<PAGE> 1
INTERCAPITAL INCOME SECURITIES INC. Two World Trade Center,
LETTER TO THE SHAREHOLDERS September 30, 1996 New York, New York 10048
DEAR SHAREHOLDER:
The fiscal year ended September 30, 1996, was volatile for the fixed-income
markets. Through the end of 1995 and into early 1996, interest rates moved
dramatically lower as the economy appeared to weaken and inflation remained
benign. A 25 basis point reduction in the federal-funds rate in December and
January, along with high expectations for a balanced budget, also contributed to
the decline. However, beginning in mid-February, economic reports, most notably
those regarding labor, showed signs of renewed strength. This prompted the
market to discount any further easing of interest rates by the Federal Reserve
Board and, at times, to predict and to factor in a tighter monetary policy. As a
result, the fixed-income rally, which in just over four months drove interest
rates on thirty-year Treasuries down one-half of one percentage point and
interest rates on two-year Treasuries down one percentage point, came to an end.
Yields began to rise and retrace their previous descent, at times reaching 7
percent on ten-year Treasuries and 7.15 percent on thirty-year Treasuries.
Ultimately, however, in September, when the Federal Reserve did not take action,
some of the upward pressure on interest rates abated. The month ended with
Treasury yields 25 to 50 basis points higher than they had been twelve months
earlier. On September 30, 1996, two-year Treasuries yielded 6.09 percent,
ten-year Treasuries 6.70 percent and thirty-year Treasuries 6.92 percent.
Beginning in June 1996, various monthly economic reports portrayed alternating
pictures of an economy that was overheating and one in which consumer demand was
weakening. The market's nervousness about the Federal Reserve's response to this
uncertain environment caused interest rates to swing by as much as 40 basis
points from month to month. However, despite this volatility, interest rates
were virtually unchanged on September 30, 1996 from where they had been on June
30.
<PAGE> 2
INTERCAPITAL INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS September 30, 1996, continued
PERFORMANCE AND PORTFOLIO
For the twelve-month period ended September 30, 1996, InterCapital Income
Securities Inc. provided a total return of 5.27 percent, based on its net asset
value of $17.42 per share. Based on its closing market price of $15.875 per
share on the New York Stock Exchange, the Fund's total return for the fiscal
year was 6.39 percent. During the same period, the Lehman Brothers Government
Corporate Bond Index returned 4.50 percent. U.S. Government securities, as
represented by the Lehman Brothers Government Bond Index, returned 4.42 percent,
while corporate bonds, as measured by the Lehman Brothers Corporate Bond Index,
returned 4.75 percent. The Fund distributed income dividends totaling $1.38 per
share during the twelve-month period.
The extreme rise in interest rates in the beginning of the calendar year
hindered the Fund's performance. However, the impact of this broader economic
development was offset by the Fund's heavy weighting in corporate bonds (nearly
95% of the portfolio on September 30, 1996), which generally outperformed
Treasuries during the period. In addition, several of the Fund's corporate
holdings provided superior returns, and a number were upgraded by Standard &
Poor's or Moody's, including Phillips Petroleum Co. and Columbia/HCA HealthCare
Corp. Prices for other issues also rose dramatically in response to announced
sales or mergers with equal or stronger partners, including Cleveland Electric
Illuminating Co. and Diamond Shamrock Corp. The debt of another issuer, Weirton
Steel Corp., was tendered at a price substantially above its year-end market
valuation. The Fund's emphasis on BBB-rated corporate bonds and their
high-income stream has served the portfolio well throughout the volatile
interest rate environment of the past several months. Holding corporate bonds
with longer final maturities has especially benefitted the Fund, as corporate
spreads over Treasuries have narrowed in recent months, due to a limited supply
of new corporate debt securities and the improved credit ratings of many
corporate issuers.
During the first six months of the period under review, 15 percent of the
portfolio's positions, generating nearly $32 million in proceeds, were called.
