<PAGE>
November 5, 1996
DEAR SHAREHOLDER:
This financial report covers the fiscal year ended September 30, 1996 which
is our twenty-fourth fiscal year of operations.
Intermediate and long-term interest rates moved generally higher during the
fiscal year as economic growth accelerated and labor markets tightened. Fixed
income markets focused on the risk that inflation might accelerate and that the
Federal Reserve would raise its short-term interest rate targets. Yields on
thirty year Treasury bonds rose from 6.5% at the beginning of the fiscal year to
6.9% by September 30, 1996. The bond price declines associated with rising
market yields detracted from the total returns available to fixed income
investors. Net asset value per share declined 3.2% during the fiscal year, while
dividend payments totaled 7.0% of beginning net asset value.
Net investment income for the year was $1.19 per share. Net realized and
unrealized gains on investments were a negative $0.56 per share. Net asset value
per share, after dividends of $1.16 per share, declined by $0.53 during the
fiscal year. On September 30, 1996 the net asset value per share was $15.97 and
the stock closed that day at a market price of $14.75 per share.
During the fiscal year the Board of Directors declared four quarterly
dividends of $0.28 per share which were payable on December 15, 1995 and on
March 15, June 14 and September 20, 1996. The Board also declared a year-end
extra dividend of $.04 per share payable December 29, 1995.
No new shares of capital stock were issued in the fiscal year, while 32,900
shares were repurchased in the open market at an average discount to net asset
value of 10.46%. On September 30, 1996 there were 8,800,065 shares of capital
stock outstanding and the net assets applicable to those shares were $140.5
million.
As of September 30, 1996 the Company's investment grade long-term bond
portfolio contained 68 issues with an average market yield to maturity of 7.6%,
an average Moodys quality rating of Aa3, an average duration of 8.6 years and an
average maturity of 16.7 years. The distribution of the portfolio maturities and
the Moodys quality ratings were as follows:
<TABLE>
<CAPTION>
AVERAGE MATURITIES QUALITY
- ----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C>
0-1 year.......................... 2.6% Treasury, Agency and Aaa.......... 37.0%
1-3 years......................... 3.9 Aa................................ 10.7
3-5 years......................... 7.9 A................................. 23.6
5-10 years........................ 24.1 Baa............................... 27.9
10-20 years....................... 33.0 Below Baa......................... 0.8
20 plus years..................... 28.5
--- ---
100% 100 %
</TABLE>
1
<PAGE>
At current levels we believe long-term U.S. interest rates are meaningfully
above fair value. If market interest rates do decline to levels approximating
our estimate of fair value, the portfolio is well positioned to appreciate in
market value while continuing to provide shareholders with a stable interest
income stream.
STOCK REPURCHASE PLAN
On July 25, 1988 the Board of Directors of the Company approved a resolution
to repurchase up to 700,000 shares of its capital stock. The Company may
repurchase shares, at a price not in excess of the market and at a discount from
net asset value, if and when such repurchases are deemed appropriate and in the
shareholders best interest. Any repurchases will be made in compliance with
applicable requirements of the federal securities law.
Under such law, the Company is required to give written notice to all
shareholders of its intention to purchase stock within six months of the actual
repurchase of shares. This report is to serve as notice to all shareholders with
respect to any shares repurchased within the next six months pursuant to the
Companys stock repurchase plan.
Audited financial statements for the year ended September 30, 1996, and a
list of the securities owned on that date are included in this report.
Sincerely,
Gary P. Brinson
PRESIDENT
2
<PAGE>
FORT DEARBORN INCOME SECURITIES, INC. is a closed-end bond fund investing
principally in investment grade long-term fixed income debt securities. The
primary objective of Fort Dearborn is to provide its shareholders with:
-a stable stream of current income consistent with external interest rate
conditions, and
-a total return over time that is above what they could receive by investing
individually in the investment grade and long-term maturity sectors of the
bond market.
