Logo appears here
Semi-Annual Report
To Shareholders
June 30, 2000
<PAGE>
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NOT FDIC INSURED, MAY LOSE VALUE, NO BANK GUARANTEE
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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.
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<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, 2000
and to share our outlook for the near term.
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 2000 was one of the most volatile periods for fixed income
securities in recent history. The Federal Reserve Board (the "Fed") continued
to raise short-term interest rates citing continued strong economic growth,
tight labor markets and fear of inflation as their rationale. Counteracting the
increase in short-term rates, the U.S. Treasury announced its intention to
repurchase longer maturity U.S. Treasury issues with the proceeds from the
budget surplus. As a result of these actions, the Federal Funds Rate, which
began the year at 5.50%, increased 100 basis points (100 basis points equals
1%) to end the first half of the year at 6.50%, while the 30-year U.S. Treasury
bond yield, actually declined 58 basis points to yield 5.90%.
Volatility in the U.S. Treasury market dramatically increased the volatility of
spread sectors -- those sectors that offer yield advantages or "spreads" above
the yields of Treasuries -- in the credit markets. In the first half of the
year, almost all fixed income sectors underperformed comparable duration U.S.
Treasury securities whose performance was buoyed by the Treasury's intention to
repurchase outstanding U.S. Treasury debt with a focus on longer-term debt.
This caused the U.S. Treasury yield curve to invert (shorter maturity
securities yield more than longer maturity securities during an inversion) and
the 2-year U.S. Treasury note ended the first half of the year with a yield of
6.36%, 46 basis points higher than the 30-year U.S. Treasury bond.
The decrease in supply of U.S. Treasury issues, and the possibility of the
complete elimination of the U.S. Treasury market over the next 10 years, left
investors searching for a new "risk-free" benchmark. The U.S. government
sponsored entities (GSEs), Fannie Mae, Freddie Mac and the Federal Home Loan
Banks were the obvious choices until Congressman Richard Baker of Louisiana
introduced a bill to eliminate the implicit government guarantee of GSE debt.
This action caused prices on U.S. agency debt to decline and yield spreads to
widen significantly over 10-year U.S. Treasury notes.
The corporate markets were not much calmer. The combination of the inverted
yield curve, increased merger and acquisition activity and a series of issuer
specific credit events were more than the corporate market could handle.
Throughout the first five months of the year, investors demanded higher and
higher risk premiums to compensate for the possibility of a Fed-engineered
"hard landing." Spreads on investment grade corporate issuers, such as JC
Penney and Dillard department stores (Dillards, Inc.) exploded from 150 basis
points over U.S. Treasury securities to over 400 basis points over the Treasury
yield. In many cases, logic was no longer part of the investment decision.
The first quarter was a difficult one for the Company because of the
portfolio's high level of exposure to both high yield and investment grade debt
securities. These sectors underperformed comparable duration U.S. Treasury
securities by 4.75% and 1.86%, respectively. Spreads on corporate securities
widened to levels not seen since early 1991 when the U.S. was entering a
recession. Despite its underperformance, we held exposure to the corporate
market constant during the quarter. The second quarter rewarded this strategy.
While economic news for the majority of the first quarter pointed to continuing
strength in the U.S. economy, U.S. economic results in the second quarter
produced a collective sigh of relief. The 200 basis point increase in the
Federal Funds Rate finally started to weigh on the economy, and April and May
retail sales declined 0.6% and 0.3%, respectively. U.S. housing starts declined
4% and "core" consumer prices increased only 0.2% for the month of May. The Fed
left rates unchanged after its June 28th meeting and recent commentary by Alan
Greenspan has been surprisingly balanced. Further, Congressman Baker's proposal
was changed from an elimination of the implicit government guarantee to a
proposal to limit GSE investment activities. These seemingly minor changes
brought investors back to the credit markets and spreads on agency, corporate
and mortgage-backed securities tightened dramatically.
