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.
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(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.
51 West 52nd Street
New York, NY 10019-6114
(Name and address of agent for service)
Copy to:
M. Finley Maxson, Esq.
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60606
Registrant's telephone number, including area code: 312-525 7877
Date of fiscal year end: September 30, 2003
Date of reporting period: September 30, 2003
Item 1. Reports to Stockholders.
--------------------------------
November 15, 2003
Dear Shareholder,
We present you with the annual report for Fort Dearborn Income Securities,
Inc. (the "Fund") for the fiscal year ended September 30, 2003.
An Interview with the Portfolio Manager
Q. Can you describe the economic environment during the reporting period?
A. As the reporting period began in October 2002, there was a great deal of
uncertainty surrounding the economy. Fourth quarter 2002 and first quarter
2003 gross domestic product (GDP) growth was a tepid 1.4%. While consumer
spending was resilient leading up to the start of the war in Iraq,
corporations postponed major purchases as they waited for clearer signs of a
sustainable economic upturn.
Although the conclusion of major combat in Iraq stimulated the equity
markets, its impact on the economy was initially unclear. Despite some
indications that the economy was turning a corner; heightened concerns about
terrorism, widening turmoil in the Middle East and continued lackluster
corporate spending all served to undermine the economy.
The following quarter produced more positive news. The combined effects of
significantly higher military spending, an increase in exports, and a
stronger manufacturing sector fueled an uptick in economic growth that
resulted in a second quarter 2003 GDP figure of 3.3%. This was followed by a
preliminary third quarter 2003 GDP estimate of 7.2%--far higher than
anticipated, and the sharpest recorded advance since 1984. Consumer and
business spending provided significant impetus behind this figure; consumer
spending rose 6.6%, its highest rate since 1988, while business spending
surged to 11.1%, its best posting since the first quarter of 2000.
Q. How did the Federal Reserve Board (the "Fed") react in this economic
environment?
A. The Fed was on hold early in the reporting period, as it waited for more
definitive signs regarding the economy's direction. However, by November
2002, it became apparent that the interest rate cuts up to that point had not
spurred meaningful growth. Thus, the Fed lowered interest rates by another 50
basis points to 1.25%--a four-decade low. (A basis point is 1/100th of a
percent.)
Given consumers' and businesses' preoccupation with the situation in Iraq,
the economic picture remained murky during the early months of 2003. Fed
Chairman Alan Greenspan, in a statement at that time, expressed concerns
about deflation. It came as no surprise, then, when, in June 2003, the Fed
moved to cut rates an additional 25 basis points to 1.00%--the lowest level
since 1958. Since that time, the Fed has remained on hold, although it has
made clear its willingness to cut rates further if necessary. At its
September 16, 2003 meeting, the Fed rationalized this position, noting, "an
accommodative stance on monetary policy, coupled with robust underlying
growth in productivity, is providing important ongoing support to economic
activity."
Q. How did the overall fixed income markets perform during the fiscal year?
A. The fixed income markets were extremely volatile during the reporting period.
Initially, interest rates fell and bond prices rose as geopolitical concerns
and the weak stock market caused investors to flock to the relative safety
offered by fixed income securities.
1
In the days leading up to the war and during its initial phases, bond prices
generally fell. Based on reports surrounding the progress of the war,
investors believed that it would be short-lived and would result in an
increase in economic activity. However, following the end of major conflict
in Iraq and the absence of a post-war economic bounce, bond prices rallied.
The riskier segments of the bond market generated the best returns, as
investors searched for incremental yields in the low interest rate
environment.
Toward the end of the fiscal year, the bond market experienced unprecedented
fluctuations. Fed-driven concerns about deflation dominated the market and
drove the yield on the 10-year Treasury to a 45-year low of 3.1%. This gave
way, however, to a market that began pricing in stronger economic growth
prospects for the second half of the year. A selloff ensued, and the yield on
the 10-year Treasury surged to 4.60% in a span of 10 weeks, reaching a
14-month high. By period end, this figure fell back to 3.93%, as continued
high unemployment eased fears that the Fed would raise rates at its September
meeting. Indeed, the Fed did leave rates on hold at that time, citing labor
statistics as a significant reason behind its decision to do so. Further, it
reiterated its commitment to maintaining low rates.
Q. How did you position the Fund's portfolio during the period?
A. For much of the reporting period, the Fund's duration was shorter than that
of its benchmark, the Investment Grade Bond Index (the "benchmark").* This
stance led to mixed results--hurting performance when interest rates
declined, helping performance when interest rates rose. Toward the end of the
period, we opportunistically increased the Fund's duration to a neutral
position, since we believed rates had risen too far, too fast. This benefited
results when rates subsequently declined at the end of the reporting period.
From a sector standpoint, corporate credit was the best performing segment of
the investment grade market. Throughout the period, our long-standing process
of utilizing bottom-up credit analysis in this market helped us to identify
compelling opportunities that generated positive absolute returns. However,
our underweight in credit compared to the benchmark hurt relative results.
The Fund also maintained an overweight position in asset-backed and
commercial mortgage-backed securities over the period. These sectors
underperformed the credit markets, detracting from results.
Q. What is your outlook for the economy and how do you anticipate positioning
the Fund going forward?
A. We are fairly positive regarding the growth prospects for the economy.
Consumer spending is solid, the manufacturing sector appears to be gaining
momentum, the housing market remains strong, tax cuts are starting to work
their way through the system, and the Fed should remain accommodative. One
major issue we're following very closely is the job market. Even though the
economy appears to be picking up steam, it has not yet triggered an increase
in job growth. With approximately 70% of the economy driven by the consumer,
continued high unemployment could hurt consumer confidence and temper
economic expansion.
In terms of the Fund's portfolio, its duration is now in line with the
benchmark. To the extent possible, we have added long duration and short
duration bonds, as we believe this will be beneficial if the yield curve
flattens from its current steep slope. We continue to be underweight
investment grade credit, as we feel spreads are too tight relative to their
risk.
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*Index composition, 12/31/81 to present: 5% Lehman U.S. Agency Index, 75%
Lehman U.S. Credit Index, 10% Lehman U.S. Mortgage Fixed Rate MBS Index, 10%
Lehman U.S. Treasury Index.
2
Performance Summary
Net investment income for the 12 months was $0.83 per share and net
realized and unrealized gains on investments totaled $0.81 per share. On
September 30, 2003, the net asset value per share was $16.46 and the stock
closed that day at $14.70 per share.
During the period, the Board of Directors declared regular quarterly
dividends of $0.23 per share, $0.22 per share, $0.20 per share and $0.20 per
share payable on December 13, 2002, March 26, 2003, June 13, 2003 and September
12, 2003, respectively. In addition to regular dividends, the Board declared a
capital gains distribution of $0.04 per share payable on December 13, 2002.
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 8.3 years, and an average maturity of 14.9 years. The distribution
of the portfolio's expected maturities and quality was as follows:
Maturities Quality
-------------------------------- --------------------------------------
0-1 year 1.0% Treasury, Agency and Aaa 36.6%
1-3 years 3.7 Aa 1.8
3-5 years 1.9 A 28.7
5-10 years 53.6 Baa 30.8
10-20 years 11.3 Below Baa 2.1
20 plus years 28.5 -----
----- 100.0%
100.0%
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support
and welcome any comments or questions you may have.
