<PAGE>
Duff & Phelps
Utilities
Tax-Free
Income Inc.
- ------------------------------------------------------------
Annual Report
October 31, 1998
<PAGE>
Letter to Shareholders
December 8, 1998
Dear Shareholder:
Duff & Phelps Utilities Tax-Free Income Inc. (DTF)
continued to provide a
very attractive level of tax-free income over the past
fiscal year ending
October 31, 1998. On October 30, the stock closed at $17.31.
Our 8 cent
monthly dividend translates to a tax- free yield of 5.54%.
This attractive
level of income continues to be generated by a high quality,
well diversified
investment portfolio.
DTF's total return for the one, three and five year
periods compare
favorably to the Lehman Brothers Municipal Bond Index as
shown below:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(10/31/98)
One Year Three Year
Five Year
<S> <C> <C>
<C>
Duff & Phelps Utilities Tax-
Free Income Inc.1 8.14% 7.46%
6.61%
Lehman Brothers Municipal Index 8.02% 7.40%
6.35%
</TABLE>
1Source: Lipper Analytical Services, Inc. Total return of
the Fund as
calculated for the period ended October 31, 1998 is based on
the 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.
In addition, DTF's total return over the past five years
compares favorably
to the Lipper Leveraged Municipal Bond Fund Index of 6.29%
(this is the average
of 42 closed-end funds for the five years ended October 31,
1998 in the General
and Insured Leveraged Municipal Bond Fund Index according to
Lipper Analytical
Services, Inc.).
-1-
<PAGE>
FUND DIVERSIFICATION
<TABLE>
<CAPTION>
Market Sectors
<S> <C>
Electric Utilities
25%
Non-Utilities
31
Pollution Control
20
Water/Sewer Revenue
13
Pre-Refunded Utilities
9
Cash
2
</TABLE>
The Fund's strong call protection and diversified sector
holdings
contributed to this strong relative performance over these
periods. The Fund's
diversification by market sector is shown above.
General Economic Commentary
The bond market was extremely volatile for the twelve
months ended October
31, 1998 as interest rates declined significantly during
this period in
response to major global economic turmoil which began in
late 1997 and reached
a peak during the third quarter of 1998.
This global economic turmoil was brought on by a series
of currency
devaluations in Asia and heightened by a devaluation of the
Russian Ruble on
August 17. The threat of a global "credit crunch" and
economic recession soon
took hold, sending investors to the safest investments,
specifically US
Treasury securities, causing interest rates to decline.
Concerned that this
credit crunch could slow the US economy dramatically, the
Federal Reserve
reacted by cutting the overnight bank lending rate twice (25
basis points each
cut) in just 17 days. The initial reaction from all
investment markets has
been favorable, however, the Fed remains on watch to ensure
continued economic
expansion in the context of contained inflation.
The Municipal Market and Your Fund
The U.S. Treasury market outperformed the municipal
market over the past
twelve months due primarily to supply and demand factors.
As interest rates declined throughout 1998, municipal
issuers flooded the
market with new supply in an effort to take advantage of the
lower interest
rates. Total new issue supply for 1998 is shaping up to be
the second largest
new supply year on record and the highest level of new
municipal issuance
since the record year of 1993. Retail demand for municipals
could not keep
pace with this massive new supply of bonds coming into the
market causing
yields on municipal bonds to trade close to and even exceed
the yield levels
on 30 year U.S Treasury Bonds at various points. The last
time this ratio of
municipal yields to U.S. Treasury yields exceeded 100% was
in 1986 when then
U.S. Senator Robert Packwood proposed the idea of taxing the
income generated
from municipal bonds. With municipal yields still
historically high relative
to U.S. Treasury yields, municipal bonds remain quite
attractive as we head
into 1999.
-2-
<PAGE>
We continue to emphasize higher quality issues as the
yield premium between
higher quality bonds and lower quality bonds remains close
to historically
narrow levels across the municipal yield curve. The Fund
currently has an
average quality rating of AA/Aa with over 75% of its issues
rated AA or higher.