3
<PAGE>
While the change in sentiment did not erase the underperformance of the first
quarter, investment grade and high yield corporate securities did perform more
in line with comparable duration U.S. Treasury securities. Investment grade
corporate securities underperformed Treasury notes by only 0.59% while the
yield premium of high yield securities enabled them to outperform U.S. Treasury
notes by roughly 1.70%.
The net asset value of the Company's shares on June 30, 2000 was $14.36 per
share. The Company's total return for the six-month period was 1.76% based on
net asset value at the end of the period.* The improvement in the corporate
market helped the Company rank in the top half of the Lipper Closed-end
Investment Grade Bond Funds Universe** for the quarter. The Company ranks in
the top third of the universe year-to-date and for the two year period.
Market Outlook
Looking forward to the second half of 2000, we believe that economic growth
will continue to show signs of moderation and that the Company should benefit
from its exposure to both investment grade debt and high yield corporate bonds.
Spreads on corporate debt securities remain at levels that we have not seen
since the recession of 1991 and we believe they offer tremendous value. In
addition, many other sectors of the bond market offer good value as they are
trading at or near historically wide spreads over treasuries. Our strategy over
the second half will be to increase the diversification of the portfolio by
adding mortgage-backed securities. We believe we will be able to lower the risk
of the portfolio while maintaining an attractive yield. Despite recent
volatility, higher yielding sectors generally produce higher total returns than
U.S. Treasury securities over the long term and we are committed to our
strategy.
We thank you for your continued support.
Sincerely,
/s/ Signature of Robert H. Gordon
ROBERT H. GORDON
President
June 30, 2000
*The performance information quoted represents past performance, which is not
an indication of future results.
**The Lipper Closed-end Investment Grade Bond Funds Universe includes 15 funds.
Lipper Inc. is an independent monitor of closed-end fund performance.
4
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
<S> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 72.3%
BANKING AND FINANCE -- 10.9%
$500,000 CSC Holding Inc.,
8.125% 07/15/09 ........................... Ba2 BB+ $ 486,585
800,000 DLJ Commercial Mortgage Corporation,
7.300% 06/10/09 ........................... Aaa AAA 787,954
500,000 FCB/NB Capital Trust I, Gtd. Notes,
8.050% 03/01/28 ........................... Baa3 BB+ 413,080
500,000 First Union Corporation,
7.700% 02/15/05 ........................... A1 A 497,332
800,000 First Union-Chase Commerical Mortgage,
6.645% 04/15/09 ........................... Aaa AAA 757,234
800,000 Golden State Escrow Corporation,
7.000% 08/01/03 ........................... Ba1 BB+ 741,824
500,000 Lehman Brothers Inc.,
11.625% 05/15/05 .......................... Baa1 A 567,147
550,000 Newcourt Credit Group,
6.875% 02/16/05 ........................... A1 A+ 526,648
500,000 Popular Inc., MTN,
6.375% 09/15/03 ........................... A3 BBB+ 477,670
---------
Total Banking and Finance: 5,255,474
---------
CONTAINERS -- 1.5%
750,000 BWAY Corporation, Sr. Sub. Notes,
10.250% 04/15/07 .......................... B2 B 720,000
---------
ELECTRIC UTILITY -- 0.9%
500,000 Dominion Capital Trust I, Sr. Notes,
7.830% 12/01/27 ........................... Baa1 BBB+ 445,536
---------
ENERGY -- 7.4%
650,000 Barrett Resources Corporation, Sr. Notes,
7.550% 02/01/07 ........................... Ba1 BB+ 610,716
500,000 CMS Energy Corporation,
8.125% 05/15/02 ........................... Ba3 BB 489,189
500,000 K.N. Energy Inc.,
6.450% 03/01/03 ........................... Baa2 BBB- 484,780
700,000 Occidental Petroleum Corporation, Sr. Deb.,
