<PAGE>
DEAR SHAREHOLDER:
This financial report covers the fiscal year ended September 30, 1999, which
is our twenty-seventh fiscal year of operations.
Intermediate and long-term U.S. interest rates moved sharply higher over the
course of the fiscal year. While inflation remained well under control, robust
domestic growth coupled with an exceedingly tight labor market prompted the
Federal Reserve to raise short-term interest rates twice in 1999. The Federal
Reserve appears to be concerned that the tight labor conditions in the U.S. may
translate into higher wage growth and higher inflation at the consumer level.
Over the past year, 10 year Treasury rates increased nearly 1.5%, from 4.4% to
5.9%. Admittedly, the sharp rise in market interest rates during the fiscal year
was a partial normalization from the liquidity infusion during the late summer
of 1998 when global economic uncertainty prevailed. However, inflationary
concerns were the primary driver. Yields on corporate debt rose less, as the
bond markets were willing to substitute interest rate risk for credit risk. This
rise in yields resulted in bond price depreciation in the Fort Dearborn
portfolio. Net asset value per share declined 10.4% during the fiscal year,
while dividend payments from income and capital gains totaled 9.1% of beginning
net asset value.
Net investment income for the year was $1.05 per share and net realized and
unrealized losses on investments totaled $1.27 per share. Net asset value per
share, after dividends of $1.54 per share, declined by $1.76 during the fiscal
year. On September 30, 1999 net asset value per share was $15.11 and the stock
closed that day at a market price of $13.875 per share.
During the fiscal year, the Board of Directors declared four regular
quarterly dividends. Dividends of $.26 per share were payable on December 11,
1998 and on March 19, June 18, and September 17, 1999. In addition, a capital
gains distribution of $0.50 per share was payable on December 11, 1998
No new shares of capital stock were issued in the fiscal year, and no shares
were repurchased. On September 30, 1999, there were 8,788,865 shares of capital
stock outstanding and the net assets applicable to those shares were $132.8
million.
As of September 30, 1999, the Company's high quality long-term bond
portfolio contained 82 issues with an average market yield to maturity of 8.0%,
an average Moody's quality rating of A2, an average duration of 8.0 years and an
average maturity of 17.2 years. The distribution of the portfolio maturities and
the Moodys quality ratings were as follows:
<TABLE>
<S> <C>
Average Maturities
- -----------------------------------------
0-1 year 2.5%
1-3 years 1.1
3-5 years 11.2
5-10 years 27.7
10-20 years 16.7
20 plus years 40.8
-----
100%
Quality
- -----------------------------------------
Treasury, Agency and Aaa 29.5%
Aa 7.6
A 20.6
Baa 37.3
Below Baa 5.0
-----
100%
</TABLE>
1
<PAGE>
Long-term U.S. market interest rates are at their highest levels of the
year. With the issuance of Treasury Inflation Protected Securities (TIPS) a few
years ago, we can estimate the level of inflation that the "market" is
forecasting moving forward. That level, which is now at 2.25%, is remarkably
close to reported and consensus inflation. What that indicates to us is that
investors feel adequately compensated for future inflation uncertainty and
require no additional compensation for the risk of a negative inflationary
surprise. This may be overly optimistic in the near term. Longer term, we do
believe that interest rates can decline to lower "real" levels thus providing
positive price appreciation for Fort Dearborn.
