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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4915
DNP Select Income Fund Inc.
--------------------------------------------------
(Exact name of registrant as specified in charter)
55 East Monroe Street, Chicago, Illinois 60603
---------------------------------------------------
(Address of principal executive offices) (Zip code)
Nathan I. Partain John R. Sagan
DNP Select Income Fund Inc. Mayer, Brown, Rowe & Maw LLP
55 East Monroe Street 71 South Wacker Drive
Chicago, Illinois 60603 Chicago, Illinois 60606
(Name and address of agents for service)
Registrant's telephone number, including area code: (312) 368-5510
Date of fiscal year end: December 31
Date of reporting period: June 30, 2005
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Semi-Annual Report to Stockholders follows.
Dear Fellow Shareholders:
Performance Review: Your Fund had a total return (market price change plus
income) of 9.7% for the quarter ended June 30, 2005. In comparison, the S&P
Utilities Index had a total return of 9.3%. 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 8.3%.
During the second quarter of 2005, 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 6.75% common stock dividend yield based on the June
30, 2005 closing price of $11.56 per share. That yield compares favorably with
the quarter-end yields of 3.06% on the Dow Jones Utility Index and 3.28% on the
S&P Utilities Index. Please see the Board of Directors meeting section below
for more information about the Fund's dividends.
On a longer-term basis, as of June 30, 2005, your Fund had a three-year
cumulative total return of 43.5%. In comparison, the S&P Utilities Index had a
total return during that period of 47.3%, while 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 40.0%.
A paradox within a conundrum: Earlier this year, Federal Reserve Chairman
Alan Greenspan surprised investors and economists alike by calling the current
interest rate environment a conundrum. The surprise was not that the practice
of economic theory and monetary policy are inexact, of which investors were
already aware, but that the learned and consummately articulate leader of the
United States central bank acknowledged that the reasons for recent movements
in long-term interest rates were not readily explained by historic precedent.
In an attempt to moderate economic growth to a level consistent with
contained inflation, the Federal Reserve began raising short-term interest
rates in June 2004. Through July 2005, the federal funds rate has been raised
incrementally 8 times for a total of 225 basis points (21/4 percentage points).
Historically, increases in short-term rates have always pushed up long-term
rates. Chairman Greenspan's conundrum is that, over the same period that
short-term rates have risen by 225 basis points, yields on 10-year and 30-year
U.S. Treasury securities have actually fallen by 38 and 87 basis points,
respectively.
Paradoxically, long-term interest rates have fallen as economic growth and,
to a lesser extent, inflation have accelerated. Incoming economic data indicate
that the economy ended
the second quarter of 2005 on very solid ground, continuing the trend of the
last two years. Second quarter 2005 real Gross Domestic Product (GDP) grew by
3.4%, and was accompanied by a 5.8% surge in final domestic sales, a measure of
domestic demand excluding the effects of the change in inventories. If
businesses increase production to compensate for the implied sizable inventory
reduction, the economy could be poised for robust growth in the second half of
the year.
Various explanations have been offered for the conundrum. Perhaps investors
are demanding less of an inflation risk premium than in the past as a vote of
confidence for monetary policy makers, or as an acknowledgement of the
inflation suppressing effects of global competition. Another plausible
explanation is that foreign investors are depressing long-term interest rates
by recycling vast amounts of energy and other dollar-denominated export
earnings into the U.S. fixed income markets, where they can earn relatively
high interest rates on relatively safe investments compared to the rest of the
developed world.
Whatever explanations the passage of time and the good judgment of market
participants validate, your Fund managers understand investor desire for income
from conservative investments. We will continue to pursue opportunities that
meet the Fund's primary objective--income.
The Energy Bill: After several attempts over recent years, the U.S.
Congress has enacted comprehensive energy legislation. Passage of the Energy
Bill was spurred by strong backing from the White House, as the President has
made energy reform a priority. This is the most wide-ranging energy legislation
in almost fifteen years. The massive bill addresses a multitude of issues,
including oil and gas production tax credits, refinery expansions, ethanol
production, hybrid vehicle purchases, and even daylight-savings time. The
biggest criticism of the bill has been that it is not expected to provide
immediate relief for record-high energy prices. The areas of the bill that have
the most important implications for your Fund are the very comprehensive
provisions specific to the utility industry. Various titles of the bill address
a broad range of utility-related subjects, including electricity, energy
efficiency, nuclear energy, renewable energy, and coal.
From the perspective of both the electric and gas utility sectors the bill
has several potentially positive components. The main benefit for utility
companies is an increased certainty in terms of regulatory oversight,
tax-incentives, and future capital investment.
2
Specifically, the bill addresses issues related to transmission reliability and
siting, utility mergers and acquisitions, clean coal technologies, energy tax
incentives, and nuclear energy research.
The bill is particularly strong in addressing electricity
transmission--moving high voltages over long distances. Transmission system
reliability is supported by encouraging investments for maintenance and
expansion. The Federal Energy Regulatory Commission (FERC) is given authority
over mandatory reliability rules and the ability to site transmission lines in
national interest corridors. The bill also allows for the tax deferral of any
gains associated with the sale of transmission assets to an independent
transmission organization.
The bill codifies a variety of tax incentives, including accelerated
depreciation provisions for electric transmission and natural gas distribution
infrastructure investments as well as pollution control equipment. The
production tax credits for renewables are extended, and a 20% tax credit is
provided for certain clean coal technologies.
Favorable for the nuclear energy industry, liability protections for
facility construction are extended through 2016. The Department of Energy is
required to propose a permanent nuclear waste disposal facility within one
year. The bill also enhances nuclear security provisions, and a research
program for new nuclear reactor technologies is established.
The bill accomplishes the long debated repeal of the Public Utility Holding
Company Act (PUHCA). As a result, the SEC will no longer have jurisdiction over
utility holding company mergers. It should be easier now for non-utility
companies to buy utilities and allow more geographically dispersed utility
combinations. However, merger activity may remain limited because state
regulatory agencies still have significant approval authority. Additionally,
the bill gives the FERC extended authority over M&A activities. The FERC is
required to use a public interest standard when evaluating mergers and must
also consider market power issues. A positive aspect for potential mergers is
that the FERC is required to establish rules that provide for an expeditious
review of merger applications.
