- ---------------------------------------------
- --------------
Duff & Phelps
Utilities
Tax-Free
Income Inc.
- ---------------------------------------------
- ---------------
Annual Report
October 31, 1997
<PAGE>
Letter to
Shareholders
December 5, 1997
Dear Shareholder:
The first 11 months of 1997 were much like
1996 in terms of volatility in
the fixed income markets. Over the first
third of the year, interest rates
rose in response to a rapidly expanding U.S.
economy. On March 25, 1997,
the Federal Reserve raised interest rates by
25 basis points in an effort to
tighten monetary policy. The Fed's tightening
of monetary policy was a
preemptive action designed to head off an
increase in inflation expected to
occur as the result of a rapidly growing U.S.
economy. Over the next two
quarters, interest rates reacted favorably to
more subdued price inflation,
moderate labor compensation growth, and
slower economic expansion. As such,
30-year interest rates ended October, 1997 at
6.15%, near their 24 month lows.
Fund Performance
As you can see on the following page, the
Duff and Phelps Utilities Tax-Free
Income Fund underperformed its peers in 1997,
underperforming the average
fund in its Lipper peer group by 49 basis
points for the 12 months ended
10/31/97. The primary reason for the Fund's
underperformance was its emphasis
on higher quality bonds in an environment
where lower quality bonds
experienced greater price appreciation.
Further, the Fund's exposure to
electric utilities contributed to
underperformance as this sector lagged the
overall municipal market, due to concerns
about utility deregulation. The
Fund continued to pay its eight cents per
share monthly dividend, maintaining
this level over the seventy-two month period
since inception November, 1991.
-1-
<PAGE>
FUND
PERFORMANCE
As of October
31, 1997
<TABLE>
<CAPTION>
One
Year Three Years
Ended
Ended
10/31/97 10/31/97
-------
- --------------------------
<S> <C>
<C>
Duff & Phelps Utilities
Tax-Free Income, Inc.1 9.19%
11.33%
Average Lipper General and Insured
Leveraged Municipal Bond Fund Index2 9.68%
11.55%
</TABLE>
1 Source: Lipper Analytical Services,
Inc. Total return of the Fund as
calculated for the period ended October 31,
1997 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, 1997, and 63 closed-end funds for
the three years ended October
31, 1997 in the General and Insured Leveraged
Municipal Bond Fund Index
according to Lipper Analytical Services, Inc.
FUND
DIVERSIFICATION
<TABLE>
<CAPTION>
Quality D
Market Sectors
- ---------------------------------------------
- -----------------------------
<C> <C> <S>
<C>
AAA 51%
Electric Utilities 25%
AA 24
Non-Utilities 31
A 11
Prerefunded Utilities 10
BBB 14
Pollution Control 21
Water/Sewer Revenue 13
</TABLE>
D Duff & PhelpOs ratings.
The Municipal Market and Your Fund
The municipal market outperformed the U.S,
Treasury market over the first
half of 1997 as municipal supply and demand
technicals were quite favorable.
The market experienced good demand from
retail investors while issuance of
municipal bonds was declining on a year over-
year basis. However, as interest
rates declined over the second half of the
year, these favorable market
technicals reversed and municipal bonds began
to underperform the U.S.
Treasury market. Retail interest for
municipal bonds slowed while municipal
issuers began to flood the market with new
supply in an effort to take
advantage of lower interest rates.
Within the Fund we continue to emphasize
higher quality issues with an
average quality rating of AA/Aa and 75% of
the issues rated AA or higher. We
have maintained a high quality emphasis in
the Fund in response to current
market valuations, whereby lower quality
issues are trading at historically
-2-
<PAGE>
tight yield levels when compared to higher
quality municipal bonds. The
electric utility sector remains an area of
concern due to the uncertainty
surrounding the issue of industry
deregulation. Numerous states are at
different stages of the deregulation process
and the ultimate implications
for various utilities is uncertain as to the
timing and magnitude of any
changes. As such, the Fund remains well
diversified in an effort to minimize
the portfolio's risk to any one sector.
Electric utility exposure has
declined to a historically low level of 24.5%
while non-utility exposure has
risen to 30.8%.
Outlook
Our overall outlook for the municipal bond
market is constructive as we
head into 1998. As we saw last year, the
market is expecting limited issuance
of municipal bonds during the first quarter
of 1998 while retail demand for
municipal bonds is expected to improve as we
head into tax season. Further,
the market may regain investor focus as
nervous equity market investors look
to reallocate assets away from the volatile
stock market.