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, 1999, 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
FORT DEARBORN INCOME SECURITIES
MARKET VALUE OF INDEX AND SHARE PRICE (1) WITH ALL
DIVIDENDS/INTEREST REINVESTED
AS OF SEPTEMBER 30, 1999
$ Wealth Index
Investment Fort
Grade Bond Index Dearborn
12/31/1972 18.17 18.17
3/31/1973 18.16 18.17
6/30/1973 18.06 17.10
9/30/1973 18.41 17.09
12/31/1973 18.23 16.74
3/31/1974 17.55 13.73
6/30/1974 16.61 15.62
9/30/1974 16.07 13.40
12/31/1974 17.05 16.33
3/31/1975 17.83 16.82
6/30/1975 18.43 17.61
9/30/1975 17.79 16.79
12/31/1975 19.39 16.54
3/31/1976 20.17 18.45
6/30/1976 20.19 18.37
9/30/1976 21.28 20.03
12/31/1976 22.83 20.26
3/31/1977 22.26 20.50
6/30/1977 23.08 21.07
9/30/1977 23.28 21.49
12/31/1977 23.04 20.68
3/31/1978 23.00 20.93
6/30/1978 22.70 21.00
9/30/1978 23.36 20.90
12/31/1978 22.84 19.04
3/31/1979 23.16 20.31
6/30/1979 24.15 21.40
9/30/1979 23.61 20.84
12/31/1979 21.70 19.25
3/31/1980 18.79 17.16
6/30/1980 23.31 20.99
9/30/1980 20.76 18.99
12/31/1980 20.93 19.11
3/31/1981 20.69 19.19
6/30/1981 20.24 19.51
9/30/1981 18.40 19.39
12/31/1981 20.51 20.85
3/31/1982 21.47 21.83
6/30/1982 21.63 22.26
9/30/1982 26.21 26.55
12/31/1982 29.02 28.83
3/31/1983 30.14 29.96
6/30/1983 30.55 31.44
9/30/1983 30.40 31.01
12/31/1983 30.59 31.22
3/31/1984 30.09 32.50
6/30/1984 28.94 30.21
9/30/1984 32.51 32.66
12/31/1984 35.48 37.09
3/31/1985 35.82 37.34
6/30/1985 40.17 43.27
9/30/1985 40.92 42.71
12/31/1985 45.80 46.79
3/31/1986 50.64 53.14
6/30/1986 50.88 55.71
9/30/1986 51.74 56.95
12/31/1986 54.47 57.70
3/31/1987 55.37 60.37
6/30/1987 53.02 58.78
9/30/1987 49.70 55.66
12/31/1987 53.50 56.99
3/31/1988 55.86 62.51
6/30/1988 56.58 63.41
9/30/1988 57.95 63.23
12/31/1988 58.38 65.30
3/31/1989 59.10 63.95
6/30/1989 64.57 69.00
9/30/1989 64.91 71.79
12/31/1989 67.02 73.38
3/31/1990 65.82 75.08
6/30/1990 68.35 75.50
9/30/1990 67.72 74.62
12/31/1990 71.21 80.42
3/31/1991 74.02 83.65
6/30/1991 75.16 85.57
9/30/1991 80.14 91.67
12/31/1991 84.58 96.45
3/31/1992 83.43 93.81
6/30/1992 87.02 97.18
9/30/1992 91.22 102.91
12/31/1992 91.65 101.67
3/31/1993 96.61 108.40
6/30/1993 100.19 113.71
9/30/1993 104.21 117.42
12/31/1993 103.37 112.65
3/31/1994 98.48 107.51
6/30/1994 96.30 106.80
9/30/1994 96.42 105.14
12/31/1994 97.14 101.57
3/31/1995 103.18 107.51
6/30/1995 111.98 116.50
9/30/1995 114.54 118.69
12/31/1995 121.13 126.33
3/31/1996 116.32 124.45
6/30/1996 116.17 122.62
9/30/1996 118.35 129.34
12/31/1996 123.00 137.71
3/31/1997 120.84 135.62
6/30/1997 126.34 142.43
9/30/1997 131.91 148.57
12/31/1997 136.87 156.83
3/31/1998 138.88 160.03
6/30/1998 142.78 159.51
9/30/1998 147.81 166.11
12/31/1998 148.73 178.86
3/31/1999 146.24 174.77
6/30/1999 142.24 164.31
9/30/1999 142.02 161.53
ANNUALIZED RETURNS
SINCE
12 MONTHS INCEPTION
- -2.76% 8.51%
- -3.92 7.99
Returns are net of fees
(1) Share price return is impacted by changes in the premium
or discount to the net asset value (NAV)
At September 30, 1999, the share price was at a 8.17%
discount to NAV
</TABLE>
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $132,407,708)............ $129,615,422
Short-term securities, at cost, which approximates
market................................................. 924,972
------------
Total portfolio of investments....................... 130,540,394
Receivable for interest on debt securities (Note 1)........ 2,477,956
------------
Total assets......................................... 133,018,350
------------
LIABILITIES:
Expenses:
Accrued investment advisory and administrative fees (Note
6)..................................................... 153,967
Accrued custodial and transfer agent fees................ 10,878
Accrued other expenses................................... 45,462
------------
Total liabilities.................................... 210,307
------------
NET ASSETS (equivalent to $15.11 per share for 8,788,865
shares of capital stock outstanding) (Note 4)............. $132,808,043
============
Analysis of Net Assets:
Shareholder capital (Note 4)............................. $135,289,938
Accumulated undistributed net investment income (Note
3)..................................................... 224,250
Accumulated net realized gain on sales of investments
(Note 3)............................................... 86,141
Net unrealized depreciation on investments............... (2,792,286)
------------
