<PAGE>
(Hatteras Income Securities, Inc. logo appears here)
ANNUAL REPORT
TO SHAREHOLDERS
DECEMBER 31, 1995
<PAGE>
DEAR SHAREHOLDER:
I am pleased to present the Hatteras Income Securities, Inc. (the "Fund")
Annual Report to Shareholders for the fiscal year ended December 31, 1995.
The Fund returned 20.22%* in 1995 based on net asset value. For the
three-year period ended December 31, 1995, the Fund returned 10.75%* on an
annualized basis, which ranked it #1 out of 18 funds for net asset value
performance in its Lipper category. The Fund returned 10.12%* on an annualized
basis over the last 10 years.
As a result of dramatic interest rate declines during 1995, the Fund's
dividend was reduced in November, from $0.115 per share to $0.110. However, the
Fund's yield remained very attractive: $0.110 was equivalent to a 7.86%
annualized yield based on the closing net asset value of $16.79 per share on
December 31, 1995.
ECONOMIC ENVIRONMENT
In 1994, the Federal Reserve Board progressively raised the federal funds
rate, which led to a slowing of economic growth in 1995. As a result, in 1995,
the bond market enjoyed one of its best-performing years in history.
Worthy of note is the fact that bond market volatility appears to have
increased over the last three years. In 1993, the yield on the 30-year Treasury
fell 1.06%, in 1994, it rose 1.53%, and in 1995 it fell 1.93%. We do not believe
these dramatic moves can be explained solely by traditional market factors such
as economic growth and supply and demand. Rather, there appear to be new forces
that have pushed trends in rates to extremes: World capital markets have become
more open, information flows have become more advanced and the ability to move
quickly between markets has increased. And, while the U.S. market remains a
major component of the world's bond markets, it is no longer the dominant
player. Major pools of money have emerged to pursue global opportunities using
leverage, structured transactions and short time horizons.
As we go forward, volatility and uncertainty will continue to provide
challenges for bond market investors. However, we believe fundamentals for 1996
remain positive. The current environment of low inflation and decelerating
growth could prompt the Fed to ease rates further, which should provide
investors with attractive returns.
NationsBank remains true to its disciplines. Returns and consistency of
returns are enhanced by using a combination of investment strategies. Portfolio
management requires a full examination of both return and risk. The use of a
diversified mix of investment strategies and a focus on long-term performance
allow us to strive to meet our shareholders' expectations. We remain confident
in our ability to pursue the Fund's investment objective of high monthly income,
consistent with prudent investment risk.
Sincerely,
(Signature of Mark H. Williamson)
MARK H. WILLIAMSON
PRESIDENT
DECEMBER 31, 1995
SHARES OF HATTERAS INCOME SECURITIES, INC. ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY NATIONSBANK, N.A.
("NATIONSBANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE COMPANY
INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
NATIONSBANK OR ITS AFFILIATES PROVIDE INVESTMENT ADVISORY SERVICES TO THE
FUND, FOR WHICH THEY ARE COMPENSATED.
* Ranking and performance information represents past performance and is
not an indication of future results. Investment return and principal value will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost. All percentages are based upon net asset value as
of December 31, 1995. Lipper Analytical Services, Inc. is an independent monitor
of closed-end fund performance. Ranking is for the year ended December 31, 1995.
