Letter to
Shareholders
-------------------------------------------------
June 3, 2002
Dear Shareholder:
New Fund Name
The Securities Exchange Commission (SEC) has
adopted a new rule that goes into effect July
1, 2002, whereby a fund whose name suggests an
investment focus in a certain industry must
adopt a policy to invest at least 80% of the
value of its assets in that particular
industry. Duff & Phelps Utilities Tax-Free
Income Inc. (the DTF Fund), has over 65% of its
assets invested in municipal utilities as
required under the Fund's investment policy.
The Board of Directors of the DTF Fund believes
that it would not be in the best interests of
the Fund to increase the minimum level of such
utility obligations from 65% to 80% as would be
required by the SEC's new rule if the Fund's
name remained the Duff & Phelps Utilities Tax-
Free Income Inc. Instead, the Board has
decided to change the name of the Fund to "DTF
Tax-Free Income Inc." While the Fund has a new
name, its current investment policy and
objectives remain unchanged. This new name
will enable the Fund to maintain its existing
investment policy and thereby preserve its
current flexibility to pursue its investment
objective of current income exempt from regular
federal income tax consistent with the
preservation of capital.
Fund Performance
Dividend
The DTF Fund provided an attractive level of
tax-free income over the past six months ending
April 30, 2002. On April 30th, the stock
closed at $14.86. The $0.07 cent monthly
dividend translated to a tax-free current yield
of 5.65%.
The Board of Directors increased the dividend
for the second time this year at its meeting on
May 22, 2002. The monthly dividend was
increased from $0.07 per common share to $0.075
per common share. The increase in the dividend
has been the result of the Fund's higher
earnings due primarily to the low interest rate
on its remarketed preferred stock (its
leverage). This rate has declined from almost
5% in May of 2000 to as low as 1.15% in early
March 2002. Based on the May 31, 2002 closing
stock price of $15.15, the $0.075 monthly
dividend translates into a tax-free current
yield of 5.94%. This level of income continues
to be generated by a high quality, well-
diversified investment portfolio.
1
Return Analysis
The DTF's total return for one, three and five year periods
is compared to its Lipper Leveraged Municipal Peer Group below:
ANNUALIZED TOTAL RETURN
(04/30/02)
One Year Three Years Five Years Since Inception1
DTF 8.76% 5.46% 6.74% 7.62%
Lipper Leveraged
Municipal Peer Group 8.22 4.60 6.33 7.03
1 Inception date 11/30/91.
General Economic Commentary
The bond market experienced a steady increase
in U.S. Treasury rates over the past six
months, as the U.S. economy has begun to show
signs of growth after the Federal Reserve (Fed)
lowered interest rates by 475 basis points in
2001. Over the six months ending April 30,
2002, two-year U.S. Treasury rates increased by
80 basis points while 30-year U.S. Treasury
rates increased by 72 basis points. This
similar rise in interest rates across all
maturities has kept the U.S. Treasury yield
curve at steep levels, as the market wrestles
with conflicting economic indicators and the
timing of a reversal in the Fed's accommodative
interest rate policy. We expect the U.S.
Treasury yield curve to remain steep over the
near term as the Fed waits for solid evidence
that the forces restraining economic expansion
have abated and an economic recovery is firmly
underway.
During the first few months of 2002, U.S.
economic activity slowly rebounded after
dipping briefly into a recession during 2001.
Consumer spending, housing starts, and GDP have
all rebounded since the start of the year.
Consumer spending, ex-automobiles, has been
strong during 2002 as consumer confidence
improved considerably since September 11th.
Housing starts, buoyed by an unusually warm and
dry winter and very low mortgage rates also
rebounded from a decline in late 2001. GDP hit
its highest level since the fourth quarter of
1999 as consumers increased expenditures on
items like furniture and clothing while
businesses saw only a moderate decline in
inventory levels. Inflation, as measured by
the Consumer Price Index (CPI), remains tame as
it ended April 2002 on a year-over-year basis
at 1.6%, unchanged from December 2001. This low
rate of inflation should help keep the Fed on
hold and provide the necessary stimulus to
ensure the economy continues to expand.