Sincerely, Sincerely,
/s/ Joseph A. Varnas /s/ Craig G. Ellinger
Joseph A. Varnas Craig G. Ellinger
President Portfolio Manager
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended September 30, 2003, and reflects our
views at the time of its writing. Of course, these views may change in response
to changing circumstances, and they do not guarantee the future performance of
the markets or the Fund. We encourage you to consult your financial advisor
regarding your personal investment program.
3
Fort Dearborn Income Securities, Inc.
Performance At A Glance
Average Annual Return, Periods Ended 9/30/03
Net Asset Value Returns 6 months 1 year 5 years 10 years
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Fort Dearborn Income Securities, Inc. 5.04% 10.63% 6.87% 7.32%
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Investment Grade Bond Index 4.82% 10.71% 7.22% 7.63%
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Market Price Returns
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Fort Dearborn Income Securities, Inc. 0.61% 3.21% 6.40% 6.80%
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Investment Grade Bond Index 4.82% 10.71% 7.22% 7.63%
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Past performance does not predict future performance. The return and principal
value of an investment will fluctuate, so that an investor's shares, when sold,
may be worth more or less than their original cost. NAV return assumes, for
illustration only, that dividends were reinvested at the net asset value on the
ex-dividend dates. Market price return assumes dividends were reinvested under
the Dividend Reinvestment Plan. NAV and market price returns for periods of less
than one year are cumulative. Returns do not include brokerage commissions or
taxes paid on realized capital gains.
Index composition, 12/31/81 - present: 5% Lehman US Agency Index; 75% Lehman US
Credit Index; 10% Lehman US Mortgage Fixed Rate MBS Index; 10% Lehman US
Treasury Index.
Market Price, Dividend and Yields as of 9/30/03
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Market Price $14.70
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Net Asset Value (per share applicable to common shareholders) $16.46
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12-Month Net Investment Income Dividend (ended 9/30/03) $0.850
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September 2003 Dividend $0.200
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Market Yield* 5.44%
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NAV Yield* 4.86%
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IPO Yield* 4.27%
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* Market yield is calculated by multiplying the September dividend by 4 and
dividing by the month-end market price. NAV yield is calculated by multiplying
the September dividend by 4 and dividing by the month-end net asset value. IPO
yield is calculated by multiplying the September dividend by 4 and dividing by
the initial public offering price. Prices and yields will vary.
4
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2003
ASSETS:
Portfolio of investments:
Debt securities, at value (cost $132,912,304) ................... $142,506,017
Short-term securities, at cost, which approximates market ....... 1,200,255
------------
Total portfolio of investments ............................... 143,706,272
Receivable for interest on debt securities ........................ 2,003,737
Other assets ...................................................... 8,055
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Total assets ................................................. 145,718,064
------------
LIABILITIES:
Payable for investments purchased ............................... 1,014,844
Accrued investment advisory and administrative fees ............. 160,155
Accrued professional fees ....................................... 28,000
Accrued custodial and transfer agent fees ....................... 14,053
Accrued other expenses .......................................... 31,743
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Total liabilities ............................................ 1,248,795
------------
NET ASSETS (equivalent to $16.46 per share for 8,775,665
shares of capital stock outstanding) ............................ $144,469,269
============
Analysis of Net Assets:
Shareholders' capital ........................................... $135,120,133
Accumulated undistributed net investment income ................. 20,394
Accumulated net realized loss on sales of investments ........... (264,971)
Unrealized appreciation on investments .......................... 9,593,713
------------
Net assets applicable to outstanding shares ...................... $144,469,269
============
See Notes to Financial Statements.
5
STATEMENT OF OPERATIONS
For the Year Ended
September 30, 2003
Investment income:
Interest income earned ................................... $ 8,310,515
-----------
Expenses:
Investment advisory and administrative fees .............. 663,376
Directors' fees and expenses ............................. 89,898
Transfer agent and dividend disbursing agent fees ........ 72,212
Stockholders' reports and annual meeting fees ............ 61,929
Professional fees ........................................ 54,444
Custody fees ............................................. 38,434
Franchise taxes .......................................... 15,856
Other expenses ........................................... 43,131
-----------
Total expenses ............................................. 1,039,280
-----------
Net investment income ...................................... 7,271,235
-----------
Net realized and unrealized gain on investments:
Net realized gain from investment transactions ........... 186,121
Change in unrealized appreciation ........................ 6,960,588
-----------
Total realized and unrealized gain on investments .......... 7,146,709
-----------
Net increase in net assets from operations ................. $14,417,944
===========
See Notes to Financial Statements.
6
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended September 30,
2003 2002
------------ ------------
From operations:
Net investment income ................................. $ 7,271,235 $ 8,314,247
Net realized gain from investment transactions ........ 186,121 623,636
Change in unrealized appreciation (depreciation)
of investments ...................................... 6,960,588 (1,229,377)
------------ ------------
Net increase in net assets from operations ............ 14,417,944 7,708,506
Distributions to shareholders from:
Net investment income ................................. (7,459,315) (8,424,638)
Net realized gain ..................................... (351,027) (1,404,106)
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Total distributions ................................. (7,810,342) (9,828,744)
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Net increase (decrease) in net assets ............... 6,607,602 (2,120,238)
Net Assets:
Beginning of period ................................... 137,861,667 139,981,905
------------ ------------
End of period (including accumulated
undistributed net investment income of
$20,394 and $133,939, respectively) ................. $144,469,269 $137,861,667
============ ============
See Notes to Financial Statements.
7
FINANCIAL HIGHLIGHTS
Financial highlights for each share of capital stock outstanding through each
period:
Years Ended September 30,
------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Net asset value, beginning of period ........... $ 15.71 $ 15.95 $ 15.05 $ 15.11 $ 16.87
------- ------- ------- ------- -------
Net investment income .......................... 0.83 0.95 1.04 1.05 1.05
Net realized and unrealized gain (loss)
on investments ............................... 0.81 (0.07) 0.90 (0.06) (1.27)
------- ------- ------- ------- -------
Total from investment operations ............... 1.64 0.88 1.94 0.99 (0.22)
Less distributions from:
Net investment income ...................... (0.85) (0.96) (1.04) (1.04) (1.04)
Net realized gain .......................... (0.04) (0.16) -- (0.01) (0.50)
------- ------- ------- ------- -------
Total distributions ............................ (0.89) (1.12) (1.04) (1.05) (1.54)
------- ------- ------- ------- -------
Net asset value, end of period ................. $ 16.46 $ 15.71 $ 15.95 $ 15.05 $ 15.11
======= ======= ======= ======= =======
Market price per share at end of period ........ $ 14.70 $ 15.10 $ 14.84 $ 13.38 $ 13.88
Total investment return (market value) (1) ..... 3.21% 9.46% 18.98% 4.34% (2.76)%
Total return (net asset value) (2) ............. 10.63% 5.82% 13.22% 6.77% (1.48)%
Net assets at end of period (in millions) ...... $144.47 $137.86 $139.98 $132.09 $132.81
Ratios of expenses to average net assets ....... 0.74% 0.73% 0.71% 0.74% 0.73%
Ratio of net investment income to average
net assets ................................... 5.16% 6.07% 6.68% 7.01% 6.61%
Portfolio turnover ............................. 62.3% 126.8% 142.7% 73.8% 69.9%
Number of shares outstanding at end of
period (in thousands) ........................ 8,776 8,776 8,776 8,776 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.