2
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING COST VALUE
(UNAUDITED) (UNAUDITED)
<C> <S> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 87.63%
AIRLINES -- 2.28%
$ 1,000,000 Delta Airlines 10.125% 05/15/10............... Ba1 BB $ 1,214,850 $ 1,260,580
AUTOMOBILES -- 2.12%
750,000 Auburn Hills Trust Certificates 12.000%
05/1/20....................................... A3 A- 730,000 1,170,327
BANKING AND FINANCE -- 16.24%
1,500,000 Ahmanson 9.875% 11/15/99...................... Baa2 BBB 1,602,405 1,697,586
134,301 Bank of America 9.500% Mortgage Backed
Pass-Through, Series 1978-5 07/01/08.......... NR AAA 128,880 134,301
1,500,000 First Chicago Corporation 10.250% 05/01/01.... A2 A 1,551,460 1,789,210
76,766 Home Savings & Loan Association 10.000%
Mortgage Backed Pass-Through, 4th Series,
07/01/09...................................... NR AAA 74,080 76,766
1,000,000 Leucadia 8.250% 06/15/05...................... Ba1 BBB 1,000,000 1,056,682
1,000,000 Security Pacific Corporation 11.000%
03/01/01...................................... A3 A 1,202,730 1,214,404
1,500,000 Sun America, Inc., 9.950% 02/01/12............ Baa1 A 1,486,815 1,934,298
1,000,000 Western Financial Services 8.500% 07/01/03.... Ba3 BB+ 1,068,720 1,071,276
Total Banking and Finance: 8,115,090 8,974,523
BASIC AND CAPITAL GOODS -- 6.24%
1,500,000 Inland Steel Company 12.000% 12/01/98......... Ba3 BB- 1,575,000 1,638,750
1,500,000 USX Corporation 9.375% 05/15/22............... Baa3 BB+ 1,591,740 1,809,744
Total Basic and Capital Goods: 3,166,740 3,448,494
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING COST VALUE
(UNAUDITED) (UNAUDITED)
<C> <S> <C> <C> <C> <C>
COMPUTERS -- 1.60%
$ 1,000,000 Unisys Corporation 10.625% 10/01/99........... Ba3 BB- $ 1,071,250 $ 885,000
ENERGY -- 5.16%
1,500,000 Occidental Petroleum 11.750%
03/15/11...................................... Baa3 BBB 1,698,750 1,585,024
1,000,000 Pennzoil Company 10.250% 11/01/05............. Baa3 BBB 1,074,810 1,264,204
Total Energy: 2,773,560 2,849,228
FOOD AND TOBACCO -- 4.92%
1,500,000 Borden Incorporated 9.250% 08/15/19........... Ba1 BBB- 1,550,100 1,678,044
1,000,000 Chiquita Brands International 11.500%
06/01/01...................................... B3 B 1,045,000 1,040,000
Total Food and Tobacco: 2,595,100 2,718,044
LEASING -- 1.76%
985,179 GPA Leasing 9.125% 12/02/96................... B3 B 907,596 973,554
LEISURE -- 1.50%
1,000,000 Bally's Health and Tennis, 13.000%
01/15/03...................................... B3 B- 1,000,000 830,000
MANUFACTURING AND DISTRIBUTION -- 5.42%
1,500,000 Federal Express Corporation 9.650% 06/15/12... Baa2 BBB 1,498,635 1,900,602
1,000,000 US Can Company 13.500% 01/15/02............... B2 B 1,107,500 1,092,500
Total Manufacturing and
Distribution: 2,606,135 2,993,102
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING COST VALUE
(UNAUDITED) (UNAUDITED)
<C> <S> <C> <C> <C> <C>
MEDIA AND CABLE -- 13.43%
$ 1,000,000 Jones Intercable 9.625% 03/15/02.............. Ba2 BB $ 1,002,625 $ 1,073,750
1,500,000 News American Holdings 10.125% 10/15/12....... Ba3 BBB 1,650,160 1,820,379
1,000,000 Rogers Cablesystems 10.000% 12/01/07.......... Ba3 BB+ 1,000,000 1,062,500
1,500,000 Time Warner 9.150% 02/01/23................... Ba1 BBB- 1,556,707 1,705,832
1,500,000 TKR Cable, Inc. 10.500% 10/30/07.............. Ba2 BBB- 1,696,875 1,757,669
Total Media and Cable: 6,906,367 7,420,130
OIL AND GAS -- 5.33%
1,500,000 Coastal Corporation, 11.750% 06/15/06......... Baa3 BB+ 1,771,875 1,594,751
1,250,000 Louis Dreyfus Natural Gas 9.250% 06/15/04..... Ba3 BB+ 1,358,325 1,350,000
Total Oil and Gas: 3,130,200 2,944,751
PAPER AND FOREST PRODUCTS -- 13.86%
1,250,000 Bowater, Inc. 9.500% 10/15/12................. Baa1 BBB 1,397,917 1,567,556
1,000,000 Domtar, Inc., 12.000% 04/15/01................ Ba1 BB 1,065,000 1,176,250
1,000,000 Georgia-Pacific Corporation
9.625% 03/15/22............................... Baa2 BBB- 1,166,730 1,179,742
1,000,000 SD Warren 12.000% 12/15/04.................... B1 B+ 1,000,000 1,100,000
1,500,000 Stone Container 11.875% 12/1/98............... B1 B+ 1,576,250 1,567,500
1,000,000 USG Corporation 9.250% 09/15/01............... Ba3 BB 1,066,070 1,065,000
Total Paper and Forest Products: 7,271,967 7,656,048
PUBLIC UTILITIES -- 7.77%
1,500,000 Commonwealth Edison 9.875%,
06/15/20...................................... Baa2 BBB 1,614,120 1,778,635