Net assets applicable to outstanding shares.............. $132,808,043
============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
SEPTEMBER 30, 1999
<TABLE>
<S> <C>
Investment income:
Interest income earned................................... $ 10,160,718
Dividend income earned................................... 126,363
------------
Total income earned...................................... 10,287,081
------------
Expenses:
Investment advisory and administrative fees (Note 6)..... 702,209
Transfer agent and dividend disbursing agent fees........ 100,010
Directors fees (Note 6).................................. 75,000
Stockholders reports and annual meeting fees............. 63,072
Professional fees........................................ 39,124
Franchise taxes.......................................... 15,002
Other expenses........................................... 33,315
------------
Total expenses............................................. 1,027,732
------------
Net investment income...................................... 9,259,349
------------
Net realized and unrealized gain (loss) on investments:
Net realized gain from investment transactions........... 45,211
Change in unrealized depreciation........................ (11,260,190)
------------
Total realized and unrealized gain (loss) on investments... (11,214,979)
------------
Net decrease in net assets from operations................. $ (1,955,630)
============
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
From operations:
Net investment income....................... $ 9,259,349 $ 9,231,354
Net realized gain from investment
transactions.............................. 45,211 4,803,684
Change in unrealized appreciation
(depreciation) of investments............. (11,260,190) 1,461,332
------------ ------------
Net increase (decrease) in net assets from
operations................................ (1,955,630) 15,496,370
Distributions to shareholders from:
Net investment income....................... (9,140,420) (9,142,812)
Net realized gain........................... (4,394,432) (1,319,020)
------------ ------------
Total distributions....................... (13,534,852) (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..... (15,490,482) 4,965,285
Net Assets:
Beginning of year........................... 148,298,525 143,333,240
------------ ------------
End of year (including undistributed net
investment income of $224,250 at
September 30, 1999, and $82,868 at
September 30, 1998, respectively) (Note
3)........................................ $132,808,043 $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>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............ $ 16.87 $ 16.30 $ 15.97 $ 16.50 $ 15.04
-------- -------- -------- -------- --------
Net investment income(1)........................ 1.05 1.05 1.09 1.19 1.15
Net realized and unrealized gain (loss) on
investments.................................... (1.27) 0.71 0.89 (0.56) 1.43
-------- -------- -------- -------- --------
Total from investment operations................ (0.22) 1.76 1.98 0.63 2.58
Less distributions from:
Net investment income....................... (1.04) (1.04) (1.21) (1.16) (1.12)
Net realized gain........................... (0.50) (0.15) (0.44) -- --
-------- -------- -------- -------- --------
Total distributions............................. (1.54) (1.19) (1.65) (1.16) (1.12)
-------- -------- -------- -------- --------
Net asset value, end of period.................. $ 15.11 $ 16.87 $ 16.30 $ 15.97 $ 16.50
======== ======== ======== ======== ========
Market price per share at end of period......... $ 13.875 $ 15.750 $ 15.188 $ 14.750 $ 14.625
Total investment return (market value)(2)....... (2.76)% 11.81% 14.86% 8.98% 12.88%
Total return (net asset value)(3)............... (1.48)% 11.07% 13.06% 3.84% 17.71%
Net assets at end of period (in millions)....... $ 132.81 $ 148.30 $ 143.33 $ 140.50 $ 145.76
Ratios of expenses to average net assets........ 0.73% 0.71% 0.75% 0.75% 0.69%
Ratio of net investment income to average net
assets......................................... 6.61% 6.29% 6.81% 7.22% 7.34%
Portfolio turnover.............................. 69.9% 63.5% 130.0% 159.5% 126.8%
Number of shares outstanding at end of period
(in thousands)................................. 8,789 8,789 8,793 8,800 8,833
</TABLE>
- ------------------------
(1) Beginning October 1, 1994, net investment income includes amortization of
discounts and premiums.
