<PAGE>
(HATTERAS LOGO)
HATTERAS
INCOME
SECURITIES,
INC.
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
JUNE 30, 1997
<PAGE>
DEAR SHAREHOLDER:
We welcome this opportunity to provide you with the Semi-Annual Report for
Hatteras Income Securities, Inc. (the "Company") for the six-month period ended
June 30, 1997.
INVESTMENT OBJECTIVE
The Company is a closed-end investment company registered under the
Investment Company Act of 1940, as amended, and its shares are traded on the New
York Stock Exchange under the symbol "HAT." The Company's investment objective
is to seek to provide high monthly income consistent with prudent investment
risk.
PERFORMANCE UPDATE*
The volatility that we saw in the bond market during 1996 persisted during
the first half of 1997. Although interest rates (based on the 10 year U.S.
Treasury Note) are just slightly higher than at the beginning of the
year -- 6.49% versus 6.41% -- yields have moved significantly over the period.
Bond prices declined during the first quarter and the beginning of the second
quarter before rallying. For the six months ended June 30, 1997 the Company's
total return of 3.10% (based on market price), outperformed its index benchmark,
the Lehman Corporate Bond Index**, which had a total return of 3.07%. The
Company also outperformed its benchmark for the twelve-month period ended June
30, 1997, returning 8.97% (based on market price) versus the Lehman Corporate
Bond Index return of 8.79%.
The current monthly dividend rate of $0.095 equates to an annualized yield
of 8.00%, based on the closing market price of $ 14.25 on June 30, 1997. This
remains a very competitive yield on the portfolio, given the current level of
interest rates.
ECONOMIC ENVIRONMENT
The key to performance in 1997 will come in the second half of the year, as
we learn just how strong the U.S. economy will bounce back following the second
quarter slowdown. Our current expectations are that second half growth will
surprise to the upside, driving interest rates higher before ultimately cooling
off economic growth. Given this outlook, we have remained defensive heading into
the second half of the year, as the risk of rising inflationary pressures
continues to mount. With the economy poised to return to above trend growth
later this year, we have positioned the portfolio's maturity structure
defensively relative to the benchmark.
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,
(Signature of Mark H. Williamson)
MARK H. WILLIAMSON
PRESIDENT
JUNE 30, 1997
NOT FDIC-INSURED, MAY LOSE VALUE, NO BANK GUARANTEE
SHARES OF HATTERAS INCOME SECURITIES, INC. ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR ISSUED, ENDORSED OR GUARANTEED BY NATIONSBANK, N.A. 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, N.A. AND ITS AFFILIATES PROVIDE ADVISORY AND OTHER SERVICES TO THE
COMPANY, FOR WHICH THEY ARE COMPENSATED.
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
** The Lehman Corporate Bond Index is an index based on all publicly issued
intermediate fixed-rate, non-convertible investment grade corporate debt.
2
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING COST MARKET
<C> <S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CORPORATE BONDS AND NOTES -- 46.3%
BANKING AND FINANCE -- 5.0%
$ 700,000 First Nationwide Escrow, 10.625%
10/01/03**.................................... Ba3 N/R $ 735,875 $ 773,500
1,000,000 Security Pacific Corporation, Sub Note,
11.000% 03/01/01.............................. A2 A 1,202,730 1,133,576
750,000 Western Financial Savings Bank, Sub.
