[GRAPHIC]
HATTERAS
INCOME
SECURITIES,
INC.
Annual Report
To Shareholders
December 31, 1999
<PAGE>
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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")
Annual Report to Shareholders for the year ended December 31, 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
We will remember 1999 as a very difficult year for the bond market, with
interest rates rising across the yield curve. During the year, yields rose about
180 basis points on short- and intermediate-term U.S. Treasury bonds and 139
basis points on the benchmark 30-year U.S. Treasury bond. (100 basis points is
equivalent to 1%). The big concerns for the bond market were the strength of the
U.S. economy, fear of inflation on expectations that low unemployment would lead
to wage pressures, and anticipation that the Federal Reserve Board (the Fed)
would act to raise interest rates early in the year 2000. During 1999, all of
the non-Treasury sectors of the bond market performed well, modestly
outperforming Treasury bonds on a duration-adjusted basis. The strong economy
continued to support valuations in both the investment grade and high yield
corporate sectors of the fixed income market. One result was downward net asset
value (NAV) pressure from rising rates, which was offset somewhat by the
performance of non-Treasury securities.
Despite relatively good performance for non-Treasury bonds, 1999 was not kind to
fixed income investors. The performance of the broad market registered a
negative annual performance, with the Lehman Aggregate Bond Index returning
(0.82)%. For long bond investors, the annual performance of the 30-year Treasury
was a painful (14.89)%. Even the five-year Treasury, which is considered by many
a "safe haven", provided a (2.54)% return for the year. Now that the returns are
in, we can say definitively that 1999 was the second worst total return year on
record, behind only by the infamous 1994 returns, where the bond market returned
(2.92)% as measured by the Lehman Aggregate Bond Index.
During 1999, the Company posted a return of (2.36)% based on its NAV,
underperforming the Lipper Closed-end Corporate Debt Funds BBB-Rated Average
which returned (1.54)%.(1) Consistent with its objective of high monthly income,
the Fund provided investors with a monthly dividend of $0.085 cents per share.
Hatteras Income Securities, Inc. had an annualized yield of 6.96% based on the
closing NAV of $14.65 on December 31, 1999. We believe this is a very
competitive yield on the portfolio, given the current level of rates. A similar
duration Treasury bond yields 6.34%. We also note that the Company paid out a
special dividend on December 31, 1999 of $0.0921.
THE PERFORMANCE INFORMATION QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS
NOT AN INDICATION OF FUTURE RESULTS.
(1)The Lipper Closed-end Corporate Debt Funds BBB-Rated Average includes 16
funds. Lipper Inc. is an independent monitor of closed-end fund performance.
3
<PAGE>
MARKET OUTLOOK
Looking forward into the new millennium, the outlook for the Fed remains
uncertain. We expect the Fed to scrutinize stock valuations in light of the
strength of the domestic and global economies and tight domestic labor markets
to determine whether it needs to continue to increase short-term interest rates
in the year 2000. The market expects at least a 50 basis point increase in rates
during 2000, based on where futures on the Federal Funds rate are currently
trading. This has been a very good indicator over the last few years. If the Fed
does increase short-term interest rates, the question then becomes: did the Fed
raise short-term interest rates enough to cool an "over-heating" economy? We
cannot know how the market will anticipate the Fed.'s 1st quarter 2000
decisions, but we do know that we will continue our discipline to manage the
interest rate risk in the portfolio. If sector spreads decline, or even hold
steady at current levels, our strategy should produce positive relative
performance in the New Year.
We thank you for your continued support.
Sincerely,
/s/ Robert H. Gordon
ROBERT H. GORDON
President
December 31, 1999
P.S. At the February FOMC meeting, the Federal Reserve Board raised the Fed
Funds rate by 25 basis points.
