<PAGE>
FORT
DEARBORN
INCOME
SECURITIES,
INC.
FORT DEARBORN INCOME SECURITIES, INC.
209 S. LaSalle St.
SEMI-ANNUAL REPORT
Eleventh Floor
Chicago, Illinois 60604-1295
MARCH 31, 1996
(312) 346-0676
<PAGE>
May 20, 1996
DEAR SHAREHOLDER:
This financial report covers the six months ended March 31, 1996, which is
our twenty-fourth fiscal year of operations.
Net investment income for the six months was $0.57 per share. On March 31,
1996 the net asset value per share was $16.17 and the stock closed that day at
$14.75 per share.
During the semi-annual period the Board of Directors declared three
dividends: $0.28 per share payable December 15, 1995, $0.04 per share payable
December 29, 1995, and $0.28 per share payable March 15, 1996.
At the end of the semi-annual period the 65 issues in the portfolio had an
average market yield of 7.34%, an average Moody's quality rating of Aa3, an
average duration of 8.6 years, and an average maturity of 18.5 years. The
distribution of the portfolio maturities and quality was as follows:
<TABLE>
<S> <C>
Maturities
- - ----------------------------------------------
0-1 year 3.2%
1-3 year 2.8
3-5 year 11.2
5-10 year 25.4
10-20 year 15.0
20 plus years 42.4
---
100%
</TABLE>
<TABLE>
<S> <C>
Quality
- - ----------------------------------------------
Treasury, Agency, Aaa 36.7 %
Aa 17.2
A 23.0
Baa 20.9
Below Baa 2.2
---
100%
</TABLE>
Short-term interest rates declined during the semi-annual period as the
Federal Reserve lowered its overnight funds rate target in two steps in December
and January from 5.75% to 5.25%. Initially, long-term interest rates followed,
with thirty year Treasury bond yields falling from about 6.5% to 6.0% during the
last quarter of 1995. In the early months of 1996 the bond market reversed
course. Long maturity Treasury yields increased to about 6.7% by March 31, 1996.
This shift in bond market sentiment reflected worry about a possible
acceleration of inflation driven by above-trend real economic growth at a time
of tightness in some commodity and labor markets.
Actual inflation has remained subdued and we believe the Federal Reserve
will maintain its resolve to pursue non-inflationary monetary policies. At
present levels, we believe long-term interest rates more than adequately
compensate investors for inflation and risk.
In March we lengthened the maturity structure of the portfolio to better
capture the attractive valuations embedded in current bond yields.
STOCK REPURCHASE PLAN:
On July 28, 1988 the Board of Directors of the Company approved a resolution
to repurchase up to 700,000 of its common shares. The Company may repurchase
shares, at a price not in excess of market value
1
<PAGE>
and at a discount from net asset value, if and when such repurchases are deemed
appropriate and in the shareholder's 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 such 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 Company's stock repurchase plan.
Unaudited financial statements for the six month period ended March 31,
1996, and a list of the securities owned on that date are included in the
report.
Sincerely,
Gary P. Brinson, CFA
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.
[CAMERA READY GRAPH TO COME]
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments:
Debt securities, at value (cost $135,028,022)... $136,562,487
Preferred stock, at value (cost $1,500,000)..... 1,665,000
Short-term securities, at cost, which
approximates market............................ 2,546,749
------------
Total portfolio of investments.............. 140,774,236
Cash.............................................. 79,848
Receivables:
Investment securities sold...................... 33,067
Interest on debt securities..................... 1,923,062
------------
Total assets................................ 142,810,213
------------
LIABILITIES:
Payables:
Accrued investment advisory fees................ 171,897
Accrued audit and legal fees.................... 17,874
Accrued accounting fees......................... 15,000
Accrued custodial and transfer agent fees....... 2,148
Accrued insurance fees.......................... 4,873
Accrued franchise fees.......................... 1,748
------------
Total liabilities........................... 213,540
------------
NET ASSETS (equivalent to $16.17 per share for
8,817,065 shares of capital stock outstanding)... $142,596,673
------------
------------
Analysis of Net Assets:
Shareholder capital............................. $135,790,542
Net realized gain on sales of investments....... 4,602,823
Unrealized appreciation on investments.......... 1,699,465
Undistributed net investment income............. 503,843
