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
__________________________________________________
Fort Dearborn Income Securities, Inc.
____________________________________________________________________________
(Exact name of registrant as specified in charter)
One North Wacker Drive, Chicago, Illinois 60606
____________________________________________________________________________
(Address of principal executive offices) (Zip code)
Mark F. Kemper, Esq.
UBS Global Asset Management (Americas) Inc.
One North Wacker Drive
Chicago, Ill 60606
(Name and address of agent for service)
Copy to:
Bruce G. Leto, Esq.
Stradley Ronon Stevens & Young LLP
2600 One Commerce Square
Philadelphia, PA 19103
Registrant's telephone number, including area code: 212-882 5000
Date of fiscal year end: September 30
Date of reporting period: March 31, 2006
ITEM 1. REPORTS TO STOCKHOLDERS.
---------------------------------
[LOGO OF UBS] UBS Global Asset
Management
FORT DEARBORN INCOME
SECURITIES, INC.
SEMIANNUAL REPORT
MARCH 31, 2006
FORT DEARBORN INCOME SECURITIES, INC.
May 15, 2006
DEAR SHAREHOLDER,
We present you with the semiannual report for Fort Dearborn Income Securities,
Inc. (the "Fund") for the six months ended March 31, 2006.
PERFORMANCE
Over the six-month period, the Fund declined 1.14% based on net asset value. On
a market price basis, the Fund declined 0.78%. Over the same period, the Fund's
peer group, the Lipper Corporate Debt Funds BBB-Rated median, posted a net asset
value return of 0.09% and declined 0.80% on a market price basis. Finally, the
Investment Grade Bond Index (the "Index"), the Fund's benchmark, declined 1.67%.
(For more performance information, please refer to "Performance at a Glance" on
page 4).
Over the period, the Fund did not use leverage. (Neither the Fund's peer group
nor the Index use leverage.) Leverage magnifies returns on both the upside and
on the downside, creating a wider range of returns.
--------------------------------------------------------------------------------
FORT DEARBORN INCOME SECURITIES, INC.
INVESTMENT GOAL:
Current income consistent with external interest rate conditions and total
return.
PORTFOLIO MANAGER:
Craig Ellinger
UBS Global Asset
Management (Americas) Inc.
COMMENCEMENT:
December 19, 1972
NYSE SYMBOL:
FDI
DIVIDEND PAYMENTS:
Quarterly
--------------------------------------------------------------------------------
AN INTERVIEW WITH PORTFOLIO MANAGER CRAIG ELLINGER
Q. HOW WOULD YOU DESCRIBE THE ECONOMIC ENVIRONMENT DURING THE REPORTING PERIOD?
A. Over the past six months, the economy continued to show resilience in the
wake of a brutal hurricane season and geopolitical unrest. Overall,
unemployment and core inflation both remained low, and consumer confidence,
which was somewhat volatile in the early fall, generally continued to rise
through the rest of the period. Unemployment, despite large numbers of
dislocated workers in the wake of Katrina, improved steadily finishing the
period at 4.7%, down from 5.1% at the beginning of the period. Although
final data put fourth quarter 2005 GDP growth at 1.7%, advance estimates for
the first quarter of 2006 showed a significant rebound, with the economy
growing at 4.8%--the highest it has been in nearly three years.
--------------------------------------------------------------------------------
1
FORT DEARBORN INCOME SECURITIES, INC.
Q. HOW DID THE FEDERAL RESERVE BOARD (THE "FED") REACT TO THESE ECONOMIC
CONDITIONS?
A. During the reporting period, the Fed continued its tightening campaign.
Through the change in leadership from Alan Greenspan to Ben Bernanke, the
fed funds rate (the interest rate banks charge each other for overnight
loans) was raised four times during the period, and once more after the
period ended, to bring the rate to 5.00%. The market consensus seemed to be
that the Fed may be near the end of this current tightening period after
having raised rates 16 times since June 2004. While we cannot be certain
exactly when the Fed will pause or end its current policy, we believe it is
unlikely that during 2006 we will experience the series of uninterrupted
rate increases that we saw in 2005.
Q. HOW DID THE OVERALL FIXED INCOME MARKETS PERFORM DURING THE REPORTING PERIOD?
A. This proved to be a challenging period for fixed income investors. The bond
market remained under pressure in response to the Fed's tightening campaign,
and an economy that continued to build steam. Across the curve, yields
generally rose and, following a brief inversion, the curve ended the period
largely flat across maturities. Yields on the 10-year note moved from 4.33%
at the beginning of the period to 4.85% at the end. The "carry trade"
(borrowing money cheaply and reinvesting it in higher-yielding securities),
which sustained many investors for the last two years, has all but
disappeared. The bond market, by most measures, was overvalued and therefore
unattractive on a price basis.
Q. HOW DID YOU MANAGE THE FUND'S PORTFOLIO DURING THE PERIOD?
A. In general, we maintained a defensive stance on interest rates and spread
product that has been the focus of the Fund's strategy for the past year.
(Bonds that offer a yield higher than those of similarly-dated Treasuries are
called "spread product." The difference in yields is called the "spread.")
Our strategy on spread product was driven by our belief that the risk
premium offered for longer-term securities and lower credit quality
securities was inadequate. Also, we believed the Fed would continue to raise
rates, so we kept the Fund's duration shorter than the benchmark, which
helped Fund performance during the reporting period. (A number of funds in
our Lipper peer group, however, had even shorter durations, as well as
shorter maturities, during the period, both of which detracted from our
performance relative to those peers.)
We were similarly defensive regarding our exposure to various
investment-grade bond sectors. Although the majority of the Fund's assets
remain in corporate bonds, the corporate bonds that we owned during the
period had significantly shorter maturities than those of the benchmark,
another defensive move that helped the Fund considerably.
--------------------------------------------------------------------------------
2
FORT DEARBORN INCOME SECURITIES, INC.
In contrast to these defensive strategic themes, we took risk in tactical
positions we believed to be appropriately priced. For example, we built a
relatively large position in Ford Motor Credit Company (FMCC), Ford's captive
finance subsidiary. While not defensive, this position proved to be
beneficial and had a positive impact on performance over the past six months.
Although the Fund declined during the period, our defensive position helped
limit the impact of a challenging market environment.
As always, 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. For additional information
on the UBS family of funds,* please contact your financial advisor, or visit us
at www.ubs.com/globalam-us.
Sincerely,
/s/ W. Douglas Beck
W. Douglas Beck,
President
Fort Dearborn Income Securities, Inc.
Executive Director
UBS Global Asset Management (Americas) Inc.
/s/ Craig Ellinger
Craig Ellinger
Portfolio Manager
Fort Dearborn Income Securities, Inc.
Executive Director
UBS Global Asset Management (Americas) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the six months ended March 31, 2006. The views and opinions in
the letter were current as of May 15, 2006. They are not guarantees of
performance or investment results and should not be taken as investment advice.
Investment decisions reflect a variety of factors, and we reserve the right to
change our views about individual securities, sectors and markets at any time.
As a result, the views expressed should not be relied upon as a forecast of the
Fund's future investment intent. We encourage you to consult your financial
advisor regarding your personal investment program.
* MUTUAL FUNDS ARE SOLD BY PROSPECTUS ONLY. YOU SHOULD READ IT CAREFULLY AND
CONSIDER A FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES, EXPENSES AND OTHER
IMPORTANT INFORMATION CONTAINED IN THE PROSPECTUS BEFORE INVESTING.
