<PAGE>
FORT
DEARBORN
INCOME
SECURITIES,
INC.
FORT DEARBORN INCOME SECURITIES, INC.
[LOGO]
[LOGO]
ANNUAL REPORT
SEPTEMBER 30, 1998
<PAGE>
DEAR SHAREHOLDER:
This financial report covers the fiscal year ended September 30, 1998, which
is our twenty-sixth fiscal year of operations.
Intermediate and long-term U.S. interest rates moved sharply lower over the
course of the fiscal year. Inflation continued to trend down, while Asian
economic stress spread globally. As the outlook for global economic growth
slowed, central banks became more accommodative. The Federal Reserve, which had
maintained a steady 5.5% overnight funds target all year, cut rates by 0.25% on
September 29 and again on October 15, 1998. Intermediate and long-term Treasury
yields fell an average of 1.50% during the fiscal year. Yields on corporate debt
declined less, as the bond markets began to demand sharply higher relative
compensation for credit risk. The average market yield on the Fort Dearborn
portfolio declined by 0.50% over the course of the fiscal year. This drop in
yields resulted in bond price appreciation in the Fort Dearborn portfolio. Net
asset value per share rose 3.5% during the fiscal year, while dividend payments
from income and capital gains totaled 7.3% of beginning net asset value.
Net investment income for the year was $1.05 per share and net realized and
unrealized gains on investments totaled $0.71 per share. Net asset value per
share, after dividends of $1.19 per share, rose $0.57 during the fiscal year. On
September 30, 1998 net asset value per share was $16.87 and the stock closed
that day at a market price of $15.75 per share.
During the fiscal year the Board of Directors declared four regular
quarterly dividends. Dividends of $.26 per share were payable on December 12,
1997 and on March 20, June 19, and September 18, 1998. In addition, a capital
gains distribution of $0.15 per share was payable December 12, 1997.
No new shares of capital stock were issued in the fiscal year, while 4,600
shares were repurchased in the open market at an average discount to net asset
value of 10.07%. On September 30, 1998 there were 8,788,865 shares of capital
stock outstanding and the net assets applicable to those shares were $148.3
million.
As of September 30, 1998 the Company's high quality long-term bond portfolio
contained 74 issues with an average market yield to maturity of 6.6%, an average
Moody's quality rating of A1, an average duration of 7.6 years and an average
maturity of 14.7 years. The distribution of the portfolio maturities and the
Moody's quality ratings were as follows:
<TABLE>
<S> <C>
Average Maturities
- ---------------------------------------------
0-1 year 3.7%
1-3 years 9.2
3-5 years 13.1
5-10 years 22.8
10-20 years 19.2
20 plus years 32.0
-----
100.0%
Quality
- ---------------------------------------------
Treasury, Agency and Aaa 35.8%
Aa 4.2
A 22.6
Baa 35.5
Below Baa 1.9
-----
100.0%
</TABLE>
1
<PAGE>
Long-term U.S. market interest rates are near their lowest levels in two
decades. Bond markets in the U.S. and around the world are setting long-term
interest rates at levels which are consistent with the current favorable global
inflation climate. Current "low" yield levels are sustainable if central banks
continue to pursue prudent monetary policies oriented toward the maintenance of
price stability. However, faced with a probable slowing of world economic
growth, there is a risk that central banks might become overly accommodative,
which would set the stage for some acceleration of inflation as economic growth
resumes.
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, 1998, and a
list of the securities owned on that date are included in this report.
Sincerely,
/s/ Gary P. Brinson
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]
FORT DEARBORN INCOME SECURITIES, INC.
