<PAGE> 1
INTERCAPITAL INCOME SECURITIES INC. Two World Trade Center,
New York, New York 10048
LETTER TO THE SHAREHOLDERS September 30, 1997
DEAR SHAREHOLDER:
During the period under review, a new economic order was being touted in which
increased productivity would offset any inflationary pressures arising from
higher production costs and stepped-up demand. The term Goldilocks was applied
to this economy where everything was progressing at just the right pace. The
economy continued to grow at about 4 percent annually, unemployment was
shrinking to less than 5 percent, wages were rising, consumer sentiment was
reaching record highs, business was making substantial investments and the stock
market continued to climb. Despite these signs of economic strength, interest
rates fell by as much as 60 basis points from where they were twelve months ago.
Even a 25-basis-point rise in the federal-funds rate in March prompted only a
short-lived spike in yields that was reversed less than two months later as it
became evident that inflation was still dormant. In addition, realistic
expectations for a balanced budget as early as 1998, resulting in reduced
supplies of new Treasury debt, made further Fed tightening seem unnecessary. At
the end of the period under review, ten-year Treasuries yielded 6.11 percent and
two-year notes yielded 5.78 percent, down 59 and 32 basis points, respectively,
from twelve months earlier. Thirty-year bonds yielded 6.40 percent, 52 basis
points lower than one year before.
PERFORMANCE AND PORTFOLIO
For the twelve months ended September 30, 1997, InterCapital Income Securities
produced a total return of 14.61 percent, based on its net asset value of $18.40
per share and reinvestment of dividends totaling $1.32 per share. Based on its
September 30, 1997 closing price of $16.688 per share on the New York Stock
Exchange and the reinvestment of dividends, the Fund's total return was 14.06
percent. During the same period, the Lehman Brothers Government/Corporate Bond
Index returned 9.60 percent and the Lipper Closed-End Investment Grade Funds
Index returned 11.41 percent. U.S. government securities, as measured by the
Lehman Brothers Government Bond Index, returned
<PAGE> 2
INTERCAPITAL INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS September 30, 1997, continued
9.16 percent compared to 10.83 percent for corporate bonds, as measured by the
Lehman Brothers Corporate Bond Index.
The Fund's performance over the fiscal year reflects its emphasis on
longer-maturity investments and continued credit improvements among lower-rated
issues in the portfolio. Longer-term noncallable securities performed especially
well in recent months as interest rates declined. However, the Fund's callable
issues have underperformed since August, due to their increased risk of being
called at the earliest possible date. On September 30, 1997, 30.8 percent of the
portfolio, adjusted for likely calls, was invested in issues expected to come
due in more than ten years. Callables comprised 53.0 percent of the portfolio,
down from 61.3 percent last year, and only 7.0 percent of the portfolio was due
to mature or be called in less than one year, down from 12.3 percent last year.
At period end, the average maturity (the average length of time until each bond
held by the Fund reaches maturity and is repaid) adjusted for likely calls was
10.86 years.
As interest rates declined over the summer, the portfolio's average duration (a
measure of a bond fund's sensitivity to interest-rate moves) was reduced through
the sale of longer-maturity bonds rather than intermediate maturities. The
increased likelihood of call features being activated on eligible securities
also exerted downward pressure on duration. As a result, the portfolio's average
duration declined from 7.76 years to 5.88 years.
Bonds called during the year totaled just 8.4 percent of the portfolio's
holdings as compared to 19.0 percent in the prior twelve months. Proceeds from
called bonds were reinvested in noncallable intermediate-maturity corporates and
Treasuries. New credits added to the portfolio included American General
Investment Corp., Digital Equipment Corp., Gulf States Utility Co., MedPartners,
Inc., Millennium America Inc., The Money Store, Inc., Staples, Inc., Toro Co.
and US West Capital Funding, Inc.
The portfolio's creditworthiness improved through upgrades of several corporate
holdings, including Niagara Mohawk Power Corp., Cleveland Electric Illuminating
Co. (Series B), Delta Air Lines, Inc. and Panhandle Eastern Corp. Despite the
lack of an official quality upgrade, Kmart Corp. and Borden, Inc. also performed
particularly well.
PORTFOLIO ALLOCATION
At the year's end, corporate bonds comprised 89 percent of the portfolio, U.S.
government obligations almost 11 percent and 0.1 percent was invested in money
markets. The portfolio was diversified among 51 issues with an average coupon of
8.71 percent and an average quality rating of BBB. The
<PAGE> 3
INTERCAPITAL INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS September 30, 1997, continued
greatest increase in asset allocation was to industrials, with Treasuries and
telephones also experiencing greater favor over electric utilities and finance.
