MAY 8, 2002
DEAR SHAREHOLDER:
This financial report covers the six-month period ended March 31, 2002,
which is our thirtieth fiscal year of operations.
The period began with considerable interest rate volatility, as the market
attempted to digest conflicting signs of economic strength and weakness, the
elimination of the 30-year U.S. Treasury bond issuance, and of course the tragic
events of September 11. By the end of the period, the U.S. bond market was
generally weaker with market participants focused primarily on growth oriented
economic news. While the market expected flat to negative economic growth for
the fourth quarter 2001, the Bureau of Economic Analysis indicated the U.S.
economy had actually increased output by 1.7% for the quarter. At the beginning
of 2002 consensus expectation for real GDP was 0.7%, a figure that eventually
was reported at 5.8%. Discounting increasing unemployment numbers as a lagging
indicator, the market became more concerned over inflation in light of the
unexpected growth and the Federal Reserve's loose monetary policy. By the end of
the semi-annual period, the yield on the 10-year U.S. Treasury had increased
0.82%.
We believe the economy is recovering, but will trend below our secular
expectation of over 3% real growth over the next several years. This is largely
due to the working off of the vestiges of the bubble with resultant excess
capacity, overborrowing and general excess. We believe that inflation risk will
remain muted. Corporate earnings continue to suffer as many of the largest U.S.
companies combat top line growth issues stemming from a slower nominal economy.
Productivity gains remain strong helping firms limit the negative effects of
reduced sales volume and competitive pricing pressure. However, significant idle
capacity currently exists which is likely to constrain aggregate business
investment in the near term. Given this economic backdrop, long-term interest
rates look fairly priced while short-term interest rates are likely to climb as
economic activity begins to increase.
Despite the profits recession, the overall corporate bond market performed
well as the investor community concentrated on an improving economic picture as
well as cost and debt reduction plans of many corporations. The
telecommunications industry is the exception, as it is suffering from a hangover
from heavy capital expenditures and concurrent debt growth that exploded after
deregulation. Investors are concerned with price competition and debt burden in
the long distance communications business, and are quick to punish companies
with any headline risk.
Firms with high levels of short-term debt also fared poorly as banks and
money market investors became leery of advancing additional capital forcing the
borrowers to fund operations using higher cost long-term debt. Performance of
the corporate sector was further dampened as investors responded to heightened
scrutiny by regulatory bodies over accounting practices at several large firms.
We expect volatility of corporate spreads will remain high as a result of the
aforementioned market concerns. We have offset our credit risk with defensive
AAA sectors, a strategy that has served us well.
Net investment income for the six months was $0.48 per share and net
realized and unrealized losses on investments totaled $0.67 per share. On
March 31, 2002, the net asset value per share was $15.11 and the stock closed
that day at $14.67 per share.
1
During the period the Board of Directors declared regular quarterly
dividends of $0.25 per share and $0.24 per share payable on December 14, 2001
and March 22, 2002, respectively. In addition to regular dividends, the Board
declared a capital gains distribution of $0.16 per share payable on December 14,
2001.
