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)
David M. Goldenberg, Esq.
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, NY 10019-6114
(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, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
[UBS LOGO OMITTED] UBS GLOBAL ASSET
MANAGEMENT
FORT DEARBORN INCOME
SECURITIES, INC.
SEMIANNUAL REPORT
MARCH 31, 2004
FORT DEARBORN INCOME SECURITIES, INC.
--------------------------------
May 14, 2004 FORT DEARBORN INCOME
SECURITIES, INC.
INVESTMENT GOAL:
DEAR SHAREHOLDER,
Current income consistent with
We present you with the semiannual report external interest rate
for Fort Dearborn Income Securities, Inc. conditions and total return.
(the "Fund") for the six months ended
March 31, 2004. PORTFOLIO MANAGER:
Craig Ellinger
PERFORMANCE COMMENCEMENT:
For the six months ended March 31, 2004, December 19, 1972
the Fund's net asset value return was
4.77%. On a market price basis, the Fund's NYSE SYMBOL:
return was 6.84%. Over the same period,
the Investment Grade Bond Index (the FTD
"Index"), the Fund's benchmark, generated
a return of 4.68%. (For more performance DIVIDEND PAYMENT:
information, please refer to "Performance
At A Glance" on page 5). Quarterly
--------------------------------
AN INTERVIEW WITH PORTFOLIO MANAGER CRAIG ELLINGER
Q. CAN YOU DESCRIBE THE ECONOMIC ENVIRONMENT DURING THE FISCAL YEAR?
A. During the reporting period, the US economy continued to gain momentum,
fueled by the ongoing effects of significantly higher military spending, an
increase in exports, and robust consumer and business spending. Gross
domestic product (GDP) figures confirmed the economy's growth: In the
second quarter of 2003, GDP came in at 3.3%, up from 1.4% for the prior
quarter. A third quarter 2003 GDP of 8.2% followed; this number, far higher
than anticipated, was the sharpest recorded advance of GDP since 1984.
Although estimated fourth quarter GDP came in at a lower-than-expected
4.1%, it was, nonetheless, viewed as a solid gain.
While first quarter 2004 GDP figures have not yet been released, the
economy appears to be moving forward at a strong pace. With the exception
of the job market, which has been slow to recover, most areas of the
economy are expanding, while overall inflation remains benign.
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1
FORT DEARBORN INCOME SECURITIES, INC.
Q. HOW DID THE FEDERAL RESERVE BOARD (THE "FED") RESPOND TO THE ECONOMIC
ENVIRONMENT?
A. The Fed held rates steady throughout the period, as it has since it lowered
short-term rates to 1.00% on June 25, 2003. However, at its May 4, 2004
meeting (held after period end) there was a clear shift in the Fed's stance
when, in its official statement, it noted, "accommodation can be removed at
a pace that is likely to be measured." Many viewed this as an indication
that the Fed could raise rates as early as its next meeting in June.
Q. HOW DID THE OVERALL FIXED INCOME MARKET PERFORM DURING THE REPORTING
PERIOD?
A. As the period began, 10-year Treasury yields were at 3.93%. In subsequent
months, strong economic data, along with fears that the Fed would raise
interest rates sooner, rather than later, led the 10-year yield upward, to
end 2003 at 4.25%. As 2004 began, a widely accepted expectation that the
economy would continue to expand created a less-than-promising outlook for
fixed income investors. However, the bond market proved surprisingly
resilient. Despite strong evidence that the economy was expanding,
continued weakness in the labor market created a somewhat muddled picture.
In February 2004, news that only 21,000 new jobs were created--
significantly less than forecasted--gave rise to concerns that consumer
confidence could weaken, and, thus, temper economic growth. Fears of a
jobless economic recovery, combined with terrorism in Europe and turmoil in
the Middle East, prompted a bond rally, and the yield on the 10-year
Treasury fell from 4.25% on December 31, 2003, to 3.85% by period end, on
March 31, 2004.
Q. HOW DID YOU POSITION THE FUND'S PORTFOLIO DURING THE PERIOD?
A. During the fourth quarter of 2003, the Fund's duration was neutral to the
Index, which did not contribute positively or negatively to returns. While
the portfolio maintained this neutral position into 2004, we shortened
duration on two occasions during the first quarter of 2004. The first
occurrence was in late January, following the significant purchase of
Treasury notes by the Bank of Japan, as it attempted to prop up the US
dollar. The second shortening took place in early March 2004, following an
announcement that the number of new jobs created in February fell
significantly short of expectations. In both instances, we felt the market
overreacted to the news, and viewed these events as opportunities to
shorten duration. However, the shortened duration posture detracted from
performance when Treasury yields declined.
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2
FORT DEARBORN INCOME SECURITIES, INC.
From a sector standpoint, we were underweight in corporate credit during
the period. While this detracted from results during the fourth quarter of
2003, it enhanced results during the first quarter of 2004. In addition,
agency securities became more attractive in the beginning of 2004, as the
yield spread between agencies and Treasuries widened. We viewed this as an
opportunity to increase the Fund's exposure, and, in particular, chose to
emphasize shorter-term, callable agency securities.
We continued to favor lower-quality, BBB-rated corporate bonds. This
boosted returns in the first half of the period, when these issues
significantly outperformed their higher-quality counterparts. However, as
investors became more risk averse in the first quarter of 2004, this
positioning detracted from results.
Q. WHAT IS YOUR OUTLOOK FOR THE ECONOMY, AND HOW DO YOU ANTICIPATE POSITIONING
THE FUND GOING FORWARD?
A. Volatility in the marketplace is being driven by the latest economic and
geopolitical news. Until there is further clarity, we believe that interest
rates will likely continue to trade in a set range. Currently, we believe
the greatest risk to the market would be a sudden increase in interest
rates, brought about by strong employment gains or a definitive change in
the Fed's stance regarding the economy.