The electric utility sector continues to be an area of
ongoing due diligence
for us due to the uncertainty surrounding the timing and
extent of electric
deregulation and its ultimate impact on valuations.
Numerous states have adopted or proposed various forms of
electric utility
deregulation while federal law-makers are also debating the
issue in an effort
to propose a national deregulation plan. As such, the
portfolio continues to
be well diversified in an effort to minimize the portfolio's
exposure to any
one sector. Consequently, we have lowered electric utility
exposure to a
historically low level of 25%.
Outlook
As we move forward in 1999, factors that could drive the
relative value of
municipal bonds over the year include; the global economic
outlook and its
impact on the U.S. economy and its investment markets,
legislative
developments that could change the current tax laws relating
to municipal
bonds, and lastly, the amount of new municipal supply that
the market will
experience, especially in light of the large amount of new
issue supply the
market had to digest in 1998. Finally, should the U.S.
stock market continue
to experience the same pace of appreciation that is has
enjoyed subsequent to
its large sell-off during the 3rd quarter of 1998, it could
divert money away
from the tax exempt sector thus putting some additional
pressure on
municipals. In spite of all these potential risks, the
municipal market
represents excellent relative value at current levels. If
we continue to
get good news on the U.S. economic picture and we start to
see a slowdown
in municipal issuance, the municipal market should fare well
in 1999.
We continue to appreciate your interest in the Duff &
Phelps Utilities
Tax-Free Income Fund and look forward to being of continued
service in the
future.
Sincerely,
Francis E. Jeffries, CFA
Chairman of the Board
Calvin J. Pedersen
President and Chief Executive Officer
-3-
<PAGE>
- ----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Portfolio of Investments
October 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note
1)
- ----------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--96.4%
California--16.1%
Foothill/Eastern Trans.
Corridor Agency
California Toll Road
Revenue
Baa $ 5,640 6.00%, 1/1/34, Ser. A.... $
6,033,503
Fresno Swr. Rev.,
Aaa 3,030 6.00%, 9/1/09,
A.M.B.A.C..............
3,520,769
Aaa 2,000 6.25%, 9/1/14,
A.M.B.A.C..............
2,370,620
Pomona California Sngl.
Fam. Mortgage Rev.,
Aaa 2,705 7.375%, 8/1/10...........
3,270,589
Riverside County
California Sngl. Fam.
Rev., Mortgage Backed
Aaa 2,500 7.80%, 5/1/21, Ser. A....
3,395,300
San Bernardino County California
Residential Mtge. Rev.,
Aaa 7,840(c) 9.60%, 9/1/15
Prerefunded 9/1/96
@$100..................
12,139,142
Santa Monica Waste Wtr.
Enterprise Rev.,
Hyperion Proj.,
A1 2,000(c) 6.70%, 1/1/22, Ser. A,
Prerefunded 1/1/02
@$102..................
2,224,860
--------
- ----
32,954,783
--------
- ----
Colorado--2.8%
Colorado Hsg. Fin. Auth.,
Sngl. Fam. Prog.,
Aa2 1,940 8.00%, 6/1/25............
2,121,313
Aa2 995 8.125%, 6/1/25...........
1,099,415
Colorado Springs Utils.
Rev.,
Aa2 2,300 6.50%, 11/15/15, Ser.
A......................
2,511,508
--------
- ----
5,732,236
--------
- ----
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..............
3,854,445
--------
- ----
Florida--7.2%
Dade County Water & Sewer
Systems Rev.,
Aaa 3,000 5.25%, 10/1/26...........
3,075,090
- ----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note
1)
- ----------------------------------------------------------
Florida St. Bd. Ed. Cap.
Outlay,
Pub. Ed.
Aa2 $ 5,000 5.25%, 6/1/23, Ser. D.... $
5,062,450
Martin Cnty. Ind. Dev.
Auth.
Rev., Indiantown Cogen.
Proj.,
Baa3 1,000 7.875%, 12/15/25.........
1,154,720
Reedy Creek Impvt. Dist.
