<PAGE>
OCTOBER 31, 2000
DEAR SHAREHOLDER:
This financial report covers the fiscal year ended September 30, 2000, which
is our twenty-eighth fiscal year of operations.
Short-term and long-term interest rates moved in different directions over
the course of the fiscal year in response to a variety of events. Unrelenting
economic strength motivated the Federal Open Market Committee to raise
short-term interest rates (Federal Funds) 1.25% to their current level of 6.5%.
At the same time, well-behaved inflation numbers and a steady stream of U.S.
Treasury buy-backs of longer-dated Treasury bonds allowed long-term interest
rates to decline modestly. The result was an inverted curve for the better part
of the year. As the fiscal year came to a close, signs of economic moderation
have emerged allowing the Federal Reserve to assume a more neutral position on
interest rates. Yields on corporate debt rose relative to Treasury yields
providing a period of under-performance for corporate bonds.
Net investment income for the year was $1.05 per share and net realized and
unrealized losses on investments totaled $0.06 per share. On September 30, 2000
the net asset value per share was $15.05 and the stock closed that day at
$13.375 per share.
During the fiscal year, the Board of Directors declared four regular
quarterly dividends of $0.26 per share payable on December 10, 1999 and on
March 24, June 16, and September 15, 2000. In addition to the regular dividends,
the Board declared a capital gains distribution of $0.0065 per share, payable on
December 10, 1999.
No new shares of capital stock were issued in the fiscal year, while 13,200
shares were repurchased in the open market at an average discount to net asset
value of 14.27%. On September 30, 2000, there were 8,775,665 shares of capital
stock outstanding and the net assets applicable to those shares were $132.1
million.
As of September 30, 2000, the Company's high quality long-term bond
portfolio contained 75 issues with an average market yield of 8.09%, an average
Moody's quality rating of A1, an average duration of 7.56 years, and an average
maturity of 15.8 years. The distribution of the portfolio maturities and quality
was as follows:
<TABLE>
<S> <C>
Maturities
-----------------------------------------
0-1 year 1.2%
1-3 years 8.7
3-5 years 13.4
5-10 years 22.6
10-20 years 12.6
20 plus years 41.5
Moody's Quality Breakdown
-----------------------------------------
Treasury, Agency and Aaa 37.5%
Aa 4.1
A 24.4
Baa 26.5
Below Baa 7.5
</TABLE>
We believe that long-term interest rates are fairly priced in the context of
a weaker economic picture. While short-term interest rates appear to be too
high, the Fed may be reluctant to lower them until the economic moderation is
confirmed. Additionally, inflationary risks are skewed with the risk of higher
1
<PAGE>
inflation rising. Fed policy will be cognizant of this and keep short-term rates
artificially high. The weak economic note that the fiscal year closed on has
also provided a difficult period for corporate bond spreads. Fears of weak
economic growth have actually permeated the market creating a preference for
higher quality assets. Investors should recognize that current corporate bond
spreads provide adequate compensation for a slower, but positive, economic
growth environment.
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.
Audited financial statements for the year ended September 30, 2000, and a
list of the securities owned on that date are included in this report.
