Dear Fellow Shareholders:
Performance Review--Your Fund had a total return (market price change plus
income) of -8.0% for the second quarter of 2002. In comparison, the S&P
Utilities Index had a total return of -16.8%, and a composite of the S&P
Utilities Index and the Lehman Utility Bond Index, reflecting the stock and
bond ratio of the Fund, had a total return of -12.4%. The comparable total
returns for the year-to-date period are -4.5%, -14.1%, and -6.6% respectively.
During the second quarter of 2002, your Fund paid three monthly 6.5 cent
dividends. The 6.5 cent per share monthly rate, without compounding, would be
78 cents annualized, or a 7.66% common stock dividend yield based on the June
28, 2002 closing price of $10.18 per share. That yield compares favorably with
the quarter-end yields of 6.1% on the Dow Jones Utility Index and 6.1% on the
S&P Utilities Index.
During the month of July, the stock and bond markets have continued to be
volatile. Investors have taken a beating in virtually all sectors of the
market, including high quality income oriented mutual funds such as DNP. A
discussion of some factors specifically affecting the utility industries
follows. Your Fund managers are maintaining their focus on high quality stocks
and bonds in these turbulent times.
Corporate Credit Quality--Crisis or Recurring Cycle? In the movie "The Perfect
Storm" three independent weather patterns collided to create a storm of
destructive proportions. Today, cyclical economic forces are combining with
non-cyclical and rating agency forces to create a credit crisis of
value-destructive proportions. How did this happen?
"Rating agencies" of some form or another have existed since 1931, when
regulators began requiring institutional investors to take account of a bond
issuer's credit rating. In 1975, the Securities and Exchange Commission created
an official regulatory category--Nationally Recognized Statistical Rating
Organization. Standard and Poor's, Moody's, and Fitch IBCA qualify for this
classification currently.
To ensure that their opinions are reliable and credible, rating agencies must
use systematic approaches to evaluate a company's creditworthiness, including
employment of ample staff and information resources as well as safeguards to
prevent the dissemination of non-public information. The agencies analyze a
company's financial statements, strategic business plan, place in its industry,
and broad economy-related factors to come up with a credit "grade," or rating.
There are also levels within each rating, such as plusses or minuses that
depict the strength of the company's credit within the grade. For example,
Standard & Poor's rates companies AAA+ down to D (for default). As a company's
unique characteristics, its industry, and the macro-economic environment
change, the agencies may put the company on review for a downgrade or upgrade,
and reevaluate the appropriate credit rating.
The business outlook for an individual company is dependent on its credit
rating because the cost of raising capital will vary based on the assigned
rating as well as the rating agency's outlook (positive, stable, or negative).
Similarly, aggregating upward or downward movements in credit ratings in
general gives some idea of economy-wide credit conditions. One popular measure
of the trend in corporate credit quality is the ratio of rating downgrades to
upgrades. Recently, the trend has been decidedly negative. For example, the
ratio of S&P's downgrades to upgrades, based on dollar volume of the debt
considered, was 8.1 through June of this year, compared to 4.8 in 2001 year and
3.6 in 2000. Moreover, default rates have advanced sharply and reached decade
highs after a record year in 2000. The default rate for all Moody's-rated
corporate bond issues was 3.7% in 2001; considering only speculative high yield
issues, the default rate reached 10.2%. The prior high for defaults was in
1991, just after a recession. This year is not looking any better.
What environment has brought out this surge in default rates? To predict
default rates, Moody's model asks the following questions: Is borrowed capital
expensive? Is interest rate policy accommodative? Are corporations already
highly leveraged on average? Are corporations finding willing investors? Is the
economic cycle favorable?
We believe the environment of the late-1990s set the stage for part of the
ongoing deterioration in corporate credit quality. Many companies took
advantage of readily available, low-cost capital in the bond and equity markets
because economic growth was robust and inflation was low. Technology changes
had boosted productivity, so company
managements and investors anticipated continued high profit growth. However,
the unexpected slowdown in the economic cycle late in 2000 put pressure on
profits and companies were less able to service their debt, leading to rating
downgrades. Unfortunately, downgrades are a potentially self-fulfilling
prophecy--credit deterioration reduces the availability of capital to a
borrower, which can lead to a liquidity crisis, further downgrades, and a rise
in default rates. This is exactly what has occurred.
Non-cyclical factors have also have had an impact. For example, the two
industry categories experiencing the weakest credit characteristics--energy and
telecommunications--were deregulated in the recent past. Moreover,
technological developments had spurred many companies to enter the
telecommunications industry and invest in new infrastructure to accommodate an
overly optimistic forecast in demand for high-speed data transfer and wireless
services. According to Moody's, the energy sector, including California
electric utilities and Enron, accounted for 17% of defaults in 2001, while
telecommunications constituted 25% of the total.
Other non-cyclical factors have also come into play. For instance, the
increasing use of complicated financial derivatives and the creation of new
OTC-type markets challenged the application of traditional accounting
principles, regulatory oversight, and financial disclosure. As well, intense
competitive pressures and focus on short-term performance incentivized
managements to expand the usage of admittedly gray areas in accounting, with
some executives resorting to outright fraud to achieve their profits goals.
To deal with the non-cyclical aspect of credit quality erosion, the rating
agencies are developing new metrics to replace or enhance the old ones. In
general, the new measures of credit quality for a given rating involve more
equity capital and less debt, higher earnings and cash flow to cover debt and
debt service, and better financial disclosure and corporate governance. The
application of these new metrics has resulted in multiple downgrades.
