<PAGE>
DEAR FELLOW SHAREHOLDERS:
PERFORMANCE REVIEW: We are very pleased to report that your Fund had a total
return (market price change plus income) of 27.7% for 1997. This compares very
favorably with the Dow Jones Utilities Index and the Standard and Poor's
Utility Index which had total returns of 23.1% and 24.8% respectively. The
Fund, which contains approximately 25% bonds, also significantly surpassed the
Lehman Brothers Utility Bond Index which had a 12.7% annual total return. On
February 13, 1998, we were notified by the Lipper Analytical Services
organization that for 1997 the Fund ranked Number One in the Lipper Closed-End
Funds Performance Analysis Service (Specialty Funds: Income Oriented Equity).
The income portion of return came in the form of 6 monthly 6 cent per share
dividends and 6 monthly 6.5 cent per share dividends. At the July 1997 Board
of Directors meeting, the monthly dividend rate was increased from 6 cents per
share to 6.5 cents per share. The Fund is dedicated to the continuity of
monthly dividend payouts at the 6.5 cent per share level. A 6.5 cent monthly
dividend rate, without compounding, would be 78 cents annualized or a 7.70%
common stock dividend yield based on the December 31, 1997 closing price of
$10.125. That yield compares favorably with the 1997 year-end 5.33% yield on
the Dow Jones Utility Index, the 5.05% yield on the S&P Utilities Index, and
the 2.51% yield of the Lipper Utility Fund Universe.
THE INVESTMENT ENVIRONMENT AND OUTLOOK: The investment environment was
favorable for Fund shareholders during 1997. Long term interest rates,
historically important to the performance of utilities, declined from 6.64% to
5.93% during the year. Economic growth was robust, yet inflationary pressures
were not a factor.
The past year was a turning point for the electric industry. Regulatory and
legislative changes continued at a rapid pace as the lead states, California
and Illinois, finalized restructuring plans. Several other states made
significant progress toward finalization. While there remains some uncertainty
and apprehension about restructuring and its effects, in general restructuring
is progressing in a favorable manner for investors.
Due to modest construction spending, the sale of electric generating plants,
and stranded cost securitization, many electric utilities will be in a cash
surplus position going forward. This could be a major positive for investors
as managements decide on the best deployment of the cash. We expect to see
increasing numbers of stock repurchase programs, further debt retirements, and
continued investment in both regulated and unregulated (but energy related)
businesses. We also expect to see a continued emphasis on international
diversification.
Given the recent volatility in some of the international markets, we thought
it would be appropriate to review your Fund managers' international investment
approach. First, it is important to realize that we have invested in a slow
and deliberate manner. For example, in 1993 the Fund had only one
international equity holding. By year end 1997, the portfolio consisted of
eleven international stocks totaling approximately 9% of total assets.
Our process for stock selection internationally is similar to that which we
apply in the U.S. We start with fundamental company analysis, focusing on six
key factors: regulatory environment, competitive position, financial strength,
earnings/dividend growth prospects, management, and valuation. However, we do
not stop there. Before we can make a decision on an international stock, we
have the added task of determining the country's attractiveness and/or risk
level. There are three main risks that need to be assessed in this regard:
political, economic, and currency.
With the extra analysis and risk that is involved, you may ask why the
Fund's managers have chosen to invest internationally in the first place. Part
of the reason for looking internationally is that in some cases we find the
fundamentals to be more attractive than for companies in the U.S. For example,
very often the regulatory environment is more favorable than would be the case
in the U.S., which puts the company in a better competitive position.
<PAGE>
Another reason is that in many instances the earnings and dividend growth
prospects are more appealing. Our analysis indicates that the expected growth
in 1998, particularly for dividends, for the Fund's international holdings far
exceeds that of the domestic holdings in both the electric and
telecommunications industries, with comparable yields. We believe this is a
strong testament to our international investment strategy and careful stock
selection.
Finally, a key reason for our international research effort is the
additional knowledge we gain with respect to our U.S. holdings. Because of the
globalization of both the electric and telecommunications industries, it has
become increasingly important to be informed about events around the world
that have an impact on the U.S. companies. Additionally, these companies have
significantly increased their investments abroad. As a result, our
international research assists in our analysis and judgment of the companies'
investment strategies outside the U.S.
Your managers also continue to look for opportunities domestically, of
course. Over the last several years the Fund has increased its holdings in
stocks of the Real Estate Investment Trust (REIT) sector. The high dividend
yields and growth in earnings and dividend prospects of this sector have
helped the Fund to meet its income objective. Total return for the Fund's
REITs has been favorable too--up 27.7% for 1997.
Our outlook for REITs remains very positive, for several reasons. First,
real estate and REITs continue to exhibit strong fundamentals. Demand and
supply are in equilibrium in most markets and the pace of new development is
modest. REITs have access to low cost funding which facilitates their growth.
In a number of markets occupancy continues to rise and rents are escalating.
Second, growth rates for REITs are projected to be similar to other industry
groups but valuations are cheap in comparison. REITs began 1997 with average
prices equal to 11.5 times funds from operations and ended the year at
approximately the same level. The S&P 500 ended 1997 at 20 times current
earnings. REITs are trading at a 40% discount to the broader market.