Although the effects of the Energy Bill are wide ranging, the investment
implications must be determined on a sector-by-sector and company-by-company
basis. Your Fund managers and analysts will continue to do fundamental research
and select investments for
3
your portfolio that are best suited to meet Fund objectives. The graph below is
a presentation of your Fund's investments summarized by sector as of June 30,
2005.
Sector Allocation*
June 30, 2005
[CHART]
Electric 47.1%
Gas 10.9%
Communication 17.5%
REITs 7.0%
Short Term Investments 17.1%
Other 0.4%
* Sector allocation is based on total investments rather than total net assets
applicable to common shares and includes securities purchased with the cash
collateral for securities loaned.
Board of Directors Meeting: At the regular August 2005 Board of Directors'
meeting, the Board declared the following monthly dividends:
Cents Per Share Record Date Payable Date
--------------- ------------ ------------
6.5 September 30 October 11
6.5 October 31 November 10
6.5 November 30 December 12
The determination of the character of all Fund distributions (specifying
which portion is ordinary income, qualifying dividend income, short or long
term capital gains, or return of capital) is made each year-end and is reported
to shareholders on Form 1099-DIV, which is mailed every year in late January.
At the February 2005 meeting, the Board reviewed the Fund's dividend policy
and reaffirmed the current 6.5 cents per share per month dividend rate.
Interest rates remain near
4
40-year lows, despite recent Federal Reserve actions, and utility common stock
dividends are well below their long-term average. Since 2004, the Fund has made
increased use of realized gains to supplement its investment income and has
reduced its use of short-term trading strategies designed to capture dividend
income. Until the Fund utilizes all of its tax loss carryforwards,
distributions to shareholders are expected to be treated as ordinary income for
tax purposes. In addition, the reduced use of short-term trading strategies by
the Fund has lowered the Fund's portfolio turnover rate and transaction costs.
Automatic Dividend Reinvestment Plan and Direct Deposit Service--The Fund
has a dividend reinvestment plan available as a benefit to all registered
shareholders and also offers direct deposit service through electronic funds
transfer to all registered shareholders currently receiving a monthly dividend
check. These services are 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). Information on these services is also available on
the Fund's web site at the address noted below.
Visit us on the Web--You can obtain the most recent shareholder financial
reports and dividend information at our web site,
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/ Francis E. Jeffries /s/ Nathan I. Partain
Francis E. Jeffries, CFA Nathan I. Partain, CFA
Chairman President and Chief
Executive Officer
5
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
June 30, 2005
COMMON STOCKS--97.8%
Market
Value
Shares Description (Note 1)
--------- ----------- --------------
[_] ELECTRIC--61.3%
1,603,300 Ameren Corp.................................... $ 88,662,490
1,310,245 Cinergy Corp................................... 58,725,181
800,000 Consolidated Edison Inc........................ 37,472,000
1,013,650 Dominion Resources Inc......................... 74,391,774
1,000,000 DTE Energy Co.................................. 46,770,000
1,100,000 Energy East Corp............................... 31,878,000
1,750,000 Exelon Corp.................................... 89,827,500
1,700,000 FirstEnergy Corp............................... 81,787,000
1,965,000 FPL Group Inc.................................. 82,647,900
800,000 Great Plains Energy Inc........................ 25,512,000
1,080,000 Iberdrola S.A. (Spain)......................... 28,529,678
215,000 National Grid Transco PLC ADR.................. 10,485,550
770,000 National Grid Transco PLC (United Kingdom)..... 7,466,804
1,200,000 NiSource Inc................................... 29,676,000
2,237,200 NSTAR.......................................... 68,972,876
1,000,000 OGE Energy Corp................................ 28,940,000
1,390,000 Pinnacle West Capital Corp..................... 61,785,500
600,000 PPL Corp....................................... 35,628,000
1,375,000 Progress Energy Inc............................ 62,205,000
600,000 SCANA Corp..................................... 25,626,000
1,000,000 Scottish & Southern Energy ADR................. 18,157,400
850,000 Scottish & Southern Energy PLC (United Kingdom) 15,433,880
409,500 Sempra Energy.................................. 16,916,445
2,000,000 Southern Co.................................... 69,340,000
1,500,000 Vectren Corp................................... 43,095,000
581,000 WPS Resources Corp............................. 32,681,250
3,499,304 Xcel Energy Inc................................ 68,306,414
--------------
1,240,919,642
[_] GAS--10.2%
1,076,000 AGL Resources Inc.............................. 41,587,400
1,000,000 Atmos Energy Corp.............................. 28,800,000
The accompanying notes are an integral part of the financial statements.
6
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2005
Market
Value
Shares Description (Note 1)
--------- ----------- --------------
1,543,055 Keyspan Corp........................ $ 62,802,339
900,000 Peoples Energy Corp................. 39,114,000
1,000,000 WGL Holdings Inc.................... 33,640,000
-------------
205,943,739
[_] TELECOMMUNICATION--15.7%
177,100 Alltel Corp......................... 11,029,788
1,600,000 BCE Inc............................. 37,888,000
475,000 Belgacom S.A........................ 16,245,401
565,000 BT Group PLC ADR.................... 23,504,000
1,529,200 BellSouth Corp...................... 40,630,844
1,250,000 Chunghwa Telecom Co. Ltd............ 26,787,500
2,000,000 Citizens Communications Co.......... 26,880,000
1,392,230 SBC Communications, Inc............. 33,065,463
856,250 Telecom Corp of New Zealand Ltd. ADR 28,761,437
1,068,400 Telstra Corp. Ltd. ADR.............. 20,673,540
1,519,000 Verizon Communications Inc.......... 52,481,450
-------------
317,947,423
[_] NON-UTILITY--10.6%
45,294 Alexandria Real Estate Equities Inc. 3,326,844
55,938 AMB Property Corp................... 2,429,387
193,367 Archstone Smith Trust............... 7,467,834
29,861 AvalonBay Communities Inc........... 2,412,769
35,099 BioMed Realty Trust Inc............. 837,111
147,218 Boston Properties Inc............... 10,305,260
39,000 Brookfield Properties Corp.......... 1,123,200
60,363 Camden Property Trust............... 3,244,511
133,406 CBL & Associates Properties Inc..... 5,745,796
253,470 CenterPoint Properties Trust........ 10,721,781
232,359 Corporate Office Properties Trust... 6,842,973
202,389 Developers Diversified Realty Corp.. 9,301,798
113,974 DiamondRock Hospitality Co.......... 1,287,906
17,024 Digital Realty Trust Inc............ 295,877
153,154 Equity Office Properties Trust...... 5,069,397
The accompanying notes are an integral part of the financial statements.