In the gas sector, the companies that have been most affected by the revised
and enhanced credit criteria are those that engage in energy marketing and
trading. The general response of these "merchant companies" has been to issue
equity or equity-linked securities, reduce capital expenditures, and downsize
energy marketing and trading operations. In addition, companies have announced
sales of non-core assets and the consideration of partnership arrangements in
other businesses. These measures will boost the quality of their balance
sheets, increase cash flow, and lessen the volatility of the earnings stream.
As a result however, earnings growth will slow materially.
In contrast, local gas distribution companies have seen very limited effects
from changes in rating agency methodologies. Core regulated gas delivery
businesses are relatively dependable, earnings and cash flows are less
volatile, and ability to service debt is considerably more certain than for
companies involved in marketing and trading.
Within the electric sector, the "perfect storm" has turned the high revenue and
income projections from unregulated power trading, marketing, and generation
into unprecedented credit rating downgrades, unprecedented earnings
disappointments, unprecedented common stock price declines, and now,
unprecedented management overhauls. Earlier projections are being replaced by
lower growth forecasts anchored by regulated utility businesses as corporate
managements embrace "back to basics" strategies. Being a regulated electric
utility and earning a regulated return is a good place to weather the storm.
Those companies that did not stray far from the traditional regulated electric
businesses are faring much better than those that bet their future on the newer
unregulated aspects of the industry. Unfortunately, in the current environment
all companies within the sector suffer from depressed valuations.
The credit rating agencies have taken an increasingly harsh view of the
telecommunications sector in light of deteriorating fundamentals. The level of
financial ratios that the agencies find acceptable has steadily become more
stringent, forcing some companies to take drastic action to maintain an
investment grade rating. In some cases, such action has not helped or occurred
soon enough to prevent a downgrade.
All companies in the sector, not just the financially strapped ones, have
reduced their capital expenditures. Given the excessive capital investment of
the past few years, this was a needed development to improve credit quality. As
a result, cash flow has started to improve, but not enough for the more heavily
indebted companies in the group.
2
Significant cuts in operating expenses, primarily through workforce reductions,
has also begun to help cash flow generation at some companies. Other actions
being taken include the sale of non-strategic assets, such as a directory
business or investments in foreign countries.
Unfortunately, it is difficult to get top dollar for assets in a challenging
market environment and particularly in a short time frame. Many of the
companies in the telecommunications industry will be able to weather the storm
through these and other actions to shore up their balance sheets. Others, as we
have already seen, will not.
While a confluence of factors has adversely impacted the utility industries,
consumers and businesses are going to continue to heat and cool their houses
and enterprises, make telephone calls from fixed-line and cell phones, and use
the internet as a cost effective resource. Utility products and services are
not going to vanish.
Your Fund management relies on its own team of analysts as well as outside
resources to select for investment those companies that are best situated for
the current and future operating environment. Some of the factors working
negatively on the markets now are setting the stage for an eventual recovery in
high quality security valuation, and are creating opportunities to invest in
quality income producing securities. We remain diligent in our analysis and
maintenance of a high quality portfolio of investments for the Fund.
Board Appoints New Independent Auditors--On June 12, 2002 a press release was
issued announcing that the Board of Directors adopted the recommendation of its
Audit Committee to appoint the accounting firm Ernst & Young LLP as the Fund's
independent auditors, replacing Arthur Andersen LLP.
It was noted that the historic audit reports of Andersen on the consolidated
financial statements of the Fund did not contain any adverse opinion, nor were
they qualified in any way. There had been no disagreements between the Fund and
Andersen on any matter of accounting principles or practices, disclosure, or
auditing scope or procedures.
Board of Directors Meeting--At the regular July Board of Directors' meeting,
the Board declared the following monthly dividends:
Cents Per Share Record Date Payable Date
--------------- ------------ ------------
6.5 cents August 30 September 10
6.5 cents September 30 October 10
6.5 cents October 31 November 12
Automatic Dividend Reinvestment Plan and Direct Deposit Service--The Fund has a
dividend reinvestment plan available to all registered shareholders. Those
shareholders whose shares are held for them by a brokerage house or nominee in
"street-name" may not participate in the Fund's automatic dividend reinvestment
plan. For such shareholders desiring automatic dividend reinvestment, we
suggest you contact your broker or other nominee.
As an added service, without cost to the shareholder, the Fund offers direct
deposit service through electronic funds transfer to all registered
shareholders currently receiving a monthly dividend check. This service is
offered through The Bank of New York. For more information and/or an
authorization form on automatic dividend reinvestment or direct deposit, please
contact The Bank of New York (1-877-381-2537 or http://stock.bankofny.com).
Visit us on the Web--You can obtain the most recent shareholder financial
report and dividend information at our web site, which has a new home address,
http://www.dnpselectincome.com.
We appreciate your interest in DNP Select Income Fund Inc., and we will
continue to do our best to be of service to you.