Third, REITs are beginning to substantiate the view that they are defensive
investments. The uncertainty of investors evaluating the impact of economic
and currency weakness in southeast, Asia, Korea, and Japan, has resulted in a
volatile stock market. REITs experienced far less volatility, in part due to
their high current yields, to the stable revenues derived from contractual
rents, and because real estate is a 100% domestic industry. We anticipate that
investors will continue to view REITs as an attractive "safe harbor"
investment.
In all industries, our analysts will continue to be selective, focusing on
those companies which have able managements and good outlooks. The outlook for
1998, although challenging, remains favorable.
BOARD OF DIRECTORS MEETINGS: A special meeting of the Board of Directors was
held in December 1997 to consider the declaration of the year-end and January
dividends. The Board declared the following monthly dividends:
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE RECORD DATE PAYABLE DATE
------------------- ----------- ------------
<S> <C> <C>
6.5 cents 12/31/97 1/12/98
6.5 cents 1/30/98 2/10/98
</TABLE>
A regular meeting of the Board of Directors was held in January 1998. At
that meeting, the Board declared the following monthly dividends:
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE RECORD DATE PAYABLE DATE
------------------- ----------- ------------
<S> <C> <C>
6.5 cents 2/27/98 3/10/98
6.5 cents 3/31/98 4/10/98
6.5 cents 4/30/98 5/11/98
</TABLE>
2
<PAGE>
The December Board Meeting was the final forum in which Mr. Richard Spletzer
acted as Chief Investment Officer of the Fund. Mr. Spletzer, who was also
Executive Vice President of the Fund, retired at the end of 1997. The Board
recognized and applauded Mr. Spletzer's 11 years of service to the Fund and
excellent contribution to furthering the investment objectives of the Fund.
Mr. Nathan Partain has been working with Mr. Spletzer on the Fund since May
1996, and was elected by the Board in January 1997 as Senior Vice President
and Assistant Secretary to the Fund, and subsequently in October named by the
Board as successor Chief Investment Officer effective January 1, 1998. Mr.
Partain has been an employee of the Fund's Advisor for more than 10 years,
where most recently he headed the firm's utilities research. Mr. Partain will
continue to manage the Fund for income and growth in income, with a vigilant
eye on risk.
AUTOMATIC DIVIDEND REINVESTMENT PLAN AND DIRECT DEPOSIT SERVICE--The Fund
has a dividend reinvestment plan available to all registered shareholders. As
long as the market price of the common stock of the Fund exceeds or is equal
to the net asset value per share, new shares for the dividend reinvestment
program are issued at the greater of either 95% of the market price or the net
asset value. If the market price per share of common stock is below the net
asset value per share, shares are purchased in the open market at prevailing
market prices, plus any brokerage commissions paid by The Bank of New York for
all shares purchased by it in the reinvestment of the distribution and
credited to the accounts of plan participants.
For those shareholders whose shares are held for them by a brokerage house
or nominee in "street-name" you may not participate in the Fund's automatic
dividend reinvestment plan inasmuch as the Fund cannot communicate directly
with you since the Fund does not have your name and address. Thus for those
Fund shareholders in "street-name" desiring automatic dividend reinvestment,
we suggest you contact your broker or other nominee.
As an added service, the Fund now offers direct deposit service through
electronic funds transfer to all registered shareholders currently receiving a
monthly dividend check. Direct deposit provides automatic and immediate access
to your funds on the dividend payment date and eliminates the possibility of
mail delays and lost or stolen checks. This service is offered through The
Bank of New York.
For more information and/or an authorization form on automatic dividend
reinvestment or direct deposit, please contact The Bank of New York. You can
contact the Advisor, Administrator, or The Bank of New York by calling the
Fund's toll free number of 1-800-680-4DNP.
VISIT US ON THE WEB--You can obtain the most recent shareholder financial
report and dividend information at our web site http://www.duff.com.
We appreciate your interest in Duff & Phelps Utilities Income Inc., and we
will continue to do our best to be of service to you.