However, these signs of a renewed economic
climate are being tempered by higher
unemployment, weak corporate profits, higher
energy costs, and heightened tensions in the
Middle East. The national unemployment rate,
which bottomed in October 2000 at 3.9%, rose to
6.0% in April 2002 as company layoffs continued
to impact employment. Corporations are still
struggling with declining profits thereby
negatively impacting capital spending and
employment. Energy costs have increased
2
steadily during the year and the escalating
tensions in the Middle East should continue to
keep prices high until this uncertainty
diminishes. Despite the recent evidence that
an economic recovery is underway, we expect the
Fed to remain on hold in the near term until it
gains more confidence that the economy is more
firmly entrenched and risks of slipping back
into a recession have diminished.
The Municipal Market and Your Fund
Two major themes have dominated the tax-exempt
market over the past six months: a steep tax-
exempt yield curve and increased supply of
municipal bonds. The very accommodative
monetary policy stance by the Fed in attempt to
stimulate the economy has caused the municipal
yield curve to remain very steep. Since April
2001, long maturity tax-exempt rates have
declined by only 10-15 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 the early
1990's. The second theme has been increased
supply. Through April 2002, issuance of
municipal bonds is up 12% on a year over year
basis. Growing infrastructure needs and a cash
crunch brought about by the recession has
helped contribute to this strong issuance. The
demand for new projects continues, but the
slower economy is providing less current
revenues to cover the costs of projects forcing
municipalities to issue more debt. 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. Finally, concerns about
credit risk have spilled over from corporate
bonds to municipals causing municipal credit
spreads to widen somewhat over the past six
months. 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
Fund has continued the theme of increasing
exposure to the water and sewer utility sector
while slowly reducing exposure to electric
utility bonds due to the higher quality,
liquidity, and essential nature that water and
sewer bonds offer relative to electric
utilities. Specifically, the power crisis that
plagued California, the bankruptcy of Enron,
and the accounting questions surrounding
independent power producers has cast a negative
shadow over the electric utility industry which
has spilled over into municipal electric
utility bonds. As a result, the portfolio
remains well diversified in an effort to
minimize exposure to any one sector, with
electric utility exposure currently at 18%,
which historically is a low level of exposure
for the Fund. Further, the Fund has no
exposure to any California electric utilities.
The Fund's diversification by market sector is shown below:
Fund Diversification
Market Sectors
Water/Sewer Revenue 33%
Electric Utilities 18
Pollution Control 10
Pre-Refunded Utilities 7
Non-Utilities 31
Cash 1
Outlook
As we move forward into the second half of
2002, factors that could drive the relative
value of municipal bonds over the balance of
the year include: the fragility of the economic
recovery, possible Federal Reserve policy
changes, 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
it has experienced over the past two years,
nervous equity investors could continue to move
money into tax-exempt issues, which could be
positive for the market. In spite of many
uncertainties, we believe the municipal market
represents good relative value at current
levels.
We continue to appreciate your interest in the
DTF 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
4
----------------------------------------------------------
DTF TAX-FREE INCOME INC.
Portfolio of Investments
April 30, 2002 (Unaudited)
----------------------------------------------------------
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
----------------------------------------------------------
LONG-TERM INVESTMENTS--143.7%
Alabama--4.8%
Jefferson Cnty. Swr. Rev.
Capital Impvt.
Aaa $ 3,000 5.125%, 2/1/29, Ser. A,
F.G.I.C................ $ 2,925,120
Aaa 4,000 5.00%, 2/1/33, Ser. A,
F.G.I.C................ 3,795,360
------------
6,720,480
------------
California--21.8%
Foothill/Eastern Corr.
Agency
Toll Road Rev.,
Aaa 5,640(b) 6.00%, 1/1/34, Ser. A,
Perefunded 1/01/07 @
$100................... 6,374,441
Fresno Swr. Rev.,
Aaa 3,030 6.00%, 9/1/09,
A.M.B.A.C.............. 3,472,531
Aaa 2,000 6.25%, 9/1/14,
A.M.B.A.C.............. 2,359,680
Pomona Sngl. Fam. Mtge.
