Letter to
Shareholders
-------------------------------------------------
December 3, 2001
Dear Shareholder:
Fund Performance
Duff & Phelps Utilities Tax-Free Income Fund (DTF) provided an
attractive level of tax-free income over the past twelve months
ending October 31, 2001. On October 31st, the stock closed at
$14.45. Our $0.0625 cent monthly dividend translates to a tax-free
current yield of 5.19%. This level of income continues to be
generated by a high quality, well-diversified investment portfolio.
The DTF's total return based on the net asset value, for its one,
three and five year periods is compared to its Lipper Leveraged
Municipal Peer Group below:
ANNUALIZED TOTAL RETURN
(10/31/01)
One Year Three Year Five Year Since Inception1
DTF 13.44% 5.76% 6.91% 7.98%
Lipper Leveraged
Municipal Peer Group 12.97 4.91 6.64 7.37
1 Inception date 11/30/91.
The Fund's strong credit quality combined with good call protection
and well diversified sector holdings, contributed to this
outperformance over these periods. The Fund's diversification by
market sector is shown below:
Fund Diversification
Market Sectors
Water/Sewer Revenue 29%
Electric Utilities 20
Pollution Control 11
Pre-Refunded Utilities 7
Non-Utilities 32
Cash 1
General Economic Commentary
The bond market has seen short-term U.S. Treasury rates decline
significantly in 2001, as the Federal Reserve lowered interest rates
nine times, totaling 400 basis points, in response to a rapidly
deteriorating domestic
-1-
economy. The Fed remains on close watch as the U.S. economy has moved
into a recession. Over the twelve months ended October 31, 2001,
two-year U.S. Treasury rates have decreased by 349 basis points
while 30-year U.S. Treasury rates have declined by only 91 basis
points. This significant decline in short-term rates is a reversal
of the market's trend last year. As a result of this significant
decline in short-term rates, the U.S. Treasury yield curve has
steepened dramatically. We expect the U.S. Treasury curve to
remain steep over the near term, as the weak economy and a very
aggressive Fed should keep shorter-term rates low.
The U.S. economy continued to slow in 2001 after setting a post war
record of over nine years of uninterrupted economic expansion. The
tragic events of September 11th helped push the U.S. economy lower as
already weak corporate profits are now expected to remain low into
2002. Additionally, layoff announcements pushed the unemployment
rate higher, consumer spending has slowed, GDP growth has declined,
and the decline in the performance of the equity markets have all
contributed to the current recessionary conditions. The national
unemployment rate, which ended 2000 at 4.0%, rose to 5.4% by the end
of October 2001 as company layoffs impacted employment. Consumer
spending, as measured by retail sales, has experienced several
declines over the past twelve months as consumers have become more
cautious in the face of rising unemployment. Inflation, as measured
by the Consumer Price Index (CPI), has declined steadily in 2001 as
it ended October on a year-over-year basis at 2.1%, down from
December 2000 at 3.4%. Despite the recent easing of monetary policy,
the economy remains fragile as labor markets have slowed and consumer
spending is weaker. Consumer confidence remains a critical element
for a healthy economy. Consequently, we expect the Fed to remain
vigilant to ensure that the economy does not dip into a prolonged
recession.
The Municipal Market and Your Fund
The past twelve months in the tax-exempt market could be
characterized by two major themes: a significant steepening of the
tax-exempt yield curve and increased supply of municipal bonds. The
aggressive interest rate actions by the Fed in attempt to jump start
the economy resulted in a dramatic steepening of the municipal yield
curve. Through October of 2001, long maturity tax-exempt rates
declined by only 20-25 basis points. However, there was a pronounced
decline in rates seven years and shorter, causing the yield curve to
steepen to levels not seen since 1992. The second theme has been
increased supply. Municipalities have taken advantage of
historically low municipal yields to fund new projects as well as
refund older, higher cost debt. Through October of 2001, new
issuance is up 36% year over year, driven by refinancing of older,
higher cost debt, which is up 238% this year. Generally, new issues
are heavily weighted toward longer-dated maturities when rates are
low. As such, this higher proportion of longer-dated bonds has
contributed to the steepening of the municipal yield curve. Overall,
municipal credit spreads have tightened over the past twelve months.
