shareholder Services Plan
64
fees $144,012, custodian fees $41,793, Chief Compliance Officer fees $6,172 and transfer agency fees $67,239, which are offset against an expense reimbursement currently in effect in the amount of $204,127.
(d)
Each Board member also serves as a Board member of other funds within the Dreyfus complex. Annual retainer fees and attendance fees are allocated to each fund based on net assets.
NOTE 4—Securities Transactions:
The aggregate amount of purchases and sales of investment securities, excluding short-term securities and swap transactions during the period ended August 31, 2013, amounted to $554,542,697 and $229,429,655, respectively.
Inverse Floater Securities:
The fund participates in secondary inverse floater structures in which fixed-rate, tax-exempt municipal bonds are transferred to a trust.The trust subsequently issues two or more variable rate securities that are collateralized by the cash flows of the fixed-rate, tax-exempt municipal bonds. One or more of these variable rate securities pays interest based on a short-term floating rate set by a remarketing agent at predetermined intervals.A residual interest tax-exempt security is also created by the trust, which is transferred to the fund, and is paid interest based on the remaining cash flow of the trust, after payment of interest on the other securities and various expenses of the trust.
The fund accounts for the transfer of bonds to the trust as secured borrowings, with the securities transferred remaining in the fund’s investments, and the related floating rate certificate securities reflected as fund liabilities in the Statement of Assets and Liabilities.
The average amount of borrowings outstanding under the inverse floater structure during the period ended August 31, 2013, was approximately $1,250,000, with a related weighted average annualized interest rate of .66%.
The Fund
65
NOTES TO FINANCIAL STATEMENTS
(continued)
Derivatives:
A derivative is a financial instrument whose performance is derived from the performance of another asset. Each type of derivative instrument that was held by the fund during the period ended August 31, 2013 is discussed below.
Swap Transactions:
The fund enters 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 these agreements to hedge certain market or interest rate risks, to manage the interest rate sensitivity (sometimes called duration) of fixed income securities, to provide a substitute for purchasing or selling particular securities or to increase potential returns.
The fund accrues for the interim payments on swap agreements on a daily basis, with the net amount recorded within unrealized appreciation (depreciation) on swap agreements in the Statement of Assets and Liabilities. Once the interim payments are settled in cash, the net amount is recorded as a realized gain (loss) on swaps, in addition to realized gain (loss) recorded upon the termination of swap agreements in the Statement of Operations. Upfront payments made and/or received by the fund, are recorded as an asset and/or liability in the Statement of Assets and Liabilities and are recorded as a realized gain or loss ratably over the agreement’s term/event with the exception of forward starting interest rate swaps which are recorded as realized gains or losses on the termination date. Fluctuations in the value of swap agreements are recorded for financial statement purposes as unrealized appreciation or depreciation on swap transactions.
Interest Rate Swaps:
Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional principal amount. The fund may elect to pay a fixed rate and receive a floating rate, or receive a fixed rate and pay a floating rate on a notional principal amount.The net interest received or paid on interest rate swap agreements is included within realized gain (loss) on swap agreements in the
66
Statement of Operations. Interest rate swap agreements are subject to general market risk, liquidity risk, counterparty risk and interest rate risk. For financial reporting purposes, forward rate agreements are classified as interest rate swaps.At August 31, 2013, there were no interest rate swap agreements outstanding.
The following summarizes the average notional value of swap agreements outstanding during the period ended August 31, 2013:
The following summarizes the average notional value of swap agreements outstanding during the period ended August 31, 2013:
|
|
|
|
|
Average Notional Value ($)
|
|
Interest rate swap agreements
|
31,282,692
|
At August 31, 2013, the cost of investments for federal income tax purposes was $817,994,500; accordingly, accumulated net unrealized depreciation on investments was $1,934,547, consisting of $28,828,189 gross unrealized appreciation and $30,762,736 gross unrealized depreciation.
The Fund
67
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Dreyfus AMT-Free Municipal Bond Fund
We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Dreyfus AMT-Free Municipal Bond Fund (one of the series comprising Dreyfus Municipal Funds, Inc.) as of August 31, 2013, 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 the 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 the standards of the Public Company Accounting Oversight Board (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.We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2013 by correspondence with the custodian and others. 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 AMT-Free Municipal Bond Fund at August 31, 2013, 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 U.S. generally accepted accounting principles.
New York, New York
October 28, 2013
68
IMPORTANT TAX INFORMATION
(Unaudited)
In accordance with federal tax law, the fund hereby reports all the dividends paid from investment income-net during its fiscal year ended August 31, 2013 as “exempt-interest dividends” (not generally subject to regular federal income tax), except $50,045 that is being reported as an ordinary income distribution for reporting purposes.
Where required by federal tax law rules, shareholders will receive notification of their portion of the fund’s taxable ordinary dividends (if any), capital gains distributions (if any) and tax-exempt dividends paid for the 2013 calendar year on Form 1099-DIV, which will be mailed in early 2014.
The Fund
69
DISCUSSION OF FUND PERFORMANCE
For the period of September 1, 2012, through August 31, 2013, as provided by Colleen Meehan, Senior Portfolio Manager
Fund and Market Performance Overview
For the 12-month period ended August 31, 2013, Dreyfus BASIC Municipal Money Market Fund produced a yield of 0.00%.Taking into account the effects of compounding, the fund produced an effective yield of 0.00%.
1
Yields of municipal money market instruments stayed near historical lows throughout the reporting period. Despite rising long-term interest rates and more robust economic growth, short-term interest rates remained anchored by an overnight federal funds rate between 0% and 0.25%.
The Fund’s Investment Approach
The fund seeks as high a level of current income exempt from federal income taxes as is consistent with the preservation of capital and the maintenance of liquidity.To pursue its goal, the fund normally invests substantially all of its assets in short-term, high-quality municipal obligations that provide income exempt from federal income taxes.The fund may also invest in high-quality, short-term structured notes, which are derivative instruments whose value is tied to underlying municipal obligations.
Although the fund seeks to provide income exempt from federal income taxes, interest from some of its holdings may be subject to the federal alternative minimum tax. In addition, the fund may invest temporarily in high-quality, taxable money market instruments when the portfolio manager believes acceptable municipal obligations are not available for investment.
Gradual Economic Recovery Continues
The reporting period began in a slowly improving economic environment as U.S. GDP grew at a 1.1% annualized rate during the first quarter of 2013. Recovering labor and housing markets drove the domestic economy’s mild advance, but the positive impact of these factors was offset by significant cuts in government spending.The U.S. economy grew at a 2.5% annualized rate during the second quarter, fueled by gains in
The Fund
3
DISCUSSION OF FUND PERFORMANCE
(continued)
consumer spending, export activity, and real estate markets. In addition, the unemployment rate declined to a multi-year low of 7.3% by the reporting period’s end.
Longer term interest rates climbed over the reporting period’s second half as the recovery gained traction, but the Federal Reserve Board’s (the “Fed”) target for the overnight federal funds rate remained near historical lows, and the Fed indicated that rates were unlikely to change until the unemployment rate reaches 6.5%. However, the central bank adopted a more hawkish posture in May, when remarks by Fed Chairman Ben Bernanke were widely interpreted as a signal that the Fed would back away from its ongoing quantitative easing program sooner than expected.
In this environment, demand from individual investors remained focused on higher yielding, longer term municipal bonds. Demand for municipal securities also remained strong among nontraditional buyers, such as separately managed accounts and intermediate bond funds, due to attractive tax-exempt yields compared to taxable securities and narrow yield differences across the zero- to three-year maturity spectrum. Nonetheless, yields of high-quality, one-year municipal notes remained near historical lows over the reporting period. Moreover, rates on variable rate demand notes (“VRDNs”) remained steady amid robust demand from taxable money market funds seeking to comply with more stringent liquidity requirements from regulators and tax-exempt money market fund maintaining high levels of liquidity.
Despite a bankruptcy filing by the city of Detroit over the summer, municipal credit quality generally continued to improve as most states and local governments recovered gradually from the recession. For example, California’s fiscal condition improved after last fall’s approval of higher taxes by voters, and many issuers of revenue-backed municipal securities have reported higher revenues.
Credit Selection Remains Paramount
Most tax-exempt money market funds have maintained relatively short weighted average maturities compared to historical averages. Due to narrow yield differences along the money market’s maturity spectrum, as well as ongoing regulatory uncertainty, it has made little sense for fund managers to extend their weighted average maturities. The fund was no exception, and we maintained its weighted average maturity in a range that was consistent with industry averages.
4
In addition, careful and well-researched credit selection has remained paramount.As we have for some time, we have continued to favor state general obligation bonds; essential service revenue bonds backed by revenues from water, sewer, and electric facilities; certain local credits with strong financial positions and stable tax bases; and health care and education issuers with stable credit characteristics.We generally have shied away from instruments issued by localities that depend heavily on state aid.
Low Rates Likely to Persist
We remain cautiously optimistic regarding U.S. economic prospects as the United States and overseas markets continue to recover gradually from recession and various financial crises.While the Fed has indicated that it may begin to taper off its ongoing, open-ended quantitative easing program later this year, it also has made clear that short-term interest rates are likely to remain low for some time to come. Consequently, we believe that the prudent course continues to be an emphasis on preservation of capital and liquidity.