(2) 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.
(3) 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, 1999
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- --------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
DEBT SECURITIES--99.3%
/ / MUNICIPAL SECURITIES (5.0%)
New Jersey Economic Development Authority,
Zero Coupon Revenue Bonds,
$25,000,000 due 2/15/18................................ Aaa $ 6,346,120 $ 6,508,100
------------ ------------
/ / U.S. GOVERNMENT
SECURITIES (10.9%)
DIRECT OBLIGATIONS--(2.3%)
U.S. Treasury Bonds,
2,100,000 6.00%, due 2/15/26........................ Aaa 1,992,854 2,002,220
810,000 8.00%, due 11/15/21....................... Aaa 979,063 957,066
------------ ------------
2,971,917 2,959,286
------------ ------------
AGENCY--(8.6%)
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
1,282,383 6.50%, due 3/01/03........................ (a) 1,295,961 1,277,643
114,420 9.00%, due 8/01/04........................ (a) 119,426 118,444
133,410 9.00%, due 3/01/24........................ (a) 138,224 140,319
Federal National Mortgage Association
Guaranteed Mortgage Pass Thru
Certificates,
5,398,274 6.50%, due 10/01/28 Pool #405224.......... (a) 5,410,776 5,179,926
886,473 7.00% REMIC, due 6/25/13 Series 1993-106
Class Z.................................. (a) 824,321 879,283
1,541,845 7.25%, CMO, due 3/25/23 Series 1994-69
Class CA................................. (a) 1,304,519 1,511,008
6,942 9.50%, due 4/01/20 Pool #93731............ (a) 6,865 7,408
Government National Mortgage Association
Pass Thru Mortgage Backed Certificates,
1,930,701 7.50%, due 12/15/22 Pool #780230.......... (a) 1,928,024 1,946,015
41,014 9.00%, due 6/15/18 Pool #253034........... (a) 40,758 43,038
35,702 9.00%, due 8/15/19 Pool #271892........... (a) 36,216 37,464
4,601 9.00%, due 9/15/19 Pool #268553........... (a) 4,667 4,828
75,169 9.00%, due 10/15/19 Pool #283370.......... (a) 74,699 79,151
9,684 9.00%, due 5/15/21 Pool #298198........... (a) 9,623 10,162
------------ ------------
11,194,079 11,234,689
------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- --------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
/ / CORPORATE BONDS AND
NOTES (83.4%)
INTERNATIONAL--(26.4%)
$ 2,900,000 Abbey National PLC, 6.70% Note,
due 6/29/49............................... Aa3 $ 2,895,766 $ 2,639,070
2,500,000 Augusta Funding Ltd., 144-A, 7.375% Bond,
due 4/15/13............................... Aaa 2,438,319 2,506,250
3,550,000 Banque Cent de Tunisie, 8.25% Bond,
due 9/19/27............................... Baa3 3,522,731 2,848,875
2,100,000 Credit Suisse-London, 144-A, 7.90% Note,
due 5/01/07............................... A3 2,095,402 2,006,581
2,295,000 Empresa National Electric, 8.125% Bond,
due 2/01/97............................... Baa1 2,246,605 1,758,658
1,655,000 Government of Malaysia, 8.75% Bond,
due 6/01/09............................... Baa3 1,643,285 1,664,599
3,455,000 Interamerican Development Bank, 6.80% Note,
due 10/15/25.............................. Aaa 3,215,662 3,367,651
2,000,000 Korea Electric Power Corp., 7.00%
Debenture, due 2/01/27.................... Baa3 1,859,398 1,811,316
1,000,000 National Westminster Bank Plc, 7.375% Note,
due 10/01/09.............................. Aa3 996,013 994,417
1,000,000 PDVSA Finance Ltd., Series 1998-1, 6.45%
Bond, due 2/15/04......................... A3 939,815 901,406
Petroliam Nasional Berhad, 144-A, Notes,
1,000,000 7.750%, due 8/15/15........................ Baa3 638,820 850,661
1,500,000 7.625%, due 10/15/26....................... Baa3 1,481,439 1,192,098
1,010,000 Ras Laffan Liquified Natural Gas, 144-A,