-2-
However, credit spreads still remain narrow when taking the risks of
lower rated securities into consideration, making higher quality
bonds still good relative value.
Within the DTF Fund, we continue to emphasize higher quality bonds.
The Fund currently has an average quality rating of AA with over 90%
of its issues rated AA or higher. Within the utility segment of the
portfolio, the Fund is well diversified between electric utility,
pollution control, and water/sewer issues. The electric utility
sector continues to be an area of close focus due to the problems
experienced in California with electric deregulation. Specifically,
the power crisis that plagued California cast a negative shadow over
the electric utility industry. The challenges facing electric
utilities are likely to continue as each model of deregulation
experiences growing pains. As a result, the portfolio remains well
diversified in an effort to minimize exposure to any one sector, with
electric utility exposure currently at 20%, which historically is a
low level of exposure for the DTF fund. Further, the fund has no
exposure to any California electric utilities.
Outlook
As we move forward into 2002, factors that could drive the relative
value of municipal bonds over the next year include: the U.S.
economic outlook, further tax reform which impacts the demand for
municipal bonds, Federal Reserve policy, and future U.S. military
actions abroad that could cause a flight to U.S. Treasury bonds.
Finally, should the U.S. stock market continue to experience the same
level of volatility and negative returns that is has experienced over
the past year, nervous investors could continue to move money into
tax-exempt issues, which could be positive for the market. In spite
of these uncertainties, we believe the municipal market represents
good relative value at current levels.
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
President and Chief Executive Officer
-3-
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DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Portfolio of Investments
October 31, 2001
----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
----------------------------------------------------------
LONG-TERM INVESTMENTS--98.4%
Alabama--3.3%
Jefferson Cnty. Swr.
Rev. Capital Impvt.,
Aaa $ 3,000 5.125%, 2/1/29, Ser. A,
F.G.I.C................ $ 3,005,460
Aaa 4,000 5.00%, 2/1/33, Ser. A,
F.G.I.C................ 3,931,360
------------
6,936,820
------------
California--16.0%
Foothill/Eastern Corr.
Agency Toll Road Rev.,
Aaa 5,640(b) 6.00%, 1/1/34, Ser. A,
Prerefunded 1/1/07 @
$100................... 6,484,759
Fresno Swr. Rev.,
Aaa 3,030 6.00%, 9/1/09,
A.M.B.A.C.............. 3,535,859
Aaa 2,000 6.25%, 9/1/14,
A.M.B.A.C.............. 2,421,180
Pomona Sngl. Fam. Mtge.
Rev.,
Aaa 2,705 7.375%, 8/1/10
Escrowed to maturity... 3,195,958
Riverside Cnty. Sngl.
Fam.
Rev., Mtge. Backed
Aaa 2,500 7.80%, 5/1/21, Ser. A,
Escrowed to maturity... 3,392,350
San Bernardino Cnty.
Residential Mtge. Rev.,
Aaa 7,840 9.60%, 9/1/15
Escrowed to maturity... 12,062,310
Santa Monica Waste Wtr.
Enterprise Rev.,
Hyperion Proj.,
A1 2,000(b) 6.70%, 1/1/22, Ser. A,
Prerefunded 1/1/02 @
$102................... 2,055,500
------------
33,147,916
------------
Colorado--1.7%
Colorado Hsg. Fin. Auth.,
Sngl. Fam. Prog.,
Aa2 745 8.00%, 6/1/25............ 791,063
Aa2 300 8.125%, 6/1/25........... 318,546
Colorado Springs Utils.
Rev.,
Aa2 2,300 6.50%, 11/15/15, Ser.
