<PAGE> 1
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC. Two World Trade Center
LETTER TO THE SHAREHOLDERS March 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
During the six-month period ended March 31, 1999, the domestic fixed-income
markets were subject to highly volatile yield shifts. As the period began,
potential fallout from economic turmoil in Russia and Latin America, as well as
major losses by hedge funds, perpetuated an ongoing flight to quality and a
decoupling of the corporate bond and Treasury markets. With only companies
having the best credit ratings being able to borrow funds, corporate bond prices
were sharply lower in late 1998. Having cut interest rates once in late
September to attack the evaporation in corporate liquidity, the Federal Reserve
Board cut rates two additional times during the period, reducing the
federal-funds rate to 4.75 percent. This action clearly demonstrated a shift in
focus by the central bank from an anti-inflationary stance toward one of
avoiding recession and helped drive down Treasury yields to some of their lowest
levels in decades.
The central bank's commitment toward preventing recession at home and easing
financial turmoil abroad led to an increase in demand for corporate bonds, which
in turn resulted in higher bond prices. To ensure continued liquidity, the Fed
cut rates two times during the period, with the federal-funds rate settling in
at 4.75 percent by mid November. As a result, the U.S. economy grew at a
startling 6.1 percent rate in the fourth quarter of 1998 and began 1999 on a
strong footing.
Despite this robust growth and an unemployment rate of only 4.2 percent during
the period under review, inflation remained dormant throughout the period.
Nevertheless, the surge in production, coupled with renewed acceleration in
stock prices, was sufficient to send fixed-income yields higher in early 1999,
although the corporate bond sector did benefit from improving liquidity and a
perception of continued healthy economic growth.
PERFORMANCE
For the six-month period ended March 31, 1999, Morgan Stanley Dean Witter Income
Securities posted a return of -0.77 percent based on a change in net asset value
(NAV) from $19.04 per share to $18.23
<PAGE> 2
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS March 31, 1999, continued
per share and reinvestment of dividends. Based on a change in market value on
the New York Stock Exchange from $17.75 per share to $18.50 per share, and
reinvestment of dividends, the Fund provided a total return of 8.02 percent for
the six-month period. Over the same period, the Lehman Brothers
Government/Corporate Bond Index registered a total return of -1.07 percent.
The Fund's performance over the period under review was reflective of the sharp
rise in interest rates, tempered by a somewhat more favorable market for
corporate bonds as 1998's flight to quality began to reverse itself in early
1999. The Fund also benefited from its emphasis on Baa-rated issues, which on
March 31, 1999, accounted for nearly 52 percent of its invested assets.
According to Lehman Brothers, these issues were the best investment-grade
corporate bond performers for the period, with a total return of 0.45 percent,
compared to -0.35 percent for A-rated issues and -1.26 percent for Aaa-rated
issues.
Hindering the Fund's overall performance was its callable bond and sinking-fund
holdings (just under 50 percent of its assets). While callable bonds
underperformed noncallable bonds as credit spreads compressed during the first
three months of the period, they do provide the Fund with an attractive level of
income.
PORTFOLIO STRATEGY
On March 31, 1999, corporate bonds comprised 92.2 percent of the Fund's assets,
with 7.7 percent in U.S. Treasuries and the remainder in money market
instruments. The portfolio was diversified among 61 issues, with an average
coupon of 8.43 percent and an average quality rating of BBB. On March 31, 1999,
the portfolio's average maturity, adjusted for likely calls, was 12.42 years.
The combination of higher interest rates and wider spreads available during most
of the period also prompted the Fund to reduce its exposure to U.S. Treasuries
and increase its average duration through the purchase of corporate bonds with
maturities of 10 to 30 years. The Fund's portfolio was further extended by the
tendering of $6.7 million Pacific Telephone bonds callable in 2001. Proceeds
from this transaction were reinvested in corporate bonds maturing from 2002 to
2008 at substantially higher yields. The largest increases in allocation were to
the industrial and finance sectors, while the Fund's exposure to the telephone
sector was reduced. At the end of the period under review, the Fund's average
duration was 6.22 years, compared to 5.72 years six months earlier.
LOOKING AHEAD
Corporate America admirably weathered the international economic turmoil that
occurred during the latter half of 1998, largely due to the Federal Reserve
Board's accommodative monetary policy. As the
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
LETTER TO THE SHAREHOLDERS March 31, 1999, continued
Fund enters the second half of its fiscal year, we believe that the
fundamentally sound U.S. economy and the relative calm on the international
economic front require no further assistance from lower interest rates. As a
result, intermediate- and longer-term interest rates are returning to a more
traditional relationship with overnight rates. With a strong equity market and
the economy at virtually full employment, investors are once again on an
inflation watch. While currently there are no sightings of it on the horizon,
due in large part to improving productivity, the beginnings of a worldwide
recovery could stimulate pricing pressure, initially in raw materials and in
turn to consumer goods. However, for the time being economic uncertainty still
pervades Asia and Latin America, making any reversal of current Federal Reserve
policy unlikely. Given this balance of health at home and the international
uncertainty, we believe that the interest-rate outlook is likely to be
relatively stable in the months ahead.