8.294% Secured Note, due 3/15/14.......... Baa3 894,377 920,382
2,500,000 Republic of Brazil, 11.625% Bond,
due 4/15/04............................... B2 2,478,719 2,331,250
2,000,000 Republic of Panama, 8.25% Note,
due 4/22/08............................... Ba1 1,993,086 1,730,000
2,000,000 Republic of South Africa, 9.625% Debenture,
due 12/15/99.............................. Baa3 1,998,109 2,005,000
3,560,000 SE Banken, 144-A, 6.50% Bond, due
12/29/49.................................. Baa1 3,433,416 3,363,573
1,670,000 Southern Investments UK, 6.80% Senior Note,
due 12/01/06.............................. Baa1 1,667,012 1,586,233
------------ ------------
36,437,974 34,478,020
------------ ------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- --------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
INDUSTRIAL--(24.8%)
$ 1,825,000 Aetna Services, 7.625% Debenture,
due 8/15/26............................... A3 $ 1,808,203 $ 1,677,376
1,000,000 Cendant Corp., 7.75% Note, due 12/01/03.... Baa1 998,567 1,000,770
1,250,000 Conoco Inc., 6.95% Senior Note,
due 4/15/29............................... A3 1,250,000 1,160,081
1,500,000 Ford Motor Co., 6.625% Note,
due 10/01/28.............................. A1 1,483,788 1,334,660
2,000,000 Freeport-McMoran C&G, 7.20% Senior Note,
due 11/15/26.............................. B3 1,022,062 1,540,000
1,500,000 Kroger Co., 144-A, 7.25% Note,
due 6/01/09............................... Baa3 1,499,081 1,465,060
1,000,000 Lilly Del Mar, 144-A, 7.717% Bond,
due 8/01/29............................... A1 1,000,000 1,005,804
815,000 Lockheed Martin Corp., 7.70% Note,
due 6/15/08............................... Baa2 814,821 817,180
2,520,000 Monsanto Co., 144-A, 6.60% Debenture,
due 12/01/28.............................. A2 2,516,248 2,182,718
635,000 Noram Energy Corp., 6.375% Bond,
due 11/01/03.............................. Baa1 633,915 611,930
1,510,000 Pepsi Bottling Group, Inc., 7.00% Senior
Note, due 3/01/29......................... Baa1 1,499,924 1,391,239
3,000,000 Philips Electronics, 7.75% Debenture,
due 5/15/25............................... A3 2,991,264 2,979,150
2,300,000 Rite Aid Corp., 7.70% Debenture,
due 2/15/27............................... Baa3 2,294,072 1,896,332
1,400,000 Rohm & Haas Co., 144-A, 7.85% Debenture,
due 7/15/29............................... A3 1,457,146 1,422,337
1,400,000 SafeWay, Inc., 6.50% Note, due 11/15/08.... Baa2 1,291,319 1,313,526
1,330,000 Sonat, Inc., 7.625% Note, due 7/15/11...... Baa1 1,316,278 1,320,518
2,500,000 Tennessee Gas Pipeline, 7.625% Bond,
due 4/01/37............................... Baa2 2,432,272 2,372,007
1,565,000 Time Warner Entertainment, Inc., 8.375%
Debenture, due 3/15/23.................... Baa2 1,560,536 1,673,221
2,215,000 Time Warner, Inc., 7.57% Debenture,
due 2/01/24............................... Baa3 2,215,000 2,180,752
1,275,000 Tyco International Group, 7.00% Bond,
due 6/15/28............................... Baa1 1,266,207 1,161,005
1,000,000 United Technology Corp., 7.50% Debenture,
due 9/15/29............................... A2 998,112 1,007,961
995,000 Waste Management, Inc., 7.00% Senior Note,
due 10/01/04.............................. Ba1 1,029,822 924,622
------------ ------------
33,378,637 32,438,249
------------ ------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- --------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
FINANCE--(15.3%)
$ 160,000 Berkshire Hathaway, Inc., 9.75% Debenture,
due 1/15/18............................... Aaa $ 158,985 $ 168,379
2,820 Centaur Funding Corp., 144-A, Bonds,