At the end of the period, the 108 issues in the portfolio had an average
market yield of 7.06%, an average Moody's quality rating of A1, an average
duration of 7.8, and an average maturity of 14.5 years. The distribution of the
portfolio maturities and quality was as follows:
Maturities
-----------------------------------------
0-1 year 0.6%
1-3 years 1.1
3-5 years 5.3
5-10 years 51.6
10-20 years 10.9
20 plus years 30.5
------
100.0%
Quality
-----------------------------------------
Treasury, Agency and Aaa 34.7%
Aa 7.7
A 26.0
Baa 28.2
Below Baa 3.4
------
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 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,
2002, 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
2
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 REINVESTED
AS OF MARCH 31, 2002
$ Wealth Index
INVESTMENT GRADE
FORT DEARBORN BOND INDEX
1972 $18.17 $18.17
'73 $18.17 $18.16
'73 $17.10 $18.06
'73 $17.09 $18.41
'73 $16.74 $18.23
'74 $13.73 $17.55
'74 $15.62 $16.61
'74 $13.40 $16.07
'74 $16.33 $17.05
'75 $16.82 $17.83
'75 $17.61 $18.43
'75 $16.79 $17.79
'75 $16.54 $19.39
'76 $18.45 $20.17
'76 $18.37 $20.19
'76 $20.03 $21.28
'76 $20.26 $22.83
'77 $20.50 $22.26
'77 $21.07 $23.08
'77 $21.49 $23.28
'77 $20.68 $23.04
'78 $20.93 $23.00
'78 $21.00 $22.70
'78 $20.90 $23.36
'78 $19.04 $22.84
'79 $20.31 $23.16
'79 $21.40 $24.15
'79 $20.84 $23.61
'79 $19.25 $21.70
'80 $17.16 $18.79
'80 $20.99 $23.31
'80 $18.99 $20.76
'80 $19.11 $20.93
'81 $19.19 $20.69
'81 $19.51 $20.24
'81 $19.39 $18.40
'81 $20.85 $20.51
'82 $21.83 $21.47
'82 $22.26 $21.63
'82 $26.55 $26.21
'82 $28.83 $29.02
'83 $29.96 $30.14
'83 $31.44 $30.55
'83 $31.01 $30.40
'83 $31.22 $30.59
'84 $32.50 $30.09
'84 $30.21 $28.94
'84 $32.66 $32.51
'84 $37.09 $35.48
'85 $37.34 $35.82
'85 $43.27 $40.17
'85 $42.71 $40.92
'85 $46.79 $45.80
'86 $53.14 $50.64
'86 $55.71 $50.88
'86 $56.95 $51.74
'86 $57.70 $54.47
'87 $60.37 $55.37
'87 $58.78 $53.02
'87 $55.66 $49.70
'87 $56.99 $53.50
'88 $62.51 $55.86
'88 $63.41 $56.58
'88 $63.23 $57.95
'88 $65.30 $58.38
'89 $63.95 $59.10
'89 $69.00 $64.57
'89 $71.79 $64.91
'89 $73.38 $67.02
'90 $75.08 $65.82
'90 $75.50 $68.35
'90 $74.62 $67.72
'90 $80.42 $71.21
'91 $83.65 $74.02
'91 $85.57 $75.16
'91 $91.67 $80.14
'91 $96.45 $84.58
'92 $93.81 $83.43
'92 $97.18 $87.02
'92 $102.91 $91.22
'92 $101.67 $91.65
'93 $108.40 $96.61
'93 $113.71 $100.19
'93 $117.42 $104.21
'93 $112.65 $103.37
'94 $107.51 $98.48
'94 $106.80 $96.30
'94 $105.14 $96.42
'94 $101.57 $97.14
'95 $107.51 $103.18
'95 $116.50 $111.98
'95 $118.69 $114.54
'95 $126.33 $121.13
'96 $124.45 $116.32
'96 $122.62 $116.17
'96 $129.34 $118.35
'96 $137.71 $123.00
'97 $135.62 $120.84
'97 $142.43 $126.34
'97 $148.57 $131.91
'97 $156.83 $136.87
'98 $160.03 $138.88
'98 $159.51 $142.78
'98 $166.11 $147.81
'98 $178.86 $148.73
'99 $174.77 $146.24
'99 $164.31 $142.24
'99 $161.53 $142.02
'99 $145.64 $140.99
'00 $157.67 $143.82
'00 $164.57 $144.71
'00 $168.54 $149.23
'00 $176.54 $155.49
'01 $190.74 $161.70
'01 $201.75 $162.17
'01 $200.54 $168.73
'01 $207.71 $169.83
'02 $206.82 $168.71
ANNUALIZED RETURNS 12 MONTHS SINCE INCEPTION
Fort Dearborn 8.43% 8.67%
Investment Grade Bond Index 4.34 7.92
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, 2002, the share price was at a 2.91% discount to NAV.