[CHART TO COME]
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $135,458,241)..... $136,526,072
Preferred stock, at value (cost $500,000)......... 507,500
Short - term securities, at cost, which
approximates market (Note 1)..................... 1,641,987
-----------
Total portfolio of investments................ 138,675,559
Cash................................................ 72,774
Receivables:
Investment securities sold........................ 2,505,766
Interest on debt securities (Note 1).............. 2,097,699
-----------
Total assets.................................. 143,351,798
LIABILITIES:
Payables:
Investment securities purchased................... 2,557,387
Expenses:
Accrued investment advisory and administrative
fees (Note 6).................................... 162,628
Accrued accounting fees........................... 45,000
Accrued audit and legal fees...................... 30,454
Accrued custodial and transfer agent fees......... 10,929
Accrued insurance fees............................ 1,100
-----------
Total accrued expenses........................ 250,111
Total liabilities............................. 2,807,498
-----------
NET ASSETS (equivalent to $15.97 per share for
8,800,065 shares of capital stock outstanding)
(Note 4)........................................... $140,544,300
-----------
-----------
Analysis of Net Assets:
Shareholder capital (Note 4)...................... $135,454,146
Accumulated net realized gain on sales of
investments...................................... 2,911,633
Unrealized appreciation on investments............ 1,075,331
Accumulated undistributed net investment income... 1,103,190
-----------
Net assets applicable to outstanding shares....... $140,544,300
-----------
-----------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
Interest income earned............................... $11,511,911
Expenses:
Investment advisory and administrative (Note 6).... 673,970
Transfer agent and dividend disbursing agent....... 117,171
Directors (Note 6)................................. 70,965
Stockholders reports and annual meeting............ 59,962
Professional....................................... 46,766
Accounting......................................... 45,000
Registration and filing............................ 19,395
Franchise taxes.................................... 15,237
Custodian.......................................... 14,220
All other expenses................................. 21,102
----------
Total expenses....................................... 1,083,788
----------
Net investment income................................ 10,428,123
----------
Net Realized and unrealized gain/(loss) on
investments:
Net realized gain from investment transactions
(excluding short-term securities)................. 3,805,586
Change in unrealized appreciation/(depreciation)... (8,737,671)
----------
Total realized and unrealized loss on investments.... (4,932,085)
----------
Net increase in net assets from operations........... $5,496,038
----------
----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
From operations:
Net investment income......................... $ 10,428,123 $ 10,172,057
Net realized gain from investment
transactions................................. 3,805,586 1,383,243
Change in unrealized appreciation/
(depreciation) of investments................ (8,737,671) 11,233,523
-------------- --------------
Net increase in net assets from operations.... 5,496,038 22,788,823
Dividends to shareholders....................... (10,228,623) (9,913,530)
From capital share transactions: (Note 4)
Net asset value of shares repurchased from
shareholders................................. (485,960) (550,011)
-------------- --------------
Net (decrease)/increase in net assets....... (5,218,545) 12,325,282
Net assets:
Beginning of period........................... 145,762,845 133,437,563
-------------- --------------
End of period (including undistributed net
investment income of $1,103,190 at September
30,1996, and $812,182 at September 30, 1995,
respectively)................................ $ 140,544,300 $ 145,762,845
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
FINANCIAL HIGHLIGHTS
FOR THE FIVE YEARS ENDED
SEPTEMBER 30, 1996
Financial highlights for each share of capital
stock outstanding through each period:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............ $16.50 $15.04 $17.58 $16.64 $15.63
----------- ----------- ----------- ----------- -----------
Net investment income(1)........................ 1.19 1.15 1.15 1.22 1.24
Net realized and unrealized gain (loss) on
investments(2)................................ (0.56) 1.43 (2.57) 0.96 1.01
----------- ----------- ----------- ----------- -----------
Total from investment operations................ 0.63 2.58 (1.42) 2.18 2.25
Less dividends from net investment income..... (1.16) (1.12) (1.12) (1.24) (1.24)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period.................. $15.97 $16.50 $15.04 $17.58 $16.64
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Market price per share at end of period......... $14.750 $14.625 $14.000 $17.375 $16.375
Total investment return (market value)(3)....... 8.98% 12.88% (10.45%) 14.10% 12.25%
Total return (net asset value)(4)............... 3.84% 17.71% (5.32%) 13.56% 14.85%
Net assets at end of period (in millions)....... $140.50 $145.76 $133.44 $125.02 $117.63
Ratio of expenses to average net assets......... 0.75% 0.69% 0.72% 0.76% 0.86%
Ratio of net investment income to average net
assets........................................ 7.22% 7.34% 7.13% 7.24% 7.73%
Portfolio turnover.............................. 159.5% 126.8% 70.2% 12.7% 32.5%
Number of shares outstanding at end of period
(in thousands)................................ 8,800 8,833 8,872 7,111 7,067
</TABLE>
- --------------------------
(1) Beginning October 1, 1994, net investment income includes amortization of
discounts and premiums.