4
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
Moody's S&P
Principal Rating Rating Market
Amount (unaudited) (unaudited) Value
<S> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 60.6%
BANKING AND FINANCE -- 10.8%
$500,000 Aon Capital Trust A,
8.205% 01/01/27 ........................... A3 A $ 503,411
500,000 Capital One Bank,
6.700% 05/15/08 ........................... Baa2 BBB- 456,369
500,000 CSC Holding Inc.,
8.125% 07/15/09 ........................... Ba2 BB+ 499,375
500,000 FCB/NB Capital Trust I, Gtd. Notes,
8.050% 03/01/28 ........................... Baa3 BB+ 442,730
500,000 First Union Institutional Capital Trust I,
8.040% 12/01/26 ........................... A1 BBB+ 464,770
800,000 Golden State Escrow Corporation,
7.000% 08/01/03 ........................... Ba1 BB+ 740,181
750,000 Great Western Financial,
8.206% 02/01/27 ........................... A3 BBB- 702,607
500,000 Lehman Brothers Inc.,
11.625% 05/15/05 .......................... Baa1 A 582,013
500,000 Popular Inc., MTN,
6.375% 09/15/03 ........................... A3 BBB+ 479,072
500,000 Wilmington Trust Corporation,
6.625% 05/01/08 ........................... Baa2 A- 468,567
----------
Total Banking and Finance: 5,339,095
----------
CONTAINERS -- 1.5%
750,000 BWAY Corporation, Sr. Sub. Notes,
10.250% 04/15/07 .......................... B2 B 739,688
----------
ELECTRIC UTILITY -- 0.9%
500,000 Dominion Capital Trust I, Sr. Notes,
7.830% 12/01/27 ........................... Baa1 BBB+ 438,595
----------
ENERGY -- 5.3%
650,000 Barrett Resources Corporation, Sr. Notes,
7.550% 02/01/07 ........................... Ba1 BB+ 608,169
500,000 CMS Energy Corporation,
8.125% 05/15/02 ........................... Ba3 BB 497,340
700,000 Occidental Petroleum Corporation, Sr. Deb.,
10.125% 09/15/09 .......................... Baa3 BBB 785,173
800,000 PDV America Inc., Gtd. Sr. Notes,
7.875% 08/01/03 ........................... Baa3 B+ 753,140
----------
Total Energy: 2,643,822
----------
</TABLE>
5
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
December 31, 1999
<TABLE>
<CAPTION>
Moody's S&P
Principal Rating Rating Market
Amount (unaudited) (unaudited) Value
<S> <C> <C> <C> <C>
FINANCIAL/BROKERAGE -- 4.1%
$500,000 Household Finance Corporation,
5.875% 02/01/09 ........................... A2 A $ 442,410
500,000 Merrill Lynch & Company,
6.000% 02/17/09 ........................... Aa3 AA- 448,175
550,000 Morgan Stanley Finance plc, Gtd. Sub. Deb.,
8.030% 02/28/17 ........................... A2 A- 541,903
600,000 Paine Webber Group, Inc., Sr. Notes,
7.625% 10/15/08 ........................... Baa1 BBB+ 584,044
----------
Total Financial/Brokerage: 2,016,532
----------
GAS -- 1.5%
750,000 Louis Dreyfus Natural Gas Corporation,
Sr. Sub Notes,
9.250% 06/15/04 ........................... Ba3 BB+ 750,256
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HEALTH CARE -- 2.2%
525,000 HEALTHSOUTH Corporation,
7.000% 06/15/08 ........................... Baa3 BBB 431,919
650,000 Tenet Healthcare Corporation,
7.875% 01/15/03 ........................... Ba1 BB+ 629,688
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Total Healthcare: 1,061,607
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INDUSTRIAL -- 14.9%
600,000 Allied Waste North America,
7.625% 01/01/06 ........................... Ba3 BB- 541,500
350,000 American Standard Inc.,
7.375% 04/15/05 ........................... Ba3 BB- 331,187
530,000 Beckman Instruments, Inc.,
7.450% 03/04/08 ........................... Ba1 BB+ 485,562
600,000 Coltec Industries, Inc.,
7.500% 04/15/08 ........................... Ba2 A- 577,856
500,000 Enterprise Rent A Car,
6.625% 02/15/05 ........................... Baa2 BBB+ 472,977
525,000 Equistar Chemicals LP,
8.500% 02/15/04 ........................... Baa3 BBB- 521,994
650,000 Federal - Mogul Corporation,
7.500% 07/01/04 ........................... Ba2 BB+ 615,382
</TABLE>
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<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
December 31, 1999
<TABLE>
<CAPTION>
Moody's S&P
Principal Rating Rating Market
Amount (unaudited) (unaudited) Value
<S> <C> <C> <C> <C>
INDUSTRIAL -- (continued)
$ 500,000 Fisher Scientific International, Sr. Notes,
7.125% 12/15/05 ........................... B1 B+ $ 454,103
500,000 J. Seagram and Sons,
7.500% 12/15/18 ........................... Baa3 BBB- 472,541
500,000 LCI International Inc.,
7.250% 06/15/07 ........................... Ba1 BB+ 479,829
650,000 Owens Illinois,
7.850% 05/15/04 ........................... Ba1 BB+ 629,052
500,000 Raytheon Company,
7.000% 11/01/28 ........................... Baa2 BBB- 434,433
500,000 Service Corporation International,
7.375% 04/15/04 ........................... Baa3 BBB- 421,235
600,000 USA Waste Services, Inc.,
6.500% 12/15/02 ........................... Ba1 BBB 554,510
375,000 Westpoint Stevens Inc.,