/s/ Claire V. Hansen
/s/ Nathan I. Partain
Claire V. Hansen, CFA
Nathan I. Partain, CFA
Chairman
President and Chief
Executive Officer
3
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
June 30, 2002
COMMON STOCKS--85.4%
Market
Value
Shares Company (Note 1)
---------- ------- ------------
[_] ELECTRIC--50.3%
1,300,000 Allegheny Energy Inc....................... $ 33,475,000
#1,000,000 Allete Inc................................. 27,100,000
#2,425,000 Aquila Inc................................. 19,400,000
# 796,000 Dominion Resources......................... 52,695,200
1,417,000 DTE Energy Co.............................. 63,254,880
#1,300,000 Duke Energy Corp........................... 40,430,000
1,100,000 Energy East Corp........................... 24,860,000
#1,005,000 Entergy Corp............................... 42,652,200
#1,000,000 Exelon Corp................................ 52,300,000
# 900,000 FPL Group Inc.............................. 53,991,000
1,750,000 Iberdrola S.A. (Spain)..................... 25,491,309
1,000,000 Keyspan Corp............................... 37,650,000
215,000 National Grid Group PLC ADR................ 7,559,400
770,000 National Grid Group PLC (United Kingdom)... 5,457,247
#2,256,600 NiSource Inc............................... 49,261,578
#1,318,600 NSTAR...................................... 59,046,908
1,120,000 Pinnacle West Capital Corp................. 44,240,000
#1,375,000 Progress Energy Inc........................ 71,513,750
#1,000,000 Public Service Enterprise Group............ 43,300,000
850,000 Scottish & Southern Energy (United Kingdom) 8,408,017
200,000 Scottish & Southern Energy ADR............. 19,785,380
#2,647,300 Southern Co................................ 72,536,020
420,748 TXU Corp................................... 21,689,559
1,500,000 Vectren Corp............................... 37,650,000
------------
913,747,448
[_] GAS--5.3%
926,000 AGL Resources.............................. 21,483,200
600,000 NICOR Inc.................................. 27,450,000
# 600,000 Peoples Energy Corp........................ 21,876,000
#1,000,000 WGL Holdings Inc........................... 25,900,000
------------
96,709,200
The accompanying notes are an integral part of the financial statements.
4
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2002
Market
Value
Shares Company (Note 1)
---------- ------- ------------
[_] TELECOMMUNICATION--14.5%
#1,000,000 Alltel Corp.............................. $ 47,000,000
1,730,000 BellSouth Corp........................... 54,495,000
1,637,230 SBC Communications Inc................... 49,935,515
# 700,000 Swisscom AG ADR.......................... 20,300,000
# 856,250 Telecom Corp. of New Zealand Interim ADR. 16,705,438
#1,068,400 Telstra Corp. ADR........................ 14,209,720
1,519,000 Verizon Communications................... 60,987,850
------------
263,633,523
[_] NON-UTILITY--15.3%
223,450 Apartment Investment & Management Co..... 10,993,740
195,000 Archstone Smith Trust.................... 5,206,500
58,000 Avalon Bay Communities Inc............... 2,708,600
340,000 Boston Properties Inc.................... 13,583,000
160,000 Camden Property Trust.................... 5,924,800
# 382,400 CBL & Associates Properties Inc.......... 15,487,200
# 247,000 Centerpoint Properties Corporation....... 14,328,470
580,000 Chelsea GCA Realty Inc................... 19,401,000
91,653 Corporate Office Properties Trust........ 1,337,217
281,214 Developers Diversified Realty Corporation 6,327,315
295,000 Duke Realty Corp......................... 8,540,250
300,000 Equity Office Properties Trust........... 9,030,000
310,000 Equity Residential Properties Trust...... 8,912,500
83,100 Essex Property Trust Inc................. 4,545,570
# 200,000 First Industrial Realty Trust............ 6,570,000
# 250,000 General Growth Properties, Inc........... 12,750,000
# 290,000 Green S.L. Realty Properties Inc......... 10,338,500
135,000 Health Care Property Investors Inc....... 5,791,500
178,000 Health Care Realty Trust Inc............. 5,696,000
140,000 Hospitality Properties Trust............. 5,110,000
266,400 iStar Financial Inc...................... 7,592,400
48,000 Kimco Realty Corp........................ 1,607,520
90,000 Macerich Co.............................. 2,790,000
The accompanying notes are an integral part of the financial statements.
5
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2002
Market Value
Shares Company (Note 1)
---------- ------- --------------
300,000 Pan Pacific Retail Properties Inc.............. $ 10,254,000
370,600 ProLogis Trust................................. 9,635,600
240,000 Public Storage Inc............................. 8,904,000
90,000 Realty Income Corp............................. 3,322,800
35,025 Reckson Associates Realty Corp................. 872,123
171,545 Reckson Associates Realty Corp. Class B........ 4,374,398
119,367 Shurgard Storage Centers Inc................... 4,142,035
# 387,000 Simon Property Group........................... 14,257,080
490,000 United Dominion Realty Trust................... 7,717,500
465,800 Vornado Realty Trust........................... 21,519,960
231,750 Weingarten Realty Investors.................... 8,203,950
--------------
277,775,528
--------------
Total Common Stocks (Cost--$ 1,513,260,061).... 1,551,865,699
--------------
PREFERRED STOCKS--19.5%
[_] NON-UTILITY--1.1%
500,000 Cox Communications Inc. 7% 8/16/02............. 20,380,000
--------------
20,380,000
[_] UTILITY--18.4%
200,000 Alltell Corp. 7 3/4% 5/17/05................... 9,708,000
750,000 Ameren Corp. 9 3/4% 5/15/05.................... 20,212,500
450,900 Aquila Inc. 9 3/4% 11/16/02.................... 4,599,180
800,000 Centurytel Inc. 6 7/8% 5/15/05................. 20,600,000
626,200 Cinergy Corp. 9 1/2% 2/16/05................... 36,601,390
450,000 Dominion Resources 9 1/2% 11/16/04............. 27,315,000
786,700 DTE Energy Co. 8 3/4% 8/16/05.................. 20,650,875
700,000 Duke Capital Financing Trust III 8 3/8% 8/31/29 18,746,000
#1,200,000 Duke Energy 8 1/4% 5/18/04..................... 27,000,000
223,500 EIX Trust II Series B 8.60% 10/29/29 **........ 5,185,200
500,000 FPL Group Inc. 8 1/2% 2/16/05.................. 27,705,000
100,000 Keyspan Corp. 8 3/4% 5/16/05................... 5,220,000
550,000 MediaOne Group 7.00% 11/15/02.................. 8,228,000
500,000 NiSource Industries Inc. 7.75% 2/19/03......... 21,095,000
The accompanying notes are an integral part of the financial statements.
