-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NvHC+RJHRv0aw1zWBVHBSyDW4weu+dCJY78f/Y26hHClceYfZhp9XqRpAx7i2/1U jWoRI6Nn9vuhZQCtcmIoQg== 0000898733-99-000477.txt : 19990708 0000898733-99-000477.hdr.sgml : 19990708 ACCESSION NUMBER: 0000898733-99-000477 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990707 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUFF & PHELPS UTILITIES TAX FREE INCOME INC CENTRAL INDEX KEY: 0000879535 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-06416 FILM NUMBER: 99659984 BUSINESS ADDRESS: STREET 1: 55 EAST MONROE ST CITY: CHICAGO STATE: IL ZIP: 60603 BUSINESS PHONE: 3122141250 MAIL ADDRESS: STREET 1: 100 MULBERRY STREET CITY: NEWARK STATE: NJ ZIP: 07102-4077 N-30D 1 DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Duff & Phelps Utilities Tax-Free Income Inc. - ------------------------------------------------------------ Semi-Annual Report April 30, 1999 Letter to Shareholders June 14, 1999 Dear Shareholder: Duff & Phelps Utilities Tax-Free Income Fund (DTF) continued to provide a very attractive level of tax-free income over the past six months ending April 30, 1999. On April 30, the stock closed at $16.88. Our 8 cent monthly dividend translates to a tax-free yield of 5.69%. This attractive level of income continues to be generated by a high quality, well diversified investment portfolio. DTF's total return for the one, three and five year periods compare favorably to the Lehman Brothers Municipal Bond Index as shown below: Caption> TOTAL RETURN (4/30/99) One Year Three Year Five Year Duff & Phelps Utilities Tax- Free Income Inc.1 6.71% 8.17% 8.18% Lehman Brothers Municipal Index 6.95% 7.62% 7.49%
1Source: Lipper Analytical Services, Inc. Total return of the Fund as calculated for the period ended April 30, 1999 is based on net asset value and assumes the reinvestment of dividends and distributions. Shares of the Fund are traded on the NYSE. Past performance is no guarantee of future results. The Fund's strong call protection and diversified sector holdings contributed to this strong relative performance over these periods. The Fund's diversification by market sector is shown below: Caption> FUND DIVERSIFICATION Market Sectors Electric Utilities 18% Non-Utilities 33% Pollution Control 20% Water/Sewer Revenue 12% Pre-Refunded Utilities 17%
As you know, interest rates are significantly lower today than they were in 1991 when the Fund was launched. Because of these lower rates, we have significant capital gains in the portfolio. As these gains have been realized, due to either maturity or call, we have been forced to reinvest these proceeds at lower rates. This, of course, has reduced income to the Fund. 1 Nevertheless, we have been able to maintain our 8 cent monthly dividend by using part of our retained earnings from previous years. Under the current yield curve structure, we will not be able to continue doing this indefinitely. Alternatives would be to pay out capital gains or lower the monthly distribution. Your management team and Board of Directors will continue to monitor this situation and keep you apprised. General Economic Commentary The bond market's volatility has continued into 1999 as U.S. Treasury rates increased significantly in response to a strong U.S. economy and fears that inflation may be increasing. Over the past 6 months ending April 30, 1999, 30-year U.S. Treasury interest rates have increased by 43 basis points while 10-year U.S. Treasury interest rates have risen by 59 basis points. This rapid increase in interest rates has been caused by fears that the resilient U.S. economy, now in its ninth consecutive year of expansion, will cause inflation, which has been quite benign over the past few years, to rise. Financial conditions have improved significantly since the Federal Reserve eased rates last fall in response to the global economic turmoil brought on by a series of currency devaluations in Asia and heightened by a devaluation of the Russian Ruble in August. The reaction to this global economic improvement by the financial markets has been favorable, however, the Fed remains on watch to ensure continued economic expansion in the context of contained inflation. The Municipal Market and Your Fund The municipal bond market has outperformed the U.S. Treasury market over the past six months due primarily to improved supply and demand factors. As interest rates declined throughout 1998, municipal issuers flooded the market with new supply in an effort to take advantage of the lower interest rates. Total new issue supply in 1998 ended as the second largest new supply year on record and the highest level of new municipal issuance since the record year of 1993. Retail demand for municipals could not keep pace with this massive new supply of bonds coming into the market causing yields on municipal bonds to trade close to and even exceed the yield levels on 30-year U.S Treasury Bonds at various points. This trend has reversed in 1999 as rising interest rates have caused new supply to decline by over 21%. Retail demand for municipal bonds has also improved, helping the ratio of municipal yields to U.S. Treasury yields to return to more historical levels. This improvement in the ratio has helped municipal bonds to perform well relative to U.S. Treasury bonds in 1999. With municipal yields still at levels slightly above historical relationships when compared to U.S. Treasury yields, municipal bonds remain attractive as we head into the second half of 1999. 