UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-02319
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FORT DEARBORN INCOME SECURITIES, INC.
------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
One North Wacker Drive, Chicago, Illinois 60606
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(Address of principal executive offices) (Zip code)
Amy R. Doberman
UBS Global Asset Management (Americas) Inc.
One North Wacker Drive
Chicago, Illinois 60606
(Name and address of agent for service)
Registrant's telephone number, including area
code: 312-525-7100
Date of fiscal year end: September 30, 2003
Date of reporting period: March 31, 2003
ITEM 1. REPORTS TO STOCKHOLDERS.
FORT DEARBORN INCOME SECURITIES, INC.
[LOGO] FTD [LOGO] THE
LISTED CHICAGO
NYSE STOCK EXCHANGE
FORT
DEARBORN
INCOME
SECURITIES,
INC.
SEMI-ANNUAL REPORT
MARCH 31, 2003
APRIL 14, 2003
DEAR SHAREHOLDER:
This financial report covers the six-month period ended March 31, 2003,
which is our thirty-first fiscal year of operations.
Daily headlines brought an ever-changing picture of what the situation in
Iraq would mean for the United States and the rest of the developed world. This
cloud of uncertainty weighed heavily on consumer and business confidence.
Forward-looking economic indicators amplified negative sentiment and provided
further worrisome headlines for markets to digest. In this environment, U.S.
fixed income continued to enjoy increased demand as a flight to quality made it
more attractive than riskier assets.
By the tone of headlines and market sentiment, one would think that bond
yields would have fallen to historically low levels. However, price history
since September of last year shows a market that is very much range bound. We
have seen 30-year Treasury yields at 4.9% in every one of the past six months,
and yields are currently trading above that level. High quality spreads have
also been remarkably stable, which indicates that the flight to quality has not
only benefited Treasuries, but also the mortgage, agency and high-quality
corporate markets. We continue to be defensive on duration as rates across the
entire yield curve are trading below our estimates of fair value. However, there
have been several market developments that have provided us with the opportunity
to add value as we wait for bond yields to normalize.
In October 2002, the difference between the nominal yield of the 10-year
Treasury notes and the real yield of Treasury inflation-protected securities
(TIPS) was roughly 1.5%. This yield difference, which is referred to as the
break-even inflation (BEI), represents the level of inflation over the life of
the securities that would make investors indifferent to owning one versus the
other. At this level, our valuation indicated that there was significant value
in the sector and we maintained positive exposure relative to our benchmark.
Over the remainder of 2002, talk of deflation faded and fear of higher oil
prices increased. By February 2003, this resulted in BEI increasing to nearly
2.0%. At this level, we reduced our exposure to the sector and positioned the
portfolio back into nominal Treasury notes.
Another interesting development in bond markets involves the lower end of
the credit quality spectrum. As 2002 produced more corporate downgrades than any
other period in recent history, market participants sought to quantify the risk
of corporate debt and to build models that might predict future credit
deterioration. The best of these models use a Merton methodology to relate a
company's credit spreads to its equity price volatility. This framework has
intuitive appeal and was generally accepted as a good way to monitor investment
grade credit.
Looking back to 2002, the theory appears sound as one could observe a
relationship between aggregated credit spreads and the general level and
volatility of the equity market. However, 2003 has yielded very different
results. Corporate bond spreads have improved and stabilized while equity prices
have declined and remain volatile. This breakdown does not come as a surprise to
us, as we believe investment grade corporate bonds are much more sensitive to
expected changes in liquidity and leverage than to equity volatility. All else
equal, an increase in leverage, particularly in the short-term, tends to cause
bond yields to increase while equity price direction is more uncertain.
1
At the end of 2002, we did extensive back testing on what, in our opinion,
was the best of the Merton models. Our results indicated that this
representative model had very little predictive power. Based on what we
considered poor results for these models, we have chosen to continue with our
long-standing process of utilizing bottom-up credit analysis to look at
investment grade corporate debt.
Following a stellar fourth quarter of 2002, corporate debt was again the
best performing investment grade sector in the first quarter of 2003. We
attribute the resiliency in corporate bond spreads to balance sheet repair
(de-leveraging) and strong investor demand. The more volatile BBB sector led
performance, tightening by 38 basis points relative to Treasuries. Adding
exposure to the corporate bond market over the last six months was timely. We
will continue to increase our credit exposure as good lending opportunities
arise.
Net investment income for the six months was $0.42 per share and net
realized and unrealized gains on investments totaled $0.41 per share. On March
31, 2003, the net asset value per share was $16.05 and the stock closed that day
at $15.00 per share.
During the period the Board of Directors declared regular quarterly
dividends of $0.23 per share and $0.22 per share payable on December 13, 2002
and March 22, 2003, respectively. In addition to regular dividends, the Board
declared a capital gains distribution of $0.04 per share payable on December 13,
2003.
At the end of the period, the 160 issues in the portfolio had an average
market yield of 5.02%, an average Moody's quality rating of A1, an average
duration of 7.2, and an average maturity of 15.0 years. The distribution of the
portfolio expected maturities and quality was as follows:
Maturities
-----------------------------------------
0-1 year 1.9%
1-3 years 11.3
3-5 years 1.7
5-10 years 52.4
10-20 years 10.3
20 plus years 22.4
------
100.0%
Quality
-----------------------------------------
Treasury, Agency and Aaa 37.7%
Aa 11.9
A 22.9
Baa 25.6
Below Baa 1.9
------
100.0%
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
2
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,
2003, and a list of the securities owned on that date are included in this
report.