Corporate credit spreads remain grounded by above-consensus earnings growth
and muted equity market volatility. While we expect moderate free cashflow
improvements in the next year, we still believe aggregate balance sheet
leverage remains too high in the investment-grade corporate bond universe.
Deleveraging must continue throughout 2004, as it did in the prior year, to
justify current market pricing. We remain cautious on the corporate bond
market as a result, but anticipate allocating funds to the sector should
the spread between credit and Treasury yields widen, and equity market
volatility remain muted. While we expect the economy to grow at or above
long-term secular averages, we believe the portfolio should benefit from
our position in cyclical industrials. Additional proceeds would most likely
be allocated to relatively higher quality, less cyclical bonds, whose
spread should widen if Treasury bond prices fall due to inflation fears and
a less accommodative Fed.
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3
FORT DEARBORN INCOME SECURITIES, INC.
We are carefully monitoring the performance of the Fund's callable agency
holdings. These securities have performed quite well, and we may look to
reduce our exposure if we determine that their valuations are no longer
attractive.
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,
/s/ Joseph A. Varnas /s/ Craig Ellinger
Joseph A. Varnas Craig Ellinger
President Portfolio Manager
Fort Dearborn Income Securities, Inc. Fort Dearborn Income Securities, Inc.
Managing Director Executive Director
UBS Global Asset Management UBS Global Asset Management
(Americas) Inc. (Americas) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the six months ended March 31, 2004, 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.
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4
FORT DEARBORN INCOME SECURITIES, INC.
PERFORMANCE AT A GLANCE
AVERAGE ANNUAL RETURNS, PERIODS ENDED 3/31/04
NET ASSET VALUE RETURNS* 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
===========================================================================================
Fort Dearborn Income Securities, Inc. 4.77% 9.87% 7.62% 8.19%
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Investment Grade Bond Index** 4.68% 9.73% 8.41% 8.78%
===========================================================================================
MARKET PRICE RETURNS*
===========================================================================================
Fort Dearborn Income Securities, Inc. 6.84% 7.55% 6.87% 8.61%
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Investment Grade Bond Index** 4.68% 9.73% 8.41% 8.78%
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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 distribution 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.
** 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.
SHARE PRICE, DIVIDEND AND YIELDS AS OF 3/31/04
================================================================================
Market Price $15.30
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Net Asset Value (per share applicable to common shareholders) $16.80
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12-Month Net Investment Income Dividend (ended 3/31/04) $0.800
--------------------------------------------------------------------------------
March 2004 Dividend $0.200
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Market Yield*** 5.23%
--------------------------------------------------------------------------------
NAV Yield*** 4.76%
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IPO Yield*** 5.33%
================================================================================
*** Market yield is calculated by multiplying the March dividend by 4 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the March dividend by 4 and dividing by the month-end net asset
value. IPO yield is calculated by multiplying the March dividend by 4 and
dividing by the initial public offering price. Prices and yields will vary.
--------------------------------------------------------------------------------
5
Fort Dearborn Income Securities, Inc.
Portfolio of Investments - March 31, 2004 (unaudited)
PRINCIPAL
AMOUNT MOODY'S
(000) RATING VALUE
================================================================================
BONDS - 97.78%
================================================================================
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 20.70%
================================================================================
MORTGAGE-BACKED SECURITIES - 8.50%
================================================================================
$1,500 Fannie Mae,
2.750%, due 08/11/06 Aaa $1,507,171
--------------------------------------------------------------------------------
785 4.375%, due 03/15/13 Aaa 799,708
--------------------------------------------------------------------------------
1,405 4.625%, due 10/15/13 Aaa 1,446,220
--------------------------------------------------------------------------------
711 Fannie Mae Grantor Trust,
5.500%, due 03/01/33 (a) 729,365
--------------------------------------------------------------------------------
1,039 6.500%, due 07/25/42 (a) 1,114,480
--------------------------------------------------------------------------------
455 Federal Home Loan Mortgage Corp.,
Gold Pool,
6.500%, due 02/01/17 (a) 483,338
--------------------------------------------------------------------------------
1,115 Federal National Mortgage Association,
5.125%, due 01/02/14 Aa2 1,162,611
--------------------------------------------------------------------------------
407 6.000%, due 06/01/23 (a) 425,561
--------------------------------------------------------------------------------
616 6.000%, due 11/01/28 (a) 641,348
--------------------------------------------------------------------------------
473 7.000%, due 03/01/31 (a) 503,186
--------------------------------------------------------------------------------
86 Federal National Mortgage Association,
Guaranteed Mortgage Pass Thru
Certificates REMIC, 7.000%,
due 06/25/13 (a) 87,393
--------------------------------------------------------------------------------
1,825 Freddie Mac,
3.875%, due 01/12/09 Aaa 1,858,516
--------------------------------------------------------------------------------
1,445 5.000%, due 01/30/14 Aaa 1,476,689
--------------------------------------------------------------------------------
282 Government National Mortgage
Association,
6.500%, due 05/15/29 (a) 298,151
--------------------------------------------------------------------------------
12,533,737
================================================================================
U.S. TREASURY BONDS - 2.62%
================================================================================
1,440 1.875%, due 12/31/05 Aaa 1,450,068
--------------------------------------------------------------------------------
385 5.375%, due 02/15/31 Aaa 419,650
--------------------------------------------------------------------------------
1,065 6.875%, due 08/15/25 Aaa 1,360,496
--------------------------------------------------------------------------------
440 8.750%, due 05/15/17 Aaa 638,086
--------------------------------------------------------------------------------
3,868,300
================================================================================
U.S. TREASURY NOTES - 9.58%
================================================================================
