- -----------------------------------------------------------
Duff & Phelps
Utilities
Tax-Free
Income Inc.
- ------------------------------------------------------------
Annual Report
October 31, 1996
<PAGE>
Letter to Shareholders
December 18, 1996
Dear Shareholder:
Through the first ten months, 1996 has been an extremely
volatile year in the
fixed income markets. Over the first half of the year,
interest rates rose
steadily in response to signs of an overheating U.S.
economy. Market
sentiment which had been so positive in 1995, turned
negative in the face of
concerns that robust economic growth would ultimately
translate into inflation.
The interest rate roller coaster peaked in June, and rates
have declined
steadily through the end of October, driven by the favorable
combination of
moderating economic growth and a benign inflation picture,
as the CPI hovered
around 3% for the fourth consecutive year.
Fund Performance
As you can see below, the Duff and Phelps Tax-Free Income
Fund underperformed
its peers in 1996, underperforming the average fund in its
Lipper peer group by
164 basis points. The primary reason for the Fund's
underperformance was its
emphasis on long maturity tax-exempt bonds which
underperformed the market in
the generally rising rate environment in 1996. Over longer
time periods, the
Fund has been an outperformer in its peer group,
outperforming the average fund
in its Lipper peer group over the most recent three year
period. Additionally,
the Fund continued to pay its eight cent per share monthly
dividend, maintaining
this level over the sixty month period since inception in
November 1991.
<PAGE>
FUND PERFORMANCE
As of October 31, 1996
<TABLE>
<CAPTION>
One Year
Three Years
Ended
Ended
10/31/96
10/31/96
<S> <C>
<C>
Duff & Phelps Utilities
Tax-Free Income, Inc.1 5.08%
5.26%
Average Lipper General and Insured
Leveraged Municipal Bond Fund Index2 6.72%
4.52%
</TABLE>
1. Source: Lipper Analytical Services, Inc. Total
return of the Fund as
calculated for the period ended October 31, 1996 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.
2. This is the average of 64 closed-end funds for the
one year ended
October 31, 1996 and 61 closed-end funds for the three years
ended October 31,
1996 in the General and Insured Leveraged Municipal Bond
Fund Index according
to Lipper Analytical Services, Inc.
FUND DIVERSIFICATION
<TABLE>
<CAPTION>
QualityD Market Sectors
<C> <C> <S>
<C>
AAA 49% Electric Utilities
29%
AA 27% Non-Utilities
23%
A 11 Prerefunded Utilities
12%
BBB 13 Pollution Control
21%
Water/Sewer Revenue
11%
Cash
4
</TABLE>
D Duff & Phelp's reading.
The Municipal Market and Your Fund
The municipal market has been volatile in 1996, although
long municipal rates
have been generally less volatile than long Treasury rates.
Over the past year
ended October 31, municipals have outperformed Treasury
securities of comparable
maturity. The primary reason for this outperformance has
been the erosion of
flat tax fears in the municipal market, given the failed
political fortunes of
flat tax proponent Steve Forbes.
Within the Fund we continue to emphasize higher quality
issues, with an average
quality rating of AA/Aa and 76.1% of the issues rated AA or
higher. We have
maintained this high quality emphasis in the Fund in
response to growing risk
in the municipal credit arena. A particular area of concern
has been the
electric utility sector, which is struggling with the
competitive implications
of industry deregulation. Anecdotally, Standard and Poor's
recently downgraded
six California public power credits in response to the
<PAGE>
potential negative impact this proposed deregulation will
have on the
creditworthiness of these companies. In addition, we
continue to maintain a
well diversified portfolio in order to minimize portfolio
risk. The largest
sector concentration remains electric utilities at 29%,
although we continue
to maintain a relatively large offsetting non-utility
exposure at 23%.
Outlook
Going forward we feel that the outlook for the municipal
bond market and our
Fund appears favorable. At current rate levels, demand for
tax-exempt
securities from individuals should be strong as we head into
tax season in the
first quarter of 1997. Additionally, the diminution of
"flat tax" fears should
continue to bring tax conscious investors back into the
municipal market.
