<PAGE>
FORT
DEARBORN
INCOME
SECURITIES,
INC.
FORT DEARBORN INCOME SECURITIES, INC.
[NYSE LOGO]
[CHICAGO STOCK EXCHANGE LOGO]
SEMI-ANNUAL REPORT
MARCH 31, 1997
<PAGE>
May 19, 1997
DEAR SHAREHOLDER:
This financial report covers the six months ended March 31, 1997, which is
our twenty-fifth fiscal year of operations.
Net investment income for the six months was $0.55 per share. On March 31,
1997, the net asset value per share was $15.29 and the stock closed that day at
$14.375 per share.
During the semi-annual period the Board of Directors declared two regular
quarterly dividends of $0.28 per share payable December 13, 1996 and March 14,
1997. In addition to the regular dividends, the Board declared a year-end extra
dividend of $0.11 per share and a capital gains distribution of $0.4378 per
share, both payable on December 13, 1996. These extra distributions that totaled
$4,829,988.21, reduced the size of the fund and had a corresponding impact on
income available to fund the current dividend. Therefore, at the May 19, 1997,
meeting of the Board of Directors, the Board decided to reduce the dividend by
$0.01 per share and declared a quarterly dividend of $0.27 per share payable
June 13, 1997 to shareholders of record on May 30, 1997.
At the end of the semi-annual period the 64 issues in the portfolio had an
average market yield of 7.69%, an average Moody's quality rating of Aa3, an
average duration of 8.9 years, and an average maturity of 16.8 years. The
distribution of the portfolio maturities and quality was as follows:
<TABLE>
<S> <C>
Maturities
- - ---------------------------------------------
0-1 year 0.9%
1-3 years 2.0
3-5 years 5.7
5-10 years 29.4
10-20 years 16.9
20 plus years 45.1
-----
100.0%
Quality
- - ---------------------------------------------
Treasury, Agency and Aaa 37.4%
Aa 5.1
A 34.1
Baa 23.4
Below Baa 0.0
-----
100.0%
</TABLE>
Long-term interest rates rose by an average of about one quarter percent
over the course of the semi-annual period ending March 31, 1997. Both the fourth
quarter of 1996, and the first quarter of 1997, were periods of above trend real
economic growth. This rapid economic growth resulted in increased rates of
capacity utilization and rising levels of employment. While inflation remained
moderate during this period, tightening labor and product markets gave rise to
concerns that inflation could accelerate in the future. As a result of these
concerns, the Federal Reserve raised its overnight interest rate target from
5.25% to 5.50% on March 25, 1997.
At present yield levels we believe long-term U.S. interest rates offer
investors unusually attractive value. Prospective returns from owning long-term
U.S. fixed income securities are well above the levels needed to compensate
investors for inflation and risk.
1
<PAGE>
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 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 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,
1997, and a list of the securities owned on that date are included in this
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, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $134,964,241)... $132,118,131
Short-term securities, at cost, which
approximates market (Note 1)................... 600,000
------------
Total portfolio of investments.............. 132,718,131
Cash.............................................. 121,507
Receivable for interest on debt securities (Note
1)............................................... 1,937,560
Other assets...................................... 18,520
------------
Total assets................................ 134,795,718
------------
LIABILITIES:
Expenses:
Accrued investment advisory and administrative
fees (Note 6).................................. 168,052
Accrued accounting fees......................... 61,302
Accrued custodial and transfer agent fees....... 36,864
Accrued directors' fees......................... 21,073
Accrued audit and legal fees.................... 18,520
Accrued insurance fees.......................... 1,579
Accrued other expenses.......................... 5,384
------------
Total liabilities........................... 312,774