Rev.,
Aaa 2,705 7.375%, 8/1/10,
Escrowed to maturity... 3,138,963
Riverside Cnty. Sngl.
Fam.
Rev., Mtge. Backed,
Aaa 2,500 7.80%, 5/1/21, Ser. A,
Escrowed to maturity... 3,264,300
San Bernardino Cnty.
Residential Mtge. Rev.,
Aaa 7,840 9.60%, 9/1/15,
Escrowed to maturity... 11,718,370
------------
30,328,285
------------
Colorado--0.6%
Colorado Hsg. Fin. Auth.,
Sngl. Fam. Prog.,
Aa2 545 8.00%, 6/1/25............ 567,192
Aa2 200 8.125%, 6/1/25........... 208,576
------------
775,768
------------
Connecticut--4.9%
Connecticut St. Airport
Rev.,
Aaa 925(b) 7.65%, 10/1/12,
F.G.I.C................ 1,037,859
Prerefunded 10/1/04 @
$100
Aaa 2,075 7.65%, 10/1/12,
F.G.I.C................ 2,295,407
----------------------------------------------------------
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
----------------------------------------------------------
Mashantucket Western
Pequot Tribe Spl. Rev.,
Baa3 $ 3,500 5.75%, 9/1/18, Ser. B.... $ 3,466,820
------------
6,800,086
------------
Delaware--2.6%
Delaware St., Econ. Dev.
Auth. Rev., Delmarva
Pwr.,
Aaa 3,500 6.75%, 5/1/19, Ser. B,
A.M.B.A.C.............. 3,582,985
------------
Florida--5.6%
Dade Cnty. Wtr. & Swr.
Sys. Rev.,
Aaa 3,000 5.25%, 10/1/26,
F.G.I.C................ 3,003,510
St. Petersburg Public
Utility Rev.,
Aaa 5,000 5.00%, 10/1/28, Ser. A,
F.S.A.................. 4,846,550
------------
7,850,060
------------
Georgia--16.0%
Atlanta Wtr. & Wastewater
Rev., Ser. A
Aaa 2,385 5.00%, 11/1/29,
F.G.I.C................ 2,305,460
Aaa 715 5.00%, 11/1/38,
F.G.I.C................ 681,631
Aaa 2,615(b) 5.00%, 11/1/29, F.G.I.C.
Prefunded 5/1/09 @
$101................... 2,823,102
Aaa 785(b) 5.00%, 11/1/38, F.G.I.C.
Prefunded 5/1/09 @
$101................... 847,470
De Kalb Cnty Wtr. & Swr.
Rev.,
Aa2 4,000 5.00%, 10/1/24........... 3,915,360
Fulton Cnty. Schl. Dist.,
Aa2 2,000 5.375%, 1/1/16........... 2,149,540
Georgia Mun. Elec. Auth.
Pwr. Rev., Ser. Y,
Aaa 145 6.40%, 1/1/13,
A.M.B.A.C.............. 170,964
Aaa 2,470 6.40%, 1/1/13,
A.M.B.A.C.............. 2,889,159
Georgia Mun. Elec. Auth.
Rev.,
Aaa 5,500 6.50%, 1/1/20, Ser. X,
A.M.B.A.C.............. 6,531,965
------------
22,314,651
------------
See Notes to Financial Statements.
5
----------------------------------------------------------
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
----------------------------------------------------------
Idaho--4.3%
Idaho Hsg. Agcy.,
Sngl. Fam. Mtge. Sr.,
Aa1 $ 3,415 6.65%, 7/1/14, Ser. B.... $ 3,571,339
Aaa 2,348 6.60%, 7/1/27, Ser. B,
F.H.A.................. 2,428,677
------------
6,000,016
------------
Illinois--6.7%
Chicago Gas Supply Rev.,
(People's Gas, Lt. &
Coke Co.),
Aa2 4,600 6.875%, 3/1/15........... 4,709,066
Chicago Gen. Oblig.,
Aaa 4,000 6.25%, 1/1/11,
A.M.B.A.C.............. 4,584,160
------------
9,293,226
------------
Indiana--4.1%
Indiana Mun. Pwr. Agcy.,
Pwr. Supply Sys. Rev.,
Aaa 5,000 6.00%, 1/1/13, Ser. B,
M.B.I.A................ 5,665,900
------------
Kentucky--1.4%
Louisville & Jefferson
Cnty.