Deb., 8.500% 07/01/03......................... B1 BB+ 801,540 760,045
Total Banking and Finance: 2,740,145 2,667,121
COMPUTER -- 1.3%
700,000 Unisys Corporation, Sr. Note, 10.625%
10/01/99...................................... B1 B+ 749,875 724,500
ENERGY -- 5.7%
550,000 Barrett Resources Corporation, Notes,
7.550% 02/01/07............................... Ba1 BB+ 549,378 547,106
750,000 Maxus Energy Corporation, Notes, 9.375%
11/01/03...................................... B1 BBB- 758,750 804,375
700,000 Occidental Petroleum Corporation, Sr. Deb.,
10.125% 09/15/09.............................. Baa2 BBB 911,288 859,571
800,000 PDV America Inc., 7.875% 0/8/01/03............ Baa3 B 788,604 811,635
Total Energy: 3,008,020 3,022,687
FINANCIAL\BROKERAGE -- 2.8%
500,000 Morgan Stanley Finance plc, 8.030%
02/28/17...................................... A2 A- 501,460 496,499
500,000 Paine Webber Group, Inc., Notes, 7.625%
10/15/08...................................... Baa1 BBB+ 512,785 505,758
475,000 Salomon Brothers, Inc., Notes, 6.700%
07/05/00...................................... Baa1 BBB 474,611 473,627
1,488,856 1,475,884
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C> <C>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING COST MARKET
(UNAUDITED) (UNAUDITED)
GAS -- 2.0%
$ 1,000,000 Louis Dreyfus Natural Gas Corporation,
Sr. Sub note, 9.250% 06/15/04................. Ba3 BB+ $ 1,086,660 $ 1,085,506
HEALTH CARE -- 5.7%
600,000 Genesis Health Ventures Inc., 9.250%
10/01/06...................................... N/R B 606,250 618,000
750,000 HealthSouth Corporation, 9.500% 04/01/01...... Ba3 BB- 794,375 787,500
1,000,000 Tenet Healthcare Corporation, Sr. Sub Note,
10.125% 03/01/05.............................. Ba3 B+ 1,080,000 1,095,000
500,000 Quorum Health Group, Inc., 8.750% 11/01/05.... Ba3 BB- 518,685 513,750
Total Health Care: 2,999,310 3,014,250
INDUSTRIAL -- 8.8%
1,000,000 Auburn Hills Trust Certificates, Deb.,
12.000% 05/01/20.............................. A3 A 1,418,220 1,494,687
500,000 Fisher Scientific International, Sr. Note,
7.125% 12/15/05............................... Ba1 BBB 467,775 490,777
1,100,000 Harris Corporation, 10.375% 12/01/18.......... A3 A- 1,230,196 1,220,023
700,000 Valassis Inserts Inc., Sr. Sub. Note, 9.375%
03/15/99...................................... Ba3 BB+ 723,499 722,872
700,000 Westpoint Stevens Incorporated, 8.750%
12/15/01...................................... Ba3 BB- 700,000 721,000
Total Industrial: 4,539,690 4,649,359
INSURANCE -- 4.2%
1,000,000 Conseco Inc., Sr. Note, 10.500% 12/15/04...... Ba1 BBB 1,164,810 1,168,171
1,000,000 Leucadia National Corporation, Sr. Sub. Note,
8.250% 06/15/05............................... Ba1 BBB 1,000,000 1,032,964
2,164,810 2,201,135
See Notes to Financial Statements.
</TABLE>
4
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING COST MARKET
<C> <S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
MEDIA AND CABLE -- 6.3%
$ 700,000 Jones Intercable, Inc., Sr. Note, 9.625%
03/15/02...................................... Ba2 BB $ 700,375 $ 733,250
1,000,000 Rogers Cablesystems Limited, Deb., 10.000%
12/01/07...................................... Ba3 BB+ 1,000,000 1,070,000
500,000 Summit Communications Group Inc., Deb.,
10.500% 04/15/05.............................. Ba3 BB+ 544,705 536,250
1,000,000 Viacom Inc., Sr. Note, 7.750% 06/01/05........ Ba2 BB+ 1,025,630 1,003,666
Total Media and Cable: 3,270,710 3,343,166
PAPER & FOREST PRODUCTS -- 1.1%
500,000 Georgia-Pacific, 9.950% 06/15/02.............. Baa2 BBB- 571,400 562,376
PHARMACEUTICALS -- 0.9%
500,000 Merck & Company, Inc., 5.760% 05/03/37........ N/R AAA 500,000 502,156
PUBLISHING -- 1.3%
625,000 News America Holdings Inc., Sr. Deb.,
10.250% 10/15/12.............................. Baa3 BBB 719,584 703,556
TRANSPORTATION -- 1.2%
500,000 Federal Express Corporation, Note, 9.650%
06/15/12...................................... Baa2 BBB 503,075 609,931
TOTAL CORPORATE BONDS AND NOTES: 24,342,135 24,561,627
MORTGAGE-BACKED SECURITIES -40.4%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -- 11.1%
1,507,584 8.000% 09/15/24............................... 1,548,101 1,540,091
3,367,825 8.500% 07/15/26 -- 08/15/24................... 3,469,828 3,497,274
714,469 9.000% 04/15/09 -- 12/15/16................... 667,319 754,433
96,636 9.500% 07/15/09............................... 91,804 104,155
5,777,052 5,895,953
See Notes to Financial Statements.
