<PAGE> 1
INTERCAPITAL INCOME SECURITIES INC. Two World Trade Center, New York, New York
10048
LETTER TO THE SHAREHOLDERS September 30, 1998
DEAR SHAREHOLDER:
The fixed-income markets benefited from solid economic news in the United
States, fueled by lower interest rates at the end of the fiscal year. For nearly
a year, fallout from concern over the economic situation in Asia has translated
into lower prices for goods and services, as well as lower borrowing costs in
the United States. The resulting robust spending on the part of both business
and consumers were the primary factors driving fixed-income performance over the
past 12 months.
From October 1, 1997 through June 30, 1998, the economy grew by nearly 3.5
percent annualized. Unemployment remained below 5 percent, dropping to a low of
4.3 percent, while wages began to increase without prices for goods and services
rising. Although U.S. Treasury yields continued to fall through the summer,
ongoing Asian woes, which eventually spread to Russia and Latin America, also
influenced the U.S. stock market's "correctional" move in August. This resulted
in a decoupling of corporate bond and U.S. Treasury yields, causing yields on
corporate bonds issued by companies with little or no foreign exposure to rise.
Between July 1 and September 30, interest rates on 10- and 30-year U.S.
Treasury bonds declined by 1.00 and 0.66 percentage points, respectively. For
the 12 months ended September 30, 1998, yields on 10- and 30-year bonds
declined by 1.70 and 1.44 percentage points, respectively, to 4.41 percent and
4.97 percent, respectively.
PERFORMANCE
For the fiscal year ended September 30, 1998, InterCapital Income Securities
Inc. provided a total return of 11.63 percent based on a change in net asset
value (NAV) from $18.40 per share to $19.04 per share and reinvestment of
dividends totaling $1.32 per share. Based on a change in market value on the New
York Stock Exchange from $16.688 per share to $17.75 per share, and reinvestment
of dividends, the Fund provided a total return of 14.75 percent for the fiscal
year. Over the same period, the Lehman Brothers Government/Corporate Bond Index
registered a total return of 12.84 percent.
<PAGE> 2
INTERCAPITAL INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS September 30, 1998, continued
The Fund's performance over the fiscal year was reflective of the sharp decline
in interest rates over the period, which was tempered somewhat by late-summer
pressure on corporate bonds. Furthermore, a preference for higher-rated
securities, exacerbated by a summer "flight to quality," translated into
declining returns for lower-rated issues.
According to Lehman Brothers, AAA-rated corporate bonds were the best non-U.S.
government performers for the year, with an average total return of 13.71
percent, compared to 9.77 percent for BBB-rated bonds. Also negatively
impacting performance was the portfolio's position in callable issues. Because
of anticipated early redemptions, these securities failed to participate in most
of the past year's rally.
According to Lipper Analytical Services, InterCapital Income Securities ranked
#4 out of 16 corporate debt BBB funds for the 12 month period ended 9/30/98, #2
of 16 funds for the past three years, #1 of 16 funds for the past five years and
#8 of 15 funds for the past ten years.
THE PORTFOLIO
As of September 30, 1998, BBB-rated corporate bonds accounted for 52.3 percent
of the portfolio on September 30, 1998. At the conclusion of the fiscal year,
callable bonds comprised approximately 49 percent of the portfolio's net assets,
with only 2.1 percent redeemable before 2001. The Fund benefited from an
emphasis on longer-term investments and tender offers for securities held in the
portfolio. On September 30, 1998, 32 percent of the portfolio (adjusted for
likely calls) was invested in issues expected to come due in more than 10 years.
The Money Store and Digital Equipment were the portfolio's strongest performers.
Both companies were acquired by higher-rated companies, which opted to pay
attractive premiums.
During the course of the fiscal year, duration (a measure of a bond fund's
sensitivity to interest-rate moves) was held fairly constant. The portfolio's
average duration on September 30, 1998 was 5.72 years, compared to 5.88 years a
year earlier. Bonds called during the fiscal year totaled just 5 percent of the
portfolio's holdings, with that number expected to decline to approximately 2
percent over the next year. Proceeds from called bonds during the year were
reinvested in non-callable corporate issues.