Met. Swr. District,
Swr. & Drain Sys. Rev.,
Aaa 2,000 5.00%, 5/15/30,
F.G.I.C................ 1,915,660
------------
Louisiana--0.9%
St. Charles Parish, Solid
Waste Disp. Rev.,
(Louisiana Pwr. & Lt.
Co.),
Aaa 1,250 7.00%, 12/1/22, F.S.A.... 1,305,462
------------
Massachusetts--8.9%
Boston Wtr. & Swr.
Comm. Rev.,
Aaa 2,000 5.00%, 11/1/28, Ser. D,
F.G.I.C................ 1,934,980
Massachusetts St Tpk.
Auth., Metro. Highway
Sys. Rev.,
Aaa 2,355 5.125%, 1/1/23, Ser. B... 2,338,515
Aaa 2,500 4.75%, 1/1/34, Ser. A,
A.M.B.A.C.............. 2,237,200
Massachusetts St., Wtr.
Res. Auth.,
Aaa......... 5,330(b) 7.00%, 8/1/13, Ser A.,
M.B.I.A.,
Prerefunded 8/01/04 @
$101 1/2............... 5,933,409
------------
12,444,104
------------
----------------------------------------------------------
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
----------------------------------------------------------
Michigan--1.4%
Detroit Wtr. Supply Sys.
Rev.,
Sr. Lien,
Aaa $ 2,000 5.00%, 7/1/30, Ser. A,
F.G.I.C................ $ 1,915,400
------------
Nebraska--4.1%
Omaha Pub. Pwr. Dist.,
Elec. Rev.,
Aa2 2,500 6.15%, 2/1/12, Ser. B
Escrowed to maturity..... 2,852,725
Aa2 2,500 6.20%, 2/1/17, Ser. B
Escrowed to maturity..... 2,870,250
------------
5,722,975
------------
New Jersey--1.5%
New Jersey St. Gen.
Oblig., Ser. H,
Aa2 2,000 5.25%, 7/1/17............ 2,107,100
------------
New York--15.4%
Long Island Pwr. Auth.
Elec. Sys. Rev.,
Aaa 4,000 5.25%, 12/1/26, Ser. A,
M.B.I.A................ 4,005,040
New York City Mun. Wtr.
Fin. Auth. Wtr & Swr.
Sys. Rev.,
Aaa 5,000 5.00%, 6/15/29, Ser. B... 4,827,000
New York St. Dorm. Auth.
Rev., Comsewogue Pub.
Lib. Insd.,
Aaa 2,380 6.00%, 7/1/15,
M.B.I.A................ 2,574,827
New York St. Energy
Research & Dev. Auth.
Facs. Rev.,
(Con Edison Co. of NY),
A1 4,000 7.125%, 12/1/29.......... 4,456,840
New York St. Envir. Fac.
Corp. Poll. Ctrl. Rev.,
Aaa 5,000 6.90%, 11/15/15, Ser.
D...................... 5,562,500
------------
21,426,207
------------
Ohio--1.9%
Ohio St. Wtr. Dev. Auth.
Rev.,
Aaa 2,445 5.50%, 6/1/20, Ser. B,
F.S.A.................. 2,628,693
------------
South Carolina--1.1%
Spartanburg Waterworks
Rev., Jr. Lien,
Aaa 1,500 5.25%, 6/1/28............ 1,500,585
------------
See Notes to Financial Statements.
6
----------------------------------------------------------
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
----------------------------------------------------------
Tennessee--2.4%
Tennessee Hsg. Dev.
Agcy., Mtge. Fin.,
Aaa $ 3,135 6.15%, 7/1/15, Ser. B,
M.B.I.A................ $ 3,294,509
------------
Texas--14.8%
Bexar Met. Wtr. Dist.
Waterworks Sys. Rev.,
Aaa 2,500 5.00%, 5/1/25,
M.B.I.A................ 2,400,975
Coastal Wtr. Auth.