See Notes to Financial Statements.
8
PORTFOLIO OF INVESTMENTS
September 30, 2003
Moody's
Face Value Rating Cost Value
----------- ------- ----------- -----------
DEBT SECURITIES--(99.2%)
[ ] MUNICIPAL SECURITIES--(3.0%)
New Jersey Economic Development Authority,
$10,000,000 Zero Coupon Revenue Bond, due 02/15/18 .......... Aaa $ 3,421,054 $ 4,307,000
----------- -----------
[ ] U.S. GOVERNMENT SECURITIES--(16.1%)
AGENCY OBLIGATIONS--(5.9%)
Fannie Mae,
1,180,000 4.625%, due 05/01/13 ........................... Aa2 1,177,465 1,172,857
430,000 7.125%, due 01/15/30 ........................... Aaa 552,567 528,071
Fannie Mae Grantor Trust,
736,739 5.500%, due 03/01/33 ........................... (a) 759,301 752,049
1,218,237 6.500%, due 07/25/42 ........................... (a) 1,324,452 1,294,758
Federal Home Loan Mortgage Corp., Gold Pool,
587,382 6.500%, due 02/01/17 ........................... (a) 621,157 618,128
Federal National Mortgage Association,
451,514 6.000%, due 06/01/23 ........................... (a) 470,280 467,950
809,182 6.000%, due 11/01/28 ........................... (a) 796,792 835,101
692,770 7.000%, due 03/01/31 ........................... (a) 701,538 735,120
Federal National Mortgage Association,
Guaranteed Mortgage Pass Thru Certificates,
154,902 REMIC, 7.000%, due 06/25/13 .................... (a) 144,041 159,147
Freddie Mac,
1,365,000 5.875%, due 03/21/11 ........................... Aa2 1,557,182 1,501,324
Government National Mortgage Association,
398,411 6.500%, due 05/15/29 ........................... (a) 367,596 418,539
----------- -----------
8,472,371 8,483,044
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U.S. TREASURY BONDS--(10.2%)
1,000,000 4.250%, due 08/15/13 ........................... Aaa 1,014,844 1,025,117
830,000 4.375%, due 08/15/12 ........................... Aaa 824,877 865,437
4,195,000 6.250%, due 05/15/30 ........................... Aaa 4,959,933 4,977,795
2,745,000 8.000%, due 11/15/21 ........................... Aaa 3,639,015 3,807,400
13,250,000 Principal Only, due 08/15/26 ................... Aaa 3,583,271 3,899,409
----------- -----------
14,021,940 14,575,158
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Total U.S. Government Securities ................ 22,494,311 23,058,202
----------- -----------
See Notes to Financial Statements.
9
PORTFOLIO OF INVESTMENTS--(Continued)
September 30, 2003
Moody's
Face Value Rating Cost Value
----------- ------- ----------- -----------
[ ] CORPORATE BONDS AND NOTES--(80.1%)
FINANCE--(38.8%)
$ 195,000 Allstate Corp. (The), 6.750%, due 05/15/18 ........... A1 $ 208,024 $ 225,938
745,000 Anadarko Finance Co., 7.500%, due 05/01/31 ........... Baa1 785,604 900,496
375,000 Avalonbay Communities, Inc., 7.500%, due
08/01/09 ............................................ Baa1 391,385 439,194
1,915,000 Bank of America Corp., 7.400%, due 01/15/11 .......... Aa3 1,978,724 2,274,790
235,000 Bank of New York Co., Inc. (The), 7.300%, due
12/01/09 ............................................ A1 265,450 279,783
815,000 Bank One Corp., 7.875%, due 08/01/10 ................. A1 868,679 991,948
1,655,000 Barclays Bank, PLC, 144A, 8.550%, due
12/31/49 ............................................ Aa3 1,652,733 2,059,138
1,250,000 Bear Stearns Commercial Mortgage Securities,
00-WF2, Class A2, 7.320%, due 10/15/32 .............. AAA* 1,436,084 1,474,095
320,000 Boeing Capital Corp., 7.375%, due 09/27/10 ........... A3 342,837 371,926
140,000 CIT Group, Inc., 7.750%, due 04/02/12 ................ A2 152,833 166,161
2,175,000 Citigroup, Inc., 7.250%, due 10/01/10 ................ Aa2 2,298,256 2,576,242
275,000 Conoco Funding Co., 7.250%, due 10/15/31 ............. A3 314,830 328,164
3,000,000 CPL Transition Funding LLC, 6.250%, due
01/15/17 ............................................ Aaa 3,243,281 3,351,777
1,105,000 Credit Suisse First Boston USA, Inc., 6.500%,
due 01/15/12 ........................................ Aa3 1,123,525 1,240,229
2,800,000 CS First Boston Mortgage Securities Corp.,
00-C1, Class A2, 7.545%, due 04/15/62 ............... AAA* 3,026,625 3,323,296
1,075,838 CS First Boston Mortgage Securities Corp., 03-8,
Class 5A1, 6.500%, due 04/25/33 ..................... Aaa 1,116,182 1,124,989
635,000 DLJ Commercial Mortgage Corp., 00-CKP1,
Class A1B, 7.180%, due 08/10/10 ..................... Aaa 638,274 730,142
750,000 DLJ Commercial Mortgage Corp., 99-CG3,
Class A1B, 7.340%, due 10/10/32 ..................... Aaa 814,219 881,571
700,000 EOP Operating, 7.250%, due 06/15/28 .................. Baa1 709,188 764,035
590,000 FleetBoston Financial Corp., 7.375%, due
12/01/09 ............................................ A2 623,984 697,604
1,805,000 Ford Motor Co., 7.450%, due 07/16/31 ................. Baa1 1,657,672 1,664,636
1,185,000 Ford Motor Credit Co., 7.375%, due 02/01/11 .......... A3 1,167,864 1,246,436
930,000 General Electric Capital Corp., 6.750%, due
03/15/32 ............................................ Aaa 907,269 1,049,514
See Notes to Financial Statements.