PROSPECTUSES FOR MOST OF OUR FUNDS CAN BE OBTAINED FROM YOUR FINANCIAL
ADVISOR, BY CALLING UBS FUNDS AT 800-647 1568 OR BY VISITING OUR WEB SITE AT
WWW.UBS.COM/GLOBALAM-US.
--------------------------------------------------------------------------------
3
FORT DEARBORN INCOME SECURITIES, INC.
PERFORMANCE AT A GLANCE (UNAUDITED)
AVERAGE ANNUAL RETURNS, PERIODS ENDED 3/31/06
NET ASSET VALUE RETURNS* 6 months 1 year 5 years 10 years
---------------------------------------------------------------------------------------------
Fort Dearborn Income Securities, Inc. -1.14% 1.65% 5.85% 6.86%
---------------------------------------------------------------------------------------------
Investment Grade Bond Index** -1.67 1.67 6.74 7.25
---------------------------------------------------------------------------------------------
Lipper Corporate Debt Funds
BBB-Rated median*** 0.09 2.50 5.89 6.60
=============================================================================================
MARKET PRICE RETURNS*
---------------------------------------------------------------------------------------------
Fort Dearborn Income Securities Inc. -0.78% 4.09% 5.91% 7.47%
---------------------------------------------------------------------------------------------
Investment Grade Bond Index** -1.67 1.67 6.74 7.25
---------------------------------------------------------------------------------------------
Lipper Corporate Debt Funds
BBB-Rated median*** -0.80 4.92 5.70 7.15
=============================================================================================
SHARE PRICE, DIVIDEND AND YIELDS AS OF 3/31/06
---------------------------------------------------------------------------------------------
Market Price $14.06
---------------------------------------------------------------------------------------------
Net Asset Value (per share applicable to common shareholders) $15.49
---------------------------------------------------------------------------------------------
6-Month Net Investment Income Dividend (ended 3/31/06) $0.420
---------------------------------------------------------------------------------------------
March 2006 Dividend $0.200
---------------------------------------------------------------------------------------------
Market Yield**** 5.69%
---------------------------------------------------------------------------------------------
NAV Yield**** 5.16%
=============================================================================================
* 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/DISTRIBUTIONS WERE
REINVESTED AT THE NET ASSET VALUE ON THE MONTH-END DATES. MARKET PRICE
RETURN ASSUMES THAT DIVIDENDS/DISTRIBUTIONS WERE REINVESTED UNDER THE
DIVIDEND REINVESTMENT PLAN. NAV AND MARKET PRICE RETURNS FOR PERIODS ONE
YEAR OR LESS HAVE NOT BEEN ANNUALIZED. FOR CURRENT MONTH-END PERFORMANCE
FIGURES, PLEASE VISIT HTTP://WWW.UBS.COM.
RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY
ON FUND DIVIDENDS/DISTRIBUTIONS OR BROKERAGE COMMISSIONS AND TAXES ON THE
SALE OF FUND SHARES.
** Index composition, 12/31/81 - present: 5% Lehman US Agency Index
(7+ years); 75% Lehman US Credit Index (7+ years); 10% Lehman US Mortgage
Fixed Rate MBS Index (all maturities); 10% Lehman U.S. Treasury Index
(7+ years).
*** Lipper peer group data calculated by Lipper Inc.; used with permission. The
Lipper median is the return of the fund that places in the middle of the
peer group.
**** Market yield is calculated by multiplying the March 2006 dividend by 4 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the March 2006 dividend by 4 and dividing by the month-end net
asset value. Prices and yields will vary.
--------------------------------------------------------------------------------
4
FORT DEARBORN INCOME SECURITIES, INC.
INDUSTRY DIVERSIFICATION
As a Percent of Net Assets
As of March 31, 2006 (unaudited)
--------------------------------------------------------------------------------
Bonds
U.S. Bonds
U.S. Corporate Bonds
Aerospace & Defense .............................................. 1.32%
Auto Components .................................................. 0.50
Automobiles ...................................................... 0.73
Beverages ........................................................ 0.52
Capital Markets .................................................. 3.36
Chemicals ........................................................ 0.61
Commercial Banks ................................................. 5.48
Commercial Services & Supplies ................................... 1.83
Consumer Finance ................................................. 3.36
Diversified Financial Services ................................... 10.42
Diversified Telecommunication Services ........................... 5.49
Electric Utilities ............................................... 2.00
Food & Staples Retailing ......................................... 1.14
Food Products .................................................... 0.88
Gas Utilities .................................................... 0.91
Health Care Providers & Services ................................. 0.49
Household Durables ............................................... 0.68
Insurance ........................................................ 1.15
Media ............................................................ 2.10
Multi-Utilities & Unregulated Power .............................. 0.61
Multiline Retail ................................................. 0.26
Oil & Gas ........................................................ 2.04
Paper & Forest Products .......................................... 0.52
Personal Products ................................................ 0.99
Pharmaceuticals .................................................. 1.19
Real Estate ...................................................... 1.35
Road & Rail ...................................................... 1.57
Thrifts & Mortgage Finance ....................................... 1.50
Tobacco .......................................................... 0.62
Wireless Telecommunication Services .............................. 0.88
------
Total U.S. Corporate Bonds .................................... 54.50
------
Asset-Backed Securities ............................................. 6.60
Mortgage & Agency Debt Securities ................................... 9.51
Municipal Notes and Bonds ........................................... 3.52
U.S. Government Obligations ......................................... 16.51
------
Total U.S. Bonds .............................................. 90.64
------
International Bonds
International Corporate Bonds
Aerospace & Defense .............................................. 0.72
Commercial Banks ................................................. 1.23
--------------------------------------------------------------------------------
5
FORT DEARBORN INCOME SECURITIES, INC.
INDUSTRY DIVERSIFICATION
As a Percent of Net Assets
As of March 31, 2006 (unaudited)
--------------------------------------------------------------------------------
Diversified Financial Services ................................... 1.86%
Diversified Telecommunication Services ........................... 0.83
Energy Equipment & Services ...................................... 0.50
Oil & Gas ........................................................ 1.16
Road & Rail ...................................................... 0.24
------
Total International Corporate Bonds ........................... 6.54
------
Sovereign/Supranational Bonds ....................................... 0.36
------
Total International Bonds ..................................... 6.90
------
TOTAL BONDS ......................................................... 97.54
SHORT-TERM INVESTMENT ............................................... 1.43
------
TOTAL INVESTMENTS ................................................... 98.97
CASH AND OTHER ASSETS, LESS LIABILITIES ............................. 1.03
------
NET ASSETS .......................................................... 100.00%
------
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6
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
FACE
AMOUNT VALUE
---------------------------------------------------------------------------------------------------
BONDS -- 97.54%
U.S. BONDS -- 90.64%
U.S. CORPORATE BONDS -- 54.50%
Albertson's, Inc.
8.000%, due 05/01/31 ............................................. $ 165,000 $ 153,592
Allstate Corp.
6.750%, due 05/15/18 ............................................. 195,000 210,657
Altria Group, Inc.
7.750%, due 01/15/27 ............................................. 310,000 354,720
American General Finance Corp.
5.375%, due 10/01/12 ............................................. 370,000 362,956
AT&T Corp.
9.750%, due 11/15/31+ ............................................ 860,000 1,026,894
AT&T, Inc.