------------
Net assets applicable to outstanding shares..... $142,596,673
------------
------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Investment income earned.................................... $5,573,910
Expenses:
Investment advisor........................................ 345,127
Directors................................................. 37,171
Transfer agent and dividend disbursing agent.............. 66,582
Stockholders reports and annual meeting................... 46,330
Professional fees......................................... 26,311
Registration and filing fees.............................. 19,270
Accounting Fees........................................... 15,000
Custodian................................................. 6,351
Franchise taxes........................................... 1,748
All other expenses........................................ 22,640
----------
Total expenses............................................ 586,530
----------
Net investment income....................................... 4,987,380
----------
Net realized and unrealized gain on investments:
Net realized gain on sales of investments (excluding
short-term securities)................................... 5,496,776
Change in unrealized appreciation of investments.......... (8,113,537)
----------
Total realized and unrealized loss on investments........... (2,616,761)
----------
Net increase in net assets from operations.................. $2,370,619
----------
----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH YEAR ENDED
31, 1996 SEPTEMBER 30, 1995
-------------- ------------------
<S> <C> <C>
Operations:
Net investment income............................... $ 4,987,380 $ 10,172,057
Net realized gain on sales of investments........... 5,496,776 1,383,243
Change in unrealized appreciation of investments.... (8,113,537) 11,233,523
-------------- ------------------
Net increase in net assets from operations.......... 2,370,619 22,788,823
Dividends to shareholders............................. (5,295,719) (9,913,530)
From capital share transactions:
Net asset value of shares repurchased from
shareholders....................................... (241,072) (550,011)
-------------- ------------------
Net increase (decrease) in net assets............. (3,166,172) 12,325,282
Net assets:
Beginning of period................................. 145,762,845 133,437,563
-------------- ------------------
End of period (including undistributed net
investment income of $503,843 at March 31, 1996,
and $812,182 at September 30, 1995)................ $ 142,596,673 $ 145,762,845
-------------- ------------------
-------------- ------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<C> <S> <C> <C> <C>
DEBT SECURITIES--97.0%
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- - ---------- --------- ----------- -----------
<C> <S> <C> <C> <C>
/ / U.S. GOVERNMENT
SECURITIES (26.7%)
DIRECT OBLIGATIONS--14.0%
U.S. Treasury
$7,790,000 8.125% Note, due 5/15/21................... AAA $ 9,649,271 $ 8,939,025
35,000,000 Zero Coupon Strip, due 08/15/20............ AAA 6,492,454 6,360,550
16,835,000 Zero Coupon Strip, due 08/15/15............ AAA 5,059,467 4,373,396
----------- -----------
21,201,192 19,672,971
----------- -----------
AGENCY--12.7%
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
651,767 9.00%, due 8/1/04.......................... (a) 680,282 686,396
70,343 9.50%, due 7/1/18.......................... (a) 69,288 74,959
89,829 7.50%, due 11/1/99......................... (a) 87,471 89,323
1,047,747 9.00%, due 3/1/17.......................... (a) 1,119,262 1,111,921
412,935 9.00%, due 3/1/24.......................... (a) 427,882 432,810
Federal Home Loan Mortgage Corp.,
Participation Certificates,
89,113 9.875%, due 3/15/09........................ (a) 88,670 94,599
106,903 9.00%, due 9/15/08......................... (a) 106,903 113,852
51,370 8.85%, due 3/15/08......................... (a) 49,772 53,040
Federal National Mortgage Association
Guaranteed Mortgage Pass Thru
Certificates,
43,191 9.50%, due 4/1/20 Pool #93731.............. (a) 42,705 46,080
1,701,276 7.25% CMO, due 3/25/23..................... (a) 1,437,751 1,604,516
815,028 6.00%, due 4/1/01 Pool #250039............. (a) 793,965 797,199
2,677,479 6.00%, due 4/1/01 Pool #283449............. (a) 2,608,283 2,618,909
905,671 6.50%, due 2/1/26.......................... (a) 892,114 861,520
Government National Mortage Association
Pass Thru Mortgage Backed Securities,
</TABLE>
- - ------------------------
(a) Moody's, as a matter of policy, does not rate these issues.
See Notes to Financial Statements.