6
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2002
Market
Value
Shares Company (Note 1)
------- ------- ------------
209,000 P P & L Capital Trust II 8.10% 7/01/27..... $ 5,225,000
789,100 TXU Corp. 9 1/4% 8/16/02................... 21,179,444
400,000 TXU Corp. 8 3/4% 11/16/05.................. 21,684,000
500,000 TXU Corp. 8 1/8% 5/16/06................... 25,225,000
595,000 Williams Companies Inc. 9% 2/16/05......... 7,485,100
------------
333,664,689
------------
Total Preferred Stocks (Cost--$377,781,454) 354,044,689
------------
BONDS--25.6%
Ratings
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
----------- ------- --------- ------- -------- -----------
[_] ELECTRIC--12.9%
$ 4,983,994 AES Ironwood Corp.
8.857%, due 11/30/25............ Not Rated Baa3 BBB- $ 4,779,859
23,571,000 Cleveland Electric Illuminating
9%, due 7/01/23................. BBB Baa2 BBB 24,759,191
18,050,000 Comed Financing II
8 1/2%, due 1/15/27............. Not Rated Baa2 BBB 18,734,582
7,500,000 Commonwealth Edison Co.
9 7/8%, due 6/15/20............. A- A3 A- 8,547,232
7,000,000 Commonwealth Edison Co.
8 3/8%, due 9/15/22............. A- A3 A- 7,295,869
#10,000,000 Commonwealth Edison Co.
8 3/8%, due 2/15/23............. A- A3 A- 10,570,700
6,000,000 Dayton Power and Light
8.15% due 1/15/26............... AA A2 BBB+ 6,215,016
#24,000,000 Dominion Resources Capital Trust
7.83%, due 12/01/27............. Not Rated Baa2 BBB- 23,328,768
5,000,000 Gulf States Utilities
8.94%, due 1/01/22.............. Not Rated Baa3 BBB- 5,164,140
The accompanying notes are an integral part of the financial statements.
7
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2002
Ratings
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
------------ ------- --------- ------- -------- ------------
$ 1,000,000 Houston Lighting
8 3/4%, due 3/01/22........... A- A3 BBB+ $ 1,042,670
# 19,800,000 Hydro--Quebec
9 3/4%, due 1/15/18........... AA- A1 A+ 20,562,617
5,000,000 Illinois Power Co.
7 1/2%, due 7/15/25........... BBB Baa3 BBB- 4,075,160
# 5,000,000 Progress Energy Inc
7 3/4%, due 3/1/31............ Not Rated Baa1 BBB 5,382,110
9,000,000 PSEG Power
8 5/8%, due 4/15/31........... Not Rated Baa1 BBB 9,967,779
# 10,000,000 Public Service Co. of Colorado
8 3/4%, due 3/01/22........... A A3 A 10,404,820
22,750,000 Puget Capital Trust
8.231%, due 6/01/27........... Not Rated Ba1 BB 21,361,454
# 13,000,000 Southern Co. Capital Trust
8.14%, due 2/15/27............ Not Rated Baa1 BBB+ 13,206,726
12,000,000 UtiliCorp United Inc.
8%, due 3/01/23............... BBB- Baa3 BBB 8,964,636
# 10,000,000 Virginia Electric & Power Co.
8 5/8%, due 10/01/24.......... Not Rated A2 A 10,955,650
# 17,700,000 Virginia Electric & Power Co.
8 1/4%, due 3/01/25........... Not Rated A2 A 19,043,412
------------
234,362,391
[_] GAS--3.3%
5,125,000 ANR Pipeline Co.
9 5/8%, due 11/01/21.......... Not Rated Baa1 BBB+ 5,679,469
5,000,000 KN Energy Inc.
7 1/4%, due 3/01/28........... BBB Baa2 BBB 4,927,750
10,000,000 Northern Border Partners LP
8 7/8%, due 6/15/10........... BBB+ Baa2 BBB+ 11,029,430
6,488,000 Southern Union Co.
7.60%, due 2/01/24............ BBB Baa3 BBB+ 6,162,205
The accompanying notes are an integral part of the financial statements.
8
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2002
Ratings
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
------------ ------- --------- ------- -------- ------------
$ 8,850,000 Southern Union Co.
8 1/4%, due 11/15/29............. BBB Baa3 BBB+ $ 8,998,733
10,000,000 TE Products Pipeline Co.
7.51%, due 1/15/28............... Not Rated Baa3 BBB 9,649,480
9,000,000 Trans-Canada Pipeline
9 1/8%, due 4/20/06.............. Not Rated A3 BBB 10,126,044
4,000,000 Transcontinental Gas Pipeline Co.
8 7/8%, due 9/15/02.............. BBB+ Baa2 BBB 3,996,564
------------
60,569,675
[_] TELECOMMUNICATION--6.7%
# 19,000,000 AT&T Corp.
8.35%, due 1/15/25............... BBB+ Baa2 BBB+ 15,160,936
15,000,000 AT&T Wireless Services Inc.
8 3/4%, due 3/01/31.............. BBB Baa2 BBB 11,614,335
# 10,000,000 Bell South Capital Funding
7 7/8%, due 2/15/30.............. AA- Aa3 A+ 11,235,190
# 25,000,000 British Telecom PLC
8 5/8%, due 12/15/30............. Not Rated Baa1 A- 27,318,750
12,000,000 GTE California Inc.
8.07%, due 4/15/24............... AA AA3 A+ 12,446,148
2,835,000 GTE Corp.
9.10%, due 6/01/03............... Not Rated A2 A+ 2,984,770
17,625,000 GTE Corp.