Utils. Rev., Ser. 1,
Aaa 5,500 5.00%, 10/1/19,
M.B.I.A................
5,485,645
--------
- ----
14,777,905
--------
- ----
Georgia--6.3%
Mun. Elec. Auth. Pwr.
Rev.,
Ser. Y,
Aaa 2,615 6.40%, 1/1/13,
A.M.B.A.C..............
3,082,850
Mun. Elec. Auth. Rev.,
Ser. X,
Aaa 2,750 6.50%, 1/1/20,
M.B.I.A................
3,296,892
Aaa 5,500 6.50%, 1/1/20,
A.M.B.A.C..............
6,593,785
--------
- ----
12,973,527
--------
- ----
Idaho--3.9%
Idaho Housing Agency,
Sngl. Fam. Mortgage
Senior
Aa 4,105 6.65%, 7/1/14, Ser. B....
4,514,146
Aaa 3,320 6.60%, 7/1/27, Ser. B....
3,554,259
--------
- ----
8,068,405
--------
- ----
Illinois--8.5%
Chicago Gas Supply Rev.,
(People's Gas, Lt. &
Coke Co.),
Aa3 4,600 6.875%, 3/1/15...........
5,042,428
Chicago Illinois
Aaa 4,000 6.25%, 1/1/11............
4,662,440
Chicago Illinois Sales
Tax Rev.,
Aaa 5,000 5.375%, 1/1/27...........
5,137,050
Chicago Waterworks Rev.,
A1 2,500(c) 7.20%, 11/15/16, Ser.
1989
Prerefunded 11/15/99
@$102..................
2,653,575
--------
- ----
17,495,493
--------
- ----
</TABLE>
See Notes to
Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note
1)
- ----------------------------------------------------------
<S> <C> <C> <C>
Indiana--2.8%
Indiana Mun. Pwr. Agcy.,
Pwr. Supply Sys. Rev.,
Aaa $ 5,000 6.00%, 1/1/13,
M.B.I.A................ $
5,733,750
--------
- ----
Louisiana--5.3%
St. Charles Parish, Poll. Ctrl.
Rev.,
(Louisiana Pwr. & Lt. Co.),
Baa3 3,500 8.25%, 6/1/14............
3,671,885
Baa3 5,500 8.00%, 12/1/14, Ser.
1989...................
5,859,810
Aaa 1,250 7.00%, 12/1/22...........
1,401,200
--------
- ----
10,932,895
--------
- ----
Massachusetts--3.0%
Massachusetts St., Wtr.
Res. Auth., Ser. A,
Aaa 5,330 7.00%, 8/1/13,
M.B.I.A................
6,237,699
--------
- ----
Nebraska--2.8%
Omaha Pub. Pwr. Dist.,
Elec. Rev.,
Aa2 2,500 6.15%, 2/1/12, Ser. B....
2,881,225
Aa2 2,500 6.20%, 2/1/17, Ser. B....
2,864,650
--------
- ----
5,745,875
--------
- ----
New York--10.1%
New York City Mun. Wtr.
Fin. Auth., Wtr. & Swr.
Sys. Rev.,
A1 3,760(c) 7.10%, 6/15/12
Prerefunded 6/15/01
@$101..................
4,115,508
New York St. Dorm. Auth.
Rev.,
Comsewogue Pub. Lib.
Insd.
Aaa 2,680 6.00%, 7/1/15,
M.B.I.A................
2,953,950
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....................
3,190,650
A1 4,000 7.125%, 12/1/29..........
4,614,400
New York St. Envir. Fac.
Corp.
Poll. Ctrl. Rev.,
Aaa 5,000 6.90%, 11/15/15
5,791,450
--------
- ----
20,665,958
--------
- ----
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................
3,273,450
--------
- ----
- ----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note
1)
- ----------------------------------------------------------
Tennessee--1.6%
Tennessee Hsg. Dev.