1,000,000 GTE Corporation 10.250% 11/01/20.............. Baa1 BBB+ 989,840 1,210,772
999,348 RGS (AEGCO) Funding Corporation 9.810%
12/07/22...................................... Baa2 BBB 994,351 1,301,706
Total Public Utilities: 3,598,311 4,291,113
TOTAL CORPORATE BONDS AND NOTES: 45,087,166 48,414,894
</TABLE>
See Notes to Financial Statements
5
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING COST VALUE
(UNAUDITED) (UNAUDITED)
<C> <S> <C> <C> <C> <C>
FOREIGN BONDS AND NOTES -- 4.56%
$ 1,000,000 HYDRO of Quebec 9.490% 02/01/21............... A2 A+ $ 1,167,770 $ 1,269,090
1,000,000 Nova Scotia Province (of Canada), 9.125%
05/01/21...................................... A3 A- 1,149,220 1,250,410
Total Foreign Bonds and Notes: 2,316,990 2,519,500
MORTGAGE-BACKED SECURITIES -- 3.21%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES -- 2.23%
GNMA Mortgage Pass-Through Certificates:
974,499 9.000% 04/15/09 -- 12/15/16, (4 Pools)........ 907,223 1,032,056
184,062 9.500% 07/15/09 Pool# 29089................... 174,859 197,464
1,082,082 1,229,520
FEDERAL HOME LOAN MORTGAGE (FHLMC) CERTIFICATES -- 0.20%
106,546 9.250% 08/01/08............................... 90,164 111,956
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) CERTIFICATES -- 0.78%
407,805 9.250% 09/01/10, Pool# 003852................. 370,287 431,764
TOTAL MORTGAGE-BACKED SECURITIES: 1,542,533 1,773,240
TREASURY BONDS -- 4.60%
475,000 United States Treasury Bonds, 8.750%,
08/15/20...................................... 619,961 637,242
1,250,000 United States Treasury Bonds, 12.750%,
11/15/10...................................... 1,750,000 1,905,469
TOTAL TREASURY BONDS: 2,369,961 2,542,711
TOTAL INVESTMENTS $ 51,316,650 $55,250,345
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $51,316,650) (Note 1)....................... $55,250,345
Cash............................................................................................. 15,475
Interest receivable.............................................................................. 902,242
Total assets............................................................................. 56,168,062
LIABILITIES:
Accrued management and advisory fees............................................................. 31,607
Accrued expenses................................................................................. 27,018
Total liabilities........................................................................ 58,625
NET ASSETS (equivalent to $16.79 per share based on 3,341,682 shares of capital stock
outstanding)..................................................................................... $56,109,437
</TABLE>
NET ASSETS CONSIST OF
<TABLE>
<S> <C>
CAPITAL STOCK -- $1.00 par value (shares authorized, 5,000,000; shares outstanding, 3,341,682)..... $ 3,341,682
SURPLUS:
Capital surplus.................................................................................. 50,871,028
Distributions in excess of net investment income (Notes 1 and 2)................................. (30,000)
Accumulated net realized loss on investments..................................................... (2,006,968)
TOTAL CAPITAL STOCK AND SURPLUS.................................................................... 52,175,742
NET UNREALIZED APPRECIATION OF INVESTMENTS......................................................... 3,933,695
NET ASSETS......................................................................................... $56,109,437
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest......................................................................................... $4,924,232
EXPENSES:
Management and investment advisory fees (Note 5)................................... $ 319,415
Transfer agent, postage and other shareholder expenses............................. 59,176
Directors fees..................................................................... 25,000
Legal and accounting fees.......................................................... 37,219
Custody fees (Note 5).............................................................. 16,548
Printing........................................................................... 13,502
New York Stock Exchange Annual Fee................................................. 16,170
Miscellaneous expenses............................................................. 5,382