Finally, increasing investor caution regarding aggressive
equity market
valuations, may lead to a reallocation of some funds into
tax-exempt securities.
We continue to appreciate your interest in the Duff and
Phelps 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
<PAGE>
- ----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Portfolio of Investments
October 31, 1996
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note
1)
- ----------------------------------------------------------
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--94.3%
California--15.3%
Foothill / Eastern Trans.
Corridor Agency
California Toll Road
Revenue
Baa $ 5,640 6.00%, 1/1/34, Ser. A.... $
5,540,623
Fresno Swr. Rev.,
Aaa 3,030 6.00%, 9/1/09,
A.M.B.A.C..............
3,254,674
Aaa 2,000 6.25%, 9/1/14,
A.M.B.A.C..............
2,195,320
Pomona California Sngl.
Fam. Mortgage Rev.,
Aaa 2,705 7.375%, 8/1/10...........
3,008,880
Riverside County
California Sngl. Fam.
Rev.,
Mortgage Backed
Aaa 2,500 7.80%, 5/1/21, Ser. A....
3,025,925
San Bernardino County California
Residential Mtge. Rev.,
Aaa 7,840(c) 9.60%, 9/1/15
Prerefunded 9/1/96
@$100..................
10,915,162
Santa Monica Waste Wtr.
Enterprise Rev., Hyperion Proj.,
A1 2,000(c) 6.70%, 1/1/22, Ser. A,
Prerefunded 1/1/02
@$102..................
2,233,640
--------
- ----
30,174,224
--------
- ----
Colorado--5.9%
Colorado Hsg. Fin. Auth.,
Sngl. Fam. Prog.,
Aa 2,800 8.00%, 6/1/25............
3,169,236
Aa 1,690 8.125%, 6/1/25...........
1,927,056
Colorado Springs Utils.
Rev.,
Aa 2,300 6.50%, 11/15/15, Ser.
A......................
2,468,613
Platte River Pwr. Auth.
Rev.,
Aa 4,000 6.875%, 6/1/16, Ser.
AA.....................
4,138,680
--------
- ----
11,703,585
--------
- ----
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..............
3,864,315
--------
- ----
Florida--5.5%
Florida St. Bd. Ed. Cap.
Outlay, Pub. Ed.
Aa $ 5,000 5.25%, 6/1/23, Ser. D.... $
4,719,700
Martin Cnty. Ind. Dev.
Auth. Rev., Indiantown
Cogen Proj.
Baa3 1,000 7.875%, 12/15/25.........
1,132,260
Reedy Creek Impvt. Dist.
Utils. Rev., Ser. 1,
Aaa 5,500 5.00%, 10/1/19,
M.B.I.A................
5,063,355
--------
- ----
10,915,315
--------
- ----
Georgia--6.2%
Mun. Elec. Auth., Special Oblig.,
Fifth Crossover Ser. Proj. One,
Aaa 2,615 6.40%, 1/1/13,
A.M.B.A.C..............
2,870,564
Fourth Crossover Ser. Proj. One,
Aaa 2,750 6.50%, 1/1/20,
M.B.I.A................
3,115,310
Aaa 5,500 6.50%, 1/1/20,
A.M.B.A.C..............
6,230,620
--------
- ----
12,216,494
--------
- ----
Idaho--4.0%
Idaho Housing Agency,
Sngl. Fam. Mortgage
Senior
Aaa 3,365 6.60%, 7/1/07, Ser. B....
3,482,977
Aa 4,275 6.65%, 7/1/14, Ser. B....
4,507,602
--------
- ----
7,990,579
--------
- ----
Illinois--5.7%
Chicago Gas Supply Rev.,
(People's Gas, Lt. & Coke Co.),
Aa3 4,600 6.875%, 3/1/15...........
4,948,956
Chicago Waterworks Rev.,
A1 2,500(c) 7.20%, 11/15/16, Ser.
1989
Prerefunded 11/15/99
@$102..................
2,749,025
Du Page Wtr. Comm. Wtr. Rev.,
AAA* 3,500(c) 6.875%, 5/1/14
Prerefunded 5/1/97
@$102..................