- --------------------------------------
MARKET VALUE OF INDEX AND SHARE PRICE*
WITH ALL DIVIDENDS/INTEREST REINVESTED
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $135,674,691)... $144,142,595
Short-term securities, at cost, which
approximates market............................ 1,398,211
------------
Total portfolio of investments.............. 145,540,806
Cash.............................................. 181,524
Receivables:
Investment securities sold...................... 4,023,287
Interest on debt securities (Note 1)............ 2,279,714
Other assets...................................... 7,764
------------
Total assets................................ 152,033,095
------------
LIABILITIES:
Expenses:
Payable for investments purchased............... 3,475,683
Accrued investment advisory and administrative
fees (Note 6).................................. 169,828
Accrued professional fees....................... 25,363
Accrued custodial and transfer agent fees....... 51,195
Accrued other expenses.......................... 12,501
------------
Total liabilities........................... 3,734,570
------------
NET ASSETS (equivalent to $16.87 per share for
8,788,865 shares of capital stock outstanding)
(Note 4)......................................... $148,298,525
------------
------------
Analysis of Net Assets:
Shareholder capital (Note 4).................... $135,289,938
Accumulated undistributed net investment
income......................................... 82,868
Accumulated net realized gain on sale of
investments.................................... 4,457,815
Unrealized appreciation on investments.......... 8,467,904
------------
Net assets applicable to outstanding shares..... $148,298,525
------------
------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Investment income:
Interest income earned.................................... $10,270,147
-----------
Expenses:
Investment advisory and administrative (Note 6)........... 686,663
Transfer agent and dividend disbursing agent.............. 100,055
Directors (Note 6)........................................ 75,000
Stockholders reports and annual meeting................... 63,072
Professional fees......................................... 32,419
Franchise taxes........................................... 15,002
Other expenses............................................ 66,582
-----------
Total expenses.............................................. 1,038,793
-----------
Net investment income....................................... 9,231,354
-----------
Net realized and unrealized gain on investments:
Net realized gain from investment transactions............ 4,803,684
Change in unrealized appreciation......................... 1,461,332
-----------
Total realized and unrealized gain on investments........... 6,265,016
-----------
Net increase in net assets from operations.................. $15,496,370
-----------
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
From operations:
Net investment income.................................. $ 9,231,354 $ 9,553,653
Net realized gain from investment transactions......... 4,803,684 1,895,455
Change in unrealized appreciation of investments....... 1,461,332 5,931,241
-------------- --------------
Net increase in net assets from operations............. 15,496,370 17,380,349
Distributions to shareholders from:
Net investment income.................................. (9,142,812) (10,644,880)
Net realized gain...................................... (1,319,020) (3,851,574)
-------------- --------------
Total distributions.................................. (10,461,832) (14,496,454)
From capital share transactions: (Note 4)
Net asset value of shares repurchased from
shareholders.......................................... (69,253) (94,955)
-------------- --------------
Net increase in net assets............................. 4,965,285 2,788,940
Net Assets:
Beginning of year...................................... 143,333,240 140,544,300
-------------- --------------
End of year (including undistributed net investment
income of $82,868 at September 30, 1998, and $0 at
September 30, 1997, respectively)..................... $ 148,298,525 $ 143,333,240
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
FINANCIAL HIGHLIGHTS
Financial highlights for each share of capital stock outstanding through each
period:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period..................... $ 16.30 $ 15.97 $ 16.50 $ 15.04 $ 17.58
---------- ---------- ---------- ---------- -----------
Net investment income (1)................................ 1.05 1.09 1.19 1.15 1.15
Net realized and unrealized gain (loss) on
investments (2)......................................... 0.71 0.89 (0.56) 1.43 (2.57)
---------- ---------- ---------- ---------- -----------
Total from investment operations......................... 1.76 1.98 0.63 2.58 (1.42)
Less distributions from:
Net investment income................................ (1.04) (1.21) (1.16) (1.12) (1.12)
Net realized gain.................................... (0.15) (0.44) -- -- --
---------- ---------- ---------- ---------- -----------
Total distributions...................................... (1.19) (1.65) (1.16) (1.12) (1.12)
---------- ---------- ---------- ---------- -----------
Net asset value, end of period........................... $ 16.87 $ 16.30 $ 15.97 $ 16.50 $ 15.04
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Market price per share at end of period.................. $ 15.750 $ 15.188 $ 14.750 $ 14.625 $ 14.000
Total investment return (market value) (3)............... 11.81% 14.86% 8.98% 12.88% (10.45)%
Total return (net asset value) (4)....................... 11.07% 13.06% 3.84% 17.71% (5.32)%
Net assets at end of period (in millions)................ $ 148.30 $ 143.33 $ 140.50 $ 145.76 $ 133.44
Ratio of expenses to average net assets.................. 0.71% 0.75% 0.75% 0.69% 0.72%
Ratio of net investment income to average net assets..... 6.29% 6.81% 7.22% 7.34% 7.13%
Portfolio turnover....................................... 63.5% 130.0% 159.5% 126.8% 70.2%
Number of shares outstanding at end of period
(in thousands).......................................... 8,789 8,793 8,800 8,833 8,872
</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, 1998
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
DEBT SECURITIES--99.0%
/ / MUNICIPAL SECURITIES (5.5%)
New Jersey Economic Development Authority,
Zero Coupon Revenue Bonds,
$25,000,000 due 2/15/18............................... Aaa $ 5,889,738 $ 8,027,550
/ / U.S. GOVERNMENT SECURITIES (16.0%)
DIRECT OBLIGATIONS--6.4%
U.S. Treasury,
5,890,000 8.00% Bond, due 11/15/21.................. Aaa 7,634,655 8,096,912
1,060,000 6.25% Note, due 8/31/02................... Aaa 1,117,925 1,130,225
50,000 7.00% Note, due 7/15/06................... Aaa 54,644 58,266
------------ ------------
8,807,224 9,285,403
------------ ------------
AGENCY--9.6%
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
1,811,603 6.50%, due 3/01/03........................ (a) 1,830,285 1,840,476
2,255 7.50%, due 11/01/99....................... (a) 2,196 2,319
208,990 9.00%, due 8/01/04........................ (a) 218,133 218,055
208,866 9.00%, due 3/01/24........................ (a) 216,404 223,371
37,916 9.50%, due 7/01/18........................ (a) 37,347 40,274
Federal National Mortgage Association
Guaranteed Mortgage Pass Thru
Certificates,
2,828,051 6.50%, due 3/01/27 Pool #374461........... (a) 2,712,658 2,874,006
2,919,840 6.50%, due 2/01/28 Pool #408840........... (a) 2,876,955 2,967,287
1,009,805 7.00% REMIC, due 6/25/13 Series 1993-106
Class Z.................................. (a) 936,909 1,027,562
1,701,276 7.25%, CMO, due 3/25/23................... (a) 1,439,410 1,701,276
21,956 9.50%, due 4/01/20 Pool #93731............ (a) 21,712 23,417
