<PAGE>
(Hatteras logo) HATTERAS
INCOME
SECURITIES,
INC.
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
JUNE 30, 1996
<PAGE>
DEAR SHAREHOLDER:
I am pleased to present the semi-annual report to shareholders of Hatteras
Income Securities, Inc. (the "Company") for the six-month period ended June 30,
1996.
PERFORMANCE UPDATE*
The first half of 1996 has been one of the most difficult market
environments for our shareholders in many years. The Company's total return of
(2.88%), lagged the performance of its Lipper peer group average, which returned
(1.46%) for the six-month period ended June 30, 1996. The Company also trailed
its benchmark, the Lehman Corporate Bond Index, which had a total return of
(2.14%). The Company's underperformance was attributable to our longer duration
bias at the beginning of the year. Of course, a true measure of a fund's success
is performance over longer time horizons, and over the five year period ended
June 30, 1996, the Company has delivered a cumulative total return of 36.74%
compared to the Lipper peer group average of 35.89%.
An important component of total return is income. Over the past six months,
the Company paid a monthly dividend in the amount of $0.11 per share. This
monthly dividend rate equates to an annualized yield of 8.80%, based on the
closing market price of $15.00 on June 30, 1996.
ECONOMIC ENVIRONMENT
A surprisingly strong economy through the first half of 1996 led to higher
interest rates and poor bond market performance. Over the first six months of
the year, the yield on the 3-year Treasury rose from 5.21% to 6.31%, on the
10-year Treasury from 5.57% to 6.71% and on the 30-year Treasury from 5.95% to
6.91%. This has lead to the decline in the Company's net asset value (NAV)
during this time period.
Looking ahead to the balance of 1996, we expect economic momentum to slow,
although market volatility will remain over the near term. We do expect that the
Federal Reserve Board (the "Fed") may act to raise short-term rates to slow the
economic acceleration that the economy has experienced during the first half of
the year. Fed action will only serve to reinforce our outlook and should result
in lower interest rates later in the year. Slowing economic growth combined with
continued modest inflation should be positive for the financial markets. In this
scenario, we would expect to extend duration and upgrade the quality of the
Company.
We remain confident in pursuing the Company's investment objective of high
monthly income consistent with prudent investment risk and thank you for your
continued support.
Sincerely,
/s/ Mark H. Williamson
MARK H. WILLIAMSON
PRESIDENT
JUNE 30, 1996
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 AND ITS AFFILIATES PROVIDE INVESTMENT ADVISORY AND OTHER
SERVICES TO THE COMPANY, 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 market value as of
June 30, 1996. Lipper Analytical Services, Inc. is an independent monitor of
closed-end fund performance. Ranking is for the six months ended June 30, 1996.
2
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
June 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P COST MARKET
AMOUNT RATING RATING VALUE VALUE
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 70.70%
AIRLINES -- 2.31%
$ 1,000,000 Delta Air Lines, Inc., Deb., 10.125%
05/15/10...................................... Baa3 BB+ $ 1,214,850 $ 1,190,592
BANKING AND FINANCE -- 8.01%
1,000,000 CS First Boston 7.750% 05/15/06**............. A3 NR 995,200 999,175
968,707 GPA Leasing USA, Series BN-5, 9.125%
12/02/96**.................................... B3 B 892,421 972,872
1,000,000 Security Pacific Corporation, Sub Note,
11.000% 03/01/01.............................. A2 A 1,202,730 1,156,568
1,000,000 Western Financial Savings Bank, Sub. Deb.,
8.500% 07/01/03............................... Ba3 BB+ 1,068,720 1,005,722
Total Banking and Finance: 4,159,071 4,134,337
COMPUTER -- 1.95%
1,000,000 Unisys Corporation, Sr. Note, 10.625%
10/01/99...................................... B1 B+ 1,071,250 1,005,000
ENERGY -- 2.32%
1,000,000 Occidental Petroleum Corporation, Sr. Deb.,
10.125% 09/15/09.............................. Baa3 BBB 1,301,840 1,197,576
FOOD -- 2.03%
1,000,000 Chiquita Brands International, Inc., Sub. Note
11.500% 06/01/01.............................. B3 B 1,045,000 1,047,500
GAS -- 1.97%
1,000,000 Louis Dreyfus Natural Gas Corporation, Sr.