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
-3-
<PAGE>
- ---------------------------------------------
- -------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Portfolio of Investments
October 31, 1997
- ---------------------------------------------
- -------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
Value
(Unaudited) (000) Description
(a) (Note 1)
- ---------------------------------------------
- -------------
<C> <C> <S>
<C>
LONG-TERM
INVESTMENTS--97.2%
California--15.8%
Foothill / Eastern
Trans.
Corridor Agency
California Toll
Road
Revenue
Baa $ 5,640 6.00%, 1/1/34, Ser.
A.... $ 5,832,211
Fresno Swr. Rev.,
Aaa 3,030 6.00%, 9/1/09,
A.M.B.A.C.............. 3,378,359
Aaa 2,000 6.25%, 9/1/14,
A.M.B.A.C.............. 2,267,360
Pomona California
Sngl.
Fam. Mortgage
Rev.,
Aaa 2,705 7.375%,
8/1/10........... 3,105,448
Riverside County
California Sngl.
Fam.
Rev., Mortgage
Backed
Aaa 2,500 7.80%, 5/1/21, Ser.
A.... 3,263,300
San Bernardino
County California
Residential Mtge.
Rev.,
Aaa 7,840(c) 9.60%, 9/1/15
Prerefunded
9/1/96
@$100.................. 11,793,007
Santa Monica Waste
Wtr.
Enterprise Rev.,
Hyperion Proj.,
A1 2,000(c) 6.70%, 1/1/22, Ser.
A,
Prerefunded
1/1/02
@$102.................. 2,221,160
- ------------
31,860,845
- ------------
Colorado--3.5%
Colorado Hsg. Fin.
Auth.,
Sngl. Fam. Prog.,
Aa2 2,530 8.00%,
6/1/25............ 2,824,871
Aa2 1,460 8.125%,
6/1/25........... 1,654,662
Colorado Springs
Utils.
Rev.,
Aa 2,300 6.50%, 11/15/15,
Ser.
A...................... 2,507,437
- ------------
6,986,970
- ------------
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.............. 3,834,320
- ------------
Florida--7.1%
Dade County Water &
Sewer
Systems Rev.,
Aaa 3,000 5.25%,
10/1/26........... 2,964,660
- ---------------------------------------------
- -------------
Florida St. Bd. Ed.
Cap.
Outlay, Pub. Ed.
Aa2 $ 5,000 5.25%, 6/1/23, Ser.
D.... $ 4,910,000
Martin Cnty. Ind.
Dev.
Auth. Rev.,
Indiantown
Cogen. Proj.,
Baa3 1,000 7.875%,
12/15/25......... 1,160,720
Reedy Creek Impvt.
Dist.
Utils. Rev., Ser.
1,
Aaa 5,500 5.00%, 10/1/19,
M.B.I.A................ 5,294,245
- ------------
14,329,625
- ------------
Georgia--6.2%
Mun. Elec. Auth.
Rev.,
Ser. X,
Aaa 2,750 6.50%, 1/1/20,
M.B.I.A................ 3,190,962
Aaa 5,500 6.50%, 1/1/20,
A.M.B.A.C.............. 6,381,925
Mun. Elec. Auth.,
Special Oblig.,
Fifth Crossover
Ser. Proj. One,
Aaa 2,615 6.40%, 1/1/13,
A.M.B.A.C.............. 2,967,816
- ------------
12,540,703
- ------------
Idaho--4.0%
Idaho Housing
Agency,
Sngl. Fam.
Mortgage
Senior
Aa 4,105 6.65%, 7/1/14, Ser.
B.... 4,410,248
Aaa 3,365 6.60%, 7/1/27, Ser.
B.... 3,556,435
- ------------
7,966,683
- ------------
Illinois--8.5%
Chicago Gas Supply
Rev.,
(People's Gas,
Lt. &
Coke Co.),
Aa3 4,600 6.875%,
3/1/15........... 5,012,758
Chicago Illinois
Aaa 4,000 6.25%,
1/1/11............ 4,461,320
Chicago Illinois
Sales
Tax Rev.,
Aaa 5,000 5.375%,
1/1/27........... 4,959,550
Chicago Waterworks
Rev.,
A1 2,500(c) 7.20%, 11/15/16,
Ser.