375 1.875%, due 11/30/05 Aaa 377,842
--------------------------------------------------------------------------------
735 2.000%, due 08/31/05 Aaa 742,293
--------------------------------------------------------------------------------
8,750 4.250%, due 08/15/13 Aaa 9,067,187
--------------------------------------------------------------------------------
13,355 6.125%+, due 11/15/27 Aaa 3,935,438
--------------------------------------------------------------------------------
14,122,760
--------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations (cost - $30,282,731) 30,524,797
================================================================================
CORPORATE BONDS AND NOTES - 73.90%
================================================================================
COMMUNICATION - 7.55%
================================================================================
455 AT&T Corp., 8.000%, due 11/15/31 Baa2 536,703
--------------------------------------------------------------------------------
840 AT&T Wireless Services, Inc., 8.750%,
due 03/01/31 Baa2 1,089,482
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6
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S
(000) RATING VALUE
================================================================================
CORPORATE BONDS AND NOTES - (CONTINUED)
================================================================================
COMMUNICATION - (CONCLUDED)
================================================================================
$ 315 BellSouth Telecommunications Corp.,
6.000%, due 10/15/11 A1 $ 349,358
--------------------------------------------------------------------------------
260 Cingular Wireless LLC, 6.500%,
due 12/15/11 A3 291,475
--------------------------------------------------------------------------------
585 Citizens Communications Co., 9.000%,
due 08/15/31 Baa2 617,260
--------------------------------------------------------------------------------
1,300 Comcast Corp., 7.050%, due 03/15/33 Baa3 1,444,507
--------------------------------------------------------------------------------
355 International Business Machines Corp.,
5.875%, due 11/29/32 A1 368,303
--------------------------------------------------------------------------------
625 Motorola, Inc., 7.625%, due 11/15/10 Baa3 727,232
--------------------------------------------------------------------------------
820 News America Holdings, Inc., 7.125%,
due 04/08/28 Baa3 919,628
--------------------------------------------------------------------------------
800 SBC Communications, Inc., 5.875%,
due 02/01/12 A1 874,060
--------------------------------------------------------------------------------
665 Sprint Capital Corp., 8.750%,
due 03/15/32 Baa3 840,493
--------------------------------------------------------------------------------
1,085 Verizon New York, Inc., 7.375%,
due 04/01/32 A2 1,234,834
--------------------------------------------------------------------------------
825 Viacom, Inc., 6.625%, due 05/15/11 A3 949,830
--------------------------------------------------------------------------------
700 Vodafone Group PLC, 7.875%,
due 02/15/30 A2 886,905
--------------------------------------------------------------------------------
11,130,070
================================================================================
Finance - 28.89%
================================================================================
195 Allstate Corp., 6.750%, due 05/15/18 A1 230,169
--------------------------------------------------------------------------------
745 Anadarko Finance Co., 7.500%,
due 05/01/31 Baa1 901,648
--------------------------------------------------------------------------------
375 Avalonbay Communities, Inc., 7.500%,
due 08/01/09 Baa1 442,555
--------------------------------------------------------------------------------
1,915 Bank of America Corp., 7.400%,
due 01/15/11 Aa3 2,298,628
--------------------------------------------------------------------------------
815 Bank One Corp., 7.875%, due 08/01/10 A1 996,721
--------------------------------------------------------------------------------
290 Barclays Bank, PLC, 144A, 8.550%,
due 12/31/49 Aa3 364,383
--------------------------------------------------------------------------------
320 Boeing Capital Corp., 7.375%,
due 09/27/10 A3 379,743
--------------------------------------------------------------------------------
140 CIT Group, Inc., 7.750%, due 04/02/12 A2 169,094
--------------------------------------------------------------------------------
2,175 Citigroup, Inc., 7.250%, due 10/01/10 Aa2 2,590,342
--------------------------------------------------------------------------------
275 Conoco Funding Co., 7.250%,
due 10/15/31 A3 334,297
--------------------------------------------------------------------------------
1,000 Conseco Finance Securitizations Corp.,
7.470%, due 02/01/32 Ba2 1,041,980
--------------------------------------------------------------------------------
1,300 Conseco Finance Securitizations Corp.,
8.480%, due 12/01/30 B2 1,375,730
--------------------------------------------------------------------------------
3,000 CPL Transition Funding LLC, 6.250%,
due 01/15/17 Aaa 3,459,920
--------------------------------------------------------------------------------
762 CS First Boston Mortgage Securities
Corp., 03-8, Class 5A1, 6.500%,
due 04/25/33 Aaa 797,433
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
7
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S
(000) RATING VALUE
================================================================================
CORPORATE BONDS AND NOTES - (CONTINUED)
================================================================================
FINANCE - (CONTINUED)
================================================================================
$1,105 CS First Boston USA, Inc., 6.500%,
due 01/15/12 Aa3 $1,261,429
--------------------------------------------------------------------------------
700 EOP Operating, 7.250%, due 06/15/28 Baa1 786,640
--------------------------------------------------------------------------------
2,365 Ford Motor Co., 7.450%, due 07/16/31 Baa1 2,361,862
--------------------------------------------------------------------------------
930 Ford Motor Credit Co., 7.375%,
due 02/01/11 A3 1,014,221
--------------------------------------------------------------------------------
1,150 General Electric Capital Corp., 6.750%,
due 03/15/32 Aaa 1,328,442
--------------------------------------------------------------------------------
1,730 General Electric Capital Corp., 6.000%,
due 06/15/12 Aaa 1,933,090
--------------------------------------------------------------------------------
265 General Motors Acceptance Corp.,
6.875%, due 09/15/11 A3 287,501
--------------------------------------------------------------------------------
1,000 General Motors Acceptance Corp.,
8.375%, due 07/15/33 Baa1 1,134,361
--------------------------------------------------------------------------------
1,550 General Motors Acceptance Corp.,
8.000%, due 11/01/31 A3 1,715,624
--------------------------------------------------------------------------------
170 Goldman Sachs Group, Inc., 6.125%,
due 02/15/33 Aa3 175,286
--------------------------------------------------------------------------------
665 Goldman Sachs Group, Inc., 6.875%,
due 01/15/11 Aa3 772,650
--------------------------------------------------------------------------------
1,165 Household Finance Corp., 6.750%,
due 05/15/11 A1 1,345,648
