[HATTERAS INCOME SECURITIES, INC. LOGO APPEARS HERE]
Semi-Annual Report
To Shareholders
June 30, 1999
<PAGE>
NOT FDIC INSURED, MAY LOSE VALUE, NO BANK GUARANTEE
SHARES OF THE COMPANY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY BANK OF AMERICA, N.A. ("BANK OF AMERICA") 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.
AFFILIATES OF BANK OF AMERICA PROVIDE INVESTMENT ADVISORY AND OTHER SERVICES
TO THE COMPANY, FOR WHICH THEY ARE COMPENSATED.
<PAGE>
DEAR SHAREHOLDER:
I am pleased to present the Hatteras Income Securities, Inc. (the "Company")
Semi-annual Report to Shareholders for the six-month period ended June 30,
1999.
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 high monthly income consistent with prudent investment risk.
Performance Update*
The first half of 1999 came to a dramatic close as the Federal Reserve Board
(the "Fed") responded to continued strong economic growth by raising the
Federal Funds target rate by 25 basis points to 5%. In May, the Fed had begun
hinting at an interest rate increase at the June meeting, resulting in a
dramatic rise in interest rates across the yield curve. Since the beginning of
the year, yields have risen between 100 and 115 basis points (100 basis points
is equivalent to 1%) on short- and intermediate-term U.S. Treasury securities
and approximately 90 basis points on the 30-year U.S. Treasury bond.
Minutes of the May 18th Federal Open Market Committee meeting cited "few signs
of any moderation in the expansion," noting that recent economic reports
pointed to strengthening business conditions, rising inflationary pressures,
continuing tight labor market conditions and soaring domestic demand. At the
same time, there were credible signs that the global economy is recovering from
the depressing effects of the global financial crisis last fall. These factors
clearly led the Fed to action.
At the beginning of the year, we expected that there would be a rebound in the
corporate bond market after disappointing performance in the second half of
1998. This proved to be the case as both investment grade and high yield
corporate bonds outpaced similar maturity Treasury bonds in the first half of
1999. While this year-to-date performance was impressive, both sectors have
given back some of the gains from earlier in the year during May and June. We
continue to see value in the sector and increased the Company's weighting in
corporate bonds from 58% to 63% during the first half.
In the first half of 1999, the Company posted a return of (1.83)% based on its
net asset value ("NAV") compared to (1.02)% for the Lipper Closed-end
Investment Grade Bond Funds Average.** Of course, a truer measure of the
Company's success is performance over longer time horizons. Over the five year
period ended June 30, 1999, the Fund has delivered an average annual return of
9.10%, compared with the Lipper Closed-end Investment Grade Bond Funds Average
return of 8.55%.
In addition, an important component of total return is income and, with a
monthly dividend rate of $0.085 cents per share, Hatteras Income Securities,
Inc. has an annualized yield of 6.65% based on the closing NAV of $15.34 on
June 30, 1999. This is a very competitive yield on the portfolio, given the
current level of rates. For example, a similar duration Treasury bond yields
5.65%. (Of course, shares of the Company are not as safe as a Treasury bond.)
*The performance information quoted represents past performance, which is
not an indication of future results.
**The Lipper Closed-end Investment Grade Bond Funds Average includes 16
funds. Lipper Inc. is an independent monitor of closed-end fund performance.
3
<PAGE>
Market Outlook
Looking to the second half of 1999, we believe that economic growth will
continue, and that the Company will benefit from its exposure to investment
grade and high yield corporate bonds. In our view, the corporate sector offers
attractive valuations and domestic economic growth supports a solid credit
environment. This combination should continue in the second half and we will
look for opportunities to increase our exposure going forward. The wildcard in
the mix remains the equity market, where historically high valuations have been
supportive of economic growth. While the pace of equity market appreciation may
slow, strong domestic demand and low inflation should remain supportive in the
months ahead. In summary, we look for the economic expansion to continue in the
second half of 1999, providing a positive backdrop for both the investment
grade and high yield corporate bond markets.
