<PAGE>
FORT
DEARBORN
INCOME
SECURITIES,
INC.
FORT DEARBORN INCOME SECURITIES, INC.
[LOGO]
[LOGO]
ANNUAL REPORT
SEPTEMBER 30, 1997
<PAGE>
DEAR SHAREHOLDER:
This financial report covers the fiscal year ended September 30, 1997, which
is our twenty-fifth fiscal year of operations.
Intermediate and long-term U.S. interest rates moved irregularly lower over
the course of the fiscal year as inflation continued to trend down in spite of
relatively strong growth in real economic activity. Short-term interest rates
moved modestly higher during the year as the Federal Reserve raised its
overnight funds target by 0.25% in March, but Thirty-year Treasury bond yields
fell from 6.9% at the beginning of the fiscal year to 6.4% on September 30,
1997. The drop in long-term interest rates resulted in bond price appreciation
in the Fort Dearborn portfolio. For the fiscal year ended September 30, 1997,
the fund returned 14.86% based on market value and 13.06% based on net asset
value.
Net investment income for the year was $1.09 per share and net realized and
unrealized gains on investments totaled $0.89 per share. Net asset value per
share, after dividends of $1.65 per share, rose $0.33 during the fiscal year. On
September 30, 1997 net asset value per share was $16.30 and the stock closed
that day at a market price of $15.1875 per share.
During the fiscal year the Board of Directors declared four regular
quarterly dividends. Dividends of $.28 per share were payable on December 13,
1996 and March 14, 1997, while dividends of $0.27 per share were payable on June
13, 1997 and September 19, 1997. In addition, a year-end extra dividend of $0.11
per share and a capital gains distribution of $0.4378 per share were payable
December 13, 1996.
No new shares of capital stock were issued in the fiscal year, while 6,600
shares were repurchased in the open market at an average discount to net asset
value of 9.89%. On September 30, 1997 there were 8,793,465 shares of capital
stock outstanding and the net assets applicable to those shares were $143.3
million.
As of September 30, 1997 the Company's investment grade long-term bond
portfolio contained 72 issues with an average market yield to maturity of 7.1%,
an average Moody's quality rating of A2, an average duration of 8.0 years and an
average maturity of 15.1 years. The distribution of the portfolio maturities and
the Moody's quality ratings were as follows:
<TABLE>
<S> <C>
Average Maturities
- ---------------------------------------------
0-1 year 3.5%
1-3 years 5.9
3-5 years 7.9
5-10 years 27.5
10-20 years 16.2
20 plus years 39.0
-----
100.0%
Quality
- ---------------------------------------------
Treasury, Agency and Aaa 28.3%
Aa 5.1
A 27.6
Baa 35.3
Below Baa 3.7
-----
100.0%
</TABLE>
We believe long-term U.S. market interest rates are near fair value. If
interest rates remain near current levels the portfolio should maintain its
market value while continuing to provide shareholders with a stable interest
income stream.
1
<PAGE>
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
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.
Audited financial statements for the year ended September 30, 1997, 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.