7
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2005
Market
Value
Shares Description (Note 1)
------- ----------- --------------
220,180 Equity Residential........................ $ 8,107,028
47,604 Essex Property Trust Inc.................. 3,953,988
39,800 Extra Space Storage Inc................... 570,334
269,942 General Growth Properties Inc............. 11,091,917
56,850 Health Care REIT Inc...................... 2,142,677
27,209 Healthcare Realty Trust Inc............... 1,050,540
46,013 Home Properties Inc....................... 1,979,479
61,318 Hospitality Properties Trust.............. 2,702,284
153,440 Host Marriott Corp........................ 2,685,200
77,583 Innkeepers USA Trust...................... 1,159,090
70,004 Kilroy Realty Corp........................ 3,324,490
82,308 Kimco Realty Corp......................... 4,848,764
84,850 LaSalle Hotel Properties.................. 2,783,929
137,026 The Macerich Co........................... 9,187,593
37,190 Maguire Properties Inc.................... 1,053,964
100,637 Pan Pacific Retail Properties Inc......... 6,680,284
220,982 ProLogis.................................. 8,892,316
91,078 Public Storage, Inc....................... 5,760,684
82,092 Realty Income Corp........................ 2,055,584
131,435 Reckson Associates Realty Corp............ 4,409,644
98,061 Regency Centers Corp...................... 5,609,089
224,131 Simon Property Group Inc.................. 16,247,256
138,611 SL Green Realty Corp...................... 8,940,410
104,820 Starwood Hotels & Resorts Worldwide, Inc.. 6,139,307
178,243 Sunstone Hotel Investors Inc.............. 4,324,175
99,225 United Dominion Realty Trust Inc.......... 2,386,361
68,000 U-Store-It Trust.......................... 1,295,400
40,778 Ventas Inc................................ 1,231,496
133,459 Vornado Realty Trust...................... 10,730,104
94,927 Weingarten Realty Investors............... 3,723,037
--------------
215,478,868
--------------
Total Common Stocks (Cost--$1,634,455,958) 1,980,289,672
--------------
The accompanying notes are an integral part of the financial statements.
8
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2005
Market
Value
Shares Description (Note 1)
--------- ----------- --------------
PREFERRED STOCKS--7.4%
[_] UTILITY--7.4%
986,700 DTE Energy Co. 8 3/4% due 8/16/05.......... $ 24,874,707
1,200,000 Great Plains Energy Inc. 8% due 2/16/07.... 33,744,000
775,000 Oneok Inc. 8 1/2% due 2/16/06.............. 30,883,750
172,700 Southern Union Co. 5 3/4% due 8/16/06...... 12,562,198
500,000 TXU Corp. 8 1/8% due 5/16/06............... 33,750,000
400,000 TXU Corp. 8 3/4% due 11/16/05.............. 15,208,000
------------
Total Preferred Stocks (Cost--$118,237,953) 151,022,655
------------
BONDS--29.3%
Ratings
----------------
Standard Market
and Value
Par Value Description Moody's Poor's (Note 1)
----------- ----------- ------- -------- -------------
[_] ELECTRIC--10.7%
$18,050,000 Comed Financing II
8 1/2%, due 1/15/27............. Baa2 BBB $ 19,770,851
9,304,000 Commonwealth Edison Co.
8.00%, due 5/15/08.............. A3 A- 10,248,040
24,000,000 Dominion Resources Capital Trust
7.83%, due 12/01/27............. Baa2 BBB- 26,585,736
9,431,000 FPL Group Capital Inc.
7 5/8%, due 9/15/06............. A2 A- 9,819,680
22,500,000 Illinois Power Co.
7 1/2%, due 6/15/09............. Baa1 A- 25,129,980
6,314,929 Niagara Mohawk Power Corp.
7 5/8%, due 10/01/05............ Baa1 A- 6,373,013
15,825,000 Niagara Mohawk Power Corp.
8 7/8%, due 5/15/07............. Baa1 A- 17,141,956
5,000,000 NSTAR
8% due 2/15/10.................. A2 A- 5,743,765
The accompanying notes are an integral part of the financial statements.
9
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2005
Ratings
----------------
Standard Market
and Value
Par Value Description Moody's Poor's (Note 1)
----------- ----------- ------- -------- ------------
$ 9,000,000 PSEG Power LLC
8 5/8%, due 4/15/31.......... Baa1 BBB $ 12,464,037
22,750,000 Puget Capital Trust
8.231%, due 6/01/27.......... Ba1 BB 23,516,061
12,915,000 Sempra Energy
7.95%, due 3/1/10............ Baa1 BBB+ 14,680,312
13,000,000 Southern Co. Capital Trust II
8.14%, due 2/15/27........... Baa1 BBB+ 14,336,686
11,750,000 Virginia Electric & Power Co.
8 5/8%, due 10/01/24......... A2 A- 12,235,898
17,700,000 Virginia Electric & Power Co.
8 1/4%, due 3/01/25.......... A2 A- 18,360,263
------------
216,406,278
[_] GAS--3.6%
5,000,000 KN Energy Inc.
7 1/4%, due 3/01/28.......... Baa2 BBB 5,946,935
7,000,000 Keyspan Corp.
7 5/8%, due 11/15/10......... A3 A 8,085,798
10,000,000 Northern Border Partners LP
8 7/8%, due 6/15/10.......... Baa2 BBB 11,891,930
6,488,000 Southern Union Co.
7.60%, due 2/01/24........... Baa3 BBB 7,851,544
8,850,000 Southern Union Co.
8 1/4%, due 11/15/29......... Baa3 BBB 11,596,801
10,000,000 TE Products Pipeline Co.
7.51%, due 1/15/28........... Baa3 BBB 10,679,840
15,500,000 Trans-Canada Pipeline
9 1/8%, due 4/20/06.......... A3 BBB+ 16,098,455
------------
72,151,303
[_] TELECOMMUNICATION--12.4%
8,301,000 AT&T Wireless Services Inc.
7.35% due 3/01/06............ Baa2 A 8,483,747
The accompanying notes are an integral part of the financial statements.