Government National Mortgage Association
Pass Thru Mortgage Backed Certificates,
2,700,915 7.50%, due 12/15/22 Pool #780230.......... (a) 2,697,171 2,805,939
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 62,399 9.00%, due 6/15/18 Pool #253034........... (a) $ 62,009 $ 66,514
71,219 9.00%, due 8/15/19 Pool #271892........... (a) 72,243 75,915
4,675 9.00%, due 9/15/19 Pool #268553........... (a) 4,743 4,984
77,402 9.00%, due 10/15/19 Pool #283370.......... (a) 76,918 82,505
11,561 9.00%, due 5/15/21 Pool #298198........... (a) 11,489 12,324
------------ ------------
13,216,582 13,966,224
------------ ------------
/ / CORPORATE BONDS AND
NOTES (77.5%)
INTERNATIONAL (26.6%)
2,900,000 Abbey National PLC, 6.70% Note, due
6/29/49.................................. Aa3 2,895,281 2,991,338
2,500,000 Augusta Funding Ltd., 144-A, 7.375% Bond,
due 4/15/13.............................. Aaa 2,434,003 2,795,000
1,400,000 Banco Bilbao Vizcaya International, 7.00%
Bank Guaranteed Note, due 12/01/25....... Aa3 1,376,703 1,334,652
3,550,000 Banque Cent de Tunisie, 8.25% Bond,
due 9/19/27.............................. Baa3 3,521,758 2,763,945
2,250,000 Banque Paribas, 6.875% Note, due
3/01/09.................................. A2 2,204,222 2,395,202
2,100,000 Credit Suisse--London, 144-A, 7.90% Note,
due 5/01/07.............................. A2 2,094,800 2,204,956
2,015,000 Den Danske Bank , 144-A, 6.375% Bond,
due 6/15/05.............................. A1 2,009,776 2,037,250
2,000,000 Empresa National Electric, 8.125% Bond,
due 2/01/97.............................. Baa1 2,021,926 1,440,000
1,395,000 Hydro-Quebec, 8.05% Note, due 7/07/24..... A2 1,653,457 1,658,627
3,455,000 Interamer Development Bank, 6.80% Note,
due 10/15/25............................. Aaa 3,206,808 3,987,367
2,500,000 Petroliam Nasional Berhad, 144-A, 7.625%
Note, due 10/15/26....................... Baa2 2,467,933 1,269,280
1,990,000 Province of Quebec, 7.50% Debenture,
due 7/15/23.............................. A2 1,923,259 2,227,805
950,000 Ras Laffan Liquified Natural Gas, 144-A,
8.294% Secured Note, due 3/15/14......... Baa2 840,850 670,975
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 2,000,000 Republic of South Africa, 9.625%
Debenture, due 12/15/99.................. Baa3 $ 1,997,243 $ 1,900,000
2,000,000 Republic of Panama, 8.25% Note, due
4/22/08.................................. Ba1 1,992,281 1,700,000
3,560,000 SE Banken, 144-A, 6.50% Bond, due
6/04/03.................................. Baa1 3,399,819 3,580,737
2,165,000 Sociedad Quimica y Minera de Chiles SA,
144-A, 7.70% Note, due 9/15/06........... Baa1 2,160,547 1,960,882
1,670,000 Southern Investments UK, 6.80% Senior
Note, due 12/01/06....................... Baa1 1,666,598 1,768,236
------------ ------------
39,867,264 38,686,252
------------ ------------
INDUSTRIAL--(20.6%)
1,825,000 Aetna Services, 7.625% Debenture, due
8/15/26.................................. A2 1,807,581 1,871,216
3,000,000 Enron Corp., 6.75% Note, due 8/01/09...... Baa2 2,953,623 3,235,749
1,500,000 Ford Motor Co., 6.625% Note, due
10/01/28................................. A1 1,483,232 1,515,000
2,000,000 Kroger Co., 6.00% Note, due 7/01/00....... Baa3 1,997,706 2,021,448
2,315,000 Lockheed Martin Corp., 7.70% Note,
due 6/15/08.............................. A3 2,314,439 2,684,196
3,000,000 Nabisco Inc., 144-A, 6.30% Pass Thru
Certificate, due 8/26/99................. Baa2 2,998,796 3,032,883
3,000,000 Philips Electronics, 7.75% Debenture,
due 5/15/25.............................. A3 2,990,942 3,562,038
2,300,000 Rite Aid Corp., 7.70% Debenture, due
2/15/27.................................. Baa1 2,293,855 2,658,193
2,500,000 Tennessee Gas Pipeline, 7.625% Bond, due
4/01/37.................................. Baa2 2,430,491 2,762,010
1,565,000 Time Warner Entertainment, Inc., 8.375%
Debenture, due 3/15/23................... Baa2 1,560,350 1,872,097