[GRAPH]
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $129,890,550)... $136,897,122
Short-term securities, at cost, which
approximates market (Note 1)................... 4,397,861
------------
Total portfolio of investments.............. 141,294,983
Cash.............................................. 21,291
Receivable for interest on debt securities (Note
1)............................................... 2,277,092
Other assets...................................... 7,765
------------
Total assets................................ 143,601,131
------------
LIABILITIES:
Expenses:
Accrued investment advisory and administrative
fees (Note 6).................................. 165,134
Accrued audit and legal fees.................... 35,371
Accrued custodial and transfer agent fees....... 34,978
Accrued other expenses.......................... 32,408
------------
Total liabilities........................... 267,891
------------
NET ASSETS (equivalent to $16.30 per share for
8,793,465 shares of capital stock outstanding)
(Note 4)......................................... $143,333,240
------------
------------
Analysis of Net Assets:
Shareholder capital (Note 4).................... $135,359,191
Accumulated net realized gain on sales of
investments.................................... 967,477
Unrealized appreciation on investments.......... 7,006,572
------------
Net assets applicable to outstanding shares..... $143,333,240
------------
------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Investment Income:
Interest income earned.................................... $10,596,613
Dividend income earned.................................... 12,575
-----------
Total investment income..................................... 10,609,188
-----------
Expenses:
Investment advisory and administrative (Note 6)........... 660,993
Transfer agent and dividend disbursing agent.............. 109,334
Directors (Note 6)........................................ 75,000
Stockholders reports and annual meeting................... 63,576
Professional.............................................. 41,591
Custodian................................................. 33,518
Accounting................................................ 17,500
Registration and filing................................... 13,030
Franchise taxes........................................... 11,220
All other expenses........................................ 29,773
-----------
Total expenses.............................................. 1,055,535
-----------
Net investment income....................................... 9,553,653
-----------
Net realized and unrealized gain on investments:
Net realized gain from investment transactions............ 1,895,455
Change in unrealized appreciation......................... 5,931,241
-----------
Total realized and unrealized gain on investments........... 7,826,696
-----------
Net increase in net assets from operations.................. $17,380,349
-----------
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
From operations:
Net investment income.................................. $ 9,553,653 $ 10,428,123
Net realized gain from investment transactions......... 1,895,455 3,805,586
Change in unrealized appreciation/(depreciation) of
investments........................................... 5,931,241 (8,737,671)
-------------- --------------
Net increase in net assets from operations............. 17,380,349 5,496,038
Distributions to shareholders from:
Net investment income.................................. (10,644,880) (10,228,623)
Net realized gain...................................... (3,851,574) --
-------------- --------------
Total distributions.................................. (14,496,454) (10,228,623)
From capital share transactions: (Note 4)
Net asset value of shares repurchased from
shareholders.......................................... (94,955) (485,960)
-------------- --------------
Net increase/(decrease) in net assets.................. 2,788,940 (5,218,545)
Net Assets:
Beginning of period.................................... 140,544,300 145,762,845
-------------- --------------
End of period (including undistributed net investment
income of $0 at September 30, 1997, and $1,103,190 at
September 30, 1996, respectively)..................... $ 143,333,240 $ 140,544,300
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
FINANCIAL HIGHLIGHTS
FOR THE FIVE YEARS ENDED
SEPTEMBER 30, 1997
Financial highlights for each share of capital stock outstanding through each
period:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......................... $ 15.97 $ 16.50 $ 15.04 $ 17.58 $ 16.64
--------- --------- --------- ---------- ---------
Net investment income (1).................................... 1.09 1.19 1.15 1.15 1.22