2 We continue to emphasize higher quality issues as the yield premium between higher quality bonds and lower quality bonds remains close to historically narrow levels across the municipal yield curve. The Fund currently has an average quality rating of AA/Aa with over 77% of its issues rated AA or higher. The electric utility sector remains an area of focus due to the uncertainty surrounding the timing and extent of electric deregulation and its ultimate impact on valuations. Numerous states have adopted or proposed various forms of electric utility deregulation while federal lawmakers are also debating the issue, which could result in a national deregulation plan. As such, the portfolio continues to be well diversified in an effort to minimize the portfolio's exposure to any one sector. Consequently, we have lowered electric utility exposure to a historically low level of 18%. Outlook As we move forward into the second half of 1999, factors that could drive the relative value of municipal bonds over the year include: the U.S. inflation outlook and its impact on the U.S. Treasury rates and global investment markets, legislative developments in the electric utility industry that could change the current tax laws for municipal utility bonds, and lastly, the amount of new municipal supply that the market will experience, especially in light of the significant decline in new issue supply the market has enjoyed through the first four months of 1999. Finally, should the U.S. stock market continue to experience the same pace of appreciation that is has enjoyed over the past few years, money could continue to be diverted away from the tax exempt sector, thus putting some additional pressure on municipals. In spite of all these potential risks, the municipal market still represents good relative value at current levels. If we continue to get good news on the U.S. economic picture and municipal supply remains manageable, we should see continued strong relative performance in the municipal market over the balance of 1999. We continue to appreciate your interest in the Duff & Phelps Utilities Tax-Free Income Fund and look forward to being of continued service in the future. Sincerely, Francis E. Jeffries, CFA Chairman of the Board Calvin J. Pedersen President and Chief Executive Officer 3 - ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Portfolio of Investments April 30, 1999 (Unaudited)
- ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) - ---------------------------------------------------------- LONG-TERM INVESTMENTS--97.8% Alabama--1.6% Jefferson Cnty. Alabama Swr. Rev., Capital Impvt. Aaa $ 3,000 5.75%, 2/1/38, Ser. A.... $ 3,197,460 ------------ California--16.0% Foothill/Eastern Trans. Corr. Agency California Toll Road Rev. Baa3 5,640 6.00%, 1/1/34, Ser. A.... 6,055,330 Fresno Swr. Rev., Aaa 3,030 6.00%, 9/1/09, A.M.B.A.C.............. 3,453,291 Aaa 2,000 6.25%, 9/1/14, A.M.B.A.C.............. 2,355,240 Pomona California Sngl. Fam. Mtge. Rev., Aaa 2,705 7.375%, 8/1/10........... 3,226,064 Riverside Cnty. California Sngl. Fam. Rev., Mtge. Backed Aaa 2,500 7.80%, 5/1/21, Ser. A.... 3,410,725 San Bernardino Cnty. California Residential Mtge. Rev., Aaa 7,840(c) 9.60%, 9/1/15 Prerefunded 9/1/96 @$100.................. 11,911,547 Santa Monica Waste Wtr. Enterprise Rev., Hyperion Proj., A1 2,000(c) 6.70%, 1/1/22, Ser. A, Prerefunded 1/1/02 @$102.................. 2,194,320 ------------ 32,606,517 ------------ Colorado--2.5% Colorado Hsg. Fin. Auth., Sngl. Fam. Prog., Aa2 1,625 8.00%, 6/1/25............ 1,740,813 Aa2 770 8.125%, 6/1/25........... 830,707 Colorado Springs Utils. Rev., Aa2 2,300 6.50%, 11/15/15, Ser. A...................... 2,485,955 ------------ 5,057,475 ------------ - ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) - ---------------------------------------------------------- Connecticut--1.7% Connecticut St. Airport Rev. Aaa $ 3,000 7.65%, 10/1/12........... $ 3,504,780 ------------ Delaware--1.9% Delaware St., Econ. Dev. Auth. Rev., Delmarva Pwr. Ser. B Aaa 3,500 6.75%, 5/1/19, A.M.B.A.C.............. 3,818,395 ------------ Florida--6.6% Dade Cnty. Wtr. & Swr. Sys. Rev., Aaa 3,000 5.25%, 10/1/26........... 3,050,460 Florida St. Bd. Ed. Cap. Outlay, Pub. Ed. Aa2 5,000 5.25%, 6/1/23, Ser. D.... 5,028,550 Reedy Creek Impvt. Dist. Utils. Rev., Ser. 1, Aaa 5,500 5.00%, 10/1/19, M.B.I.A................ 5,416,785 ------------ 13,495,795 ------------ Georgia--6.3% Mun. Elec. Auth. Pwr. Rev., Ser. Y, Aaa 2,615 6.40%, 1/1/13, A.M.B.A.C.............. 3,062,296 Mun. Elec. Auth. Rev., Ser. X, Aaa 2,750 6.50%, 1/1/20, M.B.I.A................ 3,257,705 Aaa 5,500 6.50%, 1/1/20, A.M.B.A.C.............. 6,515,410 ------------ 12,835,411 ------------ Idaho--3.8% Idaho Hsg. Agcy., Sngl. Fam. Mtge. Senior Aa1 4,015 6.65%, 7/1/14, Ser. B.... 4,381,329 Aaa 3,165 6.60%, 7/1/27, Ser. B.... 3,365,914 ------------ 7,747,243 ------------ Illinois--8.5% Chicago Gas Supply Rev., (People's Gas, Lt. & Coke Co.), Aa3 4,600 6.875%, 3/1/15........... 4,995,554 Chicago Illinois Aaa 4,000 6.25%, 1/1/11............ 4,559,440