--------------------------------------------------------------------------------
260 HSBC Holdings PLC, 5.250%,
due 12/12/12 A1 274,428
--------------------------------------------------------------------------------
750 J.P. Morgan Chase & Co., 6.750%,
due 02/01/11 A2 874,554
--------------------------------------------------------------------------------
475 Lehman Brothers Holdings, Inc.,
6.625%, due 01/18/12 A1 548,942
--------------------------------------------------------------------------------
390 Lincoln National Corp., 6.200%,
due 12/15/11 A3 440,034
--------------------------------------------------------------------------------
320 Marsh & McClennan Cos., Inc., 6.250%,
due 03/15/12 A2 358,948
--------------------------------------------------------------------------------
190 MBNA America Bank N.A., 7.125%,
due 11/15/12 Baa2 224,078
--------------------------------------------------------------------------------
195 Mellon Funding Corp., 5.000%,
due 12/01/14 A2 201,888
--------------------------------------------------------------------------------
1,640 Morgan Stanley, 6.750%, due 04/15/11 Aa3 1,894,382
--------------------------------------------------------------------------------
170 Morgan Stanley, 7.250%, due 04/01/32 Aa3 205,272
--------------------------------------------------------------------------------
360 National City Bank, 4.625%,
due 05/01/13 A1 362,642
--------------------------------------------------------------------------------
440 Pemex Project Funding Master Trust,
8.000%, due 11/15/11 Baa1 511,940
--------------------------------------------------------------------------------
300 Pitney Bowes, Inc., 4.625%,
due 10/01/12 Aa3 308,592
--------------------------------------------------------------------------------
830 Qwest Capital Funding, Inc., 7.900%,
due 08/15/10 Caa2 747,000
--------------------------------------------------------------------------------
115 SLM Corp., 5.125%, due 08/27/12 A2 120,592
--------------------------------------------------------------------------------
500 U.S. Bank N.A., Minnesota, 6.375%,
due 08/01/11 Aa3 573,986
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
8
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S
(000) RATING VALUE
================================================================================
CORPORATE BONDS AND NOTES - (CONTINUED)
================================================================================
FINANCE - (CONCLUDED)
================================================================================
$ 945 Unilever Capital Corp., 7.125%,
due 11/01/10 A1 $1,126,492
--------------------------------------------------------------------------------
1,620 Wachovia Bank N.A. (Charlotte),
7.800%, due 08/18/10 Aa3 1,996,796
--------------------------------------------------------------------------------
680 Washington Mutual Bank, 5.500%,
due 01/15/13 A3 724,244
--------------------------------------------------------------------------------
350 Washington Mutual Bank, 6.875%,
due 06/15/11 A3 408,267
--------------------------------------------------------------------------------
1,025 Wells Fargo Bank, N.A., 6.450%,
due 02/01/11 Aa1 1,178,736
--------------------------------------------------------------------------------
42,581,210
================================================================================
INDUSTRIAL - 18.60%
================================================================================
720 Alcoa, Inc., 6.000%, due 01/15/12 A2 810,387
--------------------------------------------------------------------------------
675 Altria Group, Inc., 7.750%,
due 01/15/27 Baa2 752,354
--------------------------------------------------------------------------------
450 Amerada Hess Corp., 7.875%,
due 10/01/29 Ba1 509,387
--------------------------------------------------------------------------------
440 Anheuser-Busch Cos., Inc., 9.000%,
due 12/01/09 A1 561,667
--------------------------------------------------------------------------------
1,270 Avon Products, Inc., 7.150%,
due 11/15/09 A2 1,498,102
--------------------------------------------------------------------------------
325 Bear Stearns Co., 5.700%,
due 11/15/14 A1 350,166
--------------------------------------------------------------------------------
670 Bombardier, Inc., 144A, 6.750%,
due 05/01/12 Baa3 728,964
--------------------------------------------------------------------------------
395 Bristol-Myers Squibb Co., 5.750%,
due 10/01/11 A1 434,232
--------------------------------------------------------------------------------
720 Caterpillar, Inc., 6.550%, due 05/01/11 A2 837,167
--------------------------------------------------------------------------------
340 Cendant Corp., 7.375%, due 01/15/13 Baa1 398,884
--------------------------------------------------------------------------------
300 Centex Corp., 7.875%, due 02/01/11 Baa2 360,709
--------------------------------------------------------------------------------
420 Conagra Foods, Inc., 6.750%,
due 09/15/11 Baa1 482,144
--------------------------------------------------------------------------------
350 Coors Brewing Co., 6.375%,
due 05/15/12 Baa2 393,911
--------------------------------------------------------------------------------
845 DaimlerChrysler N.A. Holding Corp.,
8.500%, due 01/18/31 A3 1,039,176
--------------------------------------------------------------------------------
825 Deere & Co., 7.125%, due 03/03/31 A3 998,785
--------------------------------------------------------------------------------
330 Dow Chemical Co., 6.125%,
due 02/01/11 A3 366,978
--------------------------------------------------------------------------------
300 Federated Department Stores, Inc.,
6.625%, due 04/01/11 Baa1 344,246
--------------------------------------------------------------------------------
375 First Data Corp., 5.625%, due 11/01/11 A1 413,171
--------------------------------------------------------------------------------
730 General Dynamics Corp., 4.250%,
due 05/15/13 A2 719,132
--------------------------------------------------------------------------------
850 ICI Wilmington, Inc., 5.625%,
due 12/01/13 Baa3 887,578
--------------------------------------------------------------------------------
875 International Paper Co., 6.750%,
due 09/01/11 Baa2 995,032
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
9
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S
(000) RATING VALUE
================================================================================
CORPORATE BONDS AND NOTES - (CONTINUED)
================================================================================
INDUSTRIAL - (CONCLUDED)
================================================================================
$ 285 Kohl's Corp., 6.300%, due 03/01/11 A3 $ 322,414
--------------------------------------------------------------------------------
760 Kraft Foods, Inc., 5.625%, due 11/01/11 A3 824,125
--------------------------------------------------------------------------------
685 Kroger Co., 7.500%, due 04/01/31 Baa3 808,075
--------------------------------------------------------------------------------
255 Lockheed Martin Corp., 8.500%,
due 12/01/29 Baa2 342,058
--------------------------------------------------------------------------------
600 McKesson Corp., Inc., 7.750%,
due 02/01/12 Baa2 719,320
--------------------------------------------------------------------------------
520 Merck & Co., Inc., 6.400%,
due 03/01/28 Aaa 588,563