A...................... 2,349,933
------------
3,459,542
------------
----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
----------------------------------------------------------
Connecticut--3.3%
Connecticut St. Airport
Rev.,
Aaa $ 925(b) 7.65%, 10/1/12,
F.G.I.C................ $ 1,055,083
Prerefunded 10/1/04 @
$100
Aaa 2,075 7.65%, 10/1/12,
F.G.I.C................ 2,338,130
Mashantucket Western
Pequot Tribe Spl. Rev.,
Baa3 3,500 5.75%, 9/1/18, Ser. B.... 3,499,685
------------
6,892,898
------------
Delaware--1.8%
Delaware St., Econ. Dev.
Auth. Rev., Delmarva
Pwr.
Aaa 3,500 6.75%, 5/1/19, Ser. B,
A.M.B.A.C.............. 3,641,820
------------
Florida--3.9%
Dade Cnty. Wtr. & Swr.
Sys. Rev.,
Aaa 3,000 5.25%, 10/1/26,
F.G.I.C................ 3,064,140
St. Petersburg Public
Utility Rev., Ser A
Aaa 5,000 5.00%, 10/1/28, F.S.A.... 5,003,700
------------
8,067,840
------------
Georgia--10.9%
Atlanta Wtr. & Wastewater
Rev., Ser. A,
Aaa 5,000 5.00%, 11/1/29,
F.G.I.C................ 4,985,050
Aaa 1,500 5.00%, 11/1/38,
F.G.I.C................ 1,480,065
De Kalb Cnty. Wtr. & Swr.
Rev.,
Aa2 4,000 5.00%, 10/1/24........... 4,005,520
Fulton Cnty. Schl. Dist.,
Aa2 2,000 5.375%, 1/1/16........... 2,194,960
Georgia Mun. Elec. Auth.
Pwr. Rev., Ser. Y,
Aaa 145 6.40%, 1/1/13,
A.M.B.A.C.............. 174,054
Aaa 2,470 6.40%, 1/1/13,
A.M.B.A.C.............. 2,957,578
Georgia Mun. Elec. Auth.
Rev.,
Aaa 5,500 6.50%, 1/1/20, Ser. X,
A.M.B.A.C.............. 6,684,975
------------
22,482,202
------------
See Notes to Financial Statements.
4
----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
----------------------------------------------------------
Idaho--3.2%
Idaho Hsg. Agcy.,
Sngl. Fam. Mtge. Sr.,
Aa1 $ 3,555 6.65%, 7/1/14, Ser. B.... $ 3,803,281
Aaa 2,600 6.60%, 7/1/27, Ser. B,
F.H.A.................. 2,724,852
------------
6,528,133
------------
Illinois--4.6%
Chicago Gas Supply Rev.
(People's Gas, Lt. &
Coke Co.),
Aa3 4,600 6.875%, 3/1/15........... 4,753,364
Chicago Gen. Oblig.,
Aaa 4,000 6.25%, 1/1/11,
A.M.B.A.C.............. 4,674,680
------------
9,428,044
------------
Indiana--2.8%
Indiana Mun. Pwr. Agcy.,
Pwr. Supply Sys. Rev.,
Aaa 5,000 6.00%, 1/1/13, Ser. B,
M.B.I.A................ 5,776,000
------------
Kentucky--1.0%
Louisville & Jefferson
Cnty. Met. Swr.
District,
Swr. & Drain. Sys.
Rev.,
Aaa 2,000 5.00%, 5/15/30,
F.G.I.C................ 1,981,940
------------
Louisiana--0.6%
St. Charles Parish, Solid
Waste Disp. Rev.,
(Louisiana Pwr. & Lt.
Co.),
Aaa 1,250 7.00%, 12/1/22, F.S.A.... 1,331,363
------------
Massachusetts--6.1%
Boston Wtr. & Swr.
Comm. Rev.,
Aaa 2,000 5.00%, 11/1/28, Ser. D,
F.G.I.C................ 1,993,820
Massachusetts St. Tpk.
Auth., Met. Highway
Sys. Rev.,
Aaa 2,355 5.125%, 1/1/23, Ser. B... 2,365,480
Aaa 2,500 4.75%, 1/1/34, Ser. A,
A.M.B.A.C.............. 2,339,775
Massachusetts St., Wtr.