6.450%, due 06/15/34 ............................................. 995,000 979,389
Avon Products, Inc.
7.150%, due 11/15/09 ............................................. 1,270,000 1,343,640
Bank of America Corp.
7.400%, due 01/15/11 ............................................. 1,915,000 2,069,780
Bank One Corp.
7.875%, due 08/01/10 ............................................. 815,000 888,689
BellSouth Corp.
6.000%, due 10/15/11 ............................................. 315,000 320,823
6.550%, due 06/15/34 ............................................. 890,000 888,524
Bristol-Myers Squibb Co.
5.750%, due 10/01/11 ............................................. 395,000 399,341
Burlington Northern Santa Fe Corp.
6.875%, due 12/01/27 ............................................. 120,000 131,849
7.082%, due 05/13/29 ............................................. 740,000 832,322
C.S. First Boston USA, Inc.
6.500%, due 01/15/12 ............................................. 1,105,000 1,153,987
Capital One Financial Corp.
5.500%, due 06/01/15 ............................................. 700,000 679,388
Cendant Corp.
7.375%, due 01/15/13 ............................................. 340,000 373,449
CIT Group, Inc.
7.750%, due 04/02/12 ............................................. 140,000 154,314
Citigroup, Inc.
5.000%, due 09/15/14 ............................................. 1,882,000 1,801,262
5.625%, due 08/27/12 ............................................. 815,000 819,428
Citizens Communications Co.
9.000%, due 08/15/31 ............................................. 585,000 625,219
--------------------------------------------------------------------------------
7
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
FACE
AMOUNT VALUE
---------------------------------------------------------------------------------------------------
Comcast Corp.
7.050%, due 03/15/33 ............................................. $ 1,300,000 $ 1,337,873
ConAgra Foods, Inc.
6.750%, due 09/15/11 ............................................. 420,000 436,506
Coors Brewing Co.
6.375%, due 05/15/12 ............................................. 350,000 360,907
DaimlerChrysler N.A. Holding Corp.
8.500%, due 01/18/31 ............................................. 845,000 988,550
Devon Financing Corp. ULC
6.875%, due 09/30/11 ............................................. 985,000 1,044,325
Dominion Resources, Inc.
5.950%, due 06/15/35 ............................................. 495,000 456,388
Duke Energy Field Services LLC
8.125%, due 08/16/30 ............................................. 590,000 714,514
EOP Operating LP
7.250%, due 06/15/28 ............................................. 700,000 735,721
Erac U.S.A. Finance Co., 144A
8.000%, due 01/15/11 ............................................. 1,065,000 1,166,641
FirstEnergy Corp., Series B
6.450%, due 11/15/11 ............................................. 650,000 672,578
Ford Motor Credit Co.
5.800%, due 01/12/09 ............................................. 6,090,000 5,561,735
Fortune Brands, Inc.
5.375%, due 01/15/16 ............................................. 710,000 681,511
General Dynamics Corp.
4.250%, due 05/15/13 ............................................. 730,000 679,756
General Electric Capital Corp.
6.000%, due 06/15/12 ............................................. 1,730,000 1,776,698
6.750%, due 03/15/32 ............................................. 1,150,000 1,280,616
General Motors Acceptance Corp.
6.875%, due 09/15/11 ............................................. 2,340,000 2,181,065
Goldman Sachs Group, Inc.
6.125%, due 02/15/33 ............................................. 440,000 437,446
6.875%, due 01/15/11 ............................................. 1,685,000 1,778,703
HSBC Bank USA N.A.
5.625%, due 08/15/35 ............................................. 855,000 794,266
HSBC Finance Corp.
6.750%, due 05/15/11 ............................................. 1,165,000 1,226,482
ICI Wilmington, Inc.
5.625%, due 12/01/13 ............................................. 850,000 822,832
Johnson Controls, Inc.
5.500%, due 01/15/16 ............................................. 700,000 678,849
--------------------------------------------------------------------------------
8
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
FACE
AMOUNT VALUE
---------------------------------------------------------------------------------------------------
JPMorgan Chase & Co.
6.750%, due 02/01/11 ............................................. $ 955,000 $ 1,003,911
Kinder Morgan Energy Partners LP
5.800%, due 03/15/35 ............................................. 355,000 322,328
Kraft Foods, Inc.
5.625%, due 11/01/11 ............................................. 760,000 761,011
Kroger Co.
7.500%, due 04/01/31 ............................................. 650,000 714,335
Lockheed Martin Corp.
8.500%, due 12/01/29 ............................................. 505,000 655,662
Marathon Oil Corp.
6.125%, due 03/15/12 ............................................. 325,000 334,512
Marsh & McLennan Cos., Inc.
6.250%, due 03/15/12 ............................................. 705,000 719,621
MBNA Corp.
7.500%, due 03/15/12 ............................................. 550,000 604,832
McKesson Corp.
7.750%, due 02/01/12 ............................................. 600,000 658,953
Mellon Funding Corp.
5.000%, due 12/01/14 ............................................. 195,000 187,345
Merck & Co., Inc.
6.400%, due 03/01/28 ............................................. 520,000 530,449
Miller Brewing Co., 144A
5.500%, due 08/15/13 ............................................. 350,000 345,064
Morgan Stanley
6.750%, due 04/15/11 ............................................. 1,675,000 1,763,189
7.250%, due 04/01/32 ............................................. 355,000 406,352
National City Bank
4.625%, due 05/01/13 ............................................. 360,000 340,489
New Cingular Wireless Services, Inc.
8.750%, due 03/01/31 ............................................. 945,000 1,196,888
Newell Rubbermaid, Inc.
6.750%, due 03/15/12 ............................................. 235,000 244,054
News America, Inc.
6.200%, due 12/15/34 ............................................. 810,000 758,576
Norfolk Southern Corp.
5.257%, due 09/17/14 ............................................. 695,000 681,602
Northrop Grumman Corp.
7.125%, due 02/15/11 ............................................. 425,000 452,564
Occidental Petroleum Corp.
8.450%, due 02/15/29 ............................................. 265,000 345,964
Pacific Gas & Electric Co.
6.050%, due 03/01/34 ............................................. 670,000 655,649
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9
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
FACE
AMOUNT VALUE
---------------------------------------------------------------------------------------------------
Pitney Bowes, Inc.
4.625%, due 10/01/12 ............................................. $ 300,000 $ 285,283
Progress Energy, Inc.
7.000%, due 10/30/31 ............................................. 520,000 558,841
Progressive Corp.
6.250%, due 12/01/32 ............................................. 275,000 282,207
Prologis, 144A
5.625%, due 11/15/15 ............................................. 825,000 806,618
PSEG Power LLC
8.625%, due 04/15/31 ............................................. 290,000 368,590
Qwest Capital Funding, Inc.
7.900%, due 08/15/10 ............................................. 830,000 863,200
Safeway, Inc.
7.250%, due 02/01/31 ............................................. 645,000 683,494
Sempra Energy
7.950%, due 03/01/10 ............................................. 480,000 518,415
Simon Property Group LP REIT, 144A
5.375%, due 06/01/11 ............................................. 300,000 295,599
SLM Corp.
5.125%, due 08/27/12 ............................................. 115,000 111,812
Sprint Capital Corp.
8.750%, due 03/15/32 ............................................. 1,330,000 1,662,842
Target Corp.
7.000%, due 07/15/31 ............................................. 305,000 351,148
Time Warner, Inc.