On September 30, 1998, the portfolio's average maturity, adjusted for likely
calls, was 10.66 years. Corporate bonds comprised 90 percent of the portfolio
with U.S. government securities comprising 9 percent. Less than 1 percent was
invested in money market instruments. The portfolio was diversified among 56
issues with an average coupon of 8.47 percent and an average quality rating of
BBB. The largest increases in asset allocation were to industrials and yankees
(dollar-denominated bonds issued in the United States by foreign governments,
banks and corporations). These increases offset the reductions to electric
utilities, which resulted primarily from company calls.
2
<PAGE> 3
INTERCAPITAL INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS September 30, 1998, continued
LOOKING AHEAD
Currently, declines in corporate earnings are triggering a flight from equities
which is serving to erode market capitalizations of many major corporations.
Declines in stock prices may cause a drop in individual net worth and could
temper consumer spending. Forecasts of lower to zero growth in 1999 are already
beginning to be broadcast. The Federal Reserve Board began to ease monetary
policy at the end of September, with a decline of 25 basis points (0.25
percentage points) for the federal-funds rate, and another cut of 25 basis
points less than a month later. Further easing is still likely if a reversal in
economic conditions and sentiment both at home and abroad do not materialize.
Because reduced market capitalizations affect corporate balance sheets, various
market dislocations have resulted in the unwinding of "hedge" fund activity.
Given this factor, as well as the ongoing "flight to quality" in the market,
corporate bonds are not expected to participate to the same extent as U.S.
Treasury securities in the current rally. In fact, it is possible that corporate
bonds might fall in price and rise in yield, thereby creating exciting
opportunities for investors.
Uncertainty in the financial markets has dramatically increased the relative
attractiveness of longer maturity corporate bonds. Yields today on many
30-year corporate issues are higher than they were when the summer began. With
the Fund's average duration nearly two years shorter than where it was in
September 1996, it may once again become advantageous to extend maturities and
lock in these higher yields.
Finally, 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. During the
period under review, the Fund purchased 92,200 shares of common stock at a
weighted average market discount of 7.77 percent.
We appreciate your ongoing 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
3
<PAGE> 4
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (88.7%)
Accident & Health Insurance (1.7%)
$3,500 American General Corp. .............. 9.625% 07/15/00 $ 3,761,345
-----------
Airlines (2.9%)
5,000 Delta Air Lines, Inc. ............... 9.30 01/02/10 6,483,850
-----------
Automotive - Finance (0.5%)
1,000 Ford Capital BV (Netherlands)........ 9.50 07/01/01 1,110,050
-----------
Cable & Telecommunications (5.1%)
7,450 Tele-Communications, Inc. ........... 8.75 02/15/23 8,490,914
2,500 Time Warner Entertainment Co. ....... 8.375 07/15/33 3,054,875
-----------
11,545,789
-----------
Canadian Government & Agencies (0.8%)
1,500 Quebec (Province of)................. 7.50 07/15/23 1,696,050
-----------
Clothing/Shoe/Accessory Chains (1.3%)
2,800 Neiman Marcus Group Inc. ............ 7.125 06/01/28 2,865,660
-----------
Defense (2.6%)
5,000 Northrop Grumman Corp. .............. 9.375 10/15/24 5,872,900
-----------
Department Stores (7.9%)
5,800 Dayton Hudson Corp. ................. 8.50 12/01/22 6,557,538
2,350 Kmart Corp. ......................... 13.50 01/01/09 2,471,025
2,500 Kmart Corp. ......................... 9.35 01/02/20 2,513,225
5,597 May Department Stores Co. ........... 8.30 07/15/26 6,411,140
