<PAGE>
May 24, 1999
DEAR SHAREHOLDER:
This financial report covers the six months ended March 31, 1999, which is
our twenty-seventh fiscal year of operations.
Net investment income for the six months was $0.52 per share. On March 31,
1999 the net asset value per share was $16.04 and the stock closed that day at
$15.563 per share.
During the semi-annual period the Board of Directors declared two regular
quarterly dividends of $0.26 per share payable December 11, 1998 and March 19,
1999. In addition to the regular dividends, the Board declared capital gains
distributions totaling $0.50 per share, payable on December 11, 1998.
At the end of the semi-annual period the 79 issues in the portfolio had an
average market yield of 7.09%, an average Moody's quality rating of A2, an
average duration of 8.0 years, and an average maturity of 16.1 years. The
distribution of the portfolio maturities and quality was as follows:
<TABLE>
<S> <C>
Maturities
- ---------------------------------------------
0-1 year 2.6%
1-3 years 5.7
3-5 years 8.0
5-10 years 30.2
10-20 years 18.0
20 plus years 35.5
Quality
- ---------------------------------------------
Treasury, Agency and Aaa 29.9%
Aa 6.5
A 19.1
Baa 41.4
Below Baa 3.1
</TABLE>
Short-term U.S. interest rates declined over the past six months as the
Federal Reserve cut its overnight funds target rate in three steps from 5.5% to
4.75%. This policy shift was in response to a contraction in global liquidity
associated with Russia's debt default and hedge fund liquidations. Yield
premiums on corporate and other risky debt increased dramatically in the summer
of 1998, but those premiums have since narrowed as global economic conditions
stabilized. Continued strength in domestic economic activity during the past six
months has reduced investor concerns about global deflation and increased the
inflation premium built into bond market yields. As a result, long-term Treasury
yields have risen by about 80 basis points over the semi-annual period. Strong
economic growth has tightened labor markets, but wage growth remains subdued.
Higher labor productivity in the U.S. and excess productive capacity outside the
U.S. have allowed us to enjoy above trend real growth without an acceleration in
inflation. At present yield levels we believe long-term U.S. interest rates
continue to offer investors adequate compensation for inflation and risk.
For the six-month period ended March 31, 1999, Fort Dearborn produced strong
relative returns for its shareholders. Growth in the net asset value of 1.11%
versus an Investment Grade Bond Index return of -1.06% advanced the market value
of Fort Dearborn to $15 9/16 at March 31, 1999, generating a six-month market
value return of 5.21%. Over the past 12 months, Fort Dearborn provided a net
asset value return of 5.76% and a market value return of 9.21%. The Index
returned 5.30% over the same period. This market
1
<PAGE>
performance reflects the benefits of a lower market value discount of Fort
Dearborn relative to its net asset value. Issue selection within the portfolio
was the main contributor to the relative results over the past twelve months.
STOCK REPURCHASE PLAN:
On July 28, 1988 the Board of Directors of the Company approved a resolution
to repurchase up to 700,000 of its common shares. The Company may repurchase
shares, at a price not in excess of market and at a discount from net asset
value, if and when such repurchases are deemed appropriate and in the
shareholder's best interest. Any repurchases will be made in compliance with
applicable requirements of the federal securities law.
Under such law, the Company is required to give written notice to all
shareholders of its intention to purchase stock within six months of the actual
repurchase of shares. This report is to serve as notice to all shareholders with
respect to any shares repurchased within the next six months pursuant to the
Company's stock repurchase plan.
Unaudited financial statements for the six month period ended March 31,
1999, 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FORT DEARBORN INCOME SECURITIES, INC.