Sincerely,
/s/ Jeffrey J. Diermeier
Jeffrey J. Diermeier, CFA
PRESIDENT
3
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, Inc.
MARKET VALUE OF INDEX AND SHARE PRICE(1) WITH ALL DIVIDENDS REINVESTED AS OF
MARCH 31, 2003
ANNUALIZED RETURNS
12 MONTHS SINCE INCEPTION
Fort Dearborn 8.88% 8.68%
Investment Grade Bond Index 14.68% 8.13%
$ WEALTH INDEX
FORT INVESTMENT
DEARBORN GRADE BOND INDEX
12/31/72 18.17 18.17
3/31/73 18.17 18.16
6/30/73 17.10 18.06
9/30/73 17.09 18.41
12/31/73 16.74 18.23
3/31/74 13.73 17.55
6/30/74 15.62 16.61
9/30/74 13.40 16.07
12/31/74 16.33 17.05
3/31/75 16.82 17.83
6/30/75 17.61 18.43
9/30/75 16.79 17.79
12/31/75 16.54 19.39
3/31/76 18.45 20.17
6/30/76 18.37 20.19
9/30/76 20.03 21.28
12/31/76 20.26 22.83
3/31/77 20.50 22.26
6/30/77 21.07 23.08
9/30/77 21.49 23.28
12/31/77 20.68 23.04
3/31/78 20.93 23.00
6/30/78 21.00 22.70
9/30/78 20.90 23.36
12/31/78 19.04 22.84
3/31/79 20.31 23.16
6/30/79 21.40 24.15
9/30/79 20.84 23.61
12/31/79 19.25 21.70
3/31/80 17.16 18.79
6/30/80 20.99 23.31
9/30/80 18.99 20.76
12/31/80 19.11 20.93
3/31/81 19.19 20.69
6/30/81 19.51 20.24
9/30/81 19.39 18.40
12/31/81 20.85 20.51
3/31/82 21.83 21.47
6/30/82 22.26 21.63
9/30/82 26.55 26.21
12/31/82 28.83 29.02
3/31/83 29.96 30.14
6/30/83 31.44 30.55
9/30/83 31.01 30.40
12/31/83 31.22 30.59
3/31/84 32.50 30.09
6/30/84 30.21 28.94
9/30/84 32.66 32.51
12/31/84 37.09 35.48
3/31/85 37.34 35.82
6/30/85 43.27 40.17
9/30/85 42.71 40.92
12/31/85 46.79 45.80
3/31/86 53.14 50.64
6/30/86 55.71 50.88
9/30/86 56.95 51.74
12/31/86 57.70 54.47
3/31/87 60.37 55.37
6/30/87 58.78 53.02
9/30/87 55.66 49.70
12/31/87 56.99 53.50
3/31/88 62.51 55.86
6/30/88 63.41 56.58
9/30/88 63.23 57.95
12/31/88 65.30 58.38
3/31/89 63.95 59.10
6/30/89 69.00 64.57
9/30/89 71.79 64.91
12/31/89 73.38 67.02
3/31/90 75.08 65.82
6/30/90 75.50 68.35
9/30/90 74.62 67.72
12/31/90 80.42 71.21
3/31/91 83.65 74.02
6/30/91 85.57 75.16
9/30/91 91.67 80.14
12/31/91 96.45 84.58
3/31/92 93.81 83.43
6/30/92 97.18 87.02
9/30/92 102.91 91.22
12/31/92 101.67 91.65
3/31/93 108.40 96.61
6/30/93 113.71 100.19
9/30/93 117.42 104.21
12/31/93 112.65 103.37
3/31/94 107.51 98.48
6/30/94 106.80 96.30
9/30/94 105.14 96.42
12/31/94 101.57 97.14
3/31/95 107.51 103.18
6/30/95 116.50 111.98
9/30/95 118.69 114.54
12/31/95 126.33 121.13
3/31/96 124.45 116.32
6/30/96 122.62 116.17
9/30/96 129.34 118.35
12/31/96 137.71 123.00
3/31/97 135.62 120.84
6/30/97 142.43 126.34
9/30/97 148.57 131.91
12/31/97 156.83 136.87
3/31/98 160.03 138.88
6/30/98 159.51 142.78
9/30/98 166.11 147.81
12/31/98 178.86 148.73
3/31/99 174.77 146.24
6/30/99 164.31 142.24
9/30/99 161.53 142.02
12/31/99 145.64 140.99
3/31/2000 157.67 143.82
6/30/2000 164.57 144.71
9/30/2000 168.54 149.23
12/31/2000 176.54 155.49
3/31/2001 190.74 161.70
6/30/2001 201.75 162.17
9/30/2001 200.54 168.73
12/31/2001 207.71 169.83
3/31/2002 206.82 168.71
6/30/2002 217.23 173.81
9/30/2002 219.50 183.85
12/31/2002 219.07 189.15
3/31/2003 225.18 193.48
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 March 31, 2003, the share price was at a 6.54%
discount to NAV.