Agcy.,
Mortgage Finance
Aaa $ 3,135 6.15%, 7/1/15, Ser. B.... $
3,349,465
--------
- ----
Texas--6.5%
Brazos River Auth., Poll.
Ctrl. Rev., (Texas
Utils. Elec.),
Baa1 8,000 7.875%, 3/1/21...........
8,700,960
San Antonio Elec. & Gas
Rev.,
Aaa 3,425(c) 6.50%, 2/1/12, Ser. B
Prerefunded 2/1/99
@$101.5................
3,505,727
Aa1 1,075 6.50%, 2/1/12, Ser. B....
1,099,080
--------
- ----
13,305,767
--------
- ----
Washington--13.9%
Conservation & Renewable
Energy Sys.
Conservation Proj.
Rev.,
Aa1 2,600 6.875%, 10/1/11..........
2,990,624
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..................
5,554,100
Snohomish Cnty., Pub.
Utils.
Dist. No. 1 Elec. Rev.,
A1 1,500 6.90%, 1/1/06, Ser. A....
1,617,930
A1 8,000 5.80%, 1/1/24............
8,469,920
Washington St. Pub. Pwr. Supply,
Nuclear Proj. No. 1 Rev.,
Aaa 2,500 6.875%, 7/1/17, Ser. A...
2,747,525
Nuclear Proj. No. 2 Rev.,
Aa1 2,400 6.00%, 7/1/07............
2,681,448
Nuclear Proj. No. 3 Rev.,
Aa1 2,170 6.75%, 7/1/05, Ser. A....
2,378,298
Aaa 1,000(c) 7.25%, 7/1/15, Ser. B
Prerefunded 1/1/00
@$102..................
1,062,700
Aa1 1,000 6.50%, 7/1/18............
1,089,690
--------
- ----
28,592,235
--------
- ----
Wyoming--2.1%
Wyoming St. Farm Loan
Board Capital Fac.
Rev.,
AA-* 4,000 5.75%, 10/1/20...........
4,308,000
--------
- ----
Total long-term
investments
(cost $178,217,570)....
198,001,888
--------
- ----
</TABLE>
See Notes to
Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note
1)
- ----------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--2.0%
Goldman Sachs Tax-Exempt
Money Market Fund,
NR $ 3,918 2.84%.................... $
3,918,057
California Poll. Ctrl. Fin. Auth.
Rev.,
So. Cal. Ed., Ser. 86B
VMIG1 300 3.35%, 11/2/98,
F.R.D.D................
300,000
--------
- ----
Total short-term
investments
(cost $4,218,057)
4,218,057
--------
- ----
Total Investments--98.4%
(cost $182,435,627;
Note 3)................
202,219,945
Other assets in excess of
liabilities--1.6%......
3,245,282
--------
- ----
Net Assets--100%.........
$205,465,227
--------
- ----
--------
- ----
</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, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$182,435,627)........................ $202,219,945
Cash................................... 29,347
Interest receivable.................... 3,541,232
Receivable for investments sold........ 129,188
------------
Total assets......................... 205,919,712
------------
Liabilities
Accrued expenses....................... 263,584
Dividends payable...................... 87,752
Advisory fee payable (Note 2).......... 79,345
Administration fee payable (Note 2).... 23,804
------------
Total liabilities.................... 454,485
------------
Net Assets............................. $205,465,227
------------
------------
Capital
Remarketed preferred stock ($.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 8,452,486
issued and outstanding).............. 84,525
Paid-in capital........................ 119,520,994
Undistributed net investment income.... 1,189,237
Accumulated net realized loss on
investments.......................... (113,847)
Net unrealized appreciation on
investments.......................... 19,784,318
------------
Net assets applicable to common stock
(equivalent to $16.62 per share
based on 8,452,486 shares
outstanding)....................... 140,465,227
------------
Total capital (Net assets)........... $205,465,227
------------
------------
</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, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Interest.............................. $11,730,831
-----------
Expenses
Investment advisory fee............... 1,009,404
Administration fee.................... 302,821
Remarketing expense................... 162,500
Directors' fees and expenses.......... 123,000
Custodian's fees and expenses......... 73,000
Transfer agent's fees and expenses.... 55,000
Audit fee and expenses................ 42,000
Reports to shareholders............... 35,000
Legal fees and expenses............... 21,000
Registration expenses................. 17,000
Miscellaneous......................... 8,000
-----------
Total expenses...................... 1,848,725
-----------
Net investment income................... 9,882,106