<S> <C> <C>
MARKET VALUE OF INDEX AND SHARE PRICE*
WITH ALL DIVIDENDS/INTEREST REINVESTED
INVESTMENT FORT
GRADE BOND DEARBORN
DATE INDEX
12/31/72 18.17 18.17
03/31/73 18.16 18.17
06/30/73 18.06 17.10
09/30/73 18.41 17.09
12/31/73 18.23 16.74
03/31/74 17.55 13.73
06/30/74 16.61 15.62
09/30/74 16.07 13.40
12/31/74 17.05 16.33
03/31/75 17.83 16.82
06/30/75 18.43 17.61
09/30/75 17.79 16.79
12/31/75 19.39 16.54
03/31/76 20.17 18.45
06/30/76 20.19 18.37
09/30/76 21.28 20.03
12/31/76 22.83 20.26
03/31/77 22.26 20.50
06/30/77 23.08 21.07
09/30/77 23.28 21.49
12/31/77 23.04 20.68
03/31/78 23.00 20.93
06/30/78 22.70 21.00
09/30/78 23.36 20.90
12/31/78 22.84 19.04
03/31/79 23.16 20.31
06/30/79 24.15 21.40
09/30/79 23.61 20.84
12/31/79 21.70 19.25
03/31/80 18.79 17.16
06/30/80 23.31 20.99
09/30/80 20.76 18.99
12/31/80 20.93 19.11
03/31/81 20.69 19.19
06/30/81 20.24 19.51
09/30/81 18.40 19.39
12/31/81 20.51 20.85
03/31/82 21.47 21.83
06/30/82 21.63 22.26
09/30/82 26.21 26.55
12/31/82 29.02 28.83
03/31/83 30.14 29.96
06/30/83 30.55 31.44
09/30/83 30.40 31.01
12/31/83 30.59 31.22
03/31/84 30.09 32.50
06/30/84 28.94 30.21
09/30/84 32.51 32.66
12/31/84 35.48 37.09
03/31/85 35.82 37.34
06/30/85 40.17 43.27
09/30/85 40.92 42.71
12/31/85 45.80 46.79
03/31/86 50.64 53.14
06/30/86 50.88 55.71
09/30/86 51.74 56.95
12/31/86 54.47 57.70
03/31/87 55.37 60.37
06/30/87 53.02 58.78
09/30/87 49.70 55.66
12/31/87 53.50 56.99
03/31/88 55.86 62.51
06/30/88 56.58 63.41
09/30/88 57.95 63.23
12/31/88 58.38 65.30
03/31/89 59.10 63.95
06/30/89 64.57 69.00
09/30/89 64.91 71.79
12/31/89 67.02 73.38
03/31/90 65.82 75.08
06/30/90 68.35 75.50
09/30/90 67.72 74.62
12/31/90 71.21 80.42
03/31/91 74.02 83.65
06/30/91 75.16 85.57
09/30/91 80.14 91.67
12/31/91 84.58 96.45
03/31/92 83.43 93.81
06/30/92 87.02 97.18
09/30/92 91.22 102.91
12/31/92 91.65 101.67
03/31/93 96.61 108.40
06/30/93 100.19 113.71
09/30/93 104.21 117.42
12/31/93 103.37 112.65
03/31/94 98.48 107.51
06/30/94 96.30 106.80
09/30/94 96.42 105.14
12/31/94 97.14 101.57
03/31/95 103.18 107.51
06/30/95 111.98 116.50
09/30/95 114.54 118.69
12/31/95 121.13 126.33
03/31/96 116.32 124.45
06/30/96 116.17 122.62
09/30/96 118.35 129.34
12/31/96 123.00 137.71
03/31/97 120.84 135.62
06/30/97 126.34 142.43
09/30/97 131.91 148.57
12/31/97 136.87 156.83
03/31/98 138.88 160.03
06/30/98 142.78 159.51
09/30/98 147.81 166.11
12/31/98 148.73 178.86
03/31/99 146.24 174.77
Annualized Returns
Since
12 Months Inception
9.21% 9.01%
5.30% 8.27%
Returns are net of fees
*Share price return is impacted by changes in the premium
or
discount to the net asset value (NAV) At March 31, 1999,
the
share price was at a 2.98% discount to NAV
Data through 3/31/99
</TABLE>
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $132,825,701)... $137,261,650
Short-term securities, at cost, which
approximates market........................... 1,599,095
------------
Total portfolio of investments.............. 138,860,745
Receivable for interest on debt securities (Note
1)............................................... 2,343,428
Other assets...................................... 64,742
------------
Total assets................................ 141,268,915
------------
LIABILITIES:
Expenses:
Accrued investment advisory and administrative
fees (Note 6)................................. 161,214
Accrued custodial and transfer agent fees....... 74,650
Accrued professional fees....................... 6,488
Accrued other expenses.......................... 35,156
------------
Total liabilities........................... 277,508
------------
NET ASSETS (equivalent to $16.04 per share for
8,788,865 shares of capital stock outstanding)
(Note 4)......................................... $140,991,407
------------
------------
Analysis of Net Assets:
Shareholder capital (Note 4).................... $135,289,938
Accumulated undistributed net investment
income........................................ 82,453
Accumulated net realized gain on sales of
investments................................... 1,183,067
Unrealized appreciation on investments.......... 4,435,949
------------
Net assets applicable to outstanding shares..... $140,991,407
------------
------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
Investment income:
Interest income earned.................................... $5,057,611
Dividend income earned.................................... 28,375
----------
5,085,986
----------
Expenses:
Investment advisory and administrative (Note 6)........... 336,267
Transfer agent and dividend disbursing agent.............. 49,868
Directors (Note 6)........................................ 37,397
Stockholders reports and annual meeting................... 31,450
Professional fees......................................... 19,509
Franchise taxes........................................... 7,480
Other expenses............................................ 34,220
----------
Total expenses.............................................. 516,191
----------
Net investment income....................................... 4,569,795
----------
Net realized and unrealized gain on investments:
Net realized gain from investment transactions............ 1,119,684
Change in unrealized appreciation......................... (4,031,955)
----------
Total realized and unrealized gain(loss) on investments..... (2,912,271)
----------
Net increase in net assets from operations.................. $1,657,524
----------
----------
</TABLE>
See notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
MARCH 31, 1999 FOR THE YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1998
-------------- ------------------
<S> <C> <C>
From operations:
Net investment income............................... $ 4,569,795 $ 9,231,354
Net realized gain from investment transactions...... 1,119,684 4,803,684
Change in unrealized appreciation of investments.... (4,031,955) 1,461,332
-------------- ------------------
Net increase in net assets from operations.......... 1,657,524 15,496,370
Distributions to shareholders from:
Net investment income............................... (4,570,210) (9,142,812)
Net realized gain................................... (4,394,432) (1,319,020)
-------------- ------------------
Total distributions............................... (8,964,642) (10,461,832)
From capital share transactions: (Note 4)
Net asset value of shares repurchased from
shareholders...................................... -- (69,253)
-------------- ------------------
Net increase (decrease) in net assets............. (7,307,118) 4,965,285
Net Assets:
Beginning of period................................. 148,298,525 143,333,240
-------------- ------------------
End of period (including undistributed net
investment income of $82,453 at March 31, 1999,
and $82,868 at September 30, 1998,
respectively)..................................... $ 140,991,407 $ 148,298,525
-------------- ------------------
-------------- ------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
FINANCIAL HIGHLIGHTS
Financial highlights for each share of capital stock outstanding through each
period:
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
MARCH 31,
(UNAUDITED) YEARS ENDED SEPTEMBER 30,
--------- ---------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 16.87 $ 16.30 $ 15.97 $ 16.50 $ 15.04 $ 17.58
--------- --------- --------- --------- --------- ---------
Net investment income(1)........... 0.52 1.05 1.09 1.19 1.15 1.15
Net realized and unrealized gain
(loss) on investments(2).......... (0.33) 0.71 0.89 (0.56) 1.43 (2.57)