Total Return does not reflect brokerage commissions on purchases and sales of
fund shares or the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
4
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2003 (UNAUDITED)
ASSETS:
Portfolio of investments:
Debt securities, at value (cost $131,656,245)............. $ 138,321,546
Short-term securities, at cost, which approximates
market.................................................. 1,167,983
-------------
Total portfolio of investments........................ 139,489,529
Cash........................................................ 17,552
Receivable for interest on debt securities.................. 1,903,352
Receivable for investments sold............................. 1,901,396
Other assets................................................ 18,082
-------------
Total assets.......................................... 143,329,911
-------------
LIABILITIES:
Expenses:
Payable for investments purchased......................... 2,309,728
Accrued investment advisory and administrative fees....... 157,198
Accrued custodial and transfer agent fees................. 17,367
Accrued professional fees................................. 13,134
Accrued other expenses.................................... 26,659
-------------
Total liabilities..................................... 2,524,086
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NET ASSETS (equivalent to $16.05 per share for 8,775,665
shares of capital stock outstanding)....................... $ 140,805,825
=============
Analysis of Net Assets:
Shareholder capital....................................... $ 135,120,133
Overdistribution of net investment income................. (160,395)
Accumulated net realized loss on sales of investments..... (819,214)
Unrealized appreciation on investments.................... 6,665,301
-------------
Net assets applicable to outstanding shares............... $ 140,805,825
=============
See Notes to Financial Statements.
5
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
MARCH 31, 2003 (UNAUDITED)
Investment income:
Interest income earned.................................... $ 4,174,565
-------------
Expenses:
Investment advisory and administrative fees............... 325,583
Directors fees............................................ 48,056
Transfer agent and dividend disbursing agent fees......... 37,216
Stockholders reports and annual meeting fees.............. 34,217
Professional fees......................................... 24,930
Custody fees.............................................. 16,860
Franchise taxes........................................... 4,914
Other expenses............................................ 28,074
-------------
Total expenses.............................................. 519,850
-------------
Net investment income....................................... 3,654,715
-------------
Net realized and unrealized gain (loss) on investments:
Net realized loss from investment transactions............ (442,657)
Change in unrealized appreciation......................... 4,032,176
-------------
Total realized and unrealized gain (loss) on investments.... 3,589,519
-------------
Net increase in net assets from operations.................. $ 7,244,234
=============
See Notes to Financial Statements.
6
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS FOR THE YEAR
ENDED ENDED
MARCH 31, 2003 SEPTEMBER 30,
(UNAUDITED) 2002
--------------- --------------
From operations:
Net investment income....................... $ 3,654,715 $ 8,314,247
Net realized gain (loss) from investment
transactions.............................. (442,657) 623,636
Change in unrealized appreciation
(depreciation) of investments............. 4,032,176 (1,229,377)
------------ ------------
Net increase in net assets from
operations................................ 7,244,234 7,708,506
Distributions to shareholders from:
Net investment income....................... (3,949,049) (8,424,638)
Net realized gain........................... (351,027) (1,404,106)
------------ ------------
Total distributions....................... (4,300,076) (9,828,744)
------------ ------------
Net increase (decrease) in net assets..... 2,944,158 (2,120,238)
Net Assets:
Beginning of period......................... 137,861,667 139,981,905
------------ ------------
End of period (including accumulated
undistributed net investment income of
$133,939 at 9/30/02)...................... $140,805,825 $137,861,667
============ ============
See Notes to Financial Statements.
7
FINANCIAL HIGHLIGHTS
Financial highlights for each share of capital stock outstanding through each
period:
SIX MONTHS
ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
2003 ---------------------------------------------------------
(UNAUDITED) 2002 2001 2000 1999 1998
----------- --------- --------- --------- --------- ---------
Net asset value, beginning of
period........................ $ 15.71 $ 15.95 $ 15.05 $ 15.11 $ 16.87 $ 16.30
------- -------- -------- -------- -------- --------
Net investment income.......... 0.42 0.95 1.04 1.05 1.05 1.05
Net realized and unrealized
gain (loss) on investments.... 0.41 (0.07) 0.90 (0.06) (1.27) 0.71
------- -------- -------- -------- -------- --------
Total from investment
operations.................... 0.83 0.88 1.94 0.99 (0.22) 1.76
Less distributions from:
Net investment income...... (0.45) (0.96) (1.04) (1.04) (1.04) (1.04)
Net realized gain.......... (0.04) (0.16) -- (0.01) (0.50) (0.15)
------- -------- -------- -------- -------- --------
Total distributions............ (0.49) (1.12) (1.04) (1.05) (1.54) (1.19)
------- -------- -------- -------- -------- --------
Net asset value, end of
period........................ $ 16.05 $ 15.71 $ 15.95 $ 15.05 $ 15.11 $ 16.87
======= ======== ======== ======== ======== ========
Market price per share at end
of period..................... $ 15.00 $ 15.10 $ 14.84 $ 13.38 $ 13.88 $ 15.75
Total investment return
(market value) (1)............ 2.58% 9.46% 18.98% 4.34% (2.76)% 11.81%
Total return (net asset
value) (2).................... 5.32% 5.82% 13.22% 6.77% (1.48)% 11.07%
Net assets at end of period
(in millions)................. $140.81 $ 137.86 $ 139.98 $ 132.09 $ 132.81 $ 148.30
Ratios of expenses to average
net assets.................... 0.75%+ 0.73% 0.71% 0.74% 0.73% 0.71%
Ratio of net investment income
to average net assets......... 5.30%+ 6.07% 6.68% 7.01% 6.61% 6.29%
Portfolio turnover............. 28.6% 126.8% 142.7% 73.8% 69.9% 63.5%
Number of shares outstanding at
end of period
(in thousands)................ 8,776 8,776 8,776 8,776 8,789 8,789
--------------------------
(1) 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.
(2) 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.
+ Annualized
See Notes to Financial Statements.