10.125% 09/15/09 .......................... Baa3 BBB 784,648
800,000 PDV America Inc., Gtd. Sr. Notes,
7.875% 08/01/03 ........................... Baa3 B+ 756,568
500,000 Thermo Electron Corporation,
7.625% 10/30/08 ........................... Baa2 BBB+ 472,862
---------
Total Energy: 3,598,763
---------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
FINANCIAL/BROKERAGE -- 13.5%
<S> <C> <C> <C> <C>
$500,000 Bear Stearns Company, Inc.,
7.625% 12/07/09 ........................... A2 A $ 477,976
500,000 Case Credit Corporation,
6.150% 03/01/02 ........................... Baa2 BBB 488,875
525,000 Finova Capital Corporation,
7.250% 11/08/04 ........................... Baa2 BBB+ 462,455
500,000 Ford Motor Credit Company,
7.500% 03/15/05 ........................... A2 A 497,261
800,000 Heller Financial Commercial Mortgage,
7.750% 11/15/09 ........................... Aaa AAA 812,112
500,000 Household Finance Corporation,
8.000% 05/09/05 ........................... A2 A 503,958
550,000 Morgan Stanley Finance plc, Gtd. Sub. Deb.,
8.030% 02/28/17 ........................... A2 A- 552,647
600,000 Paine Webber Group,
6.375% 05/15/04 ........................... Baa1 BBB+ 566,398
800,000 Salomon Brothers Mortgage Securities,
Series 2000C-1,
7.520% 12/18/09 ........................... Aa3 A 799,522
500,000 Washington Mutual Inc.,
7.500% 08/15/06 ........................... A3 BBB+ 485,540
475,000 Williams Companies Inc.,
6.500% 08/01/06 ........................... Baa2 BBB- 447,282
500,000 Wilmington Trust,
6.625% 05/01/08 ........................... Baa2 A- 451,081
---------
Total Financial/Brokerage: 6,545,107
---------
GAS -- 1.6%
750,000 Louis Dreyfus Natural Gas Corporation,
Sr. Sub. Notes,
9.250% 06/15/04 ........................... Ba3 BB+ 757,430
---------
HEALTH CARE -- 2.2%
525,000 HEALTHSOUTH Corporation,
7.000% 06/15/08 ........................... Baa3 BBB 424,525
650,000 Tenet Healthcare Corporation,
7.875% 01/15/03 ........................... Ba1 BB+ 633,750
---------
Total Healthcare: 1,058,275
---------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
INDUSTRIAL -- 18.5%
<S> <C> <C> <C> <C>
$ 600,000 Allied Waste North America,
7.625% 01/01/06 ........................... Ba3 BB- $ 525,000
350,000 American Standard Inc.,
7.375% 04/15/05 ........................... Ba3 BB- 327,688
530,000 Beckman Instruments, Inc.,
7.450% 03/04/08 ........................... Ba1 BB+ 482,129
450,000 Comdisco Inc.,
6.130% 08/01/01 ........................... Baa1 BBB+ 439,549
500,000 Conoco Inc.,
5.900% 04/15/04 ........................... A3 A- 476,296
500,000 Delphi Auto Systems Corporation,
6.125% 05/01/04 ........................... Baa2 BBB 471,255
500,000 Electronic Data Systems,
6.850% 10/15/04 ........................... A1 A+ 493,170
500,000 Enterprise Rent A Car,
6.625% 02/15/05 ........................... Baa2 BBB+ 471,817
525,000 Equistar Chemicals LP,
8.500% 02/15/04 ........................... Baa3 BBB- 517,230
500,000 Fisher Scientific International, Sr. Notes,
7.125% 12/15/05 ........................... B1 B+ 460,147
600,000 Global Crossing Holdings, Ltd.,
9.125% 11/15/06 ........................... Ba2 BB 574,500
500,000 J. Seagram and Sons,
6.625% 12/15/05 ........................... Baa3 BBB- 478,020
500,000 LCI International Inc.,
7.250% 06/15/07 ........................... Ba1 BB+ 480,713
500,000 Raytheon Company,
6.750% 08/15/07 ........................... Baa2 BBB- 464,490
500,000 Safeway Inc.,
7.250% 09/15/04 ........................... Baa2 BBB 494,221
500,000 Tyco International Group,
6.875% 01/15/29 ........................... Baa1 A- 427,565
600,000 USA Waste Services, Inc.,
6.500% 12/15/02 ........................... Ba1 BBB 564,753
500,000 USX Corporation,
6.650% 02/01/06 ........................... Baa1 BBB 475,043
375,000 Westpoint Stevens Inc.,
7.875% 06/15/05 ........................... Ba3 BB 313,125