Sincerely,
/s/ Robert H. Gordon
ROBERT H. GORDON
President
June 30, 1999
4
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
June 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
<S> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 59.7%
BANKING AND FINANCE -- 11.0%
$ 500,000 Capital One Bank,
6.700% 05/15/08 ........................... Baa2 BBB- $ 476,578
500,000 FCB/NB Capital Trust I, Gtd. Notes,
8.050% 03/01/28 ........................... Baa3 BB+ 472,057
500,000 First Union Institutional Capital Trust I,
8.040% 12/01/26 ........................... A1 BBB+ 497,474
500,000 Golden State Escrow Corporation,
6.750% 08/01/01 ........................... Ba1 BB+ 493,882
750,000 Great Western Financial,
8.206% 02/01/27 ........................... A3 BBB- 744,338
500,000 Lehman Brothers Inc.,
11.625% 05/15/05 .......................... Baa1 A 597,383
500,000 Popular Inc., MTN,
6.375% 09/15/03 ........................... A3 BBB+ 473,933
550,000 Union Planters Trust,
6.500% 03/15/18 ........................... Baa1 BBB 518,527
1,000,000 Western Financial Savings Bank, Sub. Deb.,
8.500% 07/01/03 ........................... B1 BB+ 910,208
500,000 Wilmington Trust Corporation,
6.625% 05/01/08 ........................... Baa2 A- 481,770
---------
Total Banking and Finance: 5,666,150
---------
CONTAINERS -- 1.5%
750,000 BWAY Corporation, Sr. Sub. Notes,
10.250% 04/15/07 .......................... B2 B 773,437
---------
ELECTRIC UTILITY -- 0.9%
500,000 Dominion Capital Trust I, Sr. Notes,
7.830% 12/01/27 ........................... Baa1 BBB+ 475,739
---------
ENERGY -- 5.5%
800,000 Barrett Resources Corporation, Sr. Notes,
7.550% 02/01/07 ........................... Ba1 BB+ 777,323
500,000 CMS Energy Corporation,
8.125% 05/15/02 ........................... Ba3 BB 504,653
700,000 Occidental Petroleum Corporation, Sr. Deb.,
10.125% 09/15/09 .......................... Baa2 BBB 808,907
800,000 PDV America Inc., Gtd. Sr. Notes,
7.875% 08/01/03 ........................... Baa3 BB- 782,178
---------
Total Energy: 2,873,061
---------
</TABLE>
5
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
June 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
<S> <C> <C> <C> <C>
FINANCIAL/BROKERAGE -- 4.0%
$ 500,000 Household Finance Corporation,
5.875% 02/01/09 ............................. A2 A $ 453,360
500,000 Merrill Lynch & Company,
6.000% 02/17/09 ............................. Aa3 AA- 460,995
550,000 Morgan Stanley Finance plc, Gtd. Sub. Deb.,
8.030% 02/28/17 ............................. A2 A- 558,120
600,000 Paine Webber Group, Inc., Sr. Notes,
7.625% 10/15/08 ............................. Baa1 BBB+ 604,848
---------
Total Financial/Brokerage: 2,077,323
---------
GAS -- 2.1%
1,000,000 Louis Dreyfus Natural Gas Corporation,
Sr. Sub Notes,
9.250% 06/15/04 ............................. Ba3 BB+ 1,063,180
---------
HEALTH CARE -- 4.3%
600,000 Genesis Health Ventures Inc., Sr. Sub. Notes,
9.250% 10/01/06 ............................. B2 B- 480,000
525,000 HEALTHSOUTH Corporation, Sr. Notes,
6.875% 06/15/05 ............................. Baa3 BBB 496,960
500,000 Quorum Health Group, Inc., Sr. Sub. Notes,
8.750% 11/01/05 ............................. Ba3 BB- 487,500
750,000 Tenet Healthcare Corporation, Sr. Notes,
8.000% 01/15/05 ............................. Ba1 BB 738,750
---------
Total Healthcare: 2,203,210
---------
INDUSTRIAL -- 13.7%
500,000 Alaris Medical Systems,
9.750% 12/01/06 ............................. B3 B- 487,500
500,000 Allied Waste North America,
7.375% 01/01/04 ............................. Ba3 BB 473,750
475,000 Beckman Instruments, Inc.,
7.450% 03/04/08 ............................. Ba1 NR 454,601
600,000 Coltec Industries, Inc.,
7.500% 04/15/08 ............................. Ba2 BB 594,566
500,000 Delphi Auto Systems Corporation,
6.125% 05/01/04 ............................. Baa2 BBB 487,082
500,000 Enterprise Rent A Car,
6.625% 02/15/05 ............................. Baa2 BBB 484,136
</TABLE>
6
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
June 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
<S> <C> <C> <C> <C>
INDUSTRIAL -- (continued)
$ 525,000 Equistar Chemicals LP,
8.500% 02/15/04 ........................... Baa3 BBB- $ 532,728
500,000 Fisher Scientific International, Sr. Notes,
7.125% 12/15/05 ........................... B1 B+ 462,040
500,000 J. Seagram and Sons,
7.500% 12/15/18 ........................... Baa3 BBB- 483,310
500,000 LCI International Inc.,
7.250% 06/15/07 ........................... Ba1 BB+ 492,366