However, in the following six months call activity declined to only $8.6
million, with high-coupon maturities generating just $4 million for
reinvestment. On September 30, 1996, slightly more than 12 percent of the Fund's
investable assets was scheduled to come due over the following twelve months,
and just less than 57 percent had maturities of more than ten years.
<PAGE> 3
INTERCAPITAL INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS September 30, 1996, continued
PORTFOLIO STRUCTURE AND STRATEGY
Throughout the period under review, the Fund focused on creating a portfolio
structured to provide a steady stream of high income. After several years of
reducing the monthly dividend, due to a heavy loss of income resulting from
called and maturing high-coupon securities, we restructured the portfolio to
stabilize the $0.11 per share monthly dividend that we initiated in April.
However, the Fund's dividend is not fixed and is subject to change. We reduced
the Fund's Treasury holdings in favor of investment-grade corporate bonds with
attractive yields and call protection of at least five years. In many cases,
yields on new purchases were well in excess of 8 percent. Among the new
positions added to the portfolio were News America Holdings, Inc., Time Warner
Entertainment Co., May Department Stores Co., General Motors Corp., Columbia Gas
System, Inc. and Lyondell Petrochemical. The greatest percentage increase in
asset allocation was to industrials, and we began to favor electric and gas
utilities over telephone holdings. In addition, we emphasized issues with final
maturities of at least twenty years selling below their earliest call prices,
due to their high absolute yields.
On September 30, 1996, the Fund's net assets exceeded $210 million. Corporate
bonds comprised 94 percent of the portfolio, U.S. government bonds represented 5
percent and the remaining 1 percent was invested in money markets. At the end of
the period under review, the Fund's average maturity was 23.30 years and the
average duration was 7.76 years. (Duration measures a bond fund's sensitivity to
interest-rate moves. A fund's duration, when multiplied by the percentage-point
rise or fall in interest rates, provides a rough estimate of the probable
resulting percentage change to a fund's principal.) The portfolio was
diversified among 57 issues with an average coupon of 8.84 percent and an
average rating of BBB.
LOOKING AHEAD
Although the economy is no longer growing at the robust (nearly 5 percent) pace
of the second quarter of 1996, signs of continued strength remain, including a
strong labor market with accompanying wage increases (most notably in the
service sector), relatively high auto sales, a firm housing market, steady oil
prices around $25 a barrel and prices that are beginning to strengthen at the
producer level. Given this environment, we cannot rule out the prospect of
rising inflation, if only at moderate levels, sometime over the next six months.
The probability that the Federal Reserve may tighten policy in response to such
a scenario is no longer reflected in current interest-rate levels. Accordingly,
it is likely that we may position the Fund somewhat more defensively.
<PAGE> 4
INTERCAPITAL INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS September 30, 1996, continued
We would like to remind you that the directors have approved a procedure whereby
the Fund, when appropriate, may repurchase shares in the open market or in
privately negotiated transactions at a price not above market value or net asset
value, whichever is lower at the time of purchase. In accordance with this
procedure, 106,700 shares of the Fund were purchased on the New York Stock
Exchange over the twelve-month period ended September 30, 1996.