492,412
Fees paid indirectly (Note 5)...................................................... (16,548)
Total expenses........................................................................... 475,864
INVESTMENT INCOME -- NET........................................................................... 4,448,368
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on transactions in investment securities:
Proceeds from sales or maturities............................................... 25,917,328
Cost of securities sold or matured.............................................. 25,431,667
Net realized gain............................................................. 485,661
Change in unrealized appreciation/depreciation in the value of investment
securities:..................................................................... 4,892,545
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS.................................................... 5,378,206
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................... $9,826,574
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/95 12/31/94
<S> <C> <C>
INVESTMENT ACTIVITIES:
Investment Income -- net......................................................... $ 4,448,368 $ 4,591,671
Realized gain (loss) on investments -- net....................................... 485,661 (521,963)
Change in unrealized appreciation/depreciation................................... 4,892,545 (4,970,894)
Net increase (decrease) in net assets resulting from investment activities....... 9,826,574 (901,186)
Dividends to shareholders from investment income................................. (4,448,368) (4,751,482)
Distributions to shareholders in excess of net investment income................. (103,041) --
Total Increase (Decrease)................................................... 5,275,165 (5,652,668)
CAPITAL STOCK TRANSACTIONS:
Net asset value of 36,423 and 36,498 shares, respectively, of capital stock
issued in dividend reinvestment............................................... 584,429 591,105
NET ASSETS:
Beginning of period.............................................................. 50,249,843 55,311,406
End of period (including distributions in excess of net investment income of
$(30,000) and undistributed net investment income of $35,467, respectively)... $56,109,437 $50,249,843
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
HATTERAS INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of
year................................ $ 15.20 $ 16.92 $ 16.08 $ 16.03 $ 14.88 $ 15.99 $ 15.99 $ 16.07 $ 17.94
Net investment income................ 1.35 1.44 1.48 1.50 1.54 1.57 1.64 1.61 1.66
Net realized and unrealized
gain/(loss) on investment
transactions....................... 1.61 (1.71) 0.83 0.05 1.17 (1.11) (0.01) (0.07) (1.31)
Total from investment operations..... 2.96 (0.27) 2.31 1.55 2.71 0.46 1.63 1.54 0.35
Less distributions
Dividends from net investment
income............................. (1.34) (1.45) (1.47) (1.50) (1.56) (1.57) (1.63) (1.62) (2.22)
Dividends in excess of net investment
income............................. (0.03) -- -- -- -- -- -- -- --
Total distributions.................. (1.37) (1.45) (1.47) (1.50) (1.56) (1.57) (1.63) (1.62) (2.22)
Net asset value at end of year........ $ 16.79 $ 15.20 $ 16.92 $ 16.08 $ 16.03 $ 14.88 $ 15.99 $ 15.99 $ 16.07
Per share market value, end
of period........................... $ 16.125 $14.875 $18.000 $18.000 $17.500 $14.875 $15.250 $15.000 $17.000
Total Return:
Per share market value............... 17.61% -11.09% 8.40% 12.48% 29.57% 7.63% 12.11% -2.45% -5.67%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (millions)... $ 56,109 $50,250 $55,311 $51,871 $50,964 $46,559 $49,665 $49,518 $49,377
Ratio of net operating expenses to
average net assets (%)............. 0.86% 0.92% 0.90% 0.97% 0.99% 1.01% 0.97% 1.01% 0.95%
Ratio of operating expense before
fees paid indirectly............... 0.89% -- -- -- -- -- -- -- --
Ratio of net investment income to
average net assets (%)............. 8.07% 8.76% 8.83% 9.29% 9.93% 10.34% 10.15% 9.91% 9.80%
Portfolio turnover rate (%).......... 48.75% 28.28% 35.87% 32.35% 27.17% 24.58% 33.49% 58.57% 48.59%
<CAPTION>
YEAR
ENDED
1986
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of
year................................ $ 17.26
Net investment income................ 1.78