September 16, 2013
An investment in the fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
Short-term municipal securities holdings (as applicable), while rated in the highest rating category by one or more NRSRO (or unrated, if deemed of comparable quality by Dreyfus), involve credit and liquidity risks and risk of principal loss.
|
|
|
1 Effective yield is based upon dividends declared daily and reinvested monthly. Past performance is no guarantee of
|
|
future results.Yields fluctuate. Income may be subject to state and local taxes, and some income may be subject to the
|
|
federal alternative minimum tax (AMT) for certain investors.Yields provided reflect the absorption of certain fund
|
|
expenses by The Dreyfus Corporation, pursuant to an agreement in effect until such time as shareholders are given at
|
|
least 90 days’ notice and which Dreyfus has committed will remain in place until at least January 1, 2014. Had
|
|
these expenses not been absorbed, fund yields would have been lower, and in some cases, 7-day yields during the
|
|
reporting period would have been negative.
|
The Fund
5
UNDERSTANDING YOUR FUND’S EXPENSES
(Unaudited)
As a mutual fund investor, you pay ongoing expenses, such as management fees and other expenses. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds.You also may pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund’s prospectus or talk to your financial adviser.
Review your fund’s expenses
The table below shows the expenses you would have paid on a $1,000 investment in Dreyfus BASIC Municipal Money Market Fund from March 1, 2013 to August 31, 2013. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.
Expenses and Value of a $1,000 Investment
assuming actual returns for the six months ended August 31, 2013
|
|
|
|
|
Expenses paid per $1,000
†
|
$
|
1.26
|
|
Ending value (after expenses)
|
$
|
1,000.00
|
COMPARING YOUR FUND’S EXPENSES
WITH THOSE OF OTHER FUNDS
(Unaudited)
Using the SEC’s method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the table below shows your fund’s expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total cost) of investing in the fund with those of other funds.All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period.
Expenses and Value of a $1,000 Investment
assuming a hypothetical 5% annualized return for the six months ended August 31, 2013
|
|
|
|
|
Expenses paid per $1,000
†
|
$
|
1.28
|
|
Ending value (after expenses)
|
$
|
1,023.95
|
|
|
|
† Expenses are equal to the fund’s annualized expense ratio of .25%, multiplied by the average account value over the
|
|
period, multiplied by 184/365 (to reflect the one-half year period).
|
6
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2013
|
|
|
|
|
|
Cost
|
Value
|
|
Assets ($):
|
|
|
|
Investments in securities—See Statement of Investments
|
92,828,181
|
92,828,181
|
|
Cash
|
|
477,844
|
|
Interest receivable
|
|
56,018
|
|
Prepaid expenses
|
|
7,063
|
|
|
|
93,369,106
|
|
Liabilities ($):
|
|
|
|
Due to The Dreyfus Corporation and affiliates—Note 2(b)
|
|
20,957
|
|
Payable for investment securities purchased
|
|
2,313,546
|
|
Accrued expenses
|
|
56,668
|
|
|
|
2,391,171
|
|
Net Assets ($)
|
|
90,977,935
|
|
Composition of Net Assets ($):
|
|
|
|
Paid-in capital
|
|
90,977,935
|
|
Net Assets ($)
|
|
90,977,935
|
|
Shares Outstanding
|
|
|
|
(3 billion shares of $.001 par value Common Stock authorized)
|
|
90,977,935
|
|
Net Asset Value,
offering and redemption price per share ($)
|
|
1.00
|
|
|
|
See notes to financial statements.
|
|
|
The Fund
17
STATEMENT OF OPERATIONS
Year Ended August 31, 2013
|
|
|
|
|
Investment Income ($):
|
|
|
|
Interest Income
|
222,889
|
|
|
Expenses:
|
|
|
|
Management fee—Note 2(a)
|
432,429
|
|
|
Shareholder servicing costs—Note 2(b)
|
65,870
|
|
|
Professional fees
|
44,742
|
|
|
Registration fees
|
20,253
|
|
|
Custodian fees—Note 2(b)
|
11,727
|
|
|
Directors’ fees and expenses—Note 2(c)
|
7,802
|
|
|
Prospectus and shareholders’ reports
|
6,962
|
|
|
Miscellaneous
|
27,025
|
|
|
Total Expenses
|
616,810
|
|
|
Less—reduction in expenses due to undertakings—Note 2(a)
|
(393,862
|
)
|
|
Less—reduction in fees due to earnings credits—Note 2(b)
|
(69
|
)
|
|
Net Expenses
|
222,879
|
|
|
Investment Income—Net, representing net increase
|
|
|
|
in net assets resulting from operations
|
10
|
|
|
|
|
See notes to financial statements.
|
|
|
18
STATEMENT OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2013
|
|
2012
|
|
|
Operations ($):
|
|
|
|
|
|
Investment income—net
|
10
|
|
17
|
|
|
Net realized gain (loss) on investments
|
—
|
|
156
|
|
|
Net Increase (Decrease) in Net Assets
|
|
|
|
|
|
Resulting from Operations
|
10
|
|
173
|
|
|
Dividends to Shareholders from ($):
|
|
|
|
|
|
Investment income—net
|
(166
|
)
|
(17
|
)
|
|
Capital Stock Transactions
($1.00 per share):
|
|
|
|
|
|
Net proceeds from shares sold
|
23,098,572
|
|
18,841,621
|
|
|
Dividends reinvested
|
161
|
|
17
|
|
|
Cost of shares redeemed
|
(27,158,422
|
)
|
(72,530,103
|
)
|
|
Increase (Decrease) in Net Assets
|
|
|
|
|
|
from Capital Stock Transactions
|
(4,059,689
|
)
|
(53,688,465
|
)
|
|
Total Increase (Decrease) in Net Assets
|
(4,059,845
|
)
|
(53,688,309
|
)
|
|
Net Assets ($):
|
|
|
|
|
|
Beginning of Period
|
95,037,780
|
|
148,726,089
|
|
|
End of Period
|
90,977,935
|
|
95,037,780
|
|
|
|
|
See notes to financial statements.
|
|
|
|
|
The Fund
19
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,
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
1.00
|
|
1.00
|
|
1.00
|
|
1.00
|
|
1.00
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
|
.000
|
a
|
.000
|
a
|
.000
|
a
|
.000
|
a
|
.011
|
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.000
|
)
a
|
(.000
|
)
a
|
(.000
|
)
a
|
(.000
|
)
a
|
(.011
|
)
|
|
Net asset value, end of period
|
1.00
|
|
1.00
|
|
1.00
|
|
1.00
|
|
1.00
|
|
|
Total Return (%)
|
.00
|
b
|
.00
|
b
|
.00
|
b
|
.01
|
|
1.12
|
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.71
|
|
.70
|
|
.67
|
|
.62
|
|
.65
|
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.26
|
|
.25
|
|
.36
|
|
.40
|
|
.44
|
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
b
|
.00
|
b
|
.00
|
b
|
.02
|
|
1.15
|
|
|
Net Assets, end of period ($ x 1,000)
|
90,978
|
|
95,038
|
|
148,726
|
|
186,194
|
|
298,064
|
|
|
|
|
|
a
|
Amount represents less than $.001 per share.
|
|
b
|
Amount represents less than .01%.
|
See notes to financial statements.
20
NOTES TO FINANCIAL STATEMENTS
NOTE 1—Significant Accounting Policies:
Dreyfus BASIC Municipal Money Market Fund (the “fund”) is a separate non-diversified series of Dreyfus Municipal 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 three series including the fund.The fund’s investment objective is to seek as high a level of current income exempt from federal income tax as is consistent with the preservation of capital and maintenance of liquidity. The Dreyfus Corporation (the “Manager” or “Dreyfus”), a wholly-owned subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”), serves as the fund’s investment adviser. MBSC Securities 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.
It is the fund’s policy to maintain a continuous net asset value per share of $1.00; the fund has adopted certain investment, portfolio valuation and dividend and distribution policies to enable it to do so.There is no assurance, however, that the fund will be able to maintain a stable net asset value per share of $1.00.
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification is the exclusive reference of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal laws are also sources of authoritative GAAP for SEC registrants. The fund’s financial statements are prepared in accordance with GAAP, 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)
The Company enters into contracts that contain a variety of indemnifications.The fund’s maximum exposure under these arrangements is unknown.The fund does not anticipate recognizing any loss related to these arrangements.
(a) Portfolio valuation:
Investments in securities are valued at amortized cost in accordance with Rule 2a-7 under the Act. If amortized cost is determined not to approximate market value, the fair value of the portfolio securities will be determined by procedures established by and under the general supervision of the fund’s Board of Directors (the “Board”).
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). GAAP establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value.This hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Additionally, GAAP provides guidance on determining whether the volume and activity in a market has decreased significantly and whether such a decrease in activity results in transactions that are not orderly. GAAP requires enhanced disclosures around valuation inputs and techniques used during annual and interim periods.
Various inputs are used in determining the value of the fund’s investments relating to fair value measurements.These inputs are summarized in the three broad levels listed below:
Level 1
—unadjusted quoted prices in active markets for identical investments.
Level 2
—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.).
Level 3
—significant unobservable inputs (including the fund’s own assumptions in determining the fair value of investments).
22
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. For example, money market securities are valued using amortized cost, in accordance with rules under the Act. Generally, amortized cost approximates the current fair value of a security, but since the value is not obtained from a quoted price in an active market, such securities are reflected within Level 2 of the fair value hierarchy.