</TABLE>
5
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MOODY'S S&P
AMOUNT RATING RATING COST MARKET
<C> <S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
FEDERAL HOME LOAN MORTGAGE CERTIFICATES -- 7.4%
$ 81,996 9.250% 08/01/08............................... $ 69,389 $ 87,082
3,810,742 7.500% 06/01/26 Gold Pool..................... 3,796,452 3,825,040
3,865,841 3,912,122
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -- 21.9%
3,891,977 6.500% 07/01/11 -- 05/01/27................... 3,677,824 3,767,939
6,054,802 7.000% 06/01/11 -- 04/01/27................... 5,946,435 5,990,949
1,095,508 8.500% 12/01/25............................... 1,120,500 1,135,905
324,812 9.000% 05/01/27............................... 340,951 342,068
341,682 9.250% 09/01/10............................... 310,247 363,304
11,395,957 11,600,165
TOTAL MORTGAGE-BACKED SECURITIES: 21,038,850 21,408,240
TREASURY BONDS AND NOTES -- 13.3%
4,000,000 United States Treasury Notes 5.500%
11/15/98...................................... 3,965,406 3,975,000
United States Treasury Bonds:
1,725,000 12.000% due 08/15/13.......................... 2,407,273 2,429,016
675,000 6.250% due 08/16/13........................... 631,758 624,586
TOTAL TREASURY BONDS AND NOTES: 7,004,437 7,028,602
TOTAL INVESTMENTS $52,385,422* $52,998,469
* 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.
</TABLE>
6
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 1)...................................................... $52,998,469
Interest receivable.............................................................................. 625,456
Prepaid expenses and other assets................................................................ 25,144
Total assets............................................................................. 53,649,069
LIABILITIES:
Due to custodian bank............................................................................ 427,150
Management and advisory fees payable (Note 4).................................................... 25,779
Accrued expenses................................................................................. 23,319
Total Liabilities........................................................................ 476,248
NET ASSETS (equivalent to $15.81 per share based on 3,363,512 shares of capital stock
outstanding)..................................................................................... $53,172,821
Investments, at cost............................................................................... $52,385,422
NET ASSETS CONSIST OF:
Capital Stock -- $1.00 par value (shares authorized, 5,000,000).................................. $ 3,363,512
Paid-in capital.................................................................................. 51,144,960
Distributions in excess of net investment income (Note 1)........................................ (40,164)
Accumulated net realized loss on investments (Note 3)............................................ (1,908,534)
Net unrealized appreciation of investments....................................................... 613,047
NET ASSETS......................................................................................... $53,172,821
</TABLE>
7
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
For the Period Ended June 30, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.............................................................................. $2,152,386
EXPENSES:
Management and investment advisory (Note 4)........................................... $154,787
Transfer agent........................................................................ 29,145
Director.............................................................................. 12,397
Legal and audit....................................................................... 17,158
Custody (Note 4)...................................................................... 20,867
Printing.............................................................................. 12,136
New York Stock Exchange Annual Registration........................................... 8,110
Miscellaneous......................................................................... 7,920
Total expenses................................................................... 262,520
Fees reduced by credit allowed by custodian (Note 4).................................. (17,181)
Net expenses..................................................................... 245,339
NET INVESTMENT INCOME................................................................... 1,907,047
REALIZED AND UNREALIZED GAIN/LOSS
ON INVESTMENTS (NOTE 2):
Net realized loss on investments during period........................................ $ (397,758)
Net unrealized appreciation of investments during period.............................. 50,702
Net realized and unrealized loss on investments....................................... (347,056)