--------- --------- --------- --------- --------- ---------
Total from investment operations... 0.19 1.76 1.98 0.63 2.58 (1.42)
Less distributions from:
Net investment income............ (0.52) (1.04) (1.21) (1.16) (1.12) (1.12)
Net realized gain................ (0.50) (0.15) (0.44) -- -- --
--------- --------- --------- --------- --------- ---------
Total distributions................ (1.02) (1.19) (1.65) (1.16) (1.12) (1.12)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period..... $ 16.04 $ 16.87 $ 16.30 $ 15.97 $ 16.50 $ 15.04
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Market price per share at end of
period............................ $ 15.563 $ 15.750 $ 15.188 $ 14.750 $ 14.625 $ 14.000
Total investment return (market
value)(3)......................... 5.21% 11.81% 14.86% 8.98% 12.88% (10.45)%
Total return (net asset
value)(4)......................... 1.11% 11.07% 13.06% 3.84% 17.71% (5.32)%
Net assets at end of period (in
millions)......................... $ 140.99 $ 148.30 $ 143.33 $ 140.50 $ 145.76 $ 133.44
Ratios of expenses to average net
assets............................ 0.36% 0.71% 0.75% 0.75% 0.69% 0.72%
Ratio of net investment income to
average net assets................ 3.18% 6.29% 6.81% 7.22% 7.34% 7.13%
Portfolio turnover................. 38.5% 63.5% 130.0% 159.5% 126.8% 70.2%
Number of shares outstanding at end
of period (in thousands).......... 8,789 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
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
DEBT SECURITIES--98.8%
/ / MUNICIPAL SECURITIES (5.1%)
New Jersey Economic Development Authority,
Zero Coupon Revenue Bonds,
$25,000,000 due 2/15/18............................... Aaa $ 6,112,103 $ 7,103,225
/ / U.S. GOVERNMENT
SECURITIES (12.9%)
DIRECT OBLIGATIONS--3.7%
U.S. Treasury,
3,430,000 8.00% Bond, due 11/15/21.................. (a) 4,399,179 4,313,225
825,000 6.625% Note, due 7/31/01.................. (a) 850,585 852,844
------------ ------------
5,249,764 5,166,069
------------ ------------
AGENCY--9.2%
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
433 7.50%, due 11/01/99....................... (a) 422 445
159,281 9.00%, due 8/01/04........................ (a) 166,250 166,082
164,482 9.00%, due 3/01/24........................ (a) 170,418 176,301
Federal National Mortgage Association
Guaranteed Mortgage Pass Thru
Certificates,
5,639,165 6.50%, due 10/01/28 Pool #405224.......... (a) 5,652,226 5,614,042
1,017,845 7.00% REMIC, due 6/25/13 Series 1993-106
Class Z.................................. (a) 946,483 1,028,694
1,701,276 7.25%, CMO, due 3/25/23................... (a) 1,439,410 1,697,022
20,201 9.50%, due 4/01/20 Pool #93731............ (a) 19,977 21,636
Government National Mortgage Association
Pass Thru Mortgage Backed Certificates,
1,617,077 6.00%, due 4/01/03 Pool #40185............ (a) 1,634,198 1,642,684
2,213,253 7.50%, due 12/15/22 Pool #780230.......... (a) 2,210,185 2,283,490
59,915 9.00%, due 6/15/18 Pool #253034........... (a) 59,541 63,944
36,001 9.00%, due 8/15/19 Pool #271892........... (a) 36,518 38,421
4,639 9.00%, due 9/15/19 Pool #268553........... (a) 4,706 4,951
76,174 9.00%, due 10/15/19 Pool #283370.......... (a) 75,698 81,878
9,763 9.00%, due 5/15/21 Pool #298198........... (a) 9,702 10,419
------------ ------------
12,425,734 12,830,009
------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
/ / CORPORATE BONDS AND
NOTES (80.8%)
INTERNATIONAL--(27.4%)
$ 2,900,000 Abbey National PLC, 6.70% Note, due
6/29/49.................................. Aa3 $ 2,895,523 $ 2,829,539
2,500,000 Augusta Funding Ltd., 144-A, 7.375% Bond,
due 4/15/13.............................. Aaa 2,436,159 2,667,000
3,550,000 Banque Cent de Tunisie, 8.25% Bond, due
9/19/27.................................. Baa3 3,522,247 3,035,250