3,623,690
--------
- ----
11,321,671
--------
- ----
</TABLE>
See Notes to
Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note
1)
- ----------------------------------------------------------
<C> <C> <S> <C>
Indiana--2.7%
Indiana Mun. Pwr. Agcy.,
Pwr. Supply Sys. Rev.,
Aaa $ 5,000 6.00%, 1/1/13,
M.B.I.A................ $
5,270,500
--------
- ----
Louisiana--5.7%
St. Charles Parish, Poll. Ctrl.
Rev.,
(Louisiana Pwr. & Lt. Co.),
Baa3 3,500 8.25%, 6/1/14............
3,834,145
Baa3 5,500 8.00%, 12/1/14, Ser.
1989...................
6,054,070
Aaa 1,250 7.00%, 12/1/22...........
1,382,200
--------
- ----
11,270,415
--------
- ----
Massachusetts--3.1%
Massachusetts St., Wtr.
Res. Auth., Ser. A,
Aaa 5,330 7.00%, 8/1/13,
M.B.I.A................
6,080,411
--------
- ----
Nebraska--2.8%
Omaha Pub. Pwr. Dist.,
Elec. Rev.,
Aa 2,500 6.15%, 2/1/12, Ser. B....
2,720,125
Aa 2,500 6.20%, 2/1/17, Ser. B....
2,740,950
--------
- ----
5,461,075
--------
- ----
New York--9.3%
New York City Mun.
Assist. Corp.,
Aa 1,000 5.20%, 7/1/08, Ser. E....
996,290
New York City Mun. Wtr. Fin.
Auth., Wtr. & Swr. Sys. Rev.,
A 3,760(c) 7.10%, 6/15/12
Prerefunded 6/15/01
@$101..................
4,184,241
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....................
3,130,410
A1 4,000 7.125%, 12/1/29..........
4,491,880
New York St. Envir. Fac.
Corp. Poll. Ctrl. Rev.,
Aaa 5,000 6.90%, 11/15/15..........
5,681,450
--------
- ----
18,484,271
--------
- ----
Pennsylvania--1.7%
Montgomery Cnty. Ind.
Dev. Auth., Poll. Ctrl.
Rev., (Philadelphia
Elec. Co.),
Aaa 3,000 6.70%, 12/1/21,
M.B.I.A................
3,278,610
--------
- ----
Tennessee--1.6%
Tennessee Hsg. Dev.
Agcy., Mortgage Finance
Aaa $ 3,135 6.15%, 7/1/15, Ser. B.... $
3,216,040
--------
- ----
Texas--6.9%
Brazos River Auth., Poll.
Ctrl. Rev., (Texas
Utils. Elec.),
Baa2 8,000 7.875%, 3/1/21...........
8,867,280
San Antonio Elec. & Gas
Rev.,
Aa1 4,500 6.50%, 2/1/12, Ser. B....
4,694,085
--------
- ----
13,561,365
--------
- ----
Washington--14.0%
Conservation & Renewable
Energy Sys.
Conservation Proj.
Rev.,
Aa1 2,600 6.875%, 10/1/11..........
2,946,866
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..................
5,633,050
Snohomish Cnty., Pub.
Utils. Dist. No. 1
Elec. Rev.,
A1 1,500 6.90%, 1/1/06, Ser. A....
1,629,690
A1 8,000 5.80%, 1/1/24............
7,786,080
Washington St. Pub. Pwr. Supply,
Nuclear Proj. No. 1 Rev.,
Aa1 2,500 6.875%, 7/1/17, Ser. A...
2,774,425
Nuclear Proj. No. 2 Rev.,
Aa1 2,400 6.00%, 7/1/07............
2,509,464
Nuclear Proj. No. 3 Rev.,
Aa1 2,170 6.75%, 7/1/05, Ser. A....
2,324,916
Aaa 1,000(c) 7.25%, 7/1/15, Ser. B
Prerefunded 1/1/00
@$102..................
1,101,950
Aa1 1,000 6.50%, 7/1/18............
1,039,830
--------
- ----
27,746,271
--------
- ----
Wyoming--2.0%
Wyoming St. Farm Loan
Board Capital Fac.
