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)
Mark Kemper, 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: September 30, 2005
ITEM 1. REPORTS TO STOCKHOLDERS.
--------------------------------
[LOGO OF UBS] UBS GLOBAL ASSET
MANAGEMENT
FORT DEARBORN INCOME
SECURITIES, INC.
ANNUAL REPORT
SEPTEMBER 30, 2005
FORT DEARBORN INCOME SECURITIES, INC.
November 15, 2005
DEAR SHAREHOLDER,
We present you with the annual report for Fort Dearborn Income Securities, Inc.
(the "Fund") for the fiscal year ended September 30, 2005.
PERFORMANCE
Over the one-year period, the Fund's net asset value return was 4.17%. On a
market price basis, the Fund's return was 5.68%. Over the same period, the
Fund's peer group, the Lipper Corporate Debt Funds BBB-Rated median, posted a
net asset value return of 4.40% and a market price return of 5.71%. Finally, the
Investment Grade Bond Index (the "Index"), the Fund's benchmark, generated a
return of 4.67%. (For more performance information, please refer to "Performance
At A Glance" on page 4.)Over the period, the Fund did not use leverage. Leverage
magnifies returns on both the upside and on the downside, creating a wider range
of returns within the Fund's peer group.
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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
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AN INTERVIEW WITH PORTFOLIO MANAGER CRAIG ELLINGER
Q. HOW WOULD YOU DESCRIBE THE ECONOMIC ENVIRONMENT DURING THE REPORTING PERIOD?
A. The US economy faced a number of challenges during the reporting period,
including record high energy prices, natural disasters, rising interest
rates, a mixed job market, uncertainty surrounding the US presidential
election and geopolitical events. Despite these issues, the economy proved to
be surprisingly resilient, with three consecutive quarters of 3%-4% gross
domestic product (GDP) growth.
Q. HOW DID THE FED REACT TO THESE ECONOMIC CONDITIONS?
A. Given the strength of the economy, the Federal Reserve Board (the "Fed")
continued to raise rates in 0.25% increments eight times over the fiscal
year, bringing the fed funds rate to 3.75%. Throughout this tightening
campaign that began in June 2004, the Fed has made it clear that it expects
to continue to raise rates at a "measured" pace to keep inflation under
control, and toward the end of the period, seemed to become increasingly
concerned about inflation. Accordingly, the Fed raised rates another 0.25% to
4.0% on November 1, after the close of the Fund's fiscal year.
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1
FORT DEARBORN INCOME SECURITIES, INC.
Q. HOW DID THE OVERALL FIXED INCOME MARKETS PERFORM DURING THE REPORTING PERIOD?
A. In our opinion, the US bond market remained a web of contradictions. Its
reaction to a number of events was more a function of external factors and
investor sentiment than economic and financial fundamentals. Short-term
interest rates rose in conjunction with the Fed's ongoing rate hikes, but
longer-term yields marched to a different drummer, as they remained
surprisingly stable over the same period. This trend finally prompted Fed
Chairman Alan Greenspan to state in February that it was a "conundrum" to
him why short-term interest rates were rising while longer-term rates were
falling. The yield on the 10-year Treasury approached 4.4% in mid-July, but
that spike was short-lived, and the market continued to be more resilient
than most would have thought. Looking at longer-term bonds over the entire
fiscal year, 10-year Treasury yields rose very little, moving from 4.12% to
4.32%. However, the yield on the so-called 30-year, or long, bond declined
from 4.89% to 4.57%.
Q. HOW DID YOU MANAGE THE FUND'S PORTFOLIO DURING THE PERIOD?
A. We kept the Fund defensive with respect to interest rate risk during the
period, particularly at the long end of the yield curve. Given longer-term
bonds' seemingly stubborn refusal to move in line with Fed hikes, this short
duration positioning hindered Fund performance for much of the reporting
period. We were similarly defensive with the Fund's exposure to government
and agency securities, mortgage-backed securities and corporate bonds,
because tight spreads (the difference in yield between Treasuries and a
given bond) made it difficult to find attractive opportunities that
warranted the risk these securities present over Treasuries. Therefore, we
favored asset-backed securities, which offered similar yields to corporate
bonds, but at lower volatility. This position helped the Fund's performance
during the reporting period, as did the defensive strategy in relation to
corporate bonds. Finally, security selection, meaning the individual bonds
we selected for the portfolio, helped this year's performance.
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2
FORT DEARBORN INCOME SECURITIES, INC.
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 fiscal year ended September 30, 2005. The views and
opinions in the letter were current as of November 15, 2005. 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.
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3
FORT DEARBORN INCOME SECURITIES, INC.
PERFORMANCE AT A GLANCE (UNAUDITED)
AVERAGE ANNUAL RETURNS, PERIODS ENDED 9/30/05
NET ASSET VALUE RETURNS* 6 months 1 year 5 years 10 years
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Fort Dearborn Income Securities, Inc. 2.82% 4.17% 7.76% 7.15%
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Investment Grade Bond Index** 3.40 4.67 8.90 7.63
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MARKET PRICE RETURNS*
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Fort Dearborn Income Securities Inc. 4.90% 5.68% 8.74% 8.08%
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Investment Grade Bond Index** 3.40 4.67 8.90 7.63
=============================================================================================================
SHARE PRICE, DIVIDEND AND YIELDS AS OF 9/30/05
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Market Price $14.74
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Net Asset Value (per share applicable to common shareholders) $16.23
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12-Month Net Investment Income Dividend (ended 9/30/05) $0.820
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September 2005 Dividend $0.200
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Market Yield*** 5.43%
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NAV Yield*** 4.93%
=============================================================================================================
* 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.
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).
*** Market yield is calculated by multiplying the September 2005 dividend by
4 and dividing by the month-end market price. NAV yield is calculated by
multiplying the September 2005 dividend by 4 and dividing by the
month-end net asset value. Prices and yields will vary.
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4
FORT DEARBORN INCOME SECURITIES, INC.
INDUSTRY DIVERSIFICATION
As a Percent of Net Assets
As of September 30, 2005 (unaudited)
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Bonds
U.S. Bonds
U.S. Corporate Bonds
Aerospace & Defense .................................................. 1.07%
Automobiles .......................................................... 3.07
Beverages ............................................................ 0.51
Capital Markets ...................................................... 4.05
Chemicals ............................................................ 1.11
Commercial Banks ..................................................... 5.09
Commercial Services & Supplies ....................................... 0.95
Communications Equipment ............................................. 0.08
Consumer Finance ..................................................... 3.66
Diversified Financial Services ....................................... 5.54
Diversified Telecommunication Services ............................... 5.49
Electric Utilities ................................................... 2.11
Food & Staples Retailing ............................................. 1.41
Food Products ........................................................ 0.97
Gas Utilities ........................................................ 0.37
Household Durables ................................................... 0.41
Insurance ............................................................ 1.41
Machinery ............................................................ 0.55
Media ................................................................ 3.02
Metals & Mining ...................................................... 0.53
Multi-Utilities ...................................................... 1.14
Multiline Retail ..................................................... 0.49
Oil & Gas ............................................................ 2.17
Paper & Forest Products .............................................. 1.19
Personal Products .................................................... 0.97
Pharmaceuticals ...................................................... 1.19
Real Estate .......................................................... 0.84
Road & Rail .......................................................... 1.92
Thrifts & Mortgage Finance ........................................... 0.75
Tobacco .............................................................. 0.61
Wireless Telecommunication Services .................................. 0.90
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Total U.S. Corporate Bonds ........................................ 53.57
------
Asset-Backed Securities ................................................ 6.95
Mortgage & Agency Debt Securities ...................................... 13.09
Municipal Notes and Bonds .............................................. 3.52
U.S. Government Obligations ............................................ 12.10
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Total U.S. Bonds .................................................. 89.23
------
International Bonds
International Corporate Bonds
Aerospace & Defense .................................................. 0.67
Commercial Banks ..................................................... 1.23
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5
FORT DEARBORN INCOME SECURITIES, INC.