2,250,000 Banque Paribas, 6.875% Note, due
3/01/09.................................. A3 2,206,395 2,292,307
1,585,000 British Sky Broadcasting, 6.875% Bond, due
2/23/09.................................. Baa2 1,576,842 1,566,211
2,100,000 Credit Suisse - London, 144-A, 7.90% Note,
due 5/01/07.............................. A3 2,095,102 2,132,025
2,015,000 Den Danske Bank, 144-A, 6.375% Bond, due
6/15/08.................................. A1 2,010,044 2,009,642
2,295,000 Empresa National Electric, 8.125% Bond,
due 2/01/97.............................. Baa1 2,246,320 1,866,982
3,455,000 Interamer Development Bank, 6.80% Note,
due 10/15/25............................. Aaa 3,211,230 3,686,257
2,000,000 Korea Electric Power, 7.00%, due
2/01/27.................................. Baa3 1,856,906 1,872,958
1,000,000 Petroliam Nasional Berhad, 144-A, 7.750%
Note, due 8/15/15........................ Baa3 629,771 879,930
1,500,000 Petroliam Nasional Berhad, 144-A, 7.625%
Note, due 10/15/26....................... Baa3 1,481,100 1,258,296
1,010,000 Ras Laffan Liquified Natural Gas, 144-A,
8.294% Secured Note, due 3/15/14......... Baa3 890,966 944,115
2,000,000 Republic of South Africa, 9.625%
Debenture, due 12/15/99.................. Baa3 1,997,675 2,037,500
2,000,000 Republic of Panama, 8.25% Note, due
4/22/08.................................. Ba1 1,992,683 1,870,000
3,560,000 SE Banken, 144-A, 6.50% Bond, due
6/04/03.................................. Baa1 3,416,511 3,450,263
2,165,000 Sociedad Quimica y Minera de Chiles SA,
144-A, 7.70% Note, due 9/15/06........... Baa1 2,160,822 1,957,643
1,670,000 Southern Investments UK, 6.80% Senior
Note, due 12/01/06....................... Baa1 1,666,804 1,697,431
------------ ------------
38,293,100 38,053,349
------------ ------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
INDUSTRIAL--(21.8%)
$ 1,825,000 Aetna Services, 7.625% Debenture, due
8/15/26.................................. A3 $ 1,807,890 $ 1,847,955
1,000,000 Cendant Corp., 7.75% Note, due 12/01/03... Baa1 998,395 1,025,835
1,500,000 Enron Corp., 6.75% Note, due 8/01/09...... Baa2 1,477,868 1,532,764
1,500,000 Ford Motor Co., 6.625% Note, due
10/01/28................................. A1 1,483,510 1,450,710
2,000,000 Freeport-McMoran C&G, 7.20% Bond, due
11/15/26................................. B3 971,523 1,354,086
2,000,000 Kroger Co., 6.00% Note, due 7/01/00....... Baa3 1,998,359 2,007,682
815,000 Lockheed Martin Corp., 7.70% Note, due
6/15/08.................................. Baa1 814,812 886,123
2,520,000 Monsanto Co., 144-A, 6.60% Bond, due
12/01/28................................. A2 2,516,184 2,416,504
635,000 Noram Energy Corp., 6.375% Bond, due
11/01/03................................. Baa1 633,783 631,842
1,510,000 Pepsi Bottling, 144-A, 7.00%, due
3/01/29.................................. Baa1 1,499,755 1,510,592
3,000,000 Philips Electronics, 7.75% Debenture, due
5/15/25.................................. A3 2,991,103 3,165,930
2,300,000 Rite Aid Corp., 7.70% Debenture, due
2/15/27.................................. Baa1 2,293,963 2,364,377
2,500,000 Tennessee Gas Pipeline, 7.625% Bond, due
4/01/37.................................. Baa2 2,431,381 2,629,360
1,565,000 Time Warner Entertainment, Inc., 8.375%
Debenture, due 3/15/23................... Baa2 1,560,443 1,821,621
2,215,000 Time Warner, Inc., 7.57% Debenture, due
2/01/24.................................. Baa3 2,215,000 2,370,061
1,275,000 Tyco International Group, 7.00% Bond, due
6/15/28.................................. Baa1 1,266,054 1,266,502
995,000 Waste Management, Inc., 7.00%, due
10/01/04................................. Baa3 1,033,370 1,031,273
1,000,000 Vintage Petroleum, Inc., 9.00% Note, due
12/15/05................................. B1 1,045,976 995,000