7.625%, due 04/15/31 ............................................. 695,000 757,093
Travelers Property Casualty Corp.
6.375%, due 03/15/33 ............................................. 350,000 354,734
TXU Energy Co. LLC
7.000%, due 03/15/13 ............................................. 800,000 833,254
U.S. Bank N.A.
6.375%, due 08/01/11 ............................................. 500,000 521,129
Union Pacific Corp.
6.650%, due 01/15/11 ............................................. 470,000 489,863
UnitedHealth Group, Inc.
5.800%, due 03/15/36 ............................................. 705,000 671,350
UST, Inc.
6.625%, due 07/15/12 ............................................. 475,000 492,973
Valero Energy Corp.
7.500%, due 04/15/32 ............................................. 625,000 718,569
Verizon New York, Inc., Series B
7.375%, due 04/01/32 ............................................. 1,085,000 1,100,497
Wachovia Bank N.A.
7.800%, due 08/18/10 ............................................. 1,620,000 1,765,248
--------------------------------------------------------------------------------
10
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
FACE
AMOUNT VALUE
---------------------------------------------------------------------------------------------------
Washington Mutual Preferred Funding Delaware, 144A
6.534%, due 03/15/11++ (a) ....................................... $ 2,100,000 $ 2,034,942
Wells Fargo Bank N.A.
6.450%, due 02/01/11 ............................................. 1,025,000 1,067,920
Weyerhaeuser Co.
7.375%, due 03/15/32 ............................................. 665,000 710,100
Wyeth
5.500%, due 03/15/13 ............................................. 700,000 692,054
------------
74,065,310
------------
ASSET-BACKED SECURITIES -- 6.60%
CenterPoint Energy Transition Bond Co., LLC 01-1, Class A4
5.630%, due 09/15/15 ............................................. 3,200,000 3,243,054
Conseco Finance Securitizations Corp., 00-2, Class A4
8.480%, due 12/01/30 ............................................. 402,904 406,082
Conseco Finance Securitizations Corp., 00-5, Class A5
7.700%, due 02/01/32 ............................................. 1,500,000 1,496,194
CPL Transition Funding LLC, 02-1, Class A5
6.250%, due 01/15/17 ............................................. 3,000,000 3,176,645
Small Business Administration, 04-P10B, Class 1
4.754%, due 08/10/14 ............................................. 680,876 648,715
------------
8,970,690
------------
MORTGAGE & AGENCY DEBT SECURITIES -- 9.51%
C.S. First Boston Mortgage Securities Corp., 03-8, Class 5A1
6.500%, due 04/25/33 ............................................. 153,857 153,890
Federal Home Loan Mortgage Corp.
5.000%, due 01/30/14 ............................................. 30,000 29,191
5.750%, due 01/15/12 ............................................. 1,315,000 1,352,204
Federal Home Loan Mortgage Corp., Gold
5.500%, due 10/01/19 ............................................. 761,958 757,028
6.500%, due 02/01/17 ............................................. 235,197 240,245
Federal National Mortgage Association
5.000%, TBA ...................................................... 555,000 528,291
4.625%, due 10/15/13 ............................................. 785,000 758,135
5.500%, due 03/01/33 ............................................. 478,076 467,791
5.500%, due 09/01/34 ............................................. 2,370,254 2,317,057
5.500%, due 11/01/34 ............................................. 391,827 383,033
6.000%, due 06/01/23 ............................................. 221,368 222,608
6.000%, due 11/01/28 ............................................. 319,423 320,319
6.250%, due 02/01/11 ............................................. 1,370,000 1,420,831
6.625%, due 11/15/30 ............................................. 1,500,000 1,759,905
7.000%, due 03/01/31 ............................................. 166,193 171,524
--------------------------------------------------------------------------------
11
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
FACE
AMOUNT VALUE
---------------------------------------------------------------------------------------------------
Federal National Mortgage Association Grantor Trust,
02-T19, Class A1
6.500%, due 07/25/42 ............................................. $ 505,261 $ 513,555
Federal National Mortgage Association, 93-106, Class Z, REMIC
7.000%, due 06/25/13 ............................................. 44,098 45,350
Government National Mortgage Association
6.500%, due 05/15/29 ............................................. 111,470 115,747
Wells Fargo Mortgage Backed Securities Trust, 03-18, Class A2
5.250%, due 12/25/33 ............................................. 1,437,113 1,369,479
------------
12,926,183
------------
MUNICIPAL NOTES AND BONDS -- 3.52%
Illinois State Taxable Pension
5.100%, due 06/01/33 ............................................. 2,350,000 2,198,637
New Jersey Economic Development Authority, Series B
3.059%, due 02/15/18* ............................................ 5,000,000 2,580,450
------------
4,779,087
------------
U.S. GOVERNMENT OBLIGATIONS -- 16.51%
U.S. Treasury Bonds
6.250%, due 05/15/30 ............................................. 7,825,000 9,144,858
8.500%, due 02/15/20 ............................................. 3,430,000 4,599,953
8.750%, due 05/15/17 ............................................. 1,725,000 2,276,596
U.S. Treasury Inflation Indexed Bonds (TIPS)
2.000%, due 01/15/14 ............................................. 1,972,278 1,924,898
2.000%, due 07/15/14+++ .......................................... 309,962 302,298
U.S. Treasury Note
4.250%, due 10/15/10+++ .......................................... 485,000 473,671
U.S. Treasury Strips
1.766%, due 02/15/27* ............................................ 10,620,000 3,720,717
------------
22,442,991
------------
Total U.S. Bonds .................................................... 123,184,261
------------
INTERNATIONAL BONDS -- 6.90%
INTERNATIONAL CORPORATE BONDS -- 6.54%
CANADA -- 2.36%
Anadarko Finance Co., Series B
7.500%, due 05/01/31 ............................................. $ 745,000 866,305
Bombardier, Inc., 144A
6.750%, due 05/01/12 ............................................. 1,020,000 974,100
Burlington Resources Finance Co.
6.680%, due 02/15/11 ............................................. 370,000 389,013
Canadian National Railway Co.
6.900%, due 07/15/28 ............................................. 285,000 319,968
--------------------------------------------------------------------------------
12
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
FACE
AMOUNT VALUE
---------------------------------------------------------------------------------------------------
Conoco Funding Co.
7.250%, due 10/15/31 ............................................. $ 275,000 $ 321,626
Telus Corp.
8.000%, due 06/01/11 ............................................. 305,000 336,408
------------
3,207,420
------------
CAYMAN ISLANDS -- 2.37%
Augusta Funding Ltd. VI, 144A
7.375%, due 04/15/13 ............................................. $ 2,500,000 2,525,800
Transocean, Inc.
7.500%, due 04/15/31 ............................................. 585,000 693,645
------------
3,219,445
------------
LUXEMBOURG -- 0.58%
Telecom Italia Capital S.A.