7.90%, due 2/01/27............... Not Rated A2 A+ 17,360,502
9,000,000 New York Telephone Co.
7 5/8%, due 2/01/23.............. AA A1 A+ 8,810,559
9,000,000 Tele-Commun Inc.
9.80%, due 2/01/12............... BBB+ Baa2 BBB+ 9,813,636
5,000,000 Vodafone Group PCL
7 7/8%, due 2/15/30.............. Not Rated A2 A 5,222,630
------------
121,967,456
[_] NON-UTILITY--2.7%
# 17,500,000 Contl Cablevision
9 1/2% due 8/01/13 Not Rated Baa2 BBB+ 18,468,240
The accompanying notes are an integral part of the financial statements.
9
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2002
Ratings
------------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
------------ ------- ------ ------- -------- --------------
#$ 8,000,000 Dayton Hudson Corp.
9 7/8%, due 7/01/20.......... A A2 A+ $ 10,740,840
# 19,940,000 EOP Operating LP
7 1/2%, due 4/19/29.......... BBB+ Baa1 BBB+ 19,676,134
--------------
48,885,214
--------------
Total Bonds (Cost--$479,395,159)............................ 465,784,736
--------------
U.S. TREASURY OBLIGATIONS--1.3%
#19,400,000 U.S. Treasury Notes
10 3/4%, due 5/15/03........................................ 20,895,139
# 2,000,000 U.S. Treasury Bonds
10 3/4%, due 8/15/05........................................ 2,426,398
--------------
Total U.S. Treasury Obligations (Cost--$22,919,996)......... 23,321,537
--------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--3.7%
#65,000,000 Federal Home Loan Mortgage Corp.
93/4%, due 2/14/03.......................................... 68,076,970
--------------
Total U.S. Government Agency Obligations (Cost--$66,853,853) 68,076,970
--------------
COMMERCIAL PAPER--2.2%
40,000,000 General Electric Capital Corp.
1.76%, due 7/08/02.......................................... 39,986,311
--------------
Total Commercial Paper (Amortized cost--$39,986,311)........ 39,986,311
--------------
TOTAL INVESTMENTS (Cost--$2,500,196,834) (137.7%).......................... $2,503,079,942
--------------
--------
**Dividends are currently deferred.
# This security, or a portion of this security, is out on loan at June 30,
2002. Total loaned securities had a market value of $475,519,688 at June 30,
2002.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets applicable to common shares of the
Fund.
The accompanying notes are an integral part of the financial statements.
10
DNP SELECT INCOME FUND INC.
BALANCE SHEET
(UNAUDITED)
June 30, 2002
ASSETS:
Investments at market value:
Common stocks (cost $1,513,260,061)....................................................... $1,551,865,699
Preferred stocks cost ($377,781,454)...................................................... 354,044,689
Bonds (cost $479,395,159)................................................................. 465,784,736
U.S. Treasury obligations (cost $22,919,996).............................................. 23,321,537
U.S. government agency obligation (cost $66,853,853)...................................... 68,076,970
Commercial paper (amortized cost $39,986,311)............................................. 39,986,311
Collateral held for securities on loan, at value.......................................... 491,865,497
Interest-bearing deposits with custodian................................................... 11,042,141
Receivables:
Interest.................................................................................. 14,680,781
Dividends................................................................................. 6,867,610
Securities lending income................................................................. 62,664
Prepaid expenses........................................................................... 141,025
--------------
Total Assets............................................................................ $3,027,739,660
==============
LIABILITIES:
Payable for securities purchased........................................................... $ 1,211,313
Due to Adviser (Note 2).................................................................... 3,649,891
Due to Administrator (Note 2).............................................................. 916,964
Dividends payable on common stock.......................................................... 13,959,817
Dividends payable on remarketed preferred stock............................................ 480,748
Accrued expenses........................................................................... 2,095,223
Commercial paper outstanding (Note 6)...................................................... 197,329,000
Payable upon return of securities on loan.................................................. 492,247,468
--------------
Total Liabilities....................................................................... 711,890,424
--------------
Remarketed preferred stock ($.001 par value; 100,000,000 shares authorized and 5,000 shares
issued and outstanding, liquidation preference $100,000 per share) (Note 5).............. 500,000,000
--------------
CAPITAL:
Common stock ($.001 par value; 250,000,000 shares authorized and 214,766,409 shares issued
and outstanding) (Note 4)................................................................ 214,766
Paid-in surplus (Note 4)................................................................... 1,923,028,292
Accumulated net realized loss on investments............................................... (94,582,978)
Distributions in excess of net investment income........................................... (15,317,053)
Unrealized appreciation on foreign currency translation.................................... 5,072
Net unrealized appreciation on investments................................................. 2,883,108
Net unrealized loss on collateral held for securities on loan.............................. (381,971)
--------------
Net assets applicable to common stock (equivalent to $8.46 per share based on
214,766,409 outstanding).............................................................. 1,815,849,236
--------------
Total Liabilities, Preferred Stock and Capital.......................................... $3,027,739,660
==============
The accompanying notes are an integral part of the financial statements.