------------
NET ASSETS (equivalent to $15.29 per share for
8,797,565 shares of capital stock outstanding)
(Note 4)......................................... $134,482,944
------------
------------
Analysis of Net Assets:
Shareholder capital (Note 4).................... $135,417,321
Accumulated net realized gain on sales of
investments.................................... 1,845,047
Unrealized depreciation on investments.......... (2,846,110)
Accumulated undistributed net investment
income......................................... 66,686
------------
Net assets applicable to outstanding shares..... $134,482,944
------------
------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<S> <C>
Investment Income:
Interest income earned.................................... $5,372,806
Dividend income earned.................................... 11,875
----------
Total income................................................ 5,384,681
----------
Expenses:
Investment advisory and administrative (Note 6)........... 338,588
Transfer agent and dividend disbursing agent.............. 55,036
Directors (Note 6)........................................ 40,693
Stockholders reports and annual meeting................... 30,854
Professional.............................................. 21,540
Accounting................................................ 16,302
Custodian................................................. 5,105
Registration and filing................................... 4,295
Franchise taxes........................................... 3,699
All other expenses........................................ 9,204
----------
Total expenses.............................................. 525,316
----------
Net investment income....................................... 4,859,365
----------
Net realized and unrealized gain/(loss) on investments:
Net realized gain from investment transactions............ 2,784,988
Change in unrealized appreciation/(depreciation).......... (3,921,441)
----------
Total realized and unrealized loss on investments........... (1,136,453)
----------
Net increase in net assets from operations.................. $3,722,912
----------
----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
MARCH 31, 1997 FOR THE YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1996
-------------- ------------------
<S> <C> <C>
From operations:
Net investment income............................... $ 4,859,365 $ 10,428,123
Net realized gain from investment transactions...... 2,784,988 3,805,586
Change in unrealized appreciation/ (depreciation) of
investments........................................ (3,921,441) (8,737,671)
-------------- ------------------
Net increase in net assets from operations.......... 3,722,912 5,496,038
Distributions to shareholders from:
Net investment income............................... (5,895,869) (10,228,623)
Net realized gain................................... (3,851,574) --
-------------- ------------------
Total distributions............................... (9,747,443) (10,228,623)
From capital share transactions: (Note 4)
Net asset value of shares repurchased from
shareholders....................................... (36,825) (485,960)
-------------- ------------------
Net decrease in net assets........................ (6,061,356) (5,218,545)
Net Assets:
Beginning of period................................. 140,544,300 145,762,845
-------------- ------------------
End of period (including undistributed net
investment income of $66,686 at March 31, 1997, and
$1,103,190 at September 30, 1996, respectively).... $ 134,482,944 $ 140,544,300
-------------- ------------------
-------------- ------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
FINANCIAL HIGHLIGHTS
MARCH 31, 1997
Financial highlights for each share of capital stock outstanding through each
period:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH YEARS ENDED SEPTEMBER 30,
31, 1997 ----------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............ $ 15.97 $ 16.50 $ 15.04 $ 17.58 $ 16.64 $ 15.63
----------- ---------- ---------- ---------- ---------- ----------
Net investment income (1)....................... 0.55 1.19 1.15 1.15 1.22 1.24