See Notes to Financial Statements. 4
- ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) - ---------------------------------------------------------- Illinois--(cont'd.) Chicago Illinois Sales Tax Rev., Aaa $ 5,000 5.375%, 1/1/27........... $ 5,082,850 Chicago Waterworks Rev., A1 2,500(c) 7.20%, 11/15/16, Ser. 1989 Prerefunded 11/15/99 @$102.................. 2,601,250 ------------ 17,239,094 ------------ Indiana--2.8% Indiana Mun. Pwr. Agcy., Pwr. Supply Sys. Rev., Aaa 5,000 6.00%, 1/1/13, M.B.I.A................ 5,655,150 ------------ Louisiana--5.3% St. Charles Parish, Poll. Ctrl. Rev., (Louisiana Pwr. & Lt. Co.), Baa3 3,500 8.25%, 6/1/14............ 3,614,030 Baa3 5,500 8.00%, 12/1/14, Ser. 1989................... 5,765,375 Aaa 1,250 7.00%, 12/1/22........... 1,387,762 ------------ 10,767,167 ------------ Massachusetts--3.0% Massachusetts St., Wtr. Res. Auth., Ser. A, Aaa 5,330 7.00%, 8/1/13, M.B.I.A................ 6,172,780 ------------ Nebraska--2.8% Omaha Pub. Pwr. Dist., Elec. Rev., Aa2 2,500 6.15%, 2/1/12, Ser. B.... 2,840,150 Aa2 2,500 6.20%, 2/1/17, Ser. B.... 2,875,150 ------------ 5,715,300 ------------ New York--10.6% New York City Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys. Rev., A1 3,760(c) 7.10%, 6/15/12 Prerefunded 6/15/01 @$101.................. 4,057,679 New York St. Dorm. Auth. Rev., Comsewogue Pub. Lib. Insd. Aaa 2,680 6.00%, 7/1/15, M.B.I.A................ 2,912,276 New York St. Energy Research & Dev. Auth. Facs. Rev., (Con Edison Co. of N.Y.), A1 3,000 6.75%, 1/15/27, Ser. 92A.................... 3,157,920 A1 4,000 7.125%, 12/1/29.......... 4,586,440 New York St. Envir. Fac. Corp. Poll. Ctrl. Rev., Aaa 5,000 6.90%, 11/15/15.......... 5,750,250 Suffolk Cnty. New York Ind. Dev. Agcy., Ind. Dev. Rev. NR $ 1,000 5.50%, 1/1/23............ $ 1,002,650 ------------ 21,467,215 ------------ Pennsylvania--1.6% Montgomery Cnty. Ind. Dev. Auth., Poll. Ctrl. Rev., (Philadelphia Elec. Co.), Aaa 3,000 6.70%, 12/1/21, M.B.I.A................ 3,240,960 ------------ Tennessee--1.6% Tennessee Hsg. Dev. Agcy., Mtge. Finance Aaa 3,135 6.15%, 7/1/15, Ser. B 3,328,774 ------------ Texas--5.2% Brazos River Auth., Poll. Ctrl. Rev., (Texas Utils. Elec.), Baa1 8,000 7.875%, 3/1/21........... 8,615,920 Harris Cnty. Texas Toll Road Sub. Lien Aa2 1,650 7.00%, 8/15/10, Ser. A... 2,002,093 ------------ 10,618,013 ------------ Washington--13.9% Conservation & Renewable Energy Sys. Conservation Proj. Rev., Aa1 2,600 6.875%, 10/1/11.......... 2,959,060 Lewis Cnty. Pub. Utils. Dist. No. 1, Cowlitz Falls Hydroelectric Proj. Rev., Aaa 5,000(c) 7.00%, 10/1/22 Prerefunded 10/1/01 @$102.................. 5,484,500 Snohomish Cnty., Pub. Utils. Dist. No. 1 Elec. Rev., A1 1,500 6.90%, 1/1/06, Ser. A.... 1,598,055 A1 8,000 5.80%, 1/1/24............ 8,353,920 Washington St. Pub. Pwr. Supply, Nuclear Proj. No. 1 Rev., Aaa 2,500 6.875%, 7/1/17, Ser. A... 2,711,675
See Notes to Financial Statements. 5
- ---------------------------------------------------------- Principal Moody's Amount Value Rating (000) Description (a) (Note 1) - ---------------------------------------------------------- Washington--(cont'd.) Nuclear Proj. No. 2 Rev., Aa1 $ 2,400 6.00%, 7/1/07............ $ 2,654,016 Nuclear Proj. No. 3 Rev., Aa1 2,170 6.75%, 7/1/05, Ser. A.... 2,350,501 Aaa 1,000(c) 7.25%, 7/1/15, Ser. B Prerefunded 1/1/00 @$102.................. 1,045,170 Aaa 1,000 6.50%, 7/1/18............ 1,078,010 ------------ 28,234,907 ------------ Wyoming--2.1% Wyoming St. Farm Loan Board Capital Fac. Rev., AA-* 4,000 5.75%, 10/1/20........... 4,351,640 ------------ Total long-term investments (cost $181,362,013).... 199,054,076 ------------ SHORT-TERM INVESTMENTS--0.8% California Poll. Ctrl. Fin. Auth. Rev., So. Cal. Ed., Ser. 86B VMIG1 300 4.35%, 5/3/99, F.R.D.D................ 300,000 Goldman Sachs Tax-Exempt Money Market Fund, NR 1,327 3.32%.................... 1,326,603 ------------ Total short-term investments (cost $1,626,603)...... 1,626,603 ------------ Total Investments--98.6% (cost $182,988,616; Note 3)................ 200,680,679 Other assets in excess of liabilities--1.4%...... 2,830,226 ------------ Net Assets--100%......... $203,510,905 ------------ ------------
- --------------- (a) The following abbreviations are used in portfolio descriptions: A.M.B.A.C.--American Municipal Bond Assurance Corporation. M.B.I.A.--Municipal Bond Insurance Association. F.R.D.D.--Floating Rate Daily Demand Note (b). (b) For purposes of amortized cost valuation, the maturity date of Floating Rate Daily Demand Notes is considered to be the later of the next date on which the security can be redeemed at par or the next date on which the rate of interest is adjusted. (c) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. * Standard & Poor's rating. NR--Not Rated by Moody's or Standard & Poor's. See Notes to Financial Statements. - ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Statement of Assets and Liabilities April 30, 1999 (Unaudited) - ---------------------------------------------------------- Assets Investments, at value (cost $182,988,616)........................ $200,680,679 Interest receivable.................... 3,503,202 Receivable for investments sold........ 82,674 ------------ Total assets......................... 204,266,555 ------------ Liabilities Bank overdraft......................... 403,622 Accrued expenses....................... 158,969 Dividends payable...................... 90,854 Advisory fee payable (Note 2).......... 78,619 Administration fee payable (Note 2).... 23,586 ------------ Total liabilities.................... 755,650 ------------ Net Assets............................. $203,510,905 ------------ ------------ Capital Remarketed preferred stock ($.01 par value; 1,300 preferred shares, issued and outstanding, liquidation preference $50,000 per share; Note 4)........... $ 65,000,000 ------------ Common stock at par ($.01 par value; 600,000,000 shares authorized and 8,479,602 issued and outstanding).............. 84,796 Paid-in capital........................ 119,967,489 Undistributed net investment income.... 950,009 Accumulated net realized loss on investments.......................... (183,452) Net unrealized appreciation on investments.......................... 17,692,063 ------------ Net assets applicable to common stock (equivalent to $16.33 per share based on 8,479,602 shares outstanding)....................... 138,510,905 ------------ Total capital (Net assets)........... $203,510,905 ------------ ------------
See Notes to Financial Statements. 6 - ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Statement of Operations Six Months Ended April 30, 1999 (Unaudited) - ---------------------------------------------------------- Net Investment Income Income Interest.............................. $ 5,817,157 ----------- Expenses Investment advisory fee............... 508,852 Administration fee.................... 152,655 Remarketing expense................... 81,250 Directors' fees and expenses.......... 62,500 Custodian's fees and expenses......... 43,000 Transfer agent's fees and expenses.... 22,000 Audit fee and expenses................ 21,000 Reports to shareholders............... 19,000 Legal fees and expenses............... 13,000 Registration expenses................. 8,000 Miscellaneous......................... 3,221 ----------- Total expenses...................... 934,478 ----------- Net investment income................... 4,882,679 ----------- Realized and Unrealized Loss on Investments Net realized loss on investment transactions.......................... (69,605) Net change in unrealized depreciation on investments........................... (2,092,255) ----------- Net realized and unrealized loss on investments........................... (2,161,860) ----------- Net Increase in Net Assets Resulting from Operations............... $ 2,720,819 ----------- -----------
See Notes to Financial Statements. - ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Statement of Changes In Net Assets (Unaudited) - ----------------------------------------------------------
Six Months Ended Year Ended Increase (Decrease) April 30, October 31, in Net Assets 1999 1998 ------------ ------------ Operations: Net investment income...... $ 4,882,679 $ 9,882,106 Net realized loss on investment transactions............. (69,605) (113,847) Net change in unrealized appreciation/depreciation of investments........... (2,092,255) 3,526,116 ------------ ------------ Net increase in net assets resulting from operations............... 2,720,819 13,294,375 Dividends and distributions: Dividends to common shareholders from net investment income........ (4,120,426) (8,086,351) Dividends to preferred shareholders from net investment income........ (1,001,481) (2,347,865) Capital share transactions (Note 4): Value of Fund shares issued to shareholders in reinvestment of dividends................ 446,766 788,541 ------------ ------------ Total increase (decrease).... (1,954,322) 3,648,700 Net Assets Beginning of period.......... 205,465,227 201,816,527 ------------ ------------ End of period................ $203,510,905 $205,465,227 ------------ ------------ ------------ ------------
See Notes to Financial Statements. 7 - -------------------------------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Financial Highlights (Unaudited) - --------------------------------------------------------------------------------