Net realized and unrealized
gain/(loss) on investment
transactions....................... 0.70
Total from investment operations..... 2.48
Less distributions
Dividends from net investment
income............................. (1.80)
Dividends in excess of net investment
income............................. --
Total distributions.................. (1.80)
Net asset value at end of year........ $ 17.94
Per share market value, end
of period........................... $20.375
Total Return:
Per share market value............... 25.82%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (millions)... $54,066
Ratio of net operating expenses to
average net assets (%)............. 0.93%
Ratio of operating expense before
fees paid indirectly............... --
Ratio of net investment income to
average net assets (%)............. 10.01%
Portfolio turnover rate (%).......... 31.09%
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Hatteras Income Securities, Inc. ("the Company") is registered under the
Investment Company Act of 1940, as amended, as a closed-end diversified
investment management company.
A summary of significant accounting policies followed by the Company, all of
which are in conformity with generally accepted accounting principles,
follows. The presentation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. Security Valuation:
Portfolio securities listed on an exchange are valued at the closing
sales price taken from the exchange on which the security is primarily
traded, and listed securities for which there is no sale on the
valuation date and securities traded in only the over-the-counter market
are valued at the closing bid price unless the Company's investment
adviser determines that market quotations are not readily available for
institutional size holdings, in which case such securities are valued in
good faith at fair value under the direction of the Company's Board of
Directors. Short-term investments that have a remaining maturity of 60
days or less are valued at amortized cost which approximates market
value. Restricted securities and other debt obligations purchased in
private transactions for which no quotations are readily available are
valued in good faith at fair value by or under the direction of the
Company's Board of Directors.
B. Federal Income Tax:
It is the Company's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies
and to distribute substantially all of its taxable income to
shareholders. Therefore, no federal income or excise tax provision
is required.
C. Investment Policy
At least 70% of the Company's total assets will be invested in
a) debt securities which are rated at the time of purchase as
Baa (Moody's Investors Service, Inc. ("Moody's")) or BBB
(Standard & Poor's Corporation ("S&P")) or better, b) securities
of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities, c) securities of, or guaranteed by, the
Government of Canada or of a Province of Canada or political
subdivision thereof, such securities not to exceed 25% of the
Company's total assets, d) obligations of, or guaranteed by,
banks, savings and loan institutions or their holding companies,
which obligations, although not rated as a matter of policy by
either Moody's or S&P, either are rated in the four highest
ratings assigned by Fitch Investors Service, Inc. (AAA, AA, A or
BBB), or if not rated are considered by the Company's investment
adviser to be of investment quality comparable to securities
described under item a), e) commercial paper considered by the
Company's investment adviser to be of investment quality
comparable to securities which may be purchased under item a)
above, and cash or cash equivalents.
11
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
D. Security Transactions and Investment Income
Security transactions are accounted for on the date
securities are purchased or sold. Dividend income is
recorded on the ex-dividend date. Interest income is
recognized daily on the accrual basis. Original issue
discount is amortized using the effective yield method.
Market discount and premiums on securities are not amortized
EXCEPT FOR U.S. TREASURY SECURITIES. The Company maintains a
general allowance for uncollected interest on the high yield
portion of its portfolio. At December 31, 1995, this
allowance was $30,000. Interest receivable is shown net of
this allowance.