10
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2005
Ratings
----------------
Standard Market
and Value
Par Value Description Moody's Poor's (Note 1)
----------- ----------- ------- -------- ------------
$15,200,000 AT&T Wireless Services Inc.
7 1/2%, due 5/01/07.............. Baa2 A $ 16,106,893
5,098,000 BellSouth Corp.
7 3/4%, due 2/15/10.............. A2 A 5,812,826
22,000,000 British Telecom PLC
8 3/8%, due 12/15/10............. Baa1 A- 26,076,820
15,000,000 Centurytel Inc.
8 3/8%, due 10/15/10............. Baa2 BBB+ 17,284,875
10,000,000 Centurytel Inc.
6 7/8%, due 1/15/28.............. Baa2 BBB+ 10,694,270
5,645,000 Comcast Cable Communications Inc.
8 3/8%, due 5/01/07.............. Baa2 BBB+ 6,058,282
7,361,000 Continental Cablevision Inc.
9.50%, due 8/01/13............... Baa2 BBB+ 7,740,430
10,000,000 France Telecom SA
7.20%, due 3/01/06............... A3 A- 10,220,700
10,000,000 France Telecom SA
7 3/4%, due 3/01/11.............. A3 A- 11,618,270
17,625,000 GTE Corp.
7.90%, due 2/01/27............... A3 A+ 19,100,970
5,000,000 GTE North Inc., Series C
7 5/8%, due 5/15/26.............. A1 A+ 5,290,420
10,000,000 Koninklijke KPN NV
8.00%, due 10/01/10.............. Baa1 A- 11,591,810
10,000,000 Sprint Capital Corp.
8 3/8%, due 3/15/12.............. Baa3 BBB- 12,044,090
10,000,000 TCI Communications Inc.
8 3/4%, due 8/01/15.............. Baa2 BBB+ 12,850,650
11,500,000 Telefonica Europe BV
7 3/4%, due 9/15/10.............. A3 A 13,282,937
12,295,000 360 Communications Co.
7.60%, due 4/01/09............... A2 A 13,614,696
10,500,000 Verizon Global Funding Corp.
7 3/4%, due 12/01/30............. A2 A+ 13,601,101
The accompanying notes are an integral part of the financial statements.
11
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2005
Ratings
------------------
Standard Market
and Value
Par Value Description Moody's Poor's (Note 1)
----------- ----------- ------- -------- ------------
$20,000,000 Vodaphone Group PLC
7 3/4%, due 2/15/10.... A2 A $ 22,858,140
5,000,000 Vodaphone Group PLC
7 7/8%, due 2/15/30.... A2 A 6,720,840
------------
251,052,767
[_] NON-UTILITY--2.6%
16,000,000# CIT Group Inc.
3.45%, due 6/07/06..... A2 A 16,005,942
8,000,000 Dayton Hudson Corp.
9 7/8%, due 7/01/20.... A2 A+ 11,962,048
10,000,000 EOP Operating LP
7 3/4%, due 11/15/07... Baa2 BBB+ 10,743,400
15,000,000# Sigma Finance Inc.
3.06%, due 12/16/05.... Aaa AAA 15,001,350
------------
53,712,740
------------
Total Bonds (Amortized Cost--$570,232,008) 593,323,088
------------
Market
Par Value/ Value
Shares Description (Note 1)
------------ ----------- ---------------
U.S. TREASURY OBLIGATION--0.1%
$ 2,000,000 U.S. Treasury Bond
10 3/4%, due 8/15/05....................................... $ 2,018,986
---------------
Total U.S. Treasury Obligation (Amortized Cost--$2,010,752) 2,018,986
---------------
MONEY MARKET INSTRUMENTS--26.0%
30,000,000 AIG Funding Inc.
3.23% due 7/05/05.......................................... 29,989,233
3,058,755# AIM STIC Liquid Assets Portfolio........................... 3,058,755
24,210,000# Bavaria TRR Corp.
3.480%, due 7/01/05........................................ 24,210,000
125,000,000# Bear Stearns Inc. Master Note
3.588%, due 7/01/05........................................ 125,000,000
The accompanying notes are an integral part of the financial statements.
12
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2005
Market
Par Value/ Value
Shares Description (Note 1)
----------- ----------- --------------
$25,000,000# Chesham Finance LLC
3.265%, due 8/31/05............................................................ $ 24,999,789
50,000,000# Goldman Sachs & Co. Repurchase Agreement, 3.508%, dated 6/30/05, due
7/01/05, with a repurchase price of $50,004,872 and collateralized by
$51,000,000 market value of Asset Backed Securities (ABS) and Collateralized
Mortgage Obligations (CMO's) having an average coupon rate of 4.53% and
original weighted average maturity of 5/25/35.................................. 50,000,000
50,000,000# Greenwich Capital Markets Inc. Repurchase Agreement, 3.518%, dated 6/30/05,
due 7/01/05, with a repurchase price of $50,004,886 and collateralized by
$51,004,777 market value of ABS and CMO's having an average coupon rate of
4.65% and original weighted average maturity of 6/22/35........................ 50,000,000
18,609,426# Janus Institutional Cash Reserves Fund......................................... 18,609,426
50,000,000# Lehman Brothers Inc. Repurchase Agreement, 3.488%, dated 6/30/05, due 7/01/05,
with a repurchase price of $50,004,844 and collateralized by $51,000,190 market
value of ABS and CMO's having an average coupon rate of 5.71% and original
weighted average maturity of 10/13/33.......................................... 50,000,000
50,000,000# Merrill Lynch Government Securities Inc. Repurchase Agreement,
3.518%, dated 6/30/05, due 7/01/05, with a repurchase price of $50,004,886 and
collateralized by $52,502,600 market value of ABS and CMO's having an
average coupon rate of 4.36% and original weighted average maturity of
8/20/37........................................................................ 50,000,000
The accompanying notes are an integral part of the financial statements.