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on investment
transactions.......................... (113,847)
Net change in unrealized appreciation on
investments........................... 3,526,116
-----------
Net realized and unrealized gain on
investments........................... 3,412,269
-----------
Net Increase in Net Assets
Resulting from Operations............... $13,294,375
-----------
-----------
</TABLE>
- ----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Statement of Changes
In Net Assets
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease)
in Net Assets Year Ended October 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operations:
Net investment income...... $ 9,882,106 $ 9,923,978
Net realized gain (loss) on
investment
transactions............. (113,847) 75,567
Net change in unrealized
appreciation of
investments.............. 3,526,116 4,101,139
------------ ------------
Net increase in net assets
resulting from
operations............... 13,294,375 14,100,684
Dividends and distributions:
Dividends to common
shareholders from net
investment income........ (8,086,351) (8,052,953)
Dividends to preferred
shareholders from net
investment income........ (2,347,865) (2,341,196)
Capital share transactions
(Note 4):
Value of Fund shares issued
to shareholders in
reinvestment of
dividends................ 788,541 431,295
------------ ------------
Total increase............... 3,648,700 4,137,830
Net Assets
Beginning of year............ 201,816,527 197,678,697
------------ ------------
End of year.................. $205,465,227 $201,816,527
------------ ------------
------------ ------------
</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: 1998
1997 1996 1995 1994
--------
- -------- -------- -------- --------
<S> <C>
<C> <C> <C> <C>
Net asset value, beginning of year............. $ 16.28
$ 15.84 $ 15.90 $ 14.23 $ 16.41
--------
- -------- -------- -------- --------
Net investment income(d)..................... 1.17
1.18 1.21 1.24 1.24
Net realized and unrealized gain (loss) on
investments(d)............................... .41
.50 -- 1.70 (2.25)
--------
- -------- -------- -------- --------
Net increase (decrease) from investment
operations................................... 1.58
1.68 1.21 2.94 (1.01)
--------
- -------- -------- -------- --------
Dividends from net investment income to:
Preferred shareholders....................... (.28)
(.28) (.27) (.31) (.21)
--------
- -------- -------- -------- --------
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)................ $ 16.62
$ 16.28 $ 15.84 $ 15.90 $ 14.23
--------
- -------- -------- -------- --------
--------
- -------- -------- -------- --------
Per share market value, end of year(a)......... $ 17.31
$ 16.00 $ 15.13 $ 14.38 $ 13.25
--------
- -------- -------- -------- --------
--------
- -------- -------- -------- --------
TOTAL INVESTMENT RETURN OF COMMON
SHAREHOLDERS(b)................................ 11.41%
12.42% 12.19% 16.03% (13.93)%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:(c)
Operating expenses............................. 1.34%
1.35% 1.35% 1.37% 1.35%
Net investment income.......................... 7.18%
7.46% 7.69% 8.15% 8.04%
SUPPLEMENTAL DATA:
Average net assets of common shareholders
(000)........................................ $137,680
$133,055 $132,361 $127,112 $129,300
Portfolio turnover............................. 0%
5% 10% 66% 37%
Net assets of common shareholders, end of year
(000)........................................ $140,465
$136,817 $132,678 $133,124 $119,090
Asset coverage per share of preferred stock,
end of year.................................. $158,050
$155,243 $152,126 $152,403 $141,607
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 year.
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 60 days
but which currently have maturities of 60 days or less are
valued at cost
adjusted for amortization of premiums and accretion of
discounts.
Securities Transactions and Investment Income: Securities
transactions are
recorded on the trade date. Realized gains and losses on
sales of securities are
calculated on the identified cost basis. Interest income is
recorded on the
accrual basis. The Fund amortizes premiums and accretes
original issue discount
on securities using the effective interest method.
