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