Sincerely,
/s/ Jeffrey J. Diermeier, CFA
Jeffrey J. Diermeier, 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
FORT DEARBORN INCOME SECURITIES
MARKET VALUE OF INDEX AND SHARE PRICE (1) WITH ALL DIVIDENDS/INTEREST REINVESTED
AS OF SEPTEMBER 30, 2000
$ Wealth Index
<TABLE>
<S> <C> <C>
Investment Fort
Grade Bond Index Dearborn
12/31/72 18.17 18.17
3/31/73 18.16 18.17
6/30/73 18.06 17.10
9/30/73 18.41 17.09
12/31/73 18.23 16.74
3/31/74 17.55 13.73
6/30/74 16.61 15.62
9/30/74 16.07 13.40
12/31/74 17.05 16.33
3/31/75 17.83 16.82
6/30/75 18.43 17.61
9/30/75 17.79 16.79
12/31/75 19.39 16.54
3/31/76 20.17 18.45
6/30/76 20.19 18.37
9/30/76 21.28 20.03
12/31/76 22.83 20.26
3/31/77 22.26 20.50
6/30/77 23.08 21.07
9/30/77 23.28 21.49
12/31/77 23.04 20.68
3/31/78 23.00 20.93
6/30/78 22.70 21.00
9/30/78 23.36 20.90
12/31/78 22.84 19.04
3/31/79 23.16 20.31
6/30/79 24.15 21.40
9/30/79 23.61 20.84
12/31/79 21.70 19.25
3/31/80 18.79 17.16
6/30/80 23.31 20.99
9/30/80 20.76 18.99
12/31/80 20.93 19.11
3/31/81 20.69 19.19
6/30/81 20.24 19.51
9/30/81 18.40 19.39
12/31/81 20.51 20.85
3/31/82 21.47 21.83
6/30/82 21.63 22.26
9/30/82 26.21 26.55
12/31/82 29.02 28.83
3/31/83 30.14 29.96
6/30/83 30.55 31.44
9/30/83 30.40 31.01
12/31/83 30.59 31.22
3/31/84 30.09 32.50
6/30/84 28.94 30.21
9/30/84 32.51 32.66
12/31/84 35.48 37.09
3/31/85 35.82 37.34
6/30/85 40.17 43.27
9/30/85 40.92 42.71
12/31/85 45.80 46.79
3/31/86 50.64 53.14
6/30/86 50.88 55.71
9/30/86 51.74 56.95
12/31/86 54.47 57.70
3/31/87 55.37 60.37
6/30/87 53.02 58.78
9/30/87 49.70 55.66
12/31/87 53.50 56.99
3/31/88 55.86 62.51
6/30/88 56.58 63.41
9/30/88 57.95 63.23
12/31/88 58.38 65.30
3/31/89 59.10 63.95
6/30/89 64.57 69.00
9/30/89 64.91 71.79
12/31/89 67.02 73.38
3/31/90 65.82 75.08
6/30/90 68.35 75.50
9/30/90 67.72 74.62
12/31/90 71.21 80.42
3/31/91 74.02 83.65
6/30/91 75.16 85.57
9/30/91 80.14 91.67
12/31/91 84.58 96.45
3/31/92 83.43 93.81
6/30/92 87.02 97.18
9/30/92 91.22 102.91
12/31/92 91.65 101.67
3/31/93 96.61 108.40
6/30/93 100.19 113.71
9/30/93 104.21 117.42
12/31/93 103.37 112.65
3/31/94 98.48 107.51
6/30/94 96.30 106.80
9/30/94 96.42 105.14
12/31/94 97.14 101.57
3/31/95 103.18 107.51
6/30/95 111.98 116.50
9/30/95 114.54 118.69
12/31/95 121.13 126.33
3/31/96 116.32 124.45
6/30/96 116.17 122.62
9/30/96 118.35 129.34
12/31/96 123.00 137.71
3/31/97 120.84 135.62
6/30/97 126.34 142.43
9/30/97 131.91 148.57
12/31/97 136.87 156.83
3/31/98 138.88 160.03
6/30/98 142.78 159.51
9/30/98 147.81 166.11
12/31/98 148.73 178.86
3/31/99 146.24 174.77
6/30/99 142.24 164.31
9/30/99 142.02 161.53
12/31/99 140.99 145.64
3/31/00 143.82 157.67
6/30/00 144.71 164.57
9/30/00 149.23 168.54
</TABLE>
<TABLE>
<S> <C> <C>
ANNUALIZED RETURNS
SINCE
12 MONTHS INCEPTION
Fort Dearborn 4.34% 8.36%
Investment Grade Bond Index 5.07 7.88
</TABLE>
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, 2000, the
share price was at a 11.13% discount to NAV
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
<TABLE>
<S> <C>
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $130,339,634)............ $128,243,609
Short-term securities, at cost, which approximates
market................................................. 1,550,387
------------
Total portfolio of investments....................... 129,793,996
Receivable for interest on debt securities (Note 1)...... 2,515,129
------------
Total assets......................................... 132,309,125
------------
LIABILITIES:
Expenses:
Accrued investment advisory and administrative fees (Note
6)..................................................... 151,878
Accrued custodial and transfer agent fees................ 9,671
Accrued other expenses................................... 58,950
------------
Total liabilities.................................... 220,499
------------