We appreciate your support of InterCapital Income Securities Inc. and look
forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 5
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (91.3%)
Airlines (2.6%)
$ 5,000 Delta Air Lines, Inc. .................................................. 9.30 % 01/02/10 $ 5,479,450
----------
Automobiles (2.4%)
5,000 General Motors Corp. ................................................... 8.10 06/15/24 5,003,350
----------
Automotive - Finance (0.5%)
1,000 Ford Capital BV (Netherlands)........................................... 9.50 07/01/01 1,099,980
----------
Banks (3.4%)
6,000 Continental Bank N.A. .................................................. 12.50 04/01/01 7,278,060
----------
Brokerage (1.8%)
2,000 Morgan Stanley Group, Inc. ............................................. 7.50 02/01/24 1,865,960
2,000 Paine Webber Group, Inc. ............................................... 7.625 02/15/14 1,890,320
----------
3,756,280
----------
Cable & Telecommunications (7.8%)
6,000 News America Holdings, Inc. ............................................ 7.70 10/30/25 5,606,460
5,100 Tele-Communications, Inc. .............................................. 9.25 01/15/23 4,941,798
6,000 Time Warner Entertainment Co. .......................................... 8.375 07/15/33 5,802,240
----------
16,350,498
----------
Canadian Government (3.2%)
7,000 Quebec (Province of).................................................... 7.50 07/15/23 6,709,780
----------
Computer Equipment (0.5%)
1,000 Unisys Corp. ........................................................... 15.00 07/01/97 1,052,500
----------
Defense (2.6%)
5,000 Northrop Grumman Corp. ................................................. 9.375 10/15/24 5,480,550
----------
Financial (1.4%)
3,000 Conseco, Inc. .......................................................... 8.125 02/15/03 3,080,190
----------
Food Processing (1.4%)
3,000 Borden, Inc............................................................. 9.20 03/15/21 2,894,970
----------
Gas Transmission (4.0%)
5,000 Columbia Gas System, Inc. .............................................. 7.62 11/28/25 4,709,950
1,000 Panhandle Eastern Corp. ................................................ 8.625 04/15/25 1,038,400
3,100 Tennessee Gas Pipeline Co. ............................................. 6.00 12/15/11 2,704,378
----------
8,452,728
----------
Health & Personal Care (1.5%)
3,500 Columbia/HCA Healthcare Corp. .......................................... 7.05 12/01/27 3,242,890
----------
Leisure Time/Equipment (1.3%)
3,000 Brunswick Corp. ........................................................ 7.375 09/01/23 2,830,830
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Manufacturing (1.6%)
$ 3,400 Westinghouse Electric Corp. ............................................ 8.625% 08/01/12 $ 3,281,136
----------
Metals & Mining (4.9%)
4,000 Cyprus Amax Minerals Co. ............................................... 8.375 02/01/23 3,958,560
6,000 Inco, Ltd. (Canada)..................................................... 9.60 06/15/22 6,374,460
----------
10,333,020
----------
Oil & Gas Products (2.2%)
5,000 Lyondell Petrochemical Co. ............................................. 7.55 02/15/26 4,691,700
----------
Oil Refineries (1.6%)
3,500 Diamond Shamrock Corp. ................................................. 8.00 04/01/23 3,344,320
----------
Oil Related (6.1%)
2,500 Citgo Petroleum Corp. .................................................. 7.875 05/15/06 2,506,825
5,200 Lasmo (USA), Inc. ...................................................... 8.375 06/01/23 5,206,188
5,000 Phillips Petroleum Co. ................................................. 8.49 01/01/23 5,118,200
----------
12,831,213
----------
Paper & Forest Products (4.2%)
2,500 Champion International Corp. ........................................... 7.35 11/01/25 2,308,975
6,000 Georgia Pacific Co. .................................................... 9.625 03/15/22 6,500,640
----------
8,809,615
----------
Retail (5.0%)
2,800 Dayton Hudson Corp. .................................................... 8.50 12/01/22 2,852,276