Res. Auth.,
Aaa 5,330(b) 7.00%, 8/1/13, Ser. A,
M.B.I.A., Prerefunded
8/1/04 @ $101 1/2...... 6,025,778
------------
12,724,853
------------
Michigan--1.0%
Detroit Wtr. Supply Sys.
Rev., Sr. Lien, Ser. A,
Aaa 2,000 5.00%, 7/1/30,
F.G.I.C................ 1,972,860
------------
----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
----------------------------------------------------------
Nebraska--2.8%
Omaha Pub. Pwr. Dist.,
Elec. Rev.,
Aa2 $ 2,500 6.15%, 2/1/12, Ser. B,
Escrowed to maturity... $ 2,910,400
Aa2 2,500 6.20%, 2/1/17, Ser. B,
Escrowed to maturity... 2,926,900
------------
5,837,300
------------
New Jersey--1.0%
New Jersey St., Ser. H,
Aa1 2,000 5.25%, 7/1/17............ 2,169,560
------------
New York--10.5%
Long Island Pwr. Auth.
Elec. Sys. Rev.,
Aaa 4,000 5.25%, 12/1/26, Ser. A,
M.B.I.A................ 4,063,320
New York City Mun. Wtr.
Fin. Auth. Wtr. & Swr.
Sys. Rev.,
Aaa 5,000 5.00%, 6/15/29, Ser. B,
F.S.A.................. 4,948,000
New York St. Dorm. Auth.
Rev.,
Comsewogue Pub. Lib.
Insd.,
Aaa 2,380 6.00%, 7/1/15,
M.B.I.A................ 2,627,472
New York St. Energy
Research & Dev. Auth.
Facs. Rev.,
(Con Edison Co. of
N.Y.),
A1 4,000 7.125%, 12/1/29.......... 4,532,400
New York St. Envir. Fac.
Corp.
Poll. Ctrl. Rev.,
Aaa 5,000 6.90%, 11/15/15, Ser.
D...................... 5,648,900
------------
21,820,092
------------
Pennsylvania--1.5%
Montgomery Cnty. Ind.
Dev.,
Auth., Poll. Ctrl.
Rev.,
Ser. B, (PECO Energy
Co.),
Aaa 3,000 6.70%, 12/1/21........... 3,069,510
------------
Tennessee--1.6%
Tennessee Hsg. Dev.
Agcy.,
Mtge. Fin.,
Aaa 3,135 6.15%, 7/1/15, Ser. B,
M.B.I.A................ 3,323,633
------------
Texas--9.4%
Bexar Met. Wtr. Dist.
Waterworks Sys. Rev.,
Aaa 2,500 5.00%, 5/1/25,
M.B.I.A................ 2,476,125
See Notes to Financial Statements.
5
----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
----------------------------------------------------------
Texas (cont'd.)
Coastal Wtr. Auth.
Contract Rev.,
City Of Houston Proj.,
Aaa $ 4,000 5.00%, 12/15/25,
F.S.A.................. $ 3,961,040
Harris Cnty. Toll Road
Sub. Lien.,
Aa1 1,650 7.00%, 8/15/10, Ser. A... 2,009,535
Houston Wtr. & Swr. Sys.
Rev.,
Aaa 1,500 5.25%, 12/1/23, Ser. B... 1,523,760
Aaa 3,500 5.00%, 12/1/28, Ser. A... 3,453,835
Lower Colorado River
Auth. Rev.,
Refunding & Impvmnt.,
Aaa 2,000 5.00%, 5/15/31, F.S.A.... 1,969,600
San Antonio Elec. & Gas
Rev.,
Aa1 4,000 5.00%, 2/1/18, Ser. A.... 4,013,120
------------
19,407,015
------------
Virginia--1.9%
Henrico Cnty. Wtr. & Swr.
Rev.,
Aa2 3,985 5.00%, 5/1/28............ 3,990,978
------------
Washington--7.4%
Conservation & Renewable
Energy Sys. Cons. Proj.