/s/ Claire V. Hansen, CFA /s/ Calvin J. Pedersen, CFA
Claire V. Hansen, CFA Calvin J. Pedersen, CFA
Chairman President and Chief Executive
Officer
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Duff & Phelps Utilities Income Inc.:
We have audited the accompanying balance sheet of DUFF & PHELPS UTILITIES
INCOME INC. (a Maryland corporation), including the schedule of investments,
as of December 31, 1997, and the related statements of operations and cash
flows 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
the years indicated thereon. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Duff & Phelps Utilities Income Inc. as of December 31, 1997, the results of
its operations and cash flows 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 the years indicated thereon, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
February 6, 1998
4
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
COMMON STOCKS--74.4%
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES COMPANY (NOTE 1)
------ ------- --------------
<C> <S> <C>
ELECTRIC--40.5%
1,733,000 Baltimore Gas & Electric Co.......................... $ 59,030,313
1,618,600 Boston Edison Co..................................... 61,304,475
1,017,900 Carolina Power & Light Co............................ 43,197,131
1,235,000 CINergy Corp......................................... 47,315,938
705,000 CIPSCO Inc........................................... 31,196,250
1,352,700 CMS Energy Corp...................................... 59,603,343
1,265,000 DQE Incorporated..................................... 44,433,125
1,000,000 Duke Energy Corp..................................... 55,375,000
1,858,400 Edison International................................. 50,525,250
2,240,000 Endesa S.A........................................... 40,740,000
1,500,000 FirstEnergy Corp..................................... 43,500,000
1,447,800 FPL Group Inc........................................ 85,691,662
1,000,000 GPU Inc.............................................. 42,125,000
686,500 National Power PLC ADR............................... 27,202,562
1,000,000 New Century Energies, Inc............................ 47,937,500
1,278,300 NIPSCO Industries Inc................................ 63,195,956
920,000 Pinnacle West Capital Corp........................... 38,985,000
302,000 Powergen PLC ADR..................................... 16,043,750
20,000 SCANA Corp........................................... 598,750
500,000 Scottish Power PLC ADR............................... 17,750,000
2,000,000 Southern Co.......................................... 51,750,000
500,000 Southern Electric PLC ADR............................ 3,998,300
1,319,700 TECO Energy Inc...................................... 37,116,562
700,000 Texas Utilities Co................................... 29,093,750
682,600 Wisconsin Energy Corp................................ 19,624,750
--------------
1,017,334,367
GAS--6.4%
235,000 AGL Resources........................................ 4,802,812
225,000 CMS Energy Corp. Class G............................. 6,103,125
245,000 EL Paso Natural Gas Co............................... 16,292,500
661,600 Keyspan Energy Corp.................................. 24,355,150
75,000 MCN Energy Group Inc................................. 3,028,125
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES COMPANY (NOTE 1)
------ ------- --------------
<C> <S> <C>
400,000 National Fuel Gas Co................................. $ 19,475,000
444,700 NICOR Inc............................................ 18,760,781
600,000 Pacific Enterprises.................................. 22,575,000
300,000 Washington Gas Light Co.............................. 9,281,250
1,320,000 Williams Companies Inc............................... 37,455,000
--------------
162,128,743
TELECOMMUNICATION--15.9%
843,100 Ameritech Corp....................................... 67,869,550
699,500 Bell Atlantic Corp................................... 63,654,500
565,000 Bellsouth Corp....................................... 31,816,563
420,200 British Telecommunications PLC ADR................... 33,747,313
695,000 Cable and Wireless ADS............................... 18,895,312
200,000 Royal PTT Nederland ADS.............................. 8,300,000
1,018,615 SBC Communications Inc............................... 74,613,549
575,000 Sprint Corp.......................................... 33,709,375
142,100 Telestra Corp. ADR................................... 5,932,675
664,400 Telefonica De Espana ADS............................. 60,501,925
--------------
399,040,762
NON-UTILITY--11.6%
175,000 Arden Realty Inc..................................... 5,381,250
200,000 Bay Apartment Communities............................ 7,800,000
309,000 Boston Properties Inc................................ 10,216,312
253,800 CBL & Associates Properties Inc...................... 6,265,688
350,000 Centerpoint Properties Corporation................... 12,293,750
120,000 Chelsea GCA Realty Inc............................... 4,582,500
100,000 Colonial Properties Trust............................ 3,012,500
450,000 Cornerstone Properties Inc........................... 8,634,375
50,000 Crescent Operating Inc............................... 1,225,000
500,000 Crescent Real Estate Equities Inc.................... 19,687,500
200,000 Developers Diversified Realty Corp................... 7,650,000
400,000 Equity Residential Properties Trust.................. 20,225,000
200,000 Essex Property Trust Inc............................. 7,000,000
478,100 First Industrial Realty Trust........................ 17,271,363
126,300 Gables Residential Trust............................. 3,489,038
131,000 Great Lakes REIT Inc................................. 2,546,312
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES COMPANY (NOTE 1)
------ ------- --------------
<C> <S> <C>
455,000 Highwoods Properties Inc........................... $ 16,920,313
175,000 Macerich Co........................................ 4,987,500
590,000 Nationwide Health Properties....................... 15,045,000
500,008 Patriot American Hospitality....................... 14,406,481
714,200 Reckson Associates Realty Corp..................... 18,122,825
512,500 Starwood Lodging Trust............................. 29,660,938
466,700 Sunstone Hotel Investors Inc....................... 8,050,575
373,400 TriNet Corporate Realty Trust...................... 14,445,912
200,000 Urban Shopping Centers Inc......................... 6,975,000
384,200 Vornado Realty Trust............................... 18,033,388
200,000 Weeks Corp......................................... 6,400,000
--------------
290,328,520
--------------
Total Common Stocks (Cost--$1,547,842,297)......... 1,868,832,392
--------------
CONVERTIBLE PREFERRED STOCKS--0.0%
NON-UTILITY--0.0%
47,000 Tanger Factory Outlet Centers Inc. Series A........ $ 1,222,000
--------------
Total Convertible Preferred Stocks (Cost--
$989,350).......................................... 1,222,000
--------------
</TABLE>
BONDS--24.8%
<TABLE>
<CAPTION>
RATINGS
-----------------------
STANDARD
DUFF & AND MARKET VALUE
PAR VALUE COMPANY PHELPS MOODY'S POOR'S (NOTE 1)
--------- ------- ------ ------- -------- --------------
<C> <S> <C> <C> <C> <C>
ELECTRIC--13.6%
$24,920,000 Alabama Power Co.
9%, due 12/01/24 AA- A1 A+ $ 27,501,488
14,500,000 Commonwealth Edison Co.