650,000 Owens Illinois,
7.150% 05/15/05 ........................... Ba1 BB+ 619,915
500,000 Raytheon Company,
7.000% 11/01/28 ........................... Baa1 BB- 472,713
500,000 Service Corporation International,
6.000% 12/15/05 ........................... Baa1 BBB 459,465
600,000 USA Waste Services, Inc.,
6.500% 12/15/02 ........................... Baa3 BBB 594,990
---------
Total Industrial: 7,099,162
---------
INSURANCE -- 2.1%
600,000 Conseco Inc., Sr. Notes,
8.796% 04/01/27 ........................... Ba2 BBB- 550,903
525,000 Jefferson-Pilot Capital Trust,
8.285% 03/01/46 ........................... A1 A+ 524,287
---------
Total Insurance: 1,075,190
---------
MEDIA AND CABLE -- 5.9%
700,000 Jones Intercable, Inc., Sr. Notes,
9.625% 03/15/02 ........................... Ba2 BB 738,500
750,000 Primedia Inc.,
7.625% 04/01/08 ........................... Ba3 BB- 716,250
1,000,000 Rogers Cablesystems Limited, Deb.,
10.000% 12/01/07 .......................... Ba3 BB+ 1,071,250
500,000 Viacom Inc.,
8.250% 08/01/22 ........................... Ba2 BB+ 506,993
---------
Total Media and Cable: 3,032,993
---------
PAPER & FOREST PRODUCTS -- 1.7%
750,000 Georgia-Pacific Corporation,
9.500% 12/01/11 ........................... Baa2 BBB- 867,569
---------
</TABLE>
7
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
June 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
<S> <C> <C> <C> <C>
PUBLISHING -- 1.6%
$ 750,000 News America Holdings Inc., Gtd. Deb.,
10.125% 10/15/12 ..................... Baa3 BBB $ 828,289
----------
TELECOMMUNICATIONS -- 3.7%
500,000 GTE Corporation,
7.900% 02/01/27 ...................... Baa1 A 501,693
450,000 Lenfest Communications,
10.500% 06/15/06 ..................... B1 BB- 517,500
650,000 Martin Marietta Technology,
7.750% 04/15/23 ...................... A3 BBB+ 636,094
250,000 Paramount Communications,
7.500% 07/15/23 ...................... Ba2 BB+ 243,426
----------
Total Telecommunications: 1,898,713
----------
TRANSPORTATION -- 1.7%
750,000 Federal Express Corporation, Notes,
9.650% 06/15/12 ...................... Baa2 BBB 881,250
----------
Total Corporate Bonds and Notes:
(Cost $31,891,368).................... 30,815,266
==========
FOREIGN BONDS AND NOTES -- 1.6%
500,000 Corp. Andina de Fomento,
7.750% 03/01/04 ...................... A3 BBB+ 487,042
500,000 United Mexican States,
6.250% 12/31/19 ...................... Ba2 BB 366,869
----------
Total Foreign Bonds and Notes:
(Cost $857,700)....................... 853,911
==========
MORTGAGE-BACKED SECURITIES -- 12.7%
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC)
CERTIFICATES -- 1.1%
519,796 7.000% 07/01/28 ...................... 515,248
49,470 9.250% 08/01/08 ...................... 52,495
----------
Total: 567,743
----------
</TABLE>
8
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
June 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES -- (Continued)
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA)
CERTIFICATES -- 8.9%
$2,933,749 6.500% 07/01/11 -- 05/01/27 .......... $2,864,575
1,236,405 7.000% 06/01/11 -- 05/01/28 .......... 1,237,021
144,955 8.000% 01/01/28 ...................... 148,753
95,589 9.000% 05/01/27 ...................... 101,269
229,591 9.250% 09/01/10 ...................... 244,089
----------
Total: 4,595,707
----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA)
CERTIFICATES -- 2.7%
817,900 8.000% 09/15/24 ...................... 840,721
428,719 9.000% 04/15/09 -- 12/15/16 .......... 455,017
75,201 9.500% 07/15/09 ...................... 81,015
----------
Total: 1,376,753
----------
Total Mortgage-Backed Securities:
(Cost $6,330,945)..................... 6,540,203
==========
U.S. TREASURY OBLIGATIONS -- 24.2%
U.S. Treasury Bonds:
1,850,000 8.125% 05/15/21 ...................... 2,246,594
3,465,000 12.000% 08/15/13 ..................... 4,862,912
U.S. Treasury Notes:
4,000,000 13.750% 08/15/04 ..................... 5,370,000
----------
Total U.S. Treasury Obligations:
(Cost $13,255,059).................... 12,479,506
==========
</TABLE>
9
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
June 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Market
Value
--------------
<S> <C> <C> <C>
TOTAL INVESTMENTS
(Cost $52,335,072*)........................ 98.2% $50,688,886
OTHER ASSETS AND LIABILITIES (Net) ........ 1.8% 906,238
------- -----------
NET ASSETS ................................ 100.0% $51,595,124
======= ===========
</TABLE>
- ----------
* Aggregate cost for Federal tax purposes.