INDUSTRY DIVERSIFICATION
As a Percent of Net Assets
As of September 30, 2005 (unaudited)
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Diversified Financial Services ....................................... 1.81%
Diversified Telecommunication Services ............................... 0.87
Energy Equipment & Services .......................................... 0.52
Oil & Gas ............................................................ 1.17
Road & Rail .......................................................... 0.24
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Total International Corporate Bonds ............................... 6.51
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Foreign Government Bonds ............................................... 2.14
Sovereign/Supranational Bonds .......................................... 0.35
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Total International Bonds ......................................... 9.00
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TOTAL BONDS ............................................................ 98.23
SHORT-TERM INVESTMENT .................................................. 1.36
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TOTAL INVESTMENTS ...................................................... 99.59
CASH AND OTHER ASSETS, LESS LIABILITIES ................................ 0.41
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NET ASSETS ............................................................. 100.00%
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6
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005
FACE
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
BONDS -- 98.23%
U.S. BONDS -- 89.23%
U.S. CORPORATE BONDS -- 53.57%
Albertson's, Inc.
8.000%, due 05/01/31 ................................................. $ 610,000 $ 555,470
Alcoa, Inc.
6.000%, due 01/15/12 ................................................. 720,000 761,830
Allstate Corp.
6.750%, due 05/15/18 ................................................. 195,000 215,987
Altria Group, Inc.
7.750%, due 01/15/27 ................................................. 310,000 361,482
American General Finance Corp.
5.375%, due 10/01/12 ................................................. 370,000 374,151
AT&T Corp.
9.750%, due 11/15/31 ................................................. 860,000 1,088,975
AvalonBay Communities, Inc. REIT
7.500%, due 08/01/09 ................................................. 375,000 408,988
Avon Products, Inc.
7.150%, due 11/15/09 ................................................. 1,270,000 1,385,005
Bank of America Corp.
7.400%, due 01/15/11 ................................................. 1,915,000 2,138,601
Bank One Corp.
7.875%, due 08/01/10 ................................................. 815,000 920,580
BellSouth Corp.
6.000%, due 10/15/11 ................................................. 315,000 332,924
6.550%, due 06/15/34 ................................................. 890,000 956,650
Boeing Capital Corp.
7.375%, due 09/27/10 ................................................. 320,000 357,004
Bristol-Myers Squibb Co.
5.750%, due 10/01/11 ................................................. 395,000 414,328
Burlington Northern Santa Fe Corp.
6.875%, due 12/01/27 ................................................. 120,000 138,936
7.082%, due 05/13/29 ................................................. 740,000 882,603
C.S. First Boston USA, Inc.
6.500%, due 01/15/12 ................................................. 1,105,000 1,196,532
Capital One Financial Corp.
5.500%, due 06/01/15 ................................................. 700,000 704,105
Caterpillar, Inc.
6.550%, due 05/01/11 ................................................. 720,000 784,113
Cendant Corp.
7.375%, due 01/15/13 ................................................. 340,000 371,706
Centex Corp.
7.875%, due 02/01/11 ................................................. 300,000 331,096
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7
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005
FACE
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
CIT Group, Inc.
7.750%, due 04/02/12 ................................................. $ 140,000 $ 160,486
Citigroup, Inc.
5.000%, due 09/15/14 ................................................. 1,882,000 1,871,839
5.625%, due 08/27/12 ................................................. 815,000 847,196
Citizens Communications Co.
9.000%, due 08/15/31 ................................................. 585,000 593,044
Comcast Corp.
7.050%, due 03/15/33 ................................................. 1,300,000 1,446,834
ConAgra Foods, Inc.
6.750%, due 09/15/11 ................................................. 420,000 451,613
Coors Brewing Co.
6.375%, due 05/15/12 ................................................. 350,000 370,832
DaimlerChrysler N.A. Holding Corp.
8.500%, due 01/18/31 ................................................. 845,000 1,023,043
Devon Financing Corp. ULC
6.875%, due 09/30/11 ................................................. 985,000 1,082,730
Dominion Resources, Inc.
5.950%, due 06/15/35 ................................................. 495,000 483,559
Dow Chemical Co.
6.125%, due 02/01/11 ................................................. 330,000 351,674
Duke Energy Field Services LLC
8.125%, due 08/16/30 ................................................. 590,000 764,763
EOP Operating LP REIT
7.250%, due 06/15/28 ................................................. 700,000 789,727
Erac U.S.A. Finance Co., 144A
8.000%, due 01/15/11 ................................................. 1,065,000 1,202,208
Federated Department Stores, Inc.
6.625%, due 04/01/11 ................................................. 300,000 322,701
FirstEnergy Corp., Series B
6.450%, due 11/15/11 ................................................. 650,000 692,097
Ford Motor Credit Co.
7.375%, due 02/01/11 ................................................. 3,500,000 3,347,771
General Dynamics Corp.
4.250%, due 05/15/13 ................................................. 730,000 705,022
General Electric Capital Corp.
6.000%, due 06/15/12 ................................................. 1,730,000 1,841,457
6.750%, due 03/15/32 ................................................. 1,150,000 1,352,662
General Motors Acceptance Corp.
6.875%, due 09/15/11 ................................................. 2,630,000 2,392,282
Goldman Sachs Group, Inc.
6.125%, due 02/15/33 ................................................. 440,000 457,988
6.875%, due 01/15/11 ................................................. 1,685,000 1,833,937
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8
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005
FACE
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
HSBC Bank USA N.A.
5.625%, due 08/15/35 ................................................. $ 355,000 $ 349,673
HSBC Finance Corp.
6.750%, due 05/15/11 ................................................. 1,165,000 1,267,077
ICI Wilmington, Inc.
5.625%, due 12/01/13 ................................................. 850,000 857,950
International Paper Co.
6.750%, due 09/01/11 ................................................. 875,000 937,793
JPMorgan Chase & Co.
6.750%, due 02/01/11 ................................................. 955,000 1,033,390
Kinder Morgan Energy Partners LP
5.800%, due 03/15/35 ................................................. 355,000 340,970
Kraft Foods, Inc.
5.625%, due 11/01/11 ................................................. 760,000 785,246
Kroger Co.
7.500%, due 04/01/31 ................................................. 685,000 765,123
Lincoln National Corp.
6.200%, due 12/15/11 ................................................. 390,000 416,233
Lockheed Martin Corp.
8.500%, due 12/01/29 ................................................. 255,000 351,813
Marathon Oil Corp.
6.125%, due 03/15/12 ................................................. 325,000 346,945
Marsh & McLennan Cos., Inc.
6.250%, due 03/15/12 ................................................. 705,000 724,034
MBNA Corp.
7.500%, due 03/15/12 ................................................. 550,000 625,320
McKesson Corp.
7.750%, due 02/01/12 ................................................. 600,000 679,286
Mellon Funding Corp.
5.000%, due 12/01/14 ................................................. 195,000 195,578
Merck & Co., Inc.
6.400%, due 03/01/28 ................................................. 520,000 561,380
Miller Brewing Co., 144A
5.500%, due 08/15/13 ................................................. 350,000 358,411
Morgan Stanley
6.750%, due 04/15/11 ................................................. 1,675,000 1,822,130
7.250%, due 04/01/32 ................................................. 355,000 426,423
Motorola, Inc.
7.625%, due 11/15/10 ................................................. 100,000 113,175
National City Bank
4.625%, due 05/01/13 ................................................. 360,000 352,561
New Cingular Wireless Services, Inc.
8.750%, due 03/01/31 ................................................. 945,000 1,275,559
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9
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005
FACE
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
Newell Rubbermaid, Inc.
6.750%, due 03/15/12 ................................................. $ 235,000 $ 251,750
News America, Inc.
6.200%, due 12/15/34 ................................................. 810,000 811,223
Northrop Grumman Corp.
7.125%, due 02/15/11 ................................................. 425,000 469,684
Occidental Petroleum Corp.
8.450%, due 02/15/29 ................................................. 265,000 370,196
Pacific Gas & Electric Co.
6.050%, due 03/01/34 ................................................. 510,000 530,600
Pitney Bowes, Inc.