8
PORTFOLIO OF INVESTMENTS
MARCH 31, 2003 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
DEBT SECURITIES--(99.2%)
/ / MUNICIPAL SECURITIES--(3.1%)
New Jersey Economic Development Authority,
$10,000,000 Zero Coupon Revenue Bond, due 02/15/18.... Aaa $ 3,294,908 $ 4,274,000
------------ ------------
/ / U.S. GOVERNMENT SECURITIES--(15.0%)
AGENCY OBLIGATIONS--(9.5%)
Fannie Mae Grantor Trust,
799,196 5.500%, due 03/01/33..................... (a) 823,671 817,131
Federal Home Loan Mortgage Corp, Gold
Pool,
1,894,184 5.500%, due 12/01/17..................... (a) 1,952,786 1,966,732
Federal National Mortgage Association,
1,872,519 5.500%, due 12/01/17..................... (a) 1,929,864 1,945,406
2,023,264 5.500%, due 01/01/18..................... (a) 2,089,653 2,101,817
1,164,961 6.000%, due 11/01/28..................... (a) 1,147,122 1,209,306
2,188,390 6.500%, due 08/01/32..................... (a) 2,267,036 2,284,474
865,266 7.000%, due 03/01/31..................... (a) 876,217 917,095
685,000 7.125%, due 01/15/30..................... (a) 766,310 853,048
Federal National Mortgage Association,
Guaranteed Mortgage Pass Thru
Certificates,
404,027 REMIC, 7.000%, due 06/25/13.............. (a) 375,700 431,088
Government National Mortgage Association,
650,496 6.500%, due 05/15/29..................... (a) 600,184 683,918
------------ ------------
12,828,543 13,210,015
------------ ------------
U.S. TREASURY NOTES--(5.5%)
80,000 2.000%, due 11/30/04..................... Aaa 80,650 80,803
1,050,000 3.250%, due 08/15/07..................... Aaa 1,064,172 1,078,793
210,000 4.250%, due 05/31/03..................... Aaa 211,109 211,067
3,645,000 4.375%, due 08/15/12..................... Aaa 3,766,880 3,810,450
1,585,000 6.250%, due 05/15/30..................... Aaa 1,879,989 1,891,474
35,000 6.750%, due 05/15/05..................... Aaa 38,469 38,769
See Notes to Financial Statements.
9
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 465,000 8.000%, due 11/15/21..................... Aaa $ 626,925 $ 648,003
------------ ------------
7,668,194 7,759,359
------------ ------------
Total U.S. Government Securities.......... 20,496,737 20,969,374
------------ ------------
/ / CORPORATE BONDS AND NOTES--(81.1%)
FINANCE--(40.2%)
195,000 Allstate Corp. (The), 6.750%, due
05/15/18................................. A1 208,298 219,878
205,000 American Express Co., 3.750%, due
11/20/07................................. A1 204,075 209,882
745,000 Anadarko Finance Co., 7.500%, due
05/01/31................................. Baa1 785,844 893,462
375,000 Avalonbay Communities, Inc., 7.500%, due
08/01/09................................. Baa1 392,528 432,640
1,915,000 Bank of America Corp., 7.400%, due
01/15/11................................. Aa3 1,982,161 2,281,512
235,000 Bank of New York Co., Inc., 7.300%, due
12/01/09................................. A1 267,551 279,603
815,000 Bank One Corp., 7.875%, due 08/01/10...... A1 871,776 987,411
1,655,000 Barclays Bank, PLC, 144-A, 8.550%, due
12/31/49................................. Aa3 1,652,733 2,032,214
280,000 Boeing Capital Corp., 7.375%, due
09/27/10................................. A3 299,689 309,268
200,000 ChevronTexaco Capital Co., 3.500%, due
09/17/07................................. Aa2 199,106 204,128
140,000 CIT Group, Inc., 7.750%, due 04/02/12..... A2 153,396 156,636
2,175,000 Citigroup, Inc., 7.250%, due 10/01/10..... Aa2 2,305,297 2,576,881
275,000 Conoco Funding Co., 7.250%, due
10/15/31................................. A3 315,096 323,798
335,000 Countrywide Home Loans, Inc., 5.500%, due
02/01/07................................. A3 338,792 358,238
3,000,000 CPL Transition Funding LLC, 6.250%, due
01/15/17................................. Aaa 3,243,281 3,330,542
1,105,000 Credit Suisse First Boston USA, Inc.,
6.500%, due 01/15/12..................... Aa3 1,124,737 1,187,601
1,250,000 Credit Suisse First Boston USA, Inc.,
6.500%, due 03/25/33..................... Aaa 1,296,875 1,294,875
2,800,000 CS First Boston Mortgage Securities Corp.,
00-C1, Class A2, 7.545%, due 04/15/62.... AAA* 3,026,625 3,329,437
635,000 DLJ Commercial Mortgage Corp., 00-CKP1,
Class A1B, 7.180%, due 08/10/10.......... Aaa 638,274 738,642
See Notes to Financial Statements.