2,215,000 Time Warner, Inc., 7.57% Debenture,
due 2/01/24.............................. Baa1 2,215,000 2,478,663
1,275,000 Tyco International Group, 7.00% Bond, due
6/15/28.................................. Baa1 1,265,902 1,290,833
1,000,000 Vintage Petroleum, Inc., 9.00% Note,
due 12/15/05............................. B1 1,046,203 1,016,250
------------ ------------
27,358,120 30,000,576
------------ ------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
FINANCE--(16.5%)
$ 160,000 Berkshire Hathaway, Inc., 9.75% Debenture,
due 1/15/18.............................. Aa1 $ 159,060 $ 169,614
2,500,000 Ford Credit Auto Loan Master Trust, 6.50%
Asset Backed Note, due 8/15/02........... Aaa 2,493,554 2,567,375
1,700,000 Lehman Brothers, Inc., 7.25% Senior Note,
due 4/15/03.............................. Baa1 1,700,941 1,734,230
1,800,000 Norwest Asset Securities Corp., Series
96-2, 7.00% Note, due 9/25/11............ Aaa 1,814,625 1,857,537
771,542 Residential Asset Securitization Trust,
7.50% Note, due 9/25/27.................. Aaa 777,329 782,655
4,000,000 Republic Bank of New York, 5.70%
Adjustable Rate Note, due 8/07/02........ A1 3,998,837 4,003,560
1,000,000 Salomon, Inc., 6.75% Note, due 2/15/03.... A2 998,532 1,041,834
5,000,000 Secured Finance Inc., 9.05% Guaranteed
Senior Secured Bond, due 12/15/04........ Aaa 4,988,713 5,908,965
2,500,000 Standard Credit Card Master Trust, 8.25%
Credit Card Certificate of Participation,
due 1/07/07.............................. Aaa 2,495,604 2,877,980
1,600,000 Travelers Group, Inc., 6.875% Debenture,
due 2/15/08.............................. Aa3 1,585,262 1,609,166
1,465,000 U.S. West Capital Funding, Inc., 6.875%
Note, due 7/15/28........................ A3 1,463,673 1,508,418
------------ ------------
22,476,130 24,061,334
------------ ------------
COMMUNICATION--(6.8%)
4,250,000 News America Holdings, Inc., 7.75% Bond,
due 1/20/24.............................. Baa3 3,655,494 4,421,781
800,000 PanAmSat Corp., 6.00% Note, due 1/15/03... Baa2 799,560 809,332
1,715,000 PanAmSat Corp., 144-A, 6.375% Note,
due 1/15/08.............................. Baa2 1,707,535 1,738,048
1,350,000 Tele-Communications, Inc., 7.875% Note,
due 8/01/13.............................. Baa3 1,454,023 1,607,271
425,000 Tele-Communications, Inc., 9.80% Note,
due 2/01/12.............................. Baa3 555,344 581,011
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 590,000 TCI Communications, Inc., 8.75% Note,
due 8/01/15.............................. Baa3 $ 724,193 $ 741,563
------------ ------------
8,896,149 9,899,006
------------ ------------
UTILITY (2.5%)
2,500,000 Delmarva Power & Light Co., 9.95% Note,
due 12/01/20............................. A3 2,498,121 2,875,000
825,000 Teco Energy, Inc., 5.54% Note, due
9/15/01.................................. A1 826,368 830,080
------------ ------------
3,324,489 3,705,080
------------ ------------
TRANSPORTATION--(4.5%)
1,500,000 Delta Airlines, Inc., 10.50% Pass Thru
Certificate, due 4/30/16................. Baa1 1,803,995 2,064,180
1,035,000 Continental Airlines, Inc., 6.90% Pass
Thru Certificate, due 1/02/18............ A1 1,035,000 1,095,330
3,000,000 United Airlines, Inc., 7.87% Pass Thru
Certificate, due 1/30/19................. Baa1 3,000,000 3,351,660
------------ ------------
5,838,995 6,511,170
------------ ------------
Total Debt Securities..................... 135,674,691 144,142,595
------------ ------------
/ / SHORT TERM SECURITIES (1.0%)
1,400,000 Safeway Inc., Commercial Paper, due
10/09/98................................. P2 1,398,211 1,398,211
------------ ------------
Total Portfolio of Investments 100%....... $137,072,902 $145,540,806
------------ ------------
------------ ------------
</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 September
30, 1998, the value of these securities amounted to $19,290,011 or 13.3%
of the total portfolio of investments.