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................ 1,559,991
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD YEAR
ENDED ENDED
6/30/97 12/31/96
<S> <C> <C>
Net investment income............................................................ $ 1,907,047 $ 4,129,705
Net realized gain/loss on investments............................................ (397,758) 571,972
Change in unrealized appreciation/depreciation of investments.................... 50,702 (3,371,350)
Net increase in net assets resulting from investment operations.................. 1,559,991 1,330,327
Dividends to shareholders from investment income................................. (1,907,047) (4,129,705)
Distributions to shareholders in excess of net investment income................. (10,164) (122,932)
Net asset value of 0 and 21,830 shares, respectively, of capital stock issued in
dividend reinvestment......................................................... -- 342,914
Net decrease in net assets....................................................... (357,220) (2,579,396)
NET ASSETS:
Beginning of period.............................................................. 53,530,041 56,109,437
End of period.................................................................... $53,172,821 $53,530,041
Distributions in excess of net investment income at end of period................ $ (40,164) $ (30,000)
</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>
PERIOD YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
6/30/97 12/31/96 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value at
beginning of
year............... $ 15.91 $ 16.79 $ 15.20 $ 16.92 $ 16.08 $ 16.03 $ 14.88 $ 15.99 $ 15.99 $ 16.07
Net investment
income........... 0.57 1.23 1.35 1.44 1.48 1.50 1.54 1.57 1.64 1.61
Net realized and
unrealized
gain/(loss) on
investment
transactions..... (0.10) (0.84) 1.61 (1.71) 0.83 0.05 1.17 (1.11) (0.01) (0.07)
Total from
investment
operations....... 0.47 0.39 2.96 (0.27) 2.31 1.55 2.71 0.46 1.63 1.54
Less distributions
Dividends from net
investment
income........... (0.57) (1.23) (1.34) (1.45) (1.47) (1.50) (1.56) (1.57) (1.63) (1.62)
Dividends in excess
of net investment
income........... -- (0.04) (0.03) -- -- -- -- -- -- --
Total
distributions.... (0.57) (1.27) (1.37) (1.45) (1.47) (1.50) (1.56) (1.57) (1.63) (1.62)
Net asset value at
end of period...... $ 15.81 $ 15.91 $ 16.79 $ 15.20 $ 16.92 $ 16.08 $ 16.03 $ 14.88 $ 15.99 $ 15.99
Per share market
value, end of
period............. $14.250 $ 14.375 $ 16.125 $ 14.875 $ 18.000 $ 18.000 $ 17.500 $ 14.875 $ 15.250 $ 15.000
Total Return:
Per share market
value............ 3.10% -3.32% 17.61% -11.09% 8.40% 12.48% 29.57% 7.63% 12.11% -2.45%
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
year
(millions)....... $53,173 $ 53,658 $ 56,109 $ 50,250 $ 55,311 $ 51,871 $ 50,964 $ 46,559 $ 49,665 $ 49,518
Ratio of net
operating
expenses to
average net
assets (%)....... 0.93% 0.89% 0.86% 0.92% 0.90% 0.97% 0.99% 1.01% 0.97% 1.01%
Ratio of operating
expense before
fees paid
indirectly....... 1.00% 0.90% 0.89% -- -- -- -- -- -- --
Ratio of net
investment income
to average net
assets (%)....... 7.26% 7.73% 8.07% 8.76% 8.83% 9.29% 9.93% 10.34% 10.15% 9.91%
Portfolio turnover
rate (%)......... 101.75% 166.30% 48.75% 28.28% 35.87% 32.35% 27.17% 24.58% 33.49% 58.57%
<CAPTION>
YEAR
ENDED
1987
<S> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value at
beginning of
year............... $ 17.94
Net investment
income........... 1.66
Net realized and
unrealized
gain/(loss) on
investment
transactions..... (1.31)
Total from
investment
operations....... 0.35
Less distributions
Dividends from net
investment
income........... (2.22)
Dividends in excess
of net investment
income........... --
Total
distributions.... (2.22)
Net asset value at
end of period...... $ 16.07
Per share market
value, end of
period............. $ 17.000
Total Return:
Per share market
value............ -5.67%
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
year
(millions)....... $ 49,377
Ratio of net
operating
expenses to
average net
assets (%)....... 0.95%
Ratio of operating
expense before
fees paid
indirectly....... --
Ratio of net
investment income
to average net
assets (%)....... 9.80%
Portfolio turnover
rate (%)......... 48.75%
</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 may 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 market 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 also valued in good faith at fair market 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 of 1986, as amended, 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 applicable.
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 f) 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. The Company maintains a general allowance for
uncollected interest on the high yield portion of its
Portfolio. At June 30, 1997, this allowance was $30,000.
Interest receivable is shown net of this allowance.
