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. Distributions from and in excess of net investment income on the Statements of Changes in Net Assets consists of ordinary income distributions for federal income tax purposes. Ordinary income distributions for federal income tax purposes include distributions from net investment income and distributions derived from realized gains, until the Fund utilizes all of its tax loss carryforwards.
The tax character of all Fund distributions for the year ending December 31, 2006 will be determined at the end of the current fiscal year.
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 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, 2006 the following reclassifications were recorded:
The Fund is authorized to issue 100,000,000 shares of preferred stock with a par value of $.001. 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. In 2006, the Fund issued 12,000 shares of Auction Preferred Stock (“APS”) in three series of 4,000 shares each at a public offering price of $25,000 per share. The underwriting discount and other offering costs incurred in connection with the issuance of the RP and APS were recorded as a reduction of paid-in surplus on common stock. Dividends on the RP and APS are cumulative at a rate which was initially established for each series at the time of its initial offering. Since the initial offering of each series of RP and APS, the dividend rate on each series of RP has been reset every 49 days by a remarketing process and the dividend rate on each series of APS has been reset every seven days by an auction process. Dividend rates ranged from 3.47% to 4.47% on the RP and from 4.57% and to 5.26% on the APS during the six months ended June 30, 2006.
The RP and APS are redeemable at the option of the Fund on any dividend payment date at a redemption price equal to $100,000 per share for each share of RP and $25,000 per share for each share of APS, plus
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
June 30, 2006
accumulated and unpaid dividends in each case. The Fund is required to maintain certain asset coverage with respect to the RP and APS, and the RP and APS are 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 and the holders of the APS are entitled to one quarter of a vote per share. Since each share of APS represents a liquidation preference of $25,000, and each share of RP represents a liquidation preference of $100,000, the allocation of one quarter of a vote per share to the APS gives all holders of preferred stock equal voting power per dollar of liquidation preference. The holders of the RP and APS, together 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 APS and the Common Stock.
On July 18, 2006, the Fund issued two additional series of APS having an aggregate liquidation preference of $200,000,000.
(6) COMMERCIAL PAPER:
As of January 1, 2006, the Fund had Commercial Paper Notes (“Notes”) outstanding with a par value of $200,000,000 and had entered into a credit agreement to provide liquidity. The Notes were unsecured, general obligations of the Fund. During the period ended May 31, 2006, the Fund decreased the amount of its outstanding Notes to zero. Interest rates on the Notes ranged from 4.37% to 4.80% during the period from January 1, 2006 through May 31, 2006. As of June 1, 2006, the Fund no longer issues such Notes and has terminated the related backup credit facility.
(7) INVESTMENT TRANSACTIONS:
For the six months ended June 30, 2006 purchases and sales of investment securities (excluding short-term securities) were $682,150,023 and $599,190,991, 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 30,2006 the Fund had loaned portfolio securities with a market value of $702,463,712 and received $724,182,153 of cash collateral. This cash was invested in securities as shown in the Schedule of Investments.
22
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 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 94.5% 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
23
Renewal of Investment Advisory Agreement—(Continued)
of advisory fees by their sponsors. The Committee’s view is that gross fees provide a more useful comparison 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 recent years 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 24, 2006, 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, 2007.
24
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 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 is 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.
Annual Meeting Proxy Results
The Annual Meeting of Shareholders of the Fund was held on May 11, 2006. The description of each matter voted upon and the number of shares voted is as follows:
| | | For | | Withheld | | |
| |
| |
| | |
| 1. Election of Directors* | | | | | | |
| |
| Directors elected by the holders | | | | | | |
| of the Fund’s common stock: | | | | | | |
| Christian H. Poindexter | | 197,569,899 | | 4,231,459 | | |
| David J. Vitale | | 197,616,242 | | 4,185,116 | | |
| |
| Director elected by the holders | | | | | | |
of the Fund’s preferred stock: | | | | | | |
| Nancy Lampton | | 4,470 | | 0 | | |
| |
| | | For | | Against | | Abstentions |
| |
| |
| |
|
| 2. Proposal to amend and restate the | | | | | | |
| Fund’s charter to amend certain | | | | | | |
| provisions governing Series A, B, | | | | | | |
| C, D and E of the Fund’s | | | | | | |
| Remarketed Preferred Stock | | 191,547,065 | | 4,841,041 | | 5,417,722 |
| * | Directors whose term of office continued beyond this meeting are Stewart E. Conner, Connie K. Duckworth, Robert J. Genetski, Francis E. Jeffries and Carl F. Pollard. |
| |
25
This Page Intentionally Left Blank.
Board of Directors STEWART E. CONNER CONNIE K. DUCKWORTH ROBERT J. GENETSKI FRANCIS E. JEFFRIES
Chairman NANCY LAMPTON
Vice Chairman 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.
Senior Vice President and Treasurer DIANNA P. WENGLER
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, Suite 3600
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 1258
New York, New York 10286-1258
(877) 381-2537 Investment Adviser Duff & Phelps Investment
Management Co.
55 East Monroe Street, Suite 3600
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 |
| 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 April 3, 2006) 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 | August 28, 2006 | |
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 | August 28, 2006 | |
| | |
| | | |
| By (Signature and Title)* | /s/ JOSEPH C. CURRY, JR. | |
| |
| |
| Joseph C. Curry, Jr. | |
| Senior Vice President and Treasurer (principal financial officer) | |
| |
| Date | August 28, 2006 | |
* Print the name and title of each signing officer under his or her signature.