10
PORTFOLIO OF INVESTMENTS--(Continued)
September 30, 2003
Moody's
Face Value Rating Cost Value
----------- ------- ----------- -----------
$ 1,730,000 General Electric Capital Corp., 6.000%, due
06/15/12 ............................................. Aaa $ 1,834,482 $ 1,895,933
365,000 General Motors Acceptance Corp., 6.875%, due
09/15/11 ............................................. A3 361,340 378,871
1,000,000 General Motors Acceptance Corp., 8.375%, due
07/15/33 ............................................. Baa1 982,535 1,045,598
1,565,000 General Motors Acceptance Corp., 8.000%, due
11/01/31 ............................................. A3 1,590,689 1,607,537
170,000 Goldman Sachs Group, Inc., 6.125%, due
02/15/33 ............................................. Aa3 170,000 172,723
665,000 Goldman Sachs Group, Inc., 6.875%, due
01/15/11 ............................................. Aa3 664,759 764,647
1,165,000 Household Finance Corp., 6.750%, due
05/15/11 ............................................. A1 1,156,113 1,328,691
260,000 HSBC Holdings PLC, 5.250%, due 12/12/12 ............... A1 259,321 270,788
475,000 Lehman Brothers Holdings, Inc., 6.625%, due
01/18/12 ............................................. A2 472,554 540,325
390,000 Lincoln National Corp., 6.200%, due 12/15/11 .......... A3 388,534 425,619
320,000 Marsh & McClennan Cos., Inc., 6.250%, due
03/15/12 ............................................. A2 354,630 355,924
190,000 MBNA America Bank N.A., 7.125%, due
11/15/12 ............................................. Baa2 194,688 217,928
195,000 Mellon Funding Corp., 5.000%, due 12/01/14 ............ A2 193,366 199,227
1,213,031 Merrill Lynch Mortgage Investors, Inc., 96-C2,
Class A3, 6.960%, due 11/21/28 ....................... AAA* 1,287,661 1,319,662
170,000 Morgan Stanley, 7.250%, due 04/01/32 .................. Aa3 170,963 198,584
1,640,000 Morgan Stanley, 6.750%, due 04/15/11 .................. Aa3 1,645,037 1,873,728
360,000 National City Bank, 4.625%, due 05/01/13 .............. A1 359,719 362,759
670,000 Pemex Project Funding Master Trust, 8.000%,
due 11/15/11 ......................................... Baa1 732,409 757,100
1,500,000 PNC Mortgage Acceptance Corp., 99-CM1,
Class A1B, 7.330%, due 12/10/32 ...................... Aaa 1,608,750 1,757,615
870,000 Prudential Mortgage Capital Funding, LLC,
01-ROCK, Class A2, 6.605%, due 05/10/34 .............. Aaa 874,350 991,558
1,380,000 PSE&G Transition Funding LLC, 6.450%, due
03/15/13 ............................................. Aaa 1,445,766 1,590,418
See Notes to Financial Statements.
11
PORTFOLIO OF INVESTMENTS--(Continued)
September 30, 2003
Moody's
Face Value Rating Cost Value
----------- ------- ----------- -----------
$ 3,000,000 PSE&G Transition Funding LLC, 6.610%, due
06/15/15 ......................................... Aaa $ 3,376,875 $ 3,470,699
830,000 Qwest Capital Funding, Inc., 7.900%, due
08/15/10 ......................................... Caa2 862,051 755,300
115,000 SLM Corp., 5.125%, due 08/27/12 ................... A2 114,202 118,478
500,000 U.S. Bank N.A., Minnesota, 6.375%, due
08/01/11 ......................................... Aa3 509,916 567,653
945,000 Unilever Capital Corp., 7.125%, due 11/01/10 ...... A1 1,008,792 1,119,676
1,620,000 Wachovia Bank N.A. (Charlotte), 7.800%, due
08/18/10 ......................................... Aa3 1,709,242 1,980,610
350,000 Washington Mutual Bank, 6.875%, due 06/15/11 ...... A3 377,971 401,081
1,025,000 Wells Fargo Bank, N.A., 6.450%, due 02/01/11 ...... Aa1 1,014,672 1,168,428
----------- -----------
51,444,909 55,799,264
----------- -----------
UTILITIES--(7.0%)
305,000 Apache Corp., 6.250%, due 04/15/12 ................ A3 308,151 345,705
110,000 Boston Edison Co., 4.875%, due 10/15/12 ........... A1 109,227 112,040
370,000 Burlington Resources Finance Co., 6.680%, due
02/15/11 ......................................... Baa1 404,302 421,423
270,000 Commonwealth Edison Co., 6.150%, due
03/15/12 ......................................... A3 270,563 300,127
680,000 ConocoPhillips, 8.750%, due 05/25/10 .............. A3 769,943 863,496
1,400,000 Consolidated Edison Co. of New York, 7.500%,
due 09/01/10 ..................................... A1 1,389,332 1,684,367
670,000 Devon Financing Corp., ULC, 6.875%, due
09/30/11 ......................................... Baa2 651,274 769,039
415,000 Dominion Resources, Inc., 5.700%, due 09/17/12 .... Baa1 414,718 440,988
205,000 DTE Energy Co., 7.050%, due 06/01/11 .............. Baa2 222,906 231,040
590,000 Duke Energy Field Services, LLC, 8.125%, due
08/16/30 ......................................... Baa2 637,752 734,237
650,000 FirstEnergy Corp., 6.450%, due 11/15/11 ........... Baa2 642,400 678,275
165,000 Kerr-McGee Corp., 7.875%, due 09/15/31 ............ Baa3 198,145 193,814
345,000 Midamerican Energy Co., 5.125%, due 01/15/13 ...... A3 344,251 356,165
210,000 Praxair, Inc., 6.375%, due 04/01/12 ............... A3 213,065 238,572
520,000 Progress Energy, Inc., 7.000%, due 10/30/31 ....... Baa2 526,487 547,281
290,000 PSEG Power LLC, 8.625%, due 04/15/31 .............. Baa1 206,415 366,856
480,000 Sempra Energy, 7.950%, due 03/01/10 ............... Baa1 478,742 573,468
See Notes to Financial Statements.
12
PORTFOLIO OF INVESTMENTS--(Continued)
September 30, 2003
Moody's
Face Value Rating Cost Value
----------- ------- ----------- -----------
$ 325,000 Southern Power Co., 6.250%, due 07/15/12 ............ Baa1 $ 328,821 $ 356,662
300,000 Union Oil Co. of California, 7.500%, due
02/15/29 ........................................... Baa2 316,207 347,899
470,000 Valero Energy Corp., 7.500%, due 04/15/32 ........... Baa3 465,958 523,370
----------- -----------
8,898,659 10,084,824
----------- -----------
INDUSTRIAL--(17.6%)
720,000 Alcoa, Inc., 6.000%, due 01/15/12 ................... A2 718,195 792,890
675,000 Altria Group, Inc., 7.750%, due 01/15/27 ............ Baa2 700,852 704,869
180,000 Amerada Hess Corp., 7.875%, due 10/01/29 ............ Baa3 211,938 204,900
940,000 Anheuser-Busch Cos., Inc., 9.000%, due 12/01/09 ..... A1 1,095,896 1,214,682
1,815,000 AOL Time Warner, Inc., 7.625%, due 04/15/31 ......... Baa1 1,785,641 2,063,065
1,270,000 Avon Products, Inc., 7.150%, due 11/15/09 ........... A2 1,290,827 1,505,850
325,000 Bear Stearns Co., 5.700%, due 11/15/14 .............. A2 340,169 346,626
670,000 Bombardier, Inc.,144A, 6.750%, due 05/01/12 ......... Baa3 633,971 698,475
395,000 Bristol-Myers Squibb Co., 5.750%, due 10/01/11 ...... A1 404,457 429,503
720,000 Caterpillar, Inc., 6.550%, due 05/01/11 ............. A2 720,862 830,188
340,000 Cendant Corp., 7.375%, due 01/15/13 ................. Baa1 405,876 391,975
300,000 Centex Corp., 7.875%, due 02/01/11 .................. Baa2 360,808 355,095
420,000 Conagra Foods, Inc., 6.750%, due 09/15/11 ........... Baa1 466,972 482,966
350,000 Coors Brewing Co., 6.375%, due 05/15/12 ............. Baa2 348,586 390,074
380,000 DaimlerChrysler N.A. Holding Corp., 8.500%,
due 01/18/31 ....................................... A3 426,226 444,217
825,000 Deere & Co., 7.125%, due 03/03/31 ................... A3 841,357 969,012
330,000 Dow Chemical Co. (The), 6.125%, due 02/01/11 ........ A3 333,229 352,435
300,000 Federated Department Stores, Inc., 6.625%, due
04/01/11 ........................................... Baa1 333,670 341,894
375,000 First Data Corp., 5.625%, due 11/01/11 .............. A1 373,845 402,367
730,000 General Dynamics Corp., 4.250%, due 05/15/13 ........ A2 728,883 712,509
440,000 Harrah's Operating Co., Inc., 7.500%, due
01/15/09 ........................................... Baa3 480,959 511,521
875,000 International Paper Co., 6.750%, due 09/01/11 ....... Baa2 876,063 987,105
285,000 Kohl's Corp., 6.300%, due 03/01/11 .................. A3 288,605 323,006
760,000 Kraft Foods, Inc., 5.625%, due 11/01/11 ............. A3 790,640 801,023
685,000 Kroger Co., 7.500%, due 04/01/31 .................... Baa3 765,550 807,953
255,000 Lockheed Martin Corp., 8.500%, due 12/01/29 ......... Baa2 351,025 341,099
520,000 Merck & Co., Inc., 6.400%, due 03/01/28 ............. Aaa 563,279 587,865
See Notes to Financial Statements.