Rev.,
AA-* 4,000 5.75%, 10/1/20...........
3,994,600
--------
- ----
Total long-term
investments
(cost $174,392,678)....
186,549,741
--------
- ----
</TABLE>
See Notes to
Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note
1)
- ----------------------------------------------------------
<C> <C> <S> <C>
SHORT-TERM INVESTMENTS--4.1%
Goldman Sachs Tax Exempt
Money Market Fund,
NR $ 7,736 3.12%.................... $
7,736,483
California Poll. Ctrl.
Fin. Auth. Rev., So.
Cal. Ed., Ser. 86B
VMIG1 300 2.20%, 11/1/96,
F.R.D.D................
300,000
--------
- ----
Total short-term
investments
(cost $8,036,483)......
8,036,483
--------
- ----
Total Investments--98.4%
(cost $182,429,161;
Note 3)................
194,586,224
Other assets in excess of
liabilities--1.6%......
3,092,473
--------
- ----
Net Assets--100%.........
$197,678,697
--------
- ----
--------
- ----
</TABLE>
- ---------------
(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.
- ----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Statement of Assets and Liabilities
October 31, 1996
- ----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$182,429,161)......................... $194,586,224
Cash.................................... 10,680
Interest receivable..................... 3,623,490
Receivable for investments sold......... 67,177
Deferred expenses and other assets...... 3,954
------------
Total assets.......................... 198,291,525
------------
Liabilities
Accrued taxes payable................... 217,528
Accrued expenses........................ 208,070
Dividends payable....................... 88,663
Advisory fee payable (Note 2)........... 75,821
Administration fee payable (Note 2)..... 22,746
------------
Total liabilities..................... 612,828
------------
Net Assets.............................. $197,678,697
------------
------------
Capital
Remarketed preferred stock ($.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
8,377,470 issued and outstanding)..... 83,775
Paid-in capital......................... 115,564,069
Undistributed net investment income..... 2,211,518
Accumulated net realized gain on
investments........................... 2,662,272
Net unrealized appreciation on
investments........................... 12,157,063
------------
Net assets applicable to common stock
(equivalent to $15.84 per share
based on 8,377,470 shares
outstanding)........................ 132,678,697
------------
Total capital (Net assets)............ $197,678,697
------------
------------
</TABLE>
See Notes to Financial Statements. See Notes to
Financial Statements.
6
<PAGE>
- ----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Statement of Operations
Year Ended October 31, 1996
- ----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Interest............................... $11,966,414
-----------
Expenses
Investment advisory fee................ 996,747
Administration fee..................... 299,024
Remarketing expense.................... 152,000
Directors' fees and expenses........... 65,000
Transfer agent's fees and expenses..... 64,000
Reports to shareholders................ 62,000
Custodian's fees and expenses.......... 57,000
Audit fee and expenses................. 42,000
Registration expenses.................. 17,000
Amortization of deferred organization
expense................................ 12,600
Legal fees and expenses................ 10,000
Miscellaneous.......................... 10,419
-----------
Total expenses....................... 1,787,790
-----------
Net investment income.................... 10,178,624
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment
transactions........................... 623,982
Tax expense on undistributed net realized
gain................................... (85,661)
-----------
538,321
-----------
Net change in unrealized
appreciation/depreciation on
investments............................ (565,783)
-----------
Net realized and unrealized loss on
investments............................ (27,462)
-----------
Net Increase in Net Assets
Resulting from Operations................ $10,151,162
-----------
-----------
</TABLE>
- ----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Statement of Changes
In Net Assets
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) ---------------------------
in Net Assets 1996 1995
------------ ------------
<S> <C> <C>
Operations:
Net investment income....... $ 10,178,624 $ 10,355,503
Net realized gain on
investment transactions... 538,321 2,672,725
Net change in unrealized
appreciation/depreciation
of investments............ (565,783) 11,622,990
------------ ------------
Net increase in net assets
resulting from
operations................ 10,151,162 24,651,218
Dividends and distributions:
Dividends to common
shareholders from net
investment income......... (8,081,172) (8,068,765)
Dividends to preferred
shareholders from net
investment income......... (2,271,066) (2,547,753)
Distributions to
shareholders from net
realized gain
Common.................... (251,153) --
Preferred................. (81,973) --
Capital share transactions
(Note 4):
Value of Fund shares issued
to shareholders in
reinvestment of
dividends................. 88,551 --
------------ ------------
Total increase (decrease)..... (445,651) 14,034,700
Net Assets
Beginning of year............. 198,124,348 184,089,648
------------ ------------
End of year................... $197,678,697 $198,124,348
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to
Financial Statements.