ABBREVIATIONS:
MTN Medium Term Note
10
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 1) ......................................... $ 50,688,886
Interest receivable ................................................................. 984,989
------------
Total assets ....................................................................... 51,673,875
------------
LIABILITIES:
Due to custodian bank ............................................................... 3,255
Management and advisory fees payable (Note 4) ....................................... 23,591
Accrued legal and audit fees ........................................................ 20,670
Transfer agent fees payable ......................................................... 15,809
Accrued Directors' fees and expenses ................................................ 6,400
Accrued expenses .................................................................... 9,026
------------
Total Liabilities .................................................................. 78,751
------------
NET ASSETS (equivalent to $15.34 per share based on 3,363,512 shares of capital stock
outstanding) ........................................................................ $ 51,595,124
============
Investments, at cost .................................................................. $ 52,335,072
============
NET ASSETS CONSIST OF:
CAPITAL STOCK -- $1.00 par value (shares authorized, 5,000,000)........................ $ 3,363,512
Paid-in capital ..................................................................... 51,162,365
Undistributed net investment income (Note 1) ........................................ 269,375
Accumulated net realized loss on investments (Note 3) ............................... (1,553,942)
Net unrealized depreciation of investments .......................................... (1,646,186)
------------
NET ASSETS ............................................................................ $ 51,595,124
============
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest ........................................................................ $ 2,098,689
------------
EXPENSES:
Management and investment advisory (Note 4) ..................................... 149,084
Transfer agent .................................................................. 33,537
Legal and audit ................................................................. 23,804
Directors ....................................................................... 14,852
Printing ........................................................................ 10,844
New York Stock Exchange Annual Registration ..................................... 8,019
Custody (Note 4) ................................................................ 3,314
Miscellaneous ................................................................... 1,363
-------
Total expenses ................................................................ 244,817
Fees reduced by credits allowed by the custodian (Note 4) ....................... (3,277)
-------
Net expenses .................................................................. 241,540
-------
NET INVESTMENT INCOME ............................................................ 1,857,149
------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS (Note 2):
Net realized loss on investments during period .................................. (222,821)
Net change in unrealized appreciation/(depreciation) of investments during period (2,617,336)
------------
Net realized and unrealized loss on investments ................................. (2,840,157)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................. $ (983,008)
============
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year
6/30/99 Ended
(unaudited) 12/31/98
------------------ ---------------
<S> <C> <C>
Net investment income ................................................... $ 1,857,149 $ 3,743,102
Net realized gain/(loss) on investments ................................. (222,821) 309,270
Net change in unrealized appreciation/(depreciation) of investments ..... (2,617,336) (243,047)
------------ ------------
Net increase/(decrease) in net assets resulting from operations ......... (983,008) 3,809,325
Dividends to shareholders from investment income ........................ (1,715,396) (3,716,696)
------------ ------------
Net increase/(decrease) in net assets ................................... (2,698,404) 92,629
NET ASSETS:
Beginning of period ..................................................... 54,293,528 54,200,899
------------ ------------
End of period ........................................................... $ 51,595,124 $ 54,293,528
============ ============
Undistributed net investment income at end of period .................... $ 269,375 $ 127,622
============ ============
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
HATTERAS INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
Six Months Ended Year
6/30/99 Ended
(unaudited) 1998
------------------ -------------
<S> <C> <C>
Per Share Operating Performance
Net asset value at beginning of period ......... $ 16.14 $ 16.11
Net investment income ......................... 0.55 1.11