4.625%, due 10/01/12 ................................................. 300,000 296,209
Progress Energy, Inc.
7.000%, due 10/30/31 ................................................. 520,000 577,820
Progressive Corp.
6.250%, due 12/01/32 ................................................. 275,000 296,473
PSEG Power LLC
8.625%, due 04/15/31 ................................................. 290,000 376,433
Qwest Capital Funding, Inc.
7.900%, due 08/15/10 ................................................. 830,000 823,775
Rohm & Haas Co.
7.850%, due 07/15/29 ................................................. 290,000 376,521
Safeway, Inc.
7.250%, due 02/01/31 ................................................. 645,000 682,169
SBC Communications, Inc.
6.450%, due 06/15/34 ................................................. 995,000 1,051,730
Sempra Energy
7.950%, due 03/01/10 ................................................. 480,000 533,057
SLM Corp.
5.125%, due 08/27/12 ................................................. 115,000 116,203
Sprint Capital Corp.
8.750%, due 03/15/32 ................................................. 1,330,000 1,783,434
Target Corp.
7.000%, due 07/15/31 ................................................. 305,000 370,709
Time Warner, Inc.
7.625%, due 04/15/31 ................................................. 995,000 1,165,672
Travelers Property Casualty Corp.
6.375%, due 03/15/33 ................................................. 350,000 363,203
TXU Energy Co. LLC
7.000%, due 03/15/13 ................................................. 1,115,000 1,210,472
Tyson Foods, Inc.
8.250%, due 10/01/11 ................................................. 125,000 144,333
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10
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005
FACE
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
U.S. Bank N.A.
6.375%, due 08/01/11 ................................................. $ 500,000 $ 538,705
Union Oil Co. of California
7.500%, due 02/15/29 ................................................. 300,000 384,523
Union Pacific Corp.
6.650%, due 01/15/11 ................................................. 470,000 506,658
UST, Inc.
6.625%, due 07/15/12 ................................................. 475,000 511,472
Valero Energy Corp.
7.500%, due 04/15/32 ................................................. 470,000 567,295
Verizon New York, Inc., Series B
7.375%, due 04/01/32 ................................................. 1,085,000 1,194,085
Viacom, Inc.
6.625%, due 05/15/11 ................................................. 825,000 877,528
Wachovia Bank N.A.
7.800%, due 08/18/10 ................................................. 1,620,000 1,838,404
Washington Mutual Bank FA
5.500%, due 01/15/13 ................................................. 1,050,000 1,072,321
Wells Fargo Bank N.A.
6.450%, due 02/01/11 ................................................. 1,025,000 1,103,093
Weyerhaeuser Co.
7.375%, due 03/15/32 ................................................. 665,000 752,261
Wyeth
5.500%, due 03/15/13 ................................................. 700,000 717,892
------------
76,318,504
------------
ASSET-BACKED SECURITIES -- 6.95%
CenterPoint Energy Transition Bond Co., LLC 01-1, Class A4
5.630%, due 09/15/15 ................................................. 3,200,000 3,337,436
Conseco Finance Securitizations Corp., 00-2, Class A4
8.480%, due 12/01/30 ................................................. 665,684 677,537
Conseco Finance Securitizations Corp., 00-5, Class A4
7.470%, due 02/01/32 ................................................. 341,066 345,100
Conseco Finance Securitizations Corp., 00-5, Class A5
7.700%, due 02/01/32 ................................................. 1,500,000 1,499,924
CPL Transition Funding LLC, 02-1, Class A5
6.250%, due 01/15/17 ................................................. 3,000,000 3,322,793
Small Business Administration, 04-P10B, Class 1
4.754%, due 08/10/14 ................................................. 723,125 725,132
------------
9,907,922
------------
MORTGAGE & AGENCY DEBT SECURITIES -- 13.09%
C.S. First Boston Mortgage Securities Corp., 03-8, Class 5A1
6.500%, due 04/25/33 ................................................. 232,378 234,676
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11
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005
FACE
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
3.875%, due 01/12/09 ................................................. $1,825,000 $ 1,786,514
5.000%, due 01/30/14 ................................................. 30,000 29,767
5.750%, due 01/15/12 ................................................. 1,315,000 1,395,749
6.000%, due 06/15/11 ................................................. 4,025,000 4,312,860
Federal Home Loan Mortgage Corp., Gold
5.500%, due 10/01/19 ................................................. 845,948 858,573
6.000%, due 10/01/34 ................................................. 802,779 816,883
6.500%, due 02/01/17 ................................................. 270,078 278,862
Federal National Mortgage Association
4.625%, due 10/15/13 ................................................. 785,000 785,727
5.500%, due 03/01/33 ................................................. 523,875 524,155
5.500%, due 09/01/34 ................................................. 2,640,965 2,641,157
5.500%, due 11/01/34 ................................................. 429,955 429,986
6.000%, due 06/01/23 ................................................. 246,308 252,022
6.000%, due 11/01/28 ................................................. 340,178 346,825
6.250%, due 02/01/11 ................................................. 1,370,000 1,464,057
7.000%, due 03/01/31 ................................................. 195,645 205,524
Federal National Mortgage Association Grantor Trust, 02-T19, Class A1
6.500%, due 07/25/42 ................................................. 589,669 605,955
Federal National Mortgage Association, 93-106, Class Z, REMIC
7.000%, due 06/25/13 ................................................. 47,822 49,856
Government National Mortgage Association
6.500%, due 05/15/29 ................................................. 130,170 135,657
Wells Fargo Mortgage Backed Securities Trust, 03-18, Class A2
5.250%, due 12/25/33 ................................................. 1,526,300 1,490,719
------------
18,645,524
------------
MUNICIPAL NOTES AND BONDS -- 3.52%
Illinois State Taxable Pension
5.100%, due 06/01/33 ................................................. 2,350,000 2,318,698
New Jersey Economic Development Authority, Series B*
2.900%, due 02/15/18 ................................................. 5,000,000 2,689,500
------------
5,008,198
------------
U.S. GOVERNMENT OBLIGATIONS -- 12.10%
U.S. Treasury Bonds
6.250%, due 08/15/23 ................................................. 1,640,000 1,961,017
6.250%, due 05/15/30 ................................................. 4,315,000 5,357,849
8.750%, due 05/15/17 ................................................. 490,000 678,803
U.S. Treasury Inflation Indexed Bonds TIPS
2.000%, due 01/15/14 ................................................. 3,952,058 4,034,340
U.S. Treasury Notes
3.875%, due 07/31/07 ................................................. 640,000 636,600
4.750%, due 05/15/14 ................................................. 2,420,000 2,493,166
--------------------------------------------------------------------------------
12
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005
FACE
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
U.S. Treasury Strips*
1.683%, due 02/15/27 ................................................. $5,620,000 $ 2,082,806
------------
17,244,581
------------
Total U.S. Bonds ....................................................... 127,124,729
------------
INTERNATIONAL BONDS -- 9.00%
INTERNATIONAL CORPORATE BONDS -- 6.51%
CANADA -- 2.32%
Anadarko Finance Co., Series B
7.500%, due 05/01/31 ................................................. $ 745,000 916,168
Bombardier, Inc., 144A
6.750%, due 05/01/12 ................................................. 1,020,000 951,150
Burlington Resources Finance Co.
6.680%, due 02/15/11 ................................................. 370,000 400,420
Canadian National Railway Co.
6.900%, due 07/15/28 ................................................. 285,000 336,888
Conoco Funding Co.
7.250%, due 10/15/31 ................................................. 275,000 347,030
Telus Corp.
8.000%, due 06/01/11 ................................................. 305,000 348,933
------------
3,300,589
------------
CAYMAN ISLANDS -- 2.33%
Augusta Funding VI, 144A
7.375%, due 04/15/13 ................................................. $2,500,000 2,589,200
Transocean, Inc.
7.500%, due 04/15/31 ................................................. 585,000 737,823
------------
3,327,023
------------
FRANCE -- 0.31%
France Telecom S.A. +
8.500%, due 03/01/31 ................................................. $ 330,000 442,251
------------
LUXEMBOURG -- 0.31%
Telecom Italia Capital S.A.