3
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2002 (UNAUDITED)
ASSETS:
Portfolio of investments: (Note 1)
Debt securities, at value (cost $133,123,858)............. $ 129,842,552
Short-term securities, at cost, which approximates
market.................................................. 663,964
-------------
Total portfolio of investments........................ 130,506,516
Cash...................................................... 76,647
Receivable for interest on debt securities (Note 1)......... 2,157,326
Receivable for investments sold............................. 161,115
Other Assets................................................ 25,000
-------------
Total assets.......................................... 132,926,604
-------------
LIABILITIES:
Expenses:
Accrued investment advisory and administrative fees (Note
6)...................................................... 154,099
Payable for investments purchased......................... 148,586
Accrued custodial and transfer agent fees................. 18,563
Accrued other expenses.................................... 19,199
-------------
Total liabilities..................................... 340,447
-------------
NET ASSETS (equivalent to $15.11 per share for 8,775,665
shares of capital stock outstanding) (Note 4).............. $ 132,586,157
=============
Analysis of Net Assets:
Shareholder capital (Note 4).............................. $ 135,120,133
Accumulated undistributed net investment income (Note
3)...................................................... 169,001
Accumulated net realized gain on sales of investments
(Note 3)................................................ 578,329
Unrealized depreciation on investments.................... (3,281,306)
-------------
Net assets applicable to outstanding shares............... $ 132,586,157
=============
See Notes to Financial Statements.
4
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
MARCH 31, 2002 (UNAUDITED)
Investment income:
Interest income earned.................................... $ 4,732,727
-------------
Expenses:
Investment advisory and administrative fees (Note 6)...... 325,263
Transfer agent and dividend disbursing agent fees......... 44,954
Directors Fees (Note 6)................................... 37,397
Stockholders reports and annual meeting fees.............. 30,800
Custody fees.............................................. 20,655
Professional fees......................................... 19,508
Franchise taxes........................................... 4,914
Other expenses............................................ 9,100
-------------
Total expenses.............................................. 492,591
-------------
Net investment income....................................... 4,240,136
-------------
Net realized and unrealized gain (loss) on investments:
Net realized gain from investment transactions............ 1,212,107
Change in unrealized depreciation......................... (7,143,808)
-------------
Total realized and unrealized gain(loss) on investments..... (5,931,701)
-------------
Net decrease in net assets from operations.................. $ (1,691,565)
=============
See Notes to Financial Statements.
5
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED FOR THE YEAR
MARCH 30, ENDED
2002 SEPTEMBER 30,
(UNAUDITED) 2001
------------- --------------
From operations:
Net investment income....................... $ 4,240,136 $ 9,088,903
Net realized gain (loss) from investment
transactions.............................. 1,212,107 1,972,541
Change in unrealized appreciation of
investments............................... (7,143,808) 5,958,527
------------ ------------
Net increase in net assets from
operations................................ (1,691,565) 17,019,971
Distributions to shareholders from:
Net investment income....................... (4,300,076) (9,126,692)
Net realized gain........................... (1,404,107) 0
------------ ------------
Total distributions....................... (5,704,183) (9,126,692)
Net increase (decrease) in net assets..... (7,395,748) 7,893,279
Net Assets:
Beginning of period......................... 139,981,905 132,088,626
------------ ------------
End of period (including undistributed net
investment income of $169,001 and
$228,941, respectively)................... $132,586,157 $139,981,905
============ ============
See Notes to Financial Statements.