2,350 Kmart Corp. ............................................................ 13.50 01/01/09 2,444,000
2,500 Kmart Corp. ............................................................ 9.35 01/02/20 2,112,500
3,000 May Department Stores Co. .............................................. 8.30 07/15/26 3,059,010
----------
10,467,786
----------
Steel (0.3%)
590 Weirton Steel Corp. .................................................... 10.875 10/15/99 615,075
----------
Telecommunications (3.5%)
7,000 AT&T Corp. ............................................................. 8.625 12/01/31 7,363,510
----------
Telephones (1.0%)
2,000 Pacific Bell............................................................ 8.50 08/15/31 2,039,940
----------
Tobacco (1.4%)
2,975 RJR Nabisco, Inc. ...................................................... 8.75 08/15/05 2,901,101
----------
Transportation (2.3%)
4,975 Union Pacific Corp. .................................................... 7.875 02/01/23 4,815,253
----------
Utilities - Electric (21.8%)
1,000 Cleveland Electric Illuminating Co. (Series B).......................... 9.50 05/15/05 1,031,310
4,000 Cleveland Electric Illuminating Co. (Series E).......................... 9.00 07/01/23 3,835,080
4,325 Commonwealth Edison Co. ................................................ 8.875 10/01/21 4,378,587
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,000 CTC Mansfield Funding Corp. ............................................ 11.125% 09/30/16 $ 2,115,000
3,500 Long Island Lighting Co. ............................................... 9.75 05/01/21 3,473,750
3,500 Long Island Lighting Co. ............................................... 9.625 07/01/24 3,473,750
2,000 Louisiana Power & Light Co. ............................................ 8.75 03/01/26 2,003,520
2,000 Louisiana Power & Light Co. (Series A).................................. 10.67 01/02/17 2,142,680
1,000 Louisiana Power & Light Co. (Series C).................................. 10.67 01/02/17 1,072,330
2,000 Niagara Mohawk Power Corp. ............................................. 9.50 03/01/21 1,931,480
4,000 Niagara Mohawk Power Corp. ............................................. 8.75 04/01/22 3,688,120
3,500 San Diego Gas & Electric Co. ........................................... 9.625 04/15/20 3,848,635
3,000 Southern California Edison Co. ......................................... 8.875 06/01/24 3,127,710
5,250 Texas Utilities Electric Co. ........................................... 8.75 11/01/23 5,443,410
4,300 United Illuminating Co. ................................................ 10.24 01/02/20 4,386,000
----------
45,951,362
----------
Utilities - Gas (1.0%)
2,000 Southern California Gas Co. ............................................ 8.75 10/01/21 2,102,526
----------
TOTAL CORPORATE BONDS
(Identified Cost $192,699,436)................................................................. 192,259,613
----------
U.S. GOVERNMENT OBLIGATIONS (4.9%)
3,600 U.S. Treasury Bond...................................................... 7.25 05/15/16 3,678,048
4,500 U.S. Treasury Note...................................................... 8.50 05/15/97 4,578,930
2,000 U.S. Treasury Note...................................................... 7.875 01/15/98 2,047,460
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Identified Cost $10,545,140).................................................................. 10,304,438
----------
SHORT-TERM INVESTMENT (0.9%)
REPURCHASE AGREEMENT
1,883 The Bank of New York (dated 09/30/96; proceeds $1,883,445;
collateralized by $1,596,679 U.S. Treasury Bond 8.75% due 11/15/08
valued at $1,821,461 and $68,736 U.S. Treasury Bond 12.75% due 11/15/10
valued at $99,386) (Identified Cost $1,883,183)........................ 5.00 10/01/96 1,883,183
----------
TOTAL INVESTMENTS
(Identified Cost $205,127,759) (a)..................................................... 97.1% 204,447,234
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................................... 2.9 6,227,804
---- ----------
NET ASSETS............................................................................. 100.0% $210,675,038
==== ==========
</TABLE>
- ---------------------
* Non-income producing security.