6.375%, due 11/15/33 ................................................. $ 430,000 442,304
------------
UNITED KINGDOM -- 1.24%
Abbey National PLC
7.950%, due 10/26/29 ................................................. $ 750,000 974,287
Barclays Bank PLC, 144A ++
8.550%, due 06/15/11 ................................................. 290,000 339,895
Royal Bank of Scotland Group PLC
9.118%, due 03/31/10 ................................................. 385,000 447,603
------------
1,761,785
------------
Total International Corporate Bonds .................................... 9,273,952
------------
--------------------------------------------------------------------------------
13
FORT DEARBORN INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005
FACE
AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS -- 2.14%
MEXICO -- 2.14%
United Mexican States
8.125%, due 12/30/19 ................................................. $2,520,000 $ 3,055,500
------------
SOVEREIGN/SUPRANATIONAL BONDS -- 0.35%
PEMEX Project Funding Master Trust
8.000%, due 11/15/11 ................................................. 440,000 500,720
------------
Total International Bonds .............................................. 12,830,172
------------
Total Bonds (Cost $134,122,340) ........................................ 139,954,901
------------
SHARES
----------
SHORT-TERM INVESTMENT -- 1.36%**
OTHER -- 1.36%
UBS Supplementary Trust -- U.S. Cash Management Prime Fund
yield of 3.802%***
(Cost $1,938,323) .................................................... 1,938,323 1,938,323
------------
Total Investments (Cost $136,060,663) -- 99.59% ........................ 141,893,224
Cash and other assets, less liabilities -- 0.41% ....................... 577,418
------------
Net Assets -- 100.00% .................................................. $142,470,642
============
NOTES TO SCHEDULE OF INVESTMENTS
+ Step Bonds - Coupon rate increases in increments to maturity. Rate
disclosed as of September 30, 2005. Maturity date disclosed is the
ultimate maturity date.
++ Reflects rate at September 30, 2005 on variable rate securities.
Maturity dates reflect earlier of reset date or stated maturity date.
The interest rates shown are the current rates as of September 30, 2005
and resets periodically.
* Reflects annualized yield at September 30, 2005 on zero coupon bonds.
** Security is issued by a fund that is advised by a related entity of
UBS Global Asset Management (Americas) Inc., Fort Dearborn Income
Securities, Inc.'s advisor.
*** Interest rate reflects yield at September 30, 2005.
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 September 30, 2005, the value of these
securities amounted to $5,440,864 or 3.82% 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.
TIPS Treasury Inflation Protected Security.
See accompanying notes to financial statements
--------------------------------------------------------------------------------
14
FORT DEARBORN INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES -- SEPTEMBER 30, 2005
--------------------------------------------------------------------------------
ASSETS:
Investments in securities of unaffiliated issuers, at value
(cost - $134,122,340) $139,954,901
----------------------------------------------------------------------------------------
Investments in affiliated issuers, at value
(cost - $1,938,323) 1,938,323
----------------------------------------------------------------------------------------
Cash 17,552
----------------------------------------------------------------------------------------
Interest receivable 1,838,819
----------------------------------------------------------------------------------------
Other assets 7,013
----------------------------------------------------------------------------------------
Total assets 143,756,608
----------------------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 1,023,526
----------------------------------------------------------------------------------------
Payable for investment advisory fees 169,883
----------------------------------------------------------------------------------------
Payable for directors' fees 4,933
----------------------------------------------------------------------------------------
Accrued expenses and other liabilities 87,624
----------------------------------------------------------------------------------------
Total liabilities 1,285,966
----------------------------------------------------------------------------------------
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 282,670
----------------------------------------------------------------------------------------
Accumulated net realized gain from investment transactions 1,235,278
----------------------------------------------------------------------------------------
Net unrealized appreciation on investments 5,832,561
----------------------------------------------------------------------------------------
Net assets $142,470,642
----------------------------------------------------------------------------------------
Net asset value per share $ 16.23
========================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
15
FORT DEARBORN INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
For the
Year Ended
September 30, 2005
---------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 7,995,658
---------------------------------------------------------------------------------------------------
Affiliated interest 59,958
---------------------------------------------------------------------------------------------------
Total income 8,055,616
---------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 679,936
---------------------------------------------------------------------------------------------------
Professional fees 134,594
---------------------------------------------------------------------------------------------------
Reports and notices to shareholders 66,789
---------------------------------------------------------------------------------------------------
Transfer agency fees 65,799
---------------------------------------------------------------------------------------------------
Custody and accounting fees 43,198
---------------------------------------------------------------------------------------------------
Directors' fees 17,149
---------------------------------------------------------------------------------------------------
Franchise taxes 8,204
---------------------------------------------------------------------------------------------------
Other expenses 56,926
---------------------------------------------------------------------------------------------------
Total expenses 1,072,595
---------------------------------------------------------------------------------------------------
Net investment income 6,983,021
---------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES:
Net realized gains from investment transactions 1,420,317
---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of investments (2,375,570)
---------------------------------------------------------------------------------------------------
Net realized and unrealized loss from investment activities (955,253)
---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 6,027,768
===================================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
16
FORT DEARBORN INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------
2005 2004
------------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 6,983,021 $ 7,241,544
------------------------------------------------------------------------------------------------------------
Net realized gains from investment transactions 1,420,317 1,281,992
------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/
depreciation of investments (2,375,570) (1,385,582)
------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,027,768 7,137,954
------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (7,213,597) (7,020,532)
------------------------------------------------------------------------------------------------------------
Net realized gains (930,220) --
------------------------------------------------------------------------------------------------------------
Total dividends and distributions to shareholders (8,143,817) (7,020,532)
------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets (2,116,049) 117,422
------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of year 144,586,691 144,469,269
------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $282,670 and $312,688, respectively) $142,470,642 $144,586,691
============================================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
17
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
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 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,
--------------------------------------------------------------------------------
18
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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.
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 Conduits) and REITs (Real Estate Investment
Trusts) which are simply another form of CMOs. 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
--------------------------------------------------------------------------------
19
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
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. 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 September 30, 2005, there were 12,000,000 shares of $0.01 par value capital
stock authorized, and 8,775,665 shares issued and outstanding. During the year
ended September 30, 2005, 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 September 30, 2005, the
Fund owed UBS Global AM $169,883 in investment advisory fees.
--------------------------------------------------------------------------------
20
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
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. Amounts relating to those investments at September 30, 2005 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 $29,139,217 $30,923,894 $59,958 $1,938,323 1.36%
===============================================================================================
PURCHASES AND SALES OF SECURITIES
Purchases and sales (including maturities) of portfolio securities during the
year ended September 30, 2005, were as follows: debt securities, excluding
short-term securities and U.S. government debt obligations, $45,866,523 and
$48,189,577, respectively; and U.S. government debt obligations, $65,271,751 and
$64,081,278, 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 fiscal years ended September
30, 2005 and 2004 were as follows:
DISTRIBUTIONS PAID FROM: 2005 2004
-----------------------------------------------------------------------------------------------
Ordinary income $7,210,549 $7,020,532
-----------------------------------------------------------------------------------------------
Long-term capital gains 933,268 --
===============================================================================================
$8,143,817 $7,020,532
===============================================================================================
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 193,549
-----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,830,714
-----------------------------------------------------------------------------------------------
Total accumulated earnings $7,350,509
===============================================================================================
--------------------------------------------------------------------------------
21
FORT DEARBORN INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
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 current fiscal year, the Fund had no capital loss carry-forwards to
offset current year gains.
For federal income tax purposes, the cost of securities owned at September 30,
2005, was $136,062,510.
At September 30, 2005, the components of net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having an excess of value over cost) $7,099,731
-----------------------------------------------------------------------------------------------
Gross depreciation (investments having an excess of value over cost) (1,269,017)
-----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments $5,830,714
===============================================================================================
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.