Federal Income Taxes: It is the Fund's intention to meet the
requirements of the
Internal Revenue Code applicable to regulated investment
companies and to
distribute sufficient net income to shareholders to qualify
as a regulated
investment company. For this reason, no federal income tax
provision is
required.
On the statement of assets and liabilities, as a result
of permanent
book-to-tax differences, $2,737,839 has been reclassed from
accumulated net
realized gains to paid-in-capital. This reclassification has
no effect on net
assets or net asset value per share.
Dividends and Distributions: The Fund will declare and pay
dividends to common
shareholders monthly from net investment income. Net long-
term capital gains, if
any, in excess of loss carryforwards are expected to be
distributed annually.
The Fund will make a determination at the end of its fiscal
year as to whether
to retain or distribute such gains. Dividends and
distributions are recorded on
the ex-dividend date. Dividends to preferred shareholders
are accrued on a
weekly basis and are determined as described in Note 4.
Income distributions and capital gain distributions are
determined in
accordance with income tax regulations which may differ from
investment income
and capital gains recorded in accordance with generally
accepted accounting
principles.
Use of Estimates: The preparation of financial statements in
conformity with
generally accepted accounting principles requires management
to make estimates
and assumptions that affect the amounts reported in the
financial statements and
accompanying notes. Actual results could differ from those
estimates.
Note 2. Agreements The Fund has an Advisory
Agreement with Duff & Phelps
Investment Management
Co. (the 'Adviser'), a subsidiary of Phoenix Duff & Phelps
Corporation, and an
Administration Agreement with Prudential Investments Fund
Management LLC
('PIFM'), an indirect, wholly owned subsidiary of The
Prudential Insurance
Company of America.
The investment fee paid to the Adviser is computed weekly
and payable monthly
at an annual rate of .50% of the Fund's average weekly
managed assets. The
administration fee paid to PIFM is also computed weekly and
payable monthly at
an annual rate of .15% of the Fund's average weekly managed
assets.
9
<PAGE>
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 year ended
October 31, 1998 aggregated $0 and $1,190,000, respectively.
The Federal income tax basis of the Fund's investments at
October 31, 1998
was substantially the same as the basis for financial
reporting and,
accordingly, net unrealized appreciation for federal income
tax purposes was
$19,784,318 (gross unrealized appreciation--$19,792,192;
gross unrealized
depreciation--$7,874).
The Fund had a capital loss carryforward as of October
31, 1998 of
approximately $113,800 which expires in 2006. Accordingly,
no capital gains
distribution is expected to be paid to shareholders until
net realized gains
have been realized in excess of such amounts.
Note 4. Capital There are 600 million shares
of $.01 par value common stock
authorized.
During the fiscal year ended October 31, 1998 the Fund
issued 47,727 common
shares in connection with the reinvestment of dividends. For
the year ended
October 31, 1997 the Fund issued 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 3.25% to
4.50% during the fiscal year ended October 31, 1998.
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,
1998, dividends declared and
paid on preferred
shares totalled $361,348. On November 2, 1998, the Board of
Directors of the
Fund declared a dividend of $.08 per common share payable on
November 30, to
common shareholders of record on November 16. On November
17, 1998 the Board of
Directors approved a dividend of $.08 per common share to be
declared on
December 1, 1998 payable on December 31, to common
shareholders of record on
December 15.
10
<PAGE>
- ------------------------------------------------------------
- --------------------
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, 1998, and the
related statement of
operations for the year then ended, the statement of changes
in net assets for
each of the two years in the period then ended and the
financial highlights for
each of the five years in the period then ended. These
financial statements and
financial highlights are the responsibility of the Fund's
management. Our
responsibility is to express an opinion on these financial
statements and
financial highlights based on our audits.
We conducted our audits in accordance with 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, 1998 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,
1998, 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 five years in the period then ended, in conformity with
generally accepted
accounting principles.