Sub. Note, 9.250% 06/15/04.................... Ba3 BB+ 1,086,660 1,017,500
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
June 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P COST MARKET
AMOUNT RATING RATING VALUE VALUE
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INDUSTRIAL -- 20.85%
$ 750,000 Auburn Hills Trust Certificates, Deb., 12.000%
05/01/20...................................... A3 A- $ 730,000 $ 1,082,302
1,000,000 Domtar, Inc., Sr. Note, 12.000% 04/15/01...... Ba1 BB+ 1,065,000 1,152,500
1,500,000 Federal Express Corporation, Note, 9.650%
06/15/12...................................... Baa2 BBB 1,498,635 1,737,071
1,000,000 Fisher Scientific International, Sr. Note,
7.125% 12/15/05............................... Ba2 BBB 935,550 949,828
1,000,000 Inland Steel Company, First Mortgage Series T,
12.000% 12/01/98.............................. Ba3 BB- 1,055,000 1,072,500
1,000,000 Stone Container Corporation, Sr. Note, 11.875%
12/01/98...................................... B1 B+ 1,035,000 1,055,000
1,000,000 United States Can Company, Sr. Sub. Note,
13.500% 01/15/02.............................. B2 B 1,107,500 1,070,000
1,500,000 USX Corporation, 9.375% 05/15/22.............. Baa3 BB+ 1,591,740 1,632,683
1,000,000 Valassis Inserts Inc., Sr. Sub. Note, 9.375%
03/15/99...................................... Ba3 BB- 1,033,570 1,014,286
Total Industrial: 10,051,995 10,776,169
INSURANCE -- 8.06%
1,000,000 Conseco Inc., Sr. Note, 10.500% 12/15/04...... Ba2 BBB- 1,164,810 1,140,126
1,000,000 Leucadia National Corporation, Sr. Sub. Note
8.250% 06/15/05............................... Ba1 BBB 1,000,000 991,676
1,000,000 Liberty Mutual, Surplus Note, 8.200%
05/04/07**.................................... A2 A+ 1,095,890 1,042,098
1,000,000 Prudential Insurance 7.650% 07/01/07**........ A2 A 987,640 989,052
Total Insurance: 4,248,340 4,162,952
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
June 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P COST MARKET
AMOUNT RATING RATING VALUE VALUE
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
MEDIA AND CABLE -- 16.32%
$ 1,000,000 Jones Intercable, Inc., Sr. Note, 9.625%
03/15/02...................................... Ba2 BB $ 1,002,625 $ 1,015,000
1,500,000 News America Holdings Inc., Sr. Deb., 9.700%
10/30/25...................................... Baa3 BBB 1,502,340 1,374,735
1,000,000 Rogers Cablesystems Limited, Deb., 10.000%
12/01/07...................................... Ba3 BB+ 1,000,000 972,500
1,000,000 TCI Communications, Inc., Sr. Deb., 7.875%
02/15/26...................................... Ba1 BBB- 876,680 879,355
1,500,000 Time Warner Inc., Deb., 9.150% 02/1/2023...... Ba1 BBB- 1,556,708 1,545,567
1,500,000 TKR Cable 1, Inc., Sr. Deb., 10.500%
10/30/07...................................... Ba3 BBB- 1,696,875 1,668,846
1,000,000 Viacom Inc., Sr. Note, 7.750% 06/01/05........ Ba2 BB+ 1,025,630 971,974
Total Media and Cable: 8,660,858 8,427,977
UTILITIES -- 5.44%
1,500,000 Commonwealth Edison Company, First Mortgage,
9.875% 06/15/20............................... Baa2 BBB 1,614,120 1,668,518
1,000,000 GTE Corporation, Deb., 10.250% 11/01/20....... A3 BBB+ 989,840 1,141,278
Total Utilities: 2,603,960 2,809,796
RETAIL -- 1.46%
750,000 Federated Dept. Stores 8.500% 06/15/03........ Ba1 BB- 746,910 751,875
TOTAL CORPORATE BONDS AND NOTES: 36,190,734 36,511,274
MORTGAGE-BACKED SECURITIES -- 18.04%
CORPORATE -- 0.23%
120,648 Bank of America 9.500% Mortgage Backed
Pass-Through, Series 1978-5, 07/01/08......... NR AAA 115,786 120,648
</TABLE>
See Notes to Financial Statements
5
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
June 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL COST MARKET
AMOUNT VALUE VALUE
<S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES -- 4.05%
$ 1,071,132 7.500% 01/15/26 Pool #415014.................. $ 1,048,036 $ 1,055,391
833,837 9.000% 04/15/19 -- 12/15/16, (4 Pools)........ 776,282 872,396
156,074 9.500% 07/15/09 Pool #29089................... 148,271 166,755
1,972,589 2,094,542
FEDERAL HOME LOAN MORTGAGE (FHLMC) CERTIFICATES -- 0.19%
94,999 9.250% 08/01/08............................... 80,393 99,912
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) CERTIFICATES -- 13.56%
1,346,973 6.500% 04/01/26 -- 05/01/26, (2 Pools)........ 1,246,792 1,259,829
1,577,179 7.000% 05/01/11 Pool #1915135................. 1,548,593 1,554,999
2,371,991 8.000% 05/01/26 Pool #344525.................. 2,380,145 2,390,502
1,341,185 8.500% 12/01/25 Pool #250472.................. 1,371,781 1,376,381
398,063 9.250% 09/01/10 Pool #003852.................. 361,441 419,208
6,908,752 7,000,919
TOTAL MORTGAGE-BACKED SECURITIES: 9,077,520 9,316,020
TREASURY BONDS AND NOTES -- 2.69%
550,000 United States Treasury Notes 5.125%