------------ ------------
29,039,369 30,308,217
------------ ------------
FINANCE--(15.3%)
1,475,000 BankAmerica Corp., 5.875%, due 2/15/09.... Aa2 1,465,098 1,425,818
160,000 Berkshire Hathaway, Inc., 9.75% Debenture,
due 1/15/18.............................. Aaa 159,021 171,261
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
$ 2,820 Centaur Funding Corp., 144-A, 0.000% Bond,
due 4/21/20.............................. Baa3 $ 376,860 $ 535,851
1,500 Centaur Funding Corp., 144-A, 9.08% Bond,
due 4/21/20.............................. Baa3 1,500,000 1,665,000
1,600,000 Citigroup Inc., 6.875%, due 2/15/98....... Aa2 1,585,375 1,537,250
2,290,000 Comed Transitional Funding Trust, Series
1998-1 Class A6, 5.630% Bond, due 6/25/09 Aaa 2,288,888 2,231,101
1,700,000 Lehman Brothers Inc., 7.25% Senior Note,
due 4/15/03.............................. Baa1 1,700,845 1,734,433
1,500,000 Merrill Lynch & Co., 6.875% Bond, due
11/15/18................................. Aa3 1,492,764 1,486,390
1,435,000 MidAmerican Funding LLC, Inc., 144-A,
6.927%, due 3/01/29...................... Baa1 1,435,000 1,428,144
1,800,000 Norwest Asset Securities Corp., Series
96-2, 7.00% Note, due 9/25/11............ AAA 1,814,625 1,822,997
495,541 Residential Asset Securitization Trust,
7.50% Note, due 9/25/27.................. AAA 499,258 499,513
1,000,000 Salomon, Inc., 6.75% Note, due 2/15/03.... Aa3 998,674 1,022,526
5,000,000 Secured Finance Inc., 9.05% Guaranteed
Senior Secured Bond, due 12/15/04........ Aaa 4,989,129 5,694,440
------------ ------------
20,305,537 21,254,724
------------ ------------
COMMUNICATION--(8.9%)
1,270,000 GTE Florida Inc., Series E, 6.86%, due
2/01/28.................................. A2 1,307,329 1,283,364
4,250,000 News America Holdings, Inc., 7.75% Bond,
due 1/20/24.............................. Baa3 3,665,411 4,459,393
800,000 PanAmSat Corp., 6.00% Note, due 1/15/03... Baa2 799,611 785,279
1,715,000 PanAmSat Corp., 144-A, 6.375% Note, due
1/15/08.................................. Baa2 1,707,935 1,636,297
1,500,000 Sprint Capital Corp. 6.875%, due
11/15/28................................. Baa1 1,497,570 1,478,516
425,000 Tele-Communications, Inc., 9.80% Note, due
2/01/12.................................. A2 549,837 556,457
1,780,000 TCI Communications, Inc., 8.75% Note, due
8/01/15.................................. A2 2,199,945 2,175,521
------------ ------------
11,727,638 12,374,827
------------ ------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- ----------- ------- ------------ ------------
<C> <S> <C> <C> <C>
UTILITIES--(3.0%)
$ 2,500,000 Delmarva Power & Light Co., 9.95% Note,
due 12/01/20............................. A3 $ 2,498,153 $ 2,795,000
1,235,000 Pacific Gas & Electric, Series 93-H,
7.05%, due 3/01/24....................... A1 1,344,701 1,286,348
------------ ------------
3,842,854 4,081,348
------------ ------------
TRANSPORTATION--(4.4%)
1,500,000 Delta Airlines, Inc., 10.50% Pass Thru
Certificate, due 4/30/16................. Baa1 1,794,602 1,922,190
1,035,000 Continental Airlines, Inc., 6.90% Pass
Thru Certificate, due 1/02/18............ Aa3 1,035,000 1,053,992
3,000,000 United Airlines, Inc., 7.87% Pass Thru
Certificate, due 1/30/19................. Baa1 3,000,000 3,113,700
------------ ------------
5,829,602 6,089,882
------------ ------------
Total Debt Securities..................... 132,825,701 137,261,650
------------ ------------
SHARES
- -----------
SHORT TERM SECURITIES 1.2%
1,599,095 Brinson Supplementary Trust U.S. Cash
Management Prime Fund.................... 1,599,095 1,599,095
------------ ------------
Total Portfolio of Investments 100%....... $134,424,796 $138,860,745
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(a) Moody's as a matter of policy, does not rate this issue.