--------------------------------------------------------------------------------
22
FORT DEARBORN INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding through each year is
presented below:
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $16.48 $16.46 $15.71 $15.95 $15.05
-------------------------------------------------------------------------------------------------------------
Net investment income 0.80 0.83 0.83 0.95 1.04
-------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
from investment transactions (0.12) (0.01) 0.81 (0.07) 0.90
-------------------------------------------------------------------------------------------------------------
Net increase from investment operations 0.68 0.82 1.64 0.88 1.94
-------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.82) (0.80) (0.85) (0.96) (1.04)
-------------------------------------------------------------------------------------------------------------
Distributions from net realized gain (0.11) -- (0.04) (0.16) --
-------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.93) (0.80) (0.89) (1.12) (1.04)
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.23 $16.48 $16.46 $15.71 $15.95
-------------------------------------------------------------------------------------------------------------
MARKET PRICE PER SHARE, END OF YEAR $14.74 $14.84 $14.70 $15.10 $14.84
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
(MARKET VALUE)(1) 5.68% 6.54% 3.21% 9.46% 18.98%
-------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN (NET ASSET VALUE)(2) 4.17% 5.13% 10.63% 5.82% 13.22%
-------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in millions) $142.5 $144.6 $144.5 $137.9 $140.0
-------------------------------------------------------------------------------------------------------------
Expenses to average net assets 0.74% 0.70% 0.74% 0.73% 0.71%
-------------------------------------------------------------------------------------------------------------
Net investment income to average
net assets 4.81% 5.05% 5.16% 6.07% 6.68%
-------------------------------------------------------------------------------------------------------------
Portfolio turnover 78% 101% 62% 127% 143%
-------------------------------------------------------------------------------------------------------------
Number of shares outstanding at
end of year (in thousands) 8,776 8,776 8,776 8,776 8,776
=============================================================================================================
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 year reported and
a sale at the current market price on the last day of each year 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. 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 year reported
and a sale at the current net asset value on the last day of each year
reported, and assuming reinvestment of dividends and other distributions at
the net asset value on month-end date. Total investment return does not
reflect brokerage commissions. Returns do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or sale of Fund
shares.
--------------------------------------------------------------------------------
23
FORT DEARBORN INCOME SECURITIES, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ERNST & YOUNG LLP
The Board of Directors and Shareholders of
Fort Dearborn Income Securities, Inc.
We have audited the accompanying statement of assets and liabilities of Fort
Dearborn Income Securities, Inc., (the "Fund"), including the portfolio of
investments, as of September 30, 2005, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of September 30, 2005, by correspondence with the custodian
and brokers. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Fort
Dearborn Income Securities, Inc. at September 30, 2005, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
November 4, 2005
--------------------------------------------------------------------------------
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 Fund's primary objective 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 had
over $66.8 billion in assets under management as of September 30, 2005.
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.
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 Form N-Q are available on the SEC's Web
site at http://www.sec.gov. The Fund's Form 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-0330.
Additionally, you may obtain copies of Form N-Q from the Fund upon request by
calling 1-800-647 1568.
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 Fund's Web site: www.ubs.com/ubsglobalam-proxy, or on the Edgar
Database on the SEC's Web site (http://www.sec.gov.)
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
--------------------------------------------------------------------------------
25
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
best interest. Any repurchases will be made in compliance with applicable
requirements of the federal securities law.
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.
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 eighth 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 to it 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 EquiServe Trust Company, N.A. ("EquiServe") as administrator of the
Plan for the Participants. EquiServe, in turn, will 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
--------------------------------------------------------------------------------
26
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
(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 EquiServe 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.
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 EquiServe 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
EquiServe for further information. A Participant may terminate participation in
the Plan at any time by notice in writing to EquiServe. All correspondence
concerning the Plan should be directed to EquiServe at EquiServe Dividend
Reinvestment Services, P.O. Box 43081, Providence, RI 02940-3081. You may also
contact EquiServe 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 EquiServe before the record date for the payment of such dividend or
distribution. If a notice to discontinue is received by EquiServe 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. EquiServe,
in its sole discretion, may either pay such dividend in cash or reinvest it in
shares on behalf of the terminating Participant. EquiServe 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 EquiServe'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,
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27
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
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 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.
--------------------------------------------------------------------------------
28
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT
At the meeting of the Board of Directors (the "Board") of Fort Dearborn Income
Securities, Inc. (the "Fund"), held on May 26, 2005 (the "Meeting"), the Board,
consisting entirely of Directors who are not "interested persons" (as defined in
the 1940 Act) of the Fund or UBS Global Asset Management (Americas) Inc. (the
"Advisor") and its affiliates (together, the "Independent Directors"),
considered the continuation of the investment advisory agreement (the "Advisory
Agreement") between the Fund and the Advisor. Prior to the Meeting, the
Independent Directors' counsel had sent to the Advisor a request detailing the
information that the Independent Directors wished to receive in connection with
their consideration of the continuation of the Advisory Agreement. The
Independent Directors met with their independent counsel on May 25, 2005 to
discuss the materials provided to them in response to the information request,
including materials prepared by the Advisor, as well as reports prepared by
Lipper Analytical Services, Inc. ("Lipper Reports"), an independent statistical
compilation company, providing comparative expense information and comparative
performance for the Fund. The Board also made reference to information and
material that had been provided to the Independent Directors throughout the year
at quarterly Board meetings and other issues related to the continuation of the
Advisory Agreement.
At the Meeting, the Board considered a number of factors in connection with
their deliberations concerning the continuation of the Advisory Agreement for
the Fund, including: (i) the nature, extent and quality of the services provided
by the Advisor to the Fund; (ii) the performance of the Fund and the Advisor;
(iii) the Fund's expenses, costs of the services to be provided and profits to
be realized by the Advisor and its affiliates from the relationship with the
Fund; and (iv) whether economies of scale are realized by the Advisor with
respect to the Fund, as it grows larger, and the extent to which the economies
of scale are reflected in the level of the advisory fees charged.
NATURE, EXTENT AND QUALITY OF SERVICES In considering the nature, extent and
quality of the services provided by the Advisor to the Fund, the Board reviewed
the material presented by the Advisor describing the various services provided
to the Fund. The Board noted that in addition to investment management services,
the Advisor provides the Fund with operational, legal and compliance support.
The Board also considered the scope and depth of the Advisor's organization and
the experience and expertise of the professionals currently providing investment
management and other services to the Fund. The Board considered that the Advisor
was a well-established investment management organization employing investment
personnel with significant experience in the investment management industry. The
Board also considered the Advisor's in-house research capabilities, as well as
other research services available to it, including research services available
to the Advisor as a result of securities transactions effected for the Fund and
--------------------------------------------------------------------------------
29
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
the Advisor's other investment management clients. The Board also evaluated the
Advisor's portfolio management process and reviewed the information concerning
the process that had been provided by the Advisor in advance of the Meeting. The
Board noted that various presentations had been made by investment personnel at
Board meetings throughout the year concerning the Fund's investment performance
and investment strategies.
The Board also discussed the compliance program for the Advisor and its
affiliates, including the Advisor's compliance with its code of ethics, trade
allocation procedures and best execution procedures. After analyzing the
services provided by the Advisor to the Fund, both quantitatively and
qualitatively, including the impact of these services on investment performance,
the Board concluded that the nature, extent and quality of services provided to
the Fund were consistent with the operational requirements of the Fund, and met
the needs of the Fund's shareholders.
PERFORMANCE In evaluating the performance of the Fund, the Board analyzed the
Lipper Reports, which compared the performance of the Fund with other funds in
its respective peer universe over various time periods. In reviewing the Lipper
Reports, the Board noted that the Fund's short-term performance had not been as
good as some of the other funds in its peer group. The Advisor explained that
the Fund's allocation of assets to lower-rated securities had not been as high
as other funds in its peer group. The Advisor stated that it does not invest as
high a percentage of the Fund's portfolio in lower-rated securities as other
funds because these investments are more volatile than other fixed income
investments and the Advisor seeks to provide the Fund with stability of income
while managing risk. After analyzing the performance for the Fund, the Board
determined that the performance of the Fund was acceptable as compared with
relevant performance standards, given the investment strategies and risk profile
of the Fund and the expectations of the shareholder base.