6
FINANCIAL HIGHLIGHTS
Financial highlights for each share of capital stock outstanding through each
period:
SIX MONTHS
ENDED YEARS ENDED SEPTEMBER 30,
MARCH 31, ---------------------------------------------------------
2002 (UNAUDITED) 2001 2000 1999 1998 1997
---------------- --------- --------- --------- --------- ---------
Net asset value,
beginning of period..... $ 15.95 $ 15.05 $ 15.11 $ 16.87 $ 16.30 $ 15.97
-------- -------- -------- -------- -------- --------
Net investment income
(1)..................... 0.48 1.04 1.05 1.05 1.05 1.09
Net realized and
unrealized gain (loss)
on investments.......... (0.67) 0.90 (0.06) (1.27) 0.71 0.89
-------- -------- -------- -------- -------- --------
Total from investment
operations.............. (0.19) 1.94 0.99 (0.22) 1.76 1.98
Less distributions
from:
Net investment
income............. (0.49) (1.04) (1.04) (1.04) (1.04) (1.21)
Net realized gain.... (0.16) -- (0.01) (0.50) (0.15) (0.44)
-------- -------- -------- -------- -------- --------
Total distributions...... (0.65) (1.04) (1.05) (1.54) (1.19) (1.65)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 15.11 $ 15.95 $ 15.05 $ 15.11 $ 16.87 $ 16.30
======== ======== ======== ======== ======== ========
Market price per share at
end of period........... $ 14.67 $ 14.84 $ 13.38 $ 13.88 $ 15.75 $ 15.19
Total investment return
(market value) (2)...... 3.15% 18.98% 4.34% (2.76)% 11.81% 14.86%
Total return (net asset
value) (3).............. -1.24% 13.22% 6.77% (1.48)% 11.07% 13.06%
Net assets at end of
period (in millions).... $ 132.59 $ 139.98 $ 132.09 $ 132.81 $ 148.30 $ 143.33
Ratios of expenses to
average net assets...... 0.72% 0.71% 0.74% 0.73% 0.71% 0.75%
Ratio of net investment
income to average net
assets.................. 6.16% 6.68% 7.01% 6.61% 6.29% 6.81%
Portfolio turnover....... 75.4% 142.7% 73.8% 69.9% 63.5% 130.0%
Number of shares
outstanding at end of
period (in thousands)... 8,776 8,776 8,776 8,789 8,789 8,793
--------------------------
(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
PORTFOLIO OF INVESTMENTS
MARCH 31, 2002 (UNAUDITED)
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
DEBT SECURITIES--(99.5%)
/ / MUNICIPAL SECURITIES--(2.6%)
New Jersey Economic Development Authority,
$10,000,000 0.000%, due 02/15/18..................... Aaa $ 3,057,954 $ 3,344,000
------------ ------------
/ / U.S. GOVERNMENT SECURITIES--(19.1%)
AGENCY OBLIGATIONS--(11.6%)
Fannie Mae Grantor Trust,
4,915,000 7.125%, due 01/15/30..................... (a) 5,539,662 5,255,378
Federal Home Loan Mortgage Corp.,
Guaranteed Mortgage Certificates,
1,696 9.000%, due 08/01/04..................... (a) 1,770 1,778
Federal National Mortgage Association,
1,175,188 7.000%, due 03/01/31..................... (a) 1,190,061 1,200,785
1,492,033 6.000%, due 11/01/28..................... (a) 1,469,186 1,447,505
2,912,906 6.000%, due 11/01/28..................... (a) 2,887,873 2,825,973
Federal National Mortgage Association,
Guaranteed Mortgage Pass Thru
Certificates,
522,397 7.000%, due 06/25/13..................... (a) 485,772 542,491
2,768,488 6.500%, due 03/01/28..................... (a) 2,754,213 2,759,189
Government National Mortgage Association,
1,095,471 6.500%, due 05/15/29..................... (a) 1,010,743 1,093,460
------------ ------------
15,339,280 15,126,559
------------ ------------
DIRECT OBLIGATIONS--(7.5%)
3,000,000 U.S. Treasury Bond, 8.000%, due
11/15/21................................. Aaa 3,823,197 3,673,359
930,000 U.S. Treasury Note, 6.500%, due
02/15/10................................. Aaa 1,027,309 995,754
4,980,000 U.S. Treasury Note, 6.250%, due
05/15/30................................. Aaa 5,390,079 5,175,505
------------ ------------
10,240,585 9,844,618
------------ ------------
25,579,865 24,971,177
------------ ------------
See Notes to Financial Statements.