Net realized and unrealized gain/(loss) on
investment transactions ..................... ( 0.84) 0.03
----------- --------
Total from investment operations .............. ( 0.29) 1.14
Less distributions
Dividends from net investment income .......... ( 0.51) ( 1.11)
Dividends in excess of net investment
income ...................................... -- --
----------- ---------
Total distributions ........................... ( 0.51) ( 1.11)
----------- ---------
Net asset value at end of period ............... $ 15.34 $ 16.14
=========== =========
Per share market value, end of period .......... $ 13.750 $ 15.125
Total Return:
Per share market value ........................ ( 5.69)% 10.46%
Ratios and Supplemental Data
Net assets, end of period (thousands) ......... $ 51,595 $ 54,294
Ratio of operating expenses to average net
assets ...................................... 0.93%+ 0.91%
Ratio of operating expenses to average net
assets without fees reduced by credits
allowed by the custodian .................... 0.94%+ 0.92%
Ratio of net investment income to average
net assets .................................. 7.17%+ 6.86%
Portfolio turnover rate ....................... 24.56% 72.04%
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
1997 1996 1995 1994
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value at beginning of period ......... $ 15.91 $ 16.79 $ 15.20 $ 16.92
Net investment income ......................... 1.18 1.23 1.35 1.44
Net realized and unrealized gain/(loss) on
investment transactions ..................... 0.16 ( 0.84) 1.61 ( 1.71)
--------- ---------- -------- ---------
Total from investment operations .............. 1.34 0.39 2.96 ( 0.27)
Less distributions
Dividends from net investment income .......... ( 1.14) ( 1.23) ( 1.34) ( 1.45)
Dividends in excess of net investment
income ...................................... --(a) ( 0.04) ( 0.03) --
--------- ---------- --------- ---------
Total distributions ........................... ( 1.14) ( 1.27) ( 1.37) ( 1.45)
--------- ---------- --------- ---------
Net asset value at end of period ............... $ 16.11 $ 15.91 $ 16.79 $ 15.20
========= ========== ========= =========
Per share market value, end of period .......... $ 14.875 $ 14.375 $ 16.125 $ 14.875
Total Return:
Per share market value ........................ 11.03% ( 3.32)% 17.61% (11.09)%
Ratios and Supplemental Data
Net assets, end of period (thousands) ......... $ 54,201 $ 53,658 $ 56,109 $ 50,250
Ratio of operating expenses to average net
assets ...................................... 0.94% 0.89% 0.86% 0.92%
Ratio of operating expenses to average net
assets without fees reduced by credits
allowed by the custodian .................... 0.95% 0.90% 0.89% --
Ratio of net investment income to average
net assets .................................. 7.18% 7.73% 8.07% 8.76%
Portfolio turnover rate ....................... 199.52% 166.30% 48.75% 28.28%
</TABLE>
- ----------
+ Annualized.
(a) Amount represents less than $0.01 per share.
See Notes to Financial Statements.
14
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Unaudited)
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.
1. SIGNIFICANT ACCOUNTING POLICIES:
A summary of significant accounting policies followed by the Company, in
preparation of its financial statements, follows. The preparation 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.
Security Valuation: The Company's portfolio securities listed on an
exchange are valued at the closing sales price taken from the exchange on
which the security is primarily traded, or the last sales price on a
national securities market. Securities traded in only the over-the-counter
market are valued on the basis of the closing bid price or, if no sale
occurred on such day, at the mean of the current bid and asked prices.
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 assets are valued by or under the direction of the
Company's Board of Directors.
Investment Policy: At least 70% of the Company's total assets will be
invested in: (i) debt securities which are rated at the time of purchase as
Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard &
Poor's Corporation ("S&P") or better; (ii) securities of, or guaranteed by,
the U.S. Government, its agencies or instrumentalities; (iii) securities
of, or guaranteed by, the Government of Canada or of a Province of Canada
or a political subdivision thereof, such securities not to exceed 25% of
the Company's total assets; (iv) 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 (i); (v) commercial paper
considered by the Company's investment adviser to be of investment quality
comparable to securities which may be purchased under item (i) above; and
(vi) cash or cash equivalents.
Securities Transactions and Investment Income: Securities transactions are
accounted for on trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recognized daily on the accrual basis. Original
issue discount is accreted using the effective yield method. Market
discount and premiums on securities are not amortized or accreted.
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.
Federal Income Tax: The Company intends to continue 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.