--------------------------------------------------------------------------------
350 Miller Brewing Co.,144A, 5.500%,
due 08/15/13 Baa1 372,077
--------------------------------------------------------------------------------
235 Newell Rubbermaid, Inc., 6.750%,
due 03/15/12 Baa2 263,080
--------------------------------------------------------------------------------
425 Northrop Grumman Corp., 7.125%,
due 02/15/11 Baa3 502,355
--------------------------------------------------------------------------------
265 Occidental Petroleum Corp., 8.450%,
due 02/15/29 Baa1 359,882
--------------------------------------------------------------------------------
275 Progressive Corp. (The), 6.250%,
due 12/01/32 A1 298,262
--------------------------------------------------------------------------------
290 Rohm & Haas Co., 7.850%,
due 07/15/29 A3 370,140
--------------------------------------------------------------------------------
435 Safeway, Inc., 7.250%, due 02/01/31 Baa2 489,954
--------------------------------------------------------------------------------
525 Target Corp., 7.000%, due 07/15/31 A2 619,173
--------------------------------------------------------------------------------
1,815 Time Warner, Inc., 7.625%,
due 04/15/31 Baa1 2,123,423
--------------------------------------------------------------------------------
585 Transocean, Inc., 7.500%, due 04/15/31 Baa2 707,945
--------------------------------------------------------------------------------
350 Travelers Property Casualty Corp.,
6.375%, due 03/15/33 A3 371,409
--------------------------------------------------------------------------------
125 Tyson Foods, Inc., 8.250%,
due 10/01/11 Baa3 149,024
--------------------------------------------------------------------------------
430 United Technologies Corp., 6.100%,
due 05/15/12 A2 484,112
--------------------------------------------------------------------------------
475 UST, Inc., 6.625%, due 07/15/12 A3 538,806
--------------------------------------------------------------------------------
400 Walt Disney Co. (The), 6.375%,
due 03/01/12 Baa1 446,033
--------------------------------------------------------------------------------
310 Wendy's International, Inc., 6.200%,
due 06/15/14 Baa1 343,584
--------------------------------------------------------------------------------
665 Weyerhaeuser Co., 7.375%,
due 03/15/32 Baa2 763,267
--------------------------------------------------------------------------------
700 Wyeth, 5.250%, due 03/15/13 Baa1 734,754
--------------------------------------------------------------------------------
27,424,007
================================================================================
INTERNATIONAL - 6.70%
================================================================================
DIVERSIFIED TELECOMMUNICATIONS - 1.37%
================================================================================
340 British Telecommunications, PLC,
8.125%, due 12/15/10 Baa1 420,156
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
10
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S
(000) RATING VALUE
================================================================================
CORPORATE BONDS AND NOTES - (CONTINUED)
================================================================================
INTERNATIONAL - (CONCLUDED)
================================================================================
DIVERSIFIED TELECOMMUNICATIONS - (CONCLUDED)
================================================================================
$ 530 France Telecom S.A., 8.500%,
due 03/01/31 Baa2 $ 716,400
--------------------------------------------------------------------------------
430 Telecom Italia Capital, 144A, 6.375%,
due 11/15/33 Baa2 449,292
--------------------------------------------------------------------------------
365 Telus Corp., 8.000%, due 06/01/11 Baa3 439,683
--------------------------------------------------------------------------------
2,025,531
================================================================================
FINANCE - 3.22%
================================================================================
570 Abbey National PLC, 7.950%,
due 10/26/29 A1 727,981
--------------------------------------------------------------------------------
2,500 Augusta Funding Ltd., 7.375%,
due 04/15/13 Aaa 2,712,450
--------------------------------------------------------------------------------
625 Deutsche Telekom International Finance
BV, 8.250%, due 06/15/30 Baa2 819,395
--------------------------------------------------------------------------------
385 Royal Bank of Scotland, 9.118%,
due 03/31/10 A1 491,873
--------------------------------------------------------------------------------
4,751,699
================================================================================
FOREIGN GOVERNMENT BOND - 1.88%
================================================================================
475 State of Qatar, 144A, 9.750%,
due 06/15/30 A3 684,000
--------------------------------------------------------------------------------
1,755 United Mexican States, 8.125%,
due 12/30/19 Baa2 2,084,062
--------------------------------------------------------------------------------
2,768,062
================================================================================
TRANSPORTATION - 0.23%
================================================================================
285 Canadian National Railway Co.,
6.900%, due 07/15/28 Baa1 336,921
--------------------------------------------------------------------------------
Total International Bonds 9,882,213
================================================================================
TRANSPORTATION - 2.30%
================================================================================
120 Burlington Northern Santa Fe Corp.,
6.875%, due 12/01/27 Baa2 136,985
--------------------------------------------------------------------------------
740 Burlington Northern Santa Fe Corp.,
7.082%, due 05/13/29 Baa2 866,760
--------------------------------------------------------------------------------
700 Delta Air Lines, Inc., 10.500%,
due 04/30/16(b) B3 545,965
--------------------------------------------------------------------------------
1,065 Erac U.S.A. Finance Co., 144A, 8.000%,
due 01/15/11 Baa1 1,295,604
--------------------------------------------------------------------------------
470 Union Pacific Corp., 6.650%,
due 01/15/11 Baa2 539,789
--------------------------------------------------------------------------------
3,385,103
--------------------------------------------------------------------------------
UTILITIES - 9.86%
================================================================================
305 Apache Corp., 6.250%, due 04/15/12 A3 350,367
--------------------------------------------------------------------------------
110 Boston Edison Co., 4.875%,
due 10/15/12 A1 114,229
--------------------------------------------------------------------------------
370 Burlington Resources Finance Co.,
6.680%, due 02/15/11 Baa1 422,835
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
11
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2004 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S
(000) RATING VALUE
================================================================================
CORPORATE BONDS AND NOTES - (CONCLUDED)
================================================================================
UTILITIES - (CONCLUDED)
================================================================================