10
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 2,000,000 DLJ Commercial Mortgage Corp., 99-CG3,
Class A1B, 7.340%, due 10/10/32.......... Aaa $ 2,171,250 $ 2,354,166
615,000 EOP Operating LP, 7.875%, due 07/15/31.... Baa1 624,293 700,011
590,000 FleetBoston Financial Corp., 7.375%, due
12/01/09................................. A3 626,221 692,728
1,805,000 Ford Motor Co., 7.450%, due 07/16/31...... Baa1 1,656,201 1,381,524
510,000 Ford Motor Credit Co., 5.800%, due
01/12/09................................. A3 478,775 456,382
1,185,000 Ford Motor Credit Co., 7.375%, due
02/01/11................................. A3 1,167,833 1,104,166
930,000 General Electric Capital Corp., 6.750%,
due 03/15/32............................. Aaa 907,269 1,047,498
1,730,000 General Electric Capital Corp., 6.000%,
due 06/15/12............................. Aaa 1,839,208 1,886,548
1,130,000 General Motors Acceptance Corp., 6.875%,
due 09/15/11............................. A2 1,112,949 1,116,593
1,710,000 General Motors Acceptance Corp., 8.000%,
due 11/01/31............................. A2 1,735,364 1,664,967
170,000 Goldman Sachs Group, Inc., 6.125%, due
02/15/33................................. Aa3 170,000 170,564
665,000 Goldman Sachs Group, Inc., 6.875%, due
01/15/11................................. Aa3 664,830 758,208
1,165,000 Household Finance Corp., 6.750%, due
05/15/11................................. A2 1,156,113 1,294,141
260,000 HSBC Holdings PLC, 5.250%, due 12/12/12... A1 259,321 268,853
475,000 Lehman Brothers Holdings, Inc., 6.625%,
due 01/18/12............................. A2 472,554 536,018
390,000 Lincoln National Corp., 6.200%, due
12/15/11................................. A3 388,534 420,622
320,000 Marsh & McClennan Co., Inc., 6.250%, due
03/15/12................................. A2 356,277 359,390
190,000 MBNA America Bank N.A., 7.125%, due
11/15/12................................. Baa2 194,871 205,809
195,000 Mellon Funding Corp., 5.000%, due
12/01/14................................. A2 193,366 200,778
1,410,000 Merrill Lynch Mortgage Investors, Inc.,
96-C2, Class A3, 6.960%, due 11/21/28.... AAA* 1,496,748 1,549,000
170,000 Morgan Stanley, 7.250%, due 04/01/32...... Aa3 170,968 194,646
1,640,000 Morgan Stanley, 6.750%, due 04/15/11...... Aa3 1,645,291 1,835,514
482,883 Norwest Asset Securities Corp., 96-2,
Class A, 7.000%, due 09/25/11............ AAA* 486,806 483,703
See Notes to Financial Statements.
11
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 480,000 Pemex Project Funding Master Trust, 144-A,
8.000%, due 11/15/11..................... Baa1 $ 518,332 $ 525,600
1,500,000 PNC Mortgage Acceptance Corp., 99-CM1,
Class A1B, 7.330%, due 12/10/32.......... Aaa 1,608,750 1,766,706
870,000 Prudential Mortgage Capital Funding, LLC,
01-ROCK, Class A2, 6.605%, due
05/10/34................................. Aaa 874,350 990,458
1,380,000 PSE&G Transition Funding LLC, 6.450%, due
03/15/13................................. Aaa 1,445,766 1,582,542
3,000,000 PSE&G Transition Funding LLC, 6.610%, due
06/15/15................................. Aaa 3,376,875 3,462,984
830,000 Qwest Capital Funding, Inc., 7.900%, due
08/15/10................................. Caa2 863,845 639,100
115,000 SLM Corp., 5.125%, due 08/27/12........... A2 114,202 117,971
945,000 Unilever Capital Corp., 7.125%, due
11/01/10................................. A1 1,012,363 1,117,859
500,000 US Bank N.A., Minnesota, 6.375%, due
08/01/11................................. Aa3 510,408 564,964
1,620,000 Wachovia Bank N.A. (Charlotte), 7.800%,
due 08/18/10............................. Aa3 1,714,314 1,978,525
350,000 Washington Mutual Bank, 6.875%, due
06/15/11................................. A3 379,412 397,852
1,025,000 Wells Fargo Bank, N.A., 6.450%, due
02/01/11................................. Aa2 1,014,743 1,172,960
------------ ------------
52,714,536 56,145,998
------------ ------------
INDUSTRIAL--(16.3%)
720,000 Alcoa, Inc., 6.000%, due 01/15/12......... A2 718,305 782,882
430,000 Amerada Hess Corp., 6.650%, due
08/15/11................................. Baa2 431,506 469,697
940,000 Anheuser-Busch Cos., Inc., 9.000%, due
12/01/09................................. A1 1,106,321 1,220,571
1,815,000 AOL Time Warner, Inc., 7.625%, due
04/15/31................................. Baa1 1,784,855 1,926,005
1,270,000 Avon Products, Inc., 7.150%, due
11/15/09................................. A2 1,292,178 1,486,209
185,000 Bristol-Myers Squibb Co., 5.750%, due
10/01/11................................. Aa2 180,649 198,475
720,000 Caterpillar, Inc., 6.550%, due 05/01/11... A2 720,993 819,529
900,000 Cendant Corp., 6.875%, due 08/15/06....... Baa1 899,207 964,745
330,000 Centex Corp., 9.750%, due 06/15/05........ Baa2 329,993 372,753
420,000 Conagra Foods, Inc., 6.750%, due
09/15/11................................. Baa1 469,340 472,603
350,000 Coors Brewing Co., 6.375%, due 05/15/12... Baa2 348,586 391,941
See Notes to Financial Statements.