NET ASSETS (equivalent to $15.05 per share for 8,775,665
shares of capital stock outstanding) (Note 4)............. $132,088,626
============
Analysis of Net Assets:
Shareholder capital (Note 4)............................. $135,120,133
Accumulated undistributed net investment income (Note
3)..................................................... 278,670
Accumulated net realized loss on sales of investments
(Note 3)............................................... (1,214,152)
Unrealized depreciation on investments................... (2,096,025)
------------
Net assets applicable to outstanding shares.............. $132,088,626
============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
SEPTEMBER 30, 2000
<TABLE>
<S> <C>
Investment income:
Interest income earned.................................... $10,026,741
Dividend income earned.................................... 136,200
-----------
Total income earned....................................... 10,162,941
-----------
Expenses:
Investment advisory and administrative fees (Note 6)...... 660,368
Transfer agent and dividend disbursing agent fees......... 90,115
Directors Fees (Note 6)................................... 75,749
Stockholders reports and annual meeting fees.............. 48,155
Professional fees......................................... 41,251
Franchise taxes........................................... 15,042
Other expenses............................................ 42,846
-----------
Total expenses.............................................. 973,526
-----------
Net investment income....................................... 9,189,415
-----------
Net realized and unrealized gain (loss) on investments:
Net realized loss from investment transactions............ (1,247,286)
Change in unrealized appreciation......................... 696,261
-----------
Total realized and unrealized gain(loss) on investments..... (551,025)
-----------
Net increase in net assets from operations.................. $ 8,638,390
===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------- -------------------
<S> <C> <C>
From operations:
Net investment income................. $ 9,189,415 $ 9,259,349
Net realized gain (loss) from
investment transactions............. (1,247,286) 45,211
Change in unrealized appreciation
(depreciation) of investments....... 696,261 (11,260,190)
------------ ------------
Net increase (decrease) in net assets
from operations..................... 8,638,390 (1,955,630)
Distributions to shareholders from:
Net investment income................. (9,130,884) (9,140,420)
Net realized gain..................... (57,118) (4,394,432)
------------ ------------
Total distributions................. (9,188,002) (13,534,852)
From capital share transactions: (Note
4)
Net asset value of shares repurchased
from shareholders................... (169,805) --
------------ ------------
Net decrease in net assets.......... (719,417) (15,490,482)
Net Assets:
Beginning of period................... 132,808,043 148,298,525
------------ ------------
End of period (including undistributed
net investment income of $278,670 at
September 30, 2000, and $224,250 at
September 30, 1999, respectively)
(Note 3)............................ $ 132,088,626 $ 132,808,043
============ ============
</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,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............ $ 15.11 $ 16.87 $ 16.30 $ 15.97 $ 16.50
-------- -------- -------- -------- --------
Net investment income(1)........................ 1.05 1.05 1.05 1.09 1.19
Net realized and unrealized gain (loss) on
investments.................................... (0.06) (1.27) 0.71 0.89 (0.56)
-------- -------- -------- -------- --------
Total from investment operations................ 0.99 (0.22) 1.76 1.98 0.63
Less distributions from:
Net investment income....................... (1.04) (1.04) (1.04) (1.21) (1.16)
Net realized gain........................... (0.01) (0.50) (0.15) (0.44) --
-------- -------- -------- -------- --------
Total distributions............................. (1.05) (1.54) (1.19) (1.65) (1.16)
-------- -------- -------- -------- --------
Net asset value, end of period.................. $ 15.05 $ 15.11 $ 16.87 $ 16.30 $ 15.97
======== ======== ======== ======== ========
Market price per share at end of period......... $ 13.375 $ 13.875 $ 15.750 $ 15.188 $ 14.750
Total investment return (market value)(2)....... 4.34% (2.76)% 11.81% 14.86% 8.98%
Total return (net asset value)(3)............... 6.77% (1.48)% 11.07% 13.06% 3.84%
Net assets at end of period (in millions)....... $ 132.09 $ 132.81 $ 148.30 $ 143.33 $ 140.50
Ratios of expenses to average net assets........ 0.74% 0.73% 0.71% 0.75% 0.75%
Ratio of net investment income to average net
assets......................................... 7.01% 6.61% 6.29% 6.81% 7.22%
Portfolio turnover.............................. 73.8% 69.9% 63.5% 130.0% 159.5%
Number of shares outstanding at end of period
(in thousands)................................. 8,776 8,789 8,789 8,793 8,800
</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, 2000
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
DEBT SECURITIES--98.8%
/ / MUNICIPAL SECURITIES (5.3%)
New Jersey Economic Development Authority,
$25,000,000 Zero Coupon Revenue Bond, due 2/15/18...... Aaa $ 6,836,977 $ 6,930,250
------------ ------------
/ / U.S. GOVERNMENT
SECURITIES (17.7%)
DIRECT OBLIGATIONS--(8.8%)
U.S. Treasury Bond,
470,000 8.00%, due 11/15/21....................... Aaa 574,396 574,134
U.S. Treasury Notes,
1,515,000 5.625%, due 5/15/08....................... Aaa 1,479,621 1,486,121
4,650,000 6.625%, due 5/31/02....................... Aaa 4,669,665 4,689,237
4,330,000 6.625%, due 2/15/27....................... Aaa 4,646,588 4,641,219
------------ ------------
11,370,270 11,390,711
------------ ------------
AGENCY--(8.9%)
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
1,040,639 6.50%, due 3/01/03 Pool #G4018............ (a) 1,051,657 1,031,124
49,187 9.00%, due 8/01/04 Pool #503997........... (a) 51,338 50,491
143,834 9.00%, due 7/01/30 Pool #C40149........... (a) 148,374 148,751
Federal National Mortgage Association,
Guaranteed Mortgage Pass Thru
Certificates,
5,034,737 6.50%, due 10/01/28 Pool #405224.......... (a) 5,046,397 4,838,050
886,473 7.00%, REMIC, due 6/25/13 Series 1993-106
Class Z.................................. (a) 824,321 870,142
1,530,482 7.25%, CMO, due 3/25/23 Series 1994-69
Class CA................................. (a) 1,294,905 1,505,554
Government National Mortgage Association,
Pass Thru Mortgage Backed Certificates
1,669,836 7.50%, due 12/15/22 Pool #780230.......... (a) 1,667,522 1,682,574
1,450,435 6.50%, due 5/15/29 Pool #781029........... (a) 1,338,253 1,397,675
------------ ------------
11,422,767 11,524,361
------------ ------------
22,793,037 22,915,072
------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
/ / CORPORATE BONDS AND
NOTES (75.8%)
INDUSTRIAL--(21.2%)
$ 2,635,000 Burlington Resources, 7.375% Debenture, due
3/01/29................................... A3 $ 2,424,925 $ 2,504,425
1,000,000 Cendant Corp., 7.75% Note, due 12/01/03.... Baa1 998,280 978,396
330,000 Centex Corp., 9.75% Note, due 6/15/05...... Baa2 329,993 340,875
1,300,000 Comdisco, Inc., 9.50% Senior Note, due
8/15/03................................... Baa1 1,297,101 1,310,165
1,250,000 Conoco Inc., 6.95% Senior Note, due
4/15/29................................... A3 1,250,000 1,153,660
1,500,000 Ford Motor Co., 6.625% Note, due
10/01/28.................................. A1 1,483,230 1,264,744