Contract Rev., City Of
Houston Proj.,
Aaa 4,000 5.00%, 12/15/25,
F.S.A.................. 3,839,120
El Paso Wtr. & Swr. Rev.,
Aaa 1,555 5.50%, 3/1/12, Ser. A,
F.S.A.................. 1,698,075
Harris Cnty. Toll Road
Sub. Lien.,
Aa1 1,650 7.00%, 8/15/10, Ser. A... 1,971,816
Houston Wtr. & Swr. Sys.
Rev.,
Aaa 1,500 5.25%, 12/1/23, Ser. B... 1,499,925
Aaa 3,500 5.00%, 12/1/28, Ser. A... 3,295,460
Lower Colorado River
Auth. Rev., Refunding &
Impvmnt.,
Aaa 2,000 5.00%, 5/15/31, F.S.A.... 1,877,760
San Antonio Elec. & Gas
Rev.,
Aaa 4,000 5.00%, 2/1/18, Ser. A.... 3,978,120
------------
20,561,251
------------
Virginia--2.8%
Henrico Cnty. Wtr & Swr.
Rev.,
Aa2 3,985 5.00%, 5/1/28............ 3,887,049
------------
Washington--12.6%
Conservation & Renewable
Energy Sys., Cons.
Proj. Rev.,
Aa1 2,600 6.875%, 10/1/11.......... 2,879,136
King Cnty. Swr. Rev.,
Aaa 2,500 5.00%, 1/1/31,
F.G.I.C................ 2,354,825
Snohomish Cnty., Pub.
Utils. Dist. No. 1
Elec. Rev.,
A1 1,500 6.90%, 1/1/06, Ser. A
Prerefunded 1/01/03 @
$100................... 1,549,845
A1 8,000 5.80%, 1/1/24, Ser. B.... 8,023,600
----------------------------------------------------------
Principal
Moody's Amount Value
Rating (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.... $ 2,653,848
------------
17,461,254
------------
Wyoming--3.1%
Wyoming St. Farm Loan
Brd. Cap. Fas. Rev.,
AA-* 4,000 5.75%, 10/1/20........... 4,351,920
------------
Total long-term
investments
(cost $182,861,311).... 199,853,626
------------
SHORT-TERM INVESTMENT--0.7%
Shares
---------
Goldman Sachs Tax Exempt
Money Market Fund,
NR 1,036 (cost $1,036,150)........ 1,036,150
------------
Total Investments--144.4%
(cost $183,897,461).... 200,889,776
Other assets in excess of
liabilities--2.3%...... 3,214,051
Liquidation Value of
Remarketed Preferred
Stock--(46.7%)......... (65,000,000)
------------
Net Assets Applicable to
Common Stock--100%..... $139,103,827
------------
------------
---------------
(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.
7
----------------------------------------------------------
DTF TAX-FREE INCOME INC.
Statement of Assets and Liabilities
April 30, 2002
(Unaudited)
----------------------------------------------------------
Assets
Investments, at value (cost
$183,897,461)........................ $200,889,776
Cash................................... 49,788
Interest receivable.................... 3,412,025
Deferred expenses...................... 690
------------
Total assets......................... 204,352,279
------------
Liabilities
Advisory fee payable (Note 2).......... 83,915
Dividends payable to common
shareholders......................... 71,774
Accrued expenses....................... 67,589
Administration fee payable (Note 2).... 25,174
------------
Total liabilities.................... 248,452
------------
Remarketed preferred stock ($.01 par
value; 1,300
preferred shares, issued and
outstanding, liquidation preference
$50,000 per share; Note 4)........... $ 65,000,000
------------
Net Assets Applicable to Common
Stock................................ $139,103,827
------------
------------
Net assets applicable to common stock
were comprised of:
Common stock at par ($.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............................. 1,684,500
Accumulated net realized loss on
investments........................ (66,841)
Net unrealized appreciation on
investments........................ 16,992,315
------------
Net assets applicable to common stock
(equivalent to $16.35 per share
based on 8,507,456 shares
outstanding)....................... 139,103,827
------------
------------
----------------------------------------------------------
DTF TAX-FREE INCOME INC.