8
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2002
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
/ / CORPORATE BONDS AND NOTES--(77.8%)
FINANCE (28.8%)
$ 1,905,000 Bank of America Corp., 7.400%, due
01/15/11................................. Aa3 $ 1,974,941 $ 2,011,562
725,000 Bank One Corp., 7.875%, due 08/01/10...... A1 772,754 786,336
430,000 Capital One Bank, 6.875%, due 02/01/06.... Baa2 417,271 414,963
Chase Commercial Mortgage Securities
Corp.,
1,000,000 98-1 A2, 6.560%, due 05/18/30............ Aaa 1,064,180 1,025,977
150,000 CIT Group, Inc., 7.750%, due 04/02/12..... A2 148,585 150,413
2,500,000 Citigroup, Inc., 7.250%, due 10/01/10..... Aa2 2,591,898 2,628,422
CS First Boston Mortgage Securities Corp.,
2,800,000 7.545%, due 04/15/62..................... Aaa 3,026,625 2,997,308
DLJ Commercial Mortgage Corp.,
2,000,000 7.340%, due 10/10/32..................... Aaa 2,171,250 2,118,579
DLJ Commercial Mortgage Corp., 00-CKP1,
635,000 Class A1B, 7.180%, due 08/10/10.......... Aaa 638,274 668,799
615,000 EOP Operating Ltd., 7.875%, due
07/15/31................................. Baa1 624,382 610,715
1,620,000 First Union National Bank, 7.800%, due
08/18/10................................. A1 1,723,899 1,759,064
555,000 Fleet Boston Corp., 7.375%, due
12/01/09................................. A3 592,405 576,460
650,000 Ford Motor Credit Co., 6.875%, due
02/01/06................................. A3 648,862 646,300
1,170,000 Ford Motor Credit Co., 7.375%, due
02/01/11................................. A3 1,153,304 1,138,621
2,395,000 Ford Motor Credit Co., 5.800%, due
01/12/09................................. A3 2,224,897 2,157,701
1,835,000 General Electric Capital Corp., 6.750%,
due 03/15/32............................. Aaa 1,801,508 1,773,546
1,095,000 General Motors Acceptance Corp., 6.875%,
due 09/15/11............................. A2 1,077,718 1,057,859
1,605,000 General Motors Acceptance Corp., 8.000%,
due 11/01/31............................. A2 1,625,924 1,606,470
665,000 Goldman Sachs Group, Inc., 6.875%, due
01/15/11................................. A1 664,965 668,201
2,815,000 Household Finance Corp., 6.750%, due
05/15/11................................. A2 2,798,391 2,731,445
230,000 Keycorp Capital III, 7.750%, due
07/15/29................................. A3 230,328 225,765
475,000 Lehman Bros. Holdings, Inc., 6.625%, due
01/18/12................................. A2 472,554 466,174
See Notes to Financial Statements.
9
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2002
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 390,000 Lincoln National Corp., 6.200%, due
12/15/11................................. A3 $ 388,534 $ 377,407
1,640,000 Morgan Stanley Dean Witter, 6.750%, due
04/15/11................................. Aa3 1,645,775 1,644,405
1,437,976 Norwest Asset Securities Corp., 7.000%,
due 09/25/11............................. AAA 1,449,659 1,474,803
PNC Mortgage Acceptance Corp., 99-CM1,
1,500,000 Class A1B, 7.330%, due 12/10/32.......... Aaa 1,608,750 1,583,132
Prudential Mortgage Capital Funding, LLC,
870,000 00-ROCK, Class A2, 6.605%, due
05/10/34................................ Aaa 874,350 882,360
1,380,000 PSE&G Transition Funding LLC, 6.450%, due
03/15/13................................. Aaa 1,445,766 1,416,314
945,000 Unilever Capital Corp., 7.125%, due
11/01/10................................. A1 1,019,217 998,554
1,025,000 Wells Fargo Bank N.A., 6.450%, due
02/01/11................................. Aa2 1,014,879 1,026,970
------------ ------------
37,891,845 37,624,625
------------ ------------
INDUSTRIAL--(20.0%)
665,000 Abitibi-Consolidated, Inc., 8.850%, due
08/01/30................................. Baa3 671,778 685,004
690,000 Alcoa Inc., 6.000%, due 01/15/12.......... A1 685,935 669,667
430,000 Amerada Hess Corp., 6.650%, due
08/15/11................................. Baa2 431,646 426,686
745,000 Anadarko Finance Co., 7.500%, due
05/01/31................................. Baa1 786,300 764,783
940,000 Anheuser-Busch Cos., Inc., 9.000%, due
12/01/09................................. A1 1,126,264 1,103,589
1,460,000 AOL Time Warner, Inc., 7.625%, due
04/15/31................................. Baa1 1,488,367 1,453,209
1,270,000 Avon Products, Inc., 7.150%, due
11/15/09................................. A2 1,294,751 1,321,237
190,000 Burlington Northern Santa Fe Corp.,
6.875%, due 12/01/27..................... Baa2 186,612 182,488
740,000 Burlington Northern Santa Fe Corp.,
7.082%, due 05/13/29..................... Baa2 733,582 730,897
720,000 Caterpillar, Inc., 6.550%, due 05/01/11... A2 721,244 724,627
1,325,000 Cendant Corp., 6.875%, due 08/15/06....... Baa1 1,324,571 1,286,046
330,000 Centex Corp., 9.750%, due 06/15/05........ Baa2 329,993 364,782
520,000 Daimler Chrysler NA Holdings, 7.300%, due
01/15/12................................. A3 531,232 522,588
825,000 Deere & Co., 7.125%, due 03/03/31......... A3 841,646 792,822
840,000 Delhaize America, Inc., 8.125%, due
04/15/11................................. Baa3 855,774 889,738
See Notes to Financial Statements.