Ernst & Young LLP
Chicago, Illinois
November 20, 1998
- ------------------------------------------------------------
- --------------------
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, 1998) 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, 1998, all
dividends paid from net
investment income were federally tax-exempt interest
dividends.
11
<PAGE>
- ------------------------------------------------------------
- --------------------
OTHER INFORMATION (Unaudited)
- ------------------------------------------------------------
- --------------------
Pursuant to certain rules of the Securities and Exchange
Commission the
following additional disclosure is required.
Pursuant to the Fund's Dividend Reinvestment Plan (the
'Plan'), common
shareholders may elect to have all distributions of
dividends and capital gains
automatically reinvested by State Street Bank & Trust
Company (the 'Plan Agent')
in shares of common stock of the Fund ('Fund Shares')
pursuant to the Plan;
provided that such election is subject to the power of the
Board of Directors to
declare capital gains distributions in the form of stock (if
such a declaration
is made by the Board of Directors, all shareholders who do
not elect to receive
cash will receive the distribution in the form of stock
whether or not they
elect to participate in the Plan). Common shareholders who
do not participate in
the Plan will receive all distributions in cash (except as
described above) paid
by check in United States dollars mailed directly to the
shareholder of record
(or if the shares are held in street or other nominee name,
then to the nominee)
by the Custodian, as dividend disbursing agent. Common
shareholders who wish to
participate in the Plan should contact the Fund at P.O. Box
8200, Boston,
Massachusetts, 02266 or call toll free (800) 451-6788.
The Plan Agent serves as agent for the common
shareholders in administering
the Plan. After the Fund declares a dividend or determines
to make a capital
gain distribution, if (1) the market price is lower than net
asset value, the
participants in the Plan will receive the equivalent in Fund
Shares valued at
the market price determined as of the time of purchase
(generally, the payment
date of the dividend or distribution); or if (2) the market
price of Fund Shares
on the payment date of the dividend or distribution is equal
to or exceeds their
net asset value, participants will be issued Fund Shares at
the higher of net
asset value or 95% of the market price. This discount
reflects savings in
underwriting and other costs that the Fund otherwise will be
required to incur
to raise additional capital. If net asset value exceeds the
market price of Fund
Shares on the payment date or the Fund declares a dividend
or other distribution
payable only in cash (i.e., if the board of directors
precludes reinvestment in
Fund Shares for that purpose), the Plan Agent will, as agent
for the
participants, receive the cash payment and use it to buy
Fund Shares in the open
market, on the New York Stock Exchange, other national
securities exchanges on
which the Fund's common stock is listed or elsewhere, for
the participants'
accounts. If, before the Plan Agent has completed its
purchases, the market
price exceeds the net asset value of a Fund Share, the
average per share
purchase price paid by the Plan Agent may exceed the net
asset value of Fund
Shares, resulting in the acquisition of fewer shares than if
the dividend or
distribution had been paid in shares issued by the Fund. The
Fund will not issue
shares under the Plan below net asset value.
Participants in the Plan may withdraw from the Plan upon
written notice to
the Plan Agent and will receive certificates for whole Fund
Shares and a cash
payment will be made for any fraction of a Fund Share.
There is no charge to participants for reinvesting
dividends or capital gain
distributions, except for certain brokerage commissions, as
described below. The
Plan Agent's fees for the handling of the reinvestment of
dividends and
distributions will be paid by the Fund. There will be no
brokerage commissions
charged with respect to shares issued directly by the Fund.
However, each
participant will pay a pro rata share of brokerage
commissions incurred with
respect to the Plan Agent's open market purchases in
connection with the
reinvestment of dividends and distributions. The automatic
reinvestment of
dividends and distributions will not relieve participants of
any federal income
tax that may be payable on such dividends or distributions.
Experience under the Plan may indicate that changes are
desirable.