COSTS AND EXPENSES When considering the fees and expenses borne by the Fund,
and the reasonableness of the advisory fees paid to the Advisor in light of the
services provided to the Fund, the Board compared the fees charged by the
Advisor to the Fund to the fees charged to the funds in its peer group for
comparable services, as provided in the Lipper Reports. In examining the Lipper
Reports, and in reviewing comparative costs, it was noted that the results of
such expense comparisons showed that the advisory fee rate and total expenses
for the Fund were comparable to the funds in its Lipper expense group.
The Board also received and considered information about the fee rates charged
to other funds and accounts that are managed by the Advisor. After discussing
the information about the other funds and accounts with the Advisor, the Board
determined that the fees charged by the Advisor to the Fund were within a
reasonable range, giving effect to differences in services performed for such
--------------------------------------------------------------------------------
30
FORT DEARBORN INCOME SECURITIES, INC.
GENERAL INFORMATION (UNAUDITED)
other funds and accounts as compared to such fee rates. The Board, after
reviewing all pertinent material, concluded that the advisory fee payable under
the Fund's Advisory Agreement was fair and reasonable, both on an absolute basis
and in comparison with the fees of other funds identified in its peer group.
PROFITABILITY The Board considered the profitability of the Fund to the Advisor
by reviewing the profitability analysis provided by the Advisor, including
information about its fee revenues and income. The Board reviewed the
profitability of the Fund to the Advisor, and the compensation that was received
for providing services to the Fund. The profitability analysis, which provided
information for the last two calendar years, included schedules relating to the
revenue and expenses attributable to the investment advisory and administration
services provided by the Advisor. The Board paid specific attention to the cost
allocation methodology used in the profitability analysis and determined that
the methodology used was reasonable. The Board also considered "fall-out" or
ancillary benefits to the Advisor or its affiliates as the result of their
relationship with the Fund; for example, the ability to attract other clients
due to the Advisor's role as investment advisor to the Fund. Upon closely
examining the information provided concerning the Advisor's profitability, the
Board noted that while the information showed that the Advisor was not
experiencing a profit in managing the Fund at this time, based on management's
presentation and other information, the Fund was a valuable contributor to the
Advisor's overhead.
ECONOMIES OF SCALE The Board also discussed whether economies of scale are
realized by the Advisor with respect to the Fund as it grows larger, and the
extent to which this is reflected in the level of advisory fees charged. The
Board noted that the Fund's advisory fee was one of the lowest in its peer group
and that the Advisor was not experiencing a profit with respect to the Fund.
Based on this analysis, the Board concluded that economies of scale and the
reflection of such economies of scale in the level of advisory fees charged were
inapplicable to the Fund at the present time due to the current level of fees
and the profitability of the Fund and because as a closed-end fund that does not
continuously offer shares, any increase in the Fund's assets will primarily
result from market appreciation which will benefit the Fund's shareholders.
CONCLUSIONS After full consideration of the factors discussed above, with no
single factor identified as being of paramount importance, the Board, with the
assistance of independent counsel, concluded that the continuation of the
Advisory Agreement for the Fund was in the best interests of the Fund and its
shareholders.
--------------------------------------------------------------------------------
31
FORT DEARBORN INCOME SECURITIES, INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
BOARD OF DIRECTORS & OFFICERS
The Fund is governed by a Board of Directors (the "Board"), which oversees the
Fund's operations. Each Director serves until the next annual meeting of
shareholders or until his or her succesor is elected and qualified or until he
or she resigns or is otherwise removed. Officers are appointed by the Directors
and serve at the pleasure of the Board. The table below shows, for each Director
and Officer, his or her name, address and age, the position held with the Fund,
the length of time served as a Director or Officer of the Fund, the Director's
or Officer's principal occupations during the last five years, the number of
funds in the UBS fund complex overseen by the Director or for which a person
served as an Officer, and other directorships held by the Director.
NON-INTERESTED DIRECTORS
Term of
Position(s) Office(1) and
Name, Address, Held with Length of Principal Occupation(s)
and Age Fund Time Served During Past 5 Years
-----------------------------------------------------------------------------------------------------------
Adela Cepeda; 47 Director Since 2000 Ms. Cepeda is founder and president of
A.C. Advisory, Inc. A.C Advisory, Inc. (since 1995).
161 No. Clark Street,
Suite 4975
Chicago, Illinois 60601
Frank K. Reilly; 69 Chairman Since 1993 Mr. Reilly is a Professor at the University
Mendoza College of Business and of Notre Dame since 1982.
University of Notre Dame Director
Notre Dame, IN
46556-5649
Edward M. Roob; 71 Director Since 1993 Mr. Roob is retired (since 1993).
841 Woodbine Lane
Northbrook, IL 60002
J. Mikesell Thomas; 54 Director Since 2002 Mr. Thomas is President and CEO of
Federal Home Loan Federal Home Loan Bank of Chicago
Bank of Chicago (since 2004). Mr. Thomas was an
111 East Wacker Drive independent financial advisor
Chicago, Illinois 60601 (2001-2004). He was a managing
director of Lazard Freres & Co.
(1995 to 2001).
--------------------------------------------------------------------------------
32
FORT DEARBORN INCOME SECURITIES, INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
Number of
Portfolios in Fund Complex Other Directorships
Overseen by Director Held by Director
---------------------------------------------------------------------------------------------------------
Ms. Cepeda is a director or trustee of Ms. Cepeda is a director of Lincoln National
four investment companies (consisting of Income Fund, Inc. (since 1992). She is also a Director
53 portfolios) for which UBS Global AM or of Amalgamated Bank of Chicago (since 2003),
one of its affiliates serves as investment and the MGI Funds (since 2005).
advisor, sub-advisor or manager.
Mr. Reilly is a director or trustee of four Mr. Reilly is a Director of Discover Bank; Morgan Stanley
investment companies (consisting of Trust and FSB.
53 portfolios) for which UBS Global AM or
one of its affiliates serves as investment
advisor, sub-advisor or manager.
Mr. Roob is a director or trustee of four None.
investment companies (consisting of
53 portfolios) for which UBS Global AM or
one of its affiliates serves as investment
advisor, sub-advisor or manager.
Mr. Thomas is a director or trustee of four Mr. Thomas is a director and chairman of the Finance
investment companies (consisting of Committee for Evanston Northwestern Healthcare.
53 portfolios) for which UBS Global AM or He is also a vice president of the Board of Trustees
one of its affiliates serves as investment for Mid-Day Club.
advisor, sub-advisor or manager.
--------------------------------------------------------------------------------
33
FORT DEARBORN INCOME SECURITIES, INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS
Term of
Position(s) Office(1) and
Name, Address, Held with Length of Principal Occupation(s)
and Age the Fund Time Served During Past 5 Years
--------------------------------------------------------------------------------------------------------------------
Joseph Allessie*; 40 Vice President Since 2005 Mr. Allessie is a director and deputy general
and Assistant counsel at UBS Global Asset Management (US) Inc.
Secretary and UBS Global Asset Management (Americas) Inc.
(collectively, "UBS Global AM--Americas
region") (since 2005). Prior to joining UBS
Global AM--Americas region, he was senior vice
president and general counsel of Kenmar
Advisory Corp. (from 2004 to 2005). Prior to
that Mr. Allessie was general counsel and
secretary of GAM USA Inc., GAM Investments, GAM
Services, GAM Funds, Inc. and the GAM Avalon
Funds (from 1999 to 2004). Such entities are
affiliates of UBS Global AM--Americas region.
Prior to joining GAM, Mr. Allessie was
Regulatory Officer to the State of New Jersey,
Department of Law and Public Safety, Bureau of
Securities (from 1993 to 1999). Mr. Allessie is
a vice president and assistant secretary of 20
investment companies (consisting of 86
portfolios) for which UBS Global AM--Americas
region or one of its affiliates serves as
investment advisor, sub-advisor or manager.