7.875% 06/15/05 ........................... Ba3 BB 343,125
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Total Industrial: 7,335,286
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INSURANCE -- 2.1%
600,000 Conseco Inc., Sr. Notes,
8.796% 04/01/27 ........................... Ba2 BBB- 543,328
525,000 Jefferson-Pilot Capital Trust,
8.285% 03/01/46 ........................... A1 A+ 503,650
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Total Insurance: 1,046,978
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MEDIA AND CABLE -- 7.2%
700,000 Jones Intercable, Inc., Sr. Notes,
9.625% 03/15/02 ........................... Baa3 BBB- 730,663
750,000 Primedia Inc.,
7.625% 04/01/08 ........................... Ba3 BB- 701,250
1,000,000 Rogers Cablesystems Limited, Deb.,
10.000% 12/01/07 .......................... Ba3 BB+ 1,066,250
500,000 Time Warner Incorporated,
9.125% 01/15/13 ........................... Baa3 BBB 540,000
500,000 Viacom Inc.,
8.250% 08/01/22 ........................... Baa3 BBB- 494,312
----------
Total Media and Cable: 3,532,475
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</TABLE>
7
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
December 31, 1999
<TABLE>
<CAPTION>
Moody's S&P
Principal Rating Rating Market
Amount (unaudited) (unaudited) Value
<S> <C> <C> <C> <C>
PAPER & FOREST PRODUCTS -- 1.5%
$800,000 Georgia-Pacific Corporation,
7.250% 06/01/28 ...................... Baa2 BBB- $ 719,762
-----------
PUBLISHING -- 1.7%
750,000 News America Holdings Inc., Gtd. Deb.,
10.125% 10/15/12 ..................... Baa3 BBB- 825,155
-----------
TELECOMMUNICATIONS -- 5.2%
850,000 AT&T Capitial Corporation,
6.600% 05/15/05 ...................... A1 A+ 816,768
500,000 British Sky Broadcasting,
8.200% 07/15/09 ...................... Baa2 BBB- 480,583
500,000 GTE Corporation,
7.900% 02/01/27 ...................... Baa1 A 480,185
500,000 Lenfest Communications,
10.500% 06/15/06 ..................... B2 BB- 560,000
250,000 Paramount Communications,
7.500% 07/15/23 ...................... Baa3 BBB- 223,893
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Total Telecommunications: 2,561,429
-----------
TRANSPORTATION -- 1.7%
750,000 Federal Express Corporation, Notes,
9.650% 06/15/12 ...................... Baa2 BBB 835,438
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Total Corporate Bonds and Notes:
(Cost $32,466,158).................... 29,846,118
===========
FOREIGN BONDS AND NOTES -- 1.8%
500,000 Corp. Andina de Fomento,
7.750% 03/01/04 ...................... A2 BBB+ 500,096
500,000 United Mexican States,
6.250% 12/31/19 ...................... Ba2 BB 394,400
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Total Foreign Bonds and Notes:
(Cost $857,700)....................... 894,496
===========
MORTGAGE-BACKED SECURITIES -- 15.9%
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC)
CERTIFICATES -- 0.1%
41,200 9.250% 08/01/08 ...................... 43,284
-----------
</TABLE>
8
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
December 31, 1999
<TABLE>
<CAPTION>
Principal Market
Amount Value
MORTGAGE-BACKED SECURITIES -- (Continued)
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA)
CERTIFICATES -- 13.4%
$5,825,000 5.250% 01/15/09 ................. $5,129,215
850,000 5.625% 05/14/04 ................. 810,719
94,344 7.000% 04/01/27 ................. 91,245
218,225 7.000% 05/01/28 ................. 211,056
133,384 8.000% 01/01/28 ................. 134,511
59,234 9.000% 05/01/27 ................. 61,690
191,979 9.250% 09/01/10 ................. 201,896
----------
Total: 6,640,332
----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA)
CERTIFICATES -- 2.4%
685,207 8.000% 09/15/24 ................. 692,559
51,064 9.000% 04/15/09 ................. 53,452
112,568 9.000% 09/15/16 ................. 117,833
119,080 9.000% 12/15/16 ................. 124,649
109,676 9.000% 12/15/16 ................. 114,806
69,433 9.500% 07/15/09 ................. 73,930
----------
Total: 1,177,229
----------
Total Mortgage-Backed Securities:
(Cost $6,822,370)................ 7,860,845
==========
U.S. TREASURY OBLIGATIONS -- 19.6%
U.S. Treasury Bonds:
1,600,000 8.125% 05/15/21 ................. 1,834,501
2,000,000 12.000% 08/15/13 ................ 2,669,376
U.S. Treasury Notes:
4,000,000 13.750% 08/15/04 ................ 5,133,752
----------
Total U.S. Treasury Obligations:
(Cost $10,765,079)............... 9,637,629
==========
</TABLE>
9
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS(Continued)
December 31, 1999
<TABLE>
<CAPTION>
Market
Value
--------------
TOTAL INVESTMENTS
(Cost $50,911,307*)........................ 97.9% $48,239,088
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (Net) ........ 2.1% 1,050,199
---------
NET ASSETS ................................ 100.0% $49,289,287
======= ===========
</TABLE>