Rev.,
Aa1 2,600 6.875%, 10/1/11.......... 2,923,830
Snohomish Cnty., Pub.
Util.
Dist. No. 1 Elec. Rev.,
A1 1,500(b) 6.90%, 1/1/06, Ser. A
Prerefunded 1/1/03 @
$100................... 1,579,350
A1 8,000 5.80%, 1/1/24, Ser. B.... 8,139,360
----------------------------------------------------------
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
----------------------------------------------------------
Washington St. Pub. Pwr.
Supply,
Nuclear Proj. No. 2
Rev.,
Aa1 $ 2,400 6.00%, 7/1/07, Ser. A.... $ 2,678,424
------------
15,320,964
------------
Wyoming--2.1%
Wyoming St. Farm Loan
Brd. Cap. Facs. Rev.,
AA-* 4,000 5.75%, 10/1/20........... 4,419,280
------------
Total long-term
investments
(cost $182,917,063).... 203,730,563
------------
SHORT-TERM INVESTMENT
Shares
---------
Goldman Sachs Tax Exempt
Money Market Fund,
NR 67,890 (cost $67,890)........... 67,890
------------
Total Investments--98.4%
(cost $182,984,953).... 203,798,453
Other assets in excess of
liabilities--1.6%...... 3,276,783
------------
Net Assets--100%......... $207,075,236
------------
------------
---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guarantee Insurance Company.
F.H.A.--Federal Housing Authority.
F.S.A.--Financial Security Assurance Inc.
M.B.I.A.--Municipal Bond Insurance Association.
(b) 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.
6
----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Statement of Assets and Liabilities
October 31, 2001
----------------------------------------------------------
Assets
Investments, at value (cost
$182,984,953)........................ $203,798,453
Cash................................... 79,274
Interest receivable.................... 3,463,058
Deferred expenses...................... 4,121
------------
Total assets......................... 207,344,906
------------
Liabilities
Advisory fee payable (Note 2).......... 86,127
Accrued expenses....................... 93,821
Dividends payable...................... 63,884
Administration fee payable (Note 2).... 25,838
------------
Total liabilities.................... 269,670
------------
Net Assets............................. $207,075,236
------------
------------
Remarketed preferred stock ($.01 par
value; 1,300
preferred shares, issued and
outstanding, liquidation preference
$50,000 per share; Note 4)........... $ 65,000,000
------------
Net assets were comprised of:
Common stock at par ($.01 par value;
600,000,000 shares authorized and
8,507,456 issued and
outstanding)....................... 85,075
Paid-in capital...................... 120,408,778
Undistributed net investment
income............................. 994,740
Accumulated net realized loss on
investments........................ (226,857)
Net unrealized appreciation on
investments........................ 20,813,500
------------
Net assets applicable to common stock
(equivalent to $16.70 per share
based on 8,507,456 shares
outstanding)....................... 142,075,236
------------
Total capital (Net assets)........... $207,075,236
------------
------------
----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Statement of Operations
Year Ended October 31, 2001
----------------------------------------------------------
Net Investment Income
Income
Interest.............................. $11,136,951
-----------
Expenses
Investment advisory fee............... 1,004,179
Administration fee.................... 301,254
Remarketing expense................... 164,000
Directors' fees and expenses.......... 125,000
Custodian's fees and expenses......... 68,000
Reports to shareholders............... 50,000
Audit fee and expenses................ 45,000
Transfer agent's fees and expenses.... 57,000
Legal fees and expenses............... 26,000
Registration fees..................... 25,000
Tax expense on undistributed net
realized gain......................... 17,348
Miscellaneous......................... 6,944
-----------
Total operating expenses............ 1,889,725
-----------
Net investment income................... 9,247,226
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on investment
transactions.......................... (41,497)
Net change in unrealized appreciation on
investments........................... 10,205,803
-----------
Net realized and unrealized gain on
investments........................... 10,164,306
-----------
Net Increase in Net Assets
Resulting from Operations............... $19,411,532
-----------
-----------
See Notes to Financial Statements. See Notes to Financial Statements.