12
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 1,005,000 DaimlerChrysler N.A. Holdings Corp.,
8.500%, due 01/18/31..................... A3 $ 1,116,556 $ 1,185,561
825,000 Deere & Co., 7.125%, due 03/03/31......... A3 841,456 957,409
445,000 Dow Chemical Co. (The), 6.125%, due
02/01/11................................. A3 450,212 460,108
375,000 First Data Corp., 5.625%, due 11/01/11.... A1 373,845 405,972
440,000 Harrahs Operating Co., Inc., 7.500%, due
01/15/09................................. Baa3 484,276 493,507
875,000 International Paper Co., 6.750%, due
09/01/11................................. Baa2 876,113 980,960
285,000 Kohl's Corp., 6.300%, due 03/01/11........ A3 288,795 320,840
685,000 Kroger Co., 7.500%, due 04/01/31.......... Baa3 766,071 766,086
520,000 Merck & Co., Inc., 6.400%, due 03/01/28... Aaa 563,681 583,157
235,000 Newell Rubbermaid, Inc., 6.750%, due
03/15/12................................. Baa1 260,087 268,399
735,000 Occidental Petroleum Corp., 8.450%, due
02/15/29................................. Baa2 830,977 953,574
680,000 Pepsi Bottling Holdings, Inc., 144-A,
5.625%, due 02/17/09..................... A1 684,869 751,495
185,000 Progressive Corp. (The), 6.250%, due
12/01/32................................. A2 183,607 194,533
290,000 Rohm & Haas Co., 7.850%, due 07/15/29..... A3 319,414 354,684
320,000 Safeway, Inc., 7.250%, due 02/01/31....... Baa2 334,391 359,168
525,000 Target Corp., 7.000%, due 07/15/31........ A2 567,917 592,095
1,135,000 Transocean, Inc., 7.500%, due 04/15/31.... Baa2 1,102,267 1,333,374
430,000 United Technologies Corp., 6.100%, due
05/15/12................................. A2 429,248 482,371
475,000 UST, Inc., 6.625%, due 07/15/12........... A3 472,777 529,854
145,000 Wal-Mart Stores, Inc., 6.875%, due
08/10/09................................. Aa2 154,118 171,385
400,000 Walt Disney Co. (The), 6.375%, due
03/01/12................................. Baa1 406,542 429,957
310,000 Wendy's International, Inc., 6.200%, due
06/15/14................................. Baa1 309,095 345,243
665,000 Weyerhaeuser Co., 7.375%, due 03/15/32.... Baa2 658,430 726,592
------------ ------------
20,756,677 22,751,734
------------ ------------
UTILITIES--(8.6%)
265,000 Apache Corp., 6.250%, due 04/15/12........ A3 263,113 300,159
110,000 Boston Edison Co., 4.875%, due 10/15/12... A1 109,227 112,599
370,000 Burlington Resources Finance Co., 6.680%,
due 02/15/11............................. Baa1 406,208 419,222
See Notes to Financial Statements.
13
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 270,000 Commonwealth Edison Co., 6.150%, due
03/15/12................................. A3 $ 270,597 $ 301,471
680,000 ConocoPhillips, 8.750%, due 05/25/10...... A3 775,323 851,953
1,400,000 Consolidated Edison Co. of New York,
7.500%, due 09/01/10..................... A1 1,389,332 1,673,137
670,000 Devon Financing Corp., ULC, 6.875%, due
09/30/11................................. Baa2 650,429 762,514
415,000 Dominion Resources, Inc., 5.700%, due
09/17/12................................. Baa1 414,718 434,976
205,000 DTE Energy Co., 7.050%, due 06/01/11...... Baa2 223,832 234,738
1,300,000 Duke Energy Field Services, LLC, 8.125%,
due 08/16/30............................. Baa2 1,405,838 1,411,694
835,000 FirstEnergy Corp., 6.450%, due 11/15/11... Baa2 826,754 882,752
165,000 Kerr-McGee Corp., 7.875%, due 09/15/31.... Baa2 198,360 191,367
345,000 Midamerican Energy Co., 5.125%, due
01/15/13................................. A3 344,251 355,822
985,000 Mirant Americas Generation, Inc., 9.125%,
due 05/01/31............................. B3 1,067,491 467,875
210,000 Praxair, Inc., 6.375%, due 04/01/12....... A3 213,200 235,070
520,000 Progress Energy, Inc., 7.000%, due
10/30/31................................. Baa2 526,527 555,796
105,000 PSEG Power LLC, 7.750%, due 04/15/11...... Baa1 98,969 121,108
250,000 PSEG Power LLC, 8.625%, due 04/15/31...... Baa1 158,571 306,864
1,000,000 Sempra Energy, 7.950%, due 03/01/10....... Baa1 997,380 1,163,355
325,000 Southern Power Co., 6.250%, due
07/15/12................................. Baa1 329,001 355,859
300,000 Union Oil Co. of California, 7.500%, due
02/15/29................................. Baa2 316,322 343,712
470,000 Valero Energy Corp., 7.500%, due
04/15/32................................. Baa3 465,959 505,770
------------ ------------
11,451,402 11,987,813
------------ ------------
COMMUNICATION--(7.3%)
455,000 AT&T Corp., 8.000%, due 11/15/31.......... Baa2 396,996 489,105
140,000 AT&T Wireless Services, Inc., 7.875%, due
03/01/11................................. Baa2 117,554 156,583
760,000 AT&T Wireless Services, Inc., 8.750%, due
03/01/31................................. Baa2 836,950 871,539
315,000 BellSouth Telecommunications Corp.,
6.000%, due 10/15/11..................... Aa3 321,935 350,932
See Notes to Financial Statements.