$ 270 Commonwealth Edison Co., 6.150%,
due 03/15/12 A3 $ 304,488
--------------------------------------------------------------------------------
680 ConocoPhillips, 8.750%, due 05/25/10 A3 864,835
--------------------------------------------------------------------------------
1,400 Consolidated Edison Co. of New York,
7.500%, due 09/01/10 A1 1,688,016
--------------------------------------------------------------------------------
670 Devon Financing Corp., ULC, 6.875%,
due 09/30/11 Baa2 775,276
--------------------------------------------------------------------------------
415 Dominion Resources, Inc., 5.700%,
due 09/17/12 Baa1 446,983
--------------------------------------------------------------------------------
205 DTE Energy Co., 7.050%, due 06/01/11 Baa2 234,787
--------------------------------------------------------------------------------
590 Duke Energy Field Services, LLC,
8.125%, due 08/16/30 Baa2 747,738
--------------------------------------------------------------------------------
650 FirstEnergy Corp., 6.450%,
due 11/15/11 Baa3 711,640
--------------------------------------------------------------------------------
165 Kerr-McGee Corp., 7.875%,
due 09/15/31 Baa3 196,026
--------------------------------------------------------------------------------
345 MidAmerican Energy Co., 5.125%,
due 01/15/13 A3 361,261
--------------------------------------------------------------------------------
310 Oncor Electric Delivery Co., 7.250%,
due 01/15/33 Baa1 364,822
--------------------------------------------------------------------------------
330 PP&L Capital Funding, Inc., 7.750%,
due 04/15/05 Baa3 349,018
--------------------------------------------------------------------------------
210 Praxair, Inc., 6.375%, due 04/01/12 A3 240,879
--------------------------------------------------------------------------------
520 Progress Energy, Inc., 7.000%,
due 10/30/31 Baa2 577,786
--------------------------------------------------------------------------------
290 PSEG Power LLC, 8.625%, due 04/15/31 Baa1 382,720
--------------------------------------------------------------------------------
3,200 Reliant Energy Transition, 01-1, Class
A4, 5.630%, due 09/15/15 Aaa 3,542,534
--------------------------------------------------------------------------------
480 Sempra Energy, 7.950%, due 03/01/10 Baa1 580,031
--------------------------------------------------------------------------------
325 Southern Power Co., 6.250%,
due 07/15/12 Baa1 359,681
--------------------------------------------------------------------------------
300 Union Oil Co. of California, 7.500%,
due 02/15/29 Baa2 363,052
--------------------------------------------------------------------------------
470 Valero Energy Corp., 7.500%,
due 04/15/32 Baa3 559,271
--------------------------------------------------------------------------------
14,538,275
================================================================================
TOTAL CORPORATE BONDS AND NOTES (COST - $98,766,348) 108,940,878
================================================================================
MUNICIPAL SECURITIES - 3.18%
================================================================================
2,350 Illinois State, 5.100%, due 06/01/33 Aa3 2,284,670
--------------------------------------------------------------------------------
5,000 New Jersey Economic Development
Authority, Zero Coupon
Revenue Bond, due 02/15/18 Aaa 2,398,650
================================================================================
TOTAL MUNICIPAL SECURITIES (COST - $3,946,194) 4,683,320
================================================================================
TOTAL BONDS (COST - $132,995,273) $144,148,995
================================================================================
--------------------------------------------------------------------------------
12
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS - MARCH 31, 2004 (UNAUDITED)
NUMBER OF
SHARES
(000) VALUE
================================================================================
INVESTMENT IN AFFILIATED ISSUER - 1.07%
================================================================================
MONEY MARKET FUND* - 1.07%
================================================================================
1,571 UBS Supplementary Trust U.S. Cash
Management Prime Fund, 1.09%
(cost - $1,570,641) $ 1,570,641
--------------------------------------------------------------------------------
Total Investments (cost - $134,565,914) - 98.85% 145,719,636
--------------------------------------------------------------------------------
Other assets in excess of liabilities - 1.15% 1,690,655
--------------------------------------------------------------------------------
Net assets - 100% $147,410,291
--------------------------------------------------------------------------------
(a) Moody's as a matter of policy, does not rate this issue.
(b) Security is illiquid. This security amounted to $545,965 or 0.37% of net
assets.
144A Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities, valued at $3,894,320 represent 2.6% of net
assets as of March 31, 2004, may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
REMIC Real Estate Mortgage Investment Conduit
+ Interest rate shown reflects yield to maturity at purchase date for zero
coupon bonds.
* Interest rate shown reflects yield at March 31, 2004.
See accompanying notes to financial statements
--------------------------------------------------------------------------------
13
FORT DEARBORN INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES - MARCH 31, 2004 (UNAUDITED)
================================================================================
ASSETS:
Investments in securities in unaffiliated issuers, at value
(cost - $132,995,273) $144,148,995
--------------------------------------------------------------------------------
Investments in securities in affiliated issuers, at value
(cost - $1,570,641) 1,570,641
--------------------------------------------------------------------------------
Receivable for investments sold 3,310,947
--------------------------------------------------------------------------------
Interest receivable 1,965,622
--------------------------------------------------------------------------------
Total assets 150,996,205
--------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 3,380,439
--------------------------------------------------------------------------------
Payable for investment advisory fees 163,192
--------------------------------------------------------------------------------
Accrued expenses and other liabilities 42,283
--------------------------------------------------------------------------------
Total liabilities 3,585,914
--------------------------------------------------------------------------------
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 77,455
--------------------------------------------------------------------------------
Accumulated net realized gain from investment transactions 1,058,981
--------------------------------------------------------------------------------
Net unrealized appreciation of investments 11,153,722
--------------------------------------------------------------------------------
Net assets $147,410,291
--------------------------------------------------------------------------------
Net asset value per share $ 16.80
================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
14
Fort Dearborn Income Securities, Inc.