9 3/4%, due 2/15/20 BBB Baa2 BBB 16,131,975
7,500,000 Commonwealth Edison Co.
9 7/8%, due 6/15/20 BBB Baa2 BBB 8,754,503
6,850,000 Commonwealth Edison Co.
8 5/8%, due 2/01/22 BBB Baa2 BBB 7,421,454
5,000,000 Commonwealth Edison Co.
8 3/8%, due 9/15/22 BBB Baa2 BBB 5,334,755
10,000,000 Commonwealth Edison Co.
8 3/8%, due 2/15/23 BBB Baa2 BBB 10,724,800
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
RATINGS
--------------------------
STANDARD
DUFF & AND MARKET VALUE
PAR VALUE COMPANY PHELPS MOODY'S POOR'S (NOTE 1)
--------- ------- --------- ------- -------- --------------
<C> <S> <C> <C> <C> <C>
$ 8,000,000 Duquesne Light Co.
7.55%, due 6/15/25 A- Baa1 BBB+ $ 8,134,784
5,000,000 Gulf States Utilities
8.94%, due 1/01/22 Not Rated Baa3 BBB- 5,567,120
20,000,000 Illinois Power Co.
8%, due 2/15/23 BBB+ Baa1 BBB 20,791,260
5,000,000 Louisiana Power & Light
Co.
8 3/4%, due 3/01/26 Not Rated Baa2 BBB 5,343,035
15,000,000 New York State Electric
& Gas Corp.
9 7/8%, due 11/01/20 Not Rated Baa1 BBB+ 16,480,980
4,000,000 New York State Electric
& Gas Corp.
8 7/8%, due 11/01/21 Not Rated Baa1 BBB+ 4,361,488
6,500,000 Ohio Edison Co.
8 3/4%, due 2/15/98 BBB+ Baa2 BBB- 6,516,094
14,105,000 Pennsylvania Power &
Light Co.
9 1/4%, due 10/01/19 Not Rated A3 A- 15,638,453
16,850,000 Pennsylvania Power &
Light Co.
9 3/8%, due 7/01/21 Not Rated A3 A- 19,071,656
11,750,000 Philadelphia Electric
8 3/4%, due 4/01/22 Not Rated Baa1 BBB+ 12,390,469
27,580,000 Potomac Electric Power
Co.
9%, due 6/01/21 AA- A1 A 32,589,769
10,000,000 Public Service Co. of
Colorado
8 3/4%, due 3/01/22 Not Rated A3 A 11,034,940
3,000,000 Rochester Gas & Electric
Corp.
9 3/8%, due 4/01/21 BBB+ Baa1 BBB+ 3,324,609
29,830,000 Texas Utilities Electric
Co.
9 3/4%, due 5/01/21 A- Baa1 BBB+ 34,029,288
10,000,000 Texas Utilities Electric
Co.
8 3/4%, due 11/01/23 A- Baa1 BBB+ 11,210,210
12,000,000 UtiliCorp United Inc.
8%, due 3/01/23 BBB Baa3 BBB 12,775,656
4,000,000 Union Electric Co.
8 3/4%, due 12/01/21 AA- A1 AA- 4,409,700
29,780,000 Virginia Electric &
Power Co.
9 3/8%, due 6/01/98 A A2 A 30,177,831
11,500,000 Virginia Electric &
Power Co.
8 1/4%, due 3/01/25 A A2 A 12,658,993
--------------
342,375,310
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
RATINGS
--------------------------
STANDARD
DUFF & AND MARKET VALUE
PAR VALUE COMPANY PHELPS MOODY'S POOR'S (NOTE 1)
--------- ------- --------- ------- -------- --------------
<C> <S> <C> <C> <C> <C>
GAS--1.8%
$ 2,125,000 ANR Pipeline Co.
9 5/8%, due 11/01/21.... Not Rated Baa2 BBB $ 2,817,654
8,875,000 Enron Corp.
9.65%, due 5/15/01...... BBB+ Baa2 BBB+ 9,760,317
7,885,000 Penzoil Co.
10 1/8%, due 11/15/09... Not Rated Baa3 BBB 10,060,811
10,000,000 Phillips Petroleum Co.
9.18%, due 9/15/21...... Not Rated A3 A- 11,343,220
4,500,000 Sonat Inc.
9 1/2%, due 8/15/99..... Not Rated A3 A- 4,728,407
Southern California Gas
5,000,000 Co.
8 3/4%, due 10/01/21.... AA- A1 AA- 5,535,980
--------------
44,246,389
TELECOMMUNICATION--8.3%
18,000,000 AT & T Corp.
8.35%, due 1/15/25...... AA Aa3 AA- 19,835,676
3,500,000 Bellsouth Capital
Funding Corp.
9 1/4%, due 1/15/98..... AA+ Aa1 AAA 3,502,807
35,428,000 GTE Corp
9 3/8%, due 12/01/00.... A- Baa1 A 38,351,483
6,000,000 GTE Corp.
10 1/4%, due 11/01/20... A- Baa1 A 6,795,786
10,000,000 GTE California Inc.
8.07%, due 4/15/24...... AA A1 AA- 11,111,380
6,625,000 GTE Corp.