Net realized and unrealized gain (loss) on
investments (2)................................ (0.12) (0.56) 1.43 (2.57) 0.96 1.01
----------- ---------- ---------- ---------- ---------- ----------
Total from investment operations................ 0.43 0.63 2.58 (1.42) 2.18 2.25
Less distributions from:
Net investment income....................... (0.67) (1.16) (1.12) (1.12) (1.24) (1.24)
Net realized gain........................... (0.44) -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ----------
Total distributions............................. (1.11) (1.16) (1.12) (1.12) (1.24) (1.24)
----------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period.................. $ 15.29 $ 15.97 $ 16.50 $ 15.04 $ 17.58 $ 16.64
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
Market price per share at end of period......... $ 14.375 $ 14.750 $ 14.625 $ 14.000 $ 17.375 $ 16.375
Total investment return (market
value) (3)..................................... 4.86% 8.98% 12.88% (10.45%) 14.10% 12.25%
Total return (net asset
value) (4)..................................... 2.58% 3.84% 17.71% (5.32%) 13.56% 14.85%
Net assets at end of period (in millions)....... $ 134.48 $ 140.50 $ 145.76 $ 133.44 $ 125.02 $ 117.63
Ratio of expenses to average net assets......... 0.37% 0.75% 0.69% 0.72% 0.76% 0.86%
Ratio of net investment income to average net
assets......................................... 3.45% 7.22% 7.34% 7.13% 7.24% 7.73%
Portfolio turnover.............................. 82.3% 159.5% 126.8% 70.2% 12.7% 32.5%
Number of shares outstanding at end of period
(in thousands)................................. 8,798 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
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- - ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
DEBT SECURITIES--99.5%
/ / U.S. GOVERNMENT
SECURITIES (23.9%)
DIRECT OBLIGATIONS--12.8%
U.S. Treasury
$ 3,545,000 6.00% Bond, due 2/15/26................... (a) $ 3,098,024 $ 3,032,083
67,755,000 Zero Coupon Strip, due 2/15/19............ (a) 15,663,979 13,925,685
------------ ------------
18,762,003 16,957,768
------------ ------------
AGENCY--11.1%
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
32,900 7.50%, due 11/01/99....................... (a) 32,036 32,684
459,682 9.00%, due 8/01/04........................ (a) 479,793 479,075
332,202 9.00%, due 3/01/24........................ (a) 344,190 348,915
903,921 9.00%, due 4/01/25........................ (a) 957,450 949,117
56,258 9.50%, due 7/01/18........................ (a) 55,414 60,460
Federal National Mortgage Association
Guaranteed Mortgage Pass Thru
Certificates,
722,495 6.00%, due 4/01/01 Pool #250039........... (a) 705,974 702,175
2,209,301 6.00%, due 4/01/01 Pool #283449........... (a) 2,252,439 2,147,855
879,633 6.50%, due 2/01/26 Pool #335199........... (a) 866,556 818,333
3,030,000 6.50%, due 3/01/27 Pool #374461........... (a) 2,906,175 2,821,688
909,430 7.00% REMIC, due 6/25/13 Series 1993-106
Class Z................................. (a) 837,376 831,560
1,701,276 7.25% CMO, due 3/25/23.................... (a) 1,439,410 1,487,553
27,105 9.50%, due 4/01/20 Pool #93731............ (a) 26,805 29,206
Government National Mortgage Association
Pass Thru Mortgage Backed Securities,
3,608,315 7.50%, due 12/15/22 Pool #780230.......... (a) 3,603,314 3,554,191
81,500 8.50%, due 11/15/16 Pool #195322.......... (a) 79,208 84,786
69,787 8.50%, due 12/15/16 Pool #190373.......... (a) 67,825 72,601
115,665 9.00%, due 6/15/18 Pool #253034........... (a) 114,942 122,749
108,573 9.00%, due 8/15/19 Pool #271892........... (a) 110,134 115,223
10,674 9.00%, due 9/15/19 Pool #268553........... (a) 10,827 11,327
95,398 9.00%, due 10/15/19 Pool #283370.......... (a) 94,802 101,241
19,942 9.00%, due 5/15/21 Pool #298198........... (a) 19,817 21,113
------------ ------------
15,004,487 14,791,852
------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- - ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
/ / CORPORATE BONDS AND
NOTES (75.6%)
INTERNATIONAL--25.2%
$ 2,500,000 Augusta Funding Ltd.,
7.375% Bond, due 4/15/13................. Aaa $ 2,427,542 $ 2,366,406