7
<PAGE>
- ------------------------------------------------------------
- --------------------
DUFF & PHELPS UTILITIES TAX-FREE INCOME INC.
Financial Highlights
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
November 29,
1991(a)
Year Ended October 31, through
PER SHARE OPERATING PERFORMANCE OF COMMON ---
- -------------------------------------------- October 31,
SHAREHOLDERS:
1996 1995 1994 1993 1992
---
- ----- -------- -------- -------- -----------
- -
<S> <C>
<C> <C> <C> <C>
Net asset value, beginning of period................. $
15.90 $ 14.23 $ 16.41 $ 14.14 $
14.05
---
- ----- -------- -------- -------- -----------
- -
Net investment income(g)...........................
1.21 1.24 1.24 1.24 1.06
Net realized and unrealized gain (loss) on
investments(g).....................................
- -- 1.70 (2.25) 2.19 .20
---
- ----- -------- -------- -------- -----------
- -
Net increase (decrease) from investment operations...
1.21 2.94 (1.01) 3.43 1.26
---
- ----- -------- -------- -------- -----------
- -
Dividends from net investment income to:
Preferred shareholders.............................
(.27) (.31) (.21) (.20)
(.18)
---
- ----- -------- -------- -------- -----------
- -
Common shareholders................................
(.96) (.96) (.96) (.96)
(.72)
---
- ----- -------- -------- -------- -----------
- -
Distributions from net realized gains to:
Preferred shareholders.............................
(.01) -- -- -- --
---
- ----- -------- -------- -------- -----------
- -
Common shareholders................................
(.03) -- -- -- --
---
- ----- -------- -------- -------- -----------
- -
Capital charge with respect to issuance of common
stock..............................................
- -- -- -- -- (.27)
---
- ----- -------- -------- -------- -----------
- -
Net asset value, end of period(b).................... $
15.84 $ 15.90 $ 14.23 $ 16.41 $
14.14(c)
---
- ----- -------- -------- -------- -----------
- -
---
- ----- -------- -------- -------- -----------
- -
Per share market value, end of period(b)............. $
15.13 $ 14.38 $ 13.25 $ 16.63 $
14.75
---
- ----- -------- -------- -------- -----------
- -
---
- ----- -------- -------- -------- -----------
- -
TOTAL INVESTMENT RETURN OF COMMON SHAREHOLDERS(d)....
12.19% 16.03% (13.93)% 19.88%
10.32%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:(f)
Operating expenses...................................
1.35% 1.37% 1.35% 1.40%
1.35%(e)
Net investment income................................
7.69% 8.15% 8.04% 8.00%
8.23%(e)
SUPPLEMENTAL DATA:
Average net assets of common shareholders (000)......
$132,361 $127,112 $129,300 $129,036 $
114,518
Portfolio turnover...................................
10% 66% 37% 1% 35%
Net assets of common shareholders, end of period
(000)..............................................
$132,678 $133,124 $119,090 $137,104 $
117,211
Asset coverage per share of preferred stock, end of
period.............................................
$152,126 $152,403 $141,607 $155,465 $
140,162
Preferred stock outstanding (000).................... $
65,000 $ 65,000 $ 65,000 $ 65,000 $
65,000
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) NAV and market value are published in The Wall Street
Journal each Monday.
(c) Net asset value immediately after the closing of the
first public offering
was $14.05.
(d) 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 return for periods of less
than a full year are
not annualized.
(e) Annualized.
(f) 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.
(g) Calculated based upon weighted average shares
outstanding during the
period.