7.90%, due 2/01/27...... A- Baa1 A 7,059,202
Mountain States
11,995,000 Telephone
9 1/2%, due 5/01/00..... AA- Aa3 A 12,873,357
New England Telephone &
13,750,000 Telegraph
9%, due 8/01/31......... AA Aa2 AA 15,315,011
10,000,000 New York Telephone Co.
7 5/8%, due 2/01/23..... A A2 A+ 10,527,820
10,000,000 New York Telephone Co.
7%, due 8/15/25......... A A2 A+ 9,919,020
20,740,000 New York Telephone Co.
9 3/8%, due 7/15/31..... A A2 A+ 23,357,575
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
RATINGS
-----------------------
STANDARD
DUFF & AND MARKET VALUE
PAR VALUE COMPANY PHELPS MOODY'S POOR'S (NOTE 1)
--------- ------- ------ ------- -------- --------------
<C> <S> <C> <C> <C> <C>
$ 5,000,000 Pacific Bell
8 1/2%, due 8/15/31........ AA- A1 AA- $ 5,416,910
24,900,000 Southwestern Bell Telephone
7.20%, due 10/15/26........ AA Aa3 AA 25,462,516
13,000,000 US West Capital Funding
7.90%, due 2/01/27......... BBB+ Baa1 BBB+ 14,129,960
5,000,000 US West Communications
8 7/8%, due 6/01/31........ AA- Aa3 A 5,557,200
--------------
209,215,703
NON-UTILITY--1.1%
15,700,000 American General Corp.
9 5/8%, due 2/01/18........ A+ A2 AA- 16,437,194
8,000,000 Dayton Hudson Corp.
9 7/8%, due 7/01/20........ A- Baa1 BBB+ 10,562,704
--------------
26,999,898
--------------
Total Bonds (Cost--$604,400,104).................... 622,837,300
--------------
U.S. TREASURY OBLIGATIONS--1.4%
29,000,000 U.S. Treasury Bonds
11 3/4%, due 2/15/01................................ 34,011,577
--------------
Total U.S. Treasury Obligations (Cost--
$35,325,625)........................................ 34,011,577
--------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--0.1%
1,237,045 Federal National Mortgage Association
8%, due 5/01/05..................................... 1,280,342
--------------
Total U.S. Government Agency Obligations (Cost--
$1,278,409)......................................... 1,280,342
--------------
TOTAL INVESTMENTS (Cost--$2,189,835,785)--(100.7%).. $2,528,183,611
==============
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the total net assets of the Fund.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments at market value:
Common stocks (cost $1,547,842,297).......................... $1,868,832,392
Convertible preferred stock (cost $989,350).................. 1,222,000
Bonds (cost $604,400,104).................................... 622,837,300
U.S. Treasury obligations (cost $35,325,625)................. 34,011,577
U.S. Government agency obligations (cost $1,278,409)......... 1,280,342
Interest-bearing deposits with custodian...................... 44,130,881
Receivables:
Securities sold.............................................. 32,941,504
Interest..................................................... 14,617,503
Dividends.................................................... 8,997,323
Securities lending income.................................... 172,105
Prepaid expenses.............................................. 52,075
---------------
Total Assets................................................ $2,629,095,002
===============
LIABILITIES:
Due to Adviser (Note 2)....................................... $ 3,360,604
Due to Administrator (Note 2)................................. 773,793
Dividends payable on common stock............................. 13,190,897
Dividends payable on remarketed preferred stock............... 1,540,158
Accrued expenses.............................................. 1,752,974
Commercial paper outstanding (Note 6)......................... 98,441,884
---------------
Total Liabilities........................................... 119,060,310
---------------
CAPITAL:
Remarketed preferred stock ($.001 par value; 100,000,000
shares authorized and 5,000 shares issued and outstanding,
liquidation preference $100,000 per share) (Note 5)........... 500,000,000
---------------
Common stock ($.001 par value; 250,000,000 shares authorized
and 202,936,881 shares issued and outstanding) (Note 4)....... 202,937
Paid-in surplus (Note 4)...................................... 1,805,521,585
Accumulated net realized loss on investments.................. ( 136,353,031)
Undistributed net investment income........................... 2,315,375
Net unrealized appreciation on investments.................... 338,347,826
---------------
Net assets applicable to common stock (equivalent to $9.90
per share based on 202,936,881 shares outstanding).......... 2,010,034,692
---------------
Total Capital (Net Assets).................................. 2,510,034,692
---------------
Total Liabilities and Capital............................... $2,629,095,002
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest......................................................... $ 58,321,357
Dividends (less withholding tax of $1,869,224)................... 140,018,188
Securities lending income........................................ 328,236
------------
Total investment income......................................... 198,667,781
EXPENSES:
Commercial paper interest expense (Note 6)....................... 5,606,847
Management fees (Note 2)......................................... 12,730,134
Administrative fees (Note 2)..................................... 2,997,616
Transfer agent fees.............................................. 803,000
Custodian fees................................................... 255,500
Remarketing agent fees........................................... 1,267,360
Shareholder reports.............................................. 547,500
Legal and audit fees............................................. 120,150
Directors' fees (Note 2)......................................... 276,800
Other expenses................................................... 824,723
------------
Total expenses.................................................. 25,429,630
------------
Net investment income........................................... 173,238,151
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments................................. 43,757,905
Net change in unrealized appreciation on investments............. 250,102,364
------------
Net gain on investments......................................... 293,860,269
------------
Net increase in net assets resulting from operations............ $467,098,420
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income....................... $ 173,238,151 $ 167,128,840