At the close of the period, the Fund's net assets totaled $219.8 million. As a
result of last year's portfolio restructuring, the Fund maintained the $0.11 per
share monthly dividend established in March 1996, and income dividends of $1.32
per share were distributed during the twelve-month period.
LOOKING AHEAD
At this time, although there appear to be no signs of rising inflation, economic
conditions continue to favor higher interest rates over an easing of interest
rates by the Fed. The economy is still powerful and labor markets are still
tight. With labor settlements resulting in higher wages, oil prices again above
$20 a barrel and foreign economies such as Germany and France beginning to show
signs of recovery, an increase in inflation cannot be ruled out some time over
the next twelve months.
However, deflationary events in Asia and the possibility of a budget surplus at
home, which would lower the supply of new Treasury debt, may keep inflation in
check. With these potential cross-currents, the most likely scenario is for
rates to remain near current levels for the next several months. Given this
outlook, the Fund will likely maintain its somewhat defensive posture.
We would like to remind you that the Directors have approved a procedure whereby
the Fund may attempt, when appropriate, to 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. During the fiscal year
under review the Fund purchased 151,400 shares of common stock at a weighted
average market discount of 10.18 percent.
We appreciate your ongoing support of InterCapital Income Securities 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> 4
INTERCAPITAL INCOME SECURITIES INC.
RESULTS OF SPECIAL MEETING (UNAUDITED)
* * *
On May 20, 1997, a special meeting of shareholders of InterCapital Income
Securities Inc. was held for the purpose of voting on two separate matters, the
results of which are as follows:
(1) ELECTION OF DIRECTOR:
<TABLE>
<S> <C>
Wayne E. Hedien
For................................................................. 9,002,311
Withheld............................................................ 268,131
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, John R. Haire, Dr. Manuel
H. Johnson, Michael E. Nugent, Philip J. Purcell and John L. Schroeder.
(2) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE FUND AND DEAN
WITTER INTERCAPITAL INC., IN CONNECTION WITH THE MERGER OF MORGAN STANLEY
GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
<TABLE>
<S> <C>
For................................................................. 8,716,197
Against............................................................. 151,887
Abstain............................................................. 402,358
</TABLE>
<PAGE> 5
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (87.5%)
Airlines (2.7%)
$ 5,000 Delta Air Lines, Inc. ............... 9.30% 01/02/10 $ 5,839,150
------------
Automobiles (2.4%)
5,000 General Motors Corp. ................ 8.10 06/15/24 5,330,750
------------
Automotive - Finance (0.5%)
1,000 Ford Capital BV (Netherlands)........ 9.50 07/01/01 1,101,810
------------
Banks (3.3%)
6,000 Continental Bank N.A. ............... 12.50 04/01/01 7,145,220
------------
Cable & Telecommunications (8.8%)
3,300 News America Holdings, Inc. ......... 8.25 08/10/18 3,454,598
2,900 News America Holdings, Inc. ......... 7.70 10/30/25 2,850,555
7,100 Tele-Communications, Inc. ........... 9.25 01/15/23 7,640,310
5,000 Time Warner Entertainment Co. ....... 8.375 07/15/33 5,356,250
------------
19,301,713
------------
Canadian Government (2.3%)
5,000 Quebec (Province of)................. 7.50 07/15/23 5,137,950
------------
Chemical - Specialty (1.5%)
3,200 Millennium America Inc. ............. 7.00 11/15/06 3,203,712
------------
Computers - Systems (1.0%)
2,000 Digital Equipment Corp. ............. 8.625 11/01/12 2,091,960
------------
Defense (2.7%)
5,000 Northrop Grumman Corp. .............. 9.375 10/15/24 5,824,350
------------
Financial - Miscellaneous (1.9%)
4,000 The Money Store, Inc. ............... 8.375 04/15/04 4,201,760
------------
Food Processing (1.5%)
3,000 Borden, Inc. ........................ 9.20 03/15/21 3,296,520
------------
Gas Transmission (0.5%)
1,000 Panhandle Eastern Corp. ............. 8.625 04/15/25 1,091,590
------------
Health & Personal Care (1.4%)
3,500 Columbia/HCA Healthcare Corp. ....... 7.05 12/01/27 3,148,110
------------
Healthcare Services (0.9%)
2,000 MedPartners, Inc. ................... 6.875 09/01/00 1,997,960
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Insurance (1.7%)
$ 3,500 American General Investment Co. ..... 9.625% 07/15/00 $ 3,801,105
------------
Manufacturing (1.2%)
2,400 Westinghouse Electric Corp. ......... 8.625 08/01/12 2,558,448
------------
Manufacturing - Consumer & Industrial
Products (2.3%)
5,000 Toro Co. ............................ 7.80 06/15/27 5,164,250
------------
Metals & Mining (2.4%)
5,000 Cyprus Amax Minerals Co. ............ 8.375 02/01/23 5,223,400
------------
Office Equipment & Supplies (1.8%)
4,000 Staples, Inc. ....................... 7.125 08/15/07 4,009,000
------------
Oil & Gas Products (2.3%)
5,000 Lyondell Petrochemical Co. .......... 7.55 02/15/26 4,975,900
------------
Oil Refineries (1.6%)
3,500 Diamond Shamrock Corp. .............. 8.00 04/01/23 3,580,710