15
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Unaudited)(Continued)
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 or determining the
cost of securities sold or matured. Purchases and sales (including
maturities) of securities during the six months ended June 30, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
Sales and
Purchases Maturities
-------------- -------------
<S> <C> <C>
Corporate Bonds .................................. $10,947,835 $ 8,966,655
U.S. Government and Agencies (Long-Term) ......... 3,644,656 3,771,803
Foreign Bonds .................................... 497,700 --
----------- -----------
Total ....................................... $15,090,191 $12,738,458
=========== ===========
</TABLE>
At June 30, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $(1,646,186) of which $440,578 related to appreciated
securities and $2,086,764 related to depreciated securities. The aggregate
cost of investment securities owned for Federal income tax purposes was
$52,335,072.
3. CAPITAL LOSS CARRYFORWARD:
At December 31, 1998, approximately $1,331,100 was available to offset
future capital gains of which $731,727 expires in 1999, $47,580 expires in
2000, $476,575 expires in 2002 and $75,218 expires in 2005. Management does
not plan to distribute to shareholders any future net realized gains on
investments until the capital loss carryforwards are used or expired.
4. MANAGEMENT AND INVESTMENT ADVISORY FEES AND OTHER RELATED PARTY
TRANSACTIONS:
The Company has entered into an investment advisory agreement ("Advisory
Agreement") with NationsBanc Advisors, Inc. ("NBAI"), a wholly-owned
subsidiary of NationsBank, N.A. ("NationsBank"), which in turn is an
indirect wholly-owned banking subsidiary of Bank of America Corporation, a
bank holding company organized as a Delaware corporation. 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 Company's 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%
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 the
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 six months ended June 30, 1999.
The Company and NBAI have entered into an investment sub-advisory agreement
("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, out of its advisory fee, a sub-advisory fee equal to an annual rate
of 0.15% of the Company's average weekly net assets.
The Bank of New York ("BNY") serves as the custodian of the Company's
assets. For the six months ended June 30, 1999, expenses of the Company
were reduced by $3,277 under expense offset arrangements with BNY. The
Company could have invested a portion of the assets utilized in connection
with the expense offset arrangements in an income producing asset if they
had not entered into such arrangements.
16
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Unaudited)(Continued)
ChaseMellon Shareholder Services ("ChaseMellon") serves as transfer agent
and dividend disbursing agent for the Company.
No officer, director or employee of NationsBank, NBAI, TradeStreet, BNY, 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.
5. SUBSEQUENT EVENTS:
In July of 1999, NationsBank merged into Bank of America, N.A. Effective on
or about September 1, 1999, it is anticipated that NBAI will change its
name to Banc of America Advisors, Inc. Neither of these changes is expected
to alter the level or quality of advisory or other services provided to the
Company.
17
<PAGE>
HATTERAS INCOME SECURITIES, INC.
DIVIDEND REINVESTMENT PLAN
Dividend Reinvestment Plan
The Company's Dividend Reinvestment Plan (the "Plan") offers an automatic
way to reinvest 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 (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 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
18
<PAGE>
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.
19
<PAGE>
BOARD OF DIRECTORS OFFICE OF THE COMPANY
A. MAX WALKER, Chairman Hatteras Income Securities, Inc.
Financial Consultant One Bank of America Plaza -- NC1-002-33-31
101 S. Tryon Street
Charlotte, North Carolina 28255
WILLIAM H. GRIGG
Chairman Emeritus,
Duke Power Company INVESTMENT ADVISER
NationsBanc Advisors, Inc.
One Bank of America Plaza
THOMAS F. KELLER 101 S. Tryon Street
Retired Dean, Charlotte, North Carolina 28255
Fuqua School of Business,
Duke University
INVESTMENT SUB-ADVISOR
TradeStreet Investment Associates, Inc.
FUND OFFICERS One Bank of America Plaza
ROBERT H. GORDON 101 S. Tryon Street
President Charlotte, North Carolina 28255
EDWARD D. BEDARD FUND COUNSEL
Chief Financial Officer Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W.
Suite 5500
ROBERT B. CARROLL Washington, D.C. 20006
Secretary
CUSTODIAN
GERALD MURPHY The Bank of New York
Treasurer 90 Washington St.
New York, NY 10286
ANDREW R. PETRUSKI
Assistant Treasurer TRANSFER AGENT
ChaseMellon Shareholder Services
450 West 33rd Street 15th Floor
TRACIE PERSINGER New York, NY 10001
Assistant Treasurer
INDEPENDENT ACCOUNTANTS
MARK S. AHNRUD, CFA PricewaterhouseCoopers LLP
Assistant Secretary and 1177 Avenue of the Americas
Portfolio Manager New York, NY 10036