-----------
17,952,928
-----------
Finance Companies (1.0%)
2,000 John Deere Capital Corp. ............ 8.625 08/01/19 2,330,860
-----------
Gas Transmission (0.5%)
1,000 Panhandle Eastern Corp. ............. 8.625 04/15/25 1,143,160
-----------
Hospital/Nursing Management (0.4%)
1,000 Columbia/HCA Healthcare Corp. ....... 7.19 11/15/15 875,820
-----------
Industrial Specialties (0.9%)
2,000 Cummins Engine Co., Inc. ............ 7.125 03/01/28 2,009,280
-----------
Integrated Oil Companies (2.5%)
5,000 Phillips Petroleum Co. .............. 8.49 01/01/23 5,604,700
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Major Banks (3.1%)
$6,000 Continental Bank N.A. ............... 12.50% 04/01/01 $ 7,056,540
-----------
Major U.S. Telecommunications (8.4%)
7,000 AT&T Corp. .......................... 8.625 12/01/31 7,739,340
6,700 Pacific Bell ........................ 8.50 08/15/31 7,480,215
3,500 Worldcom, Inc. ...................... 6.95 08/15/28 3,688,545
-----------
18,908,100
-----------
Manufacturer Consumer & Industrial
Products (2.4%)
5,000 Toro Co. ............................ 7.80 06/15/27 5,306,350
-----------
Media Conglomerates (4.3%)
3,300 News America Holdings, Inc. ......... 8.25 08/10/18 3,762,957
2,900 News America Holdings, Inc. ......... 7.75 02/01/24 3,142,585
2,400 Westinghouse Electric Corp. ......... 8.625 08/01/12 2,718,432
-----------
9,623,974
-----------
Motor Vehicles (3.9%)
2,600 Ford Motor Co. ...................... 8.875 11/15/22 3,034,460
5,000 General Motors Corp. ................ 8.10 06/15/24 5,692,450
-----------
8,726,910
-----------
Multi-Line Insurance (1.8%)
4,000 Provident Companies Inc. ............ 7.00 07/15/18 4,026,520
-----------
Non-U.S. Utilities (1.3%)
3,000 United Utilities PLC (United
Kingdom)........................... 6.875 08/15/28 3,033,240
-----------
Office Equipment & Supplies (0.9%)
2,000 Staples, Inc. ....................... 7.125 08/15/07 2,131,400
-----------
Oil & Gas Production (2.5%)
5,200 Lasmo (USA), Inc. ................... 8.375 06/01/23 5,592,392
-----------
Oil Refining/Marketing (1.6%)
3,500 Diamond Shamrock Corp. .............. 8.00 04/01/23 3,700,340
-----------
Oil/Gas Transmission (0.9%)
2,000 Southern Union Co. .................. 7.60 02/01/24 2,095,520
-----------
Oilfield Services/Equipment (1.3%)
3,000 Petro Geo-Services ASA (Norway)...... 7.125 03/30/28 2,977,140
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Other Metals/Minerals (2.3%)
$5,000 Cyprus Amax Minerals Inc. ........... 8.375% 02/01/23 $ 5,178,700
-----------
Packaged Foods (1.4%)
3,000 Borden, Inc. ........................ 9.20 03/15/21 3,260,790
-----------
Paper (1.3%)
3,000 Abitibi-Consolidated Inc. (Canada)... 7.50 04/01/28 2,867,970
-----------
Paper & Forest Products (4.9%)
6,000 Georgia Pacific Co. ................. 9.625 03/15/22 6,915,840
4,000 Noranda Forest, Inc. (Canada)........ 6.875 11/15/05 4,027,360
-----------
10,943,200
-----------
Railroads (3.9%)
3,500 Burlington Northern Santa Fe......... 6.875 12/01/27 3,606,645
4,975 Union Pacific Corp. ................. 7.875 02/01/23 5,276,087
-----------
8,882,732
-----------
Semiconductor Equipment (0.9%)
2,000 Applied Materials, Inc. ............. 7.125 10/15/17 2,028,860
-----------
Services to the Health Industry (0.7%)
2,000 MedPartners, Inc. ................... 7.375 10/01/06 1,520,000
-----------
Specialty Chemicals (3.4%)
5,000 Lyondell Chemical Co. ............... 7.55 02/15/26 4,578,000
3,200 Millennium America, Inc. ............ 7.625 11/15/26 3,232,512
-----------
7,810,512
-----------
Steel/Iron Ore (0.9%)
2,000 Pohang Iron & Steel Co. (South
Korea)............................. 7.125 11/01/06 1,430,720
590 Weirton Steel Corp. ................. 10.875 10/15/99 587,050
-----------
2,017,770
-----------
Utilities - Electric (8.5%)
1,000 Cleveland Electric Illuminating Co.