Net realized gain on investments............ 43,757,905 10,386,225
Net change in unrealized appreciation on
investments................................. 250,102,364 ( 90,555,515)
--------------- ---------------
Net increase in net assets resulting from
operations................................. 467,098,420 86,959,550
DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income--preferred stock (Note
5).......................................... ( 20,366,612) ( 20,294,342)
Net investment income--common stock (Note
3).......................................... ( 151,165,448) ( 146,738,947)
--------------- ---------------
Total distributions........................ ( 171,532,060) ( 167,033,289)
FROM CAPITAL STOCK TRANSACTIONS (NOTE 4):
Shares issued to common stockholders from
dividend reinvestment....................... 28,025,074 27,186,063
--------------- ---------------
Net increase in net assets derived from
capital share transactions.................. 28,025,074 27,186,063
--------------- ---------------
Total increase (decrease).................. 323,591,434 ( 52,887,676)
TOTAL NET ASSETS:
Beginning of year........................... 2,186,443,258 2,239,330,934
--------------- ---------------
End of year (including undistributed net
investment income of $2,315,375 and $609,284
respectively)............................... $2,510,034,692 $2,186,443,258
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
CASH FLOWS FROM (FOR):
OPERATING ACTIVITIES
Interest received.............................. $ 59,203,959
Income dividends received...................... 147,551,044
Securities lending income...................... 156,131
Operating expenses paid (excluding interest)... ( 19,197,169)
Interest paid on commercial paper.............. ( 5,514,768)
--------------
Net cash provided by operating activities.................... $182,199,197
INVESTING ACTIVITIES
Purchase of investment securities.............. (6,178,487,193)
Proceeds from sale/redemption of investment
securities..................................... 6,183,025,265
Return of capital on investments............... 2,713,316
Long-term capital gains dividends received..... 180,185
--------------
Net cash provided by investing activities.................... 7,431,573
FINANCING ACTIVITIES
Dividends paid................................. ( 174,079,447)
Proceeds from issuance of common stock under
dividend reinvestment plan..................... 28,025,074
Change in net proceeds from issuance of
commercial paper............................... 81,075
--------------
Net cash used in financing activities........................ ( 145,973,298)
-------------
Net increase in cash and cash equivalents...................... 43,657,472
Cash and cash equivalents--beginning of year................... 473,409
-------------
Cash and cash equivalents--end of year......................... $ 44,130,881
=============
Reconciliation of net investment income to net
cash provided by operating activities:
Net investment income......................................... $173,238,151
Adjustments to reconcile net investment income
to net cash provided by operating activities:
Decrease in interest receivable............... 882,601
Decrease in dividends receivable.............. 7,532,857
Increase in accrued expenses.................. 717,693
Increase in other receivable.................. ( 172,105)
--------------
Total adjustments........................................... 8,961,046
-------------
Net cash provided by operating activities..................... $182,199,197
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SIGNIFICANT ACCOUNTING POLICIES:
Duff & Phelps Utilities Income Inc. (the "Fund") was incorporated under the
laws of the State of Maryland on November 26, 1986. The Fund commenced
operations on January 21, 1987, as a closed-end diversified management
investment company registered under the Investment Company Act of 1940. The
primary investment objectives of the Fund are current income and long-term
growth of income. Capital appreciation is a secondary objective.
The following are the significant accounting policies of the Fund:
(a) The market values for securities are determined as follows:
Securities traded on a national securities exchange or traded over-the-
counter and quoted on the NASDAQ System are valued at last sales prices.
Securities so traded for which there were no sales and other securities are
valued at the mean of the most recent bid-asked quotations. Bonds not
traded on a securities exchange nor quoted on the NASDAQ System are valued
at a fair value using a procedure determined in good faith by the Board of
Directors which includes the use of a pricing service. Each money market
instrument having a maturity of 60 days or less is valued on an amortized
cost basis, which approximates market value. Other assets and securities
are valued at a fair value, as determined in good faith by the Board of
Directors.
(b) No provision is made for Federal income taxes since the Fund has
elected to be taxed as a "regulated investment company" and has made such
distributions to its shareholders deemed necessary to be relieved of all
Federal income taxes under provisions of current Federal tax law. The Fund
intends to utilize provisions of Federal income tax laws which allow a
realized capital loss to be carried forward for eight years following the
year of loss and offset such losses against any future realized gains. At
December 31, 1997, the Fund had tax capital loss carry forwards of
$149,351,791 which expire beginning on December 31, 2002.
In 1993, the Fund adopted the American Institute of Certified Public
Accountants' Statement of Position 93-2, "Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of
Capital Distributions by Investment Companies". In conformance with this
statement, the Fund changed the classification of distributions to
shareholders to better disclose the differences between financial statement
amounts and distributions determined in accordance with federal income tax
regulations. As a result, the accumulated net realized loss and
undistributed net investment income captions on the balance sheet reflect
book/tax temporary differences. These differences are a result of the
deferral of wash sale losses, the accretion of market discount and the cash
basis recognition of preferred dividends for tax purposes.
(c) The accounts of the Fund are kept on the accrual basis of accounting.