13
DNP SELECT INCOME FUND INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2005
Market
Par Value/ Value
Shares Description (Note 1)
----------- ----------- ---------------
$50,000,000# Morgan Stanley & Co., Inc. Repurchase Agreement, 3.488%, dated 6/30/05,
due 7/01/05, with a repurchase price of $50,004,844 and collateralized by
$51,050,029 market value of ABS and CMO's having an average coupon rate
of 5.19% and original weighted average maturity of 07/02/35............... $ 50,000,000
50,000,000# Nomura Securities International Inc. Repurchase Agreement,
3.488%, dated 6/30/05, due 7/01/05, with a repurchase price of $50,004,844
and collateralized by $51,000,000 market value of ABS and CMO's having an
average coupon rate of 5.59% and original weighted average maturity of
09/05/31.................................................................. 50,000,000
---------------
Total Money Market Instruments (Amortized Cost--$525,867,203)............. 525,867,203
---------------
TOTAL INVESTMENTS (Cost--$2,850,803,874) (160.6%)......................... 3,252,521,604
---------------
OTHER ASSETS LESS LIABILITIES ((60.6%))................................... (1,227,605,404)
---------------
NET ASSETS APPLICABLE TO COMMON SHARES (100.0%)........................... $ 2,024,916,200
===============
--------
# This security was purchased with the cash proceeds from securities loans.
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.
14
DNP SELECT INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
June 30, 2005
ASSETS:
Investments at market value:
Common stocks (cost $1,634,455,958)....................................................... $1,980,289,672
Preferred stocks (cost $118,237,953)...................................................... 151,022,655
Bonds (cost $570,232,008)................................................................. 593,323,088
U.S. Treasury obligations (cost $2,010,752)............................................... 2,018,986
Money market instruments (amortized cost $525,867,203).................................... 525,867,203
--------------
Total investments at value (cost $2,850,803,874) including $509,720,050 of securities
loaned................................................................................ 3,252,521,604
Cash ...................................................................................... 12,328,626
Receivables:
Securities sold........................................................................... 584,573
Interest.................................................................................. 10,086,605
Dividends................................................................................. 4,351,663
Securities lending income................................................................. 86,042
Prepaid expenses........................................................................... 171,995
--------------
Total................................................................................... $3,280,131,108
==============
LIABILITIES:
Payable for securities purchased........................................................... 8,724,358
Due to Adviser (Note 2).................................................................... 3,664,412
Due to Administrator (Note 2).............................................................. 919,869
Dividends payable on common stock.......................................................... 14,467,560
Interest payable on remarketed preferred stock............................................. 910,553
Accrued expenses........................................................................... 1,677,170
Commercial paper outstanding (Note 6)...................................................... 197,972,806
Payable upon return of securities on loan.................................................. 526,878,180
Remarketed preferred stock ($.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
--------------
Total Liabilities....................................................................... $1,255,214,908
--------------
CAPITAL:
Common stock ($.001 par value; 250,000,000 shares authorized and 222,577,846 shares issued
and outstanding) (Note 4)................................................................ 222,578
Paid-in surplus (Note 4)................................................................... 1,848,934,081
Accumulated net realized loss on investments............................................... (194,291,400)
Distributions in excess of net investment income........................................... (31,652,817)
Net unrealized appreciation (depreciation) on investments and foreign currency translation. 401,703,758
--------------
Net assets applicable to common stock (equivalent to $9.10 per share based on
222,577,846 shares outstanding)....................................................... 2,024,916,200
--------------
Total Liabilities and Capital........................................................... $3,280,131,108
==============
The accompanying notes are an integral part of the financial statements.
15
DNP SELECT INCOME FUND INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
For the six months ended June 30, 2005
INVESTMENT INCOME:
Interest............................................................................... $ 15,916,977
Dividends (less withholding tax of $676,934)........................................... 50,697,711
Securities lending income, net......................................................... 583,689
------------
Total investment income.............................................................. 67,198,377
EXPENSES:
Management fees (Note 2)............................................................... 7,262,002
Remarketed preferred stock interest expense (Note 5)................................... 6,132,864
Commercial paper interest expense (Note 6 )............................................ 2,792,118
Administrative fees (Note 2)........................................................... 1,824,318
Transfer agent fees.................................................................... 343,000
Custodian fees......................................................................... 288,700
Remarketing agent fees................................................................. 628,472
Shareholder reports.................................................................... 261,000
Professional fees...................................................................... 229,275
Directors' fees (Note 2)............................................................... 188,600
Other expenses......................................................................... 412,244
------------
Total expenses....................................................................... 20,362,593
------------
Net investment income................................................................ 46,835,784
------------
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments....................................................... 64,525,712
Net change in unrealized appreciation (depreciation) on investments and foreign
currency translation................................................................. 51,231,734
------------
Net realized and unrealized gain....................................................... 115,757,446
------------
Net increase in net assets applicable to common stock resulting from operations. . .. $162,593,230
============
The accompanying notes are an integral part of the financial statements.
16
DNP SELECT INCOME FUND INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the
six months For the year
ended ended
June 30, 2005 December 31,
(UNAUDITED) 2004
-------------- --------------
FROM OPERATIONS:
Net investment income.................................................... $ 46,835,784 $ 100,309,637
Net realized gain........................................................ 64,525,712 80,322,132
Net change in unrealized appreciation/(depreciation) on investments and
foreign currency translation........................................... 51,231,734 165,202,888
-------------- --------------
Net increase in net assets applicable to common stock resulting from
operations........................................................... 162,593,230 345,834,657
DISTRIBUTIONS TO COMMON STOCKHOLDERS :
From and in excess of net investment income--(Note 3).................... (86,608,881) (175,074,595)
-------------- --------------
Total distributions to common stockholders............................. (86,608,881) (175,074,595)
FROM CAPITAL STOCK TRANSACTIONS (Note 4):
Shares issued to common stockholders from dividend reinvestment of
1,246,729 shares and 2,536,362 shares, respectively.................... 13,495,120 26,390,530
-------------- --------------
Net increase in net assets derived from capital share transactions....... 13,495,120 26,390,530
-------------- --------------
Total increase......................................................... 89,479,469 197,150,592
TOTAL NET ASSETS APPLICABLE TO COMMON STOCK:
Beginning of period...................................................... 1,935,436,731 1,738,286,139
-------------- --------------
End of period (including distributions in excess of net investment income
of $31,652,817 and $32,930,964, respectively).......................... $2,024,916,200 $1,935,436,731
============== ==============
The accompanying notes are an integral part of the financial statements.