1989
Prerefunded
11/15/99
@$102.................. 2,700,175
- ------------
17,133,803
- ------------
</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................ $ 5,498,700
- ------------
Louisiana-->5.5%
St. Charles Parish,
Poll. Ctrl. Rev.,
(Louisiana Pwr. &
Lt. Co.),
Baa3 3,500 8.25%,
6/1/14............ 3,780,000
Baa3 5,500 8.00%, 12/1/14,
Ser.
1989................... 5,997,365
Aaa 1,250 7.00%,
12/1/22........... 1,388,125
- ------------
11,165,490
- ------------
Massachusetts--3.0%
Massachusetts St.,
Wtr.
Res. Auth., Ser.
A,
Aaa 5,330 7.00%, 8/1/13,
M.B.I.A................ 6,079,984
- ------------
Nebraska--2.8%
Omaha Pub. Pwr.
Dist.,
Elec. Rev.,
Aa2 2,500 6.15%, 2/1/12, Ser.
B.... 2,790,825
Aa2 2,500 6.20%, 2/1/17, Ser.
B.... 2,783,700
- ------------
5,574,525
- ------------
New York--10.2%
New York City Mun.
Wtr.
Fin. Auth., Wtr.
& Swr.
Sys. Rev.,
A2 3,760(c) 7.10%, 6/15/12
Prerefunded
6/15/01
@$101.................. 4,154,951
New York St. Dorm.
Auth.
Rev., Comsewogue
Pub.
Lib. Insd.
Aaa 2,770 6.00%, 7/1/15,
M.B.I.A................ 2,951,629
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.................... 3,191,880
A1 4,000 7.125%,
12/1/29.......... 4,565,160
New York St. Envir.
Fac.
Corp. Poll. Ctrl.
Rev.,
Aaa 5,000 6.90%,
11/15/15.......... 5,741,000
- ------------
20,604,620
- ------------
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................ 3,277,080
- ------------
- ---------------------------------------------
- -------------
Tennessee--1.6%
Tennessee Hsg. Dev.
Agcy., Mortgage
Finance
Aaa $ 3,135 6.15%, 7/1/15, Ser.
B.... $ 3,276,357
- ------------
Texas--6.7%
Brazos River Auth.,
Poll.
Ctrl. Rev.,
(Texas
Utils. Elec.),
Baa1 8,000 7.875%,
3/1/21........... 8,839,040
San Antonio Elec. &
Gas
Rev.,
Aaa 3,425(c) 6.50%, 2/1/12, Ser.
B
Prerefunded
2/1/99
@$101.5................ 3,582,687
Aa1 1,075 6.50%, 2/1/12, Ser.
B.... 1,116,871
- ------------
13,538,598
- ------------
Washington--14.0%
Conservation &
Renewable
Energy Sys.
Conservation
Proj.
Rev.,
Aa1 2,600 6.875%,
10/1/11.......... 2,983,188
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.................. 5,589,350
Snohomish Cnty.,
Pub.
Utils. Dist. No.
1
Elec. Rev.,
A1 1,500 6.90%, 1/1/06, Ser.
A.... 1,617,255
A1 8,000 5.80%,
1/1/24............ 8,076,960
Washington St. Pub.
Pwr. Supply,
Nuclear Proj. No.
1 Rev.,
Aaa 2,500 6.875%, 7/1/17,
Ser. A... 2,763,300
Nuclear Proj. No. 2
Rev.,
Aa1 2,400 6.00%,
7/1/07............ 2,614,656
Nuclear Proj. No. 3
Rev.,
Aa1 2,170 6.75%, 7/1/05, Ser.
A.... 2,348,526
Aaa 1,000(c) 7.25%, 7/1/15, Ser.
B
Prerefunded
1/1/00
@$102.................. 1,082,470
Aa1 1,000 6.50%,
7/1/18............ 1,092,720
- ------------
28,168,425
- ------------
Wyoming--2.1%
Wyoming St. Farm
Loan
Board Capital
Fac.
Rev.,
AA-* 4,000 5.75%,
10/1/20........... 4,220,560
- ------------
Total long-term
investments
(cost
$179,799,086).... 196,057,288
- ------------
</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--1.2%
Goldman Sachs Tax
Exempt
Money Market
Fund,
NR $ 2,196
3.40%.................... $ 2,195,691
California Poll.
Ctrl.
Fin. Auth. Rev.,
So.
Cal. Ed., Ser.