13
PORTFOLIO OF INVESTMENTS--(Continued)
September 30, 2003
Moody's
Face Value Rating Cost Value
----------- ------- ----------- -----------
$ 350,000 Miller Brewing Co.,144A, 5.500%, due 08/15/13 ...... Baa1 $ 348,651 $ 365,693
235,000 Newell Rubbermaid, Inc., 6.750%, due 03/15/12 ...... Baa1 258,976 266,358
425,000 Northrop Grumman Corp., 7.125%, due 02/15/11 ....... Baa3 493,115 496,826
735,000 Occidental Petroleum Corp., 8.450%, due
02/15/29 .......................................... Baa1 830,325 984,710
275,000 Progressive Corp. (The), 6.250%, due 12/01/32 ...... A1 281,688 292,686
290,000 Rohm & Haas Co., 7.850%, due 07/15/29 .............. A3 319,211 360,348
435,000 Safeway, Inc., 7.250%, due 02/01/31 ................ Baa2 465,047 490,975
525,000 Target Corp., 7.000%, due 07/15/31 ................. A2 567,636 604,488
585,000 Transocean, Inc., 7.500%, due 04/15/31 ............. Baa2 568,129 683,939
125,000 Tyson Foods Inc, 8.250%, due 10/01/11 .............. Baa3 144,464 149,498
430,000 United Technologies Corp., 6.100%, due
05/15/12 .......................................... A2 429,248 481,806
475,000 UST, Inc., 6.625%, due 07/15/12 .................... A3 472,777 531,432
400,000 Walt Disney Co. (The), 6.375%, due 03/01/12 ........ Baa1 406,219 444,156
310,000 Wendy's International, Inc., 6.200%, due
06/15/14 .......................................... Baa1 309,095 344,862
665,000 Weyerhaeuser Co., 7.375%, due 03/15/32 ............. Baa2 658,430 742,355
----------- -----------
23,191,392 25,233,296
----------- -----------
COMMUNICATION--(7.1%)
455,000 AT&T Corp., 8.000%, due 11/15/31 ................... Baa2 397,941 538,707
840,000 AT&T Wireless Services, Inc., 8.750%, due
03/01/31 .......................................... Baa2 927,648 1,038,945
315,000 BellSouth Telecommunications Corp., 6.000%,
due 10/15/11 ...................................... A1 321,614 348,566
340,000 British Telecommunications PLC, 8.125%, due
12/15/10 .......................................... Baa1 370,830 418,344
260,000 Cingular Wireless, 6.500%, due 12/15/11 ............ A3 251,534 293,975
520,000 Citizens Communications Co., 9.000%, due
08/15/31 .......................................... Baa2 538,838 684,875
1,005,000 Comcast Corp., 7.050%, due 03/15/33 ................ Baa3 998,869 1,101,453
740,000 International Business Machines Corp., 5.875%,
due 11/29/32 ...................................... A1 716,498 756,114
170,000 Motorola, Inc., 7.625%, due 11/15/10 ............... Baa2 158,507 193,800
820,000 News America, Inc., 7.125%, due 04/08/28 ........... Baa3 730,963 907,188
See Notes to Financial Statements.
14
PORTFOLIO OF INVESTMENTS--(Continued)
September 30, 2003
Moody's
Face Value Rating Cost Value
----------- ------- ------------ ------------
$ 800,000 SBC Communications, Inc., 5.875%, due
02/01/12 ............................................. A1 $ 807,940 $ 872,160
665,000 Sprint Capital Corp., 8.750%, due 03/15/32 ............ Baa3 721,933 790,175
1,085,000 Verizon New York, Inc., 7.375%, due 04/01/32 .......... A2 992,660 1,264,769
825,000 Viacom, Inc., 6.625%, due 05/15/11 .................... A3 922,592 943,539
------------ ------------
8,858,367 10,152,610
------------ ------------
INTERNATIONAL--(6.4%)
2,500,000 Augusta Funding Ltd., 7.375%, due 04/15/13 ............ Aaa 2,426,113 2,708,700
285,000 Canadian National Railway Co., 6.900%, due
07/15/28 ............................................. Baa1 296,656 322,363
625,000 Deutsche Telekom International Finance BV,
8.250%, due 06/15/30 ................................. Baa3 661,530 792,814
530,000 France Telecom S.A., 8.500%, due 03/01/31 ............. Baa3 605,677 707,623
2,805,000 Mexico Government International Bond,
8.125%, due 12/30/19 ................................. Baa2 2,858,578 3,169,650
385,000 Royal Bank of Scotland, 9.118%, due 03/31/10 .......... A1 472,719 486,357
475,000 State of Qatar, 144A, 9.750%, due 06/15/30 ............ A3 621,807 660,250
365,000 Telus Corp., 8.000%, due 06/01/11 ..................... Ba1 363,095 426,104
------------ ------------
8,306,175 9,273,861
------------ ------------
TRANSPORTATION--(3.2%)
120,000 Burlington Northern Santa Fe Corp., 6.875%,
due 12/01/27 ......................................... Baa2 117,860 132,800
740,000 Burlington Northern Santa Fe Corp., 7.082%,
due 05/13/29 ......................................... Baa2 733,549 838,732
700,000 Delta Air Lines, Inc., 10.500%, due 04/30/16 .......... B1 853,510 526,918
1,065,000 Erac U.S.A. Finance Co., 144A, 8.000%, due
01/15/11 ............................................. Baa1 1,118,529 1,279,971
470,000 Union Pacific Corp., 6.650%, due 01/15/11 ............. Baa3 473,989 535,019
3,000,000 United Airlines, Inc., 7.870%, due 01/30/19 ........... Ca 3,000,000 1,283,520
------------ ------------
6,297,437 4,596,960
------------ ------------
Total Corporate Bonds and Notes ....................... 106,996,939 115,140,815
------------ ------------
Total Debt Securities ................................. 132,912,304 142,506,017
------------ ------------
See Notes to Financial Statements.