See Notes to Financial Statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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.
Net realized gains or losses may differ for financial and tax reporting
purposes 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, 1998 for federal income tax purposes, the cost for long and
short-term investments is $137,072,902; the aggregate gross unrealized
appreciation is $11,837,443 and the aggregate gross unrealized depreciation is
$3,369,539; resulting in net unrealized appreciation of investments of
$8,467,904.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
2. NET ASSET VALUATIONS
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:
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 from losses on paydowns on Mortgage Backed Securities of $5,674 were
reclassified from accumulated net realized gain on investments to undistributed
net investment income.
Distributions from net realized gains for book purposes may include
short-term capital gains which are included as ordinary income for tax purposes.
In January, 1999, the Company will provide tax information to shareholders
for the 1998 calendar year.
4. CAPITAL STOCK
At September 30, 1998 there were 12,000,000 shares of $.01 par value capital
stock authorized, and shareholder capital of $135,289,938. During the year ended
September 30, 1998 no new shares were issued as part of the dividend
reinvestment plan and 4,600 shares were repurchased in the open market at a
weighted average discount to Net Asset Value of 10.07% 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, 1998 were as follows: debt securities, $51,838,957
and $65,457,413 respectively; short-term securities, $180,456,079 and
$178,936,105 respectively; United States government debt obligations,
$37,677,766 and $27,183,251, 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
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
6. MANAGEMENT AND OTHER FEES (CONTINUED)
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 AND OTHER INVESTMENTS
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 invests in Collateralized Mortgage Obligations (CMOs). A CMO is
a bond which is collateralized by a pool of MBS. The Company also invests in
REMICs (Real Estate Mortgage Investment Conduit) which are simply another form
of CMO. 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.
The Company invests in Asset Backed Securities, representing interests in
pools of certain types of underlying installment loans or leases or by revolving
lines of credit. They often include credit enhancements that help limit
investors exposure to the underlying credit. These securities are valued on the
basis of the timing and certainty of the cash flows compared to investments with
similar durations.
8. YEAR 2000 COMPLIANCE (UNAUDITED)
The Advisor utilizes a number of computer programs across its entire
operation relying on both internal software systems as well as external software
systems provided by third parties. The Advisor has initiated a
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
8. YEAR 2000 COMPLIANCE (UNAUDITED) (CONTINUED)
project to review both the internal and external vendor connections. The goal of
this project is to position the Advisor's business to continue unaffected as a
result of the century change. At this time, there can be no assurance that the
steps taken will be sufficient to avoid any adverse impact to the Fund, but the
Advisor does not anticipate that the move to Year 2000 will have a material
impact on the Advisor's ability to continue to provide the Fund with service at
current levels. In addition, it is possible that the securities markets in which
the Fund invests may be detrimentally affected by computer failures throughout
the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues.
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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, 1998, 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, 1998, by correspondence with the custodian and brokers; where
replies were not received we performed other auditing procedures. 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, 1998, 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.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
October 27, 1998
17
<PAGE>
REPORT ON THE AUTOMATIC DIVIDEND INVESTMENT PLAN
The Company's Automatic Dividend Investment Plan, operated for the
convenience of the shareholders, has been in operation since the dividend
payment of May 5, 1973.
For the year ended September 30, 1998, 81,636 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 $ 15.78 Open Market
March 20, 1998 17,857 $ 15.94 Open Market
June 19, 1998 18,069 $ 15.24 Open Market
September 18, 1998 17,290 $ 15.68 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 1,074 participants on September 18, 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.
18
<PAGE>
BOARD OF DIRECTORS
RICHARD M. BURRIDGE
Chairman of the Board
C. RODERICK O'NEIL, CFA
Director
RICHARD S. PETERSON
Director
FRANK K. REILLY, CFA
Director
EDWARD M. ROOB
Director
OFFICERS
GARY P. BRINSON, CFA
President
DENNIS L. HESSE
Vice President
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, Illinois 60601
19