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* Aggregate cost for Federal tax purposes. (Note 3)
ABBREVIATIONS:
MTN Medium Term Note
10
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 1) ............................................ $ 48,239,088
Cash............................................. ...................................... 32,018
Interest receivable .................................................................... 1,075,151
------------
Total assets .......................................................................... 49,346,257
============
LIABILITIES:
Management and advisory fees payable (Note 2) .......................................... 24,012
Accrued legal and audit fees............................................................ 22,250
Transfer agent fees payable............................................................. 5,000
Accrued expenses ....................................................................... 5,708
------------
Total Liabilities ..................................................................... 56,970
------------
NET ASSETS (equivalent to $14.65 per share based on 3,363,512 shares of capital stock
outstanding) ........................................................................... $ 49,289,287
============
Investments, at cost ..................................................................... $ 50,911,307
============
NET ASSETS CONSIST OF:
CAPITAL STOCK -- $1.00 par value (shares authorized, 5,000,000)........................... $ 3,363,512
Paid-in capital ........................................................................ 50,400,518
Undistributed net investment income (Note 1) ........................................... 105,504
Accumulated net realized loss on investments (Note 4) .................................. (1,908,028)
Net unrealized depreciation of investments ............................................. (2,672,219)
============
NET ASSETS ............................................................................... $ 49,289,287
============
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest ....................................................................... $ 4,153,117
------------
EXPENSES:
Management and investment advisory (Note 2) .................................... $294,107
Transfer agent ................................................................. 53,456
Printing ....................................................................... 38,473
Legal and audit ................................................................ 36,806
Directors ...................................................................... 25,760
Custody (Note 2) ............................................................... 6,494
Miscellaneous .................................................................. 11,994
--------
Total expenses ............................................................... 467,090
Fees reduced by credits allowed by the custodian (Note 2) ...................... (6,422)
--------
Net expenses ................................................................. 460,668
--------
NET INVESTMENT INCOME ........................................................... 3,692,449
------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS (Note 3):
Net realized loss on investments during year ................................... (1,295,927)
Net change in unrealized appreciation/(depreciation) of investments during year (3,643,369)
------------
Net realized and unrealized loss on investments ................................ (4,939,296)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................ $ (1,246,847)
============
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Year
Ended Ended
12/31/99 12/31/98
--------------- ---------------
<S> <C> <C>
Net investment income ................................................... $ 3,692,449 $ 3,743,102
Net realized gain/(loss) on investments ................................. (1,295,927) 309,270
Net change in unrealized appreciation/(depreciation) of investments ..... (3,643,369) (243,047)
------------ ------------
Net increase/(decrease) in net assets resulting from operations ......... (1,246,847) 3,809,325
Dividends to shareholders from investment income ........................ (3,757,394) (3,716,696)
------------ ------------
Net increase/(decrease) in net assets ................................... (5,004,241) 92,629
NET ASSETS:
Beginning of year ....................................................... 54,293,528 54,200,899
------------ ------------
End of year ............................................................. $ 49,289,287 $ 54,293,528
============ ============
Undistributed net investment income at end of year ...................... $ 105,504 $ 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 year:
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value at beginning of year ..... $ 16.14 $ 16.11 $ 15.91 $ 16.79 $ 15.20
Net investment income ................... 1.10 1.11 1.18 1.23 1.35
Net realized and unrealized
gain/(loss) on investment
transactions .......................... (1.47) 0.03 0.16 (0.84) 1.61
-------- ------- -------- --------- -------
Total from investment operations ........ (0.37) 1.14 1.34 0.39 2.96
Less distributions
Dividends from net investment
income ................................ (1.12) (1.11) (1.14) (1.23) (1.34)
Dividends in excess of net
investment income ..................... -- -- --(a) (0.04) (0.03)
-------- -------- -------- --------- --------
Total distributions ..................... (1.12) (1.11) (1.14) (1.27) (1.37)
-------- -------- -------- --------- --------
Net asset value at end of year ........... $ 14.65 $ 16.14 $ 16.11 $ 15.91 $ 16.79
======== ======== ======== ========= ========
Per share market value, end of year ...... $ 11.875 $ 15.125 $ 14.875 $ 14.375 $ 16.125
Total Return:
Per share market value .................. (14.70) % 10.46 % 11.03 % (3.32) % 17.61 %
Ratios and Supplemental Data
Net assets, end of year (thousands) $ 49,289 $ 54,294 $ 54,201 $ 53,658 $ 56,109
Ratio of operating expenses to
average net assets .................... 0.90 % 0.91 % 0.94 % 0.89 % 0.86 %
Ratio of operating expenses to
average net assets without fees
reduced by credits allowed by
the custodian ......................... 0.91 % 0.92 % 0.95 % 0.90 % 0.89 %
Ratio of net investment income to
average net assets .................... 7.21 % 6.86 % 7.18 % 7.73 % 8.07 %
Portfolio turnover rate ................. 60.28 % 72.04 % 199.52 % 166.30 % 48.75 %
</TABLE>
- ----------
(a) Amount represents less than $0.01 per share.
See Notes to Financial Statements.
14
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
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:
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. The following is a summary of
the significant accounting policies followed by the Company in the
preparation of its financial statements.
Securities Valuation: The Company's securities which are traded on a
recognized exchange on NASDAQ are valued at the last sales price on the
exchange or market on which the security is primarily traded. Securities
traded only over-the-counter 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 mature in 60 days or less are valued at
amortized cost. Restricted securities and other assets may be valued by the
Company's investment adviser, Banc of America Advisors, Inc. ("BAAI"), under
the supervision 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 BAAI or the Company's
investment sub-adviser to be of investment quality comparable to securities
described under item (i); (v) commercial paper considered by BAAI or the
Company's investment sub-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. 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: It is the policy of the Company to
declare and pay distributions monthly from net investment income to
shareholders. Net realized capital gains (including net short-term capital
gains) are distributed at least annually. Income and capital gain
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing treatments of income and gains on various
investment securities held by the Company, timing differences and differing
characterization of distributions made by the Company. Permanent differences
for the year ended December 31, 1999, resulting from differences in book and
tax accounting for expiration of capital loss carry-forward and recognition
of market discount income, have been reclassified to reflect an increase to
undistributed net investment income of $42,827, a decrease to accumulated net
realized loss of $719,020 and a decrease to paid-in capital of $761,847.
Federal Income Tax: The Company intends to continue to qualify as a
regulated investmcnt company, if such qualification is in the best interest
of its shareholders, by complying with the applicable requirements of the
15
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Internal Revenue Code of 1986, as amended, and by distributing substantially
all of its taxable earnings to its shareholders. Therefore, no Federal income
or excise tax provision is applicable.
2. INVESTMENT ADVISORY FEE, SUB-ADVISORY FEE AND OTHER RELATED
PARTY TRANSACTIONS:
The Company has entered into an investment advisory agreement with BAAI, a
wholly-owned subsidiary of Bank of America, N.A. ("Bank of America"), which
in turn is a wholly-owned banking subsidiary of Bank of America Corporation,
a bank holding company organized as a Delaware corporation. Pursuant to the
investment advisory agreement, the Company pays BAAI 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 this fee for the year ended
December 31, 1999.