02/28/98...................................... 540,117 541,921
600,000 United States Treasury Bonds 12.000%
08/15/13...................................... 850,547 846,750
TOTAL TREASURY BONDS AND NOTES: 1,390,664 1,388,671
</TABLE>
6
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONCLUDED)
June 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P COST MARKET
AMOUNT RATING RATING VALUE VALUE
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
FOREIGN BONDS -- 8.57%
1,000,000 Argentina (Republic of) Par Bonds, Series
L-GP, 5.000% 03/31/23......................... B1 BB- 577,188 528,000
750,000 Brazil (Federative Republic of) Par Bonds
4.250% 04/15/24............................... B1 B+ 421,875 371,250
1,000,000 Edelnor 7.750% 03/15/06**..................... Baa1 BBB 994,510 979,000
1,000,000 Hydro-Quebec, Deb., Series H, 9.400%
02/01/21...................................... A2 A+ 1,167,770 1,160,179
1,000,000 Mexico 6.250% 12/31/19........................ Ba2 BB 661,875 642,500
750,000 Mex-Global 9.750% 02/06/01.................... Ba2 BB 750,000 745,312
TOTAL FOREIGN BONDS: 4,573,218 4,426,241
TOTAL INVESTMENTS $51,232,135* $51,642,206
</TABLE>
* Aggregate cost for Federal tax purposes.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
See Notes to Financial Statements.
7
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $51,232,135) (Note 1)....................... $51,642,206
Cash............................................................................................. 145,198
Interest receivable.............................................................................. 806,813
Other receivables................................................................................ 752
Prepaid expenses................................................................................. 34,233
Total assets............................................................................. 56,629,202
LIABILITIES:
Accrued management and advisory fees............................................................. 25,184
Accrued expenses................................................................................. 57,631
Total liabilities........................................................................ 82,815
NET ASSETS (equivalent to $15.64 per share based on 3,359,851 shares of capital stock
outstanding)..................................................................................... $52,546,387
</TABLE>
NET ASSETS CONSIST OF
<TABLE>
<S> <C>
CAPITAL STOCK -- $1.00 par value (shares authorized, 5,000,000; shares outstanding, 3,359,851)..... $ 3,359,851
SURPLUS:
Capital surplus.................................................................................. 56,961,369
Distributions in excess of net investment income (Notes 1 and 2)................................. (195,758)
Accumulated net realized loss on investments..................................................... (7,990,402)
TOTAL CAPITAL AND SURPLUS.......................................................................... 52,135,061
NET UNREALIZED APPRECIATION OF INVESTMENTS......................................................... 410,071
PRIOR PERIOD ADJUSTMENT............................................................................ 1,255
NET ASSETS......................................................................................... $52,546,387
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
For the Period Ended June 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest........................................................................................ $ 2,333,084
EXPENSES:
Management and investment advisory fees (Note 4)................................... $ 157,586
Transfer agent, postage and other shareholder expenses............................. 28,592
Directors fees..................................................................... 12,431
Legal and accounting fees.......................................................... 16,906
Custody fees (Note 4).............................................................. 8,678
Printing........................................................................... 7,458
New York Stock Exchange Annual Fee................................................. 8,205
Miscellaneous expenses............................................................. 1,400
241,256
Fees paid indirectly (Note 4)...................................................... (5,098)
Total expenses.......................................................................... 236,158
INVESTMENT INCOME -- NET.......................................................................... 2,096,926
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on transactions in investment securities:
Proceeds from sales or maturities............................................... 43,451,027
Cost of securities sold or matured.............................................. 43,664,000
Net realized loss............................................................. $ (212,973)
Change in unrealized appreciation/depreciation in the value of investment
securities:..................................................................... (3,523,624)
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS................................................... (3,736,597)
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................................. (1,639,671)
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD YEAR
ENDED ENDED
06/30/96 12/31/95
<S> <C> <C>
INVESTMENT ACTIVITIES:
Investment Income -- net......................................................... $ 2,096,926 $ 4,448,368
Realized gain (loss) on investments -- net....................................... (212,973) 485,661
Change in unrealized appreciation/depreciation................................... (3,523,624) 4,892,545
Net increase (decrease) in net assets resulting from investment activities....... (1,639,671) 9,826,574
Dividends to shareholders from investment income................................. (2,096,926) (4,448,368)
Distributions to shareholders in excess of net investment income................. (112,768) (103,041)
Total Increase (Decrease)................................................... (3,849,365) 5,275,165
CAPITAL STOCK TRANSACTIONS:
Net asset value of 18,169 and 36,498 shares, respectively, of capital stock
issued in dividend reinvestment............................................... 286,315 584,429
NET ASSET:
Beginning of period.............................................................. 56,109,437 50,249,843
End of period (including distributions in excess of net investment income of
$195,758 and $30,000, respectively)........................................... $52,546,387 $56,109,437
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
HATTERAS INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
PERIOD YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
06/30/96 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of year... $ 16.79 $ 15.20 $ 16.92 $ 16.08 $ 16.03 $ 14.88 $ 15.99 $ 15.99 $ 16.07 $ 17.94
Net investment income................. 0.63 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........................ (1.12) 1.61 (1.71) 0.83 0.05 1.17 (1.11) (0.01) (0.07) (1.31)
Total from investment operations...... (0.49) 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.............................. (0.63) (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) (0.03) -- -- -- -- -- -- -- --
Total distributions................... (0.66) (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......... $ 15.64 $ 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............................ $15.000 $ 16.125 $14.875 $18.000 $18.000 $17.500 $14.875 $15.250 $15.000 $17.000
Total Return:
Per share market value................ (2.88%) -11.09% 8.40% 12.48% 29.57% 7.63% 12.11% -2.45% -5.67% 25.82%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (millions).... $52,546 $ 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 (%).............. 0.88% 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..................... 0.90% 0.89% -- -- -- -- -- -- -- --
Ratio of net investment income to
average net assets (%).............. 7.81% 8.07% 8.76% 8.83% 9.29% 9.93% 10.34% 10.15% 9.91% 9.80%
Portfolio turnover rate (%)........... 82.97% 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................
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.
11
<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, f) and cash or cash equivalents.
12
<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.
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. 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 period ended June 30, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
SALES AND
PURCHASES MATURITIES
<S> <C> <C>
Corporate Bonds.................................................. $ 17,267,097 $ 25,185,795
U.S. Governments and Agencies (Long-term)........................ 24,136,803 17,139,042
Foreign Municipal Bonds.......................................... 2,410,938 1,126,190
Total..................................................... $ 43,814,838 $ 43,451,027
</TABLE>
At June 30, 1996, net unrealized appreciation for financial reporting and
federal income tax purposes aggregated $410,071 of which $1,325,451 related
to appreciated securities and $915,380 related to depreciated securities. The
aggregate cost of investment securities owned for financial reporting and
federal income tax purposes was $51,232,135.