---------
Total Industrial: 8,936,711
---------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
INSURANCE -- 1.5%
<S> <C> <C> <C> <C>
$ 600,000 Conseco Inc., Sr. Notes,
8.796% 04/01/27 .................. Ba2 BBB- $ 252,000
525,000 Jefferson-Pilot Capital Trust,
8.285% 03/01/46 .................. A1 A+ 472,170
---------
Total Insurance: 724,170
---------
MEDIA AND CABLE -- 5.6%
750,000 Primedia Inc.,
7.625% 04/01/08 .................. Ba3 BB- 667,500
1,000,000 Rogers Cablesystems Limited, Deb.,
10.000% 12/01/07 ................. Ba3 BB+ 1,022,500
500,000 Time Warner Incorporated,
8.110% 08/15/06 .................. Baa3 BBB 510,625
500,000 Viacom Inc.,
8.250% 08/01/22 .................. Baa3 BBB- 483,304
---------
Total Media and Cable: 2,683,929
---------
PAPER & FOREST PRODUCTS -- 1.4%
800,000 Georgia-Pacific Corporation,
7.250% 06/01/28 .................. Baa2 BBB- 686,395
---------
TELECOMMUNICATIONS -- 4.6%
500,000 AT&T Canada, Incorporated,
7.650% 09/15/06 .................. Baa3 BBB 495,107
500,000 British Sky Broadcasting,
6.875% 02/23/09 .................. Baa2 BBB- 431,518
500,000 Lenfest Communications,
10.500% 06/15/06 ................. B2 BB- 558,027
250,000 Paramount Communications,
7.500% 07/15/23 .................. Baa3 BBB- 221,393
500,000 Vodafone Airtouch,
7.750% 02/15/10 .................. A2 A- 495,725
---------
Total Telecommunications: 2,201,770
---------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Principal Moody's S&P Market
Amount Rating Rating Value
TRANSPORTATION -- 2.7%
<S> <C> <C> <C> <C>
$ 750,000 Federal Express Corporation, Notes,
9.650% 06/15/12 .................... Baa2 BBB $ 821,800
500,000 Union Tank Car, MTN,
6.680% 01/15/08 .................... A2 A 479,305
----------
Total Transportation: 1,301,105
----------
Total Corporate Bonds and Notes:
(Cost $36,547,103).................. 34,914,665
==========
FOREIGN BONDS AND NOTES -- 1.9%
500,000 Corp. Andina de Fomento,
8.875% 06/01/05 .................... A2 BBB+ 516,720
500,000 United Mexican States,
6.250% 12/31/19 .................... Ba2 BB 417,500
----------
Total Foreign Bonds and Notes:
(Cost $858,355)..................... 934,220
==========
MORTGAGE-BACKED SECURITIES -- 12.0%
COMMERCIAL MORTGAGE-BACKED
SECURITIES -- 3.3%
800,000 PNC Mortgage Acceptance Corporation,
Series 1999-CM1, Class A1B,
7.330% 10/10/09 .................... 791,214
790,000 PNC Mortgage Acceptance Corporation,
Series 2000-C1, Class A2,
7.610% 02/15/10 .................... 790,032
----------
Total: 1,581,246
----------
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC)
CERTIFICATES -- 2.4%
1,150,000 5.500% 05/15/02 .................... 1,122,002
36,790 9.250% 08/01/08 .................... 37,648
----------
Total: 1,159,650
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA)
CERTIFICATES -- 4.1%
635,000 5.250% 01/15/09... ................. 557,242
870,000 6.250% 05/15/29... ................. 778,917
93,744 7.000% 04/01/27 .................... 90,500
206,463 7.000% 05/01/28 .................... 199,318
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount Value
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA)
CERTIFICATES (Continued) -- 4.1%
<S> <C> <C>
$ 125,448 8.000% 01/01/28 ................... $ 126,007
55,541 9.000% 05/01/27 ................... 57,190
182,276 9.250% 09/01/10 ................... 188,482
---------
Total: 1,997,656
---------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA)
CERTIFICATES -- 2.2%
643,648 8.000% 09/15/24 ................... 650,855
49,118 9.000% 04/15/09 ................... 50,744
103,594 9.000% 09/15/16 ................... 107,024
80,018 9.000% 12/15/16 ................... 82,667
108,330 9.000% 12/15/16 ................... 111,917
61,526 9.500% 07/15/09 ................... 63,948
---------
Total: 1,067,155
---------
Total Mortgage-Backed Securities:
(Cost $5,727,722)............. 5,805,707
=========