10
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2002
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 670,000 Devon Financing Corp. ULC, 6.875%, due
09/30/11................................. Baa2 $ 648,818 $ 651,615
845,000 First Data Corp., 5.625%, due 11/01/11.... A1 842,397 805,543
900,000 Ford Motor Co. Del Global Landmark,
7.450%, due 07/16/31..................... Baa1 858,809 813,917
470,000 Harrah's Operating Co., Inc., 7.125%, due
06/01/07................................. Baa3 469,615 477,080
875,000 International Paper Co., 6.750%, due
09/01/11................................. Baa2 876,209 868,829
1,120,000 Kraft Foods, Inc., 6.500%, due 11/01/31... A2 1,115,170 1,063,478
695,000 Kroger Co., 7.500%, due 04/01/31.......... Baa3 761,147 703,106
735,000 Occidental Petroleum Corp., 8.450%, due
02/15/29................................. Baa2 832,205 838,148
3,000,000 Philips Electronics, 7.750%, due
05/15/25................................. A3 2,990,353 2,886,405
735,000 Rohm & Haas Co., 7.850%, due 07/15/29..... A3 807,496 800,630
1,060,000 Target Corp., 7.000%, due 07/15/31........ A2 1,119,107 1,070,328
1,135,000 Transocean Sedco Forex, 7.500%, due
04/15/31................................. Baa2 1,102,267 1,102,738
300,000 Union Oil Co. of California, 7.500%, due
02/15/29................................. Baa1 316,541 302,774
425,000 Valero Energy Corp., 8.750%, due
06/15/30................................. Baa2 501,101 475,003
770,000 Viacom, Inc., 8.625%, due 08/01/12........ A3 859,018 863,574
145,000 Wal-Mart Stores, Inc., 6.875%, due
08/10/09................................. Aa2 155,278 154,358
315,000 Walt Disney Company, 6.375%, due
03/01/12................................. A3 314,310 307,010
------------ ------------
26,579,536 26,102,699
------------ ------------
INTERNATIONAL--(9.8%)
2,500,000 Augusta Funding Ltd., 144-A, 7.375%, due
04/15/13................................. Aaa 2,426,113 2,515,350
1,655,000 Barclays Bank PLC, 144-A, 0.000%, due
12/31/49................................. Aa3 1,652,733 1,835,233
450,000 France Telecom, 0.000%, due 03/01/31...... Baa1 520,553 480,955
300,000 Petroleum Geo-Services, 6.625%, due
03/30/08................................. Baa3 277,812 240,000
1,440,000 Petroleum Geo-Services, 7.500%, due
03/31/07................................. Baa3 1,401,494 1,195,200
1,335,000 Telus Corp., 8.000%, due 06/01/11......... Baa2 1,328,031 1,371,337
435,000 Tyco International Group, 7.000%, due
06/15/28................................. Baa1 431,864 362,517
750,000 United Mexican States, 8.375%, due
01/14/11................................. Baa2 785,717 785,625
See Notes to Financial Statements.