(a) The aggregate cost for federal income tax purposes is $205,389,682. The
aggregate gross unrealized appreciation is $4,577,802 and the aggregate
gross unrealized depreciation is $5,520,250, resulting in net unrealized
depreciation of $942,448.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
ASSETS:
Investments in securities, at value
(identified cost $205,127,759)....................................... $204,447,234
Cash.................................................................. 220
Receivable for:
Investments sold.................................................. 12,325,099
Interest.......................................................... 5,069,092
Prepaid expenses and other assets..................................... 11,806
----------
TOTAL ASSETS...................................................... 221,853,451
----------
LIABILITIES:
Payable for:
Investments purchased............................................. 10,948,145
Investment management fee......................................... 88,268
Accrued expenses and other payables................................... 142,000
----------
TOTAL LIABILITIES................................................. 11,178,413
----------
NET ASSETS:
Paid-in-capital....................................................... 237,915,309
Net unrealized depreciation........................................... (680,525)
Distribution in excess of net investment income....................... (49,008)
Accumulated net realized loss......................................... (26,510,738)
----------
NET ASSETS........................................................ $210,675,038
==========
NET ASSET VALUE PER SHARE
12,093,818 shares outstanding
(unlimited shares authorized of $.01 par value)...................... $17.42
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended September 30, 1996
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $18,553,904
---------
EXPENSES
Investment management fee.............................................. 1,075,055
Transfer agent fees and expenses....................................... 162,032
Professional fees...................................................... 43,164
Shareholder reports and notices........................................ 34,564
Custodian fees......................................................... 28,200
Registration fees...................................................... 18,546
Directors' fees and expenses........................................... 13,850
Other.................................................................. 10,122
---------
TOTAL EXPENSES..................................................... 1,385,533
---------
NET INVESTMENT INCOME.............................................. 17,168,371
---------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain...................................................... 196,014
Net change in unrealized depreciation.................................. (8,121,879)
---------
NET LOSS........................................................... (7,925,865)
---------
NET INCREASE........................................................... $ 9,242,506
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................ $ 17,168,371 $ 18,478,545
Net realized gain (loss)......................... 196,014 (7,028,971)
Net change in unrealized
appreciation/depreciation....................... (8,121,879) 20,218,112
------------ ------------
NET INCREASE................................. 9,242,506 31,667,686
------------ ------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income............................ (13,912,704) (18,124,479)
Paid-in-capital.................................. (2,886,612) (176,298)
------------ ------------
TOTAL........................................ (16,799,316) (18,300,777)
------------ ------------
Net decrease from capital stock transactions..... (1,660,563) --
------------ ------------
TOTAL INCREASE (DECREASE).................... (9,217,373) 13,366,909
NET ASSETS:
Beginning of period.............................. 219,892,411 206,525,502
------------ ------------
END OF PERIOD
(Including distributions in excess of net
investment income of $49,008 and $50,978,
respectively)................................ $210,675,038 $219,892,411
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
InterCapital Income Securities Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's primary investment objective is to
provide as high a level of current income as is consistent with prudent
investment and, as a secondary objective, capital appreciation. The Fund
commenced operations on April 6, 1973.
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. Actual results could differ from
those estimates. The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York or American Stock Exchange is valued at its latest sale price on that
exchange prior to the time when assets are valued; if there were no sales that
day, the security is valued at the latest bid price (in cases where a security
is traded on more than one exchange, the security is valued on the exchange
designated as the primary market by the Directors); (2) all other portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest available bid price prior to the time of valuation; (3)
when market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager that sale and bid prices are
not reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Directors; (4) certain portfolio securities
may be valued by an outside pricing service approved by the Directors. The
pricing service utilizes a matrix system incorporating security quality,
maturity and coupon as the evaluation model parameters, and/or research and
evaluations by its staff, including review of broker-dealer market price
quotations, if available, in determining what it believes is the fair valuation
of the portfolio securities valued by such pricing service; and (5) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Dividend
income is recognized on the ex-dividend date. Interest income is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to shareholders.
Accordingly, no federal income tax provision is required.
<PAGE> 12
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1996, continued
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Dean Witter InterCapital
Inc. (the "Investment Manager"), the Fund pays the Investment Manager a
management fee, accrued weekly and payable monthly, by applying the annual rate
of 0.50% to the Fund's weekly average net assets.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended September 30, 1996 aggregated
$189,861,127 and $192,879,246, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $46,347,220 and
$58,774,273, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the Fund's
transfer agent. At September 30, 1996, the Fund had transfer agent fees and
expenses payable of approximately $16,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Directors of the Fund who will have served as independent
Directors/Trustees for at least five years at the time of retirement. Benefits
under this plan are based on years of service and compensation during the last
five years of service. Aggregate pension costs for the year ended September 30,
1996 included in Directors' fees and expenses in the Statement of Operations
amounted to $708. At September 30, 1996, the Fund had an accrued pension
liability of $49,007 which is included in accrued expenses in the Statement of
Assets and Liabilities.