11
DNP SELECT INCOME FUND INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
For the six months ended June 30, 2002
INVESTMENT INCOME:
Interest................................................................................ $ 22,267,866
Dividends (less withholding tax of $282,366)............................................ 79,429,539
Securities lending income............................................................... 429,621
--------------
Total investment income............................................................... 102,127,026
EXPENSES:
Commercial paper interest expense (Note 6).............................................. 2,323,505
Management fees (Note 2)................................................................ 7,265,316
Administrative fees (Note 2)............................................................ 1,824,981
Transfer agent fees..................................................................... 235,300
Custodian fees.......................................................................... 162,900
Remarketing agent fees.................................................................. 628,472
Shareholder reports..................................................................... 181,000
Legal and audit fees.................................................................... 108,600
Directors' fees (Note 2)................................................................ 217,200
Other expenses.......................................................................... 277,663
--------------
Total expenses........................................................................ 13,224,937
--------------
Net investment income................................................................. 88,902,089
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments........................................................ (47,365,083)
Net change in unrealized appreciation (depreciation) on investments, collateral held for
securities on loan and foreign currency translation................................... (111,028,028)
--------------
Net loss on investments................................................................. (158,393,111)
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS:
From net investment income.............................................................. (4,006,548)
Net decrease in net assets applicable to common shares resulting from operations........ ($ 73,497,570)
==============
The accompanying notes are an integral part of the financial statements.
12
DNP SELECT INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
For the
six months For the year
ended ended
June 30, 2002 December 31,
(UNAUDITED) 2001
-------------- --------------
FROM OPERATIONS:
Net investment income.................................................... $ 88,902,089 $ 178,373,579
Net realized gain (loss) on investments.................................. (47,365,083) 18,943,412
Net change in unrealized appreciation/(depreciation) on investments,
collateral held for securities on loan and foreign currency translation (111,028,028) (296,203,058)
Distributions to preferred shareholders from net investment income....... (4,006,548) (16,247,814)
-------------- --------------
Net decrease in net assets applicable to common shares resulting from
operations........................................................... (73,497,570) (115,133,881)
DISTRIBUTIONS TO COMMON STOCKHOLDERS FROM:
Net investment income (Note 3)........................................... (83,567,423) (167,778,258)
-------------- --------------
Total distributions to common stockholders............................. (83,567,423) (167,778,258)
FROM CAPITAL STOCK TRANSACTIONS (Note 4):
Shares issued to common stockholders from dividend reinvestment.......... 13,217,598 26,595,226
-------------- --------------
Net increase in net assets derived from capital share transactions....... 13,217,598 26,595,226
-------------- --------------
Total decrease......................................................... (143,847,395) (256,316,913)
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES:
Beginning of period...................................................... 1,959,696,631 2,216,013,544
-------------- --------------
End of period (including distributions in excess of net investment income
of $15,317,053, and $16,645,171 respectively).......................... $1,815,849,236 $1,959,696,631
============== ==============
The accompanying notes are an integral part of the financial statements.
13
DNP SELECT INCOME FUND INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six months ended June 30, 2002
Cash Flows From (For):
OPERATING ACTIVITIES
Interest received...................................................... $ 23,340,211
Income dividends received.............................................. 79,357,300
Securities lending income.............................................. 456,092
Operating expenses paid (excluding interest)........................... (11,081,951)
Interest paid on commercial paper...................................... (2,447,871)
---------------
Net cash provided by operating activities.......................................... $ 89,623,781
INVESTING ACTIVITIES
Purchase of investment securities...................................... (2,768,558,059)
Proceeds from sale/redemption of investment securities................. 2,756,422,614
Amortization of premiums and discounts on debt securities.............. 2,490,926
---------------
Net cash used in investing activities.............................................. (9,644,519)
FINANCING ACTIVITIES
Dividends paid......................................................... (89,816,540)
Proceeds from issuance of common stock under dividend reinvestment plan 13,217,598
Change in net proceeds from issuance of commercial paper............... 501,715
---------------
Net cash used in financing activities.................................................... (76,097,227)
------------
Net increase in cash and cash equivalents................................................ 3,882,035
Cash and cash equivalents--beginning of period........................................... 7,160,106
------------
Cash and cash equivalents--end of period................................................. $ 11,042,141
============
Reconciliation of net investment income to net cash provided by operating activities:
Net investment income.................................................................. $ 88,902,089
Adjustments to reconcile net investment income to net cash provided by
operating activities:
Decrease in interest receivable...................................... 1,072,345
Increase in dividends receivable..................................... (72,239)
Decrease in accrued expenses......................................... (304,885)
Decrease in other receivable......................................... 26,471
---------------
Total adjustments.............................................................. 721,692
------------
Net cash provided by operating activities................................................ $ 89,623,781
============
The accompanying notes are an integral part of the financial statements.
14
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2002
(1) SIGNIFICANT ACCOUNTING POLICIES:
DNP Select Income Fund Inc. (the "Fund" formerly Duff & Phelps Utilities
Income Inc.) was incorporated under the laws of the State of Maryland on
November 26, 1986. The Fund commenced operations on January 21, 1987, as a
closed-end diversified management investment company registered under the
Investment Company Act of 1940. The primary investment objectives of the Fund
are current income and long-term growth of income. Capital appreciation is a
secondary objective.
The following are the significant accounting policies of the Fund:
(a) The market values for securities are determined as follows:
Securities traded on a national securities exchange or traded
over-the-counter and quoted on the NASDAQ System are valued at last sales
prices. Securities so traded for which there were no sales and other
securities are valued at the mean of the most recent bid-asked quotations.
Bonds not traded on a securities exchange nor quoted on the NASDAQ System
are valued at a fair value using a procedure determined in good faith by the
Board of Directors which includes the use of a pricing service. Each money
market instrument having a maturity of 60 days or less is valued on an
amortized cost basis, which approximates market value. Other securities are
valued at a fair value, as determined in good faith by the Board of
Directors.
(b) No provision is made for Federal income taxes since the Fund has
elected to be taxed as a "regulated investment company" and has made such
distributions to its shareholders deemed necessary to be relieved of all
Federal income taxes under provisions of current Federal tax law. The Fund
intends to utilize provisions of Federal income tax laws which allow a
realized capital loss to be carried forward for eight years following the
year of loss and offset such losses against any future realized gains. At
December 31, 2001, the Fund had tax capital loss carry forwards of
$72,506,566 which expire beginning on December 31, 2003.