11
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2002
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 1,900,000 United Mexican States, 9.875%, due
02/01/10................................. Baa2 $ 1,927,892 $ 2,147,000
1,660,000 Vodafone Group PLC, 7.750%, due
02/15/10................................. A2 1,757,837 1,774,442
------------ ------------
12,510,046 12,707,659
------------ ------------
UTILITIES--(7.6%)
230,000 Commonwealth Edison, 6.150%, due
03/15/12................................. A3 229,795 224,470
1,400,000 Consolidated Edison, Inc., 7.500%, due
09/01/10................................. A1 1,389,332 1,472,501
1,395,000 Dominion Resources, Inc., Class B, 7.625%,
due 07/15/05............................. Baa1 1,476,012 1,476,468
1,300,000 Duke Energy Field Services LLC, 8.125%,
due 08/16/30............................. Baa2 1,407,008 1,323,215
550,000 El Paso Energy Corp., 7.800%, due
08/01/31................................. Baa2 575,915 535,114
835,000 First Energy Corp., 6.450%, due
11/15/11................................. Baa2 826,754 767,560
985,000 Mirant Americas Generation Inc., 9.125%,
due 05/01/31............................. Ba1 1,068,216 837,250
520,000 Progress Energy Inc., 7.000%, due
10/30/31................................. Baa1 526,602 495,485
765,000 Pure Resources Inc., 7.125%, due
06/15/11................................. Baa3 754,078 724,105
1,000,000 Sempra Energy, 7.950%, due 03/01/10....... A2 997,380 1,020,936
1,095,000 Williams Cos, Inc., 7.125%, due
09/01/11................................. Baa2 1,092,966 1,039,462
------------ ------------
10,344,058 9,916,566
------------ ------------
COMMUNICATION--(7.5%)
1,380,000 AT&T Wireless Services, Inc., 8.750%, due
03/01/31................................. Baa2 1,521,091 1,432,914
1,475,000 Citizens Communications Co., 9.000%, due
08/15/31................................. Baa2 1,529,101 1,543,424
415,000 Comcast Cable Communications, 6.750%, due
01/30/11................................. Baa2 413,161 404,032
1,290,000 News America Holdings, Inc., 7.125%, due
04/08/28................................. Baa3 1,147,495 1,139,364
2,600,000 Qwest Capital Funding, Inc., 7.900%, due
08/15/10................................. Baa3 2,663,637 2,196,277
550,000 SBC Communications, 5.875%, due
02/01/12................................. Aa3 544,764 529,505
1,460,000 Sprint Capital Corp., 6.875%, due
11/15/28................................. Baa2 1,339,016 1,168,904
See Notes to Financial Statements.
12
PORTFOLIO OF INVESTMENTS--(CONTINUED)
MARCH 31, 2002
MOODY'S
FACE VALUE RATING COST VALUE
----------- ------- ------------ ------------
$ 265,000 Verizon Global Funding Corp., 7.250%, due
12/01/10................................. A1 $ 273,444 $ 271,804
1,050,000 Verizon Global Funding Corp., 7.750%, due
12/01/30................................. A1 1,088,468 1,094,083
------------ ------------
10,520,177 9,780,307
------------ ------------
TRANSPORTATION--(4.1%)
1,500,000 Delta Airlines, Inc., 10.500%, due
04/30/16................................. Ba1 1,828,950 1,336,575
1,740,000 Erac U.S.A. Finance Co., 144-A, 8.000%,
due 01/15/11............................. Baa1 1,811,427 1,805,554
3,000,000 United Airlines, Inc., 7.870%, due
01/30/19................................. B1 3,000,000 2,253,390
------------ ------------
6,640,377 5,395,519
------------ ------------
104,486,039 101,527,375
------------ ------------
Total Debt Securities (Cost
$133,123,858)............................ 133,123,858 129,842,552
------------ ------------
SHARES
-----------
SHORT TERM SECURITIES--(0.5%)
663,964 UBS Supplementary Trust U.S. Cash
Management Prime Fund.................... 663,964 663,964
------------ ------------
Total Investments (100%) (Cost
$133,787,822)............................ $133,787,822 $130,506,516
============ ============
------------------------
(a) Moody's as a matter of policy, does not rate this issue.
* Standard & Poor's Corporation rating. Security is not rated by Moody's
Investor Service, Inc.
144-A Securities exempt from registration under Rule 144-A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At March 31,
2002, the value of these securities amounted to $3,865,258 or 2.96% of
the total portfolio of investments.
See Notes to Financial Statements.