The following is a summary of the inputs used as of August 31, 2013 in valuing the fund’s investments:
|
|
|
|
|
Short-Term
|
|
Valuation Inputs
|
Investments ($)
†
|
|
Level 1—Unadjusted Quoted Prices
|
—
|
|
Level 2—Other Significant Observable Inputs
|
92,828,181
|
|
Level 3—Significant Unobservable Inputs
|
—
|
|
Total
|
92,828,181
|
|
|
|
|
†
|
See Statement of Investments for additional detailed categorizations.
|
At August 31, 2013, there were no transfers between Level 1 and Level 2 of the fair value hierarchy.
(b) Securities transactions and investment income:
Securities transactions are recorded on a trade date basis. Interest income, adjusted for accretion of discount and amortization of premium on investments, is earned from settlement date and is recognized on the accrual basis. Realized gains and losses from securities transactions are recorded on the identified cost basis. Cost of investments represents amortized cost.
(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 gains, 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 gains can be offset by capital loss carryovers, it is the policy of the fund not to distribute such gains.
The Fund
23
NOTES TO FINANCIAL STATEMENTS
(continued)
(d) Federal income taxes:
It is the policy of the fund to continue to qualify as a regulated investment company, which can distribute tax-exempt dividends, by complying with the applicable provisions of the Code, and to make distributions of income and net realized capital gain sufficient to relieve it from substantially all federal income and excise taxes.
As of and during the period ended August 31, 2013, the fund did not have any liabilities for any uncertain tax positions.The fund recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense in the Statement of Operations. During the period, the fund did not incur any interest or penalties.
Each tax year in the four-year period ended August 31, 2013 remains subject to examination by the Internal Revenue Service and state taxing authorities.
At August 31, 2013, the components of accumulated earnings on a tax basis were substantially the same as the cost for financial reporting purposes.
The tax character of distributions paid to shareholders during the fiscal periods ended August 31, 2013 and August 31, 2012 were as follows: tax-exempt income $10 and $17, and long-term capital gains $156 and $0, respectively.
During the period ended August 31, 2013, as a result of permanent book to tax differences, primarily due to dividend reclassification, the fund increased accumulated undistributed investment income-net by $156 and decreased accumulated net realized gain (loss) on investments by the same amount. Net assets and net asset value per share were not affected by this reclassification.
At August 31, 2013, the cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes (see the Statement of Investments).
24
NOTE 2—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 the value of the fund’s average daily net assets and is payable monthly.The Manager has contractually agreed, from September 1, 2012 through January 1, 2014, to waive receipt of its fees and/or assume the expenses of the fund so that annual fund operating expenses do not exceed .45% of the value of the fund’s average daily net assets.The Manager may terminate this agreement upon at least 90 days notice to shareholders, but has committed not to do so until at least January 1, 2014. The reduction in expenses, pursuant to the undertaking, amounted to $227,555 during the period ended August 31, 2013.
The Manager has also undertaken to waive receipt of the management fee and/or reimburse operating expenses in order to facilitate a daily yield at or above a certain level which may change from time to time. This undertaking is voluntary and not contractual, and may be terminated at any time. The reduction in expenses, pursuant to the undertaking, amounted to $166,307 during the period ended August 31, 2013.
(b)
Under the Shareholder Services Plan, the fund reimburses the Distributor an amount not to exceed an annual rate of .25% of the value of the fund’s average daily net assets for certain allocated expenses of providing personal services and/or maintaining shareholder accounts.The services provided may include personal services relating to shareholder accounts, such as answering shareholder inquiries regarding the fund and providing reports and other information, and services related to the maintenance of shareholder accounts. During the period ended August 31, 2013, the fund was charged $50,978 pursuant to the Shareholder Services Plan.
The Fund
25
NOTES TO FINANCIAL STATEMENTS
(continued)
The fund has arrangements with the transfer agent and the custodian whereby the fund may receive earnings credits when positive cash balances are maintained, which are used to offset transfer agency and custody fees. For financial reporting purposes, the fund includes net earnings credits as an expense offset in the Statement of Operations.
The fund compensates DreyfusTransfer, Inc., a wholly-owned subsidiary of the Manager, under a transfer agency agreement for providing transfer agency services for the fund and cash management services related to fund subscriptions and redemptions. During the period ended August 31, 2013, the fund was charged $15,033 for transfer agency services and $550 for cash management services. These fees are included in shareholder servicing costs in the Statement of Operations. Cash management fees were partially offset by earnings credits of $67.
The fund compensates The Bank of NewYork Mellon, a subsidiary of BNY Mellon and an affiliate of Dreyfus, under a custody agreement for providing custodial services for the fund. During the period ended August 31, 2013, the fund was charged $11,727 pursuant to the custody agreement.
The fund compensatesThe Bank of NewYork Mellon under a cash management agreement for performing certain cash management services related to fund subscriptions and redemptions.The Bank of New York Mellon also provides shareholder redemption draft processing services. During the period ended August 31, 2013, the fund was charged $294 pursuant to the cash management agreement, which is included in Shareholder servicing costs in the Statement of Operations. These fees were partially offset by earnings credits of $2.
During the period ended August 31, 2013, the fund was charged $8,973 for services performed by the Chief Compliance Officer and his staff.
26
The components of “Due to The Dreyfus Corporation and affiliates” in the Statement of Assets and Liabilities consist of: management fees $38,794, Shareholder Services Plan fees $4,000, custodian fees $3,956, Chief Compliance Officer fees $6,172 and transfer agency fees $3,485, which are offset against an expense reimbursement currently in effect in the amount of $35,450.
(c)
Each Board member also serves as a Board member of other funds within the Dreyfus complex. Annual retainer fees and attendance fees are allocated to each fund based on net assets.
NOTE 3— Securities Transactions:
The fund is permitted to purchase or sell securities from or to certain affiliated funds under specified conditions outlined in procedures adopted by the Board.The procedures have been designed to ensure that any purchase or sale of securities by the fund from or to another fund or portfolio that are, or could be, considered an affiliate by virtue of having a common investment adviser (or affiliated investment adviser), common Directors and/or common officers, complies with Rule 17a-7 under the Act. During the period ended August 31, 2013, the fund engaged in purchases and sales of securities pursuant to Rule 17a-7 under the Act amounting to $19,655,000 and $41,905,000, respectively.
The Fund
27
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Dreyfus BASIC Municipal Money Market Fund
We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Dreyfus BASIC Municipal Money Market Fund (one of the series comprising Dreyfus Municipal Funds, Inc.) as of August 31, 2013, 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 the financial highlights for each of the five years in the period then ended. 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 the standards of the Public Company Accounting Oversight Board (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.We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2013 by correspondence with the custodian and others.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 BASIC Municipal Money Market Fund at August 31, 2013, 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 five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
October 28, 2013
28
IMPORTANT TAX INFORMATION
(Unaudited)
In accordance with federal tax law, the fund hereby reports all the dividends paid from investment income-net during the fiscal year ended August 31, 2013 as “exempt-interest dividends” (not generally subject to regular federal income tax), except $156 that is being designated as a long-term capital gain distribution for reporting purposes. Where required by federal tax law rules, shareholders will receive notification of their portion of the fund’s exempt-interest dividends paid for the 2013 calendar year on Form 1099-DIV, which will be mailed in early 2014.
The Fund
29
DISCUSSION OF FUND PERFORMANCE
For the period of September 1, 2012, through August 31, 2013, as provided by Daniel Barton and Jeffrey Burger, Co-Primary Portfolio Managers
Fund and Market Performance Overview
For the 12-month period ended August 31, 2013, Dreyfus HighYield Municipal Bond Fund’s Class A shares achieved a –6.13% total return, Class C shares returned –6.82%, Class I shares returned –5.91%, Class Y shares returned -5.35%, and Class Z shares returned –6.05%.
1
The fund’s benchmark, the Barclays Municipal Bond Index (the “Index”), which, unlike the fund, does not include securities rated below investment grade, produced a total return of –3.70%.
2
Selling pressure stemming from investors’ changing interest-rate expectations during the final months of the reporting period sent the Index into negative territory for the reporting period overall.The fund produced lower returns than its benchmark, primarily due to its focus on lower rated and longer term securities, which lagged their investment-grade and shorter term counterparts.
The Fund’s Investment Approach
The fund primarily seeks high current income exempt from federal income tax. Secondarily, the fund may seek capital appreciation to the extent consistent with its primary goal.To pursue its goals, the fund normally invests at least 80% of its assets in municipal bonds that provide income exempt from federal income tax.The fund normally invests at least 50% of its assets in municipal bonds rated BBB/Baa or lower by independent rating agencies or the unrated equivalent as determined by Dreyfus. Municipal bonds rated below investment grade (BB/Ba or lower) are commonly known as “high yield” or “junk” bonds.The fund may invest up to 50% of its assets in higher-quality municipal bonds rated AAA/Aaa to A, or the unrated equivalent as determined by Dreyfus.
We focus on identifying undervalued sectors and securities and minimize the use of interest rate forecasting. The portfolio managers select municipal bonds for the fund’s portfolio by:
The Fund
3
DISCUSSION OF FUND PERFORMANCE
(continued)
-
Actively trading among various sectors, such as pre-refunded, general obligation,
and revenue, based on their apparent relative values.The fund seeks to invest in
several of these sectors.
Selling Pressure Intensified Late in Reporting Period
After an extended period of market support, municipal bonds encountered heightened volatility over the first eight months of 2013. The robust investor demand that had characterized much of 2012 failed to rematerialize, sending municipal bond yields higher despite a relatively meager supply of newly issued securities. Yields of U.S. Treasury securities also generally climbed in response to improved economic trends, putting additional pressure on municipal bond prices.