Six Months Ended Year Ended October 31, PER SHARE OPERATING PERFORMANCE OF COMMON April 30, ------------------------------------------------------------ SHAREHOLDERS: 1999 1998 1997 1996 1995 1994 ----------- -------- -------- -------- -------- -------- Net asset value, beginning of period........... $ 16.62 $ 16.28 $ 15.84 $ 15.90 $ 14.23 $ 16.41 ----------- -------- -------- -------- -------- -------- Net investment income(d)..................... .58 1.17 1.18 1.21 1.24 1.24 Net realized and unrealized gain (loss) on investments(d)............................... (.26) .41 .50 -- 1.70 (2.25) ----------- -------- -------- -------- -------- -------- Net increase (decrease) from investment operations................................... .32 1.58 1.68 1.21 2.94 (1.01) ----------- -------- -------- -------- -------- -------- Dividends from net investment income to: Preferred shareholders....................... (.13) (.28) (.28) (.27) (.31) (.21) ----------- -------- -------- -------- -------- -------- Common shareholders.......................... (.48) (.96) (.96) (.96) (.96) (.96) ----------- -------- -------- -------- -------- -------- Distributions from net realized gains to: Preferred shareholders....................... -- -- -- (.01) -- -- ----------- -------- -------- -------- -------- -------- Common shareholders.......................... -- -- -- (.03) -- -- ----------- -------- -------- -------- -------- -------- Net asset value, end of period(a).............. $ 16.33 $ 16.62 $ 16.28 $ 15.84 $ 15.90 $ 14.23 ----------- -------- -------- -------- -------- -------- Per share market value, end of period(a)....... $ 16.88 $ 17.31 $ 16.00 $ 15.13 $ 14.38 $ 13.25 ----------- -------- -------- -------- -------- -------- TOTAL INVESTMENT RETURN OF COMMON SHAREHOLDERS(b)................................ 0.38% 11.41% 12.42% 12.19% 16.03% (13.93)% RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:(c) Operating expenses............................. 1.35%(e) 1.34% 1.35% 1.35% 1.37% 1.35% Net investment income.......................... 7.06%(e) 7.18% 7.46% 7.69% 8.15% 8.04% SUPPLEMENTAL DATA: Average net assets of common shareholders (000)........................................ $ 139,378 $137,680 $133,055 $132,361 $127,112 $129,300 Portfolio turnover............................. 3% 0% 5% 10% 66% 37% Net assets of common shareholders, end of period (000)................................. $ 138,511 $140,465 $136,817 $132,678 $133,124 $119,090 Asset coverage per share of preferred stock, end of period................................ $ 156,547 $158,050 $155,243 $152,126 $152,403 $141,607 Preferred stock outstanding (000).............. $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000
- --------------- (a) NAV and market value are published in The Wall Street Journal each Monday. (b) Total investment return is calculated assuming a purchase of common stock at the current market value on the first day and a sale at the current market value on the last day of each period reported. Dividends are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Brokerage commissions are not reflected. Total returns for periods of less than one year are not annualized. (c) Ratios calculated on the basis of income and expenses applicable to both the common and preferred shares relative to the average net assets of common shareholders. Ratios do not reflect the effect of dividend payments to preferred shareholders. (d) Calculated based upon weighted average shares outstanding during the year. (e) Annualized. See Notes to Financial Statements. 8 - ---------------------------------------------------------- DUFF & PHELPS UTILITIES TAX-FREE INCOME INC. Notes to Financial Statements (Unaudited) - ---------------------------------------------------------- Duff & Phelps Utilities Tax-Free Income Inc. (the 'Fund') was organized in Maryland on September 24, 1991 as a diversified, closed-end management investment company. The Fund had no operations until November 20, 1991 when it sold 8,000 shares of common stock for $112,400 to Duff & Phelps Corporation. Investment operations commenced on November 29, 1991. The Fund's investment objective is current income exempt from regular federal income tax consistent with preservation of capital. The Fund will seek to achieve its investment objective by investing primarily in a diversified portfolio of investment grade tax-exempt utility obligations. The ability of the issuers of the securities held by the Fund to meet their obligations may be affected by economic developments in a specific state, industry or region. Note 1. Significant The following is a summary of Accounting Policies significant accounting policies followed by the Fund in the preparation of its financial statements. Securities Valuation: The Fund values its fixed income securities by using market quotations, prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics in accordance with procedures established by the Board of Directors of the Fund. The relative liquidity of some securities in the Fund's portfolio may adversely affect the ability of the Fund to accurately value such securities. Any securities or other assets for which such current market quotations are not readily available are valued at fair value as determined in good faith under procedures established by and under the general supervision and responsibility of the Fund's Board of Directors. Debt securities having a remaining maturity of 60 days or less when purchased and debt securities originally purchased with maturities in excess of 60 days but which currently have maturities of 60 days or less are valued at cost adjusted for amortization of premiums and accretion of discounts. Securities Transactions and Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses on sales of securities are calculated on the identified cost basis. Interest income is recorded on the accrual basis. The Fund amortizes premiums and accretes original issue discount on securities