Statement of Operations
FOR THE
SIX MONTHS
ENDED
MARCH 31, 2004
(UNAUDITED)
================================================================================
INVESTMENT INCOME:
Interest $4,063,711
--------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 339,610
--------------------------------------------------------------------------------
Directors' fees 37,603
--------------------------------------------------------------------------------
Transfer agency fees 27,075
--------------------------------------------------------------------------------
Professional fees 26,510
--------------------------------------------------------------------------------
Custody and accounting fees 21,716
--------------------------------------------------------------------------------
Reports and notices to shareholders 19,052
--------------------------------------------------------------------------------
Franchise taxes 6,017
--------------------------------------------------------------------------------
Other expenses 18,801
--------------------------------------------------------------------------------
496,384
--------------------------------------------------------------------------------
Net investment income 3,567,327
--------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS FROM INVESTMENT
ACTIVITIES:
Net realized gains from investment transactions 1,323,952
--------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments 1,560,009
--------------------------------------------------------------------------------
Net realized and unrealized gain from investment activities 2,883,961
--------------------------------------------------------------------------------
Net increase in net assets resulting from operations $6,451,288
================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
15
FORT DEARBORN INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE
MARCH 31, 2004 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2003
===========================================================================================
FROM OPERATIONS:
Net investment income $ 3,567,327 $ 7,271,235
-------------------------------------------------------------------------------------------
Net realized gain from investment transactions 1,323,952 186,121
-------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation
of investments 1,560,009 6,960,588
===========================================================================================
Net increase in net assets resulting from operations 6,451,288 14,417,944
===========================================================================================
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income (3,510,266) (7,459,315)
-------------------------------------------------------------------------------------------
Net realized gains - (351,027)
-------------------------------------------------------------------------------------------
Total dividends and distributions to shareholders (3,510,266) (7,810,342)
===========================================================================================
Net increase in net assets 2,941,022 6,607,602
===========================================================================================
NET ASSETS:
Beginning of period 144,469,269 137,861,667
-------------------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $77,455 and $20,394,
respectively) $147,410,291 $144,469,269
===========================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
16
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2004 (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"). The Fund invests principally in investment grade long-term fixed
income debt securities with the primary objective of providing its shareholders
with a stable stream of current income consistent with external interest rate
conditions, and a total return over time that is above what they could receive
by investing individually in the investment grade and long-term maturity sectors
of the bond market.
In the normal course of business the Fund enters into contracts that contain a
variety of representations that provide general indemnification. 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 accounting principles
generally accepted in the United States 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 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
--------------------------------------------------------------------------------
17
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2004 (UNAUDITED)
indirect wholly owned asset management subsidiary of UBS AG, an internationally
diversified organization with headquarters in Zurich, 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.
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. 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 accounting principles generally accepted in the United
States. 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.
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. Most of
the securities are guaranteed by federally sponsored agencies - Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) or Federal Home Loan Mortgage Corporation (FHLMC). However, some
securities may be issued by private, non-governmental corporations. MBS issued
by private entities are not government securities and are not directly
guaranteed by any government agency. They are secured by the underlying
collateral of the private issuer. Yields on privately issued MBS tend to be
higher than those of government backed issues. However, risk of loss due to
default and sensitivity to interest rate fluctuations is also higher.
The Fund invests in Collateralized Mortgage Obligations (CMOs). A CMO is a bond,
which is collateralized by a pool of MBS. The Company also invests in REMICs
(Real Estate Mortgage Investment Conduit) which are simply another form of CMO.
--------------------------------------------------------------------------------
18
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2004 (UNAUDITED)
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.
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.
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 the Advisor 50 basis points
(annualized) of the Fund'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. At March 31, 2004, the Fund owed UBS Global AM $163,192 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 interest income on the statement of
operations.
--------------------------------------------------------------------------------
19
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2004 (UNAUDITED)
Amounts relating to those investments at March 31, 2004 and for the 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 $19,800,970 $19,430,584 $12,349 $1,570,641 1.1%
=============================================================================================================
FEDERAL TAX STATUS
For federal income tax purposes, the cost of securities owned at March 31, 2004,
was substantially the same as the cost of securities for financial statement
purposes.
At March 31, 2004, the components of net unrealized appreciation of investments
were as follows:
Gross appreciation (investments having an excess of value over cost) $ 11,810,381
---------------------------------------------------------------------------------------
Gross depreciation (investments having an excess of cost over value) (656,659)
---------------------------------------------------------------------------------------
Net unrealized appreciation of investments $ 11,153,722
=======================================================================================
Purchases and sales (including maturities) of portfolio securities during the
six months ended March 31, 2004, were as follows: debt securities, $23,470,254
and $14,378,319, respectively; and United States government debt obligations,
$49,331,722 and $59,668,324, respectively.
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 fiscal year ended September
30, 2003 were as follows:
DISTRIBUTIONS PAID FROM: 2003
========================================
Ordinary income $ 7,643,604
----------------------------------------
Capital gains 166,738
----------------------------------------
$ 7,810,342
----------------------------------------
The tax character of distributions paid and the components of accumulated
earnings (deficit) on a tax basis for the current fiscal year will be calculated
after the Fund's fiscal year ending September 30, 2004.
--------------------------------------------------------------------------------
20
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2004 (UNAUDITED)
CAPITAL STOCK
At March 31, 2004, 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, 2004, no new shares were issued as part of the dividend
reinvestment plan.