At June 30, 2002, on a tax basis, the Fund had undistributed net
investment income of $5,919,919; and based on a $2,490,059,184 tax cost of
investments, gross unrealized appreciation of $201,446,302 and unrealized
depreciation of $188,425,544. The difference between the book basis and tax
basis of distributable earnings are a result of tax deferral of wash sale
losses, the accretion of market discount and the cash basis recognition of
preferred dividends for tax purposes.
(c) The accounts of the Fund are kept on the accrual basis of accounting.
Security transactions are recorded on the trade date. Realized gains or
losses from sales of securities are determined on the specific identified
cost basis. Dividend income is recognized on the ex-dividend date. Interest
income and expense are recognized on the accrual basis.
(d) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
(e) As required, effective January 1, 2002, the Fund has adopted the
classification requirement of EITF D-98, Classification and Measurement of
Redeemable Securities. EITF D-98 requires that preferred shares be presented
separately at liquidation value on the balance sheet. Accordingly, certain
reclassifications have been made to the statement of operations, statement
of changes in net assets and financial highlights for all periods presented.
The adoption of EITF D-98 had no impact on the net asset value of the common
shares of the Fund.
15
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
June 30, 2002
(2) MANAGEMENT ARRANGEMENTS:
The Fund has engaged Duff & Phelps Investment Management Co. (the "Adviser")
to provide professional investment management services for the Fund and has
engaged J. J. B. Hilliard, W. L. Lyons, Inc. (the "Administrator") to provide
administrative and management services for the Fund. The Adviser receives a
quarterly fee at an annual rate of .60% of the average weekly net assets of the
Fund up to $1.5 billion and .50% of average weekly net assets in excess
thereof. The Administrator receives a quarterly fee at annual rates of .25% of
average weekly net assets up to $100 million, .20% of average weekly net assets
from $100 million to $1 billion, and .10% of average weekly net assets over $1
billion. For purposes of the foregoing calculations, "average weekly net
assets" is defined as the sum of (i) the aggregate net asset value of the
Fund's common stock (ii) the aggregate liquidation preference of the Fund's
preferred stock and (iii) the aggregate proceeds to the Fund of commercial
paper issued by the Fund. Directors of the Fund not affiliated with the Adviser
receive a fee of $22,500 per year plus $1,500 per board meeting, plus $1,000
per committee meeting attended. Committee Chairmen receive an additional fee of
$3,000 per year. Transfer agent and custodian fees are paid to The Bank of New
York.
(3) DIVIDENDS:
The Board of Directors has authorized the following distributions to common
stockholders from investment income in 2002:
Record Payable Dividend
Date Date Per Share
---- -------- ---------
01-31-02 02-11-02 $.065
02-28-02 03-11-02 .065
03-29-02 04-10-02 .065
Record Payable Dividend
Date Date Per Share
---- -------- ---------
04-30-02 05-10-02 $.065
05-31-02 06-10-02 .065
06-28-02 07-10-02 .065
The tax basis for all distributions was net investment income.
(4) CAPITAL STOCK TRANSACTIONS:
The Fund may purchase shares of its own stock in open market or private
transactions, from time to time and in such amounts and at such prices (not
exceeding $100,000 plus accumulated and unpaid dividends in the case of the
Fund's remarketed preferred stock and less than net asset value in the case of
the Fund's common stock) as management may deem advisable. Since any such
purchases of the Fund's common stock would be made at prices below net asset
value, they would increase the net asset value per share of the remaining
shares of common stock outstanding. The Fund has not purchased any shares of
its common stock.
Transactions in common stock and paid-in surplus during 2001 and for the six
months ended June 30, 2002 were as follows:
Shares Amount
----------- --------------
For the six months ended June 30, 2002:
Beginning capitalization........ 213,521,241 $1,910,025,460
Dividend reinvestment......... 1,245,168 13,217,598
----------- --------------
Total capitalization.......... 214,766,409 $1,923,243,058
=========== ==============
For the year ended December 31, 2001:
Beginning capitalization....... 210,935,760 $1,883,430,234
Dividend reinvestment........ 2,585,481 26,595,226
----------- --------------
Total capitalization......... 213,521,241 $1,910,025,460
=========== ==============
16
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
June 30, 2002
(5) REMARKETED PREFERRED STOCK:
In 1988, the Fund issued 5,000 shares of Remarketed Preferred Stock ("RP")
in five series of 1,000 shares each at a public offering price of $100,000 per
share. The underwriting discount and other expenses incurred in connection with
the issuance of the RP were recorded as a reduction of paid-in surplus on
common stock. Dividends on the RP are cumulative at a rate which was initially
established for each series at its offering. Since the initial offering of each
series, the dividend rate on each series has been reset every 49 days by a
remarketing process. Dividend rates ranged from 1.467% to 1.690% during the six
months ended June 30, 2002.
The RP is redeemable at the option of the Fund on any dividend payment date
at a redemption price equal to $100,000 per share, plus accumulated and unpaid
dividends. The Fund is required to maintain certain asset coverage with respect
to the RP, and the RP is subject to mandatory redemption if that asset coverage
is not maintained. Each series of RP is also subject to mandatory redemption on
a date certain as follows: Series A--November 28, 2012; Series B--November 18,
2015; Series C--November 7, 2018; Series D--December 22, 2021; and Series
E--December 11, 2024.
In general, the holders of the RP and of the Common Stock have equal voting
rights of one vote per share, except that the holders of the RP, as a class,
vote to elect two members of the Board of Directors, and separate class votes
are required on certain matters that affect the respective interests of the RP
and the Common Stock. The RP has a liquidation preference of $100,000 per share
plus accumulated and unpaid dividends.