Net realized and unrealized gain (loss) on
investments (2)............................................. 0.89 (0.56) 1.43 (2.57) 0.96
--------- --------- --------- ---------- ---------
Total from investment operations............................. 1.98 0.63 2.58 (1.42) 2.18
Less distributions from:
Net investment income.................................... (1.21) (1.16) (1.12) (1.12) (1.24)
Net realized gain........................................ (0.44) -- -- -- --
--------- --------- --------- ---------- ---------
Total distributions.......................................... (1.65) (1.16) (1.12) (1.12) (1.24)
--------- --------- --------- ---------- ---------
Net asset value, end of period............................... $ 16.30 $ 15.97 $ 16.50 $ 15.04 $ 17.58
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Market price per share at end of period...................... $ 15.188 $ 14.750 $ 14.625 $ 14.000 $ 17.375
Total investment return (market value) (3)................... 14.86% 8.98% 12.88% (10.45)% 14.10%
Total return (net asset value) (4)........................... 13.06% 3.84% 17.71% (5.32)% 13.56%
Net assets at end of period (in millions).................... $ 143.33 $ 140.50 $ 145.76 $ 133.44 $ 125.02
Ratio of expenses to average net assets...................... 0.75% 0.75% 0.69% 0.72% 0.76%
Ratio of net investment income to average net assets......... 6.81% 7.22% 7.34% 7.13% 7.24%
Portfolio turnover........................................... 130.0% 159.5% 126.8% 70.2% 12.7%
Number of shares outstanding at end of period
(in thousands).............................................. 8,793 8,800 8,833 8,872 7,111
</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, 1997
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
DEBT SECURITIES--96.9%
/ / MUNICIPAL SECURITIES (4.9%)
New Jersey Economic Development Authority,
Zero Coupon Revenue Bonds,
$25,000,000 due 2/15/18............................... Aaa $ 5,466,175 $ 6,072,750
3,500,000 due 2/15/19............................... Aaa 709,475 792,295
------------ ------------
6,175,650 6,865,045
------------ ------------
/ / U.S. GOVERNMENT AGENCY
SECURITIES (11.5%)
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
1,810,843 6.50%, due 3/01/11........................ (a) 1,755,103 1,801,223
15,111 7.50%, due 11/01/99....................... (a) 14,714 15,540
367,682 9.00%, due 8/01/04........................ (a) 383,768 378,023
302,791 9.00%, due 3/01/24........................ (a) 313,718 324,933
805,691 9.00%, due 4/01/25........................ (a) 853,403 858,061
50,026 9.50%, due 7/01/18........................ (a) 49,276 53,981
Federal National Mortgage Association
Guaranteed Mortgage Pass Thru
Certificates,
846,663 6.50%, due 2/01/26 Pool #335199........... (a) 834,077 826,026
3,012,456 6.50%, due 3/01/27 Pool #374461........... (a) 2,889,539 2,937,145
941,728 7.00% REMIC, due 6/25/13 Series 1993-106
Class Z.................................. (a) 868,831 939,373
1,701,276 7.25% CMO, due 3/25/23.................... (a) 1,439,410 1,607,706
25,437 9.50%, due 4/01/20 Pool #93731............ (a) 25,155 27,440
10,000,000 Financing Corporation Strip, Zero Coupon
Debenture, due 12/06/17.................. (a) 2,217,984 2,538,700
Government National Mortgage Association
Pass Thru Mortgage Backed Securities,
3,377,806 7.50%, due 12/15/22 Pool #780230.......... (a) 3,373,124 3,451,695
80,658 8.50%, due 11/15/16 Pool #195322.......... (a) 78,389 85,598
69,008 8.50%, due 12/15/16 Pool #190373.......... (a) 67,068 73,235
112,744 9.00%, due 6/15/18 Pool #253034........... (a) 112,039 121,798
93,816 9.00%, due 8/15/19 Pool #271892........... (a) 95,164 101,350
7,158 9.00%, due 9/15/19 Pool #268553........... (a) 7,261 7,733
79,180 9.00%, due 10/15/19 Pool #283370.......... (a) 78,685 85,539
14,316 9.00%, due 5/15/21 Pool #298198........... (a) 14,227 15,417
------------ ------------
15,470,935 16,250,516
------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
/ / CORPORATE BONDS AND
NOTES (80.5%)
INTERNATIONAL--29.6%
$ 2,500,000 Augusta Funding Ltd., 144-A
7.375% Bond, due 4/15/13................. Aaa $ 2,429,695 $ 2,553,125
2,700,000 Banco Bilbao Vizcaya International,
7.00% Bank Guaranteed Note, due
12/01/25................................. Aa3 2,653,486 2,600,289
3,550,000 Banque Cent de Tunisie,
8.25% Bond, due 9/19/27.................. Baa3 3,520,786 3,514,784
2,250,000 Banque Paribas,
6.875% Note, due 3/01/09................. A3 2,199,895 2,206,710
2,100,000 Credit Suisse -- London 144-A
7.90% Note, due 5/01/07.................. A2 2,094,198 2,204,559
2,000,000 Empresa Nacional Electric,
8.125% Bond, due 2/01/2097............... Baa1 2,022,203 2,121,820
3,455,000 Interamer Development Bank,