--------------------------------------------------------------------------------
21
FORT DEARBORN INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period
is:
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
2004 -------------------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
=============================================================================================================================
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.46 $ 15.71 $ 15.95 $ 15.05 $ 15.11 $ 16.87
-----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.41 0.83 0.95 1.04 1.05 1.05
-----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
from investment transactions 0.33 0.81 (0.07) 0.90 (0.06) (1.27)
-----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment
operations 0.74 1.64 0.88 1.94 0.99 (0.22)
-----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.40) (0.85) (0.96) (1.04) (1.04) (1.04)
-----------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain - (0.04) (0.16) - (0.01) (0.50)
-----------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.40) (0.89) (1.12) (1.04) (1.05) (1.54)
=============================================================================================================================
NET ASSET VALUE, END OF PERIOD $ 16.80 $ 16.46 $ 15.71 $ 15.95 $ 15.05 $ 15.11
=============================================================================================================================
MARKET VALUE, END OF PERIOD $ 15.30 $ 14.70 $ 15.10 $ 14.84 $ 13.38 $ 13.88
=============================================================================================================================
TOTAL INVESTMENT RETURN (MARKET
VALUE)(1) 6.84% 3.21% 9.46% 18.98% 4.34% (2.76)%
-----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN (NET ASSET
VALUE)(2) 4.77% 10.63% 5.82% 13.22% 6.77% (1.48)%
-----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in millions) $147.41 $144.47 $137.86 $139.98 $132.09 $132.81
-----------------------------------------------------------------------------------------------------------------------------
Expenses to average net assets 0.69%* 0.74% 0.73% 0.71% 0.74% 0.73%
-----------------------------------------------------------------------------------------------------------------------------
Net investment income to average net
assets 4.92%* 5.16% 6.07% 6.68% 7.01% 6.61%
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 52% 62% 127% 143% 74% 70%
=============================================================================================================================
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.
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 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.
* Annualized.
--------------------------------------------------------------------------------
22
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"). The Fund's investment objective is to provide its shareholders with a
stable stream of current income consistent with external interest rate
conditions and a total return over time that is above what they could receive by
investing individually in the investment grade and long-term maturity sectors of
the bond market. 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 $53.1 billion in assets under management as
of April 30, 2004.
PROXY VOTING POLICIES AND PROCEDURES
You may obtain a description of the Fund's proxy voting policies and procedures,
without charge, upon request by contacting the Fund directly at 1-800-446-2617
or online on the Funds Web site www.ubs.com/ubsglobalam-proxy.
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.
--------------------------------------------------------------------------------
23
FORT DEARBORN INCOME SECURITIES, INC.
SHAREHOLDER INFORMATION
The Fund's NYSE trading symbol is "FTD." 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 15, 2003. 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
VOTED WITHHOLD
TO VOTE FOR OR WITHHOLD AUTHORITY IN THE ELECTION OF: FOR AUTHORITY
================================================================================
Adela Cepeda 7,554,442 59,384
--------------------------------------------------------------------------------
Frank K. Reilly 7,552,412 61,414
--------------------------------------------------------------------------------
Edward M. Roob 7,553,142 60,684
--------------------------------------------------------------------------------
J. Mikesell Thomas 7,540,835 72,991
--------------------------------------------------------------------------------
The Plan had 752 participants on March 30, 2004. Under the terms of the Plan,
any shareholder may terminate participation by giving written notice to the
Company. Upon termination, a certificate for all full shares, plus a check for
the value of any fractional interest in shares, will be sent to the withdrawing
shareholders, unless the sale of all or part of such shares is requested. ANY
REGISTERED SHAREHOLDER WHO WISHES TO PARTICIPATE IN THE PLAN MAY DO SO BY
WRITING TO EQUISERVE TRUST COMPANY N.A. OF NEW YORK, P.O. BOX 2500, JERSEY CITY,
NJ 07303-2500 OR CALLING THEM AT (800) 446-2617. A copy of the Plan and
enrollment card will be mailed to you. Shareholders who own shares in nominee
name should contact their brokerage firm. All new shareholders will receive a
copy of the Plan and a card, which may be signed to authorize reinvestment of
dividends pursuant to the Plan.
The investment of dividends does not relieve participants of any income tax
which may be payable thereon. The Fund strongly recommends that all Automatic
Dividend Investment Plan participants retain each year's final statement on
their plan participation as a part of their permanent tax record. This will
insure that cost information is available if and when it is needed.
--------------------------------------------------------------------------------
24
DIRECTORS
Adela Cepeda
Frank K. Reilly
Edward M. Roob
J. Mikesell Thomas
PRINCIPAL OFFICERS
Joseph A. Varnas Paul H. Schubert
President Vice President and Treasurer
David M. Goldenberg 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
The financial information included herein is taken from the records of the Fund
without examination by independent auditors who do not express an opinion
thereon.
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.
(c) 2004 UBS Global Asset Management (Americas) Inc. All rights reserved.
-------------
[UBS LOGO OMITTED] Presorted
Standard
US Postage
UBS GLOBAL ASSET MANAGEMENT (AMERICAS) INC. PAID
One N. Wacker Drive Smithtown, NY
38th Floor Permit 700
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. [RESERVED BY SEC FOR FUTURE USE. ]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
ITEM 9. 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 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. In order to recommend a nominee, a
shareholder should send a letter to the chairperson of the Nominating,
Compensation and Governance Committee, Mr. Frank Reilly, care of the Secretary
of the registrant at UBS Global Asset Management (US) Inc., 51 West 52nd Street,
New York, New York 10019-6114, and indicate on the envelope "Nominating,
Compensation and Governance Committee." The shareholder's letter should state
the nominee's name and should include the nominee's resume or curriculum vitae,
and 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.
ITEM 10. 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 11. 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.
(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
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Joseph A. Varnas
President
Date: June 9, 2004
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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
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Joseph A. Varnas
President
Date: June 9, 2004
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By: /s/ Paul H. Schubert
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Paul H. Schubert
Treasurer
Date: June 9, 2004
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