6.375%, due 11/15/33 ............................................. $ 835,000 786,824
------------
UNITED KINGDOM -- 1.23%
Abbey National PLC
7.950%, due 10/26/29 ............................................. $ 750,000 919,802
Barclays Bank PLC, 144A
8.550%, due 06/15/11++ (a) ....................................... 290,000 326,287
Royal Bank of Scotland Group PLC
9.118%, due 03/31/10 (a) ......................................... 385,000 431,388
------------
1,677,477
------------
Total International Corporate Bonds ................................. 8,891,166
------------
SOVEREIGN/SUPRANATIONAL BONDS -- 0.36%
PEMEX Project Funding Master Trust
8.000%, due 11/15/11 ............................................. $ 440,000 479,600
------------
Total International Bonds ........................................... 9,370,766
------------
Total Bonds (Cost $131,871,440) ..................................... 132,555,027
------------
SHARES
-----------
SHORT-TERM INVESTMENT** -- 1.43%
OTHER -- 1.43%
UBS Supplementary Trust -- U.S. Cash Management
Prime Fund, yield of 4.82%***
(Cost $1,943,044) ................................................ 1,943,044 1,943,044
------------
Total Investments (Cost $133,814,484) -- 98.97% ..................... 134,498,071
Cash and other assets, less liabilities -- 1.03% .................... 1,405,266
------------
Net Assets -- 100.00% ............................................... $135,903,337
============
--------------------------------------------------------------------------------
13
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
NOTES TO SCHEDULE OF INVESTMENTS
+ Step Bonds -- Coupon rate increases in increments to maturity. Rate
disclosed as of March 31, 2006. Maturity date disclosed is the ultimate
maturity date.
++ Floating rate securities -- The interest rates shown are the current
rates as of March 31, 2006.
+++ All or a portion of this security is segregated for "To Be Announced"
("TBA") securities.
(a) Perpetual bond security. The maturity date reflects the next call date.
* Rate shown reflects annualized yield at March 31, 2006 on zero coupon
bonds.
** Security is issued by a fund that is advised by an affiliated entity of
UBS Global Asset Management (Americas) Inc., Fort Dearborn Income
Securities, Inc.'s advisor.
*** Interest rate reflects yield at March 31, 2006.
144A Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities are considered liquid and may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At March 31, 2006, the value of these securities
amounted to $8,475,051 or 6.24% of net assets.
REIT Real Estate Investment Trust.
REMIC Real Estate Mortgage Investment Conduit.
STRIPS Bonds that can be subdivided into a series of zero-coupon bonds.
TBA (To Be Announced) Security is purchased on a forward commitment basis
with an approximate principal amount (generally+/-1.0%) and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are
assigned.
TIPS Treasury Inflation Protected Security.
See accompanying notes to financial statements
--------------------------------------------------------------------------------
14
FORT DEARBORN INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES --
MARCH 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS:
Investments in securities of unaffiliated issuers, at value
(cost - $131,871,440) $132,555,027
-------------------------------------------------------------------------------
Investments in affiliated issuers, at value (cost - $1,943,044) 1,943,044
-------------------------------------------------------------------------------
Interest receivable 1,804,645
-------------------------------------------------------------------------------
Receivable for investments sold 365,784
-------------------------------------------------------------------------------
Other assets 22,667
-------------------------------------------------------------------------------
Total assets 136,691,167
-------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 531,914
-------------------------------------------------------------------------------
Payable for investment advisory fees 160,717
-------------------------------------------------------------------------------
Payable for directors' fees 7,736
-------------------------------------------------------------------------------
Accrued expenses and other liabilities 87,463
-------------------------------------------------------------------------------
Total liabilities 787,830
-------------------------------------------------------------------------------
NET ASSETS:
Capital stock - $0.01 par value; 12,000,000 shares authorized;
8,775,665 shares issued and outstanding $135,120,133
-------------------------------------------------------------------------------
Undistributed net investment income 116,501
-------------------------------------------------------------------------------
Accumulated net realized loss from investment transactions (16,884)
-------------------------------------------------------------------------------
Net unrealized appreciation on investments 683,587
-------------------------------------------------------------------------------
Net assets $135,903,337
-------------------------------------------------------------------------------
Net asset value per share $15.49
===============================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
15
FORT DEARBORN INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
For the Six
Months Ended
March 31, 2006
(unaudited)
---------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $3,991,570
---------------------------------------------------------------------------------
Affiliated interest 46,582
---------------------------------------------------------------------------------
Total investment income 4,038,152
---------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 329,362
---------------------------------------------------------------------------------
Professional fees 55,406
---------------------------------------------------------------------------------
Reports and notices to shareholders 31,074
---------------------------------------------------------------------------------
Transfer agency fees 29,917
---------------------------------------------------------------------------------
Custody and accounting fees 24,974
---------------------------------------------------------------------------------
Directors' fees 18,252
---------------------------------------------------------------------------------
Franchise taxes 4,117
---------------------------------------------------------------------------------
Other expenses 25,440
---------------------------------------------------------------------------------
Total expenses 518,542
---------------------------------------------------------------------------------
Net investment income 3,519,610
---------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES:
Net realized loss from investment transactions (14,793)
---------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of investments (5,148,974)
---------------------------------------------------------------------------------
Net realized and unrealized loss from investment activities (5,163,767)
---------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(1,644,157)
=================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
16
FORT DEARBORN INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE
MARCH 31, 2006 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2005
-----------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $3,519,610 $6,983,021
-----------------------------------------------------------------------------------------------------------
Net realized gain (loss) from investment transactions (14,793) 1,420,317
-----------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of investments (5,148,974) (2,375,570)
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations (1,644,157) 6,027,768
-----------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,685,779) (7,213,597)
-----------------------------------------------------------------------------------------------------------
Net realized gains (1,237,369) (930,220)
-----------------------------------------------------------------------------------------------------------
Total dividends and distributions to shareholders (4,923,148) (8,143,817)
-----------------------------------------------------------------------------------------------------------
Net decrease in net assets (6,567,305) (2,116,049)
-----------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 142,470,642 144,586,691
-----------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $116,501 and $282,670, respectively) $135,903,337 $142,470,642
===========================================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
17
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- MARCH 31, 2006 (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Fort Dearborn Income Securities, Inc. ("the Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified closed-end
management investment company whose shares trade on the New York Stock Exchange
("NYSE") and the Chicago Stock Exchange ("CHX"). The Fund invests principally in
investment grade long-term fixed income debt securities. The Fund's primary
objective is to provide shareholders with a stable stream of current income
consistent with external interest rate conditions and provide 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. There can be
no assurance that the Fund's investment objective will be achieved.
In the normal course of business the Fund may enter into contracts that contain
a variety of representations or that provide general indemnification for certain
liabilities. The Fund's maximum exposure under these arrangements is unknown, as
this would involve future claims that may be made against the Fund that have not
yet occurred. However, the Fund has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires the Fund's management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies:
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. Securities traded in the over-the-counter ("OTC") market and listed
on The Nasdaq Stock Market, Inc. ("NASDAQ") normally are valued at the NASDAQ
Official Closing Price. Other OTC securities are valued at the last bid price on
the valuation date available prior to valuation. Securities
--------------------------------------------------------------------------------
18
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- MARCH 31, 2006 (UNAUDITED)
which are listed on U.S. and foreign stock exchanges normally are valued at the
last sale price on the day the securities are valued or, lacking any sales on
such day, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
as the primary market by UBS Global Asset Management (Americas) Inc. ("UBS
Global AM" or the "Advisor"), the investment advisor of the Fund. UBS Global AM
is an indirect wholly owned asset management subsidiary of UBS AG, an
internationally diversified organization with headquarters in Zurich and Basel,
Switzerland and operations in many areas of the financial services industry. 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.