Statement of Operations
Six Months Ended April 30, 2002 (Unaudited)
----------------------------------------------------------
Net Investment Income
Income
Interest............................... $ 5,442,370
-----------
Expenses
Investment advisory fee................ 508,595
Administration fee..................... 152,579
Remarketing expense.................... 82,000
Directors' fees and expenses........... 64,000
Custodian's fees and expenses.......... 34,000
Transfer agent's fees and expenses..... 30,000
Reports to shareholders................ 25,000
Audit fee and expenses................. 22,000
Legal fees and expenses................ 13,000
Registration fees...................... 12,000
Miscellaneous.......................... 6,705
-----------
Total expenses....................... 949,879
-----------
Net investment income.................... 4,492,491
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment
transactions........................... 160,016
Net change in unrealized appreciation on
investments............................ (3,821,185)
-----------
Net realized and unrealized loss on
investments............................ (3,661,169)
-----------
Dividends on remarketed preferred
stock.................................. (479,954)
-----------
Net Increase in Net Assets
Resulting from Operations................ $ 351,368
-----------
-----------
See Notes to Financial Statements. See Notes to Financial Statements.
8
----------------------------------------------------------
DTF TAX-FREE INCOME INC.
Statement of Changes
In Net Assets
(Unaudited)
----------------------------------------------------------
Six Months
Ended Year Ended
Increase in April 30, October 31,
Net Assets 2002 2001(a)
------------ ------------
Operations:
Net investment income...... $ 4,492,491 $ 9,247,226
Net realized gain (loss) on
investment
transactions............. 160,016 (41,497)
Net change in unrealized
appreciation on
investments.............. (3,821,185) 10,205,803
Dividends on remarketed
preferred stock.......... (479,954) (2,103,589)
------------ ------------
Net increase in net assets
resulting from
operations............... 351,368 17,307,943
Dividends:
Dividends to common
shareholders from net
investment income........ (3,322,777) (6,392,060)
------------ ------------
Total increase
(decrease)............. (2,971,409) 10,915,883
Net Assets Applicable to
Common Stock
Beginning of period.......... 142,075,236 131,159,353
------------ ------------
End of period(b)............. $139,103,827 $142,075,236
------------ ------------
------------ ------------
---------------
(a) Amounts have been restated to conform to new
requirements under generally accepted accounting
principles.
(b) Includes undistributed
net investment income of... $ 1,684,500 $ 994,740
------------ ------------
------------ ------------
See Notes to Financial Statements.
9
-------------------------------------------------------------------------------
DTF TAX-FREE INCOME INC.
Financial Highlights (Unaudited)
-------------------------------------------------------------------------------
Year Ended October 31,
---------------------------------------------------------------------------
Six Months
Ended
PER SHARE OPERATING PERFORMANCE OF COMMON April 30,
SHAREHOLDERS: 2002 2001(g) 2000(g) 1999(g) 1998(g) 1997(g)
---------- -------- -------- -------- -------- --------
Net asset value, beginning of period..... $ 16.70 $ 15.42 $ 14.96 $ 16.62 $ 16.28 $ 15.84
---------- -------- -------- -------- -------- --------
Net investment income(d)............... .53 1.09 1.13 1.14 1.17 1.18
Net realized and unrealized gain (loss)
on investments(d)...................... (.43) 1.19 .50 (1.59) .41 .50
Dividends from net investment income to
remarketed preferred shareholders (.06) (.25) (.32) (.25) (.28) (.28)
---------- -------- -------- -------- -------- --------
Net increase (decrease) from investment
operations............................. .04 2.03 1.31 (.70) 1.30 1.40
---------- -------- -------- -------- -------- --------
Dividends from net investment income to
common shareholders.................... (.39) (.75) (.85) (.96)(e) (.96) (.96)
---------- -------- -------- -------- -------- --------
Net asset value, end of period(a)........ $ 16.35 $ 16.70 $ 15.42 $ 14.96 $ 16.62 $ 16.28
---------- -------- -------- -------- -------- --------
Per share market value, end of
period(a).............................. $ 14.86 $ 14.45 $ 12.69 $ 14.13 $ 17.31 $ 16.00
---------- -------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN OF COMMON
SHAREHOLDERS(b).......................... 5.63% 20.14% (4.08)% (13.34)% 11.41% 12.42%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:(c)
Operating expenses....................... 1.38%(f) 1.38% 1.38% 1.39% 1.34% 1.35%
Net investment income.................... 6.54%(f) 6.73% 7.51% 7.10% 7.18% 7.46%
SUPPLEMENTAL DATA:
Average net assets of common shareholders
(000).................................. $ 138,590 $137,104 $127,639 $136,111 $137,680 $133,055
Portfolio turnover rate.................. 7% 8% 26% 6% 0% 5%
Net assets of common shareholders, end of
period (000)........................... $ 139,104 $142,075 $131,159 $127,239 $140,465 $136,817
Asset coverage per share of preferred
stock, end of period................... $ 157,003 $159,289 $150,892 $147,876 $158,050 $155,243
Preferred stock outstanding (000)........ $ 65,000 $ 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.