E. Dividends and 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, 1996, the Company reclassified $121,932 to
increase undistributed net investment income, $51,011 to
increase accumulated net realized loss on investments
and $70,921 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. Cost of purchases and proceeds from
sales (including maturities) of securities during the period ended June 30,
1997 are summarized as follows:
<TABLE>
<CAPTION>
SALES AND
PURCHASES MATURITIES
<S> <C> <C>
Corporate Bonds.................................................. $ 5,399,697 $ 10,539,719
U.S. Governments and Agencies (Long-term)........................ 48,401,581 38,750,338
Foreign Bonds.................................................... 264,063 3,246,730
Total..................................................... $ 54,065,341 $ 52,536,787
</TABLE>
At June 30, 1997, net unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $613,047 of which $917,270 related to
appreciated securities and $304,223 related to depreciated securities. The
aggregate cost of investment securities owned for financial reporting and
federal income tax purposes was $52,385,422.
3. CAPITAL LOSS CARRYFORWARD:
At December 31, 1996, approximately $1,486,007 was available to offset
future capital gains of which $138,935 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.
12
<PAGE>
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. ("NationsBank").
Under the terms of the Advisory Agreement, the Company pays NBAI an annual
fee equal to the sum of (i) 0.45% 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 Advisory Agreement provides that if
certain recurring expenses, including the advisory and management fee,
exceed 1.5% of 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, 1997. Prior to January 1, 1996,
NationsBank acted as investment advisor to the Company. The investment
advisory fees under the Advisory Agreement are the same as those paid under
the prior agreement.
The Company and NBAI have entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with TradeStreet Investment Associates, Inc.
("TradeStreet"), a wholly-owned subsidiary of NationsBank. 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 0.15% of the Company's average
weekly net assets.
NationsBank of Texas, N.A. (the "Custodian") serves as the custodian of the
Company's assets. For the period ending June 30, 1997, the Custodian
received $3,486 for its services. The Bank of New York serves as the
sub-custodian for the Company.
ChaseMellon Shareholder Services ("ChaseMellon") serves as transfer agent
and dividend disbursing agent for the Company.
No officer, director or employee of NationsBank, NBAI, TradeStreet, or
ChaseMellon, or any affiliate thereof, receives any compensation from the
Company for serving as a director or officer of the Company. The Company
pays the Chairman an annual fee of $11,000 and each other director an annual
fee of $7,000.
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MEETING OF STOCKHOLDERS
On April 24, 1997, the Company held its Annual Meeting of Stockholders. At
the Annual Meeting, the following directors were elected by the following votes:
(i) William H. Grigg 2,597,783 For, 55,233 Against, (ii) Thomas F. Keller
2,597,388 For, 55,628 Against (iii) A. Max Walker 2,595,983 For, 57,033 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, 1997, was ratified by the following votes:
2,602,900 For, 24,982 Against, 25,134 Abstaining.
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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 ChaseMellon Shareholder Services (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. Under such circumstances, in anticipation
of receipt of a dividend in cash, the Plan Agent may purchase shares in the open
market during the period between the record date and the payable date for the
dividend or distribution. The Plan has been amended to specifically authorize
such anticipatory purchases.
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: ChaseMellon Shareholder Services, 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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BOARD OF DIRECTORS
A. MAX WALKER
Chairman of the Board
FINANCIAL CONSULTANT
WILLIAM H. GRIGG
CHAIRMAN OF THE BOARD EMERITUS,
DUKE POWER COMPANY
THOMAS F. KELLER
RETIRED DEAN,
FUQUA SCHOOL OF BUSINESS,
DUKE UNIVERSITY
FUND OFFICERS
MARK H. WILLIAMSON
PRESIDENT
EDWARD D. BEDARD
CHIEF FINANCIAL OFFICER
ROBERT B. CARROLL
SECRETARY
RICHARD S. SZAFRAN
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 LLP
2000 Pennsylvania Avenue, N.W.
Suite 5500
Washington, D.C. 20006
CUSTODIAN
NationsBank of Texas, N.A.
1401 Elm Street -- 11th Floor
Dallas, TX 75202
SUB-CUSTODIAN
The Bank of New York
90 Washington St.
New York, NY 10286
TRANSFER AGENT
ChaseMellon Shareholder Services
450 West 33rd Street 15th Floor
New York, NY 10001
INDEPENDENT ACCOUNTING FIRM
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