6.80% Note, due 10/15/25................. Aaa 3,197,979 3,443,253
1,000,000 Korea Development Bank,
7.25% Bond, due 5/15/06.................. A1 975,164 993,510
2,200,000 Macmillan Bloedel Ltd.,
7.70% Debenture, due 2/15/26............. Baa2 2,087,667 2,150,896
2,500,000 Petroliam Nasional Berhad, 144-A
7.625% Note, due 10/15/26................ A1 2,466,802 2,447,900
3,000,000 Philips Electronics, NV,
7.75% Debenture, due 5/15/25............. A3 2,990,621 3,149,070
3,490,000 Province of Quebec,
7.50% Debenture, due 7/15/23............. A2 3,362,080 3,586,847
450,000 Ras Laffan Liquid Natural Gas, 144-A
8.294% Secured Note, due 3/15/14......... A3 465,841 489,506
2,000,000 Republic of Panama,
7.875% Note, due 2/13/02................. Ba1 2,012,291 2,008,940
2,000,000 Republic of South Africa,
9.625% Debenture, due 12/15/99........... Baa3 1,996,378 2,121,220
2,300,000 Skandinaviska Enskilda Banken, 144-A
6.625% Bond, due 3/29/49................. Baa1 2,283,944 2,289,627
2,165,000 Sociedad Quimica y Minera de Chiles SA,
144-A 7.70% Note, due 9/15/06............ Baa1 2,160,000 2,253,765
1,670,000 Southern Investments UK,
6.80% Senior Note, due 12/01/06.......... Baa1 1,666,183 1,665,291
------------ ------------
40,585,213 41,801,112
------------ ------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
INDUSTRIAL--23.1%
$ 1,825,000 Aetna Services,
7.625% Debenture, due 8/15/26............ A2 $ 1,806,959 $ 1,876,301
2,875,000 Arrow Electronics Inc.,
7.50% Senior Debenture, due 1/15/27...... A2 2,840,420 2,983,388
3,000,000 Enron Corp.,
6.75% Note, due 8/01/09.................. Baa2 2,949,378 2,965,740
2,315,000 Lockheed Martin Corp.,
7.70% Note, due 6/15/08.................. A3 2,314,384 2,471,031
3,000,000 Nabisco Inc., 144-A
6.30% Pass Thru Certificate, due
8/26/99.................................. Baa2 2,997,461 3,001,860
4,250,000 News America Holdings, Inc.,
7.75% Debenture, due 1/20/24............. Baa3 3,635,651 4,198,957
2,300,000 Rite Aid Corp.,
7.70% Debenture, due 2/15/27............. Baa1 2,293,638 2,409,020
2,500,000 SFP Pipeline Holdings, Inc.,
11.16% Adjustable Rate Exchange
Debenture, due 8/15/10................... Baa3 2,304,517 3,237,500
2,500,000 Tennessee Gas Pipeline,
7.625% Bond, due 4/01/37................. Baa3 2,428,712 2,598,375
1,855,000 Time Warner, Inc.,
9.15% Debenture, due 2/01/23............. Ba1 2,000,600 2,146,179
1,565,000 Time Warner Entertainment, Inc.,
8.375% Debenture, due 3/15/23............ Baa3 1,560,164 1,678,901
3,000,000 Tosco Corp.,
7.625% Note, due 5/15/06................. Baa2 3,137,533 3,145,200
------------ ------------
30,269,417 32,712,452
------------ ------------
FINANCE--19.5%
2,000,000 Banc One Corp.,
8.00% Sub. Debenture, due 4/29/27........ A1 1,973,320 2,176,400
160,000 Berkshire Hathaway, Inc.,
9.75% Debenture, due 1/15/18............. Aa1 159,142 169,000
2,500,000 Ford Credit Auto Loan Master Trust,
6.50% Asset Backed Note, due 8/15/02..... Aaa 2,493,539 2,519,150
1,700,000 Lehman Brothers, Inc.,
7.25% Senior Note, due 4/15/03........... Baa1 1,701,120 1,741,004
2,900,000 Mellon Bank,
7.375% Note, due 5/15/07................. A2 2,900,000 3,015,739
3,465,000 Prudential Insurance, 144-A
7.65% Note, due 7/01/07.................. A3 3,569,874 3,601,764
4,000,000 Republic Bank of New York,
5.67% Adjustable Rate Note, due
8/07/02.................................. A1 3,998,693 3,910,000
2,000,000 Salomon, Inc.,
6.75% Note, due 2/15/03.................. Baa1 1,996,497 2,012,820
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 5,000,000 Secured Finance Inc.,
9.05% Guaranteed Senior Secured Bond, due
12/15/04................................. Aaa $ 4,987,879 $ 5,652,500
2,500,000 Standard Credit Card Master Trust,
8.25% Credit Card Certificate of
Participation, due 1/07/07............... Aaa 2,495,592 2,731,075
------------ ------------
26,275,656 27,529,452
------------ ------------
TRANSPORTATION--5.6%
1,035,000 Continental Airlines, Inc.,
7.461% Pass Thru Certificate, due
4/01/15.................................. A1 1,035,000 1,083,490
1,500,000 Delta Airlines,
10.50% Pass Thru Certificate, due
4/30/16.................................. Baa1 1,821,684 1,892,370
1,705,000 Norfolk Southern Corp.,
7.80% Bond, due 5/15/27.................. Baa1 1,702,878 1,822,815
3,000,000 United Airlines, Inc.,
7.87% Pass Thru Certificate, due
1/30/19.................................. Baa1 3,000,000 3,069,870
------------ ------------
7,559,562 7,868,545
------------ ------------
UTILITIES--ELECTRIC--2.7%
2,500,000 Delmarva Power & Light Co.,
9.95% Note, due 12/01/20................. A3 2,498,055 2,800,000
1,000,000 Nuevo Energy Co.,
9.50% Senior Note, due 4/15/06........... B1 1,056,062 1,070,000
------------ ------------
3,554,117 3,870,000
