<PAGE>
May 20, 1998
DEAR SHAREHOLDER:
This financial report covers the six months ended March 31, 1998, which is
our twenty-sixth fiscal year of operations.
Net investment income for the six months was $0.53 per share. On March 31,
1998 the net asset value per share was $16.63 and the stock closed that day at
$15.688 per share.
During the semi-annual period the Board of Directors declared two regular
quarterly dividends of $0.26 per share payable December 12, 1997 and March 20,
1998. In addition to the regular dividends, the Board declared a capital gains
distribution of $0.15 per share, payable on December 12, 1997.
At the end of the semi-annual period the 67 issues in the portfolio had an
average market yield of 6.74%, an average Moody's quality rating of A1, an
average duration of 7.8 years, and an average maturity of 15.4 years. The
distribution of the portfolio maturities and quality was as follows:
<TABLE>
<S> <C>
Maturities
- ---------------------------------------------
0-1 year 1.0%
1-3 years 10.5
3-5 years 8.4
5-10 years 28.5
10-20 years 20.6
20 plus years 31.0
-----
100.0%
Quality
- ---------------------------------------------
Treasury, Agency and Aaa 32.3%
Aa 4.0
A 30.1
Baa 31.5
Below Baa 2.1
-----
100.0%
</TABLE>
Short-term U.S. interest rates were stable during the past six months,
intermediate-term rates declined by about one quarter percent, and long-term
rates fell nearly one half percent over the course of the semiannual period
ending March 31, 1998. Both the fourth quarter of 1997 and the first quarter of
1998 were periods of above trend real economic growth and declining inflation.
Strong economic growth has brought the unemployment rate to the lowest level in
nearly three decades. Tight labor markets have pushed wage growth up, but
improved labor productivity, a strong dollar and increasing global competition
have kept these higher compensation costs from being passed through to final
prices.
At present yield levels we believe long-term U.S. interest rates offer
investors fair value. Prospective returns from owning long-term U.S. fixed
income securities are at levels sufficient to compensate investors for inflation
and risk.
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
1
<PAGE>
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,
1998, and a list of the securities owned on that date are included in this
report.
Sincerely,
[SIGNATURE]
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.
<TABLE>
<CAPTION>
SALOMON INDEX FT. DEARBORN
<S> <C> <C>
1973 18.16740277 18.16740277
16.81691071 18.16740277
16.74278771 17.09237699
17.08433488 17.08181567
'74 16.93260073 16.73416425
16.32227289 13.72787089
15.46244606 15.61185478
14.96790513 13.39959803
'75 16.34058564 16.32692375
17.0988688 16.81109714
17.69282176 17.6032928
17.09315213 16.78813355
'76 18.64673152 16.53514641
19.41189408 18.4407374
19.44764753 18.36225422
20.50639531 20.02871374
'77 22.02480261 20.25641185
21.49014806 20.48885771
22.29319571 21.06817985
22.50955737 21.4869506
'78 22.29910617 20.67760492
22.27963072 20.92429402
22.00813705 20.99802946
22.66381073 20.89105979
'79 22.17178901 19.03624064
22.49851158 20.30137012
23.47945444 21.38889507
22.97629005 20.83854388
'80 21.13338872 19.24078137
18.24627352 17.14973753
22.79015896 20.98737125
20.23838979 18.98605016
'81 20.4499068 19.10251532
20.19275327 19.18322704
19.70237874 19.50171372
17.83215363 19.38505477
'82 20.09857346 20.84300095
20.78602798 21.82636613
21.25246999 22.25734537
25.76593108 26.54339903
'83 28.69238477 28.82590307
29.69241551 29.95528571
30.04510535 31.42999436
29.90897095 30.99765862
'84 29.8314567 31.21043524
29.37509154 32.49106757
27.97237426 30.20187793
31.66195575 32.64716189
'85 34.47552931 37.0796206
35.09903457 37.32485631
39.44157674 43.25537482
40.05510205 42.70172928
'86 44.84897095 46.77190575
49.68120941 53.11906337
49.882262 55.69137381