The Company and BAAI have entered into a sub-advisory agreement with
TradeStreet Investment Associates, Inc. ("TradeStreet"), a wholly-owned
subsidiary of Bank of America, pursuant to which TradeStreet is entitled to
receive a sub-advisory fee from BAAI 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 year ended December 31, 1999, expenses of the Company were reduced by
$6,422 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.
ChaseMellon Shareholder Services ("ChaseMellon") serves as the transfer agent
and dividend disbursing agent for the Company.
No officer, director or employee of Bank of America, BAAI, Tradestreet, BNY,
or ChaseMellon, or any affiliate thereof, receives any compensation from the
Company for serving as a Director or Officer.
3. SECURITIES TRANSACTIONS:
For the year ended December 31, 1999, the cost of purchases and proceeds from
sales of securities (excluding short term securities) are summarized as
follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------- --------------
<S> <C> <C>
Corporate Bonds .................................. $19,251,657 $18,469,467
U.S. Government and Agencies (Long-Term) ......... 10,344,399 12,888,683
Foreign Bonds .................................... 497,700 --
----------- -----------
Total ........................................ $30,093,756 $31,358,150
=========== ===========
</TABLE>
At December 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated is $2,672,219 of which $244,519 related to appreciated
securities and $2,916,738 related to depreciated securities. The aggregate
cost of investment securities owned for Federal income tax purposes was
$50,911,307.
16
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
4. CAPITAL LOSS CARRYFORWARD:
At December 31, 1999, approximately $1,908,028 was available to offset future
capital gains of which $47,580 expires in 2000, $476,575 expires in 2002,
$75,218 expires in 2005 and $1,308,655 expires in 2007. Management does not
plan to distribute to shareholders any future net realized gains on
investments until the capital loss carryforwards are used or expired.
5. SUBSEQUENT EVENT:
On January 18, 2000, TradeStreet changed its name to Banc of America
Capital Management, Inc. ("BACAP").
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Hatteras Income Securities, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Hatteras Income Securities, Inc.
(the "Fund") at December 31, 1999, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 16, 2000
18
<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
19
<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.
20
<PAGE>
HATTERAS INCOME SECURITIES, INC.
ANNUAL MEETING OF SHAREHOLDERS
ANNUAL MEETING OF SHAREHOLDERS
On April 30, 1999, the Company held its Annual Meeting of Shareholders.
William H. Grigg, Thomas F. Keller and A. Max Walker were elected as directors
of the Company by the following votes: 2,625,605 For, 0 Withheld. In the only
other matter voted upon at the Annual Meeting, the selection of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the fiscal year ending December 31, 1999, was ratified by the following votes:
2,618,247 For, 27,438 Withheld.
21
<PAGE>
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<PAGE>
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<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
WILLIAM H. GRIGG Charlotte, North Carolina 28255
Chairman Emeritus,
Duke Power Company INVESTMENT ADVISER
Banc of America Advisors, Inc.
THOMAS F. KELLER One Bank of America Plaza
Retired Dean, 101 S. Tryon Street
Fuqua School of Business, Charlotte, North Carolina 28255
Duke University
INVESTMENT SUB-ADVISER
FUND OFFICERS TradeStreet Investment Associates, Inc.
ROBERT H. GORDON One Bank of America Plaza
President 101 S. Tryon Street
Charlotte, North Carolina 28255
EDWARD D. BEDARD
Chief Financial Officer FUND COUNSEL
Morrison & Foerster LLP
ROBERT B. CARROLL 2000 Pennsylvania Avenue, N.W.
Secretary Suite 5500
Washington, D.C. 20006
GERALD MURPHY
Treasurer CUSTODIAN
The Bank of New York
ANDREW R. PETRUSKI 100 Church St. 15th Floor
Assistant Treasurer New York, NY 10286
TRACIE PERSINGER TRANSFER AGENT
Assistant Treasurer ChaseMellon Shareholder Services
450 West 33rd Street 15th Floor
MARK S. AHNRUD, CFA New York, NY 10001
Assistant Secretary and
Portfolio Manager INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