(2) Net realized and unrealized gain (loss) on investments includes the effect
on net asset value of the Capital Stock issued in connection with the
December, 1993 rights offering.
(3) Total investment return (market value) reflects the market value experiences
of a continuous shareholder who made commission- free acquisitions through
distributions in accordance with the shareholder reinvestment plan and
exercised primary subscription rights in December, 1993 at a price below net
asset value.
(4) Total return (net asset value) reflects the Company's portfolio performance
and is the combination of reinvested dividend income, reinvested capital
gains distributions at NAV, if any, and changes in net asset value per
share.
See Notes to Financial Statements.
7
<PAGE>
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- ----------- --------- ----------- -----------
<C> <S> <C> <C> <C>
DEBT SECURITIES--98.4%
/ / U.S. GOVERNMENT
SECURITIES (22.5%)
DIRECT OBLIGATIONS--13.1%
U.S. Treasury
$ 3,635,000 8.125% Note, due 5/15/21........... (a) $ 4,028,330 $ 4,078,016
54,855,000 Zero Coupon Strip, due 11/15/15.... (a) 14,308,155 14,085,667
----------- -----------
18,336,485 18,163,683
----------- -----------
AGENCY--9.4%
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
530,762 9.00%, due 8/01/04................. (a) 553,983 552,158
61,775 9.50%, due 7/01/18................. (a) 60,849 65,907
55,771 7.50%, due 11/01/99................ (a) 54,307 55,240
867,757 9.00%, due 3/01/17................. (a) 926,785 916,026
364,934 9.00%, due 3/01/24................. (a) 378,111 380,444
Federal Home Loan Mortgage Corp.,
Participation Certificates,
89,113 9.875%, due 3/15/09................ (a) 88,670 94,210
85,803 9.00%, due 9/15/08................. (a) 85,803 90,924
51,370 8.85%, due 3/15/08................. (a) 49,810 52,911
Federal National Mortgage
Association Guaranteed Mortgage
Pass Thru Certificates,
41,471 9.50%, due 4/01/20 Pool #93731..... (a) 41,010 44,452
1,701,276 7.25% CMO, due 3/25/23............. (a) 1,438,986 1,551,085
878,240 7.00% REMIC, due 06/25/13 Series
1993-106 Class Z.................. (a) 807,843 817,312
759,882 6.00%, due 4/01/01 Pool #250039.... (a) 741,931 746,584
2,454,370 6.00%, due 4/01/01 Pool #283449.... (a) 2,504,235 2,411,419
890,679 6.50%, due 2/01/26................. (a) 877,414 837,239
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- ----------- --------- ----------- -----------
Government National Mortage
Association Pass Thru Mortgage
Backed Securities,
<C> <S> <C> <C> <C>
$ 22,115 9.00%, due 5/15/21 Pool
#298198XSF........................ (a) $ 21,977 $ 23,352
145,010 9.00%, due 10/15/19 Pool
#283370XSF........................ (a) 144,103 153,212
138,603 9.00%, due 8/15/19 Pool
#271892XSF........................ (a) 140,595 146,442
10,741 9.00%, due 9/15/19 Pool
#268553XSF........................ (a) 10,895 11,348
117,221 9.00%, due 6/15/18 Pool
#253034XSF........................ (a) 116,488 123,851
103,518 8.50%, due 11/15/16 Pool
#195322XSF........................ (a) 100,606 107,885
70,566 8.50%, due 12/15/16 Pool
#190373XSF........................ (a) 68,582 73,543
3,790,837 7.50%, due 12/15/22 Pool #780230... (a) 3,785,574 3,762,406
----------- -----------
12,998,557 13,017,950
----------- -----------
/ / CORPORATE BONDS AND
NOTES (75.9%)
FINANCE--24.4%
160,000 Berkshire Hathaway, Inc.,
9.75% Debenture, due 1/15/18...... Aa1 159,183 169,600
2,000,000 BHP Finance U.S.A.,
7.25% Company Guarnteed Notes, due
3/01/16, guaranteed by Broken Hill
Proprietary Co. Ltd............... A2 2,000,000 1,917,600
3,000,000 Dresdner Bank New York,
7.25% Sub. Debenture, due
9/15/15........................... Aa1 2,994,166 2,886,570
2,500,000 Ford Credit Auto Loan Master Trust,
6.50% Asset Backed Note, due
8/15/02........................... Aaa 2,493,455 2,457,522
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- ----------- --------- ----------- -----------
$ 1,500,000 Lehman Brothers, Inc,.