14
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 340,000 British Telecommunications PLC, 8.125%,
due 12/15/10............................. Baa1 $ 372,474 $ 412,966
260,000 Cingular Wireless, 6.500%, due 12/15/11... A3 251,213 281,120
520,000 Citizens Communications Co., 9.000%, due
08/15/31................................. Baa2 538,920 675,933
1,105,000 Comcast Cable Communications, 6.750%, due
01/30/11................................. Baa3 1,085,330 1,191,546
740,000 International Business Machines Corp.,
5.875%, due 11/29/32..................... A1 716,497 756,219
170,000 Motorola, Inc., 7.625%, due 11/15/10...... Baa2 157,760 182,750
820,000 News America, Inc., 7.125%, due
04/08/28................................. Baa3 730,391 853,841
800,000 SBC Communications, Inc., 5.875%, due
02/01/12................................. A1 808,572 871,869
650,000 Sprint Capital Corp., 6.875%, due
11/15/28................................. Baa3 598,042 568,750
100,000 Tele-Communications, Inc., 7.875%, due
08/01/13................................. Baa3 85,772 114,516
260,000 Verizon New England, Inc., 6.500%, due
09/15/11................................. Aa3 245,392 292,262
960,000 Verizon New York, Inc., 7.375%, due
04/01/32................................. A2 857,653 1,133,197
825,000 Viacom, Inc., 6.625%, due 05/15/11........ A3 927,846 935,851
------------ ------------
9,049,297 10,138,979
------------ ------------
INTERNATIONAL--(6.0%)
2,500,000 Augusta Funding Ltd., 7.375%, due
04/15/13................................. Aaa 2,426,113 2,749,350
285,000 Canadian National Railway Co., 6.900%, due
07/15/28................................. Baa1 296,768 328,874
625,000 Deutsche Telekom International Finance,
8.250%, due 06/15/30..................... Baa3 660,783 741,658
530,000 France Telecom, 8.500%, due 03/01/31...... Baa3 606,110 690,251
2,235,000 Mexico Government International Bond,
8.125%, due 12/30/19..................... Baa2 2,224,003 2,403,742
385,000 Royal Bank of Scotland, 9.118%, due
12/31/49................................. A1 472,832 479,563
365,000 Telus Corp., 8.000%, due 06/01/11......... Ba1 363,095 386,900
See Notes to Financial Statements.
15
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 500,000 WestDeutsche Landesbank, 6.750%, due
06/15/05................................. Aa1 $ 542,531 $ 542,531
------------ ------------
7,592,235 8,322,869
------------ ------------
TRANSPORTATION--(2.7%)
120,000 Burlington Northern Santa Fe Corp.,
6.875%, due 12/01/27..................... Baa2 117,861 131,281
740,000 Burlington Northern Santa Fe Corp.,
7.082%, due 05/13/29..................... Baa2 733,560 832,149
700,000 Delta Air Lines, Inc., 10.500%, due
04/30/16**............................... Ba1 853,510 337,162
1,065,000 Erac U.S.A. Finance Co., 144-A, 8.000%,
due 01/15/11............................. Baa1 1,121,321 1,236,118
470,000 Union Pacific Corp., 6.650%, due
01/15/11................................. Baa3 474,201 532,089
3,000,000 United Airlines, Inc., 7.870%, due
01/30/19**............................... Caa2 3,000,000 661,980
------------ ------------
6,300,453 3,730,779
------------ ------------
Total Corporate Bonds and Notes........... 107,864,600 113,078,172
------------ ------------
Total Debt Securities..................... 131,656,245 138,321,546
------------ ------------
SHARES
-----------
SHORT-TERM INVESTMENTS--(0.8%)
1,167,983 UBS Supplementary Trust U.S. Cash
Management Prime Fund.................... 1,167,983 1,167,983
------------ ------------
Total Investments (100.0%)................ $132,824,228 $139,489,529
============ ============
------------------------
(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.
** Illiquid securities represent 0.72% of the total portfolio of
investments.
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,
2003, the value of these securities amounted to $4,545,427 or 3.26% of
the total portfolio of investments.
REMIC Real Estate Mortgage Investment Conduit
See Notes to Financial Statements.
16
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 (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 accounting principles generally
accepted in the United States 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. VALUATION OF INVESTMENTS -- The Fund calculates its net asset value
based on the current market value, where available, for its portfolio
securities. The Fund normally obtains market values for its securities from
independent pricing sources and broker-dealers. Independent pricing sources may
use reported last sale prices, current market quotations or valuations from
computerized "matrix" systems that derive values based on comparable securities.
A matrix system incorporates parameters such as security quality, maturity and
coupon, and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, if available, in determining the
valuation of the portfolio securities.
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 -- For federal income tax purposes, the cost of
securities owned at March 31, 2003, was substantially the same as the cost of
securities for financial statement purposes.
At March 31, 2003, the components of net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having an excess of value
over cost) $10,823,136
Gross depreciation (investments having an excess of cost
over value) (4,157,835)
-----------
Net unrealized appreciation of investments $ 6,665,301
===========
17
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Fund intends to distribute substantially all of its taxable income and
to comply with the other requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for federal income
taxes is required. In addition, by distributing during each calendar year
substantially all of its net investment income, capital gains and certain other
amounts, if any, the Fund intends not to be subject to a federal excise tax.
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.
2. NET ASSET VALUATIONS
The net asset value of the Company's shares is determined as of the close of
business each day the New York Stock Exchange is open.
3. DISTRIBUTIONS
Dividends and distributions payable to shareholders are recorded by the
Company on the ex-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, 2003, there were 12,000,000 shares of $.01 par value capital
stock authorized, and shareholder capital of $135,120,133. During the six months
ended March 31, 2003 no new shares were issued as part of the dividend
reinvestment plan and no shares were repurchased in the open market.