E. Dividends & Distributions to Shareholders.
Dividends from net investment income, if any, are
declared and paid monthly. Net realized capital gains
(including net short-term capital gains) are distributed
at least annually. The amount and character of income
and gains to be distributed are determined in accordance
with income tax regulations which may differ from
generally accepted accounting principles. These
differences are due primarily to the treatment of market
discount. Reclassifications are made to the Company's
capital accounts to reflect income and gains available
for distribution (or available capital loss carryovers)
under income tax regulations. For the year ended
December 31, 1995, the Company reclassified $37,574 to
increase undistributed net investment income, $25,028 to
increase accumulated net realized loss on investments
and $12,546 to decrease Capital Surplus.
2. SUBSEQUENT DISTRIBUTION:
A distribution of $.110 per share totaling $367,585 was declared on January
2, 1996. The distribution will be paid from undistributed net investment
income on January 31, 1996 to each shareholder of record on January 12,
1996.
3. PURCHASES AND SALES OF SECURITIES:
Net realized gains or losses from investment transactions during the period
have been computed using the first-in, first-out method of determining the
cost of securities sold or matured. Purchases and sales (including
maturities) of securities during the year ended December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
SALES AND
PURCHASES MATURITIES
<S> <C> <C>
Corporate Bonds.................................................. $ 13,808,900 $ 12,842,914
U.S. Governments and Agencies (Long-term)........................ 10,520,954 9,377,304
Foreign Municipal Bonds.......................................... 2,316,990 3,697,110
Total..................................................... $ 26,646,844 $ 25,917,328
</TABLE>
At December 31, 1995, net unrealized appreciation for financial reporting and
federal income tax purposes aggregated $3,933,695 of which $4,618,940 related
to appreciated securities and $685,245 related to depreciated securities. The
aggregate cost of investment securities owned for financial reporting and
federal income tax purposes was $51,316,650.
12
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. CAPITAL LOSS CARRYFORWARD:
At December 31 approximately $2,006,968 is available to offset future
capital gains of which $659,896 expires in 1998, $822,917 expires in 1999,
$47,580 expires in 2000 and $476,575 expires in 2002. Management does not
plan to distribute to shareholders any future net realized gains on
investments until the capital loss carryforwards are used or expired.
5. MANAGEMENT AND INVESTMENT ADVISORY FEES AND OTHER RELATED PARTY
TRANSACTIONS:
Management and investment advisory fees of $319,415 were incurred in the
year ended December 31, 1995 for management and investment advisory
services. Under the agreement in effect between the Company and NationsBank,
N.A. (the "Adviser"), as successor to NationsBank of North Carolina, N.A.,
an indirect wholly owned subsidiary of NationsBank Corporation, the Adviser
receives an annual fee of the sum of (i) .45% per annum of the first
$75,000,000 of the average weekly net assets and at a reduced rate for net
assets in excess of that amount, and (ii) 1.5% of gross income. The fee is
computed and accrued weekly and paid monthly. The agreement provides that if
certain recurring expenses, including the investment advisory and management
fee, exceed 1.5% of the first $30,000,000 of average net assets annually and
1% of average net assets in excess thereof (or pro-rata portion for any
fraction of a year), the investment advisory fee will be reduced by the
amount by which such expenses exceed the limitation. There was no reduction
in the fee for the year ended December 1995.
Citibank, NA ("Citibank") serves as the custodian of the Company's assets.
The Company accrues a credit on daily cash balances held at Citibank. The
earnings credit is applied to the monthly custody fee. For the year ended
December 31, 1995, the earnings credit was $16,548. The Company could have
invested the daily cash balance in an income-producing asset had it not
agreed to a fee reduction in this expense offset arrangement.