50.75710722 56.93150495
'87 53.47436932 57.68068019
54.40173045 60.3479456
52.12852812 58.75841897
48.89599003 55.63972994
'88 52.70910987 56.97442846
49.96161721 62.49518726
55.87653598 63.39222094
57.26355662 63.20793081
'89 57.73154892 65.2752359
58.48227445 63.92900714
63.91796135 68.97431289
64.3084394 71.76346946
'90 66.39846368 73.35613131
65.20329133 75.05743313
67.71361805 75.47919579
67.0838814 74.59715921
'91 70.54540968 80.39167033
73.33195336 83.62102691
74.46126545 85.54725652
79.39060122 91.64340655
'92 83.78884053 96.41612495
82.64931229 93.78030882
86.20323272 97.14975517
90.36684886 102.8753654
'93 90.79157305 101.6390978
95.71247631 108.3683219
99.25383794 113.6759734
103.2339168 117.3790293
'94 102.4080455 112.6537481
97.56414495 107.5057737
95.41 106.8
95.53 105.14
'95 102.29 107.51
110.97 116.5
113.51 118.69
124.45 126.33
'96 115.26 124.45
116.16 122.62
118.35 129.34
123 137.71
'97 120.84 135.62
126.34 152.12
126.34 142.43
131.91 148.57
'98 136.97 156.83
138.88 160.03
'99
2000
2001
</TABLE>
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $133,938,822)... $143,351,972
Short-term securities, at cost, which
approximates market (Note 1)................... 2,299,427
------------
Total portfolio of investments.............. 145,651,399
Cash.............................................. 65,132
Receivable for interest on debt securities (Note
1)............................................... 2,131,864
Other assets...................................... 7,765
------------
Total assets................................ 147,856,160
------------
LIABILITIES:
Expenses:
Payable for investments purchased............... 1,428,676
Accrued investment advisory and administrative
fees (Note 6).................................. 168,716
Accrued custodial and transfer agent fees....... 39,914
Accrued audit and legal fees.................... 18,109
Accrued other expenses.......................... 4,549
------------
Total liabilities........................... 1,659,964
------------
NET ASSETS (equivalent to $16.63 per share for
8,793,465 shares of capital stock outstanding)
(Note 4)......................................... $146,196,196
------------
------------
Analysis of Net Assets:
Shareholder capital (Note 4).................... $135,359,191
Accumulated undistributed net investment
income......................................... 82,978
Accumulated net realized gain on sales of
investments.................................... 1,340,877
Unrealized appreciation on investments.......... 9,413,150
------------
Net assets applicable to outstanding shares..... $146,196,196
------------
------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
Investment Income:
Interest income earned.................................... $5,180,160
----------
Expenses:
Investment advisory and administrative (Note 6)........... 340,883
Transfer agent and dividend disbursing agent.............. 49,914
Directors (Note 6)........................................ 37,397
Stockholders reports and annual meeting................... 31,450
Professional.............................................. 22,914
Franchise taxes........................................... 7,480
All other expenses........................................ 34,542
----------
Total expenses.............................................. 524,580
----------
Net investment income....................................... 4,655,580
----------
Net realized and unrealized gain on investments:
Net realized gain from investment transactions............ 1,692,419
Change in unrealized appreciation......................... 2,406,578
----------
Total realized and unrealized gain on investments........... 4,098,997
----------
Net increase in net assets from operations.................. $8,754,577
----------
----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