In late May, remarks by Federal Reserve Board Chairman Ben Bernanke were widely interpreted as a signal that the central bank would back away from its ongoing quantitative easing program sooner than many analysts had expected.This development sent longer term interest rates sharply higher, further eroding returns from municipal bonds. In July, a bankruptcy filing by a the city of Detroit also intensified selling pressure in the municipal bond market, causing the benchmark to end the reporting period with negative returns.
Despite the Detroit bankruptcy filing, credit conditions continued to improve for most states and municipalities in the recovering economy. For example, the State of California received credit-rating upgrades after voters approved a measure to raise certain taxes, and many issuers of revenue-backed bonds reported solid revenue growth.
Fund Strategies Produced Mixed Results
In this environment, high yield municipal bonds generally lagged those with investment-grade credit ratings, and longer term bonds produced lower returns than bonds with shorter term maturities.The fund encountered particular weakness among Puerto Rico bonds, which were hurt by local fiscal and economic concerns, and high yield securities backed by the states’ settlement of litigation with U.S. tobacco companies.Although the fund maintained a position in a Detroit revenue bond issue, we believe that the risk of default is low due to backing by a dedicated revenue stream from the city’s water and sewer facilities.
4
The fund achieved better results from bonds backed by industrial development projects, which benefited from robust demand from institutional investors seeking competitive yields.
At times during the reporting period, the fund successfully participated in tender option bond programs, a type of derivative instrument, to take advantage of higher long-term interest rates.
Finding Attractive Values Among Beaten Down Securities
High yield municipal bonds generally ended the reporting period with attractive valuations, suggesting that they may have been punished more severely than was warranted by underlying market fundamentals. Indeed, in our judgment, recent bouts of market volatility have provided compelling opportunities to purchase high yield securities at relatively low prices, which we expect to rise as investors refocus on underlying market and issuer fundamentals. Therefore, we believe we have positioned the fund for a rebound among high yield municipal bonds through an emphasis on lower rated and longer term securities.
September 16, 2013
Bond funds are subject generally to interest rate, credit, liquidity and market risks, to varying degrees, all of which are more fully described in the fund’s prospectus. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes, and rate increases can cause price declines.
High yield bonds are subject to increased credit risk and are considered speculative in terms of the issuer’s perceived ability to continue making interest payments on a timely basis and to repay principal upon maturity.
|
|
|
1 Total return includes reinvestment of dividends and any capital gains paid. It does not include the maximum initial
|
|
sales charge in the case of Class A shares, and the applicable contingent deferred sales charge imposed on redemptions
|
|
in the case of Class C shares. Class Z, Class I and ClassY shares are not subject to any initial or deferred sales
|
|
charge. 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. Income may be subject to state and
|
|
local taxes, and some income may be subject to the federal alternative minimum tax (AMT) for certain investors.
|
|
Capital gains, if any, are fully taxable.The total return figures presented for ClassY shares of the fund reflect the
|
|
performance since 7/1/13 (the inception date for ClassY shares).
|
|
2 SOURCE: LIPPER INC. — Reflects reinvestment of dividends and, where applicable, capital gain distributions.
|
|
The Barclays Municipal Bond Index is a widely accepted, unmanaged total return performance benchmark for the
|
|
long-term, investment-grade, tax-exempt bond market. Index returns do not reflect fees and expenses associated with
|
|
operating a mutual fund. Investors cannot invest directly in any index.
|
The Fund
5
FUND PERFORMANCE
|
|
|
|
†
|
Source: Lipper Inc.
|
|
††
|
The total return figures presented for Class A and Class C shares of the fund reflect the performance of the fund’s
|
|
|
Class Z shares for the period prior to 3/15/07 (the inception date for Class A and Class C shares), adjusted to
|
|
|
reflect the applicable sales load for Class A shares.
|
|
|
The total return figures presented for Class I shares of the fund reflect the performance of the fund’s Class Z shares
|
|
|
for the period prior to 12/15/08 (the inception date for Class I shares).
|
|
|
The total return figures presented for ClassY shares of the fund reflect the performance of the fund’s Class Z shares
|
|
|
for the period prior to 7/1/13 (the inception date for ClassY shares).
|
Past performance is not predictive of future performance.
The above graph compares a $10,000 investment made in each of the Class A, Class C, Class I, ClassY and Class Z shares of Dreyfus HighYield Municipal Bond Fund on 9/30/05 (inception date) to a $10,000 investment made in the Barclays Municipal Bond Index (the “Index”) on that date.All dividends and capital gain distributions are reinvested. On April 29, 2013, the Board authorized the fund to offer ClassY shares, as a new class of shares, to certain investors, including certain institutional investors. On July 1, 2013, ClassY shares were offered at net asset value and are not subject to certain fees, including Distribution Plan and Shareholder Services Plan fees.
The fund’s performance shown in the line graph above takes into account the maximum initial sales charge on Class A shares and all other applicable fees and expenses on all classes.The fund invests primarily in municipal securities.The Index is an unmanaged total return performance benchmark for the long-term, investment-grade, tax-exempt bond market. Unlike a mutual fund, the Index is not subject to charges, fees and other expenses. Investors cannot invest directly in any index. 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 8/31/13
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
From
|
|
|
|
Date
|
1
|
Year
|
5 Years
|
|
Inception
|
|
|
Class A shares
|
|
|
|
|
|
|
|
|
with maximum sales charge (4.5%)
|
3/15/07
|
–10.35
|
%
|
2.23
|
%
|
2.77
|
%
††
|
|
without sales charge
|
3/15/07
|
–6.13
|
%
|
3.18
|
%
|
3.37
|
%
††
|
|
Class C shares
|
|
|
|
|
|
|
|
|
with applicable redemption charge
†
|
3/15/07
|
–7.72
|
%
|
2.40
|
%
|
2.74
|
%
††
|
|
without redemption
|
3/15/07
|
–6.82
|
%
|
2.40
|
%
|
2.74
|
%
††
|
|
Class I shares
|
12/15/08
|
–5.91
|
%
|
3.38
|
%
††
|
3.52
|
%
††
|
|
Class Y shares
|
7/1/13
|
–6.30
|
%
††
|
3.25
|
%
††
|
3.44
|
%
††
|
|
Class Z shares
|
9/30/05
|
–6.05
|
%
|
3.30
|
%
|
3.47
|
%
|
|
Barclays Municipal Bond Index
|
9/30/05
|
–3.70
|
%
|
4.52
|
%
|
4.18
|
%
†††
|
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 C shares is 1% for shares redeemed within one year of the
|
|
|
date of purchase.
|
|
††
|
The total return performance figures presented for Class A and Class C shares of the fund reflect the performance of
|
|
|
the fund’s Class Z shares for the period prior to 3/15/07 (the inception date for Class A and Class C shares),
|
|
|
adjusted to reflect the applicable sales load for Class A shares.
|
|
|
The total return performance figures presented for Class I shares of the fund reflect the performance of the fund’s
|
|
|
Class Z shares for periods prior to 12/15/08 (the inception date for Class I shares).
|
|
|
The total return performance figures presented for ClassY shares of the fund reflect the performance of the fund’s
|
|
|
Class Z shares for the period prior to 7/1/13 (the inception date for ClassY shares).
|
|
†††
|
The Index date is based on the life of Class Z shares.
|
The Fund
7
UNDERSTANDING YOUR FUND’S EXPENSES
(Unaudited)
As a mutual fund investor, you pay ongoing expenses, such as management fees and other expenses. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds.You also may pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund’s prospectus or talk to your financial adviser.
Review your fund’s expenses
The table below shows the expenses you would have paid on a $1,000 investment in Dreyfus HighYield Municipal Bond Fund from March 1, 2013 to August 31, 2013. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.
Expenses and Value of a $1,000 Investment
assuming actual returns for the six months ended August 31, 2013
†
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
Class C
|
|
Class I
|
|
Class Y
|
|
Class Z
|
|
Expenses paid per $1,000
††
|
$
|
4.84
|
$
|
8.47
|
$
|
3.55
|
$
|
1.32
|
$
|
4.36
|
|
Ending value (after expenses)
|
$
|
901.50
|
$
|
897.50
|
$
|
902.50
|
$
|
946.50
|
$
|
902.00
|
COMPARING YOUR FUND’S EXPENSES
WITH THOSE OF OTHER FUNDS
(Unaudited)
Using the SEC’s method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines to help investors assess fund expenses. Per these guidelines, the table below shows your fund’s expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total cost) of investing in the fund with those of other funds.All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period.