17
DNP SELECT INCOME FUND INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six months ended June 30, 2005
INCREASE (DECREASE) IN CASH
Cash flows provided by (used for) operating activities:
Interest received................................................................ $ 16,664,220
Income dividends received........................................................ 50,224,023
Securities lending income, net................................................... 571,689
Expenses paid (excluding interest)............................................... (17,401,996)
Interest paid on commercial paper................................................ (2,563,590)
Purchase of investment securities................................................ (456,844,499)
Proceeds from sale/redemption of investment securities........................... 483,115,302
Amortization of premiums and discounts on debt securities........................ 4,481,891
-------------
Net cash provided by operating activities.................................................. 78,247,040
Cash flows provided by (used for) financing activities:
Dividends paid................................................................... (89,847,811)
Proceeds from issuance of common stock under dividend reinvestment
plan........................................................................... 13,495,120
Net cash used for commercial paper issuance...................................... (388,568)
-------------
Net cash used in financing activities...................................................... (76,741,259)
------------
Net increase in cash............................................................................. 1,505,781
Cash--beginning of period........................................................................ 10,822,845
------------
Cash--end of period.............................................................................. $ 12,328,626
============
Reconciliation of net increase in net assets resulting from operations to net cash
provided by operating activities:
Net increase in net assets resulting from operations........................................... $162,593,230
Change in investments.......................................................... 26,270,803
Net realized gain on investments............................................... (64,525,712)
Net change in unrealized appreciation (depreciation) on investments............ (51,231,734)
Amortization of premiums and discounts on debt securities ..................... 4,481,891
Decrease in interest receivable................................................ 747,244
Increase in dividends receivable............................................... (473,688)
Increase in accrued expenses .................................................. 397,006
Increase in other receivable................................................... (12,000)
-------------
Total adjustments...................................................................... (84,346,190)
------------
Net cash provided by operating activities...................................................... $ 78,247,040
============
The accompanying notes are an integral part of the financial statements.
18
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2005
(1) SIGNIFICANT ACCOUNTING POLICIES:
DNP SELECT INCOME FUND INC. (the "Fund") 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: Equity
securities traded on a national securities exchange or traded
over-the-counter and quoted on the NASDAQ System are valued at last sales
prices. Fixed income securities and any other securities for which it is
determined that market prices are unavailable or inappropriate 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.
(b) Repurchase agreements are fully collateralized by U.S. Treasury, U.S.
Government Agency and other investment grade securities. All collateral is
held by an independent third-party custodian bank on behalf of the Fund
until maturity of the repurchase agreement. Provisions of the agreement
provide that the market value of the collateral plus accrued interest on the
collateral is greater than or equal to the repurchase price plus accrued
interest at all times. In the event of a default or bankruptcy by the other
party to the agreements, the Fund maintains the right to sell the underlying
collateral securities at market value; however realization and/or retention
of the collateral may be subject to legal proceedings.
(c) It is the Fund's policy to comply with requirements of Subchapter M
of the Internal Revenue Code applicable to regulated investment companies
and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for Federal income taxes is required.
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. At December 31, 2004, the Fund had tax capital
loss carry forwards of $288,053,758 of which $924,278 will expire in 2007;
$76,055,964 will expire in 2010 and $211,073,516 will expire in 2011. These
capital loss carryforwards will be reduced by future realized gains, whether
or not distributed (see Note 4). The Fund incurred losses in November and
December 2004 of $3,868,218 which will be deferred for tax purposes and
treated as if they were incurred on January 1, 2005.
At December 31, 2004, on a tax basis, the Fund had undistributed net
investment income of $0 and based on a $2,776,340,015 tax cost of
investments, gross unrealized appreciation of $365,962,302 and unrealized
depreciation of $32,560,868. The difference between the book basis and tax
basis of distributable earnings and cost of investments are primarily a
result of tax deferral of wash sale losses, the accretion of market discount
and amortization of premiums and alternative tax treatment of certain
securities.
Due to inherent differences in the recognition and distribution of income
and realized gains/losses under U.S. generally accepted accounting
principles and for federal income tax purposes, permanent
19
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENT--(Continued)
(UNAUDITED)
June 30, 2005
differences between book and tax basis reporting have been identified and
appropriately reclassified on the Statement of Assets and Liabilities. The
reclassifications primarily relate to premium amortization and capital loss
carryforwards utilized for current year distributions. These
reclassifications have no impact on the net asset value of the Fund. At June
30, 2005 the following reclassifications were recorded:
Accumulated net realized Distributions in excess of
Paid-in Surplus loss on investments net investment income
$(76,766,304) $35,715,060 $41,051,244
(d) 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. Discounts and
premiums on securities are amortized over the lives of the respective
securities for financial reporting purposes. Discounts and premiums are not
amortized for tax purposes.
(e) The preparation of financial statements in conformity with U.S.
generally accepted accounting principles 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.
(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 $25,000 per year plus $2,000 per board meeting, plus $1,500
per committee meeting attended. Committee chairmen receive an additional fee of
$5,000 per year. Beginning May 23, 2005, the chairman of the board receives an
additional fee of $50,000 per year. Total fees paid to directors for the six
months ended June 30, 2005 were $198,393.
(3) INDEMNIFICATIONS:
Under the Fund's organizational documents, its Officers and Directors are
indeminified against certain liabilities arising out of the performance of
their duties to the Fund. In addition, in the normal course of business,
20
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENT--(Continued)
(UNAUDITED)
June 30, 2005
the Fund enters into contracts that provide general indemnifications to other
parties. The Fund's maximum exposure under these arrangements is unknown as
this would involve future claims that may be made against the Fund that have
not yet occurred. However, the Fund has not had prior claims or losses pursuant
to these contracts and expects the risk of loss to be remote.
(4) DIVIDENDS:
The Board of Directors has authorized the following distributions to common
stockholders in 2005:
Record Payable Dividend
Date Date Per Share
-------- -------- ---------
01-31-05 02-10-05 $.065
02-28-05 03-10-05 .065
03-31-05 04-11-05 .065
04-29-05 05-10-05 .065
05-31-05 06-10-05 .065
06-30-05 07-11-05 .065
The Fund declares and pays dividends monthly. The amount and timing of
distributions are determined in accordance with federal income tax regulations,
which may differ from U.S. generally accepted accounting principles (See Note
(1)(c)). The tax basis of all Fund distributions in 2004 was ordinary income.
Until the Fund utilizes all of its tax loss carryforwards, distributions to
shareholders are expected to be treated as ordinary income for federal income
tax purposes.