MARCH 31, 1998 FOR THE YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1997
-------------- ------------------
<S> <C> <C>
From operations:
Net investment income............................... $ 4,655,580 $ 9,553,653
Net realized gain from investment transactions...... 1,692,419 1,895,455
Change in unrealized appreciation of investments.... 2,406,578 5,931,241
-------------- ------------------
Net increase in net assets from operations.......... 8,754,577 17,380,349
Distributions to shareholders from:
Net investment income............................... (4,572,602) (10,644,880)
Net realized gain................................... (1,319,019) (3,851,574)
-------------- ------------------
Total distributions............................... (5,891,621) (14,496,454)
From capital share transactions: (Note 4)
Net asset value of shares repurchased from
shareholders....................................... -- (94,955)
-------------- ------------------
Net increase in net assets........................ 2,862,956 2,788,940
Net Assets:
Beginning of period................................. 143,333,240 140,544,300
-------------- ------------------
End of period (including undistributed net
investment income of $82,978 at March 31, 1998, and
$0 at September 30, 1997, respectively)............ $ 146,196,196 $ 143,333,240
-------------- ------------------
-------------- ------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
FINANCIAL HIGHLIGHTS
MARCH 31, 1998
Financial highlights for each share of capital stock outstanding through each
period:
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
1998 ---------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 16.30 $ 15.97 $ 16.50 $ 15.04 $ 17.58 $ 16.64
--------- --------- --------- --------- --------- ---------
Net investment income(1)........... 0.53 1.09 1.19 1.15 1.15 1.22
Net realized and unrealized gain
(loss) on investments (2)......... 0.47 0.89 (0.56) 1.43 (2.57) 0.96
--------- --------- --------- --------- --------- ---------
Total from investment operations... 1.00 1.98 0.63 2.58 (1.42) 2.18
Less distributions from:
Net investment income.......... (0.52) (1.21) (1.16) (1.12) (1.12) (1.24)
Net realized gain.............. (0.15) (0.44) -- -- -- --
--------- --------- --------- --------- --------- ---------
Total distributions................ (0.67) (1.65) (1.16) (1.12) (1.12) (1.24)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period..... $ 16.63 $ 16.30 $ 15.97 $ 16.50 $ 15.04 $ 17.58
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Market price per share at end of
period............................ $ 15.688 $ 15.188 $ 14.750 $ 14.625 $ 14.000 $ 17.375
Total investment return (market
value)(3)......................... 7.71 14.86% 8.98% 12.88% (10.45)% 14.10%
Total return (net asset
value)(4)......................... 6.18 13.06% 3.84% 17.71% (5.32)% 13.56%
Net assets at end of period (in
millions)......................... $ 146.20 $ 143.33 $ 140.50 $ 145.76 $ 133.44 $ 125.02
Ratio of expenses to average net
assets............................ 0.36% 0.75% 0.75% 0.69% 0.72% 0.76%
Ratio of net investment income to
average net assets................ 3.19% 6.81% 7.22% 7.34% 7.13% 7.24%
Portfolio turnover................. 26.0% 130.0% 159.5% 126.8% 70.2% 12.7%
Number of shares outstanding at end
of period (in thousands).......... 8,793 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
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
DEBT SECURITIES--98.4%
/ / MUNICIPAL SECURITIES (4.7%)
New Jersey Economic Development Authority,
Zero Coupon Revenue Bonds
$25,000,000 due 2/15/18............................... Aaa $ 5,672,549 $ 6,826,250
------------ ------------
/ / U.S. GOVERNMENT
SECURITIES (14.5%)
DIRECT OBLIGATIONS--4.2%
U.S. Treasury
6,050,000 6.00% Bond, due 2/15/26................... (a) 6,026,504 6,038,656
------------ ------------
AGENCY--10.3%