10.00% Senior Note, due 5/15/99... Baa1 $ 1,482,405 $ 1,604,805
<C> <S> <C> <C> <C>
2,250,000 Nationsbank Corp.,
7.80% Sub. Note, due 9/15/16...... A3 2,236,083 2,259,045
4,250,000 News America Holdings, Inc.,
7.75% Debenture, due 1/20/24...... Baa3 3,626,653 3,985,140
4,000,000 Republic Bank of New York,
5.49% Adjustable Rate Note, due
8/07/02........................... A1 3,998,530 3,896,800
2,000,000 Salomon, Inc.,
6.750% Notes, due 2/15/03......... Baa1 1,996,003 1,905,240
5,000,000 Secured Finance Inc.,
9.05% Guaranteed Senior Secured
Bonds, due 12/15/04............... Aaa 4,987,500 5,536,500
2,500,000 Societe Generale (NY)
7.40% Sub. Note, due 6/01/06...... Aa3 2,494,362 2,504,250
4,500,000 Standard Credit Card Trust,
8.25% Credit Card Certificate of
Participation, due 1/07/05........ Aaa 4,491,627 4,791,600
----------- -----------
32,959,967 33,914,672
----------- -----------
INTERNATIONAL--20.2%
2,500,000 Augusta Funding Ltd.,
7.375% Bond, due 4/15/13 (b)...... Aaa 2,425,941 2,402,000
2,700,000 Banco Bilbao Vizcaya International,
7.000% Bank Guaranteed Note, due
12/01/25.......................... Aa3 2,651,714 2,443,851
2,000,000 BCH Cayman Island Ltd.,
7.70% note, due 7/15/06........... A3 1,986,564 2,021,400
1,800,000 Hanson Overseas PLC
6.750% Senior Notes, due
9/15/05........................... A3 1,806,939 1,726,560
3,235,000 International Bank of Recon. &
Devel.
9.75% Debenture, due 1/23/16...... Aaa 3,944,261 3,996,228
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- ----------- --------- ----------- -----------
$ 2,200,000 Macmillan Bloedel Ltd.,
7.700% Debentures, due 2/15/26.... Baa2 $ 2,084,459 $ 1,992,694
<C> <S> <C> <C> <C>
2,500,000 Petro-Canada
7.875% Debenture, due 6/15/26..... A3 2,488,358 2,544,400
1,650,000 Province of Ontario,
15.75% Debenture, due 3/15/12..... Aa3 2,294,016 1,819,620
2,665,000 Province of Quebec,
7.50% Debenture, due 7/15/23...... A2 2,557,387 2,557,387
2,000,000 Republic of South Africa,
9.625% Debenture, due 12/15/99.... Baa3 1,995,074 2,102,500
2,300,000 Skandinaviaka Enskilda Banken,
6.625% Bonds, due 3/29/49 (b)..... Baa1 2,280,328 2,230,885
2,165,000 Sociedad Quimica y Minera
de Chiles SA, 7.70% Note, due
9/15/06 (b)....................... Baa1 2,159,783 2,179,462
----------- -----------
28,674,824 28,016,987
----------- -----------
TRANSPORTATION--7.2%
2,365,000 AMR Corp.,
9.88% Debenture, due 6/15/20...... Baa3 2,825,888 2,751,370
2,950,000 Delta Air Lines,
10.06% Equipment Trust, due
1/02/16........................... Baa1 3,429,513 3,424,921
1,000,000 Northwest Airlines Corp.,
8.07% Pass Thru Certificate, due
1/02/15........................... Baa1 1,000,000 1,034,800
3,000,000 United Airlines, Inc.,
7.870% Pass Thru Certificates, due
1/30/19........................... Baa1 3,000,000 2,802,810
----------- -----------
10,255,401 10,013,901
----------- -----------
COMMUNICATIONS--4.7%
2,110,000 Airtouch Communications,
7.50% Notes, due 7/15/06.......... Baa2 2,098,136 2,103,185
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- ----------- --------- ----------- -----------
$ 5,725,000 BellSouth Corp.,
6.650% Deferred Interest Bearing
Bond, due 12/15/2095, begins
earning interest 12/15/15......... Aaa $ 1,511,162 $ 1,152,214
<C> <S> <C> <C> <C>
3,500,000 Southern New England Telephone Co.,
7.25% Medium Term Note, due
12/15/33.......................... Aa2 3,475,500 3,247,160
----------- -----------
7,084,798 6,502,559
----------- -----------
INDUSTRIAL--15.2%
3,000,000 Caterpillar, Inc.,
9.375% Debenture, due 3/15/21..... A2 3,000,000 3,554,100
2,580,000 General Motors Corp.,
7.70% Note, due 4/15/16........... A3 2,595,179 2,564,417
2,315,000 Lockheed Martin Corp.