15
PORTFOLIO OF INVESTMENTS--(Continued)
September 30, 2003
Shares Cost Value
---------- ------------ ------------
SHORT-TERM INVESTMENTS--(0.8%)
1,200,255 UBS Supplementary Trust U.S. Cash
Management Prime Fund .............. $ 1,200,255 $ 1,200,255
------------ ------------
Total Investments (100.0%) .......... $134,112,559 $143,706,272
============ ============
---------------------
(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.
144A Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At September
30, 2003, the value of these securities amounted to $5,063,527 or 3.5% of
the total portfolio of investments.
REMIC Real Estate Mortgage Investment Conduit
See Notes to Financial Statements.
16
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
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 investment company. The Company invests principally in investment
grade long-term fixed income debt securities with the primary objective of
providing its shareholders with:
o a stable stream of current income consistent with external interest rate
conditions, and
o 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. If a market value is not available from
an independent pricing source for a particular security, that security is valued
at fair value as determined in good faith by or under the direction of the
Fund's board of directors (the "Board"). The amortized cost method of valuation,
which approximates market value, generally is used to value short-term debt
instruments with sixty days or less remaining to maturity, unless the Board
determines that this does not represent fair 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 -- For federal income tax purposes, the cost of
securities owned at September 30, 2003, was substantially the same as the cost
of securities for financial statement purposes.
17
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
At September 30, 2003, the components of net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having an excess of value over cost) ...... $11,928,084
Gross depreciation (investments having an excess of cost over value) ...... (2,334,371)
-----------
Net unrealized appreciation of investments ................................ $ 9,593,713
===========
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.
At September 30, 2003, the components of accumulated earnings on a tax
basis were as follows:
Accumulated earnings ...................................................... $ 20,394
Undistributed long term capital gains ..................................... --
Accumulated capital and other losses ...................................... (235,576)
Unrealized appreciation ................................................... 9,564,317
----------
Total accumulated earnings ................................................ $9,349,135
==========
The differences between book-basis and tax-basis unrealized appreciation is
attributable to the tax deferral of losses on wash sales.
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
The tax character of distributions paid during the fiscal years ended
September 30, 2003 and September 30, 2002 were as follows:
Distributions paid from: 2003 2002
------------------------ ---------- ----------
Ordinary income ......................................... $7,643,604 $9,828,744
Capital gains ........................................... 166,738 --
---------- ----------
$7,810,342 $9,828,744
========== ==========
18
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2003
3. DISTRIBUTIONS (Continued)
At September 30, 2003, the Fund had a net capital loss carryforward of
$235,576, which is available as a reduction, to the extent provided in the
regulations, of future net realized capital gains, and will expire on September
30, 2011. To the extent that such losses are used to offset future net realized
capital gains as provided in the regulations, such gains will not be
distributed.
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.
Permanent book and tax differences of $74,535 were reclassified from accumulated
net realized gain (loss) on investments to undistributed net investment income
due to gains from paydown adjustments related to mortgage-backed securities.
Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax
purposes.
4. CAPITAL STOCK
At September 30, 2003, there were 12,000,000 shares of $.01 par value
capital stock authorized, and shareholder capital of $135,120,133. During the
year ended September 30, 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 year ended September 30, 2003, were as follows: debt securities and
preferred stock, $29,466,887 and $24,256,812, respectively; short-term
securities, $34,153,023 and $37,714,853, respectively: and United States
government debt obligations, $60,038,752 and $61,351,783, 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 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.
19
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2003
6. MANAGEMENT AND OTHER FEES (Continued)
The following table sets forth as to each Director the compensation paid to
such Director in the fiscal year ended September 30, 2003 for service on the
Board of the Company and, in the case of Messrs. Reilly and Roob, on the boards
of three other investment companies for which the Advisor performed investment
advisory services.
Pension or
Retirement
Benefits
Accrued as Total Compensation
Aggregate Part of Estimated from Company and
Compensation Company Annual Benefits Fund Complex
Name of Director from Company Expenses Upon Retirement (unaudited)
---------------- ------------ ----------- --------------- ------------------
Adela Cepeda ............... $13,500 -- -- $13,500
C. Roderick O'Neal ......... 16,500 -- -- 16,500
Frank K. Reilly ............ 13,500 -- -- 75,600
Edward M. Roob ............. 13,500 -- -- 75,600
J. Mikesell Thomas ......... 13,500 -- -- 13,500
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 September 30, 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 .............. $33,941,563 $37,503,843 $42,474 $1,200,255 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. Securities issued by Government National
Mortgage Association (GNMA) are backed by the full faith and credit of the U.S.
Government. Securities issued by Federal National Mortgage Association (FNMA) or
Federal Home Loan Mortgage Corporation (FHLMC) are not backed by the full faith
and credit of the U.S. Government, but the issuing agency has the right to
borrow from the U.S. Treasury to meet it's obligations. However, some securities
may be issued by private, non-
20
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2003
7. MORTGAGE BACKED SECURITIES AND OTHER INVESTMENTS (Continued)
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 that 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 generally has 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.
21
Report of Independent Auditors
To the Shareholders and Board of Directors of
Fort Dearborn Income Securities, Inc.
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Fort Dearborn Income Securities, Inc., (the
"Company") as of September 30, 2003, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
three years in the period then ended. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the two years in the period ended September 30, 2000, were audited by other
auditors whose report dated October 26, 2000, expressed an unqualified opinion
on the financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of September 20, 2003, by correspondence
with the custodian and others. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Fort
Dearborn Income Securities, Inc. as of September 30, 2003, and the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the three years in the period then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
November 3, 2003
22
Report on the Automatic Dividend Investment Plan
The Company's Automatic Dividend Investment Plan, operated for the
convenience of the shareholders, has been in operation since the dividend
payment of May 5, 1973.
For the year ended September 30, 2003, 59,608 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
June 13, 2003 13,649 $15.70 Open Market
September 12, 2003 13,516 $14.55 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 759 participants on September 12, 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., P.O. Box 43081, Providence,
RI 02940-3081 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
ensure that cost information is available if and when it is needed.
--------------------------------------------------------------------------------
Shareholder Information
For the year ended September 30, 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.
23
General Information
Stock Repurchase Plan
On July 28, 1988, the Board of Directors of the Company approved a
resolution to repurchase up to 700,000 of its common shares. The Company may
repurchase shares, at a price not in excess of market and at a discount from net
asset value, if and when such repurchases are deemed appropriate and in the
shareholder's best interest. Any repurchases will be made in compliance with
applicable requirements of the federal securities law.