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
2,356,340 6.50%, due 3/01/03........................ (a) 2,380,640 2,371,068
7,204 7.50%, due 11/01/99....................... (a) 7,015 7,368
272,699 9.00%, due 8/01/04........................ (a) 284,629 284,016
267,764 9.00%, due 3/01/24........................ (a) 277,426 287,201
44,846 9.50%, due 7/01/18........................ (a) 44,173 47,761
Federal National Mortgage Association
Guaranteed Mortgage Pass Thru
Certificates,
2,951,306 6.50%, due 3/01/27 Pool # 374461.......... (a) 2,830,884 2,918,104
2,988,928 6.50%, due 2/01/28 Pool # 408840.......... (a) 2,945,028 2,955,302
975,172 7.00% REMIC, due 6/25/13 Series 1993-106
Class Z................................. (a) 902,276 975,230
1,701,276 7.25% CMO, due 3/25/23.................... (a) 1,439,410 1,692,769
23,749 9.50%, due 4/01/20 Pool # 93731........... (a) 23,486 25,411
Government National Mortgage Association
Pass Thru Mortgage Backed Certificates,
3,107,074 7.50%, due 12/15/22 Pool # 780230......... (a) 3,102,767 3,193,823
89,516 9.00%, due 6/15/18 Pool # 253034.......... (a) 88,957 95,783
93,156 9.00%, due 8/15/19 Pool # 271892.......... (a) 94,495 99,677
7,109 9.00%, due 9/15/19 Pool # 268553.......... (a) 7,211 7,606
78,307 9.00%, due 10/15/19 Pool # 283370......... (a) 77,818 83,789
14,223 9.00%, due 5/15/21 Pool # 298198.......... (a) 14,134 15,218
------------ ------------
14,520,349 15,060,126
------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
/ / CORPORATE BONDS AND
NOTES (79.2%)
INTERNATIONAL--29.5%
$ 2,500,000 Augusta Funding Ltd., 144-A
7.375% Bond, due 4/15/13................. Aaa $ 2,431,847 $ 2,715,860
2,700,000 Banco Bilbao Vizcaya International,
7.00%, Bank Guaranteed Note, due
12/01/25................................. Aa3 2,654,276 2,676,820
3,550,000 Banque Cent de Tunisie
8.25% Bond, due 9/19/27.................. Baa3 3,521,275 3,435,793
2,250,000 Banque Paribas,
6.875% Note, due 3/01/09................. A3 2,202,064 2,254,084
2,100,000 Credit Suisse - London 144-A
7.90% Note, due 5/01/07.................. A2 2,094,499 2,200,817
1,605,000 Den Danske Bank 144-A
7.40%, Bond due 6/15/10.................. A1 1,660,523 1,682,123
2,000,000 Empresa National Electric,
8.125% Bond, due 2/01/2097............... Baa1 2,022,078 2,020,400
3,455,000 Interamer Development Bank,
6.80% Note, due 10/15/25................. Aaa 3,202,389 3,705,460
2,500,000 Petroliam Nasional Berhad, 144-A
7.625% Note, due 10/15/26................ A2 2,467,367 2,169,293
3,000,000 Philips Electronics, NV,
7.75% Debenture, due 5/15/25............. A3 2,990,782 3,267,441
1,000,000 Polish Government,
6.938% Non-U.S. Global Bond, due
10/27/24................................. Baa3 1,000,000 980,000
3,490,000 Province of Quebec,
7.50% Debenture, due 7/15/23............. A2 3,364,490 3,784,696
450,000 Ras Laffan Liquefied Natural Gas, 144-A
8.294% Secured Note, due 3/15/14......... Baa2 465,597 464,236
2,000,000 Republic of Panama,
7.875% Note, due 2/13/02................. Ba1 2,011,163 2,009,928
2,000,000 Republic of South Africa
9.625% Debenture, due 12/15/99........... Baa3 1,996,810 2,085,000
3,560,000 Skandinaviska Enskilda Banken, 144-A
6.625% Resettable Perpetual Preferred
Bond, due 3/29/49........................ Baa1 3,539,281 3,569,861
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 2,165,000 Sociedad Quimica y Minera de Chiles SA,
144-A
7.70% Note, due 9/15/06.................. Baa1 $ 2,160,274 $ 2,198,358
1,670,000 Southern Investments UK,
6.80% Senior Note, due 12/01/06.......... Baa1 1,666,390 1,705,910
------------ ------------
41,451,105 42,926,080
------------ ------------
INDUSTRIAL--22.3%
1,825,000 Aetna Services,
7.625% Debenture, due 8/15/26............ A2 1,807,267 1,894,536
3,000,000 Enron Corp.,
6.75% Note, due 8/01/09.................. Baa2 2,951,488 3,022,110
2,315,000 Lockheed Martin Corp.