7
----------------------------------------------------------
DUFF & PHELPS UTILITIES
TAX-FREE INCOME INC.
Statement of Changes
In Net Assets
----------------------------------------------------------
Year Ended October 31,
Increase in ---------------------------
Net Assets 2001 2000
------------ ------------
Operations:
Net investment income...... $ 9,247,226 $ 9,582,390
Net realized gain (loss) on
investment
transactions............. (41,497) 110,084
Net change in unrealized
appreciation of
investments.............. 10,205,803 4,213,584
------------ ------------
Net increase in net assets
resulting from
operations............... 19,411,532 13,906,058
Dividends:
Dividends to common
shareholders from net
investment income........ (6,392,060) (7,256,711)
Dividends to preferred
shareholders from net
investment income........ (2,103,589) (2,728,990)
------------ ------------
Total increase........... 10,915,883 3,920,357
Net Assets
Beginning of year(a)......... 196,159,353 192,238,996
------------ ------------
End of year(a)(b)............ $207,075,236 $196,159,353
------------ ------------
------------ ------------
---------------
(a) Includes $65,000,000 in preferred stock.
(b) Includes undistributed
net investment income of... $ 994,740 $ 243,163
------------ ------------
------------ ------------
See Notes to Financial Statements.
8
--------------------------------------------------------------------------------
DUFF & PHELPS UTILITIES TAX-FREE INCOME INC.
Financial Highlights
--------------------------------------------------------------------------------
Year Ended October 31,
PER SHARE OPERATING PERFORMANCE OF COMMON ----------------------------------------------------------------
SHAREHOLDERS: 2001 2000 1999 1998 1997
------------ -------- -------- -------- --------
Net asset value, beginning of year............... $ 15.42 $ 14.96 $ 16.62 $ 16.28 $ 15.84
------------ -------- -------- -------- --------
Net investment income(d)....................... 1.09 1.13 1.14 1.17 1.18
Net realized and unrealized gain (loss) on
investments(d)................................. 1.19 .50 (1.59) .41 .50
------------ -------- -------- -------- --------
Net increase (decrease) from investment
operations..................................... 2.28 1.63 (.45) 1.58 1.68
------------ -------- -------- -------- --------
Dividends from net investment income to:
Preferred shareholders......................... (.25) (.32) (.25) (.28) (.28)
------------ -------- -------- -------- --------
Common shareholders............................ (.75) (.85) (.96)(e) (.96) (.96)
------------ -------- -------- -------- --------
Net asset value, end of year(a).................. $ 16.70 $ 15.42 $ 14.96 $ 16.62 $ 16.28
------------ -------- -------- -------- --------
Per share market value, end of year(a)........... $ 14.45 $ 12.69 $ 14.13 $ 17.31 $ 16.00
------------ -------- -------- -------- --------
TOTAL INVESTMENT RETURN OF COMMON
SHAREHOLDERS(b).................................. 20.14% (4.08)% (13.34)% 11.41% 12.42%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:(c)
Operating expenses............................... 1.38% 1.38% 1.39% 1.34% 1.35%
Net investment income............................ 6.73% 7.51% 7.10% 7.18% 7.46%
SUPPLEMENTAL DATA:
Average net assets of common shareholders
(000).......................................... $137,428 $127,639 $136,111 $137,680 $133,055
Portfolio turnover rate.......................... 8% 26% 6% 0% 5%
Net assets of common shareholders, end of year
(000).......................................... $142,075 $131,159 $127,239 $140,465 $136,817
Asset coverage per share of preferred stock, end
of year........................................ $159,289 $150,892 $147,876 $158,050 $155,243
Preferred stock outstanding (000)................ $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000
---------------
(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.
(e) The unrounded amount is $0.955.
See Notes to Financial Statements.