Expenses and Value of a $1,000 Investment
assuming a hypothetical 5% annualized return for the six months ended August 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
Class C
|
|
Class I
|
|
Class Y
|
|
Class Z
|
|
Expenses paid per $1,000
††††
|
$
|
5.14
|
$
|
9.00
|
$
|
3.77
|
$
|
4.13
|
$
|
4.63
|
|
Ending value (after expenses)
|
$
|
1,020.11
|
$
|
1,016.28
|
$
|
1,021.48
|
$
|
1,021.12
|
$
|
1,020.62
|
|
|
|
|
†
|
From July 1, 2013 (commencement of initial offering) to August 31, 2013 for ClassY shares.
|
|
††
|
Expenses are equal to the fund’s annualized expense ratio of 1.01% for Class A, 1.77% for Class C, .74% for
|
|
|
Class I and .91% for Class Z, multiplied by the average account value over the period, multiplied by 184/365 (to
|
|
|
reflect the one-half year period).
|
|
|
Expenses are equal to the fund’s annualized expense ratio of .81% for ClassY shares, multiplied by the average
|
|
|
account value over the period, multiplied by 61/365 (to reflect the actual days in the period).
|
|
†††
|
Please note that while ClassY shares commenced operations on July 1, 2013, the hypothetical expenses paid during
|
|
|
the period reflect projected activity for the full six month period for purposes of comparability.This projection
|
|
|
assumes that annualized expense ratios were in effect during the period March 1, 2013 to August 31, 2013.
|
|
††††
|
Expenses are equal to the fund’s annualized expense ratio of 1.01% for Class A, 1.77% for Class C, .74% for
|
|
|
Class I, .81% for ClassY and .91% for Class Z, multiplied by the average account value over the period,
|
|
|
multiplied by 184/365 (to reflect the one-half year period).
|
8
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2013
|
|
|
|
|
|
|
Cost
|
Value
|
|
|
Assets ($):
|
|
|
|
|
Investments in securities—See Statement of Investments
|
163,066,036
|
153,592,301
|
|
|
Cash
|
|
579,928
|
|
|
Interest receivable
|
|
2,315,363
|
|
|
Receivable for shares of Common Stock subscribed
|
|
69,250
|
|
|
Prepaid expenses and other assets
|
|
32,494
|
|
|
|
|
156,589,336
|
|
|
Liabilities ($):
|
|
|
|
|
Due to The Dreyfus Corporation and affiliates—Note 3(c)
|
|
143,809
|
|
|
Payable for floating rate notes issued—Note 4
|
|
3,000,000
|
|
|
Payable for shares of Common Stock redeemed
|
|
237,175
|
|
|
Interest and expense payable related to
|
|
|
|
|
floating rate notes issued—Note 4
|
|
4,188
|
|
|
Accrued expenses
|
|
87,099
|
|
|
|
|
3,472,271
|
|
|
Net Assets ($)
|
|
153,117,065
|
|
|
Composition of Net Assets ($):
|
|
|
|
|
Paid-in capital
|
|
193,275,949
|
|
|
Accumulated undistributed investment income—net
|
|
20,115
|
|
|
Accumulated net realized gain (loss) on investments
|
|
(30,705,264
|
)
|
|
Accumulated net unrealized appreciation
|
|
|
|
|
(depreciation) on investments
|
|
(9,473,735
|
)
|
|
Net Assets ($)
|
|
153,117,065
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share
|
|
|
|
|
|
|
Class A
|
Class C
|
Class I
|
Class Y
|
Class Z
|
|
Net Assets ($)
|
44,233,698
|
21,783,909
|
15,619,316
|
939.27
|
71,479,203
|
|
Shares Outstanding
|
4,057,318
|
1,996,222
|
1,434,947
|
86.28
|
6,553,199
|
|
Net Asset Value
|
|
|
|
|
|
|
Per Share ($)
|
10.90
|
10.91
|
10.88
|
10.89
|
10.91
|
See notes to financial statements.
The Fund
21
STATEMENT OF OPERATIONS
Year Ended August 31, 2013
|
|
|
|
|
Investment Income ($):
|
|
|
|
Interest Income
|
10,244,599
|
|
|
Expenses:
|
|
|
|
Management fee—Note 3(a)
|
1,172,091
|
|
|
Distribution/Service Plan fees—Note 3(b)
|
346,140
|
|
|
Shareholder servicing costs—Note 3(c)
|
302,396
|
|
|
Registration fees
|
60,448
|
|
|
Professional fees
|
56,657
|
|
|
Prospectus and shareholders’ reports
|
21,602
|
|
|
Directors’ fees and expenses—Note 3(d)
|
18,355
|
|
|
Custodian fees—Note 3(c)
|
15,639
|
|
|
Interest and expense related to floating rate notes issued—Note 4
|
9,547
|
|
|
Loan commitment fees—Note 2
|
2,157
|
|
|
Interest expense—Note 2
|
135
|
|
|
Miscellaneous
|
45,483
|
|
|
Total Expenses
|
2,050,650
|
|
|
Less—reduction in fees due to earnings credits—Note 3(c)
|
(132
|
)
|
|
Net Expenses
|
2,050,518
|
|
|
Investment Income—Net
|
8,194,081
|
|
|
Realized and Unrealized Gain (Loss) on Investments—Note 4 ($):
|
|
|
|
Net realized gain (loss) on investments
|
790,008
|
|
|
Net unrealized appreciation (depreciation) on investments
|
(18,999,032
|
)
|
|
Net Realized and Unrealized Gain (Loss) on Investments
|
(18,209,024
|
)
|
|
Net (Decrease) in Net Assets Resulting from Operations
|
(10,014,943
|
)
|
|
|
|
See notes to financial statements.
|
|
|
22
STATEMENT OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2013
|
a
|
2012
|
|
|
Operations ($):
|
|
|
|
|
|
Investment income—net
|
8,194,081
|
|
8,198,091
|
|
|
Net realized gain (loss) on investments
|
790,008
|
|
(2,899,247
|
)
|
|
Net unrealized appreciation
|
|
|
|
|
|
(depreciation) on investments
|
(18,999,032
|
)
|
18,573,168
|
|
|
Net Increase (Decrease) in Net Assets
|
|
|
|
|
|
Resulting from Operations
|
(10,014,943
|
)
|
23,872,012
|
|
|
Dividends to Shareholders from ($):
|
|
|
|
|
|
Investment income—net:
|
|
|
|
|
|
Class A
|
(2,462,670
|
)
|
(2,413,716
|
)
|
|
Class C
|
(947,107
|
)
|
(993,391
|
)
|
|
Class I
|
(976,835
|
)
|
(750,692
|
)
|
|
Class Y
|
(8
|
)
|
—
|
|
|
Class Z
|
(3,608,726
|
)
|
(3,861,670
|
)
|
|
Net realized gain on investments:
|
|
|
|
|
|
Class A
|
(17,496
|
)
|
(80,376
|
)
|
|
Class C
|
(7,904
|
)
|
(38,794
|
)
|
|
Class I
|
(6,374
|
)
|
(21,711
|
)
|
|
Class Z
|
(23,589
|
)
|
(127,628
|
)
|
|
Total Dividends
|
(8,050,709
|
)
|
(8,287,978
|
)
|
|
Capital Stock Transactions ($):
|
|
|
|
|
|
Net proceeds from shares sold:
|
|
|
|
|
|
Class A
|
14,064,814
|
|
18,879,560
|
|
|
Class C
|
3,294,177
|
|
5,068,575
|
|
|
Class I
|
8,568,655
|
|
13,802,071
|
|
|
Class Y
|
1,000
|
|
—
|
|
|
Class Z
|
4,111,025
|
|
3,815,327
|
|
|
Dividends reinvested:
|
|
|
|
|
|
Class A
|
1,834,432
|
|
2,009,218
|
|
|
Class C
|
556,520
|
|
601,349
|
|
|
Class I
|
555,253
|
|
255,312
|
|
|
Class Z
|
2,862,317
|
|
3,139,999
|
|
|
Cost of shares redeemed:
|
|
|
|
|
|
Class A
|
(25,207,861
|
)
|
(20,539,551
|
)
|
|
Class C
|
(9,053,969
|
)
|
(4,834,652
|
)
|
|
Class I
|
(12,470,840
|
)
|
(6,861,001
|
)
|
|
Class Z
|
(15,352,820
|
)
|
(11,977,598
|
)
|
|
Increase (Decrease) in Net Assets
|
|
|
|
|
|
from Capital Stock Transactions
|
(26,237,297
|
)
|
3,358,609
|
|
|
Total Increase (Decrease) in Net Assets
|
(44,302,949
|
)
|
18,942,643
|
|
|
Net Assets ($):
|
|
|
|
|
|
Beginning of Period
|
197,420,014
|
|
178,477,371
|
|
|
End of Period
|
153,117,065
|
|
197,420,014
|
|
|
Undistributed investment income—net
|
20,115
|
|
—
|
|
The Fund
23
STATEMENT OF CHANGES IN NET ASSETS
(continued)
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2013
|
a
|
2012
|
|
|
Capital Share Transactions:
|
|
|
|
|
|
Class A
b
|
|
|
|
|
|
Shares sold
|
1,150,451
|
|
1,629,062
|
|
|
Shares issued for dividends reinvested
|
152,154
|
|
173,736
|
|
|
Shares redeemed
|
(2,099,626
|
)
|
(1,778,286
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
(797,021
|
)
|
24,512
|
|
|
Class C
b
|
|
|
|
|
|
Shares sold
|
270,298
|
|
435,546
|
|
|
Shares issued for dividends reinvested
|
46,224
|
|
51,927
|
|
|
Shares redeemed
|
(753,215
|
)
|
(419,607
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
(436,693
|
)
|
67,866
|
|
|
Class I
|
|
|
|
|
|
Shares sold
|
702,475
|
|
1,189,941
|
|
|
Shares issued for dividends reinvested
|
46,197
|
|
21,819
|
|
|
Shares redeemed
|
(1,054,549
|
)
|
(591,536
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
(305,877
|
)
|
620,224
|
|
|
Class Y
|
|
|
|
|
|
Shares sold
|
86.28
|
|
—
|
|
|
Class Z
|
|
|
|
|
|
Shares sold
|
335,823
|
|
328,905
|
|
|
Shares issued for dividends reinvested
|
237,957
|
|
271,320
|
|
|
Shares redeemed
|
(1,290,878
|
)
|
(1,036,513
|
)
|
|
Net Increase (Decrease) in Shares Outstanding
|
(717,098
|
)
|
(436,288
|
)
|
|
|
|
a Effective July 1, 2013, the fund commenced offering ClassY shares.
|
|
b During the period ended August 31, 2013, 12,054 Class C shares representing $149,785 were exchanged for
|
|
12,079 Class A shares.
|
See notes to financial statements.