7.70% Note, due 6/15/08.................. A3 2,314,412 2,519,095
3,000,000 Nabisco Inc., 144-A,
6.30% Pass Thru Certificates, due
8/26/99.................................. Baa2 2,998,123 3,019,236
4,250,000 News America Holdings, Inc.
7.75% Bond, due 1/20/24.................. Baa3 3,645,515 4,459,869
3,000,000 Pioneer Natural Resources Co.
6.50% Note, due 1/15/08.................. Baa3 2,938,680 2,894,955
2,300,000 Rite Aid Corp.,
7.70% Debenture, due 2/15/27............. Baa1 2,293,746 2,493,966
2,470,000 SFP Pipeline Holdings, Inc.,
11.16% Adjustable Rate Exchange
Debenture, due 8/15/10................... Baa3 2,281,728 4,421,300
2,500,000 Tennessee Gas Pipeline,
7.625% Bond, due 4/01/37................. Baa2 2,429,602 2,695,855
2,215,000 Time Warner, Inc.
7.57% Debenture, due 2/01/24............. Ba1 2,215,000 2,327,026
1,565,000 Time Warner Entertainment, Inc.
8.375% Debenture, due 3/15/23............ Baa3 1,560,257 1,781,042
1,000,000 Vintage Petroleum, Inc.
9.00% Note, due 12/15/05................. B1 1,046,430 1,046,250
------------ ------------
28,482,248 32,575,240
------------ ------------
FINANCE--20.6%
1,425,000 BA Mortgage Securities, Inc.
6.50% Collateralized Mortgage Obligation,
due 5/25/13.............................. (a) 1,421,215 1,416,984
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 160,000 Berkshire Hathaway, Inc.,
9.75% Debenture, due 1/15/18............. Aa1 $ 159,100 $ 172,010
2,500,000 Ford Credit Auto Loan Master Trust,
6.50% Asset Backed Note, due 8/15/02..... Aaa 2,493,539 2,529,675
1,800,000 Key Bank N.A.,
6.95% Debenture, due 2/01/28............. A1 1,793,304 1,802,120
1,700,000 Lehman Brothers, Inc.,
7.25%, Senior Note, due 4/15/03.......... Baa1 1,701,038 1,757,871
2,900,000 Mellon Bank
7.375% Note, due 5/15/07................. A2 2,900,000 3,090,835
3,020,000 Prudential Insurance, 144-A
7.65% Note, due 7/01/07.................. A3 3,108,101 3,212,746
4,000,000 Republic Bank of New York,
5.70%, Adjustable Rate Note, due
8/07/02.................................. A1 3,998,764 3,923,020
2,000,000 Salomon, Inc.
6.75% Note, due 2/15/03.................. A2 1,996,779 2,031,588
5,000,000 Secured Finance Inc.,
9.05% Guaranteed Senior Secured Bond,
due 12/15/04............................. Aaa 4,988,295 5,738,385
2,500,000 Standard Credit Card Master Trust,
8.25% Credit Card Certificate of
Participation, due 1/07/07............... Aaa 2,495,592 2,780,175
1,600,000 Travelers Group, Inc.