Certain securities in which the Fund invests are traded in markets that close
before 4:00 p.m. Eastern time. Normally, developments that occur between the
close of the foreign markets and 4:00 p.m. Eastern time will not be reflected in
the Fund's NAV. However, such developments may be determined to be so
significant that they will materially affect the value of the Fund's securities.
The Fund may use a systematic fair valuation model provided by an independent
third party to value securities principally traded in foreign markets in order
to adjust for possible stale pricing that may occur between the close of the
foreign exchanges and time for valuation. If a security is valued at a "fair
value", that value is likely to be different from the last quoted market price
for the security. Previous closing prices may be adjusted to reflect what the
Board believes to be fair value of these securities as of 4:00 p.m. Eastern
time.
MORTGAGE-BACKED SECURITIES AND OTHER INVESTMENTS--The Fund 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. 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.
--------------------------------------------------------------------------------
19
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- MARCH 31, 2006 (UNAUDITED)
The Fund invests in Collateralized Mortgage Obligations (CMOs). A CMO is a bond,
which is collateralized by a pool of MBS. The Fund may also invest 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 Graduated Payment
Mortgage (GPM) 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 Fund 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.
INFLATION PROTECTED SECURITIES--Inflation protected securities are debt
securities whose principal and/or interest payments are adjusted for inflation,
unlike debt securities that make fixed principal and interest payments.
Inflation-protected securities include Treasury Inflation Protected Securities
("TIPS"), which are securities issued by the U.S. Treasury. The interest rate
paid by TIPS is fixed, while the principal value rises or falls based on changes
in a published Consumer Price Index ("CPI"). Thus, if inflation occurs, the
principal and interest payments on the TIPS are adjusted accordingly to protect
investors from inflationary loss. During a deflationary period, the principal
and interest payments decrease, although the TIPS' principal amounts will not
drop below their face amounts at maturity. In exchange for the inflation
protection, TIPS generally pay lower interest rates than typical U.S. Treasury
securities. Only if inflation occurs will TIPS offer a higher real yield than a
conventional Treasury bond of the same maturity.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment and
foreign exchange transactions are calculated using the identified cost method.
Interest income is recorded on an accrual basis.
--------------------------------------------------------------------------------
20
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- MARCH 31, 2006 (UNAUDITED)
Discounts are accreted and premiums are amortized as adjustments to interest
income and the identified cost of investments.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to shareholders are
recorded on the ex-dividend date. The amount of dividends from net investment
income and distributions from net realized capital gains and/or return of
capital is determined in accordance with U.S. federal income tax regulations,
which may differ from U.S. generally accepted accounting principles. These
"book/tax" differences are either considered temporary or permanent in nature.
To the extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification.
CONCENTRATION OF RISK--The ability of the issuers of the debt securities held by
the Fund to meet their obligations may be affected by economic developments,
including those particular to a specific industry or region.
CAPITAL STOCK
At March 31, 2006, there were 12,000,000 shares of $0.01 par value capital stock
authorized, and 8,775,665 shares issued and outstanding. During the six months
ended March 31, 2006, no new shares were issued as part of the dividend
reinvestment plan.
INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under an agreement between the Fund and UBS Global AM, UBS Global AM manages the
Fund's investment portfolio, maintains its accounts and records, and furnishes
the services of individuals to perform executive functions for the Fund. In
return for these services, the Fund pays UBS Global AM 0.50% per annum of the
Fund's average weekly net assets up to $100,000,000 and 0.40% per annum of
average weekly net assets in excess of $100,000,000. At March 31, 2006, the Fund
owed UBS Global AM $160,717 in investment advisory fees.
The Fund invests in shares of the UBS Supplementary Trust -- U.S. Cash
Management Prime Fund ("Supplementary Trust"). Supplementary Trust is a business
trust managed by the Advisor. Supplementary Trust is offered as a cash
management option only to mutual funds and other accounts managed by
the Advisor.
The Fund pays no management fees to Supplementary Trust. Distributions from the
Supplementary Trust are reflected as affiliated interest income on the statement
of operations. Amounts relating to those investments
--------------------------------------------------------------------------------
21
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- MARCH 31, 2006 (UNAUDITED)
at March 31, 2006 and for the six month period ended are summarized as follows:
% OF
SALES INTEREST NET
FUND PURCHASES PROCEEDS INCOME VALUE ASSETS
---------------------------------------------------------------------------------------------------
UBS Supplementary Trust --
U.S. Cash Management
Prime Fund $17,632,154 $17,627,433 $46,582 $1,943,044 1.43%
===================================================================================================
PURCHASES AND SALES OF SECURITIES
Purchases and sales (including maturities) of portfolio securities during the
six months ended March 31, 2006, were as follows: debt securities, excluding
short-term securities and U.S. government debt obligations, $17,585,076 and
$26,158,099, respectively; and U.S. government debt obligations, $31,364,429 and
$25,004,438, respectively.
FEDERAL TAX STATUS
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.
The tax character of distributions paid during the year ended September 30, 2005
were as follows:
DISTRIBUTIONS PAID FROM:
-------------------------------------------------------------------------------
Ordinary income $7,210,549
-------------------------------------------------------------------------------
Long-Term capital gains 933,268
-------------------------------------------------------------------------------
$8,143,817
===============================================================================
At September 30, 2005, the components of accumulated earnings on a tax basis
were as follows:
Undistributed ordinary income $1,326,246
-------------------------------------------------------------------------------
Undistributed long-term capital gains 193,547
-------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,830,714
-------------------------------------------------------------------------------
Total accumulated earnings $7,350,507
===============================================================================
--------------------------------------------------------------------------------
22
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- MARCH 31, 2006 (UNAUDITED)
The tax character of distributions paid and components of accumulated earnings
(deficit) on a tax basis for the current fiscal year will be calculated after
the Fund's fiscal year ended September 30, 2006.
The difference between book-basis and tax-basis net unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales.
During the fiscal year ended September 30,2005, the Fund had no capital loss
carry-forwards to offset current year gains.
For federal income tax purpose, which was substantially the same for book
purposes, tax cost of investments and components of net unrealized appreciation
of investments at March 31, 2006 were as follows:
Tax cost of investments $133,814,484
--------------------------------------------------------------------------------------------
Gross appreciation (investments having an excess of value over cost) 3,440,079
--------------------------------------------------------------------------------------------
Gross depreciation (investments having an excess of cost over value) (2,756,492)
--------------------------------------------------------------------------------------------
Net unrealized appreciation of investments $683,587
============================================================================================
To reflect reclassifications arising from permanent "book/tax" differences for
the year ended September 30, 2005, accumulated undistributed net investment
income was increased by $200,558 and accumulated net realized gain from
investment activities was decreased by $200,558. These differences are primarily
due to paydown losses.