9
----------------------------------------------------------
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 illiquidity 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 LLC ('PI'), formerly known
as Prudential Investments Fund Management LLC. PI is 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 PI 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. PI pays occupancy and certain clerical
and
10
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 year ended October
31, 2001 aggregated $17,973,631 and $15,334,066, respectively.
The Federal income tax basis of the Fund's investments at October 31, 2001
was substantially the same as the basis for financial reporting and,
accordingly, net unrealized appreciation for federal income tax purposes was
$20,813,500 (gross unrealized appreciation--$20,826,105; gross unrealized
depreciation--$12,605).
The Fund had a capital loss carryforward as of October 31, 2001 of
approximately $226,900, of which $62,100 expires in 2006, $123,300 expires in
2007 and $41,500 expires in 2009. 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.
For the years ended October 31, 2001 and 2000 the Fund did not issue any
common shares in connection with the reinvestment of dividends.
The Fund's Articles of Incorporation authorize the issuance of Remarketed
Preferred Stock ('RP'). Accordingly, the Fund issued 1,300 shares of RP on
February 4, 1992. The RP has a liquidation value of $50,000 per share plus any
accumulated but unpaid dividends.
Dividends on shares of RP are cumulative from their date of original issue
and payable on each dividend payment date. Dividend rates ranged from 1.9% to
5.0% during the year ended October 31, 2001.
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,
2001, dividends declared and paid on preferred
shares totalled $95,895. On November 1, 2001, the Board of Directors of the Fund
declared a dividend of $.0625 per common share payable on November 30, to common
shareholders of record on November 15. On November 27, 2001, the Board of
Directors approved a dividend of $.0625 per common share to be declared on
December 3, 2001 payable on December 31, to common shareholders of record on
December 14.
11
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REPORT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
To the Shareholders and Board of Directors
Duff and Phelps Utilities Tax-Free Income Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Duff & Phelps Utilities Tax-Free
Income Inc. (the 'Fund') as of October 31, 2001, 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 auditing standards generally
accepted in the United States. 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, 2001 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, 2001, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Chicago, Illinois
November 16, 2001
--------------------------------------------------------------------------------
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, 2001) 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, 2001, all dividends paid from net
investment income were federally tax-exempt interest dividends.
12
--------------------------------------------------------------------------------
OTHER INFORMATION
--------------------------------------------------------------------------------
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
13
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 23, 2001, shareholders elected
William W. Crawford, Philip R. McLoughlin and Richard A. Pavia as directors of
the Fund. Francis E. Jeffries, E. Virgil Conway, William N. Georgeson, Everett
L. Morris, Eileen A. Moran 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:
Number of Shares
----------------------------------------------------
Withheld
For Authority Against Abstain
----------- ---------- --------- ---------
Election of William W. Crawford 1 7,638,808 87,573 -- --
Election of Philip R. McLoughlin 1 7,637,922 88,459 -- --
Election of Richard A. Pavia 2 1,206 -- -- --
1The number of common shares issued outstanding and eligible to vote were
8,507,456. Quorum was 7,726,381 or 90.81% of eligible voting shares.
2The number of remarketed shares outstanding and eligible to vote as a separate
class were 1,300 of which 1,206 (92.77%) were voted.
14
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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
Francis E. Jeffries, President & Chief Executive
Officer
James D. Wehr, Vice President & Chief Investment
Officer
Timothy M. Heaney, Vice President
Nancy Engberg, Secretary, Vice President & Counsel
Alan M. Meder, Treasurer & Assistant
Secretary
Investment Adviser
Duff & Phelps Investment Management Co.
55 East Monroe Street
Suite 3600
Chicago, IL 60603
(312) 263-2610
Administrator
Prudential Investments LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Call toll free (800) 225-1852
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Call toll free (800) 451-6788
Transfer Agent
Equiserve L.P.
P.O. Box 43011
Providence, RI 02940-3011
Independent Auditors
Ernst & Young LLP
233 South Wacker Drive
Chicago, IL 60606
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom (Illinois)
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
Duff & Phelps
Utilities
Tax-Free
Income Inc.
------------------------------------------------------------
Annual Report
October 31, 2001