1,500,000 Fred Meyer, Inc., 7.375%, due 3/01/05...... Baa3 1,471,098 1,483,902
2,000,000 Freeport-McMoRan C&G, Inc., 7.20% Senior
Note, due 11/15/26........................ B3 1,001,309 1,400,000
1,000,000 Lilly Del Mar, 144-A, 7.17% Step Bond, due
08/01/29.................................. A1 1,000,000 1,005,921
1,000,000 Lockheed Martin Corp., 8.50% Note, due
12/01/29.................................. Baa3 984,777 1,056,931
1,835,000 Noble Affiliates, Inc., 8.00% Senior Note,
due 4/01/27............................... Baa2 1,761,875 1,715,545
2,520,000 Pharmacia Corp., 6.60% Debenture, due
12/01/28.................................. A1 2,516,323 2,212,764
3,000,000 Philips Electronics, 7.75% Debenture, due
5/15/25................................... A3 2,990,354 2,836,917
2,300,000 Rite Aid Corp., 7.70% Debenture, due
2/15/27................................... Caa1 2,293,468 759,000
1,000,000 Target Corp., 7.50% Note, due 8/15/10...... A2 999,560 1,000,243
2,500,000 Tennessee Gas Pipeline, 7.625% Bond, due
4/01/37................................... Baa2 2,428,075 2,314,582
2,215,000 Time Warner Cos., Inc., 7.57% Debenture,
due 2/01/24............................... Ba1 2,215,000 2,121,330
1,275,000 Tyco International Group, 7.00% Bond, due
6/15/28................................... Baa1 1,265,807 1,125,309
995,000 Waste Management, Inc., 7.00% Senior Note,
due 10/01/04.............................. Ba1 1,024,591 949,864
------------ ------------
29,735,766 27,534,573
------------ ------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
INTERNATIONAL--(20.8%)
$ 2,500,000 Augusta Funding Ltd., 144-A 7.375% Bond,
due 4/15/13............................... Aaa $ 2,426,113 $ 2,495,750
2,100,000 Credit Suisse-London, 144-A, 7.90% Note,
due 5/29/49............................... A2 2,093,978 1,991,567
1,295,000 Empresa National Electric, 8.125% Bond, due
2/01/97................................... Baa1 1,235,350 1,034,424
3,455,000 Interamerican Development Bank, 6.80% Note,
due 10/15/25.............................. Aaa 3,194,078 3,314,426
2,000,000 Korea Electric Power Corp., 7.00%
Debenture, due 2/01/27.................... Baa3 1,864,326 1,857,960
1,500,000 Petroliam Nasional Berhad, 144-A, 7.625%
Note, due 10/15/26........................ Baa3 1,479,516 1,318,188
1,010,000 Ras Laffan Liquified Natural Gas, 144-A,
8.294% Secured Note, due 3/15/14.......... Baa3 902,441 959,500
2,500,000 Republic of Brazil, 11.625% Bond, due
4/15/04................................... B2 2,476,750 2,582,500
2,000,000 Republic of Panama, 8.25% Note, due
4/22/08................................... Ba1 1,991,940 1,852,000
2,415,000 Royal Bank Scotland, 9.118%, due 3/31/49... A1 2,456,988 2,535,835
3,560,000 Skandinaviska Enskilda Banken, 144-A, 6.50%
Step Bond, due 12/29/49................... Baa1 3,399,835 3,413,278
1,410,000 State of Israel, 7.75% Bond, due 3/15/10... A2 1,403,317 1,417,012
1,000,000 State of Qatar, 144-A, 9.75% Bond, due
6/15/30................................... Baa2 979,680 1,025,000
1,200,000 United Mexican States, 9.875% Note, due
2/01/10................................... Baa3 1,165,658 1,275,600
------------ ------------
27,069,970 27,073,040
------------ ------------
FINANCE--(19.0%)
950,000 Bank of America, 7.80% Note, due 2/15/10... Aa3 939,949 977,757
1,655,000 Barclays Bank PLC, 144-A 8.55% Bond, due
9/15/49................................... A+ * 1,652,733 1,662,615
160,000 Berkshire Hathaway, Inc., 9.75% Debenture,
due 1/15/18............................... Aa1 159,183 166,416
550,000 Capital One Bank, 8.25% Senior Note, due
6/15/05................................... Baa2 547,921 558,151
Centaur Funding Corp., 144-A, Bonds,
2,820 Zero Coupon, due 4/21/20.................. A3 376,860 475,875
1,500 9.08%, due 4/21/20........................ A3 1,500,000 1,521,094