(Series B).......................... 9.50 05/15/05 1,080,850
4,500 Commonwealth Edison Co. ............. 8.375 02/15/23 5,026,230
3,000 Gulf States Utilities................ 8.94 01/01/22 3,192,420
2,000 Louisiana Power & Light Co. ......... 8.75 03/01/26 2,212,660
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
INTERCAPITAL INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS September 30, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$2,000 Niagara Mohawk Power Corp. .......... 9.50% 03/01/21 $ 2,129,600
5,000 Niagara Mohawk Power Corp. .......... 8.75 04/01/22 5,552,900
-----------
19,194,660
-----------
TOTAL CORPORATE BONDS
(Identified Cost $188,346,979)............................ 200,136,012
-----------
U.S. GOVERNMENT OBLIGATIONS (9.3%)
7,000 U.S. Treasury Note................... 7.75 11/30/99 7,252,630
8,825 U.S. Treasury Note................... 8.50 02/15/00 9,289,636
4,000 U.S. Treasury Note................... 8.50 11/15/00 4,331,040
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Identified Cost $20,892,242)............................. 20,873,306
-----------
SHORT-TERM INVESTMENT (0.1%)
REPURCHASE AGREEMENT
291 The Bank of New York (dated 09/30/98;
proceeds $291,280) (a)
(Identified Cost $291,240).......... 5.00 10/01/98 291,240
-----------
TOTAL INVESTMENTS
(Identified Cost $209,530,461) (b)................. 98.1% 221,300,558
OTHER ASSETS IN EXCESS OF LIABILITIES.............. 1.9 4,282,076
----- -----------
NET ASSETS......................................... 100.0% $225,582,634
===== ===========
</TABLE>
---------------------
(a) Collateralized by $231,771 U.S. Treasury Bond 7.25% due 08/15/22
valued at $297,065.
(b) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$13,796,476 and the aggregate gross unrealized depreciation is
$2,026,379, resulting in net unrealized appreciation of $11,770,097.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
ASSETS:
Investments in securities, at value
(identified cost $209,530,461).......... $221,300,558
Interest receivable...................... 4,495,127
Prepaid expenses and other assets........ 14,884
-----------
TOTAL ASSETS......................... 225,810,569
-----------
LIABILITIES:
Investment management fee payable........ 100,627
Accrued expenses and other payables...... 127,308
-----------
TOTAL LIABILITIES.................... 227,935
-----------
NET ASSETS........................... $225,582,634
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital.......................... $233,889,406
Net unrealized appreciation.............. 11,770,097
Accumulated undistributed net investment
income.................................. 903,572
Accumulated net realized loss............ (20,980,441)
-----------
NET ASSETS........................... $225,582,634
===========
NET ASSET VALUE PER SHARE,
11,850,218 shares outstanding
(15,000,000 shares authorized of $.01
par value).............................. $19.04
===========
</TABLE>
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended September 30, 1998
NET INVESTMENT INCOME:
INTEREST INCOME........................... $17,475,156
-----------
EXPENSES
Investment management fee................. 1,116,965
Transfer agent fees and expenses.......... 157,698
Shareholder reports and notices........... 56,040
Professional fees......................... 46,855
Registration fees......................... 21,162
Directors' fees and expenses.............. 19,294
Custodian fees............................ 18,342
Other..................................... 10,236
-----------
TOTAL EXPENSES........................ 1,446,592
-----------
NET INVESTMENT INCOME................. 16,028,564
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain......................... 3,695,308
Net change in unrealized appreciation..... 3,397,794
-----------
NET GAIN.............................. 7,093,102
-----------
NET INCREASE.............................. $23,121,666
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
INTERCAPITAL INCOME SECURITIES INC.