2,700,000 Banco Bilbao Vizcaya International,
7.00% Bank Guaranteed Note, due
12/01/25................................. Aa3 2,652,694 2,398,545
2,695,000 Bangkok Bank,
8.25% Note, due 3/15/16.................. A3 2,699,881 2,583,373
2,100,000 Banque National De Paris, 7.20% Note, due
1/15/07.................................. A1 2,094,687 2,027,886
2,250,000 Banque Paribas,
6.875% Note, due 3/01/09................. A3 2,197,740 2,069,145
2,500,000 El Paso Natural Gas,
7.50% Debenture, due 11/15/26............ Baa2 2,500,000 2,380,650
3,235,000 International Bank of Recon. & Devel.,
7.625% Debenture, due 1/19/23............ Aaa 3,438,236 3,306,267
2,200,000 Macmillan Bloedel Ltd.,
7.70% Debenture, due 2/15/26............. Baa2 2,085,775 2,003,276
2,500,000 Petroliam Nasional Berhd,
7.625% Note, due 10/15/26................ A1 2,466,236 2,430,850
3,490,000 Province of Quebec,
7.50% Debenture, due 7/15/23............. A2 3,359,652 3,299,341
450,000 Ras Laffan Liquid Natural Gas,
8.294% Secured Note, due 3/15/14......... A3 466,073 450,180
2,000,000 Republic of South Africa,
9.625% Debenture, due 12/15/99........... Baa3 1,995,944 2,102,720
2,300,000 Skandinaviaka Enskilda Banken,
6.625% Bond, due 3/29/49................. Baa1 2,282,040 2,236,819
2,165,000 Sociedad Quimica y Minera
de Chiles SA, 7.70% Note, due 9/15/06.... Baa1 2,159,727 2,157,119
1,670,000 Southern Investments UK,
6.80% Senior Note, due 12/01/06.......... Baa1 1,665,976 1,582,509
------------ ------------
34,492,203 33,395,086
------------ ------------
FINANCE--24.2%
1,825,000 Aetna Services,
7.625% Debenture, due 8/15/26............ A2 1,806,645 1,748,514
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- - ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 160,000 Berkshire Hathaway, Inc.,
9.75% Debenture, due 1/15/18............. Aa1 $ 159,183 $ 169,000
2,500,000 Ford Credit Auto Loan Master Trust,
6.50% Asset Backed Note, due 8/15/02..... Aaa 2,493,539 2,451,225
2,900,000 Household Finance Corp.,
6.875% Senior Note, due 3/01/07.......... A2 2,880,514 2,745,082
1,700,000 Lehman Brothers, Inc.,
7.25% Senior Note, due 4/15/03........... Baa1 1,701,200 1,676,387
4,250,000 News America Holdings, Inc.,
7.75% Debenture, due 1/20/24............. Baa3 3,626,653 3,895,338
3,465,000 Prudential Insurance,
7.65% Note, due 7/01/07.................. A3 3,573,586 3,458,001
4,000,000 Republic Bank of New York,
5.46% Adjustable Rate Note, due
8/07/02.................................. A1 3,998,620 3,905,000
2,000,000 Salomon, Inc.,
6.75% Note, due 2/15/03.................. Baa1 1,996,212 1,926,180
5,000,000 Secured Finance Inc.,
9.05% Guaranteed Senior Secured Bond, due
12/15/04................................. Aaa 4,987,500 5,427,900
4,500,000 Standard Credit Card Master Trust,
8.25% Credit Card Certificate of
Participation, due 1/07/07............... Aaa 4,492,065 4,733,955
------------ ------------
31,715,717 32,136,582
------------ ------------
INDUSTRIAL--17.2%
2,875,000 Arrow Electronics Inc.,
7.50% Senior Debenture, due 1/15/27...... A2 2,839,831 2,730,963
1,500,000 J.C. Penney & Co.,
7.625% Bond, due 3/01/69................. A2 1,500,000 1,402,140
2,315,000 Lockheed Martin Corp.,
7.70% Note, due 6/15/08.................. A3 2,314,357 2,338,960
3,000,000 Philips Electronics, NV
7.75% Debenture, due 5/15/25............. A3 2,990,461 2,872,350
2,300,000 Rite Aid Corp.,
7.70% Debenture, due 2/15/27............. A3 2,293,529 2,223,180
2,500,000 SFP Pipeline Holdings, Inc.,
11.16% Adjustable Rate Exchange
Debenture, due 8/15/10................... Baa3 2,300,000 3,037,500
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY
FACE VALUE RATING COST VALUE
- - ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 855,000 Time Warner, Inc.,
9.15% Debenture, due 2/01/23............. Ba1 $ 941,808 $ 900,888
2,565,000 Time Warner Entertainment, Inc.,
8.375% Debenture, due 3/15/23............ Baa3 2,565,656 2,521,677
3,000,000 Tosco Corp.,
7.625% Note, due 5/15/06................. Baa2 3,143,299 3,000,600
2,000,000 WMC Finance Ltd. U.S.A.,
7.35% Guaranteed Bond, due 12/01/26...... A2 1,993,625 1,855,200
------------ ------------