86B
VMIG1 300 3.75%, 11/3/97,
F.R.D.D................ 300,000
- ------------
Total short-term
investments
(cost
$2,495,691)...... 2,495,691
- ------------
Total Investments--
98.4%
(cost
$182,294,777;
Note
3)................ 198,552,979
Other assets in
excess of
liabilities--
1.6%...... 3,263,548
- ------------
Net Assets--
100%......... $201,816,527
- ------------
- ------------
</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, 1997
- ---------------------------------------------
- -------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$182,294,777)........................
$198,552,979
Cash...................................
20,364
Interest receivable....................
3,577,482
Receivable for investments sold........
31,016
---
- ---------
Total assets.........................
202,181,841
---
- ---------
Liabilities
Accrued expenses.......................
151,463
Dividends payable......................
87,107
Advisory fee payable (Note 2)..........
77,151
Accrued taxes payable..................
26,448
Administration fee payable (Note 2)....
23,145
---
- ---------
Total liabilities....................
365,314
---
- ---------
Net Assets.............................
$201,816,527
---
- ---------
---
- ---------
Capital
Remarketed preferred stock ($.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 8,404,759
issued and outstanding)..............
84,048
Paid-in capital........................
115,995,091
Undistributed net investment income....
1,741,347
Accumulated net realized gain on
investments..........................
2,737,839
Net unrealized appreciation on
investments..........................
16,258,202
---
- ---------
Net assets applicable to common stock
(equivalent to $16.28 per share
based on 8,404,759 shares
outstanding).......................
136,816,527
---
- ---------
Total capital (Net assets)...........
$201,816,527
---
- ---------
---
- ---------
</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, 1997
- ---------------------------------------------
- -------------
<TABLE>
<S>
<C>
Net Investment Income
Income
Interest..............................
$11,722,954
--
- ---------
Expenses
Investment advisory fee...............
990,277
Administration fee....................
297,083
Remarketing expense...................
152,000
Directors' fees and expenses..........
114,000
Custodian's fees and expenses.........
55,000
Audit fee and expenses................
42,000
Reports to shareholders...............
41,000
Transfer agent's fees and expenses....
40,000
Tax expense...........................
27,000
Registration expenses.................
17,000
Legal fees and expenses...............
15,000
Amortization of deferred organization
expense...............................
3,953
Miscellaneous.........................
4,663
--
- ---------
Total expenses......................
1,798,976
--
- ---------
Net investment income...................
9,923,978
--
- ---------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions..........................
75,567
Net change in unrealized
appreciation/depreciation on
investments...........................
4,101,139
--
- ---------
Net realized and unrealized gain on
investments...........................
4,176,706
--
- ---------
Net Increase in Net Assets
Resulting from Operations...............
$14,100,684
--
- ---------
--
- ---------
</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 1997
1996
------------
- ------------
<S> <C>
<C>
Operations:
Net investment income...... $ 9,923,978
$ 10,178,624
Net realized gain on
investment
transactions............. 75,567
538,321
Net change in unrealized
appreciation/depreciation
of investments........... 4,101,139
(565,783)
------------
- ------------
Net increase in net assets
resulting from
operations............... 14,100,684
10,151,162
Dividends and distributions:
Dividends to common
shareholders from net
investment income........ (8,052,953)
(8,081,172)
Dividends to preferred
shareholders from net
investment income........ (2,341,196)
(2,271,066)
Distributions to
shareholders from net
realized gains
Common................... --
(251,153)
Preferred................ --
(81,973)
------------
- ------------
Capital share transactions
(Note 4):
Value of Fund shares issued
to shareholders in
reinvestment of
dividends................ 431,295
88,551
------------
- ------------
Total increase (decrease).... 4,137,830
(445,651)
Net Assets
Beginning of year............ 197,678,697
198,124,348
------------
- ------------
End of year.................. $201,816,527
$197,678,697
------------
- ------------
------------
- ------------
</TABLE>
See Notes to Financial Statements. See
Notes to Financial Statements.
7
<PAGE>
- ---------------------------------------------
- -----------------------------------
DUFF & PHELPS UTILITIES TAX-FREE INCOME INC.
Financial Highlights
- ---------------------------------------------
- -----------------------------------
<TABLE>
<CAPTION>
Year Ended October 31,
- ---------------------------------------------
- ---------------
PER SHARE OPERATING PERFORMANCE OF COMMON
SHAREHOLDERS: 1997 1996
1995 1994 1993
- -------- -------- -------- ------
- -- --------
<S>
<C> <C> <C> <C>
<C>
Net asset value, beginning of
year..................... $ 15.84 $
15.90 $ 14.23 $ 16.41 $ 14.14
- -------- -------- -------- ------
- -- --------
Net investment
income(d).............................