Accordingly, the Fund reserves the right to amend or
terminate the Plan as
applied to any dividend or distribution paid subsequent to
written notice of the
change sent to all shareholders of the Fund at least 90 days
before the record
date for the dividend or distribution. The Plan also may be
amended or
terminated by the Plan Agent upon at least 90 days written
notice to all common
shareholders of the Fund. All correspondence concerning the
Plan should be
directed to the Fund at the address on the front of this
report.
The Plan has been amended to permit Plan participants
periodically to
purchase additional common shares through the Plan by
delivering to the Plan
Agent a check for at least $100, but not more than $5,000,
in any month. The
Plan Agent will use the funds to purchase shares in the open
market or in
private transactions as described above with respect to
reinvestment of
dividends and distributions. This amendment to the Plan was
approved by the
Board on May 27, 1998 and is effective September 1, 1998.
Thereafter, purchases
made pursuant to the Plan will be made commencing at the
time of the first
dividend or distribution payment following the second
business day after receipt
of the funds for additional purchases, and may be aggregated
with
12
<PAGE>
purchases of shares for reinvestment of the dividends and
distributions. Shares
will be allocated to the accounts of participants purchasing
additional shares
at the average price per share, plus a service charge
imposed by the Plan Agent
and brokerage commissions (or equivalent purchase costs)
paid by the Plan Agent
for all shares purchased by it, including for reinvestment
of dividends and
distributions. Checks drawn on a foreign bank are subject to
collection and
collection fees, and will be invested at the time of the
next distribution after
funds are collected by the Plan Agent.
The Plan Agent will make every effort to invest funds
promptly, and in no
event more than 30 days after the Plan Agent receives a
dividend or
distribution, except where postponement is deemed necessary
to comply with
applicable provisions of the federal securities laws.
Funds sent to the Plan Agent for voluntary additional
share investment may be
recalled by the participant by written notice received by
the Plan Agent not
later than two business days before the next distribution
payment date. If for
any reason a regular monthly distribution is not paid by the
Fund, funds for
voluntary additional share investment will be returned to
the participant,
unless the participant specifically directs that they
continue to be held by the
Plan Agent for subsequent investment.
There have been no material changes in the Fund's
investment objectives or
policies, charter or by-laws and principal risk factors
associated with
investment in the Fund.
- ------------------------------------------------------------
- --------------------
Year 2000 Risks (Unaudited)
- ------------------------------------------------------------
- --------------------
Like other business organizations and individuals around
the world, the Fund
could be adversely affected if the computer systems used by
the Fund and its
service providers do not properly process and calculate date-
related information
from and after January 1, 2000. The Fund is taking steps
that it believes are
reasonably designed to address the Year 2000 problem with
respect to the
computer systems it uses and to obtain satisfactory
assurances that comparable
steps are being taken by each of the Fund's other major
service providers. The
Fund does not expect to incur any significant costs in order
to address the Year
2000 problem however, at this time, there can be no
assurance that these steps
will be sufficient to avoid any adverse impact on the Fund.
13
<PAGE>
- ------------------------------------------------------------
- -------
Directors
Francis E. Jeffries, Chairman
E. Virgil Conway
William W. Crawford
William N. Georgeson
Philip R. McLoughlin
Everett L. Morris
Eileen A. Moran
Richard A. Pavia
Harry Dalzell-Payne
Officers
Calvin J. Pedersen, President & Chief Executive
Officer
James D. Wehr, Vice President & Chief Investment
Officer
Timothy M. Heaney, Vice President
Thomas N. Steenburg, Secretary
James W. Rosenberger, Treasurer & Assistant
Secretary
Investment Adviser
Duff & Phelps Investment Management Co.
55 East Monroe Street
Suite 3600
Chicago, IL 60603
(312) 368-5500
Administrator
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Call toll free (800) 225-1852
Custodian and Transfer Agent
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Call toll free (800) 451-6788
Independent Auditors
Ernst & Young LLP
233 South Wacker Drive
Chicago, IL 60606
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom (Chicago)
333 West Wacker Drive
Chicago, IL 60606
This report is for stockholder information.
This is not a
prospectus intended for use in the purchase or
sale of Fund shares.
264325101