6.875% Debenture, due 2/15/98............ Aa3 1,584,474 1,554,627
------------ ------------
28,640,201 30,010,036
------------ ------------
TRANSPORTATION--4.3%
1,035,000 Continental Airlines, Inc.,
6.90% Pass thru Certificates, due
1/02/18.................................. Aa3 1,035,000 1,055,110
1,500,000 Delta Airlines, Inc,
10.50% Pass Thru Certificate, due
4/30/16.................................. Baa1 1,813,269 1,980,570
3,000,000 United Airlines, Inc.,
7.87% Pass Thru Certificate, due
1/30/19.................................. Baa1 3,000,000 3,206,850
------------ ------------
5,848,269 6,242,530
------------ ------------
UTILITY - ELECTRIC--2.0%
2,500,000 Delmarva Power & Light Co.,
9.95% Note, due 12/01/20................. A3 2,498,088 2,885,460
------------ ------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
COMMUNICATION--0.5%
$ 800,000 PanAmSat Corp. 144-A
6.00% Note, due 1/15/03.................. Baa2 $ 799,509 $ 787,594
------------ ------------
Total Debt Securities..................... 133,938,822 143,351,972
------------ ------------
/ / SHORT TERM SECURITIES (1.6%)
1,300,000 Lockheed Martin Corp., Commercial Paper,
due 4/03/98.............................. P2 1,299,586 1,299,586
1,000,000 Ultramar Diamond Shamrock Corp.,
Commercial Paper, 144-A
due 4/02/98.............................. P2 999,841 999,841
------------ ------------
2,299,427 2,299,427
------------ ------------
Total Portfolio of Investments 100%....... $136,238,249 $145,651,399
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(a) Moody's as a matter of policy, does not rate this issue.
144-A: Securities 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 March 31,
1998, the value of these securities amounted to $23,019,965 or 15.8% of
the total portfolio of investments.
Resettable Perpetual Preferred: A bond with either no maturity date or a
maturity date that is so far in the future that the bond will pay
interest indefinitely. The issuer generally retains the right to call
such a bond.
See Notes to Financial Statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(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. 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.
At March 31, 1998 for federal income tax purposes, the cost for long and
short-term investments is $136,238,249; the aggregate gross unrealized
appreciation is $9,996,808 and the aggregate gross unrealized depreciation is
$583,658; resulting in net unrealized appreciation of investments of $9,413,150.
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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
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.
Distributions from net realized gains for book purposes may include
short-term capital gains which are included as ordinary income for tax purposes.
4. CAPITAL STOCK
At March 31, 1998 there were 12,000,000 shares of $.01 par value capital
stock authorized, and capital paid in aggregate of $135,359,191. During the six
months ended March 31, 1998 no new shares were issued as part of the dividend
reinvestment plan.
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales (including maturities) of portfolio securities during
the six months ended March 31, 1998 were as follows: debt securities,
$22,670,239 and $25,200,788 respectively; short-term securities, $122,348,200
and $124,624,068 respectively; United States government debt obligations,
$16,040,301 and $10,713,182, respectively.
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
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
7. MORTGAGE BACKED SECURITIES (CONTINUED)
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.
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 six months ended March 31, 1998, 46,277 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 12, 1997 28,420 $ 15.73 Open Market
March 20, 1998 17,857 $ 15.94 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 1,122 participants on March 20, 1998. 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>
REPORT ON ANNUAL MEETING
At the annual meeting of shareholders, held on December 15, 1997,
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
------------- --------- ---------
<C> <S> <C> <C>
R.M. Burridge 7,533,704 102,054
C.R. O'Neil 7,526,098 109,660
R.S. Peterson 7,529,937 105,821
F.K. Reilly 7,523,941 111,817
E.M. Roob 7,524,685 111,073
2. Ratification of Accountants
</TABLE>
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
7,478,786 69,911 91,061 0
</TABLE>
17
<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, 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
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
18
<PAGE>
FORT
DEARBORN
INCOME
SECURITIES,
INC.
FORT DEARBORN INCOME SECURITIES, INC.
[NYSE LOGO]
[CHICAGO STOCK EXCHANGE LOGO]
SEMI-ANNUAL REPORT
MARCH 31, 1998