7.70% Note, due 6/15/08........... A3 2,314,047 2,379,126
3,000,000 Northrop-Grumman Corp.,
7.75% Note, due 3/01/16........... Baa3 2,946,140 2,964,150
3,000,000 Philips Electronics, NV
7.75% Debenture, due 5/15/25...... A3 2,990,297 2,948,820
2,500,000 SFP Pipeline Holdings, Inc.,
10.418% Adjustable Rate Exchange
Debenture, due 8/15/10............ Baa3 2,300,000 3,100,000
1,000,000 Time Warner, Inc.
9.125% Debenture, due 1/15/13..... Ba1 1,027,527 1,053,430
2,565,000 Time Warner Entertainment, Inc.,
8.375% Debenture, due 03/15/23.... Baa3 2,566,034 2,512,777
----------- -----------
19,739,224 21,076,820
----------- -----------
UTILITY-ELECTRIC AND OTHER SERVICES
COMBINED--4.2%
3,000,000 ARKLA Inc., 8.64% Medium Term Note,
due 9/04/98....................... Baa3 2,910,960 3,093,000
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- ----------- --------- ----------- -----------
$ 2,500,000 Delmarva Power & Light Co.,
9.95% Note, due 12/01/20.......... A2 $ 2,498,025 $ 2,726,500
<C> <S> <C> <C> <C>
----------- -----------
5,408,985 5,819,500
----------- -----------
Total Debt Securities.............. 135,458,241 136,526,072
----------- -----------
PREFERRED STOCK--.4%
FINANCE
20,000 SI Financing Trust I............... Baa2 500,000 507,500
----------- -----------
500,000 507,500
----------- -----------
SHORT TERM SECURITIES--1.2%
1,300,000 Rite Aid Promissory Note, due
10/03/96.......................... A2 1,299,406 1,299,406
343,000 Textron Finance Promissory Note,
due 10/08/96...................... A2 342,581 342,581
----------- -----------
1,641,987 1,641,987
----------- -----------
Total Portfolio of Investments
100%.............................. $137,600,228 $138,675,559
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(a) Moody's as a matter of policy, does not rate this issue.
(b) Restricted Security.
See Notes to Financial Statements.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Fort Dearborn Income Securities, Inc. ("the Company") is registered under
the Investment Company Act of 1940, as amended, as a diversified closed-end
management company. The Company invests principally in investment grade
long-term fixed income debt securities with the primary objective of providing
its shareholders with:
-a stable stream of current income consistent with external interest rate
conditions, and
-a total return over time that is above what they could receive by investing
individually in the investment grade and long-term maturity sectors of the
bond market.
The following is a summary of the significant accounting policies followed
by the Company in the preparation of its financial statements. The preparation
of financial statements in conformity with 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 revenues and expenses during the reporting period. Actual results could
differ from those estimates.
A. SECURITY VALUATIONS -- Investments are valued based on available quoted
bid prices on the valuation date. Short-term securities are valued at amortized
cost which approximates value.
B. INVESTMENT INCOME AND SECURITY TRANSACTIONS -- Interest income is
recorded on the accrual basis. Security transactions are accounted for on the
trade date. The Company has elected to amortize market discount and premium on
all issues purchased after September 30, 1994. Realized gains and losses from
security transactions and unrealized appreciation and depreciation of
investments are reported on a first-in first-out basis.