24
FINANCIAL HIGHLIGHTS
The following tables describe the performance for each share class for the fiscal periods indicated.All information (except portfolio turnover rate) reflects financial results for a single fund share.Total return shows how much your investment in the fund would have increased (or decreased) during each period, assuming you had reinvested all dividends and distributions.These figures have been derived from the fund’s financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
Class A Shares
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
12.11
|
|
11.14
|
|
11.74
|
|
10.64
|
|
12.05
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
a
|
.52
|
|
.52
|
|
.59
|
|
.61
|
|
.65
|
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
(1.23
|
)
|
.98
|
|
(.60
|
)
|
1.08
|
|
(1.41
|
)
|
|
Total from Investment Operations
|
(.71
|
)
|
1.50
|
|
(.01
|
)
|
1.69
|
|
(.76
|
)
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.50
|
)
|
(.51
|
)
|
(.58
|
)
|
(.59
|
)
|
(.65
|
)
|
|
Dividends from net realized
|
|
|
|
|
|
|
|
|
|
|
|
gain on investments
|
(.00
|
)
b
|
(.02
|
)
|
(.01
|
)
|
—
|
|
—
|
|
|
Total Distributions
|
(.50
|
)
|
(.53
|
)
|
(.59
|
)
|
(.59
|
)
|
(.65
|
)
|
|
Net asset value, end of period
|
10.90
|
|
12.11
|
|
11.14
|
|
11.74
|
|
10.64
|
|
|
Total Return (%)
c
|
(6.13
|
)
|
13.74
|
|
(.03
|
)
|
16.31
|
|
(5.80
|
)
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
1.01
|
|
1.02
|
|
1.00
|
|
.99
|
|
1.02
|
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
1.01
|
|
1.02
|
|
1.00
|
|
.99
|
|
1.02
|
|
|
Ratio of interest and expense related
|
|
|
|
|
|
|
|
|
|
|
|
to floating rate notes issued
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
d
|
.00
|
d
|
.00
|
d
|
—
|
|
.00
|
d
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
4.23
|
|
4.48
|
|
5.35
|
|
5.37
|
|
6.40
|
|
|
Portfolio Turnover Rate
|
17.40
|
|
26.27
|
|
41.05
|
|
25.26
|
|
28.94
|
|
|
Net Assets, end of period ($ x 1,000)
|
44,234
|
|
58,786
|
|
53,785
|
|
70,607
|
|
58,931
|
|
|
|
|
|
a
|
Based on average shares outstanding at each month end.
|
|
b
|
Amount represents less than $.01 per share.
|
|
c
|
Exclusive of sales charge.
|
|
d
|
Amount represents less than .01%.
|
See notes to financial statements.
The Fund
25
FINANCIAL HIGHLIGHTS
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
Class C Shares
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
12.12
|
|
11.15
|
|
11.75
|
|
10.66
|
|
12.06
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
a
|
.42
|
|
.43
|
|
.51
|
|
.52
|
|
.57
|
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
(1.22
|
)
|
.98
|
|
(.60
|
)
|
1.08
|
|
(1.41
|
)
|
|
Total from Investment Operations
|
(.80
|
)
|
1.41
|
|
(.09
|
)
|
1.60
|
|
(.84
|
)
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.41
|
)
|
(.42
|
)
|
(.50
|
)
|
(.51
|
)
|
(.56
|
)
|
|
Dividends from net realized
|
|
|
|
|
|
|
|
|
|
|
|
gain on investments
|
(.00
|
)
b
|
(.02
|
)
|
(.01
|
)
|
—
|
|
—
|
|
|
Total Distributions
|
(.41
|
)
|
(.44
|
)
|
(.51
|
)
|
(.51
|
)
|
(.56
|
)
|
|
Net asset value, end of period
|
10.91
|
|
12.12
|
|
11.15
|
|
11.75
|
|
10.66
|
|
|
Total Return (%)
c
|
(6.82
|
)
|
12.87
|
|
(.77
|
)
|
15.31
|
|
(6.45
|
)
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
1.77
|
|
1.78
|
|
1.75
|
|
1.76
|
|
1.80
|
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
1.77
|
|
1.78
|
|
1.75
|
|
1.76
|
|
1.80
|
|
|
Ratio of interest and expense related
|
|
|
|
|
|
|
|
|
|
|
|
to floating rate notes issued
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
d
|
.00
|
d
|
.00
|
d
|
—
|
|
.00
|
d
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
3.49
|
|
3.72
|
|
4.62
|
|
4.60
|
|
5.63
|
|
|
Portfolio Turnover Rate
|
17.40
|
|
26.27
|
|
41.05
|
|
25.26
|
|
28.94
|
|
|
Net Assets, end of period ($ x 1,000)
|
21,784
|
|
29,494
|
|
26,365
|
|
32,647
|
|
29,579
|
|
|
|
|
|
a
|
Based on average shares outstanding at each month end.
|
|
b
|
Amount represents less than $.01 per share.
|
|
c
|
Exclusive of sales charge.
|
|
d
|
Amount represents less than .01%.
|
See notes to financial statements.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
Class I Shares
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
a
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
12.09
|
|
11.12
|
|
11.72
|
|
10.63
|
|
9.15
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
b
|
.55
|
|
.54
|
|
.63
|
|
.66
|
|
.49
|
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
(1.23
|
)
|
.99
|
|
(.61
|
)
|
1.05
|
|
1.46
|
|
|
Total from Investment Operations
|
(.68
|
)
|
1.53
|
|
.02
|
|
1.71
|
|
1.95
|
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.53
|
)
|
(.54
|
)
|
(.61
|
)
|
(.62
|
)
|
(.47
|
)
|
|
Dividends from net realized
|
|
|
|
|
|
|
|
|
|
|
|
gain on investments
|
(.00
|
)
c
|
(.02
|
)
|
(.01
|
)
|
—
|
|
—
|
|
|
Total Distributions
|
(.53
|
)
|
(.56
|
)
|
(.62
|
)
|
(.62
|
)
|
(.47
|
)
|
|
Net asset value, end of period
|
10.88
|
|
12.09
|
|
11.12
|
|
11.72
|
|
10.63
|
|
|
Total Return (%)
|
(5.91
|
)
|
14.04
|
|
.22
|
|
16.50
|
|
21.80
|
d
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.75
|
|
.78
|
|
.74
|
|
.73
|
|
1.17
|
e
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.75
|
|
.78
|
|
.74
|
|
.72
|
|
.75
|
e
|
|
Ratio of interest and expense related
|
|
|
|
|
|
|
|
|
|
|
|
to floating rate notes issued
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
f
|
.00
|
f
|
.00
|
f
|
—
|
|
—
|
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
4.48
|
|
4.70
|
|
5.62
|
|
5.57
|
|
6.69
|
e
|
|
Portfolio Turnover Rate
|
17.40
|
|
26.27
|
|
41.05
|
|
25.26
|
|
28.94
|
|
|
Net Assets, end of period ($ x 1,000)
|
15,619
|
|
21,048
|
|
12,460
|
|
8,577
|
|
21
|
|
|
|
|
|
a
|
From December 15, 2008 (commencement of initial offering) to August 31, 2009.
|
|
b
|
Based on average shares outstanding at each month end.
|
|
c
|
Amount represents less than $.01 per share.
|
|
d
|
Not annualized.
|
|
e
|
Annualized.
|
|
f
|
Amount represents less than .01%.
|
See notes to financial statements.
The Fund
27
FINANCIAL HIGHLIGHTS
(continued)
|
|
|
|
|
|
Period Ended
|
|
|
Class Y Shares
|
August 31, 2013
a
|
|
|
Per Share Data ($):
|
|
|
|
Net asset value, beginning of period
|
11.59
|
|
|
Investment Operations:
|
|
|
|
Investment income—net
b
|
.11
|
|
|
Net realized and unrealized
|
|
|
|
gain (loss) on investments
|
(.72
|
)
|
|
Total from Investment Operations
|
(.61
|
)
|
|
Distributions:
|
|
|
|
Dividends from investment income—net
|
(.09
|
)
|
|
Net asset value, end of period
|
10.89
|
|
|
Total Return (%)
c
|
(5.35
|
)
|
|
Ratios/Supplemental Data (%):
|
|
|
|
Ratio of total expenses to average net assets
d
|
.81
|
|
|
Ratio of net expenses to average net assets
d
|
.81
|
|
|
Ratio of interest and expense related to
|
|
|
|
floating rate notes issued to average net assets
d
|
.00
|
e
|
|
Ratio of net investment income
|
|
|
|
to average net assets
d
|
5.62
|
|
|
Portfolio Turnover Rate
|
17.40
|
|
|
Net Assets, end of period ($ x 1,000)
|
1
|
|
|
|
|
|
a
|
From July 1, 2013 (commencement of initial offering) to August 31, 2013.
|
|
b
|
Based on average shares outstanding.
|
|
c
|
Not annualized.
|
|
d
|
Annualized.
|
|
e
|
Amount represents less than .01%.
|
See notes to financial statements.