W. Douglas Beck*; 38 President Since 2005 Mr. Beck is an executive director and head of
product development and management for UBS
Global AM--Americas region (since 2002). From
March 1998 to November 2002, he held various
positions at Merrill Lynch, the most recent
being first vice president and co-manager of
the managed solutions group. Mr. Beck is
president of 20 investment companies
(consisting of 86 portfolios) for which UBS
Global AM--Americas region or one of its
affiliates serves as investment advisor,
sub-advisor or manager, and was vice president
of such investment companies from 2003 to 2005.
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34
FORT DEARBORN INCOME SECURITIES, INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of
Position(s) Office(1) and
Name, Address, Held with Length of Principal Occupation(s)
and Age the Fund Time Served During Past 5 Years
--------------------------------------------------------------------------------------------------------------------
Rose Ann Bubloski*; 37 Vice President Since 2004 Ms. Bubloski is an associate director and
and Assistant a senior manager of the mutual fund finance
Treasurer department of UBS Global AM--Americas
region. Ms. Bubloski is vice president and
assistant treasurer of four investment
companies (consisting of 53 portfolios) for
which UBS Global AM--Americas region or
one of its affiliates serves as investment
advisor, sub-advisor or manager.
Thomas Disbrow*; 39 Vice President Since 2000 Mr. Disbrow is a director, head of retail mutual
and Assistant (Vice President); fund operations and co-head of the mutual
Treasurer since 2004 fund finance department of UBS Global AM--
(Assistant Americas region. Mr. Disbrow is a vice
Treasurer) president and treasurer of 16 investment
companies (consisting of 33 portfolios) and
vice president and assistant treasurer of four
investment companies (consisting of 53
portfolios) for which UBS Global AM--
Americas region or one of its affiliates serves
as investment advisor, sub-advisor or
manager.
Craig G. Ellinger**; 35 Vice President Since 2001 Mr. Ellinger is a portfolio manager in the
Fixed Income Group at UBS Global AM--
Americas region (since 2000). Mr. Ellinger is
also Global Head of Credit Research for UBS
Global AM--Americas region since May 2005.
He previously served in a similar position at
PPM America, Inc. (1997 to 2000). Mr. Ellinger
is vice president of one investment company
(consisting of one portfolio) for which UBS
Global AM--Americas region serves as
investment advisor.
--------------------------------------------------------------------------------
35
FORT DEARBORN INCOME SECURITIES, INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONTINUED)
Term of
Position(s) Office(1) and
Name, Address, Held with Length of Principal Occupation(s)
and Age the Fund Time Served During Past 5 Years
--------------------------------------------------------------------------------------------------------------------
Mark F. Kemper**, 47 Vice President Since 2004 Mr. Kemper is general counsel of UBS Global
and Secretary AM--Americas region (since July 2004).
Mr. Kemper also is an executive director of
UBS Global AM--Americas region. He was
deputy general counsel of UBS Global Asset
Management (Americas) Inc. from July 2001
to July 2004. He has been secretary of UBS
Global AM--Americas since 1999 and
assistant secretary of UBS Global Asset
Management Trust Company since 1993.
Mr. Kemper is secretary of UBS Global AM--
Americas region (since 2004). Mr. Kemper is
vice president and secretary of 20 investment
companies (consisting of 86 portfolios) for
which UBS Global AM--Americas region or
one of its affiliates serves as investment
advisor, sub-advisor or manager.
Joseph T. Malone*; 38 Vice President, Since 2001 Mr. Malone is a director and co-head of the
Treasurer and (Assistant mutual fund finance department of UBS
Principal Treasurer) Global AM--Americas region. From
Accounting since 2004 August 2000 through June 2001, he was
Officer (Vice President, the controller at AEA Investors Inc. From
Treasurer and March 1998 to August 2000, Mr. Malone
Principal was a manager within the investment
Accounting management services practice of
Officer) PricewaterhouseCoopers LLC. Mr. Malone is
vice president and assistant treasurer of
16 investment companies (consisting of
33 portfolios) and vice president, treasurer
and principal accounting officer of four
investment companies (consisting of
53 portfolios) for which UBS Global AM--
Americas region or one of its affiliates
serves as investment advisor, sub-advisor
or manager.
--------------------------------------------------------------------------------
36
FORT DEARBORN INCOME SECURITIES, INC.
SUPPLEMENTAL INFORMATION (UNAUDITED)
OFFICERS (CONCLUDED)
Term of
Position(s) Office(1) and
Name, Address, Held with Length of Principal Occupation(s)
and Age the Fund Time Served During Past 5 Years
--------------------------------------------------------------------------------------------------------------------
Joseph McGill*; 43 Vice President Since 2004 Mr. McGill is an executive director and
and Chief chief compliance officer at UBS Global
Compliance AM--Americas region (since 2003). Prior
Officer to joining UBS Global AM--Americas region,
he was Assistant General Counsel at
J. P. Morgan Investment Management (from
1999 to 2003). Mr. McGill is a vice president
and chief compliance officer of 20 investment
companies (consisting of 86 portfolios) for
which UBS Global AM--Americas region or
one of its affiliates serves as investment
advisor, sub-advisor or manager.
Eric Sanders*; 40 Vice President Since 2005 Mr. Sanders is a director and associate
and Assistant general counsel of UBS Global AM--Americas
Secretary region (since July 2005). From 1996 until June
2005, he held various positions at Fred Alger
& Company, Incorporated, the most recent
being assistant vice president and associate
general counsel. Mr. Sanders is a vice president
and assistant secretary of 20 investment
companies (consisting of 86 portfolios) for
which UBS Global AM--Americas region or
one of its affiliates serves as investment
advisor, sub-advisor or manager.
Keith A. Weller*; 44 Vice President Since 2004 Mr. Weller is an executive director and
and Assistant senior associate general counsel of UBS Global
Secretary AM--Americas region. Mr. Weller is a vice
president and assistant secretary of 20
investment companies (consisting of 86
portfolios) for which UBS Global AM--
Americas region or one of its affiliates serves
as investment advisor, sub-advisor or manager.
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is One North Wacker Drive, Chicago, Illinois
60606.
(1) Each Director serves until the next annual meeting of shareholders or until
his or her successor is elected and qualified or until he or she resigns or
is otherwise removed. Officers are appointed by the Directors and serve at
the pleasure of the Board.
--------------------------------------------------------------------------------
37
FORT DEARBORN INCOME SECURITIES, INC.
NEW YORK STOCK EXCHANGE CERTIFICATIONS (UNAUDITED)
Fort Dearborn Income Securities, Inc. (the "Fund") is listed on the New York
Stock Exchange ("NYSE"). As a result, it is subject to certain corporate
governance rules and related interpretations issued by the exchange. Pursuant to
those requirements, the Fund must include information in this report regarding
certain certifications. The Fund's president and treasurer have filed
certifications with the SEC regarding the quality of the Fund's public
disclosure. Those certifications were made pursuant to Section 302 of the
Sarbanes-Oxley Act ("Section 302 Certifications"). The Section 302
Certifications were filed as exhibits to the Fund's annual report on Form N-CSR,
which included a copy of this annual report along with other information about
the Fund. After the Fund's 2005 annual meeting of shareholders, it will be
required to file a certification with the NYSE stating whether its president is
aware of any violation of the NYSE's Corporate Governance listing standards.
The Fund will be required to include certain additional information in
subsequent annual reports relating to the NYSE certification.
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38
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39
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--------------------------------------------------------------------------------
40
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
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.
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.
(C) 2005 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.
-----------------------
The registrant has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions pursuant to Section 406 of
the Sarbanes-Oxley Act of 2002. (The registrant has designated the code of
ethics adopted pursuant to Sarbanes-Oxley as a "Code of Conduct" to lessen the
risk of confusion with its separate code of ethics adopted pursuant to Rule
17j-1 under the Investment Company Act of 1940, as amended.)
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
-----------------------------------------
The registrant's Board of Trustees has determined that the following person
serving on the registrant's Audit Committee is an "audit committee financial
expert" as defined in item 3 of Form N-CSR : J. Mikesell Thomas. Mr. Thomas is
independent as defined in item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
-----------------------------------------------
(a) Audit Fees:
----------
For the fiscal years ended September 30, 2005 and September 30,
2004, the aggregate Ernst & Young LLP (E&Y) audit fees for
professional services rendered to the registrant were approximately
$33,000 and $28,000, respectively.