U.S. TREASURY OBLIGATIONS -- 8.7%
U.S. Treasury Bonds:
1,825,000 8.125% 05/15/21 ................... 2,221,938
U.S. Treasury Notes:
1,500,000 5.750% 10/31/02 ................... 1,477,970
U.S. Treasury Strips:
455,000 Principal Only, 05/15/20 .......... 133,201
985,000 Principal Only, 11/15/21 .......... 266,097
415,000 Principal Only, 02/15/27 .......... 84,704
---------
Total U.S. Treasury Obligations:
(Cost $4,239,765)............. 4,183,910
=========
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
HATTERAS INCOME SECURITIES, INC.
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Market
Value
<S> <C> <C>
TOTAL INVESTMENTS
(Cost $47,372,945*).......................... 94.9% $45,838,502
OTHER ASSETS AND LIABILITIES (Net) .......... 5.1% 2,447,678
----- ---------
NET ASSETS .................................. 100.0% $48,286,180
===== ===========
</TABLE>
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* Aggregate cost for Federal tax purposes. (Note 3)
ABBREVIATIONS:
MTN Medium Term Note
See Notes to Financial Statements.
11
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (Note 1) ......................................... $ 45,838,502
Cash ................................................................................ 1,800,013
Other receivables ................................................................... 723,003
------------
Total assets ....................................................................... 48,361,518
------------
LIABILITIES:
Accrued legal and audit fees ........................................................ 24,358
Management and advisory fees payable (Note 2) ....................................... 23,481
Transfer agent fees payable ......................................................... 5,431
Accrued expenses .................................................................... 22,068
------------
Total Liabilities .................................................................. 75,338
------------
NET ASSETS (equivalent to $14.36 per share based on 3,363,512 shares of capital stock
outstanding) ........................................................................ $ 48,286,180
============
Investments, at cost .................................................................. $ 47,372,945
============
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) ........................................ 31,410
Accumulated net realized loss on investments (Note 4) ............................... (3,974,817)
Net unrealized depreciation of investments .......................................... (1,534,443)
------------
NET ASSETS ............................................................................ $ 48,286,180
============
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
For the six months ended June 30, 2000 (unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest ............................................................... $ 1,957,344
------------
EXPENSES:
Management and investment advisory (Note 2) ............................ $ 136,886
Legal and audit ........................................................ 21,308
Transfer agent ......................................................... 20,800
Directors .............................................................. 12,642
Printing ............................................................... 11,462
Custody (Note 2) ....................................................... 11,292
Miscellaneous .......................................................... 11,824
---------
Total expenses ........................................................ 226,214
Fees reduced by credits allowed by the custodian (Note 2) .............. (11,084)
---------
Net expenses .......................................................... 215,130
---------
NET INVESTMENT INCOME .................................................... 1,742,214