Security transactions are recorded on the trade date. Realized gains or
losses from sales of securities are determined on the specific identified
cost basis. Dividend income is recognized on the ex-dividend date. Interest
income and expense are recognized on the accrual basis.
(d) The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.
15
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(2) MANAGEMENT ARRANGEMENTS:
The Fund has engaged Duff & Phelps Investment Management Co. (the "Adviser")
to provide professional investment management services for the Fund and has
engaged J. J. B. Hilliard, W. L. Lyons, Inc. (the "Administrator") to provide
administrative and management services for the Fund. The Adviser receives a
quarterly fee at an annual rate of .60% of the average weekly net assets of
the Fund up to $1.5 billion and .50% of average weekly net assets in excess
thereof. The Administrator receives a quarterly fee at annual rates of .25% of
average weekly net assets up to $100 million, .20% of average weekly net
assets from $100 million to $1 billion, .10% of average weekly net assets from
$1 billion to $1.5 billion, and .06% of average weekly net assets in excess
thereof. Directors of the Fund not affiliated with the Adviser receive a fee
of $17,500 per year plus $1,000 per board or committee meeting attended.
Committee Chairmen receive an additional fee of $3,000 per year. Transfer
agent and custodian fees are paid to The Bank of New York.
(3) DIVIDENDS:
The Board of Directors has authorized the following distributions to common
stockholders from investment income in 1997:
<TABLE>
<CAPTION>
RECORD PAYABLE DIVIDEND
DATE DATE PER SHARE
------ ------- ---------
<S> <C> <C>
02-04-97 02-10-97 $.060
02-28-97 03-10-97 .060
03-31-97 04-10-97 .060
04-30-97 05-12-97 .060
05-30-97 06-10-97 .060
06-30-97 07-10-97 .060
</TABLE>
<TABLE>
<CAPTION>
RECORD PAYABLE DIVIDEND
DATE DATE PER SHARE
------ ------- ---------
<S> <C> <C>
07-31-97 08-11-97 $.065
08-29-97 09-10-97 .065
09-30-97 10-10-97 .065
10-31-97 11-10-97 .065
11-28-97 12-10-97 .065
12-31-97 01-12-98 .065
</TABLE>
(4) CAPITAL STOCK TRANSACTIONS:
The Fund may purchase shares of its own stock in open market or private
transactions, from time to time and in such amounts and at such prices (not
exceeding $100,000 plus accumulated and unpaid dividends in the case of the
Fund's remarketed preferred stock and less than net asset value in the case of
the Fund's common stock) as management may deem advisable. Since any such
purchases of the Fund's common stock would be made at prices below net asset
value, they would increase the net asset value per share of the remaining
shares of common stock outstanding. The Fund has not purchased any shares of
its common stock.
Transactions in common stock and paid-in surplus during 1996 and 1997 were
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31
1996 1997
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Beginning capitalization. 196,502,240 $1,750,513,384 199,741,443 $1,777,699,447
Dividend Reinvestment.... 3,239,203 27,186,063 3,195,438 28,025,074
----------- -------------- ----------- --------------
Total capitalization.... 199,741,443 $1,777,699,447 202,936,881 $1,805,724,521
=========== ============== =========== ==============
</TABLE>
16
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(5) REMARKETED PREFERRED STOCK:
In 1988, the Fund issued 5,000 shares of Remarketed Preferred Stock ("RP")
in five series of 1,000 shares each at a public offering price of $100,000 per
share. The underwriting discount and other expenses incurred in connection
with the issuance of the RP were recorded as a reduction of paid-in surplus on
common stock. Dividends on the RP are cumulative at a rate which was initially
established for each series at its offering. Since the initial offering of
each series, the dividend rate on each series has been reset every 49 days by
a remarketing process. Dividend rates ranged from 3.789% to 4.450% during the
year ended December 31, 1997.
The RP is redeemable at the option of the Fund on any dividend payment date
at a redemption price equal to $100,000 per share, plus accumulated and unpaid
dividends. The Fund is required to maintain certain asset coverage with
respect to the RP, and the RP is subject to mandatory redemption if that asset
coverage is not maintained. Each series of RP is also subject to mandatory
redemption on a date certain as follows: Series A--November 28, 2012; Series
B--November 18, 2015; Series C--November 7, 2018; Series D--December 22, 2021;
and Series E--December 11, 2024.
In general, the holders of the RP and of the Common Stock have equal voting
rights of one vote per share, except that the holders of the RP, as a class,
vote to elect two members of the Board of Directors, and separate class votes
are required on certain matters that affect the respective interests of the RP
and the Common Stock. The RP has a liquidation preference of $100,000 per
share plus accumulated and unpaid dividends.
(6) COMMERCIAL PAPER:
The Board of Directors has authorized the Fund to issue up to $200,000,000
of Commercial Paper Notes (the "Notes") in minimum denominations of $100,000
with maturities up to 270 days. The Notes generally will be sold on a discount
basis, but may be sold on an interest-bearing basis. The Notes are not
redeemable by the Fund nor are they subject to voluntary prepayment prior to
maturity. The aggregate amount of Notes outstanding changes from time to time.