using the effective interest method. Federal Income Taxes: It is the Fund's intention to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute sufficient net income to shareholders to qualify as a regulated investment company. For this reason, no federal income tax provision is required. Dividends and Distributions: The Fund will declare and pay dividends to common shareholders monthly from net investment income. Net long-term capital gains, if any, in excess of loss carryforwards are expected to be distributed annually. The Fund will make a determination at the end of its fiscal year as to whether to retain or distribute such gains. Dividends and distributions are recorded on the ex-dividend date. Dividends to preferred shareholders are accrued on a weekly basis and are determined as described in Note 4. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from investment income and capital gains recorded in accordance with generally accepted accounting principles. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Note 2. Agreements The Fund has an Advisory Agreement with Duff & Phelps Investment Management Co. (the 'Adviser'), a subsidiary of Phoenix Duff & Phelps Corporation, and an Administration Agreement with Prudential Investments Fund Management LLC ('PIFM'), an indirect, wholly owned subsidiary of The Prudential Insurance Company of America. The investment fee paid to the Adviser is computed weekly and payable monthly at an annual rate of .50% of the Fund's average weekly managed assets. The administration fee paid to PIFM is also computed weekly and payable monthly at an annual rate of .15% of the Fund's average weekly managed assets. Pursuant to the agreements, the Adviser provides continuous supervision of the investment portfolio and pays the compensation of officers of the Fund who are affiliated persons of the Adviser. PIFM pays occupancy and certain clerical and 9 accounting costs of the Fund. The Fund bears all other costs and expenses. Note 3. Portfolio Purchases and sales of invest- Securities ment securities, other than short-term investments, for the six months ended April 30, 1999 aggregated $9,729,720 and $6,349,400, respectively. The Federal income tax basis of the Fund's investments at October 31, 1998 was substantially the same as the basis for financial reporting and, accordingly, net unrealized appreciation for federal income tax purposes was $17,692,063 (gross unrealized appreciation--$17,759,284; gross unrealized depreciation--$67,221). The Fund had a capital loss carryforward as of October 31, 1998 of approximately $113,800 which expires in 2006. Accordingly, no capital gains distribution is expected to be paid to shareholders until net realized gains have been realized in excess of such amounts. Note 4. Capital There are 600 million shares of $.01 par value common stock authorized. During the six months ended April 30, 1999 the Fund issued 27,116 common shares in connection with the reinvestment of dividends. For the year ended October 31, 1998 the Fund issued 47,727 common shares in connection with the reinvestment of dividends. The Fund's Articles of Incorporation authorize the issuance of Remarketed Preferred Stock ('RP'). Accordingly, the Fund issued 1,300 shares of RP on February 4, 1992. The RP has a liquidation value of $50,000 per share plus any accumulated but unpaid dividends. Dividends on shares of RP are cumulative from their date of original issue and payable on each dividend payment date. Dividend rates ranged from 2.99% to 5.00% during the six months ended April 30, 1999. Under the Investment Company Act of 1940, the Fund may not declare dividends or make other distributions on shares of common stock or purchase any such shares if, at the time of the declaration, distribution or purchase, asset coverage with respect to the outstanding preferred stock would be less than 200%. The RP is redeemable at the option of the Fund, in whole or in part, on any dividend payment date at $50,000 per share plus any accumulated or unpaid dividends whether or not declared. The RP is also subject to a mandatory redemption at $50,000 per share plus any accumulated or unpaid dividends, whether or not declared, if certain requirements relating to the composition of the assets and liabilities of the Fund as set forth in the Articles of Incorporation are not satisfied. The holders of RP have voting rights equal to the holders of common stock (one vote per share) and will vote together with holders of shares of common stock as a single class. However, holders of RP are also entitled to elect two of the Fund's directors. In addition, the Investment Company Act of 1940 requires that along with approval by shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding preferred shares, voting separately as a class would be required to (a) adopt any plan of reorganization that would adversely affect the preferred shares, and (b) take any action requiring a vote of security holders, including, among other things, changes in the Fund's subclassification as a closed-end investment company or changes in its fundamental investment restrictions. Note 5. Dividends Subsequent to April 30, 1999, dividends declared and paid on preferred shares totalled $290,173. On May 3, 1999, the Board of Directors of the Fund declared a dividend of $.08 per common share payable on May 28, to common shareholders of record on May 14. On May 26, 1999 the Board of Directors approved a dividend of $.08 per common share to be declared on June 1, 1999 payable on June 30, to common shareholders of record on June 15. 