3. 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.
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HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. MANAGEMENT AND INVESTMENT ADVISORY FEES AND OTHER RELATED PARTY
TRANSACTIONS:
Effective January 1, 1996, the Company entered into an investment advisory
agreement (the "Advisory Agreement") with NationsBanc Advisors, Inc.
("NBAI") a wholly-owned subsidiary of NationsBank, N.A. Under the terms of
the Advisory Agreement, the Company pays NBAI an annual fee equal to 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 the gross income. The fee is computed and accrued weekly and
paid monthly. The agreement provides that if certain recurring expenses,
including the advisory and management fee, exceed 1.5% if the first
$30,000,000 in average net assets annually and 1.0% 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 period
ended June 30, 1996. Prior to January 1, 1996 NationsBank, N.A. acted as
Investment Adviser to the Company. The investment advisory fees under the
new Advisory Agreement are the same as those paid under the prior agreement.
The Company and NBAI have entered into a Sub-Advisory Agreement with
TradeStreet Investments Associates, Inc. ("TradeStreet") a wholly-owned
subsidiary of NationsBank, N.A. Under the terms of the Sub-Advisory
Agreement, TradeStreet is entitled to receive from NBAI a sub-advisory fee
equal to an annual rate of .15% of the Company's average weekly net assets.
Since April 1, 1996, NationsBank of Texas, N.A. (the "Custodian") serves as
the custodian of the Company's assets. For the three month period ending
June 30, 1996 the Custodian received $3,580 for its services. Prior to April
1, 1996, Citibank, N.A. ("Citibank") served as the custodian for the
Company. For the period January 1, 1996 through March 31, 1996 the Company
received an earnings credit totaling $5,098 on daily cash balances held at
Citibank, which was then applied to the custody fee charged by Citibank.
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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
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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.
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MEETING OF STOCKHOLDERS
On June 12, 1996, the Company held its Annual Meeting of Stockholders (the
Annual Meeting was originally to be held on May 24, 1996 but was adjourned for
the purpose of obtaining sufficient votes to achieve a quorum). A proposal to
remove a fundamental investment restriction prohibiting the company from
purchasing securities of other investment companies was approved by the
following votes: 1,707,619 For, 68,629 Against, 63,874 Abstaining. At the Annual
meeting, the following directors were elected by the following votes: (i)
William H. Grigg 1,805,529 For, 34,593 Against (ii) Thomas F. Keller 1,805,509
For, 34,613 Against, (iii) A. Max Walker 1,801,786 For, 38,336 Against. In the
only other matter voted upon at the Annual Meeting, the selection of Price
Waterhouse LLP as the Company's independent public accountants for the fiscal
year ending December 31, 1996, was ratified by the following votes: 1,707,020
For, 68,629 Against, 63,874 Abstaining.
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CHANGE OF NON-FUNDAMENTAL INVESTMENT POLICY
On April 16, 1996, the Board of Directors of the Company unanimously
approved two new investment policies of the Company. Because the new investment
policies were nonfundamental, the approval of the stockholders of the Company
was not required. The first new investment policy permits the Company to invest
in money market instruments, which may include, without limitation: securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; obligations of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more; Eurodollar
certificates of deposit; obligations of savings banks and savings and loan
associations having total assets of $1 billion or more; fully insured
certificates of deposit; and commercial paper rated within the highest grade by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P") or, if not rated, issued by a company having an outstanding long-term
debt issue rated AAA by S&P or Aaa by Moody's. The second new investment policy
expressly authorizes the Company to purchase securities issued by other
investment companies, to the extent that such investments are consistent with
the Company's investment objectives and policies and permissible under the
Investment Company Act of 1940, as amended.
The net effect of these two new investment policies, in combination with
the removal of a fundamental investment restriction prohibiting the Company from
purchasing securities of other investment companies (the removal of such
fundamental investment restriction was approved by the stockholders of the
Company at the Company's Annual Meeting of Stockholders), is to facilitate the
Company's entering into a program in which the Company's available cash would be
"swept" into money market funds of various investment companies on an overnight
basis, significantly supplementing the Company's short-term cash management
activities.
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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
RETIRED 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
NationsBank of Texas, NA
1401 Elm Street -- 11th Floor
Dallas, TX 75202
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