------------
Oil Related (4.9%)
5,200 Lasmo (USA), Inc. ................... 8.375 06/01/23 5,486,468
5,000 Phillips Petroleum Co. .............. 8.49 01/01/23 5,383,150
------------
10,869,618
------------
Paper & Forest Products (3.0%)
6,000 Georgia Pacific Co. ................. 9.625 03/15/22 6,690,780
------------
Retail (7.8%)
5,800 Dayton Hudson Corp. ................. 8.50 12/01/22 6,136,922
2,350 Kmart Corp. ......................... 13.50 01/01/09 2,561,500
2,500 Kmart Corp. ......................... 9.35 01/02/20 2,525,000
5,597 May Department Stores Co. ........... 8.30 07/15/26 6,023,268
------------
17,246,690
------------
Steel (0.3%)
590 Weirton Steel Corp. ................. 10.875 10/15/99 619,500
------------
Telecommunications (3.4%)
7,000 AT&T Corp. .......................... 8.625 12/01/31 7,577,570
------------
Telephones (4.6%)
4,000 Pacific Bell......................... 8.50 08/15/31 4,295,920
5,500 US West Capital Funding, Inc. ....... 7.90 02/01/27 5,805,800
------------
10,101,720
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Transportation (2.4%)
$ 4,975 Union Pacific Corp. ................. 7.875% 02/01/23 $ 5,189,970
------------
Utilities - Electric (16.4%)
1,000 Cleveland Electric Illuminating Co.
(Series B)......................... 9.50 05/15/05 1,089,850
4,500 Commonwealth Edison Corp. ........... 8.375 02/15/23 4,701,285
3,000 Gulf States Utility Co. ............. 8.94 01/01/22 3,185,220
3,500 Long Island Lighting Co. ............ 9.75 05/01/21 3,577,000
3,500 Long Island Lighting Co. ............ 9.625 07/01/24 3,570,000
2,000 Louisiana Power & Light Co. ......... 8.75 03/01/26 2,115,520
2,000 Niagara Mohawk Power Corp. .......... 9.50 03/01/21 2,181,920
5,000 Niagara Mohawk Power Corp. .......... 8.75 04/01/22 5,212,300
5,250 Texas Utilities Electric Co. ........ 8.75 11/01/23 5,714,414
4,300 United Illuminating Co. ............. 10.24 01/02/20 4,595,969
------------
35,943,478
------------
TOTAL CORPORATE BONDS
(Identified Cost $183,821,876)................................ 192,264,694
------------
U.S. GOVERNMENT OBLIGATIONS (10.3%)
1,000 U.S. Treasury Note................... 7.875 01/15/98 1,006,910
8,000 U.S. Treasury Note................... 7.75 11/30/99 8,306,960
3,325 U.S. Treasury Note................... 8.50 02/15/00 3,517,019
7,250 U.S. Treasury Note................... 8.50 11/15/00 7,778,960
2,000 U.S. Treasury Note................... 7.50 11/15/01 2,108,460
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Identified Cost $22,788,824)................................. 22,718,309
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT (0.1%)
REPURCHASE AGREEMENT
$ 175 The Bank of New York (dated 09/30/97;
proceeds $175,124) (a)
(Identified Cost $175,098)........... 5.25% 10/01/97 $ 175,098
------------
TOTAL INVESTMENTS
(Identified Cost $206,785,798) (b).................... 97.9% 215,158,101
OTHER ASSETS IN EXCESS OF LIABILITIES................. 2.1 4,600,485
----- ------------
NET ASSETS............................................ 100.0% $219,758,586
===== ============
</TABLE>
- ---------------------
(a) Collateralized by $131,671 U.S. Treasury Bond 11.625% due at 11/15/04
valued at $178,600.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $9,873,461 and the
aggregate gross unrealized depreciation is $1,501,158, resulting in net
unrealized appreciation of $8,372,303.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
ASSETS:
Investments in securities, at value
(identified cost $206,785,798)....................................... $215,158,101
Interest receivable................................................... 4,821,320
Prepaid expenses and other assets..................................... 11,360
------------
TOTAL ASSETS...................................................... 219,990,781
------------
LIABILITIES:
Payable for:
Investment management fee......................................... 95,623
Capital stock repurchased......................................... 16,718
Accrued expenses and other payables................................... 119,854
------------
TOTAL LIABILITIES................................................. 232,195
------------
NET ASSETS........................................................ $219,758,586
============
COMPOSITION OF NET ASSETS:
Paid-in-capital....................................................... $235,479,429
Net unrealized appreciation........................................... 8,372,303
Accumulated undistributed net investment income....................... 583,379
Accumulated net realized loss......................................... (24,676,525)
------------
NET ASSETS........................................................ $219,758,586
============
NET ASSET VALUE PER SHARE,
11,942,418 shares outstanding
(unlimited shares authorized of $.01 par value)...................... $18.40
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended September 30, 1997
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $17,882,850
-----------
EXPENSES
Investment management fee.............................................. 1,075,146
Transfer agent fees and expenses....................................... 151,795
Professional fees...................................................... 54,216