Zero Coupon due 4/21/20................... A3 376,860 420,603
1,500 9.08%, due 4/21/20......................... A3 1,500,000 1,527,188
2,290,000 Comed Transitional Funding Trust,
Series 1998-1 Class A6, 5.630% Bond,
due 6/25/09............................... Aaa 2,288,888 2,134,165
2,940,000 FMR Corp., 144-A, 7.57% Bond,
due 6/15/29............................... Aa3 2,940,000 2,869,408
1,201,820 GMAC Commercial Mortgage Securities, Inc.,
Series 1998-C2, Class A2, 6.42%, Bond,
due 8/15/08............................... Aaa 1,147,879 1,149,769
1,700,000 Lehman Brothers, Inc., 7.25% Senior Note,
due 4/15/03............................... A3 1,700,748 1,705,129
1,500,000 Merrill Lynch & Co., 6.875% Note,
due 11/15/18.............................. Aa3 1,492,948 1,375,851
1,800,000 Norwest Asset Securities Corp.,
Series 96-2, 7.00% Note, due 9/25/11...... AAA* 1,814,625 1,769,310
296,507 Residential Asset Securitization Trust,
97-A7, 7.50% Note, due 9/25/27............ AAA* 298,731 297,284
1,000,000 Salomon, Inc., 6.75% Senior Note,
due 2/15/03............................... Aa3 998,817 997,547
5,000,000 Secured Finance, Inc., 9.05% Guaranteed
Senior Secured Bond, due 12/15/04......... Aaa 4,989,547 5,542,780
------------ ------------
19,708,028 19,957,413
------------ ------------
COMMUNICATION--(8.8%)
1,270,000 GTE Florida, Inc., Series E, 6.86%
Debenture, due 2/01/28.................... A2 1,306,668 1,174,158
4,250,000 News America Holdings, Inc., 7.75% Bond,
due 1/20/24............................... Baa3 3,675,445 4,023,908
800,000 PanAmSat Corp., 6.00% Note, due 1/15/03.... Baa2 799,662 775,540
1,715,000 PanAmSat Corp., 144-A, 6.375% Note,
due 1/15/08............................... Baa2 1,708,338 1,602,119
1,500,000 Sprint Capital Corp., 6.875% Bond,
due 11/15/28.............................. Baa1 1,497,611 1,367,648
425,000 Tele-Communications, Inc., 9.80% Note,
due 2/01/12............................... A2 544,319 514,491
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
- --------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
$ 1,780,000 TCI Communications, Inc., 8.75% Note,
due 8/01/15............................... A2 $ 2,185,654 $ 1,998,415
------------ ------------
11,717,697 11,456,279
------------ ------------
UTILITIES--(3.7%)
2,500,000 Delmarva Power & Light Co., 9.95% Note,
due 12/01/20.............................. A3 2,498,186 2,737,500
1,235,000 Pacific Gas & Electric Corp., Series 93-H,
7.05% Bond, due 3/01/24................... A1 1,342,415 1,184,021
1,000,000 Public Service Co. of Colorado, 6.875%
Senior Note, due 7/15/09.................. Baa1 992,413 971,248
------------ ------------
4,833,014 4,892,769
------------ ------------
TRANSPORTATION--(4.4%)
1,035,000 Continental Airlines, Inc., 7.056% Pass
Thru Certificate, due 9/15/09............. Aa3 1,035,000 1,002,532
1,500,000 Delta Airlines, Inc., 10.50% Pass Thru
Certificate, due 4/30/16.................. Baa1 1,785,242 1,791,525
3,000,000 United Airlines, Inc., 7.87% Pass Thru
Certificate, due 1/30/19.................. Baa1 3,000,000 2,896,560
------------ ------------
5,820,242 5,690,617
------------ ------------
Total Debt Securities...................... 132,407,708 129,615,422
------------ ------------
<CAPTION>
SHARES
- ---------------------
<C> <S> <C> <C> <C>
SHORT TERM SECURITIES--(0.7%)
924,972 Brinson Supplementary Trust U.S. Cash
Management Prime Fund 924,972 924,972
------------ ------------
Total Portfolio of Investments 100%........ $133,332,680 $130,540,394
============ ============
</TABLE>
- ------------------------
(a) Moody's as a matter of policy, does not rate this issue.