6. UNAUDITED QUARTERLY RESULTS OF OPERATIONS:
The following is a summary of quarterly results of operations, expressed in
thousands of dollars, except for per share amounts:
<TABLE>
<CAPTION>
TOTAL NET REALIZED AND
INVESTMENT NET INVESTMENT UNREALIZED GAIN/(LOSS)
INCOME INCOME ON INVESTMENTS
QUARTER ENDED TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
<S> <C> <C> <C> <C> <C> <C>
December 30, 1995..................... $1,213 $0.36 $1,082 $0.32 $1,485 $ 0.44
September 30, 1995.................... 1,225 0.37 1,107 0.33 (40) (0.01)
June 30, 1995......................... 1,233 0.37 1,117 0.35 2,673 .80
March 31, 1995........................ 1,253 0.38 1,142 0.35 1,260 .38
December 31, 1994..................... 1,290 0.43 1,181 0.39 (158) (0.08)
September 30, 1994.................... 1,274 0.39 1,150 0.35 166 0.05
June 30, 1994......................... 1,208 0.37 1,088 0.33 57 0.02
March 31, 1994........................ 1,298 0.40 1,173 0.36 (587) (0.18)
</TABLE>
13
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENT
Effective January 1, 1996, NationsBanc Advisors, Inc. ("NBAI") became the
investment adviser to the Company. Also effective January 1, 1996,
TradeStreet Investment Associates, Inc. ("TradeStreet") became the
sub-adviser to the Company. Both NBAI and TradeStreet are indirect wholly
owned subsidiaries of NationsBank. There will be no change in advisory fees
paid by the Company.
14
<PAGE>
HATTERAS INCOME SECURITIES, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Hatteras Income Securities, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments (except bond ratings), and the
related statements of operations and of changes in net assets and the
financial highlights, present fairly, in all material respects, the
financial position of Hatteras Income Securities, Inc. (the "Company") at
December 31, 1995, the results of its operations for the year then ended,
and the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 1995 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 16, 1996
15
<PAGE>
HATTERAS INCOME SECURITIES, INC.
DIVIDEND REINVESTMENT PLAN
THE PLAN
The Company's Dividend Reinvestment Plan (the "Plan") offers you an
automatic way to reinvest your dividends and capital gains distributions in
shares of the Company.
PARTICIPATION
Shareholders of record will receive their dividends in cash unless they
have instructed Chemical Bank (the "Plan Agent") in writing otherwise. Such a
notice must be received by the Plan Agent not less than 5 business days prior to
the record date for a dividend or distribution in order to be effective with
respect to that dividend or distribution. A notice which is not received by that
time will be effective only with respect to subsequent dividends and
distributions.
Shareholders who do not participate in the Plan will receive all
distributions by check mailed directly to the shareholder by the Plan Agent, as
the dividend paying agent. For Federal income tax purposes, dividends are
treated as income or capital gains, regardless of whether they are received in
cash or reinvested in additional shares.
Participants may terminate their participation in the Plan by written
notice to the Plan Agent. If the written notice is received at least 5 business
days before the record day of any distribution, it will be effective
immediately. If received after that date, it will be effective as soon as
possible after the reinvestment of the dividend or distribution.
PRICING OF DIVIDENDS AND DISTRIBUTIONS
Whenever the Company's Board of Directors declares a dividend or other
distribution payable in cash or at the option of the Plan Agent, as agent for
all participants, in shares of capital stock issued by the Company, the Plan
Agent will elect on behalf of the participants to receive the dividend in
authorized but unissued shares of capital stock if the net asset value per share
(as determined by the investment adviser of the Company as of the close of
business on the record date for the dividend or distribution) is equal to or
less than 95% of the closing market price per share of the capital stock of the
Company on the New York Stock Exchange (the "Exchange") on such record date plus
estimated brokerage commissions. The number of such authorized but unissued
shares to be credited to a participant's account will be determined as of the
close of business on the record date for the dividend, by valuing such shares at
the greater of the net asset value per share or 95% of the market price per
share. The Plan Agent will credit each participant's account with the number of
shares corresponding in value, as determined under the foregoing formula, to the
amount such participant would have received in cash had such participant not
elected to participate in this Plan.