N/R Not rated by Moody's Investors Service, Inc. or Standard & Poor's
Corporation.
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,
1999, the value of these securities amounted to $24,491,302 or 17.6% of
the total portfolio of investments.
See Notes to Financial Statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(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.
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 March 31, 1999 for federal income tax purposes, the cost for long and
short-term investments is $134,424,796: the aggregate gross unrealized
appreciation is $6,609,957 and the aggregate gross unrealized depreciation is
$2,174,008; resulting in net unrealized appreciation of investments of
$4,435,949.
2. NET ASSET VALUATIONS
The net asset value of the Company's shares is determined each day the New
York Stock Exchange is open.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(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, 1999 there were 12,000,000 shares of $.01 par value capital
stock authorized, and capital paid in aggregate of $135,289,938. During the six
months ended March 31, 1999 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, 1999 were as follows: debt securities,
$33,486,055 and $32,639,380 respectively; short-term securities, $40,669,969 and
$40,492,917 respectively; United States government debt obligations, $20,745,948
and $24,235,848, 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.
Fort Dearborn Income Securities, Inc. invests in shares of the Brinson
Supplementary Trust U.S. Cash Management Prime Fund ("Supplementary Trust"). The
Supplementary Trust is an investment company managed by the Advisor. The
Supplementary Trust is offered as a cash management option only to mutual funds
and other accounts managed by the Advisor. The Supplementary Trust pays no
management fees.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(UNAUDITED)
MANAGEMENT AND OTHER FEES (CONTINUED)
Distributions from the Supplementary Trust are reflected as interest income on
the statement of operations. Amounts relating to those investments at March 31,
1999 and for the period ended are summarized as follows:
<TABLE>
<CAPTION>
% OF
SALES INTEREST NET
FUND PURCHASE PROCEED INCOME VALUE ASSET
- --------------------------------------------------- ------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Brinson Supplementary Trust U.S. Cash
Management Prime Fund............................ $ 10,871,710 $ 9,272,616 $ 42,629 $ 1,599,095 1.1%
</TABLE>
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 also 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. These securities are valued on the basis of timing and
certainty of cash flows compared to investments with similar durations.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(UNAUDITED)
8. YEAR 2000 COMPLIANCE
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 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 toYear 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.
16
<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, 1999, 67,042 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 11, 1998 49,558 $ 15.95 Open Market
March 19, 1999 17,484 $ 15.89 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 1,031 participants on March 19, 1999. 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 THE PLANS AGENT, EQUISERVE, 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.
17
<PAGE>
REPORT ON ANNUAL MEETING
At the annual meeting of shareholders, held on December 14, 1998,
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
------------- ---------
<C> <S> <C> <C>
R.M. Burridge 7,339,413
C.R. O'Neil 7,337,454
R.S. Peterson 7,325,431
F.K. Reilly 7,337,627
E.M. Roob 7,341,798
</TABLE>
2. Ratification of Accountants, (KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
7,310,246 59,471 70,714 0
</TABLE>
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
DANIEL J. BLUMHARDT
Assistant Secretary & Assistant 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
(1-800-446-2617)
Mail correspondence to:
EquiServe
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Mail stock certificates to:
EquiServe
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
19
<PAGE>
FORT
DEARBORN
INCOME
SECURITIES,
INC.
FORT DEARBORN INCOME SECURITIES, INC.
[NYSE LOGO]
[CHICAGO STOCK EXCHANGE LOGO]
SEMI-ANNUAL REPORT
MARCH 31, 1999