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales (including maturities) of portfolio securities during
the six months ended March 31, 2003, were as follows: debt securities and
preferred stock, $13,564,508 and $7,907,232, respectively; short-term
securities, $14,216,001 and $17,599,093, respectively: and United States
government debt obligations, $27,743,838 and $30,361,595, respectively.
6. MANAGEMENT AND OTHER FEES
Under an agreement between the Company and UBS Global Asset Management
(Americas) 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 50 basis points
(annualized) of the
18
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
6. MANAGEMENT AND OTHER FEES (CONTINUED)
Company's average weekly net assets up to $100,000,000 and 40 basis points
(annualized) of average weekly net assets in excess of $100,000,000.
The Company pays each of its directors (except the Chairman) at the rate of
$9,000 annually to serve as directors and $750 for each Board of Directors
meeting attended. The Company pays the Chairman at the rate of $13,000 annually
to serve in such capacity and $750 for each Board of Directors meeting attended.
All Company officers serve without direct compensation from Fort Dearborn.
Fort Dearborn Income Securities, Inc. invests in shares of the UBS
Supplementary Trust U.S. Cash Management Prime Fund ("Supplementary Trust"). The
Supplementary Trust is a business trust 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 March 31, 2003 and for the
period ended are summarized as follows:
% OF
COST OF SALES INTEREST NET
FUND PURCHASE PROCEEDS INCOME VALUE ASSETS
---- ----------- ----------- -------- ---------- --------
UBS Supplementary Trust U.S. Cash
Management Prime Fund................. $14,004,541 $17,599,093 $31,937 $1,167,983 0.8%
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
19
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2003 (UNAUDITED)
7. MORTGAGE BACKED SECURITIES AND OTHER INVESTMENTS (CONTINUED)
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.
20
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, 2003, 32,443 shares were purchased for
the Plan participants. The breakdown of these shares is listed below:
WHERE
NO. OF SHARES
DIVIDEND SHARES AVERAGE WERE
PAYMENT DATE PURCHASED PRICE PURCHASED
--------------------------------------------------------------------
December 13, 2002 18,318 $14.83 Open Market
March 26, 2003 14,125 $15.50 Open Market
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 768 participants on March 18, 2003. 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 EQUISERVE TRUST COMPANY N.A. 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.
--------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
FOR THE SIX MONTHS ENDED MARCH 31, 2003, THERE WERE: (I) NO MATERIAL CHANGES
IN THE COMPANY'S INVESTMENT OBJECTIVES OR POLICIES, (II) NO CHANGES IN THE
COMPANY'S CHARTER OR BY-LAWS THAT WOULD DELAY OR PREVENT A CHANGE OF CONTROL OF
THE COMPANY, (III) NO MATERIAL CHANGES IN THE PRINCIPAL RISK FACTORS ASSOCIATED
WITH INVESTMENT IN THE COMPANY, AND (IV) NO CHANGE IN THE PERSON PRIMARILY
RESPONSIBLE FOR THE DAY-TO DAY MANAGEMENT OF THE COMPANY'S PORTFOLIO.
21
REPORT ON ANNUAL MEETING
At the annual meeting of shareholders, held on December 16, 2002,
shareholders elected the Company's four nominees as directors and ratified the
selection of Ernst and Young LLP as accountants. The votes were as follows:
DIRECTORS FOR WITHHELD
1. ------------- --------- --------
C.R. O'Neil 7,613,606 55,326
A. Cepeda 7,613,226 55,706
F.K. Reilly 7,613,606 55,326
E.M. Roob 7,607,341 61,591
22
BOARD OF DIRECTORS
C. RODERICK O'NEIL, CFA
Chairman of the Board
ADELA CEPEDA
Director
FRANK K. REILLY, CFA
Director
EDWARD M. ROOB
Director
J. MIKESELL THOMAS
Director
OFFICERS
JEFFREY J. DIERMEIER, CFA
President
DAVID M. GOLDENBERG
Vice President and Secretary
AMY R. DOBERMAN
Vice President and Assistant Secretary
RITA RUBIN
Assistant Secretary
PAUL H. SCHUBERT
Vice President and Treasurer
JOSEPH A. ANDERSON
Assistant Treasurer
CRAIG G. ELLINGER, CFA
Portfolio Manager
FORT DEARBORN
INCOME SECURITIES, INC.
One N. Wacker Drive
38th Floor
Chicago, Illinois 60606
(312) 525-7877
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
Ernst & Young LLP
5 Times Square
New York, New York 10036
LEGAL COUNSEL
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
23
ITEM 2. CODE OF ETHICS.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 5 - 6. [RESERVED BY SEC FOR FUTURE USE. ]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED - END
MANAGEMENT INVESTMENT COMPANIES.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 8. [RESERVED BY SEC FOR FUTURE USE. ]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c) under the Investment Company Act of
1940, as amended) are effective based on their evaluation of these controls
and procedures as of a date within 90 days of the filing date of this
document.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent
to the date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
ITEM 10. EXHIBITS.
(a) Form N-CSR disclosure requirement not yet effective with respect to
registrant.
(b) The certifications required by Rule 30a-2 of the Investment Company Act of
1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FORT DEARBORN INCOME SECURITIES, INC.
By: /s/ Jeffrey J. Diermeier
-------------------------
Jeffrey J. Diermeier
President
Date: June 4, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Jeffrey J. Diermeier
-------------------------
Jeffrey J. Diermeier
President
Date: JUNE 4, 2003
By: /s/ Paul H. Schubert
---------------------
Paul H. Schubert
Chief Financial Officer
Date: June 4, 2003