C. FEDERAL INCOME TAXES -- It is the Company's policy to comply with the
requirements 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.
2. NET ASSET VALUATIONS
The net asset value of the Company's shares is determined each week as of
the close of business on the last day on which the New York Stock Exchange is
open, on the last business day of each month, on the eighth trading day prior to
the dividend payment date and on the last business day of each calendar quarter,
if such days are other than the last business day of the week.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996
3. DISTRIBUTIONS
Dividends and distributions payable to shareholders are recorded by the
Company on the record date. Net realized gains from the sale of investments, if
any, are distributed to shareholders in the succeeding year, unless there are
capital loss carryovers which may be applied against such realized gains.
Permanent book and tax basis differences relating to expenses that are not
deductible for tax purposes totaling $91,508 were reclassified from
Undistributed Net Investment Income to Shareholder Capital.
4. CAPITAL STOCK
At September 30, 1996 there were 12,000,000 shares of $.01 par value capital
stock authorized, and capital paid in aggregate of $135,454,146. During the year
ended September 30, 1996 no new shares were issued as part of the dividend
reinvestment plan and 32,900 shares were repurchased in the open market at a
weighted average discount to Net Asset Value of 10.46% per share by the Company
in accordance to the Company's Stock Repurchase Plan.
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales (including maturities) of portfolio securities during
the year ended September 30, 1996 were as follows: debt securities, $123,961,227
and $122,674,297 respectively; short-term securities, $201,169,357 and
$203,111,136, respectively; United States government debt obligations,
$97,487,253 and $97,369,177; preferred stock $500,000 and $1,616,346
respectively.
For Federal income tax purposes the identified cost of investments owned at
September 30, 1996, was $137,600,228. The aggregate gross unrealized
appreciation is $3,801,861 and the aggregate gross unrealized depreciation is
$2,726,530, resulting in aggregate net unrealized appreciation of $1,075,331.
6. MANAGEMENT AND OTHER FEES
Under an agreement between the Company and Brinson Partners, Inc. ("the
Advisor"), the Advisor manages the Company's investment portfolio, maintains its
accounts and records, and furnishes the services of individuals to perform
executive and administrative functions for the Company. In return for these
services, the Company pays the Advisor a quarterly fee of 1/8 of 1% (annually
1/2 of 1%) of the Company's average weekly net assets up to $100,000,000 and
1/10 of 1% (annually 2/5 of 1%) of average weekly net assets in excess of
$100,000,000.
All Company officers serve without direct compensation from the Company.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1996
7. MORTGAGE BACKED SECURITIES
The Company invests in Mortgage Backed Securities (MBS), representing
interests in pools of mortgage loans. These securities provide shareholders with
payments consisting of both principal and interest as the mortgages in the
underlying mortgage pools are paid. Most of the securities are guaranteed by
federally sponsored agencies -- Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage
Corporation (FHLMC). However, some securities may be issued by private,
non-governmental corporations. MBS issued by private entities are not government
securities and are not directly guaranteed by any government agency. They are
secured by the underlying collateral of the private issuer. Yields on privately
issued MBS tend to be higher than those of government backed issues. However,
risk of loss due to default and sensitivity to interest rate fluctuations is
also higher.
The Company also invests in Collateralized Mortgage Obligations (CMOs). A
CMO is a bond which is collateralized by a pool of MBS. These MBS pools are
divided into classes or tranches with each class having its own characteristics.
The different classes are retired in sequence as the underlying mortgages are
repaid. For instance, a Planned Amortization Class (PAC) is a specific class of
mortgages which over its life will generally have the most stable cash flows and
the lowest prepayment risk. A GPM (Graduated Payment Mortgage) is a negative
amortization mortgage where the payment amount gradually increases over the life
of the mortgage. The early payment amounts are not sufficient to cover the
interest due, and therefore, the unpaid interest is added to the principal, thus
increasing the borrower's mortgage balance. Prepayment may shorten the stated
maturity of the CMO and can result in a loss of premium, if any has been paid.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Fort Dearborn Income Securities, Inc.:
We have audited the accompanying statement of assets and liabilities of Fort
Dearborn Income Securities, Inc., (the "Company") including the portfolio of
investments, as of September 30, 1996, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1996, by correspondence with the custodian and a broker. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Fort Dearborn Income Securities, Inc. as of September 30, 1996, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles.