Shareholder reports and notices........................................ 34,532
Registration fees...................................................... 24,546
Custodian fees......................................................... 20,333
Directors' fees and expenses........................................... 15,229
Other.................................................................. 11,035
-----------
TOTAL EXPENSES..................................................... 1,386,832
------------
NET INVESTMENT INCOME.............................................. 16,496,018
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain...................................................... 1,834,213
Net change in unrealized depreciation.................................. 9,052,828
-----------
NET GAIN........................................................... 10,887,041
-----------
NET INCREASE........................................................... $27,383,059
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
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, 1997 SEPTEMBER 30, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................ $ 16,496,018 $ 17,168,371
Net realized gain................................ 1,834,213 196,014
Net change in unrealized depreciation............ 9,052,828 (8,121,879)
------------ ------------
NET INCREASE................................. 27,383,059 9,242,506
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income............................ (15,863,631) (13,912,704)
Paid-in-capital.................................. -- (2,886,612)
------------ ------------
TOTAL........................................ (15,863,631) (16,799,316)
------------ ------------
Net decrease from capital stock transactions..... (2,435,880) (1,660,563)
------------ ------------
NET INCREASE (DECREASE)...................... 9,083,548 (9,217,373)
NET ASSETS:
Beginning of period.............................. 210,675,038 219,892,411
------------ ------------
END OF PERIOD
(Including undistributed net investment
income of $583,379 and dividends in excess of
net investment income of $49,008,
respectively)................................ $219,758,586 $210,675,038
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1997
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, American or other domestic or foreign 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 securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted 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 Dean Witter InterCapital Inc. (the "Investment Manager"), that
sale or 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
(valuation or debt securities for which market quotations are not readily
available may be based upon current market prices of securities which are
comparable in coupon rating and maturity or an appropriate matrix utilizing
similar factors); (4) certain portfolio securities may be valued by an outside
pricing service approved by the Directors. The pricing service may utilize 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.
<PAGE> 13
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1997, continued
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. 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 its shareholders.
Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend 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, 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 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.
<PAGE> 14
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1997, continued
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, 1997 aggregated
$132,063,686 and $130,641,297, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $42,854,824 and
$30,324,539, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager, is the Fund's
transfer agent. At September 30, 1997, the Fund had transfer agent fees and
expenses payable of approximately $3,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Directors of the Fund who will have served as independent
Directors 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, 1997
included in Directors' fees and expenses in the Statement of Operations amounted
to $2,417. At September 30, 1997, the Fund had an accrued pension liability of
$48,276 which is included in accrued expenses in the Statement of Assets and
Liabilities.
4. CAPITAL STOCK
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, September 30, 1995..................................................... 12,200,518 $122,003 $242,340,481
Treasury shares purchased and retired (weighted average discount 10.82%)*....... (106,700) (1,067) (1,659,496)
Distribution from paid-in-capital............................................... -- -- (2,886,612)
---------- -------- ------------
Balance, September 30, 1996..................................................... 12,093,818 120,936 237,794,373
Treasury shares purchased and retired (weighted average discount 10.18%)*....... (151,400) (1,514) (2,434,366)
---------- -------- ------------
Balance, September 30, 1997..................................................... 11,942,418 $119,422 $235,360,007
========== ======== ============
</TABLE>
- ---------------------
* The Directors have voted to retire the shares purchased.