[/TABLE]
See Notes to Financial Statements.
8
<PAGE>
- ----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Notes to Financial Statements
- ----------------------------------------------------------
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 sixty 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. For the current fiscal
year end the Fund has
retained net realized capital gains. Proper accrual for the
tax liability has
been made with respect to these undistributed 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.
Deferred Organization Costs: A total of $63,000 was incurred
in connection with
the organization of the Fund. These costs have been deferred
and are being
amortized ratably over a period of sixty months from the
date the Fund commenced
investment operations.
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 Mutual Fund
Management LLC. (``PMF''),
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 PMF 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
9
<PAGE>
Adviser. PMF pays occupancy and certain clerical and
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 fiscal year ended
October 31, 1996 aggregated $18,756,091 and $27,081,143,
respectively.
The Federal income tax basis of the Fund's investments at
October 31, 1996
was substantially the same as the basis for financial
reporting, and,
accordingly, net unrealized appreciation for federal income
tax purposes was
$12,157,063 (gross unrealized appreciation--$12,370,824;
gross unrealized
depreciation--$213,761).
Note 4. Capital There are 600 million shares
of
$.01 par value common
stock authorized.
During the fiscal year ended October 31, 1996 the Fund
issued 5,709 common
shares in connection with the reinvestment of dividends. For
the year ended
October 31, 1995 the Fund did not issue any 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 6.10% to
3.36% during the fiscal year ended October 31, 1996.
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 October 31,
1996, dividends declared and
paid on preferred
shares totalled $212,342. On November 1, and December 2,
1996, the Board of
Directors of the Fund declared dividends of $.08 per common
share payable on
November 29, and December 31, 1996, respectively, to common
shareholders of
record on November 15, and December 12, 1996, respectively.
10
<PAGE>
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- --------------------
REPORT OF INDEPENDENT AUDITORS
- ------------------------------------------------------------
- --------------------
To the Shareholders and Board of Directors
Duff and Phelps Utilities Tax-Free Income Inc.
We have audited the accompanying statement of assets and
liabilities,
including the portfolio of investments, of Duff & Phelps
Utilities Tax-Free
Income Inc. (the ``Fund'') as of October 31, 1996, and the
related statement of
operations for the year then ended, the statement of changes
in net assets for
each of the two years in the period then ended and the
financial highlights for
each of the periods indicated therein. These financial
statements and financial
highlights are the responsibility of the Fund's management.
Our responsibility
is to express an opinion on these financial statements and
financial highlights
based on our audits.
We conducted our audits in accordance with 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 the
securities owned as of
October 31, 1996 by correspondence with the custodian. 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
and Phelps Utilities Tax-Free Income Inc. at October 31,
1996, the results of
its operations for the year then ended, the changes in its
net assets for each
of the two years in the periods then ended and financial
highlights for each of
the periods indicated therein, in conformity with generally
accepted accounting
principles.
Ernst
& Young LLP
Chicago, Illinois
November 22, 1996
- ------------------------------------------------------------
- --------------------
FEDERAL INCOME TAX INFORMATION
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise
you within 60 days of
the Fund's fiscal year end (October 31, 1996) as to the
federal tax status of
dividends paid by the Fund during such fiscal year.
Accordingly, we are advising
you that in the fiscal year ended October 31, 1996, all
dividends paid from net
investment income were federally tax-exempt interest
dividends. In addition, the
fund paid a short-term capital gain distribution of $63.06
per share for
preferred shareholders and $.03 per share for common
shareholders which is
taxable as ordinary income.
11
<PAGE>
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- -------
- ------------------------------------------------------------
- -------
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 P. Wehr, Vice President & Chief Investment
Officer
Thomas N. Steenburg, Secretary
Mary J. Metz, Treasurer & Assistant Secretary
Investment Adviser
Duff & Phelps Investment Management Co.
55 East Monroe Street
Suite 3800
Chicago, IL 60603
(312) 368-5500
Administrator
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Call toll free (800) 451-6788
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
This report is for stockholder information.
This is not a
prospectus intended for use in the purchase or
sale of Fund shares.
264325101