7
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- - ---------- --------- ----------- -----------
$ 25,987 9.00%, due 5/15/21 Pool #298198XSF......... (a) $ 25,825 $ 27,416
<C> <S> <C> <C> <C>
208,135 9.00%, due 10/15/19 Pool #283370XSF........ (a) 206,834 219,583
</TABLE>
<TABLE>
<C> <S> <C> <C> <C>
155,393 9.00%, due 8/15/19 Pool #271892XSF......... (a) 157,627 163,939
10,805 9.00%, due 9/15/19 Pool #268553XSF......... (a) 10,960 11,399
118,999 9.00%, due 6/15/18 Pool #253034XSF......... (a) 118,255 125,544
104,474 8.50%, due 11/15/16 Pool #195322XSF........ (a) 101,536 109,077
100,742 8.50%, due 12/15/16 Pool #190373XSF........ (a) 97,908 105,181
4,054,764 7.50%, due 12/15/22 Pool #780230........... (a) 4,049,090 4,057,298
5,000,000 Tennessee Valley Authority,
6.875% Bond, due 12/15/43................. Aaa 4,478,900 4,525,000
----------- -----------
17,651,283 17,929,561
----------- -----------
/ / CORPORATE BONDS AND
NOTES (70.3%)
FINANCE--27.0%
3,500,000 Barclays North American Capital Corp.,
9.75% Capital Note, due 5/15/21........... AA3 3,427,690 3,700,200
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
03/01/16, guaranteed by Broken Hill
Proprietary Co. LTD....................... A2 2,000,000 1,946,500
3,000,000 Dresdner Bank New York,
7.25% Sub. Debenture, due 9/15/15......... Aa1 2,994,096 2,978,220
2,500,000 Ford Credit Auto Loan Master Trust,
6.50% Asset Backed Note, due 8/15/02...... Aaa 2,493,027 2,500,300
2,500,000 ITT Destinations,
7.750% Notes, due 11/15/25................ Baa1 2,465,290 2,333,250
1,500,000 Lehman Brothers, Inc.,
10.00% Senior Note, due 5/15/99........... Baaa1 1,482,405 1,640,685
4,250,000 News America Holdings, Inc.,
7.75% Debenture, due 1/20/24.............. Baa3 3,626,653 3,992,578
4,000,000 Republic Bank of New York,
5.815% Adjustable Rate Note, due
8/07/02................................... A1 3,998,404 3,865,000
</TABLE>
- - ------------------------
(a) Moody's, as a matter of policy, does not rate these issues.
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- - ---------- --------- ----------- -----------
$2,000,000 Salomon, Inc.,
6.750% Notes, due 02/15/03................ Baa1 $ 1,995,815 $ 1,900,120
<C> <S> <C> <C> <C>
5,000,000 Secured Finance Inc.,
9.05% Guaranteed Senior Secured Bonds, due
12/15/04.................................. Aaa 4,987,500 5,603,000
4,500,000 Standard Credit Card Trust,
8.25% Credit Card Certificate of
Participation, due 1/07/05................ Aaa 4,491,318 4,885,065
----------- -----------
34,121,381 35,514,518
----------- -----------
CONSUMER--3.0%
3,000,000 Darden Restaurants,
7.125% Notes, due 02/01/16................ A3 2,970,460 2,775,300
1,500,000 RJR Nabisco,
8.625%, Sr. Note, due 12/01/02............ Baa3 1,413,102 1,506,990
----------- -----------
4,383,562 4,282,290
----------- -----------
INTERNATIONAL--18.7%
2,000,000 Bangkok Bank Public Co.,
8.250% Note, due 3/15/16 (b).............. A3 1,991,509 1,980,580
2,700,000 Banco Bilbao Vizcaya International,
7.000% Bank Guaranteed Note, due
12/01/25.................................. Aa3 2,651,531 2,463,453
3,000,000 Den Danske Bank,
6.55% Debenture, due 9/15/03 (b).......... A2 2,943,360 2,890,500
2,165,000 Export-Import Bank of Korea,
6.375% Senior Notes, due 02/15/06......... A1 2,152,950 2,056,209
3,500,000 Government of New Zealand,
9.125% Notes, due 9/25/16................. Aa1 3,427,060 4,168,850
1,800,000 Hanson Overseas PLC,
6.750% Senior Notes, due 09/15/05......... A2 1,807,227 1,749,834
2,200,000 Macmillan Bloedel LTD,
7.700% Debentures, due 02/15/26........... Baa2 2,084,066 2,050,070
3,000,000 Province of British Columbia,
6.500% Bonds, due 01/15/26................ Aa2 2,978,048 2,750,190
1,650,000 Provice of Ontario,
15.75% Debenture, due 3/15/12............. Aa3 2,294,016 1,898,490
</TABLE>
- - ------------------------
(b) Restricted security.