--------------------------------------------------------------------------------
23
FORT DEARBORN INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding through each period is
presented below:
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED SEPTEMBER 30,
MARCH 31, 2006 -----------------------------------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $16.23 $16.48 $16.46 $15.71 $15.95 $15.05
----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.40 0.80 0.83 0.83 0.95 1.04
----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
from investment transactions (0.58) (0.12) (0.01) 0.81 (0.07) 0.90
==================================================================================================================================
Net increase (decrease) from investment
operations (0.18) 0.68 0.82 1.64 0.88 1.94
----------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.42) (0.82) (0.80) (0.85) (0.96) (1.04)
----------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gains (0.14) (0.11) -- (0.04) (0.16) --
==================================================================================================================================
Total dividends and distributions (0.56) (0.93) (0.80) (0.89) (1.12) (1.04)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.49 $16.23 $16.48 $16.46 $15.71 $15.95
----------------------------------------------------------------------------------------------------------------------------------
MARKET PRICE PER SHARE, END OF PERIOD $14.06 $14.74 $14.84 $14.70 $15.10 $14.84
----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN (MARKET VALUE)(1) (0.78)% 5.68% 6.54% 3.21% 9.46% 18.98%
----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN (NET ASSET VALUE)(2) (1.14)% 4.17% 5.13% 10.63% 5.82% 13.22%
----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $135.9 $142.5 $144.6 $144.5 $137.9 $140.0
----------------------------------------------------------------------------------------------------------------------------------
Expenses to average net assets 0.74%* 0.74% 0.70% 0.74% 0.73% 0.71%
----------------------------------------------------------------------------------------------------------------------------------
Net investment income to average net assets 5.04%* 4.81% 5.05% 5.16% 6.07% 6.68%
----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 36% 78% 101% 62% 127% 143%
----------------------------------------------------------------------------------------------------------------------------------
Number of shares outstanding at end of
period (in thousands) 8,776 8,776 8,776 8,776 8,776 8,776
==================================================================================================================================
* Annualized
1 Total investment return is calculated assuming a $10,000 purchase of common
stock at the current market price on the first day of each period reported
and a sale at the current market price on the last day of each period
reported, and assuming reinvestment of dividends and other distributions at
prices obtained under the Fund's Dividend Reinvestment Plan. Total investment
return does not reflect brokerage commissions and has not been annualized
for the period less than one year. Returns do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or sale of Fund
shares.
2 Total investment return is calculated assuming a $10,000 purchase of common
stock at the current net asset value on the first day of each period
reported and a sale at the current net asset value on the last day of each
period reported, and assuming reinvestment of dividends and other
distributions at the net asset value on the month-end date. Total investment
return does not reflect brokerage commissions and has not been annualized
for the period less than one year. Returns do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or sale of Fund
shares.
--------------------------------------------------------------------------------
24
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
THE FUND
Fort Dearborn Income Securities, Inc. (the "Fund") is a diversified, closed-end
management investment company whose shares trade on the New York Stock Exchange
("NYSE") and the Chicago Stock Exchange ("CHX"). The primary objective of the
Fund is to provide its shareholders with a stable stream of current income
consistent with external interest rate conditions and provide 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. There can be
no assurance that the Fund's investment objective will be achieved. The Fund's
investment advisor is UBS Global Asset Management (Americas) Inc. ("UBS Global
AM"), an indirect wholly owned asset management subsidiary of UBS AG, which has
over $77.8 billion in assets under management as of March 31, 2006.
SHAREHOLDER INFORMATION
The Fund's NYSE trading symbol is "FDI." Comparative net asset value and market
price information about the Fund is published weekly in The Wall Street Journal;
The New York Times and Barron's, as well as in numerous other publications.
An annual meeting of shareholders of the Fund was held on December 6, 2005. At
the meeting Adela Cepeda, Frank, K. Reilly, Edward M. Roob and J. Mikesell
Thomas were elected to serve as directors until the next annual meeting of
shareholders, or until their successors are elected and qualified or until they
resign or are otherwise removed. The shares were voted as indicated below:
SHARES
SHARES WITHHOLD
TO VOTE FOR OR WITHHOLD AUTHORITY IN THE ELECTION OF: VOTED FOR AUTHORITY
-------------------------------------------------------------------------------------
Adela Cepeda 6,731,889 410,973
-------------------------------------------------------------------------------------
Frank K. Reilly 6,738,236 404,626
-------------------------------------------------------------------------------------
Edward M. Roob 6,733,573 409,289
-------------------------------------------------------------------------------------
J. Mikesell Thomas 6,698,871 443,991
-------------------------------------------------------------------------------------
The Fund is not aware of any broker non-votes. (Broker non-votes are shares held
in street name for which the broker indicates that instructions have not been
received from the beneficial owners or other persons entitled to vote and for
which the broker does not have discretionary voting authority).
--------------------------------------------------------------------------------
25
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
QUARTERLY FORM N-Q PORTFOLIO SCHEDULE
The Fund will file its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's
Web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0030. Additionally, you may obtain copies of Forms N-Q from the Fund
upon request by calling 1-800-647 1568.
STOCK REPURCHASE PLAN
On July 28, 1988, the Board of Directors of the Fund approved a resolution to
repurchase up to 700,000 of its common shares. The Fund 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.
PROXY VOTING POLICIES AND PROCEDURES AND RECORD
You may obtain a description of the Fund's (1) proxy voting policies (2) proxy
voting procedures, and (3) information regarding how the Fund voted any proxies
related to portfolio securities during the 12-month period ended June 30, 2005;
without charge, upon request by contacting the Fund directly at 1-800-647 1568,
online on the Funds Web site: www.ubs.com/ubsglobalam-proxy, or on the Edgar
Database on the SEC's website (http://www.sec.gov.)
DIVIDEND REINVESTMENT PLAN
The Fund has established a dividend reinvestment plan (the "Plan") under which
all shareholders whose shares are registered in their own names, or in the name
of a participating broker or its nominee, may elect to have all dividends and
other distributions automatically reinvested in additional Fund shares.
Shareholders who elect to hold their shares in the name of a broker or nominee
should contact such broker or nominee to determine whether, or how, they may
participate in the Plan. The ability of such shareholders to participate in the
Plan may change if their shares are transferred into the name of another broker
or nominee. More information regarding the Plan is provided below.
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26
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
The Plan is applicable in each case where the Fund declares a dividend or other
distribution payable in cash and simultaneously gives to its shareholders who
are participants under the Plan ("Participants") the option to receive such
dividend or other distribution in Fund shares.
Commencing seven trading days prior to the date of payment of such dividend or
other distribution, but only if the market price plus brokerage commission at
the time of purchase is lower than the net asset value as of the close of
business on the eighth trading day prior to such date of payment ("Base Net
Asset Value"), the agent (the "Agent"), on behalf of the Participants, will
purchase shares in the open market(s) available to it. There can be no assurance
that shares will be available in such open market(s) at a cost lower than Base
Net Asset Value or in sufficient quantities to permit such purchases by the
Agent. These purchases may be made on any securities exchange where such shares
are traded, in the over-the-counter market or by negotiated transactions and may
be subject to such terms of price, delivery, etc., to which the Agent may agree.
If the market price for the shares is greater than the net asset value as of the
close of business on the eight trading day prior to the date of payment, then
the Fund will issue shares in payment of the dividend.
On the date of payment of such dividend or other distribution, the Agent will
elect to have the Fund pay the dividend or other distribution in cash to the
extent of the cost, including brokerage commission, of the shares to be
purchased by the Agent, and will elect to have the Fund pay the balance, if any,
of the dividend or other distribution in shares. Such payments will be made by
the Fund to Computershare Trust Company, N.A. ("Computershare") as administrator
of the Plan for the Participants. Computershare, in turn, will immediately
settle the open market purchases with the Agent. If shares are distributed in
payment of a dividend or distribution because market price exceeded net asset
value, a Participant will be required to include in gross income an amount equal
to the greater of net asset value or 95% of fair market value (average of the
high and low sales price on the date of the distribution) of the shares received
by the Participant rather than the amount of such dividend. Distributions of
shares will be subject to the right of the Fund to take such actions as may be
deemed necessary in order to comply with or conform to the requirements of any
applicable law or regulation.