* Standard & Poor's Corporation rating. Security is not rated by Moody's
Investor Service, Inc.
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, 1999, the value of these securities amounted to
$23,334,782 or 17.9% of the total portfolio of investments.
See Notes to Financial Statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 differ for financial reporting and tax purposes as a
result of losses from wash sales.
At September 30, 1999 for federal income tax purposes, the cost of long and
short-term investments is $133,367,425: the aggregate gross unrealized
appreciation is $2,859,251 and the aggregate gross unrealized depreciation is
$5,686,282; resulting in net unrealized depreciation of investments of
$2,827,031.
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)
SEPTEMBER 30, 1999
3. DISTRIBUTIONS
Dividends and distributions payable to shareholders are recorded by the
Company on the record date. Net realized gains from the sale of investments, if
any, are distributed annually.
Net investment income and realized gains and losses for federal income tax
purposes may differ from that reported on the financial statements because of
permanent and temporary book and tax basis differences. Permanent book and tax
differences of $22,453 were reclassified from accumulated net realized gain
(loss) on investments to undistributed net investment income due to gains on
paydown adjustments from mortgage backed securities.
Distributions from net realized gains for book purposes may include
short-term capital gains which are included as ordinary income for tax purposes.
In January, 2000, the Company will provide tax information to shareholders
for the 1999 calendar year.
4. CAPITAL STOCK
At September 30, 1999, 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, 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 year ended September 30, 1999 were as follows: debt securities and preferred
stock, $60,132,948 and $55,472,550, respectively; short-term securities,
$55,885,683 and $56,382,753, respectively; United States government debt
obligations, $35,726,370 and $41,218,834, 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.
The Company 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
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
6. MANAGEMENT AND OTHER FEES (CONTINUED)
accounts managed by the Advisor. The Supplementary Trust pays no management
fees. Distributions from the Supplementary Trust are reflected as interest
income on the statement of operations. Amounts relating to those investments at
September 30, 1999 and for the year ended are summarized as follows:
<TABLE>
<CAPTION>
% OF
COST OF SALES INTEREST NET
FUND PURCHASES PROCEEDS INCOME VALUE ASSETS
- ---- ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Brinson Supplementary Trust U.S. Cash
Management Prime Fund.................. $26,087,424 $25,162,452 $91,949 $924,972 0.7%
</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 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 enhancement that help limit investors
exposure to the underlying 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)
SEPTEMBER 30, 1999
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 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>
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, 1999, 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, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Fort Dearborn Income Securities, Inc. as of September 30, 1999, 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 LLP
Chicago, Illinois
October 26, 1999
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, 1999, 112,395 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
June 18, 1999 22,140 $14.62 Open Market
September 17, 1999 23,213 $14.02 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 1,019 participants on September 17, 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 PLAN'S 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.
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
GREGORY P. SMITH, CFA
Vice President & Portfolio Manager
JOSEPH A. ANDERSON
Secretary & Treasurer
DANIEL J. BLUMHARDT
Assistant Secretary & Assistant Treasurer
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 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]
ANNUAL REPORT
SEPTEMBER 30, 1999