Under such law, the Company is required to give written notice to all
shareholders of its intention to purchase stock within six months of the actual
repurchase of shares. This report is to serve as notice to all shareholders with
respect to any shares repurchased within the next six months pursuant to the
Company's stock repurchase plan.
Audited financial statements for the year ended September 30, 2003 and a
list of securities owned on that date are included in this report.
24
[THIS PAGE INTENTIONALLY LEFT BLANK]
Supplemental Information (Unaudited)
Board of Directors & Officers
The Company is governed by a Board of Directors which oversees the
Company's operations. Each Director serves until the next annual meeting of
shareholders or until his or her successor is elected and qualified. Officers
are appointed by the Directors and serve at the pleasure of the Board. The table
below shows, for each Director and Officer, his or her name, address and age,
the position held with the Company, the length of time served as a Director or
Officer of the Company, the Director's or Officer's principal occupations during
the last five years, other directorships held by the Director or Officer, the
number of funds in the Fort Dearborn fund complex overseen by the Director or
for which a person served as an Officer, and shares owned by the Director or
Officer.
Position(s) Term of Office(1)
Held with and Length of
Name, Address and Age Trust Time Served Principal Occupation(s) During Past 5 Years
--------------------- -------------- ----------------- ----------------------------------------------
DIRECTORS:
C. Roderick O'Neil; 71 Director and Since 1992 Mr. O'Neil is chairman of O'Neil Associates, an
O'Neil Associates Chairman of investment and financial consulting firm.
P.O. Box 405 the Board of
South Glastonbury, CT 06073 Directors
Adela Cepeda; 44 Director Since 2000 Ms. Cepeda is founder and president of A.C.
A.C. Advisory, Inc. Advisory, Inc. (since 1995).
161 No. Clark Street,
Suite 4975
Chicago, Illinois 60601
Frank K. Reilly; 67 Director Since 1993 Mr. Reilly is a Professor at the University of
College of Business Administration Notre Dame since 1982. Mr. Reilly was a Director
University of Notre Dame of Battery Park Funds Inc. (1995-2001).
Notre Dame, IN
46556-0399
Edward M. Roob; 69 Director Since 1993 Mr. Roob is retired (since 1993). Mr. Roob was a
841 Woodbine Lane Committee Member of the Chicago Stock
Northbrook, IL 60002 Exchange from 1993-1999.
J. Mikesell Thomas, 51 Director Since 2002 Mr. Thomas is an independent financial advisor
c/o UBS Global Asset Management (since 2001). He was a managing director of
(Americas) Inc. Lazard Freres & Co. (1995 to 2001).
One N. Wacker Drive
Chicago, Illinois 60606
26
Shares
Beneficially
Owned Directly
Number of Portfolios in or Indirectly
Fund Complex Overseen Other Directorships September 30,
by Trustee Held by Trustee 2003
----------------------------------------------------- ------------------------------------------------- --------------
Mr. O'Neil is a director of one investment company Mr. O'Neil is also a director of Beckman Coulter, 3,375
(consisting of one portfolio) for which UBS Global Inc., Cadre Institutional Investors Trust and a
AM (Americas) serves as investment advisor trustee of Optimum Qu Fund.
Ms. Cepeda is a director of one investment company Ms. Cepeda is a director of Lincoln National 1,000
(consisting of one portfolio) for which UBS Global Income Fund, Inc. and Lincoln National
AM (Americas) serves as investment advisor Convertible Securities Fund.
Mr. Reilly is a director or trustee of five investment Mr. Reilly is a Director of Discover Bank; Morgan 5,706
companies (consisting of 44 portfolios) for which Stanley Trust, FSB; and NIBCO, Inc.
UBS Global AM (Americas) or one of its affiliates
serves as investment advisor, sub-advisor or manager.
Mr. Roob is a director or trustee of five investment Mr. Roob is a Trustee of the CCM Fund Complex 8,000
companies (consisting of 44 portfolios) for which (9 portfolios).
UBS Global AM (Americas) or one of its affiliates
serves as investment advisor, sub-advisor or manager.
Mr. Thomas is a director of one investment company Mr. Thomas is a director and chairman of the None
(consisting of one portfolio) for which UBS Global Finance Committee for Evanston Northwestern
AM (Americas) serves as investment advisor Healthcare. He is also a vice president of the
Board of Trustees for Mid-Day Club and
leadership of Greater Chicago Association.
27
Principal
Position(s) Term of Office(1) Occupation(s)
Name, Address Held with and Length of During Past
and Age Trust Time Served 5 Years
------- -------------- ----------------- ---------------------------------------------------------
OFFICERS:
Joseph A. Anderson*; 41 Assistant Since 1992 Mr. Anderson is an executive director of UBS Global AM
Treasurer (Americas). (since 1991) and is currently the vice
president of UBS Global Asset Management Trust
Company (since 1995). Mr. Anderson is assistant
treasurer of one investment company (consisting of one
portfolio) for which UBS Global AM (Americas) serves
as investment advisor.
Amy R. Doberman**; 41 Vice President Since 2003 Ms. Doberman is a managing director and general
and Assistant counsel of UBS Global AM. From December 1997
Secretary through July 2000, she was general counsel of Aeltus
Investment Management, Inc. Ms. Doberman is vice
president and assistant secretary of five investment
companies (consisting of 44 portfolios) and vice president
and secretary of 17 investment companies (consisting of
37 portfolios) for which UBS Global AM or one of its
affiliates serves as investment advisor, sub-advisor or
manager.
Craig G. Ellinger*; 33 Vice President Since 2001 Mr. Ellinger is a portfolio manager in the Fixed Income
Group at UBS Global AM (Americas) (since 2000) He
previously served in a similar position at PPM America,
Inc. (1997 to 2000). Mr. Ellinger is vice president of one
investment company (consisting of one portfolio) for
which UBS Global AM (Americas) serves as investment
advisor.
David M. Goldenberg**; 37 Vice President Since 2003 Mr. Goldenberg is an executive director and deputy
and Secretary general counsel of UBS Global AM. From 2000 to 2002
he was director, legal affairs at Lazard Asset
Management. Mr. Goldenberg served in various
capacities, including most recently as global director of
Compliance, at SSB Citi Asset Management Group from
1996 to 2000. Mr. Goldenberg is a vice president and
secretary of five investment companies (consisting of 44
portfolios) and a vice president and assistant secretary of
17 investment companies (consisting of 37 portfolios) for
which UBS Global AM or one of its affiliates serves as
investment advisor, sub-advisor or manager.
28
Principal
Position(s) Term of Office(1) Occupation(s)
Name, Address Held with and Length of During Past
and Age Trust Time Served 5 Years
------- -------------- ----------------- -----------------------------------------------------------
Rita Rubin**, 33 Assistant Since 2002 Ms. Rubin is a director and associate general counsel of
Secretary UBS Global AM. Prior to 2001, she was an attorney with
the law firm of Kirkpatrick & Lockhart LLP. Ms. Rubin is
an assistant secretary of four investment companies
(consisting of 42 portfolios) for which UBS Global AM
(Americas) or one of its affiliates serves as investment
advisor, sub-advisor or manager.
Paul H. Schubert**; 40 Vice President Since 2003 Mr. Schubert is an executive director and head of the
and Treasurer mutual fund finance department of UBS Global AM.