(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 2.00% to 3.40% during the six
months ended June 30, 2005.
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.
21
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENT--(Continued)
(UNAUDITED)
June 30, 2005
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 2.60% to 3.48%
during the six months ended June 30, 2005. At June 30, 2005 the Fund had Notes
outstanding with a par value of $200,000,000 and had received proceeds of
$197,972,806.
(7) INVESTMENT TRANSACTIONS:
For the six months ended June 30, 2005 purchases and sales of investment
securities (excluding short-term securities) were $434,634,301 and
$460,008,342, 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, 2005 the Fund had loaned portfolio securities with a market value of
$509,720,050 and received $526,878,180 of cash collateral. This cash was
invested in securities as shown in the Schedule of Investments.
22
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 six
months ended For the year ended December 31
June 30, 2005 -----------------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
------------- ---------- ---------- ---------- ---------- ----------
Net asset value:
Beginning of period.................... $8.75 $ 7.94 $ 7.37 $ 9.18 $ 10.51 $ 8.77
---------- ---------- ---------- ---------- ---------- ----------
Net investment income (1)(2)........... 0.22 0.54 0.75 0.79 0.77 0.88
Net realized gain (loss) and change in
unrealized appreciation/
(depreciation) on investments......... 0.52 1.06 0.62 (1.78) (1.23) 1.76
Dividends on preferred stock from net
investment income (1)................. -- -- -- (0.04) (0.08) (0.11)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations
applicable to common shares........... 0.74 1.60 1.37 (1.03) (0.54) 2.53
Dividends on common stock from and
in excess of net investment income.... (0.39) (0.79) (0.80) (0.78) (0.79) (0.79)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value:
End of period.......................... $9.10 $ 8.75 $ 7.94 $ 7.37 $ 9.18 $ 10.51
========== ========== ========== ========== ========== ==========
Per share market value:
End of period.......................... $11.56 $ 11.92 $ 10.96 $ 9.90 $ 11.06 $ 10.50
Ratio of expenses to average net assets
applicable to common stock (1).......... 2.12%* 1.86% 1.89% 1.44% 1.57% 1.79%
Ratio of net investment income to
average net assets applicable to
common stock (1)(2)..................... 4.87%* 5.63% 9.88% 9.63% 8.63% 9.73%
Total investment return on market
value................................... 0.52% 17.35% 19.82% (3.04%) 13.67% 37.37%
Portfolio turnover rate (2).............. 16.69% 43.71% 242.69% 197.27% 213.48% 229.70%
Net assets applicable to common stock,
end of period (000s omitted)............ $2,024,916 $1,935,437 $1,738,286 $1,592,970 $1,959,697 $2,216,014
--------
*Annualized
(1)Upon the adoption of FAS 150 in 2003, dividends on preferred stock are
included in interest expense and are part of net investment income. Absent
this change in accounting, per share net investment income and dividends on
preferred stock would have been $.25 and $.03, respectively for the six
months ended June 30, 2005, $.58 and $.03, respectively in 2004 and $.78 and
$.03, respectively in 2003.
(2)Beginning in 2004, the Fund reduced its use of short-term trading strategies
designed to capture dividend income and made increased use of realized gains
to supplement its investment income. Until the Fund utilizes all of its tax
loss carryforwards, distributions to shareholders are expected to be treated
as ordinary income for federal income tax purposes. In addition, the reduced
use of short-term trading strategies reduced the Fund's portfolio turnover
rate during the six month ended June 30, 2005 and the year ended December
31, 2004.
23
Renewal of Investment Advisory Agreement
Under Section 15(c) of the Investment Company Act of 1940 (the "1940 Act"), the
terms of the Fund's investment advisory agreement must be reviewed and approved
at least annually by the Board of Directors of the Fund (the "Board"),
including a majority of the directors who are not "interested persons" of the
Fund, as defined in the 1940 Act (the "Independent Directors"). Section 15(c)
of the 1940 Act also requires the Fund's directors to request and evaluate, and
the Fund's investment adviser to furnish, such information as may reasonably be
necessary to evaluate the terms of the investment advisory agreement. The Board
has a Contracts Committee, composed entirely of Independent Directors, which,
assisted by the advice of independent legal counsel, conducts an annual review
of the terms of the Fund's contractual arrangements, including the Fund's
investment advisory agreement with Duff & Phelps Investment Management Co., the
Fund's investment adviser (the "Adviser"). In the course of that review, the
members of the Contracts Committee considered all of the information they
deemed appropriate, including informational materials furnished by the Adviser
in response to a request made by the Committee. In arriving at its
recommendation that continuation of the investment advisory agreement was in
the best interests of the Fund and its shareholders, the Contracts Committee
took into account all factors that it deemed relevant, without identifying any
single factor or group of factors as all-important or controlling. Among the
factors considered by the Contracts Committee, and the conclusion reached with
respect to each, were the following:
Nature, extent, and quality of services. The Committee considered the nature,
extent and quality of the services provided to the Fund by the Adviser. In
evaluating the quality of the Adviser's services, the Committee noted the
various complexities involved in the operations of the Fund, such as the use of
two types of leverage and the lending of portfolio securities, and concluded
that the Adviser is consistently providing high-quality services to the Fund in
an increasingly complex environment. The Committee also considered the length
of service of the individual professional employees of the Adviser who provide
services to the Fund and noted an almost total lack of turnover. In the
Committee's view, the long-term service of capable and conscientious
professionals provides a significant benefit to the Fund and its shareholders.
The Committee also considered the Fund's investment performance as discussed
below. In light of the foregoing, the Committee concluded that it was generally
satisfied with the nature, extent and quality of the services provided to the
Fund by the Adviser.
Investment performance of the Fund and the Adviser. The Committee reviewed the
Fund's investment performance over time and compared that performance to
various peer groups and indices. The Committee concluded that since current
income is the Fund's primary objective, one of the best measures of the
Adviser's performance is the Fund's consistent ability to pay a 6.5 cent per
share monthly dividend. The Committee also considered the fact that since 1990,
shares of the Fund have traded at a premium to net asset value over 94% of the
time even though shares of most closed-end funds trade at a discount to net
asset value as further evidence of the Adviser's successful management of the
Fund's investment portfolio.