Chicago, Illinois
October 25, 1996
17
<PAGE>
REPORT ON THE AUTOMATIC DIVIDEND INVESTMENT PLAN
The Company's Automatic Dividend Investment Plan, operated for the
convenience of the shareholders, has been in operation since the dividend
payment of May 5, 1973.
During fiscal 1996, 89,263 shares were purchased for the Plan participants.
<TABLE>
<CAPTION>
WHERE
DIVIDEND NO. OF SHARES
PAYMENT SHARES AVERAGE WERE
DATE PURCHASED PRICE PURCHASED
- ----------------------------------------------------------
<S> <C> <C> <C>
December 15, 1995 20,949 $ 15.40 Open Market
December 29, 1995 3,039 $ 15.30 Open Market
March 15, 1996 21,298 $ 15.11 Open Market
June 14, 1996 22,439 $ 14.11 Open Market
September 20, 1996 21,538 $ 14.71 Open Market
</TABLE>
As explained in the Plan, shares are purchased at the lower of the market
value (including commission) or net asset value, depending upon availability.
The expense of maintaining the Plan, $1.35 for each participating account per
dividend payment, is borne by the Company. Shareholders who have not elected to
participate in the Plan, receive all dividends in cash.
The Plan had 1,234 participants on September 3, 1996. Under the terms of the
Plan, any shareholder may terminate participation
by giving written notice to the Company. On termination, a certificate for all
full shares, plus a check for the value of any fractional interest in shares,
will be sent to the withdrawing shareholder, unless the sale of all or part of
such shares is requested. ANY REGISTERED SHAREHOLDER WHO WISHES TO PARTICIPATE
IN THE PLAN MAY DO SO BY WRITING TO FIRST CHICAGO TRUST COMPANY OF NEW YORK,
P.O. BOX 2500 JERSEY CITY, NJ 07303-2500 OR CALLING THEM AT (800) 446-2617. A
copy of the Plan and enrollment card will be mailed to you. Shareholders who own
shares in nominee name should contact their brokerage firm. All new shareholders
will receive a copy of the Plan and a card which may be signed to authorize
reinvestment of dividends pursuant to the Plan.
- THE INVESTMENT OF DIVIDENDS DOES NOT RELIEVE PARTICIPANTS OF ANY INCOME
TAX WHICH MAY BE PAYABLE THEREON. THE COMPANY STRONGLY RECOMMENDS THAT ALL
AUTOMATIC DIVIDEND INVESTMENT PLAN PARTICIPANTS RETAIN EACH YEAR'S FINAL
STATEMENT ON THEIR PLAN PARTICIPATION AS A PART OF THEIR PERMANENT TAX RECORD.
THIS WILL INSURE THAT COST INFORMATION IS AVAILABLE IF AND WHEN IT IS NEEDED.
18
<PAGE>
BOARD OF DIRECTORS
RICHARD M. BURRIDGE
Chairman of the Board
C. RODERICK O'NEIL, CFA
Director
RICHARD S. PETERSON
Director
FRANK K. REILLY, CFA
Director
EDWARD M. ROOB
Director
OFFICERS
GARY P. BRINSON, CFA
President
DENNIS L. HESSE
Vice President & Portfolio Manager
JOSEPH A. ANDERSON
Secretary & Treasurer
GREGORY P. SMITH, CFA
Assistant Portfolio Manager
FORT DEARBORN
INCOME SECURITIES, INC.
209 S. LaSalle St.
Eleventh Floor
Chicago, Illinois 60604-1295
(312) 346-0676
STOCK TRANSFER AND
DIVIDEND DISBURSEMENT
AGENT
Mail correspondence to:
First Chicago Trust Company
of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
(800) 446-2617
Mail stock certificates to:
First Chicago Trust Company
of New York
P.O. Box 2506
Jersey City, New Jersey 07303-2506
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
303 East Wacker Drive
Chicago, Illinois 60601
LEGAL COUNSEL
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
19
<PAGE>
FORT DEARBORN INCOME SECURITIES, INC.
209 S. LaSalle St.
Eleventh Floor
Chicago, Illinois 60604-1295
(312) 346-0676
FORT
DEARBORN
INCOME
SECURITIES,
INC.
ANNUAL REPORT
SEPTEMBER 30, 1996