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Republic of South Africa,
9.625% Debenture, due 12/15/99............ MOODY
FACE VALUE RATING COST VALUE
$---------- --------- $----------- $-----------
2,000,000 Baa3 1,994,504 2,120,000
<C> <S> <C> <C> <C>
2,300,000 Skandinaviaka Enskilda Banken,
6.625% Bonds, due 03/29/49 (b)............ Baa1 2,278,475 2,231,805
2,600,000 Smurfit Capital Funding,
7.500% Debenture, due 11/20/25............ Baa1 2,587,695 2,434,692
----------- -----------
29,190,441 28,794,673
----------- -----------
TRANSPORTATION--3.6%
2,000,000 General Motors Corp.,
9.625% Note, due 12/1/00.................. A3 2,000,000 2,233,800
3,000,000 United Airlines, Inc.,
7.870% Pass Thru Certificates, due
01/30/19.................................. Baa1 3,000,000 2,844,441
----------- -----------
5,000,000 5,078,241
----------- -----------
COMMUNICATIONS--3.2%
5,725,000 BellSouth Corp.,
6.650% Deferred Interest Bearing bond, due
12/15/95, begins earning interest
12/15/15.................................. Aaa 1,459,127 1,188,281
3,500,000 Southern New England Telephone Co.,
7.25% Medium Term Note, due 12/15/33...... Aa2 3,475,500 3,296,160
----------- -----------
4,934,627 4,484,441
----------- -----------
</TABLE>
<TABLE>
<C> <S> <C> <C> <C>
INDUSTRIAL--10.7%
3,000,000 Caterpillar, Inc.,
9.375% Debenture, due 3/15/21............. A2 3,000,000 3,656,400
3,000,000 Philips Electronics,
7.50% Debenture, due 5/15/25.............. A3 2,990,127 3,037,920
2,500,000 SFP Pipeline Holdings, Inc.,
Adjustable Rate Exchange Debenture, due
8/15/10................................... BAA3 2,300,000 3,300,000
2,000,000 Time Warner Inc.,
9.125% Debenture, due 1/15/13............. Ba1 1,800,669 2,161,620
2,800,000 USX Corp.,
8.500% Note, due 3/01/23.................. Baa3 3,045,755 2,888,452
----------- -----------
13,136,551 15,044,392
----------- -----------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- - ---------- --------- ----------- -----------
UTILITY-ELECTRIC AND OTHER
SERVICES COMBINED--4.1%
<C> <S> <C> <C> <C>
$3,000,000 ARKLA Inc.,
8.64% Medium Term Note, due 9/4/98........ Ba1 $ 2,910,960 $ 3,095,400
2,500,000 Delmarva Power & Light Co.,
9.95% Note, due 12/01/20.................. A3 2,498,025 2,666,000
----------- -----------
5,408,985 5,761,400
----------- -----------
Total Debt Securities...................... 135,028,022 136,562,487
----------- -----------
/ / PREFERRED STOCK--(1.2%)
FINANCE
60,000 Grand Metropolitan Preferred Stock
9.42%, next call date 11/16/04............ A2 1,500,000 1,665,000
----------- -----------
1,500,000 1,665,000
----------- -----------
/ / SHORT TERM SECURITIES--(1.8%)
350,000 ConAgra Inc.,
Promissory Note, due 4/03/96.............. A2 349,506 349,506
1,100,000 ConAgra Inc.,
Promissory Note, due 4/09/96.............. A2 1,097,575 1,097,575
1,000,000 Praxair Inc.,
Promissory Note, due 4/01/96.............. A2 999,844 999,844
100,000 Reynolds Metals Co.,
Promissory Note, due 4/01/96.............. A2 99,824 99,824
----------- -----------
2,546,749 2,546,749
----------- -----------
Total Portfolio of Investments 100%........ $139,074,771 $140,774,236
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND
FOR THE FOUR YEARS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
Financial highlights for each share of capital stock
outstanding through each period:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED SEPTEMBER 30,
MARCH 31, ---------------------------------------------
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).............................. 0.57 1.15 1.15 1.22 1.24
Net realized and unrealized gain (loss) on investments
(2)................................................... (0.30) 1.43 (2.57) 0.96 1.01
----------- --------- ------------ --------- ---------
Total from investment operations....................... 0.27 2.58 (1.42) 2.18 2.25
Less dividends from net investment income............ (0.60) (1.12) (1.12) (1.24) (1.24)
----------- --------- ------------ --------- ---------
Net asset value, end of period......................... $ 16.17 $ 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)............. 4.85% 12.88% (10.45)% 14.10% 12.25%
Total return (net asset value) (4)..................... 1.56% 17.71% (5.32)% 13.56% 14.85%
Net assets at end of period (in millions).............. $ 142.60 $ 145.76 $ 133.44 $ 125.02 $ 117.63
Ratio of expenses to average net assets................ 0.39% 0.69% 0.72% 0.76% 0.86%
Ratio of net investment income to average
net assets............................................ 3.36% 7.34% 7.13% 7.24% 7.73%
Portfolio turnover..................................... 66.3% 126.8% 70.2% 12.7% 32.5%
Number of shares outstanding at end of period (in
thousands)............................................ 8,817 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 and exercised primary subscription rights in December, 1993 at
a price below net asset value.