If the net asset value per share is equal to or less than the closing
market price per share of the capital stock of the Company on the Exchange on
such record date plus estimated brokerage commissions, but exceeds 95% of such
closing market price plus estimated brokerage commissions, the Plan Agent may
elect on behalf of all participants (i) to take the dividend in cash and as soon
as practicable thereafter, consistent with obtaining the best price and
execution, proceed to purchase in one or more transactions the shares of capital
stock in the open market, at the then current price as hereinafter provided, and
will credit each participant's account with the number of shares corresponding
in value, as determined by the price actually paid on the open market for such
shares including brokerage expenses, to the amount such participant would have
received in cash had such participant not elected to participate in this Plan or
(ii) to receive the dividend in authorized but unissued shares of capital stock,
in which case the Plan Agent will credit each participant's
16
<PAGE>
account with the number of shares corresponding in value (determined by valuing
such shares at the greater of the net asset value per share or 95% of the market
price per share, in each case as of the close of business on the record date for
the dividend or distribution) to the amount such participant would have received
in cash had such participant not elected to participate in this Plan.
If the net asset value per share is higher than the closing market price
per share of the capital stock on the New York Stock Exchange plus estimated
brokerage commissions on such record date, the Plan Agent will elect to take the
dividend in cash and as soon as practicable thereafter, consistent with
obtaining the best price and execution, proceed to purchase in one or more
transactions the shares of capital stock in the open market, at the then current
price as hereinafter provided, and will credit each participant's account with
the number of shares corresponding in value, as determined by the price actually
paid on the open market for such shares including brokerage expenses, to the
amount such participant would have received in cash had such participant not
elected to participate in this Plan.
NO SERVICE FEE TO REINVEST
There is no service fee charged to participants for reinvesting dividends
or distributions from net realized capital gains. The Plan Agent's fees for the
handling of the reinvestment of dividends and capital gains distributions will
be paid by the Company. There will be no brokerage commissions with respect to
shares issued directly by the Company as a result of dividends or capital gains
distributions payable either in stock or in cash. However, participants will pay
a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of any
dividends or capital gains distributions payable only in cash.
PLAN AGENT ADDRESS AND TELEPHONE NUMBER
You may obtain more detailed information by requesting a copy of the Plan
from the Plan Agent. All correspondence (including notifications) should be
directed to: Chemical Bank, Agent for Hatteras Income Securities, Inc., Dividend
Reinvestment Department, P.O. Box 24850, Church Street Station, New York, New
York 10249, (800) 851-9677.
17
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<PAGE>
BOARD OF DIRECTORS
A. MAX WALKER, Chairman
FINANCIAL CONSULTANT
WILLIAM H. GRIGG
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER,
DUKE POWER COMPANY
THOMAS F. KELLER
DEAN,
FUQUA SCHOOL OF BUSINESS,
DUKE UNIVERSITY
FUND OFFICERS
MARK H. WILLIAMSON
PRESIDENT
RICHARD S. SZAFRAN
SECRETARY AND TREASURER
MARK S. AHNRUD, CFA
ASSISTANT SECRETARY AND
PORTFOLIO MANAGER
OFFICE OF THE COMPANY
Hatteras Income Securities, Inc.
One NationsBank Plaza -- NC1-002-33-31
Charlotte, North Carolina 28255
INVESTMENT ADVISER
NationsBanc Advisors, Inc.
One NationsBank Plaza
Charlotte, North Carolina 28255
SUB INVESTMENT ADVISER
TradeStreet Investment Associates, Inc.
One NationsBank Plaza
Charlotte, North Carolina 28255
FUND COUNSEL
Morrison & Foerster
2000 Pennsylvania Avenue, N.W.
Suite 5500
Washington, D.C. 20006
CUSTODIAN
Citibank, N.A.
111 Wall Street -- 14th Floor
New York, New York 10043
TRANSFER AGENT
Chemical Bank
450 West 33rd Street 15th Floor
New York, NY 10001
INDEPENDENT ACCOUNTING FIRM
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