<PAGE> 13
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1996, continued
4. CAPITAL STOCK
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, September 30, 1994.............................................. 12,200,518 $ 122,003 $242,163,879
Reclassification due to permanent book/tax differences................... -- -- 352,900
Distribution from paid-in-capital........................................ -- -- (176,298)
---------- -------- ------------
Balance, September 30, 1995.............................................. 12,200,518 122,003 242,340,481
Treasury shares purchased and retired (weighted average discount
9.96%)*................................................................ (106,700) (1,067) (1,659,496)
---------- -------- ------------
Balance, September 30, 1996.............................................. 12,093,818 $ 120,936 $240,680,985
========== ======== ============
</TABLE>
- ---------------------
* The Directors have voted to retire the shares purchased.
5. DIVIDENDS
On September 24, 1996, the Fund declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- ---------- ----------------- ------------------
<S> <C> <C>
$0.11 October 4, 1996 October 18, 1996
$0.11 November 8, 1996 November 22, 1996
$0.11 December 6, 1996 December 20, 1996
</TABLE>
6. FEDERAL INCOME TAX STATUS
At September 30, 1996, the Fund had a net capital loss carryover of
approximately $25,881,000, to offset future capital gains to the extent provided
by regulations available through September 30 of the following years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
- --------------------------------------------------------------
1998 1999 2000 2003 2004 TOTAL
- ----- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
$782 $13,382 $2,370 $6,713 $2,634 $25,881
==== ======= ====== ====== ====== =======
</TABLE>
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $368,000, during fiscal year 1996. As of September 30, 1996, the
Fund had temporary book/tax differences primarily attributable to post-October
losses and capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to foreign currency losses. To reflect
reclassifications arising from permanent book/tax differences for the year ended
September 30, 1996, distributions in excess of net investment income was charged
and accumulated net realized loss was credited $3,253,697.
<PAGE> 14
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30*
---------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 18.02 $16.93 $ 19.11 $ 18.72 $18.03
------ ----- ------ ------ -----
Net investment income.......................................... 1.41 1.51 1.62 1.69 1.79
Net realized and unrealized gain (loss)........................ (0.64) 1.08 (2.18) 0.38 0.79
------ ----- ------ ------ -----
Total from investment operations............................... 0.77 2.59 (0.56) 2.07 2.58
------ ----- ------ ------ -----
Less dividends and distributions from:
Net investment income....................................... (1.14) (1.49) (1.62) (1.68) (1.89)
Paid-in-capital............................................. (0.24) (0.01) -- -- --
------ ----- ------ ------ -----
Total dividends and distributions.............................. (1.38) (1.50) (1.62) (1.68) (1.89)
------ ----- ------ ------ -----
Anti-dilutive effect of acquiring treasury shares.............. 0.01 -- -- -- --
------ ----- ------ ------ -----
Net asset value, end of period................................. $ 17.42 $18.02 $ 16.93 $ 19.11 $18.72
====== ===== ====== ====== =====
Market value, end of period.................................... $15.875 $16.25 $16.875 $21.375 $22.25
====== ===== ====== ====== =====
TOTAL INVESTMENT RETURN+....................................... 6.39% 5.24% (14.12)% 2.97% 19.91%
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................................... 0.65% 0.69% 0.68% 0.66% 0.69%
Net investment income.......................................... 8.03% 8.75% 9.02% 9.04% 9.69%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands........................ $210,675 $219,892 $206,526 $233,103 $228,424
Portfolio turnover rate........................................ 88% 50% 82% 85% 61%
</TABLE>
- ---------------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total investment return is based upon the current market value on the last
day of each period reported. Dividends are assumed to be reinvested at the
prices obtained under the Fund's dividend reinvestment plan. Total investment
return does not reflect brokerage commissions.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 15
INTERCAPITAL INCOME SECURITIES INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF INTERCAPITAL 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 InterCapital Income Securities Inc.
(the "Fund") at September 30, 1996, 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 generally accepted accounting principles.
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 generally accepted auditing standards 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
September 30, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
November 8, 1996
<PAGE> 16
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
Rochelle G. Siegel
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
INTERCAPITAL
INCOME
SECURITIES
INC.
ANNUAL REPORT
SEPTEMBER 30, 1996