Cost of services and profits realized. The Committee considered the
reasonableness of the compensation paid to the Adviser, in both absolute and
comparative terms, and also the profits realized by the Adviser and its
affiliates from its relationship with the Fund. To facilitate this analysis,
the Committee retained Lipper Analytical Services Inc., an independent provider
of investment company data, to furnish a report comparing the Fund's advisory
fee and other expenses to the similar expenses of other comparable funds. The
Committee noted that many of the other funds in the comparison group were only
recently established, and benefited from waivers of advisory fees by their
sponsors. The Committee's view is that gross fees provide a more useful
comparison
24
because waivers tend to be associated with the launch of new funds and can be
expected to be of short duration. The Fund's fees, while higher than the
comparison group median when waivers were included, were lower than the median
when waivers were excluded. The Committee also received comparative information
from the Adviser with respect to the fees it charges to investment advisory
clients other than the Fund. However, the Committee concluded that the services
rendered to other institutional investor clients were not sufficiently
comparable to the services rendered to the Fund for a direct comparison of
advisory fees to be meaningful. The Committee also examined the profitability
of the investment advisory agreement to the Adviser and determined that the
profitability was within the range that courts had found reasonable. The
Committee considered that the Adviser must be able to compensate its employees
at competitive levels in order to attract and retain high-quality personnel to
provide high-quality service to the Fund. The Committee concluded that the
investment advisory agreement was the product of arm's length bargaining and
that it was fair and reasonable to the Fund.
Economies of scale. The Committee considered whether the Fund has
appropriately benefited from any economies of scale. The Committee noted the
breakpoints whereby the advisory fee is reduced at higher asset levels and
concluded that any economies of scale are being shared between Fund
shareholders and the Adviser in an appropriate manner.
Indirect benefits. The Committee considered the indirect benefits the Adviser
derives from its relationship with the Fund, including brokerage and soft
dollar arrangements. In this regard, the Committee noted that the Fund does not
utilize affiliates of the Adviser for brokerage purposes, that the Adviser had
significantly reduced the Fund's brokerage cost in 2004 and that the Adviser
was in the process of phasing out the use of soft dollar arrangements.
The Contracts Committee concluded, based upon its evaluation of all material
factors, including the foregoing, and assisted by the advice of independent
legal counsel, that the existing advisory fee structure is fair and reasonable,
and recommended the continuation of the investment advisory agreement as being
in the best interests of the Fund and its shareholders. On February 18, 2005,
the Committee presented its recommendation, and the criteria on which it was
based, to the full Board, whereupon the Board, including the Independent
Directors, accepted the Committee's recommendation and approved the
continuation of the Fund's investment advisory agreement for an additional
one-year term ending April 30, 2006.
25
Information about Proxy Voting by the Fund
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available without
charge, upon request, by calling the Administrator toll-free at (888) 878-7845
or is available on the Fund's web site http://www.dnpselectincome.com or on the
SEC's web site http://www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12 month period ended June 30, 2005 is
available without charge, upon request, by calling the Administrator toll-free
at (888) 878-7845 or is available on the Fund's website at
http://www.dnpselectincome.com or on the SEC's website at http://www.sec.gov.
Information about the Fund's Portfolio Holdings
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third fiscal quarters of each fiscal year (quarters ended March 31
and September 30) on Form N-Q. The Fund's Form N-Q will be available on the
SEC's website at http://www.sec.gov and may be reviewed and copied at the SEC's
Public Reference Room in Washington D.C. Information on the operation of the
SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. In
addition, the Fund's Form N-Q is available on the Fund's website at
http://www.dnpselectincome.com.
26
Board of Directors
STEWART E. CONNER
CONNIE K. DUCKWORTH
ROBERT J. GENETSKI
FRANCIS E. JEFFRIES, CFA
Chairman
NANCY LAMPTON
CHRISTIAN H. POINDEXTER
CARL F. POLLARD
DAVID J. VITALE
Officers
NATHAN I. PARTAIN, CFA
President, Chief Executive Officer and Chief Investment Officer
JOYCE B. RIEGEL
Chief Compliance Officer
T. BROOKS BEITTEL, CFA
Senior Vice President
and Secretary
MICHAEL SCHATT
Senior Vice President
JOSEPH C. CURRY, JR.
Vice President and Treasurer
DIANNA P. WENGLER
Assistant Vice President and 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 LLP
71 South Wacker Drive
Chicago, Illinois 60606
Independent Registered Public Accounting Firm
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
DNP Select
Income Fund Inc.
Semi-Annual Report
June
30, 2005
[LOGO]
ITEM 2. CODE OF ETHICS.
Not applicable to semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable to semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable to semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable to semi-annual reports.
ITEM 6. SCHEDULE OF INVESTMENTS
Included as part of the report to shareholders filed under Item 1 of
this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to semi-annual reports.
ITEM 8 PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to semi-annual reports.
ITEM 9. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
During the period covered by this report, no purchases were made by or
on behalf of the registrant or any "affiliated purchaser" (as defined
in Rule 10b-18(a)(3) under the Exchange Act) of shares or other units
of any class of the registrant's equity securities that is registered
by the registrant pursuant to Section 12 of the Exchange Act.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No changes to the procedures by which shareholders may recommend
nominees to the registrant's board of directors have been implemented
after the registrant last provided disclosure in response to the
requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (i.e., in the
registrant's Proxy Statement dated March 1, 2005) or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have concluded that the registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940 (the "1940 Act")) are effective, based on an evaluation of
those controls and procedures made as of a date within 90 days of the
filing date of this report as required by Rule 30a-3(b) under the 1940 Act
and Rule 13a-15(b) under the Exchange Act.
(b) There has been no change in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that
occurred during the second fiscal quarter of the fiscal half-year covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
(a) Exhibit 99.CERT Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(b) Exhibit 99.906CERT Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) DNP SELECT INCOME FUND INC.
By (Signature and Title)* /s/ Nathan I. Partain
-------------------------------------
Nathan I. Partain
President and Chief Executive Officer
Date September 2, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Nathan I. Partain
-------------------------------------
Nathan I. Partain
President and Chief Executive Officer
Date September 2, 2005
By (Signature and Title)* /s/ Joseph C. Curry, Jr.
-------------------------------------
Joseph C. Curry, Jr.
Vice President and Treasurer
(principal financial officer)
Date September 2, 2005
* Print the name and title of each signing officer under his or her signature.