Fees included in the audit fees category are those associated with
the annual audits of financial statements and services that are
normally provided in connection with statutory and regulatory
filings.
(b) Audit-Related Fees:
------------------
In each of the fiscal years ended September 30, 2005 and September
30, 2004, the aggregate audit-related fees billed by E&Y for
services rendered to the registrant that are reasonably related to
the performance of the audits of the financial statements, but not
reported as audit fees, were approximately $2,500 and $0,
respectively.
Fees included in the audit-related category are those associated
with the reading and providing of comments on the 2005 semiannual
financial statements.
There were no audit-related fees required to be approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the
fiscal years indicated above
(c) Tax Fees:
--------
In each of the fiscal years ended September 30, 2005 and September
30, 2004, the aggregate tax fees billed by E&Y for professional
services rendered to the registrant were approximately $5,000 and
$4,400, respectively.
Fees included in the tax fees category comprise all services
performed by professional staff in the independent accountant's tax
division except those services related to the audits. This category
comprises fees for tax return preparation and review of excise tax
calculations.
There were no tax fees required to be approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the
fiscal years indicated above.
(d) All Other Fees:
--------------
In each of the fiscal years ended September 30, 2005 and September
30, 2004, there were no fees billed by E&Y for products and
services, other than the services reported in Item 4(a)-(c) above,
rendered to the registrant.
Fees included in the all other fees category would consist of
services related to internal control reviews, strategy and other
consulting, financial information systems design and
implementation, consulting on other information systems, and other
tax services unrelated to the registrant.
There were no "all other fees" required to be approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the
fiscal years indicated above.
(e) (1) Audit Committee Pre-Approval Policies and Procedures:
----------------------------------------------------
The registrant's Audit Committee must pre-approve all audit and
non-audit services provided by the auditors relating to any series
of the registrant's operations or financial reporting. Prior to the
commencement of any audit or non-audit services, the Audit
Committee reviews the services to determine whether they are
appropriate and permissible under applicable law.
The registrant's Audit Committee has adopted a charter that, among
other things, provides a framework for the Audit Committee's
consideration of non-audit services by the registrant's auditors.
The charter requires pre-approval of any non-audit services to be
provided by the auditors to a series of the registrant when,
without such pre-approval, the auditors would not be independent of
the registrant under the applicable federal securities laws, rules
or auditing standards. The charter also requires pre-approval of
all non-audit services to be provided by the registrant's auditors
to the registrant's investment adviser or any entity that it
controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services
to the registrant when, without such pre-approval, the auditors
would not be independent of the registrant under applicable federal
securities laws, rules or auditing standards.
All non-audit services must be approved in advance of provision of
the service either: (i) by resolution of the Audit Committee; (ii)
by oral or written approval of the Chairman of the Audit Committee
and one other Audit Committee member; or (iii) if the Chairman is
unavailable, by oral or written approval of two other members of
the Audit Committee.
(e) (2) Services approved pursuant to paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X:
Audit-Related Fees:
------------------
There were no amounts that were approved by the Audit
Committee pursuant to the de minimis exception for the fiscal
years ended September 30, 2005 and September 30, 2004 on
behalf of the registrant.
There were no amounts that were required to be approved by
the Audit Committee pursuant to the de minimis exception for
the fiscal years ended September 30, 2005 and September 30,
2004 on behalf of the registrant's service providers that
relate directly to the operations and financial reporting of
the registrant.
Tax Fees:
--------
There were no amounts that were approved by the audit
committee pursuant to the de minimis exception for the fiscal
years ended September 30, 2005 and September 30, 2004 on
behalf of the registrant.
There were no amounts that were required to be approved by
the Audit Committee pursuant to the de minimis exception for
the fiscal years ended September 30, 2005 and September 30,
2004 on behalf of the registrant's service providers that
relate directly to the operations and financial reporting of
the registrant.
All Other Fees:
--------------
There were no amounts that were approved by the Audit
Committee pursuant to the de minimis exception for the fiscal
years ended September 30, 2005 and September 30, 2004 on
behalf of the registrant.
There were no amounts that were required to be approved by
the Audit Committee pursuant to the de minimis exception for
the fiscal years ended September 30, 2005 and September 30,
2004 on behalf of the registrant's service providers that
relate directly to the operations and financial reporting of
the registrant.
(f) According to E&Y, for the fiscal year ended September 30, 2005, the
percentage of hours spent on the audit of the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons who are not full-time,
permanent employees of E&Y was 0%.
(g) For the fiscal years ended September 30, 2005 and September 30,
2004, the aggregate fees billed by E&Y of $61,000 and $160,400,
respectively, for non-audit services rendered on behalf of the
registrant ("covered"), its investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser) and
any entity controlling, controlled by, or under common control with
the adviser ("non-covered") that provides ongoing services to the
registrant for each of the last two fiscal years of the registrant
is shown in the table below:
2005 2004
---- ----
Covered Services $7,500 $4,400
Non-Covered Services 53,500 156,000
(h) The registrant's audit committee was not required to consider
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
----------------------------------------------
Form N-CSR disclosure requirements not yet effective with respect to the
registrant.
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.
--------------------------------
The registrant's Board of Directors believes that the voting of proxies on
securities held by the registrant is an important element of the overall
investment process. As such, the Board has delegated the responsibility to vote
such proxies to the registrant's advisor. Following is a summary of the proxy
voting policy of the advisor.
CORPORATE GOVERNANCE PHILOSOPHY, VOTING GUIDELINES AND POLICY SUMMARY
The proxy voting policy of UBS Global AM is based on its belief that voting
rights have economic value and must be treated accordingly. Generally, UBS
Global AM expects the boards of directors of companies issuing securities held
by its clients to act as stewards of the financial assets of the company, to
exercise good judgment and practice diligent oversight with the management of
the company. While there is no absolute set of rules that determines appropriate
corporate governance under all circumstances and no set of rules will guarantee
ethical behavior, there are certain benchmarks, which, if substantial progress
is made toward, give evidence of good corporate governance. UBS Global AM may
delegate to an independent proxy voting and research service the authority to
exercise the voting rights associated with certain client holdings. Any such
delegation shall be made with the direction that the votes be exercised in
accordance with UBS Global AM's proxy voting policy.
When UBS Global AM's view of a company's management is favorable, UBS Global AM
generally supports current management initiatives. When UBS Global AM's view is
that changes to the management structure would probably increase shareholder
value, UBS Global AM may not support existing management proposals. In general,
UBS Global AM (1) opposes proposals which act to entrench management; (2)
believes that boards should be independent of company management and composed of
persons with requisite skills, knowledge and experience; (3) opposes structures
which impose financial constraints on changes in control; (4) believes
remuneration should be commensurate with responsibilities and performance; and
(5) believes that appropriate steps should be taken to ensure the independence
of auditors.
UBS Global AM has implemented procedures designed to identify whether it has a
conflict of interest in voting a particular proxy proposal, which may arise as a
result of its or its affiliates' client relationships, marketing efforts or
banking and broker/dealer activities. To address such conflicts, UBS Global AM
has imposed information barriers between it and its affiliates who conduct
banking, investment banking and broker/dealer activities and has implemented
procedures to prevent business, sales and marketing issues from influencing our
proxy votes. Whenever UBS Global AM is aware of a conflict with respect to a
particular proxy, its appropriate local corporate governance committee is
required to review and agree to the manner in which such proxy is voted.
ITEM 8. 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 each class
and series 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 as required pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002 (and designated by registrant as a "Code
of Conduct") is incorporated by reference herein from Exhibit EX-99
CODE ETH to the registrant's Report on Form N-CSR filed November
22, 2004 (Accession Number: 0000950136-04-004099)(SEC File No.
811-02319).
(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: November 23, 2005
-----------------
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: November 23, 2005
-----------------
By: /s/ Joseph T. Malone
--------------------
Joseph T. Malone
Treasurer
Date: November 23, 2005
-----------------