22,882,566 22,883,458
------------ ------------
COMMUNICATION--4.0%
2,110,000 Airtouch Communications,
7.50% Note, due 7/15/06.................. Baa2 2,098,740 2,095,441
3,500,000 Southern New England Telephone Co.,
7.25% Medium Term Note, due 12/15/33..... Aa2 3,475,500 3,183,250
------------ ------------
5,574,240 5,278,691
------------ ------------
TRANSPORTATION--2.9%
1,035,000 Continental Airlines, Inc.,
7.461% Pass Thru Certificate, due
4/01/15.................................. A1 1,035,000 1,009,394
3,000,000 United Airlines, Inc.,
7.87% Pass Thru Certificate, due
1/30/19.................................. Baa1 3,000,000 2,865,300
------------ ------------
4,035,000 3,874,694
------------ ------------
UTILITY-ELECTRIC--2.1%
2,500,000 Delmarva Power & Light Co.,
9.95% Note, due 12/01/20................. A2 2,498,025 2,800,000
------------ ------------
Total Debt Securities..................... 134,964,241 132,118,131
------------ ------------
/ / SHORT TERM SECURITIES--0.5%
600,000 Conagra Inc. Commercial Paper,
due 4/01/97.............................. P2 600,000 600,000
------------ ------------
Total Portfolio of Investments 100%....... $135,564,241 $132,718,131
------------ ------------
------------ ------------
</TABLE>
- - ------------------------
(a) Moody's, as a matter of policy, does not rate these issues.
See Notes to Financial Statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
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.
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,
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
(UNAUDITED)
3. DISTRIBUTIONS (CONTINUED)
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 for the year ended
September 30, 1996.
4. CAPITAL STOCK
At March 31, 1997 there were 12,000,000 shares of $.01 par value capital
stock authorized, and capital paid in aggregate of $135,417,321. During the six
months ended March 31, 1997 no new shares were issued as part of the dividend
reinvestment plan and 2,500 shares were repurchased in the open market at a
weighted average discount to Net Asset Value of 10.17% 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 six months ended March 31, 1997 were as follows: debt securities,
$65,030,381 and $64,243,300 respectively; short-term securities, $91,533,672 and
$92,667,195, respectively; United States government debt obligations,
$46,863,242 and $45,996,012; preferred stock $2,500,000 and $3,000,000
respectively.
For Federal income tax purposes the identified cost of investments owned at
March 31, 1997, was $135,564,241. The aggregate gross unrealized appreciation is
$2,224,095 and the aggregate gross unrealized depreciation is $5,070,205,
resulting in aggregate net unrealized deppreciation of $2,846,110.
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.
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
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
(UNAUDITED)
7. MORTGAGE BACKED SECURITIES (CONTINUED)
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.
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<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, 1997, 82,911 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, 1996 61,826 $ 14.35 Open Market
March 14, 1997 21,085 $ 14.64 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 1,196 participants on March 14, 1997. 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 16, 1996,
shareholders elected the Company's five nominees as directors and ratified the
selection of accountants. The votes on such matters were as follows:
<TABLE>
<CAPTION>
1. DIRECTORS FOR WITHHELD
------------- --------- -----------
<S> <C> <C> <C>
R.M. Burridge 7,551,218 107,367
C.R. O'Neil 7,552,732 105,853
R.S. Peterson 7,549,794 108,791
F.K. Reilly 7,544,861 113,724
E.M. Roob 7,533,314 105,271
</TABLE>
2. Ratification of Accountants
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- - --------- ----------- ----------- ----------------
<S> <C> <C> <C>
6,315,811 53,527 54,529 0
</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
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
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