------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS (Note 3):
Net realized loss on investments during period ........................... (2,066,789)
Net change in unrealized appreciation/(depreciation) of investments during
period ................................................................. 1,137,776
------------
Net realized and unrealized loss on investments .......................... (929,013)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..................... $ 813,201
============
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
HATTERAS INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six months ended Year
06/30/00 ended
(unaudited) 12/31/99
------------------ ---------------
<S> <C> <C>
Net investment income ................................................... $ 1,742,214 $ 3,692,449
Net realized loss on investments ........................................ (2,066,789) (1,295,927)
Net change in unrealized appreciation/(depreciation) of investments ..... 1,137,776 (3,643,369)
------------ ------------
Net increase/(decrease) in net assets resulting from operations ......... 813,201 (1,246,847)
Distributions to shareholders from net investment income ................ (1,816,308) (3,757,394)
------------ ------------
Net decrease in net assets .............................................. (1,003,107) (5,004,241)
NET ASSETS:
Beginning of period ..................................................... 49,289,287 54,293,528
------------ ------------
End of period ........................................................... $ 48,286,180 $ 49,289,287
============ ============
Undistributed net investment income at end of period .................... $ 31,410 $ 105,504
============ ============
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
HATTERAS INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
Year Year Year Year Year
Six months ended Ended Ended Ended Ended Ended
June 30, 2000 December 31, December 31, December 31, December 31, December 31,
(unaudited) 1999 1998 1997 1996 1995
------------------ -------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net asset value at beginning
of period ..................... $ 14.65 $ 16.14 $ 16.11 $ 15.91 $ 16.79 $ 15.20
Net investment income ......... 0.52 1.10 1.11 1.18 1.23 1.35
Net realized and
unrealized gain/(loss)
on investment
transactions ................. (0.27) (1.47) 0.03 0.16 (0.84) 1.61
--------- -------- ------- -------- --------- -------
Total from investment
operations ................... 0.25 (0.37) 1.14 1.34 0.39 2.96
Less distributions
Dividends from net
investment income ............ (0.54) (1.12) (1.11) (1.14) (1.23) (1.34)
Dividends in excess of net
investment income ............ -- -- -- -- (a) (0.04) (0.03)
--------- -------- -------- -------- --------- --------
Total distributions ........... (0.54) (1.12) (1.11) (1.14) (1.27) (1.37)
--------- -------- -------- -------- --------- --------
Net asset value at end of
period ........................ $ 14.36 $ 14.65 $ 16.14 $ 16.11 $ 15.91 $ 16.79
========= ======== ======== ======== ========= ========
Per share market value, end
of period ..................... $ 12.688 $ 11.875 $ 15.125 $ 14.875 $ 14.375 $ 16.125
Total Return:
Per share market value ........ 11.64% (14.70)% 10.46% 11.03% (3.32)% 17.61%
Ratios and Supplemental
Data
Net assets, end of period
(thousands) .................. $ 48,286 $ 49,289 $ 54,294 $ 54,201 $ 53,658 $ 56,109
Ratio of operating
expenses to average net
assets ....................... 0.89%+ 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 .................... 0.93%+ 0.91% 0.92% 0.95% 0.90% 0.89%
Ratio of net investment
income to average net
assets ....................... 7.24%+ 7.21% 6.86% 7.18% 7.73% 8.07%
Portfolio turnover rate ....... 79.78% 60.28% 72.04% 199.52% 166.30% 48.75%
</TABLE>
----------
(a) Amount represents less than $0.01 per share.