------------ ------------
Total Debt Securities..................... 129,890,550 136,897,122
------------ ------------
/ / SHORT TERM SECURITIES (3.1%)
500,000 Solutia Inc. Commercial Paper, due
10/01/97................................. P2 500,000 500,000
400,000 The Limited, Inc. Commercial Paper,
due 10/01/97............................. P2 400,000 400,000
1,200,000 Mattel Inc. Commercial Paper, due
10/02/97................................. P2 1,199,810 1,199,810
2,300,000 Thomas & Betts Corp. Commercial Paper,
due 10/06/97............................. P2 2,298,051 2,298,051
------------ ------------
4,397,861 4,397,861
------------ ------------
Total Portfolio of Investments 100%....... $134,288,411 $141,294,983
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(a) Moody's as a matter of policy, does not rate this issue.
144-A: Security exempt from registration under Rule 144-A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At September
30, 1997, the value of these securities amounted to $18,842,106 or 13.3%
of the total portfolio of investments.
See Notes to Financial Statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 market value.
B. INVESTMENT INCOME AND SECURITY TRANSACTIONS -- Interest income is
recorded on the accrual basis. Dividend income is recorded on ex-dividend date.
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.
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year.
At September 30, 1997, for federal income tax purposes, cost of long and
short-term investments is $134,288,411; the aggregate gross unrealized
appreciation is $7,191,406 and the aggregate gross unrealized depreciation is
$184,834, resulting in net unrealized appreciation on investments of $7,006,572.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
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 annually.
Net investment income and realized gains and losses for federal income tax
purposes may differ from that reported on the financial statements because of
permanent and temporary book and tax basis differences. Permanent book and tax
differences of $(11,963) were reclassified from accumulated net realized gain
(loss) on investments to undistributed net investment income due to losses on
paydown adjustments from mortgage backed securities.
Distributions from net realized gains for book purposes may include
short-term capital gains which are included as ordinary income for tax purposes.
For the year ended September 30, 1997, the Company distributed capital gains
of $3,851,574 which are subject to a tax rate of 28%. In January, 1998, the
Company will provide tax information to shareholders for the 1997 calendar year.
4. CAPITAL STOCK
At September 30, 1997 there were 12,000,000 shares of $.01 par value capital
stock authorized, and capital paid in aggregate of $135,359,191. During the year
ended September 30, 1997 no new shares were issued as part of the dividend
reinvestment plan and 6,600 shares were repurchased in the open market at a
weighted average discount to Net Asset Value of 9.89% 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, 1997 were as follows: debt securities, $106,786,820
and $98,096,081, respectively; short-term securities, $212,673,439 and
$210,127,508, respectively; United States government debt obligations,
$67,769,280 and $84,319,096, respectively; preferred stock $2,500,000 and
$3,072,397, respectively.
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<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
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 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>
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, 1997, 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, 1997, by correspondence with the custodian. 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, 1997, 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 24, 1997
15
<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 year ended September 30, 1997, 122,902 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 13, 1996 61,826 $ 14.85 Open Market
March 14, 1997 21,085 $ 14.64 Open Market
June 13, 1997 21,024 $ 14.09 Open Market
September 19, 1997 18,967 $ 15.58 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 1,156 participants on September 19, 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.
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
JOSEPH A. ANDERSON
Secretary & Treasurer
GREGORY P. SMITH, CFA
Portfolio Manager
FORT DEARBORN
INCOME SECURITIES, INC.
209 S. LaSalle St.
Eleventh Floor
Chicago, IL 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
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, IL 60601
LEGAL COUNSEL
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
17