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
Class Z Shares
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
Per Share Data ($):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
12.12
|
|
11.14
|
|
11.75
|
|
10.65
|
|
12.05
|
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income—net
a
|
.53
|
|
.53
|
|
.60
|
|
.63
|
|
.67
|
|
|
Net realized and unrealized
|
|
|
|
|
|
|
|
|
|
|
|
gain (loss) on investments
|
(1.23
|
)
|
.99
|
|
(.61
|
)
|
1.09
|
|
(1.41
|
)
|
|
Total from Investment Operations
|
(.70
|
)
|
1.52
|
|
(.01
|
)
|
1.72
|
|
(.74
|
)
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from investment income—net
|
(.51
|
)
|
(.52
|
)
|
(.59
|
)
|
(.62
|
)
|
(.66
|
)
|
|
Dividends from net realized
|
|
|
|
|
|
|
|
|
|
|
|
gain on investments
|
(.00
|
)
b
|
(.02
|
)
|
(.01
|
)
|
—
|
|
—
|
|
|
Total Distributions
|
(.51
|
)
|
(.54
|
)
|
(.60
|
)
|
(.62
|
)
|
(.66
|
)
|
|
Net asset value, end of period
|
10.91
|
|
12.12
|
|
11.14
|
|
11.75
|
|
10.65
|
|
|
Total Return (%)
|
(6.05
|
)
|
13.92
|
|
.05
|
|
16.44
|
|
(5.64
|
)
|
|
Ratios/Supplemental Data (%):
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.92
|
|
.95
|
|
.95
|
|
.82
|
|
.85
|
|
|
Ratio of net expenses
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.92
|
|
.95
|
|
.95
|
|
.82
|
|
.84
|
|
|
Ratio of interest and expense related
|
|
|
|
|
|
|
|
|
|
|
|
to floating rate notes issued
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
.00
|
c
|
.00
|
c
|
.00
|
c
|
—
|
|
.00
|
c
|
|
Ratio of net investment income
|
|
|
|
|
|
|
|
|
|
|
|
to average net assets
|
4.33
|
|
4.56
|
|
5.45
|
|
5.58
|
|
6.59
|
|
|
Portfolio Turnover Rate
|
17.40
|
|
26.27
|
|
41.05
|
|
25.26
|
|
28.94
|
|
|
Net Assets, end of period ($ x 1,000)
|
71,479
|
|
88,092
|
|
85,868
|
|
113,547
|
|
122,871
|
|
|
|
|
|
a
|
Based on average shares outstanding at each month end.
|
|
b
|
Amount represents less than $.01 per share.
|
|
c
|
Amount represents less than .01%.
|
See notes to financial statements.
The Fund
29
NOTES TO FINANCIAL STATEMENTS
NOTE 1—Significant Accounting Policies:
Dreyfus High Yield Municipal Bond Fund (the “fund”) is a separate non-diversified series of Dreyfus Municipal 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 three series, including the fund.The fund’s investment objective is to seek high current income exempt from federal income tax. The Dreyfus Corporation (the “Manager” or “Dreyfus”), a wholly-owned subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”), serves as the fund’s investment adviser.
At a meeting held on April 29, 2013, the Company’s Board of Directors (the “Board”) approved, effective July 1, 2013: (a) for the fund to offer Class Y shares; and, (b) an increase in the authorized shares of the fund from 400 million to 500 million and authorized 100 million Class Y shares.
MBSC Securities Corporation (the “Distributor”), a wholly-owned subsidiary of the Manager, is the distributor of the fund’s shares.The fund is authorized to issue 100 million shares of $.001 par value Common Stock in each of the following classes of shares: Class A, Class C, Class I, Class Y and Class Z. Class A shares generally are subject to a sales charge imposed at the time of purchase. Class C shares are subject to a contingent deferred sales charge (“CDSC”) imposed on Class C shares redeemed within one year of purchase. Class I shares are sold at net asset value per share only to institutional investors. ClassY shares are sold at net asset value per share to certain investors. Class Z shares are closed to new investors. Other differences between the classes include the services offered to and the expenses borne by each class, the allocation of certain transfer agency costs and certain voting rights. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains or losses on investments are allocated to each class of shares based on its relative net assets.
30
The sales charge may be reduced or waived for certain purchases of Class A shares. Effective April 1, 2013, pursuant to new/modified front-end sales charge waivers, Class A shares of the fund may be purchased at net asset value without payment of a sales charge by (a) investors who participate in a self-directed investment brokerage account program offered by financial intermediaries that have entered into an agreement with the fund’s Distributor (financial intermediaries offering self-directed investment brokerage accounts may or may not charge their customers a transaction fee) and (b) investors who purchase Class A shares directly through the fund’s Distributor, and either (i) have, or whose spouse or minor children have, beneficially owned shares and continuously maintained an open account with the Distributor in a Dreyfus-managed fund since on or before February 28, 2006, or (ii) such purchase is for a self-directed investment account that may or may not be subject to a transaction fee.
As of August 31, 2013, MBC Investments Corp., an indirect subsidiary of BNY Mellon, held all of the Class Y shares of the fund.
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification is the exclusive reference of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal laws are also sources of authoritative GAAP for SEC registrants. The fund’s financial statements are prepared in accordance with GAAP, which may require the use of management estimates and assumptions.Actual results could differ from those estimates.
The Fund
31
NOTES TO FINANCIAL STATEMENTS
(continued)
The Company enters into contracts that contain a variety of indemnifications.The fund’s maximum exposure under these arrangements is unknown.The fund does not anticipate recognizing any loss related to these arrangements.
(a) Portfolio valuation:
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). GAAP establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value.This hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Additionally, GAAP provides guidance on determining whether the volume and activity in a market has decreased significantly and whether such a decrease in activity results in transactions that are not orderly. GAAP requires enhanced disclosures around valuation inputs and techniques used during annual and interim periods.
Various inputs are used in determining the value of the fund’s investments relating to fair value measurements.These inputs are summarized in the three broad levels listed below:
Level 1
—unadjusted quoted prices in active markets for identical investments.
Level 2
—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.).
Level 3
—significant unobservable inputs (including the fund’s own assumptions in determining the fair value of investments).
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
32
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques used to value the fund’s investments are as follows:
Investments in securities are valued each business day by an independent pricing service (the “Service”) approved by the Board. 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 the following: yields or prices of municipal securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. All of the preceding securities are categorized within Level 2 of the fair value hierarchy.
The Service’s procedures are reviewed by Dreyfus under the general supervision of the Board.
When market quotations or official closing prices are not readily available, or are determined not to reflect accurately fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the fund calculates its net asset value, the fund may value these investments at fair value as determined in accordance with the procedures approved by the Board. Certain factors may be considered when fair valuing investments such as: fundamental analytical data, the nature and duration of restrictions on disposition, an evaluation of the forces that influence the market in which the securities are purchased and sold, and public trading in similar securities of the issuer or comparable
The Fund
33
NOTES TO FINANCIAL STATEMENTS
(continued)
issuers.These securities are either categorized within Level 2 or 3 of the fair value hierarchy depending on the relevant inputs used.
For restricted securities where observable inputs are limited, assumptions about market activity and risk are used and are categorized within Level 3 of the fair value hierarchy.
The following is a summary of the inputs used as of August 31, 2013 in valuing the fund’s investments:
|
|
|
|
|
|
|
|
|
|
|
Level 2—Other
|
|
Level 3—
|
|
|
|
|
Level 1—
|
Significant
|
|
Significant
|
|
|
|
|
Unadjusted
|
Observable
|
|
Unobservable
|
|
|
|
|
Quoted Prices
|
Inputs
|
|
Inputs
|
Total
|
|
|
Assets ($)
|
|
|
|
|
|
|
|
Investments in Securities:
|
|
|
|
|
|
|
Municipal Bonds
|
—
|
152,792,581
|
|
799,720
|
153,592,301
|
|
|
Liabilities ($)
|
|
|
|
|
|
|
|
Floating Rate Notes
†
|
—
|
(3,000,000
|
)
|
—
|
(3,000,000
|
)
|
|
|
|
|
†
|
Certain of the fund’s liabilities are held at carrying amount, which approximates fair value for
|
|
|
financial reporting purposes.
|
At August 31, 2013, there were no transfers between Level 1 and Level 2 of the fair value hierarchy.
The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value:
|
|
|
|
|
|
Municipal Bonds ($)
|
|
|
Balance as of 8/31/2012
|
1,079,880
|
|
|
Purchases
|
—
|
|
|
Sales
|
—
|
|
|
Realized gain (loss)
|
—
|
|
|
Change in unrealized appreciation (depreciation)
|
(280,160
|
)
|
|
Transfers into Level 3
|
—
|
|
|
Transfers out of Level 3
|
—
|
|
|
Balance as of 8/31/2013
|
799,720
|
|
|
The amount of total gains (losses) for the period
|
|
|
|
included in earnings attributable to the change in
|
|
|
|
unrealized gains (losses) relating to investments
|
|
|
|
still held at 8/31/2013
|
(280,160
|
)
|
34
(b) Securities transactions and investment income:
Securities transactions are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the identified cost basis. Interest income, adjusted for accretion of discount and amortization of premium on investments, is earned from settlement date and recognized on the accrual basis. Securities purchased or sold on a when issued or delayed delivery basis may be settled a month or more after the trade date.