(6) COMMERCIAL PAPER:
The Board of Directors has authorized the Fund to issue up to $200,000,000
of Commercial Paper Notes (the "Notes") in minimum denominations of $100,000
with maturities up to 270 days. The Notes generally will be sold on a discount
basis, but may be sold on an interest-bearing basis. The Notes are not
redeemable by the Fund nor are they subject to voluntary prepayment prior to
maturity. The aggregate amount of Notes outstanding changes from time to time.
The Notes are unsecured, general obligations of the Fund. The Fund has entered
into a credit agreement to provide liquidity. The Fund is able to request loans
under the credit agreement of up to $100,000,000 at any one time, subject to
certain restrictions. Interest rates on the Notes ranged from 1.08% to 2.28%
during the six months ended June 30, 2002. At June 30, 2002, the Fund had Notes
outstanding of $197,329,000.
(7) INVESTMENT TRANSACTIONS:
For the six months ended June 30, 2002, purchases and sales of investment
securities (excluding short-term securities) were $2,639,624,595 and
$2,585,889,170, respectively.
The Fund may lend portfolio securities to a broker/dealer. Loans are
required to be secured at all times by collateral at least equal to the market
value of securities loaned. The Fund receives a portion of the income earned on
the securities held as collateral and continues to earn income on the loaned
securities. Security loans are subject to the risk of failure by the borrower
to return the loaned securities in which case the Fund could incur a loss. At
June 30, 2002, the fund had loaned portfolio securities with a market value of
$475,519,688 to a broker/dealer and money market instruments with a market
value of $491,865,497 were held in the Fund's account at The Bank of New York
as collateral.
17
DNP SELECT INCOME FUND INC.
FINANCIAL HIGHLIGHTS--SELECTED PER SHARE DATA AND RATIOS
The table below provides information about income and capital changes for a
share of common stock outstanding throughout the periods indicated:
For the year ended December 31
-----------------------------------------------------------
For the six
months ending
June 30, 2002
(UNAUDITED) 2001 2000 1999 1998 1997
------------- ---------- ---------- ---------- ---------- ----------
Net asset value:
Beginning of period......... $ 9.18 $ 10.51 $ 8.77 $ 10.36 $ 9.90 $ 8.44
---------- ---------- ---------- ---------- ---------- ----------
Net investment income....... 0.42 0.77 0.88 0.89 0.88 0.85
Net realized gain (loss) and
change in unrealized
appreciation/
(depreciation) on
investments............... (0.73) (1.23) 1.76 (1.59) 0.46 1.46
Dividends on preferred stock
from net investment
income.................... (0.02) (0.08) (0.11) (0.10) (0.10) (0.10)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations applicable to
common shares............. (0.33) (0.54) 2.53 (0.80) 1.24 2.21
Dividends on common stock
from net investment
income.................... (0.39) (0.79) (0.79) (0.79) (0.78) (0.75)
Net asset value:
End of period............. $ 8.46 $ 9.18 $ 10.51 $ 8.77 $ 10.36 $ 9.90
========== ========== ========== ========== ========== ==========
Per share market value:
End of period............. $ 10.18 $ 11.06 $ 10.50 $ 8.31 $ 11.25 $ 10.13
Ratio of expenses to average
net assets applicable to
common shares............. 1.68%* 1.57% 1.79% 1.66% 1.46% 1.45%
Total investment return..... (4.48%) 13.67% 37.37% (19.85%) 19.95% 27.69%
Ratio of net investment
income to average net
assets applicable to
common shares............. 11.31%* 8.63% 9.73% 9.40% 8.85% 9.87%
Portfolio turnover rate..... 102.11% 213.48% 229.70% 223.78% 251.19% 213.57%
Net assets applicable to
common shares, end of
period (000s omitted)..... $1,815,849 $1,959,697 $2,216,014 $1,828,128 $2,131,692 $2,010,035
--------
* Annualized
18
Board of Directors
WALLACE B. BEHNKE
HARRY J. BRUCE
FRANKLIN A. COLE
GORDON B. DAVIDSON
CONNIE K. DUCKWORTH
ROBERT J. GENETSKI
CLAIRE V. HANSEN, CFA
FRANCIS E. JEFFRIES, CFA
NANCY LAMPTON
CARL F. POLLARD
DAVID J. VITALE
Officers
CLAIRE V. HANSEN, CFA
Chairman
NATHAN I. PARTAIN, CFA
President and Chief Executive Officer
T. BROOKS BEITTEL, CFA
Senior Vice President, Secretary and Treasurer
MICHAEL SCHATT
Senior Vice President
JOSEPH C. CURRY, JR.
Vice President
DIANNA P. WENGLER
Assistant Secretary
DNP Select
Income Fund Inc.
Common stock listed on the New York Stock Exchange under the symbol DNP
55 East Monroe Street
Chicago, Illinois 60603
(312) 368-5510
Shareholder inquiries please contact
Transfer Agent
Dividend Disbursing
Agent and Custodian
The Bank of New York
Shareholder Relations
Church Street Station
P.O. Box 11258
New York, New York 10286-1258
(877) 381-2537
Investment Adviser
Duff & Phelps
Investment Management Co.
55 East Monroe Street
Chicago, Illinois 60603
Administrator
J.J.B. Hilliard, W.L. Lyons, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202
(888) 878-7845
Legal Counsel
Mayer, Brown, Rowe & Maw
190 South LaSalle Street
Chicago, Illinois 60603
Independent Public Accountants
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
19
DNP Select
Income Fund Inc.
Semi-Annual Report
June 30, 2002
[LOGO]