Mr. Schubert is treasurer and principal accounting officer
of three investment companies (consisting of 41
portfolios), a vice president and treasurer of 18
investment companies (consisting of 38 portfolios), and
treasurer and chief financial officer of one investment
company (consisting of two portfolios) for which UBS
Global AM or one of its affiliates serves as investment
advisor, sub-advisor or manager.
Joseph A. Varnas**; 35 President Since 2003 Mr. Varnas is a managing director (since March 2003),
chief technology officer (since March 2001) and head of
product, technology and operations of UBS Global AM
(since November 2002). From 2000 to 2001, he was
manager of product development in Investment
Consulting Services at UBS Financial Services Inc.
Mr. Varnas was a senior analyst in the Global Securities
Research and Economics Group at Merrill Lynch from
1995 to 1999. Mr. Varnas is president of 21 investment
companies (consisting of 79 portfolios) for which UBS
Global AM or one of its affiliates serves as investment
advisor, sub-advisor or manager.
* This person's business address is One North Wacker Drive, Chicago, IL 60606.
** This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
(1) Each Director serves until the next annual meeting of shareholders or until
his or her successor is elected and qualified, or until he or she resigns or
is otherwise removed. Officers of the Fund are appointed by the Directors
and serve at the pleasure of the Board.
--------------------------------------------------------------------------------
Fort Dearborn Income Securities, Inc. Legal Counsel
One N. Wacker Drive Winston & Strawn
38th Floor 35 West Wacker Drive
Chicago, Illinois 60606 Chicago, Illinois 60601
(312) 525-7877
Independent Auditors
Ernst & Young LLP
5 Times Square
New York, New York 10036
29
EquiServe Trust Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
TELEPHONE:
Inside the United States: 1-800-446-2617
Outside the United States 1-781-575-2723
TDD/TTY for hearing impaired: 1-800-952-9245
(Operators are available Monday - Friday, 9:00 a.m. to 5:00 p.m. Eastern time.
An interactive automated system is available around the clock every day.)
INTERNET:
http://www.equiserve.com
------------------------
CERTIFICATE TRANSFERS BY MAIL:
------------------------------
EquiServe
P.O. Box 43070
Providence, RI 02940-3070
CERTIFICATE TRANSFERS BY OVERNIGHT MAIL OR PRIVATE COURIER:
-----------------------------------------------------------
EquiServe
Attn: Transfer Department
150 Royall Street
Canton, MA 02021
1-800-446-2617
DIVIDEND REINVESTMENT PLAN INFORMATION:
---------------------------------------
EquiServe
Dividend Reinvestment Service
P.O. Box 43081
Providence, RI 02940-3081
30
[FORT DEARBORN GRAPHIC]
Fort
Dearborn
Income
Securities,
Inc.
Fort Dearborn Income Securities, Inc.
FTD The ANNUAL REPORT
-------- [LOGO] Chicago SEPTEMBER 30, 2003
Listed Stock Exchange
--------
NYSE
Item 2. Code of Ethics.
-----------------------
The registrant has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions pursuant to Section 406 of
the Sarbanes-Oxley Act of 2002. (The registrant has designated the code of
ethics adopted pursuant to Sarbanes-Oxley as a "Code of Conduct" to lessen the
risk of confusion with its separate code of ethics adopted pursuant to Rule
17j-1 under the Investment Company Act of 1940, as amended.)
Item 3. Audit Committee Financial Expert.
-----------------------------------------
The registrant's Board of Directors has determined that the following person
serving on the registrant's Audit Committee is an "audit committee financial
expert" as defined in item 3 of Form N-CSR : J. Mikesell Thomas. Mr. Thomas is
independent as defined in item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
-----------------------------------------------
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
Item 5. Audit Committee of Listed Registrants.
----------------------------------------------
Not applicable to the registrant.
Item 6. [Reserved by SEC for future use.]
------------------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed -
-----------------------------------------------------------------------
End Management Investment Companies.
-------------------------------------
The registrant's Board of Directors believes that the voting of proxies on
securities held by the registrant is an important element of the overall
investment process. As such, the Board has delegated the responsibility to vote
such proxies to the registrant's advisor. Following is a summary of the proxy
voting policy of the advisor.
Corporate Governance Philosophy, Voting Guidelines and Policy Summary
The proxy voting policy of UBS Global Asset Management (Americas) Inc. ("UBS
Global AM (Americas)") is based on its belief that voting rights have economic
value and must be treated accordingly. Generally, UBS Global AM (Americas)
expects the boards of directors of companies issuing securities held by its
clients to act as stewards of the financial assets of the company, to exercise
good judgment and practice diligent oversight with the management of the
company. While there is no absolute set of rules that determine appropriate
corporate governance under all circumstances and no set of rules will guarantee
ethical behavior, there are certain benchmarks, which, if substantial progress
is made toward, give evidence of good corporate governance. UBS Global AM
(Americas) may delegate to an independent proxy voting and research service the
authority to exercise the voting rights associated with
certain client holdings. Any such delegation shall be made with the direction
that the votes be exercised in accordance with UBS Global AM (Americas)'s proxy
voting policy.
When UBS Global AM (Americas)'s view of a company's management is favorable, UBS
Global AM (Americas) generally supports current management initiatives. When UBS
Global AM (Americas)'s view is that changes to the management structure would
probably increase shareholder value, UBS Global AM (Americas) may not support
existing management proposals. In general, UBS Global AM (Americas) (1) opposes
proposals which act to entrench management; (2) believes that boards should be
independent of company management and composed of persons with requisite skills,
knowledge and experience; (3) opposes structures which impose financial
constraints on changes in control; (4) believes remuneration should be
commensurate with responsibilities and performance; and (5) believes that
appropriate steps should be taken to ensure the independence of auditors.
UBS Global AM (Americas) has implemented procedures designed to identify whether
it has a conflict of interests in voting a particular proxy proposal, which may
arise as a result of its or its affiliates' client relationships, marketing
efforts or banking, investment banking and broker/dealer activities. To address
such conflicts, UBS Global AM (Americas) has imposed information barriers
between it and its affiliates who conduct banking, investment banking, and
broker/dealer activities and has implemented procedures to prevent business,
sales and marketing issues from influencing our proxy votes. Whenever UBS Global
AM (Americas) is aware of a conflict with respect to a particular proxy, its
appropriate local corporate governance committee is required to review and agree
to the manner in which such proxy is voted.
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-3(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) The registrant's principal executive officer and principal financial
officer are aware of no changes in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal half-year that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
Item 10. Exhibits.
-------------------
(a) (1) Code of Conduct.
(a) (2) Certifications of principal executive officer and principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 is attached hereto as Exhibit Ex-99.CERT.
(b) Certifications of principal executive officer and principal financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is
attached hereto as Exhibit Ex-99.906CERT.
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/ Joseph A. Varnas
---------------------
Joseph A. Varnas
President
Date: December 2, 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/ Joseph A. Varnas
---------------------
Joseph A. Varnas
President
Date: December 2, 2003
----------------
By: /s/ Paul H. Schubert
--------------------
Paul H. Schubert
Treasurer
Date: December 2, 2003
----------------