(4) Total return (net asset value) reflects the Fund's portfolio performance and
is the combination of reinvested dividend income, reinvested capital gains
distributions, if any, and changes in net asset value per share.
See Notes to Financial Statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 following is a summary of significant accounting
policies consistently followed by the Company in preparation of its financial
statements.
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 approximate 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 fund 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 investment
are reported on a first-in first-out basis.
C. FEDERAL INCOME TAXES -- No provision is considered necessary for federal
income taxes since it is the policy of the Company to comply with requirements
of the Internal Revenue Code available to investment companies and to distribute
all of its taxable net income and realized net gains on investments, if any.
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.
3. DISTRIBUTIONS
Dividends and distributions payable to shareholder are recorded by the
Company on the record date. Net realized gains from the sale of investments are
disributed to shareholders in the succeeding year, unless there are capital loss
carryovers which may be applied against such realized gains.
The accumulated losses on the sale of investments at September 30, 1995, for
Federal income tax purposes amounted to $893,953 and can be applied against
future realized net capital gains. If not applied $879,497 expires in 1999, and
$14,456 expires in 2002.
4. CAPITAL STOCK
At March 31, 1996 there were 12,000,000 share of $.01 par value capital
stock authorized, and capital paid in aggregate of $135,790,542. During the six
months ended March 31, 1996 no new shares were issued as part of the dividend
reinvestment plan and 15,900 shares were repurchased in the open market at a
weighted average discount to Net Asset Value of 10.24% per share by the Company
in accordance to the Company's Stock Repurchase Plan.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales (including maturities) of portfolio securities during
the six months ended March 31, 1996 were as follows: debt securities,
$44,823,934 and $53,654,958 respectively; short-term securities, $123,651,399
and $124,615,526, respectively; United States government debt obligations,
$48,945,728 and $39,884,253, respectively.
For Federal income tax purposes the identified cost of investments owned at
March 31, 1996, was $139,074,771.
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 fund.
7. MORTGAGE BACKED SECURITIES
The Fund 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 fund 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.
14
<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.
For the six months ended March 31, 1996, 45,286 shares were purchased for
the Plan participants. The breakdown of these shares is listed below:
<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
</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 1,387 participants on March 15, 1996. Under the terms of the
Plan, any shareholder may terminate participation by giving written notice to
the Company. Upon 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 shareholders, 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.
15
<PAGE>
REPORT ON ANNUAL MEETING
At the annual meeting of shareholders, held on December 18, 1995,
shareholders elected the Company's five nominees as directors, ratified the
selection of accountants and approved an amendment to the Company's Investment
Advisory Agreement providing that the Company, rather than the investment
advisor, will pay the cost of maintaining the Company's books and accounts. The
votes on such matters were as follows:
<TABLE>
<CAPTION>
1. DIRECTORS FOR WITHHELD
------------- --------- -----------
<S> <C> <C> <C>
R.M. Burridge 6,966,346 117,349
R.S. Peterson 6,948,529 135,166
C.R. O'Neil 6,967,796 115,899
F.K. Reilly 6,955,720 127,975
E.M. Roob 6,951,609 132,086
</TABLE>
2. Ratification of Accountants
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- - --------- ----------- ----------- ----------------
<S> <C> <C> <C>
6,944,124 65,131 74,440 0
</TABLE>
3. Amendment of Agreement
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- - --------- ----------- ----------- ----------------
<S> <C> <C> <C>
4,524,053 341,335 205,234 2,013,073
</TABLE>
16
<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
JOHN J. FAUSTINO
Assistant Secretary
Assistant Treasurer
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