<PAGE> 15
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1997, continued
5. DIVIDENDS
On September 23, 1997, 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 3, 1997 October 17, 1997
$0.11 November 7, 1997 November 21, 1997
$0.11 December 5, 1997 December 19, 1997
</TABLE>
6. FEDERAL INCOME TAX STATUS
During the year ended September 30, 1997, the Fund utilized approximately
$1,256,000 of its net capital loss carryover. At September 30, 1997, the Fund
had a net capital loss carryover of approximately $24,646,000 to offset future
capital gains to the extent provided by regulations available through September
30 of the following years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
- ----------------------------------------
1999 2000 2003 2004
- ------- ------ ------ ------
<S> <C> <C> <C>
$12,909 $2,390 $6,713 $2,634
======= ====== ====== ======
</TABLE>
<PAGE> 16
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30*
-------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 17.42 $ 18.02 $ 16.93 $ 19.11 $ 18.72
-------- -------- -------- -------- --------
Net investment income........................................... 1.37 1.41 1.51 1.62 1.69
Net realized and unrealized gain (loss)......................... 0.91 (0.64) 1.08 (2.18) 0.38
-------- -------- -------- -------- --------
Total from investment operations................................ 2.28 0.77 2.59 (0.56) 2.07
-------- -------- -------- -------- --------
Less dividends and distributions from:
Net investment income........................................ (1.32) (1.14) (1.49) (1.62) (1.68)
Paid-in-capital.............................................. -- (0.24) (0.01) -- --
-------- -------- -------- -------- --------
Total dividends and distributions............................... (1.32) (1.38) (1.50) (1.62) (1.68)
-------- -------- -------- -------- --------
Anti-dilutive effect of acquiring treasury shares............... 0.02 0.01 -- -- --
-------- -------- -------- -------- --------
Net asset value, end of period.................................. $ 18.40 $ 17.42 $ 18.02 $ 16.93 $ 19.11
======== ======== ======== ======== ========
Market value, end of period..................................... $ 16.688 $ 15.875 $ 16.25 $ 16.875 $ 21.375
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+........................................ 14.06% 6.39% 5.24% (14.12)% 2.97%
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................................ 0.65% 0.65% 0.69% 0.68% 0.66%
Net investment income........................................... 7.69% 8.03% 8.75% 9.02% 9.04%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands......................... $219,759 $210,675 $219,892 $206,526 $233,103
Portfolio turnover rate......................................... 63% 88% 50% 82% 85%
</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> 17
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, 1997, 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, 1997 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
November 7, 1997
<PAGE> 18
INTERCAPITAL INCOME SECURITIES INC.
REVISED INVESTMENT POLICIES
On October 23, 1997, the Board of Directors of InterCapital Income Securities
Inc. (the "Company") approved an amendment to the investment policy of the
Company to permit investments in "Yankee government bonds" and "Yankee corporate
bonds." These securities are U.S. dollar denominated debt securities issued,
respectively, by foreign governments or their respective instrumentalities or
agencies or by foreign corporations, which securities in each case are either
registered under the Securities Act of 1933 or eligible for resale pursuant to
Rule 144A under that Act and pay both principal and interest in U.S. dollars and
which, in each case, have a rating at the time of purchase within the four
highest grades as determined by Moody's Investors Service Inc. ("Moody's") (Aaa,
Aa, A or Baa) or Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A
or BBB) or which, if not rated, are deemed to be of comparable quality by the
Company's Investment Manager. Investments in such securities shall be limited to
a maximum of 20% of the Company's total assets in "Yankee government bonds" and
a maximum of 15% of the Company's total assets in "Yankee corporate bonds."
Investments in "Yankee government bonds" and "Yankee corporate bonds" as well as
investments in investment grade debt securities, securities issued by the U.S.
Government or its agencies or instrumentalities, commercial paper rated at the
time of purchase in the three highest grades as determined by Standard & Poor's
(A-1, A-2 or A-3) or the two highest grades as determined by Moody's (P-1 or
P-2), or cash or cash equivalents will comprise at least 50% of the value of the
Company's total assets.
<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
BOARD OF DIRECTORS
- -----------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- -----------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Rochelle G. Siegal
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- -----------------------------------------------------
Dean Witter Trust FSB
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, 1997