10 - -------------------------------------------------------------------------------- OTHER INFORMATION (Unaudited) - -------------------------------------------------------------------------------- Pursuant to certain rules of the Securities and Exchange Commission the following additional disclosure is required. Pursuant to the Fund's Dividend Reinvestment Plan (the 'Plan'), common shareholders may elect to have all distributions of dividends and capital gains automatically reinvested by State Street Bank & Trust Company (the 'Plan Agent') in shares of common stock of the Fund ('Fund Shares') pursuant to the Plan; provided that such election is subject to the power of the Board of Directors to declare capital gains distributions in the form of stock (if such a declaration is made by the Board of Directors, all shareholders who do not elect to receive cash will receive the distribution in the form of stock whether or not they elect to participate in the Plan). Common shareholders who do not participate in the Plan will receive all distributions in cash (except as described above) paid by check in United States dollars mailed directly to the shareholder of record (or if the shares are held in street or other nominee name, then to the nominee) by the Custodian, as dividend disbursing agent. Common shareholders who wish to participate in the Plan should contact the Fund at P.O. Box 8200, Boston, Massachusetts, 02266 or call toll free (800) 451-6788. The Plan Agent serves as agent for the common shareholders in administering the Plan. After the Fund declares a dividend or determines to make a capital gain distribution, if (1) the market price is lower than net asset value, the participants in the Plan will receive the equivalent in Fund Shares valued at the market price determined as of the time of purchase (generally, the payment date of the dividend or distribution); or if (2) the market price of Fund Shares on the payment date of the dividend or distribution is equal to or exceeds their net asset value, participants will be issued Fund Shares at the higher of net asset value or 95% of the market price. This discount reflects savings in underwriting and other costs that the Fund otherwise will be required to incur to raise additional capital. If net asset value exceeds the market price of Fund Shares on the payment date or the Fund declares a dividend or other distribution payable only in cash (i.e., if the board of directors precludes reinvestment in Fund Shares for that purpose), the Plan Agent will, as agent for the participants, receive the cash payment and use it to buy Fund Shares in the open market, on the New York Stock Exchange, other national securities exchanges on which the Fund's common stock is listed or elsewhere, for the participants' accounts. If, before the Plan Agent has completed its purchases, the market price exceeds the net asset value of a Fund Share, the average per share purchase price paid by the Plan Agent may exceed the net asset value of Fund Shares, resulting in the acquisition of fewer shares than if the dividend or distribution had been paid in shares issued by the Fund. The Fund will not issue shares under the Plan below net asset value. Participants in the Plan may withdraw from the Plan upon written notice to the Plan Agent and will receive certificates for whole Fund Shares and a cash payment will be made for any fraction of a Fund Share. There is no charge to participants for reinvesting dividends or capital gain distributions, except for certain brokerage commissions, as described below. The Plan Agent's fees for the handling of the reinvestment of dividends and distributions will be paid by the Fund. There will be no brokerage commissions charged with respect to shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any federal income tax that may be payable on such dividends or distributions. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any dividend or distribution paid subsequent to written notice of the change sent to all shareholders of the Fund at least 90 days before the record date for the dividend or distribution. The Plan also may be amended or terminated by the Plan Agent upon at least 90 days written notice to all common shareholders of the Fund. All correspondence concerning the Plan should be directed to the Fund at the address on the front of this report. The Plan has been amended to permit Plan participants periodically to purchase additional common shares through the Plan by delivering to the Plan Agent a check for at least $100, but not more than $5,000, in any month. The Plan Agent will use the funds to purchase shares in the open market or in private transactions as described above with respect to reinvestment of dividends and distributions. This amendment to the Plan was approved by