The Notes are unsecured, general obligations of the Fund. The Fund has entered
into a credit agreement to provide liquidity. The Fund is able to request
loans under the credit agreement of up to $100,000,000 at any one time,
subject to certain restrictions. Interest rates on the Notes ranged from 5.35%
to 5.96% during the year ended December 31, 1997. At December 31, 1997, the
Fund had Notes outstanding of $98,441,884.
(7) INVESTMENT TRANSACTIONS:
For the year ended December 31, 1997, purchases and sales of investment
securities (excluding short-term securities) were $4,917,650,201 and
$4,845,207,058, respectively. For federal income tax purposes, at December 31,
1997, the gross unrealized depreciation on investments was $7,487,212 and
gross unrealized appreciation was $339,623,348. The cost of investments for
financial reporting and Federal income tax purposes was $2,189,835,785 and
$2,196,047,475, respectively.
The Fund may lend portfolio securities to a broker/dealer. Loans are
required to be secured at all times by collateral at least equal to the market
value of securities loaned. The Fund receives a portion of the income earned
on the securities held as collateral and continues to earn income on the
loaned securities. Security loans are subject to the risk of failure by the
borrower to return the loaned securities in which case the Fund could incur a
loss. At December 31, 1997, the fund had loaned portfolio securities with a
market value of $288,984,020 to a broker/dealer and money market instruments
with a market value of $308,357,822 were held in the Fund's account at the
broker/dealer as collateral.
17
<PAGE>
FINANCIAL HIGHLIGHTS--SELECTED PER SHARE DATA AND RATIOS
The table below provides information about income and capital changes for a
share of common stock outstanding throughout the years indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of year....... $ 8.44 $ 8.85 $ 7.23 $ 9.65 $ 9.67
---------- ---------- ---------- ---------- ----------
Net investment income.... 0.85 0.84 0.85 0.82 0.81
Net realized gain (loss)
and change in unrealized
appreciation/depreciation
on investments........... 1.46 ( 0.41) 1.62 ( 2.42) .09
---------- ---------- ---------- ---------- ----------
Total from investment
operations............... 2.31 0.43 2.47 ( 1.60) 0.90
Dividends on preferred
stock from net investment
income................... ( 0.10) ( 0.10) ( 0.12) ( 0.10) ( 0.08)
Dividends on common stock
from net investment
income................... ( 0.75) ( 0.74) ( 0.73) ( 0.72) ( 0.74)
Dividends on common stock
from net realized capital
gains.................... ( 0.00) ( 0.00) ( 0.00) ( 0.00) ( 0.10)
---------- ---------- ---------- ---------- ----------
Total distributions...... ( 0.85) ( 0.84) ( 0.85) ( 0.82) ( 0.92)
Net asset value:
End of year............. $ 9.90 $ 8.44 $ 8.85 $ 7.23 $ 9.65
========== ========== ========== ========== ==========
Per share market value:
End of year............. $10.13 $8.625 $ 9.00 $ 7.88 $10.50
Ratio of expenses to
average net assets....... 1.13% 1.18% 1.23% 1.18% 1.04%
Total investment return.. 27.69% 4.68% 24.77% ( 18.04%) 8.43%
Ratio of net investment
income to average net
assets................... 7.68% 7.79% 8.13% 7.66% 6.09%
Portfolio turnover rate.. 213.57% 226.21% 188.28% 129.56% 56.11%
Average commission rate
paid per share........... $0.0224 $0.0232 ** ** **
Net assets, end of year
(000s omitted)........... $2,510,035 $2,186,443 $2,239,331 $1,896,090 $2,017,833
</TABLE>
- --------
**Not required for periods beginning before September 1, 1995
18
<PAGE>
BOARD OF DIRECTORS
WALLACE B. BEHNKE
HARRY J. BRUCE
FRANKLIN A. COLE
GORDON B. DAVIDSON
ROBERT J. DAY
CLAIRE V. HANSEN, CFA
FRANCIS E. JEFFRIES, CFA
NANCY LAMPTON
BERYL W. SPRINKEL
OFFICERS
CLAIRE V. HANSEN, CFA
Chairman
CALVIN J. PEDERSEN, CFA
President and Chief Executive Officer
RICHARD J. SPLETZER, CFA, CIC
Executive Vice President and Chief Investment Officer
NATHAN I. PARTAIN
Senior Vice President and
Chief Investment Officer
T. BROOKS BEITTEL
Senior Vice President, Secretary and Treasurer
JOSEPH C. CURRY, JR.
Vice President
MICHAEL SCHATT
Vice President
DIANNA P. WENGLER
Assistant Secretary
DUFF & PHELPS
UTILITIES INCOME INC.
Common stock listed on the New York Stock Exchange under the symbol DNP
55 East Monroe Street
Chicago, Illinois 60603
(800) 680-4367
(312) 368-5510
Investment Adviser
Duff & Phelps
Investment Management Co.
55 East Monroe Street
Chicago, Illinois 60603
Administrator
J.J.B. Hilliard, W.L. Lyons, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202
(502) 588-8400
Transfer Agent
Dividend Disbursing
Agent and Custodian
The Bank of New York
Shareholder Relations
Church Street Station
P.O. Box 11258
New York, New York 10286-1258
1-800-432-8224
Legal Counsel
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Independent Public Accountants
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
19
<PAGE>
Duff & Phelps
Utilities Income Inc.
LOGO
ANNUAL REPORT
DECEMBER 31, 1997