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
$ 2,290,000 Comed Transitional Funding Trust,
Series 1998-1 Class A6, 5.630%, due
06/25/09.................................. Aaa $ 2,288,888 $ 2,151,340
2,940,000 FMR Corp., 144-A, 7.57% Bond, due
6/15/29................................... Aa3 2,940,000 2,847,778
1,090,000 First Union Lehman Brothers Commercial
Mortgage Trust II, Series 1997-C2, 6.60%
Bond, due 5/18/07......................... Aaa 1,030,220 1,073,568
1,201,820 GMAC Commercial Mortgage Securities, Inc.,
Series 1998-C2 Class A2, 6.42% Bond, due
8/15/08................................... Aaa 1,151,420 1,143,460
610,000 Household Finance Corp., 8.00% Note, due
5/09/05................................... A2 609,457 629,874
1,500,000 HSBC Capital Funding LP, Series 2, 144-A,
10.176% Guaranteed Note, due 6/30/30...... A1 1,500,000 1,657,845
1,500,000 Merrill Lynch & Co., 6.875% Note, due
11/15/18.................................. Aa3 1,492,635 1,370,270
1,800,000 Norwest Asset Securities Corp.,
Series 96-2, 7.00% Note, due 9/25/11...... AAA* 1,814,625 1,760,400
1,175,000 QWEST Capital Funding, 144-A, 7.90% Note,
due 8/15/10............................... Baa1 1,172,474 1,198,130
31,729 Residential Asset Securitization Trust,
Series 97-A7 Class A1, 7.50% Note, due
9/25/27................................... AAA* 31,967 31,579
5,000,000 Secured Finance Inc., 9.05% Guaranteed
Senior Secured Bond, due 12/15/04......... Aaa 4,987,500 5,392,455
------------ ------------
24,195,832 24,618,607
------------ ------------
UTILITIES - ELECTRIC--(6.0%)
1,400,000 Consolidated Edison, 7.50% Debenture, due
9/01/10................................... A1 1,389,332 1,386,972
2,500,000 Delmarva Power & Light Co., 9.95% Note, due
12/01/20.................................. A3 2,498,025 2,659,500
1,600,000 NSTAR, 8.00% Note, due 2/15/10............. A2 1,593,488 1,611,371
1,235,000 Pacific Gas & Electric Corp., Series 93-H,
7.05% Bond, due 3/01/24................... A1 1,342,082 1,110,550
1,000,000 Sempra Energy, 7.95% Note, due 3/01/10..... A2 997,380 997,434
------------ ------------
7,820,307 7,765,827
------------ ------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
MOODY'S
FACE VALUE RATING COST VALUE
--------------------- -------- ------------ ------------
<C> <S> <C> <C> <C>
COMMUNICATION--(5.3%)
$ 4,000,000 News America Holdings, 7.75% Bond, due
12/01/45.................................. Baa3 $ 3,296,004 $ 3,509,308
PanAmSat Corp., Notes,
800,000 6.00%, due 1/15/03........................ Baa2 799,488 768,097
1,500,000 6.375%, due 1/15/08....................... Baa2 1,494,292 1,349,103
1,500,000 Sprint Capital Corp., 6.875% Bond, due
11/15/28.................................. Baa1 1,497,540 1,279,942
------------ ------------
7,087,324 6,906,450
------------ ------------
TRANSPORTATION--(3.5%)
1,500,000 Delta Airlines, Inc., 10.50% Pass Thru
Certificate, due 4/30/16.................. Baa1 1,800,421 1,645,380
3,000,000 United Airlines, Inc., 7.87% Pass Thru
Certificate, due 1/30/19.................. Baa1 3,000,000 2,854,410
------------ ------------
4,800,421 4,499,790
------------ ------------
Total Debt Securities...................... 130,339,634 128,243,609
------------ ------------
<CAPTION>
SHARES
---------------------
<C> <S> <C> <C> <C>
SHORT TERM SECURITIES--(1.2%)
1,550,387 Brinson Supplementary Trust U.S. Cash
Management Prime Fund..................... 1,550,387 1,550,387
------------ ------------
Total Investments 100%..................... $131,890,021 $129,793,996
============ ============
</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 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, 2000, the value of these securities amounted to
$21,572,541 or 16.6% of the total portfolio of investments.