the Board on May 27, 1998 and is effective September 1, 1998. Thereafter, purchases made pursuant to the Plan will be made commencing at the time of the first dividend or distribution payment following the second business day after receipt of the funds for additional purchases, and may be aggregated with 11 purchases of shares for reinvestment of the dividends and distributions. Shares will be allocated to the accounts of participants purchasing additional shares at the average price per share, plus a service charge imposed by the Plan Agent and brokerage commissions (or equivalent purchase costs) paid by the Plan Agent for all shares purchased by it, including for reinvestment of dividends and distributions. Checks drawn on a foreign bank are subject to collection and collection fees, and will be invested at the time of the next distribution after funds are collected by the Plan Agent. The Plan Agent will make every effort to invest funds promptly, and in no event more than 30 days after the Plan Agent receives a dividend or distribution, except where postponement is deemed necessary to comply with applicable provisions of the federal securities laws. Funds sent to the Plan Agent for voluntary additional share investment may be recalled by the participant by written notice received by the Plan Agent not later than two business days before the next distribution payment date. If for any reason a regular monthly distribution is not paid by the Fund, funds for voluntary additional share investment will be returned to the participant, unless the participant specifically directs that they continue to be held by the Plan Agent for subsequent investment. There have been no material changes in the Fund's investment objectives or policies, charter or by-laws and principal risk factors associated with investment in the Fund. At annual shareholder meetings held on May 26, 1999, shareholders elected William N. Georgeson, Francis E. Jeffries and Eileen A. Moran as directors of the Fund and also approved the selection of Ernst & Young LLP as the independent auditors for the Fund for the fiscal year ending October 31, 1999. E. Virgil Conway, William W. Crawford, Philip R. McLoughlin, Everett L. Morris, Richard A. Pavia and Harry Dalzell-Payne were not up for election and their terms accordingly continued after the date of such meetings. The results of the matters voted upon were as follows:
Number of Shares ---------------------------------------------------- Withheld For Authority Against Abstain ---------- --------- ------- -------- Election of William N. Georgeson1 7,275,354 55,969 Election of Francis E. Jefferies1 7,275,354 55,969 Election of Eileen A. Moran1 7,275,354 55,969 Selection of Ernst & Young LLP1 7,241,007 30,976 59,340
1The number of common and preferred shares issued outstanding and eligible to vote were 8,480,902. Quorum was 7,331,323 or 86.45% of eligible voting shares. - -------------------------------------------------------------------------------- Year 2000 Risks (Unaudited) - -------------------------------------------------------------------------------- Like other business organizations and individuals around the world, the Fund could be adversely affected if the computer systems used by the Fund and its service providers do not properly process and calculate date-related information from and after January 1, 2000. The Fund is taking steps that it believes are reasonably designed to address the Year 2000 problem with respect to the computer systems it uses and to obtain satisfactory assurances that comparable steps are being taken by each of the Fund's other major service providers. The Fund does not expect to incur any significant costs in order to address the Year 2000 problem however, at this time, there can be no assurance that these steps will be sufficient to avoid any adverse impact on the Fund. 12 - ------------------------------------------------------------------- Directors Francis E. Jeffries, Chairman E. Virgil Conway William W. Crawford William N. Georgeson Philip R. McLoughlin Everett L. Morris Eileen A. Moran Richard A. Pavia Harry Dalzell-Payne Officers Calvin J. Pedersen, President & Chief Executive Officer James D. Wehr, Vice President & Chief Investment Officer Timothy M. Heaney, Vice President Thomas N. Steenburg, Secretary James W. Rosenberger, Treasurer & Assistant Secretary Investment Adviser Duff & Phelps Investment Management Co. 55 East Monroe Street Suite 3600 Chicago, IL 60603 (312) 368-5500 Administrator Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Call toll free (800) 225-1852 Custodian and Transfer Agent State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 Call toll free (800) 451-6788 Independent Auditors Ernst & Young LLP 233 South Wacker Drive Chicago, IL 60606 Legal Counsel Skadden, Arps, Slate, Meagher & Flom (Chicago) 333 West Wacker Drive Chicago, IL 60606 The accompanying financial statements as of April 30, 1999 were not audited and accordingly, no opinion is expressed on them. This report is for stockholder information. This is not a prospectus intended for use in the purchase or sale of Fund shares. 264325101 !!!!!!!!!!!!!! -----END PRIVACY-ENHANCED MESSAGE-----