Total return for periods of less than a full 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 period.
(e) The unrounded amount is $0.955.
(f) Annualized.
(g) Certain amounts have been reclassified to conform to new requirements under
generally accepted accounting principles.
See Notes to Financial Statements.
10
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DTF TAX-FREE INCOME INC.
Notes to Financial Statements (Unaudited)
----------------------------------------------------------
DTF Tax-Free Income Inc. (formerly known as 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.
Change in Accounting Principle: In July 2001, a Securities and Exchange
Commission staff announcement, Emerging Issues Task Force Discussion ('EITF
D')-98, Classification and Measurement of Redeemable Securities, was issued
providing new guidance related to the presentation of preferred shares in
financial statements, EITF D-98 is required to be applied beginning with fiscal
quarters ending after December 15, 2001 on a retroactive basis, by restating the
prior year's financial statements. In accordance with the announcement, the Fund
has presented its remarketed preferred shares outside of net assets and has
presented dividends to preferred shareholders on such remarketed preferred
shares in the net change in net assets attributable to common shareholders
resulting from operations for all periods presented. Therefore, beginning net
assets attributable to common shareholders have been restated and dividend
activity related to preferred shares has been reclassified from the capital
activity in the statements of changes in net assets and the financial highlights
to the operating activity. The application of EITF D-98 related entirely to
presentation and had no impact on net asset value or the
11
allocation of net income or capital gains or losses to common shareholders.
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'), an indirect,
wholly-owned subsidiary of Prudential Financial, Inc.
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 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, 2002 aggregated $13,934,454 and $13,981,224, respectively.
The Federal income tax basis of the Fund's investments at April 30, 2002 was
substantially the same as the basis for financial reporting and, accordingly,
net unrealized appreciation for federal income tax purposes was $16,992,315
(gross unrealized appreciation--$17,253,256; gross unrealized
depreciation--$260,941).
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 year ended October 31, 2001 and the six months ended April 30, 2002,
the Fund did not issue any common shares in connection with the reinvestment of
dividends.
Note 5. Remarketed The Fund's Articles of Incorpo-
ration authorize the issuance Preferred Stock
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 1.15% to
2.05% during the six months ended April 30, 2002.
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 6. Dividends Subsequent to April 30, 2002,
dividends declared and paid on preferred shares
totalled $86,697. On May 1, 2002, the Board of Directors of the Fund declared a
dividend of $.07 per common share payable on May 31, to common shareholders of
record on May 15. On May 22, 2002, the Board of Directors approved a dividend of
$.075 per common share to be declared on June 3, 2002 payable on June 28, to
common shareholders of record on June 14.
12
-------------------------------------------------------------------------------
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 43011, Providence,
Rhode Island, 02940-3011 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.
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
Transfer Agent
EquiServe L.P.
P.O. Box 43011
Providence, RI 02940-3011
Call toll free (800) 451-6788
Independent Auditors
Ernst & Young LLP
5 Times Square
New York, NY 10036
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, IL 60606
The accompanying financial statements as of April 30, 2002 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.
23334J107
23334J206
DTF Tax-Free
Income Inc.
------------------------------------------------------------
Semi-Annual Report
April 30, 2002