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................ $ 16,028,564 $ 16,496,018
Net realized gain................................ 3,695,308 1,834,213
Net change in unrealized
appreciation/depreciation....................... 3,397,794 9,052,828
----------- -----------
NET INCREASE................................. 23,121,666 27,383,059
Dividends from net investment income............. (15,708,371) (15,863,631)
Net decrease from capital stock transactions..... (1,589,247) (2,435,880)
----------- -----------
NET INCREASE................................. 5,824,048 9,083,548
NET ASSETS:
Beginning of period.............................. 219,758,586 210,675,038
----------- -----------
END OF PERIOD
(Including undistributed net investment
income of $903,572 and $583,379,
respectively)................................ $225,582,634 $219,758,586
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1998
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 Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., 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 of 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
10
<PAGE> 11
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
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. 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
11
<PAGE> 12
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
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, 1998 aggregated
$91,323,926 and $92,433,650, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $19,551,563 and
$21,435,010, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Fund's transfer agent. At September 30, 1998, the Fund had transfer agent
fees and expenses payable of approximately $1,000.
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, 1998
included in Directors' fees and expenses in the Statement of Operations amounted
to $5,417. At September 30, 1998, the Fund had an accrued pension liability of
$50,544 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, 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
Treasury shares purchased and retired (weighted average
discount 7.77%)*........................................... (92,200) (922) (1,588,325)
Reclassification due to permanent book/tax differences...... -- -- (776)
---------- -------- ------------
Balance, September 30, 1998................................. 11,850,218 $118,500 $233,770,906
========== ======== ============
</TABLE>
- ---------------------
* The Directors have voted to retire the shares purchased.
12
<PAGE> 13
INTERCAPITAL INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
5. DIVIDENDS
On September 29, 1998, 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 9, 1998 October 23, 1998
$0.11 November 6, 1998 November 20, 1998
$0.11 December 4, 1998 December 18, 1998
</TABLE>
6. FEDERAL INCOME TAX STATUS
During the year ended September 30, 1998, the Fund utilized approximately
$3,690,000 of its net capital loss carryover. At September 30, 1998, the Fund
had a net capital loss carryover of approximately $20,956,000 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>
$ 9,218 $2,391 $6,713 $2,634
======= ====== ====== ======
</TABLE>
13
<PAGE> 14
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*
----------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 18.40 $ 17.42 $ 18.02 $ 16.93 $ 19.11
-------- -------- -------- -------- --------
Net investment income....................................... 1.35 1.37 1.41 1.51 1.62
Net realized and unrealized gain (loss)..................... 0.60 0.91 (0.64) 1.08 (2.18)
-------- -------- -------- -------- --------
Total from investment operations............................ 1.95 2.28 0.77 2.59 (0.56)
-------- -------- -------- -------- --------
Less dividends and distributions from:
Net investment income...................................... (1.32) (1.32) (1.14) (1.49) (1.62)
Paid-in-capital............................................ -- -- (0.24) (0.01) --
-------- -------- -------- -------- --------
Total dividends and distributions........................... (1.32) (1.32) (1.38) (1.50) (1.62)
-------- -------- -------- -------- --------
Anti-dilutive effect of acquiring treasury shares........... 0.01 0.02 0.01 -- --
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 19.04 $ 18.40 $ 17.42 $ 18.02 $ 16.93
======== ======== ======== ======== ========
Market value, end of period................................. $ 17.75 $ 16.688 $ 15.875 $ 16.25 $ 16.875
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+.................................... 14.75% 14.06% 6.39% 5.24% (14.12)%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.65% 0.65% 0.65% 0.69% 0.68%
Net investment income....................................... 7.19% 7.69% 8.03% 8.75% 9.02%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $225,583 $219,759 $210,675 $219,892 $206,526
Portfolio turnover rate..................................... 42% 63% 88% 50% 82%
</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
14
<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, 1998, 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, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 9, 1998
15
<PAGE> 16
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. Siegel
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- ----------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ----------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- ----------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
INTERCAPITAL
INCOME
SECURITIES
INC.
ANNUAL REPORT
SEPTEMBER 30, 1998