1.18 1.21 1.24 1.24
1.24
Net realized and unrealized gain (loss) on
investments(d)...............................
........ .50 --
1.70 (2.25) 2.19
- -------- -------- -------- ------
- -- --------
Net increase (decrease) from investment
operations..... 1.68 1.21
2.94 (1.01) 3.43
- -------- -------- -------- ------
- -- --------
Dividends from net investment income to:
Preferred
shareholders...............................
(.28) (.27) (.31) (.21)
(.20)
- -------- -------- -------- ------
- -- --------
Common
shareholders.................................
. (.96) (.96) (.96)
(.96) (.96)
- -------- -------- -------- ------
- -- --------
Distributions from net realized gains to:
Preferred
shareholders...............................
- -- (.01) -- --
- --
- -------- -------- -------- ------
- -- --------
Common
shareholders.................................
. -- (.03) --
- -- --
- -------- -------- -------- ------
- -- --------
Net asset value, end of
year(a)........................ $ 16.28
$ 15.84 $ 15.90 $ 14.23 $
16.41
- -------- -------- -------- ------
- -- --------
- -------- -------- -------- ------
- -- --------
Per share market value, end of
year(a)................. $ 16.00 $
15.13 $ 14.38 $ 13.25 $ 16.63
- -------- -------- -------- ------
- -- --------
- -------- -------- -------- ------
- -- --------
TOTAL INVESTMENT RETURN OF COMMON
SHAREHOLDERS(b)...... 12.42%
12.19% 16.03% (13.93)% 19.88%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:(c)
Operating
expenses.....................................
1.35% 1.35% 1.37% 1.35%
1.40%
Net investment
income..................................
7.46% 7.69% 8.15% 8.04%
8.00%
SUPPLEMENTAL DATA:
Average net assets of common shareholders
(000)........ $133,055 $132,361
$127,112 $129,300 $129,036
Portfolio
turnover.....................................
5% 10% 66% 37%
1%
Net assets of common shareholders, end of
period
(000)........................................
........ $136,817 $132,678
$133,124 $119,090 $137,104
Asset coverage per share of preferred stock,
end of
period.......................................
........ $155,243 $152,126
$152,403 $141,607 $155,465
Preferred stock outstanding
(000)...................... $ 65,000 $
65,000 $ 65,000 $ 65,000 $ 65,000
</TABLE>
- ---------------
(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.
(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 period.
See Notes to Financial Statements.
8
<PAGE>
- ---------------------------------------------
- -------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Notes to Financial Statements
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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
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
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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 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 ended
October 31, 1997 aggregated $15,020,653 and
$9,414,180, respectively.
The Federal income tax basis of the Fund's
investments at October 31, 1997
was substantially the same as the basis for
financial reporting, and,
accordingly, net unrealized appreciation for
federal income tax purposes was
$16,258,202 (gross unrealized appreciation--
$16,258,202; gross unrealized
depreciation--$0).
Note 4. Capital There are 600
million shares
of $.01 par
value common
stock
authorized.
During the fiscal ended October 31, 1997
the Fund issued common shares in
connection with the reinvestment of
dividends. For the year ended October 31,
1997 the Fund did issue 27,289 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 3.15% to
4.50% during the fiscal ended October 31,
1997.
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,
1997, dividends
declared and paid on preferred
shares totalled $367,155. On November 3, and
December 1, 1997, the Board of
Directors of the Fund declared dividends of
$.08 per common share payable on
November 28, and December 31, 1997,
respectively, to common shareholders of
record on November 14, and December 15, 1997,
respectively.
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REPORT OF
INDEPENDENT AUDITORS
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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,
1997, 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, 1997 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, 1997, 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 21, 1997
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FEDERAL INCOME TAX
INFORMATION
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We are required by the Internal Revenue
Code to advise you within 60 days of
the Fund's fiscal year end (October 31, 1997)
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,
1997, all dividends paid from net
investment income were federally tax-exempt
interest dividends.
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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
Calvin J. Pedersen, Acting
Treasurer & Assistant
Secretary
Investment Adviser
Duff & Phelps Investment
Management Co.
55 East Monroe Street
Suite 3800
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
This report is for stockholder
information. This is not a
prospectus intended for use in
the purchase or sale of Fund shares.
264325101