+ Annualized.
See Notes to Financial Statements.
15
<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
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain
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: Securities which are traded on a recognized exchange
or on NASDAQ are valued at the last sale price on the exchange or market on
which such securities are primarily traded. Securities traded only
over-the-counter are valued at the last sale price, or if no sale occurred
on such day, at the mean of the current bid and asked prices. Certain
securities may be valued using broker quotations or on the basis of prices
provided by pricing services. Restricted securities, securities for which
market quotations are not readily available, and certain other assets may
be valued under procedures adopted by the Company's Board of Directors.
Short-term investments that mature in 60 days or less are valued at
amortized cost, which approximates current value.
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 Banc of America Advisors, Inc. ("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. 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.
Federal Income Tax: The Company intends to continue to qualify as a
regulated investmcnt company by complying with the applicable requirements
of the 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.
16
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- (Continued)
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 the fee for the six months ended June 30, 2000.
The Company and BAAI have entered into a sub-advisory agreement with Banc
of America Capital Management, Inc. ("BACAP") (formerly known as
TradeStreet Investment Associates, Inc.), a wholly-owned subsidiary of Bank
of America, pursuant to which BACAP is entitled to receive a sub-advisory
fee from BAAI at 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, 2000, expenses of the Company
were reduced by $11,084 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 or BACAP, or any
affiliate thereof, receives any compensation from the Company for serving
as a Director or Officer.
3. SECURITIES TRANSACTIONS
For the six months ended June 30, 2000, 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 ................................... $22,415,000 $12,925,000
U.S. Government and Agencies (Long-Term) .......... 16,955,000 24,045,000
Foreign Bonds ..................................... 500,000 500,000
----------- -----------
Total ............................................. $39,870,000 $37,470,000
=========== ===========
</TABLE>
At June 30, 2000, net unrealized depreciation for Federal income tax
purposes aggregated is $1,534,443 of which $378,121 related to appreciated
securities and $1,912,564 related to depreciated securities. The aggregate
cost of investment securities owned for Federal income tax purposes was
$47,372,945.
17
<PAGE>
HATTERAS INCOME SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- (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.
18
<PAGE>
HATTERAS INCOME SECURITIES, INC.
DIVIDEND REINVESTMENT PLAN
Dividend Reinvestment Plan
The Company's Dividend Reinvestment Plan (the "Plan") offers shareholders
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 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, 1.800.851.9677.
20
<PAGE>
BOARD OF DIRECTORS
A. MAX WALKER, Chairman
Financial Consultant
WILLIAM H. GRIGG
Chairman Emeritus,
Duke Power Company
THOMAS F. KELLER
Retired Dean,
Fuqua School of Business,
Duke University
FUND OFFICERS
ROBERT H. GORDON
President
EDWARD D. BEDARD
Chief Financial Officer
ROBERT B. CARROLL
Secretary
GERALD MURPHY
Treasurer
TRACIE PERSINGER
Assistant Treasurer
ANDREW STENWALL, CFA
Portfolio Manager
OFFICE OF THE COMPANY
Hatteras Income Securities, Inc.
One Bank of America Plaza -- NC1-002-33-31
101 S. Tryon Street
Charlotte, North Carolina 28255
INVESTMENT ADVISER
Banc of America Advisors, Inc.
One Bank of America Plaza
101 S. Tryon Street
Charlotte, North Carolina 28255
INVESTMENT SUB-ADVISER
Banc of America Capital Management, Inc.
One Bank of America Plaza
101 S. Tryon Street
Charlotte, North Carolina 28255
FUND COUNSEL
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W.
Suite 5500
Washington, D.C. 20006
CUSTODIAN
The Bank of New York
100 Church St. 15th Floor
New York, NY 10286
TRANSFER AGENT
ChaseMellon Shareholder Services
450 West 33rd Street 15th Floor
New York, NY 10001
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