13
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2002 (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. 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 March 31, 2002 for federal income tax purposes, the cost for long and
short-term investments is $133,787,822, the aggregate gross unrealized
appreciation is $1,454,871, and the aggregate gross unrealized depreciation is
$4,736,177, resulting in net unrealized depreciation of investments of
$3,281,306.
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
14
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2002 (UNAUDITED)
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.
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, 2002, 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, 2002 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, 2002, were as follows: debt securities and
preferred stock, $49,700,860 and $52,488,565, respectively; short-term
securities, $25,360,747 and $25,315,996, respectively: and United States
government debt obligations, $51,893,368 and $50,562,331, 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 a quarterly fee of
1/8 of 1% (annually 1/2 of 1%) of the Company's average weekly net assets up to
$100,000,000 and 1/10 of 1% (annually 2/5 of 1%) of average weekly net assets in
excess of $100,000,000.
All Company officers serve without direct compensation from the Company.
Fort Dearborn Income Securities, Inc. invest in shares of the UBS
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.
15
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2002 (UNAUDITED)
6. MANAGEMENT AND OTHER FEES (CONTINUED)
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, 2002 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.................. $25,360,747 $25,315,996 $36,391 $663,964 0.5%
7. MORTGAGE BACKED SECURITIES AND OTHER INVESTMENTS
The Company invests in Mortgage Backed Securities (MBS), representing
interests in pools of mortgage loans. These securities provide shareholders with
payments consisting of both principal and interest as the mortgages in the
underlying mortgage pools are paid. Most of the securities are guaranteed by
federally sponsored agencies -- Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage
Corporation (FHLMC). However, some securities may be issued by private,
non-governmental corporations. MBS issued by private entities are not government
securities and are not directly guaranteed by any government agency. They are
secured by the underlying collateral of the private issuer. Yields on privately
issued MBS tend to be higher than those of government backed issues. However,
risk of loss due to default and sensitivity to interest rate fluctuations is
also higher.
The Company invests in Collateralized Mortgage Obligations (CMOs). A CMO is
a bond, which is collateralized by a pool of MBS. The Company also invests in
REMICs (Real Estate Mortgage Investment Conduit) which are simply another form
of CMO. These MBS pools are divided into classes or tranches with each class
having its own characteristics. The different classes are retired in sequence as
the underlying mortgages are repaid. For instance, a Planned Amortization
Class (PAC) is a specific class of mortgages, which over its life will generally
have the most stable cash flows and the lowest prepayment risk. A GPM (Graduated
Payment Mortgage) is a negative amortization mortgage where the payment amount
gradually increases over the life of the mortgage. The early payment amounts are
not sufficient to cover the interest due, and therefore, the unpaid interest is
added to the principal, thus increasing the borrower's mortgage balance.
Prepayment may shorten the stated maturity of the CMO and can result in a loss
of premium, if any has been paid.
The Company invests in Asset Backed Securities, representing interests in
pools of certain types of underlying installment loans or leases or by revolving
lines of credit. They often include credit enhancement that help limit investors
exposure to the underlying credit. These securities are valued on the basis of
timing and certainty of cash flows compared to investments with similar
durations.
16
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, 2002, 47,962 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 14, 2001 31,512 $15.31 Open Market
March 22, 2002 16,450 $14.95 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 865 participants on March 22, 2002. 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.
17
REPORT ON ANNUAL MEETING
At the annual meeting of shareholders, held on December 17, 2001,
shareholders elected the Company's four nominees as directors and ratified the
selection of accountants. The votes on such matters were as follows:
DIRECTORS FOR
1. ------------- ---------
C.R. O'Neil 7,392,839
A. Cepeda 7,411,704
F.K. Reilly 7,398,208
E.M. Roob 7,405,605
2. Ratification of Accountants (Ernst and Young LLP)
FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- -------- -------- ----------------
7,386,045 38,708 39,197 0
18
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
CRAIG G. ELLINGER, 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
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
LEGAL COUNSEL
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
19
FORT DEARBORN INCOME SECURITIES, INC.
[BACKGROUND ART IS IMAGE OF FORT DEARBORN]
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FORT
DEARBORN
INCOME
SECURITIES,
INC.
SEMI-ANNUAL REPORT
MARCH 31, 2002