(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 gains, 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 gains can be offset by capital loss carryovers, it is the policy of the fund not to distribute such gains. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP.
(d) Federal income taxes:
It is the policy of the fund to continue to qualify as a regulated investment company, which can distribute tax-exempt dividends, by complying with the applicable provisions of the Code, and to make distributions of income and net realized capital gain sufficient to relieve it from substantially all federal income and excise taxes.
As of and during the period ended August 31, 2013, the fund did not have any liabilities for any uncertain tax positions.The fund recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense in the Statement of Operations. During the period, the fund did not incur any interest or penalties.
Each tax year in the four-year period ended August 31, 2013 remains subject to examination by the Internal Revenue Service and state taxing authorities.
The Fund
35
NOTES TO FINANCIAL STATEMENTS
(continued)
At August 31, 2013, the components of accumulated earnings on a tax basis were as follows: undistributed tax-exempt income $147,311, undistributed ordinary income $55,695, accumulated capital losses $31,272,962 and unrealized depreciation $8,961,732.
Under the Regulated Investment Company Modernization Act of 2010 (the “2010 Act”), the fund is permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 (“post-enactment losses”) for an unlimited period. Furthermore, post-enactment capital loss carryovers retain their character as either short-term or long-term capital losses rather than short-term as they were under previous statute.The 2010 Act requires post-enactment losses to be utilized before the utilization of losses incurred in taxable years prior to the effective date of the 2010 Act (“pre-enactment losses”).As a result of this ordering rule, pre-enactment losses may be more likely to expire unused.
The accumulated capital loss carryover is available for federal income tax purposes to be applied against future net realized capital gains, if any, realized subsequent to August 31, 2013. If not applied, $715,251 of the carryover expires in fiscal year 2016, $7,033,387 expires in fiscal year 2017, $10,523,962 expires in fiscal year 2018 and $5,919,280 expires in fiscal year 2019.The fund has $2,724,326 of post-enactment short-term capital losses and $4,356,756 of post-enactment long-term capital losses which can be carried forward for an unlimited period.
The tax character of distributions paid to shareholders during the fiscal periods ended August 31, 2013 and August 31, 2012 were as follows: tax-exempt income $7,995,346 and $8,019,469, and ordinary income $55,363 and $268,509, respectively.
During the period ended August 31, 2013, as a result of permanent book to tax differences, primarily due to the tax treatment for amortization adjustments, the fund decreased accumulated undistributed investment income-net by $178,620, increased accumulated net real-
36
ized gain (loss) on investments by $165,236 and increased paid-in capital by $13,384. Net assets and net asset value per share were not affected by this reclassification.
NOTE 2—Bank Lines of Credit:
The fund participates with other Dreyfus-managed funds in a $210 million unsecured credit facility led by Citibank, N.A. and a $300 million unsecured credit facility provided by The Bank of New York Mellon, a subsidiary of BNY Mellon and an affiliate of Dreyfus (each, a “Facility”), each to be utilized primarily for temporary or emergency purposes, including the financing of redemptions. Prior to October 10, 2012, the unsecured credit facility with Citibank, N.A. was $225 million. In connection therewith, the fund has agreed to pay its pro rata portion of commitment fees for each Facility. Interest is charged to the fund based on rates determined pursuant to the terms of the respective Facility at the time of borrowing.
The average amount of borrowings outstanding under the Facilities during the period ended August 31, 2013, was approximately $11,800 with a related weighted average annualized interest rate of 1.15%.
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 the value of the fund’s average daily net assets and is payable monthly.
During the period ended August 31, 2013, the Distributor retained $6,192 from commissions earned on sales of the fund’s Class A shares and $4,829 from CDSCs on redemptions of the fund’s Class C shares.
(b)
Under the Distribution Plan adopted pursuant to Rule 12b-1 under the Act, Class C shares pay the Distributor for distributing its shares at
The Fund
37
NOTES TO FINANCIAL STATEMENTS
(continued)
an annual rate of .75% of the value of its average daily net assets. During the period ended August 31, 2013, Class C shares were charged $209,308 pursuant to the Distribution Plan.
Under the Service Plan adopted pursuant to Rule 12b-1 under the Act, Class Z shares reimburse the Distributor for distributing its shares and servicing shareholder accounts at an amount not to exceed an annual rate of .25% of the value of the average daily net assets of Class Z shares. During the period ended August 31, 2013, Class Z shares were charged $136,832 pursuant to the Service Plan.
(c)
Under the Shareholder Services Plan, Class A and Class C shares pay the Distributor at an annual rate of .25% 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 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 (securities dealers, financial institutions or other industry professionals) with respect to these services.The Distributor determines the amounts to be paid to Service Agents. During the period ended August 31, 2013, Class A and Class C shares were charged $149,123 and $69,769, respectively, pursuant to the Shareholder Services Plan.
The fund has arrangements with the transfer agent and the custodian whereby the fund may receive earnings credits when positive cash balances are maintained, which are used to offset transfer agency and custody fees. For financial reporting purposes, the fund includes net earnings credits as an expense offset in the Statement of Operations.
The fund compensates DreyfusTransfer, Inc., a wholly-owned subsidiary of the Manager, under a transfer agency agreement for providing transfer agency services for the fund and cash management services related to fund subscriptions and redemptions. During the period ended August 31, 2013, the fund was charged $35,096 for transfer agency services and
38
$1,040 for cash management services. These fees are included in Shareholder servicing costs in the Statement of Operations. Cash management fees were partially offset by earnings credits of $128.
The fund compensatesThe Bank of NewYork Mellon under a custody agreement for providing custodial services for the fund. During the period ended August 31, 2013, the fund was charged $15,639 pursuant to the custody agreement.
The fund compensates The Bank of New York Mellon under a cash management agreement for performing certain cash management services related to fund subscriptions and redemptions.The Bank of New York Mellon also provides shareholder redemption draft processing services. During the period ended August 31, 2013, the fund was charged $560 pursuant to the cash management agreement, which is included in Shareholder servicing costs in the Statement of Operations. These fees were partially offset by earnings credits of $4.
During the period ended August 31, 2013, the fund was charged $8,973 for services performed by the Chief Compliance Officer and his staff.
The components of “Due to The Dreyfus Corporation and affiliates” in the Statement of Assets and Liabilities consist of: management fees $81,490, Distribution Plan fees $24,280, Shareholder Services Plan fees $17,053, custodian fees $6,397, Chief Compliance Officer fees $6,172 and transfer agency fees $8,417.
(d)
Each Board member also serves as a Board member of other funds within the Dreyfus complex. Annual retainer fees and attendance fees are allocated to each fund based on net assets.
(e)
A 2% redemption fee is charged and retained by the fund on certain shares redeemed within sixty days following the date of issuance subject to exceptions, including redemptions made through the use of the fund’s exchange privilege. During the period ended August 31, 2013, redemption fees charged and retained by the fund amounted to $10,883.
The Fund
39
NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 4—Securities Transactions:
The aggregate amount of purchases and sales of investment securities, excluding short-term securities during the period ended August 31, 2013, amounted to $33,054,600 and $57,261,444, respectively.
Inverse Floater Securities:
The fund participates in secondary inverse floater structures in which fixed-rate, tax-exempt municipal bonds are transferred to a trust.The trust subsequently issues two or more variable rate securities that are collateralized by the cash flows of the fixed-rate, tax-exempt municipal bonds. One or more of these variable rate securities pays interest based on a short-term floating rate set by a remarketing agent at predetermined intervals.A residual interest tax-exempt security is also created by the trust, which is transferred to the fund, and is paid interest based on the remaining cash flow of the trust, after payment of interest on the other securities and various expenses of the trust.
The fund accounts for the transfer of bonds to the trust as secured borrowings, with the securities transferred remaining in the fund’s investments, and the related floating rate certificate securities reflected as fund liabilities in the Statement of Assets and Liabilities.
The average amount of borrowings outstanding under the inverse floater structure during the period ended August 31, 2013, was approximately $1,333,000, with a related weighted average annualized interest rate of .72%.
At August 31, 2013, the cost of investments for federal income tax purposes was $159,554,033; accordingly, accumulated net unrealized depreciation on investments was $8,961,732, consisting of $6,271,934 gross unrealized appreciation and $15,233,666 gross unrealized depreciation.
40
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Dreyfus High Yield Municipal Bond Fund
We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Dreyfus HighYield Municipal Bond Fund (one of the series comprising Dreyfus Municipal Funds, Inc.) as of August 31, 2013, 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 the 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 the standards of the Public Company Accounting Oversight Board (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.We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2013 by correspondence with the custodian and others. 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 High Yield Municipal Bond Fund at August 31, 2013, 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 U.S. generally accepted accounting principles.
New York, New York
October 28, 2013
The Fund
41
IMPORTANT TAX INFORMATION
(Unaudited)
In accordance with federal tax law, the fund hereby reports all the dividends paid from investment income-net during its fiscal year ended August 31, 2013 as “exempt-interest dividends” (not generally subject to regular federal income tax).The fund also hereby reports $.0033 per share as a short-term capital gain distribution paid on December 13, 2012.
Where required by federal tax law rules, shareholders will receive notification of their portion of the fund’s taxable ordinary dividends (if any), capital gains distributions (if any) and tax-exempt dividends paid for the 2013 calendar year on Form 1099-DIV, which will be mailed in early 2014.
42