The shares credited to the accounts of Participants at Computershare will be
determined on the basis of the amount of dividend or distribution to which each
Participant is entitled, whether shares are purchased on the open market or
issued by the Fund. Each Participant will be furnished with periodic statements.
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27
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
A Participant will have the right to vote the full shares credited to the
Participant's account under the Plan on the record date for a vote. Proxies sent
to a Participant by Computershare will include the number of full shares held
for the Participant under the Plan.
The investment of dividends and distributions under the Plan does not relieve
the Participant of any income tax which may be payable on such dividends or
distributions. Annually, each participant will be provided with information for
tax purposes with respect to the dividends and distributions on the shares held
for the account of the Participant. The Fund strongly recommends that all
Participants retain each year's final statement on their Plan participation as a
part of their permanent tax record.
Shareholders who wish to elect to participate in the Plan should contact
Computershare for further information. A Participant may terminate participation
in the Plan at any time by notice in writing to Computershare. All
correspondence concerning the Plan should be directed to Computershare at
Computershare Dividend Reinvestment Services, P.O. Box 43081, Providence, RI
02940-3081. You may also contact Computershare directly at 1-800-446 2617. In
order to be effective on the payment date of any dividend or distribution,
notice of such termination must be received by Computershare before the record
date for the payment of such dividend or distribution. If a notice to
discontinue is received by Computershare on or after the record date for a
dividend payment, such notice to discontinue may not become effective until such
dividend has been reinvested and the shares purchased are credited to the
Participant's account under the Plan. Computershare, in its sole discretion, may
either pay such dividend in cash or reinvest it in shares on behalf of the
terminating Participant. Computershare may terminate, for whatever reason at any
time as it may determine in its sole discretion, an individual's participation
in the Plan upon mailing a notice of termination to the Participant at the
Participant's address as it appears on Computershare's records.
When an account is terminated, the Participant will receive a certificate for
the number of full shares credited to the Participant's account under the Plan,
unless the sale of all or part of such shares is requested. Such sale may, but
need not, be made by purchase of the shares for the account of other
Participants and any such transaction shall be deemed to have been made at the
then current market price less any applicable brokerage commissions and any
other costs of sale. The terminating Participant's fractional share interest in
the Plan will be aggregated with
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28
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
the fractional share interests of another terminating Participants and sold.
The net proceeds of such sales will be distributed to the Participants in
payment for their fractional share interests.
The Fund may terminate or amend the Plan upon thirty (30) days' notice in
writing to each Participant, such termination or amendment to be effective as to
all dividends and distributions payable to shareholders of record on any date
more than thirty (30) days after mailing of such notice.
There is no direct service charge (other than brokerage commissions) by the
Agent to Participants in the Plan. All costs of the Plan, except brokerage
commissions, will be paid by the Fund. However, the Fund reserves the right to
amend the Plan in the future to include a service charge.
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32
DIRECTORS
Adela Cepeda
Frank K. Reilly
Edward M. Roob
J. Mikesell Thomas
PRINCIPAL OFFICERS
W. Douglas Beck Joseph T. Malone
President Vice President and Treasurer
Mark F. Kemper Craig G. Ellinger, CFA
Vice President and Secretary Vice President
INVESTMENT ADVISOR
UBS Global Asset Management (Americas) Inc.
One N. Wacker Drive
Chicago, Illinois 60606
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Fund may purchase shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the Fund for their information. It
is not a prospectus, circular or representation intended for use in the purchase
or sale of shares of the Fund or of any securities mentioned in this report.
The financial information included herein is taken from the records of the Fund
without examination by independent registered public accountants who do not
express an opinion thereon.
(C) 2006 UBS Global Asset Management (Americas) Inc.
All rights reserved.
[LOGO OF UBS] UBS
UBS GLOBAL ASSET MANAGEMENT (AMERICAS) INC.
One N. Wacker Drive
38th Floor
Chicago, Illinois 60606
ITEM 2. CODE OF ETHICS.
------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
------------------------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
------------------------------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
----------------------------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 6. SCHEDULE OF INVESTMENTS.
---------------------------------
Included as part of the report to shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
--------------------------------------------------------------------------
MANAGEMENT INVESTMENT COMPANIES.
--------------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
--------------------------------------------------------------------------
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
---------------------------------------------------------------------------
COMPANY AND AFFILIATED PURCHASERS.
----------------------------------
There were no purchases made by or on behalf of the registrant or any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934, as amended, of shares of the registrant's equity
securities made in the period covered by this report.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
--------------------------------------------------------------
The registrant's Board has established a Nominating, Compensation and Governance
Committee. The Nominating, Compensation and Governance Committee will consider
nominees recommended by
Qualifying Fund Shareholders if a vacancy occurs among those board members who
are not "interested persons" as defined in Section 2(a)(19) of the Investment
Company Act of 1940, as amended. A Qualifying Fund Shareholder is a shareholder
that: (i) owns of record, or beneficially through a financial intermediary, 1/2
of 1% or more of the Fund's outstanding shares and (ii) has been a shareholder
of at least 1/2 of 1% of the Fund's total outstanding shares for 12 months or
more prior to submitting the recommendation to the Nominating, Compensation and
Governance Committee. In order to recommend a nominee, a Qualifying Fund
Shareholder should send a letter to the chairperson of the Nominating,
Compensation and Governance Committee, Mr. Frank Reilly, care of the Secretary
of the Fund at UBS Global Asset Management (Americas) Inc., One North Wacker
Drive, Chicago, Illinois 60606. The Qualifying Fund Shareholder's letter should
include: (i) the name and address of the Qualifying Fund Shareholder making the
recommendation; (ii) the number of shares of the Fund which are owned of record
and beneficially by such Qualifying Fund Shareholder and the length of time that
such shares have been so owned by the Qualifying Fund Shareholder; (iii) a
description of all arrangements and understandings between such Qualifying Fund
Shareholder and any other person or persons (naming such person or persons)
pursuant to which the recommendation is being made; (iv) the name and address of
the nominee; and (v) the nominee's resume or curriculum vitae. The Qualifying
Fund Shareholder's letter must be accompanied by a written consent of the
individual to stand for election if nominated for the Board and to serve if
elected by shareholders. The Nominating, Compensation and Governance Committee
may also seek such additional information about the nominee as it considers
appropriate, including information relating to such nominee that is required to
be disclosed in solicitations or proxies for the election of board members.
ITEM 11. 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 12. EXHIBITS.
-------------------
(a) (1) Code of Ethics - Form N-CSR disclosure requirement not applicable to
this filing of a semi-annual report.
(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.
(a) (3) Written solicitation to purchase securities under Rule 23c-1 under the
Investment Company Act of 1940 sent or given during the period covered by
the report by or on behalf of the registrant to 10 or more persons - The
registrant has not engaged in such a solicitation during the period
covered by this report.
(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/ W. Douglas Beck
-------------------
W. Douglas Beck
President
Date: May 26, 2006
------------
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/ W. Douglas Beck
-------------------
W. Douglas Beck
President
Date: May 26, 2006
------------
By: /s/ Joseph T. Malone
--------------------
Joseph T. Malone
Vice President, Treasurer and Principal Accounting Officer
Date: May 26, 2006
------------