See Notes to Financial Statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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.
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 along with losses from
wash sales.
At September 30, 2000 for federal income tax purposes, the cost for long and
short-term investments is $131,898,530, the aggregate gross unrealized
appreciation is $2,882,107, and the aggregate gross unrealized depreciation is
$4,986,641; resulting in net unrealized depreciation of investments of
$2,104,534.
2. NET ASSET VALUATIONS
The net asset value of the Company's shares is determined each week as of
the close of business on the last day on which the New York Stock Exchange is
open, on the last business day of each month, on the
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 2000
2. NET ASSET VALUATIONS (CONTINUED)
eighth trading day prior to the dividend payment date and on the last business
day of each calendar quarter, if such days are other than the last business day
of the week.
3. DISTRIBUTIONS
Dividends and distributions payable to shareholders are recorded by the
Company on the record date. Net realized gains from the sale of investments, if
any, are distributed annually. Net investment income and realized gains and
losses for federal income tax purposes may differ from that reported on the
financial statements because of permanent and temporary book and tax basis
differences. Permanent book and tax differences of ($4,111) were reclassified
from accumulated net realized gain (loss) on investments to undistributed net
investment income due to loss 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 2001, the Company will provide tax information to shareholders
for the 2000 calendar year.
4. CAPITAL STOCK
At September 30, 2000, there were 12,000,000 shares of $.01 par value
capital stock authorized, and shareholder capital of $135,120,133. During the
year ended September 30, 2000, no new shares were issued as part of the dividend
reinvestment plan and 13,200 shares were repurchased in the open market at a
weighted average discount to Net Asset Value of 14.27% 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, 2000, were as follows: debt securities and
preferred stock, $38,647,505 and $48,136,592, respectively; short-term
securities, $29,099,408 and $26,821,271, respectively; United States government
debt obligations, $55,722,701 and $47,808,457, 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.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 2000
6. MANAGEMENT AND OTHER FEES (CONTINUED)
Fort Dearborn Income Securities, Inc. invest 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. Distributions from the Supplementary Trust are reflected as
interest income on the statement of operations. Amounts relating to those
investments at September 30, 2000 and for the period ended are summarized as
follows:
<TABLE>
<CAPTION>
% OF
COST OF SALES INTEREST NET
FUND PURCHASE PROCEEDS INCOME VALUE ASSETS
---- ----------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Brinson Supplementary Trust U.S. Cash
Management Prime Fund................ $27,446,676 $26,821,271 $119,552 $1,550,387 1.2%
</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.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 2000
7. MORTGAGE BACKED SECURITIES AND OTHER INVESTMENTS (CONTINUED)
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.
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, 2000, 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 auditing standards generally
accepted in the United States of America. 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, 2000, 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, 2000, 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 accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Chicago, Illinois
October 26, 2000
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, 2000, 97,092 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 10, 1999 26,263 $12.56 Open Market
March 24, 2000 24,419 $12.90 Open Market
June 17, 2000 23,278 $13.52 Open Market
September 15, 2000 23,132 $13.42 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 936 participants on September 15, 2000. 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
FRANK K. REILLY, CFA
Director
EDWARD M. ROOB
Director
OFFICERS
JEFFREY J. DIERMEIER, CFA
President
GREGORY P. SMITH, CFA
Vice President & Portfolio Manager
JOSEPH A. ANDERSON
Secretary & Treasurer
ROBERT M. FASCIA
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, 2000