Finally, we would like to remind you that the Directors have approved a
procedure whereby the Fund may, when appropriate, 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 5,000 shares of common stock at a
weighted average market discount of 5.04 percent.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin is also the President and Chief Operating Officer of
Asset Management of Morgan Stanley Dean Witter & Co., and President, Chief
Executive Officer and Director of Morgan Stanley Dean Witter Advisors Inc., the
Fund's Investment Manager. He also serves as Chairman, Chief Executive Officer
and Director of Morgan Stanley Dean Witter Distributors Inc. and Morgan Stanley
Dean Witter Trust FSB.
We appreciate your ongoing support of Morgan Stanley Dean Witter Income
Securities and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /S/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On December 17, 1998, an annual meeting of the Fund's shareholders was held for
the purpose of voting on three separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Michael Bozic
For..................... 9,052,602
Withheld................ 158,314
Charles A. Fiumefreddo
For..................... 9,061,421
Withheld................ 149,495
Edwin J. Garn
For..................... 9,055,499
Withheld................ 155,417
John R. Haire
For..................... 9,045,290
Withheld................ 165,626
Wayne E. Hedien
For..................... 9,063,555
Withheld................ 147,361
Dr. Manuel H. Johnson
For..................... 9,064,845
Withheld................ 146,071
Michael E. Nugent
For..................... 9,055,925
Withheld................ 154,991
Philip J. Purcell
For..................... 9,062,901
Withheld................ 148,015
John L. Schroeder
For..................... 9,068,424
Withheld................ 142,492
</TABLE>
(2) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................... 8,960,197
Against..................................................... 54,731
Abstain..................................................... 195,988
</TABLE>
(3) APPROVAL OF A PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION OF THE
FUND TO CHANGE THE NAME OF THE FUND TO "MORGAN STANLEY DEAN WITTER INCOME
SECURITIES":
<TABLE>
<S> <C>
For......................................................... 8,595,434
Against..................................................... 316,466
Abstain..................................................... 299,016
</TABLE>
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (90.4%)
Accident & Health Insurance (1.9%)
$4,000 Provident Companies Inc. ............ 7.00 % 07/15/18 $ 4,012,000
-----------
Aerospace (2.6%)
5,000 Northrop Grumman Corp. .............. 9.375 10/15/24 5,583,400
-----------
Airlines (2.7%)
5,000 Delta Air Lines, Inc. ............... 9.30 01/02/10 5,855,050
-----------
Cable Television (3.8%)
7,450 Tele-Communications, Inc. ........... 8.75 02/15/23 8,149,629
-----------
Construction/Agricultural
Equipment/Trucks (0.9%)
2,000 Cummins Engine Co., Inc. ............ 7.125 03/01/28 1,884,820
-----------
Department Stores (7.0%)
5,800 Dayton Hudson Corp. ................. 8.50 12/01/22 6,188,426
5,597 May Department Stores Co. ........... 8.30 07/15/26 6,133,640
2,800 Neiman Marcus Group Inc.............. 7.125 06/01/28 2,691,920
-----------
15,013,986
-----------
Discount Chains (2.4%)
2,350 Kmart Corp. ......................... 13.50 01/01/09 2,429,430
2,500 Kmart Corp. ......................... 9.35 01/02/20 2,698,175
-----------
5,127,605
-----------
Electric Utilities (8.5%)
1,000 Cleveland Electric Illuminating Co.
(Series B)........................... 9.50 05/15/05 1,078,390
4,500 Commonwealth Edison Co. ............. 8.375 02/15/23 4,742,190
3,000 Gulf States Utilities Co. ........... 8.94 01/01/22 3,075,000
2,000 Louisiana Power & Light Co. ......... 8.75 03/01/26 2,033,080
2,000 Niagara Mohawk Power Corp. .......... 9.50 03/01/21 2,122,260
5,000 Niagara Mohawk Power Corp. .......... 8.75 04/01/22 5,373,850
-----------
18,424,770
-----------
Electronic Production Equipment
(2.1%)
4,500 Applied Materials, Inc. ............. 7.125 10/15/17 4,479,255
-----------
Finance - Automotive (0.5%)
1,000 Ford Capital BV (Netherlands)........ 9.50 07/01/01 1,077,230
-----------
Finance Companies (1.0%)
2,000 John Deere Capital Corp. ............ 8.625 08/01/19 2,218,900
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Foreign Government Obligation (0.9%)
$2,000 Israel (State of).................... 7.25 % 12/15/28 $ 1,847,320
-----------
Forest Products (4.9%)
6,000 Georgia Pacific Co. ................. 9.625 03/15/22 6,736,620
4,000 Noranda Forest, Inc. (Canada)........ 6.875 11/15/05 3,860,720
-----------
10,597,340
-----------
Home Building (0.9%)
2,000 Oakwood Homes Corp. ................. 8.25 03/01/09 1,963,740
-----------
Hospital/Nursing Management (0.4%)
1,000 Columbia/HCA Healthcare Corp. ....... 7.19 11/15/15 836,350
-----------
Integrated Oil Companies (2.4%)
5,000 Phillips Petroleum Co. .............. 8.49 01/01/23 5,219,350
-----------
Life Insurance (1.7%)
3,500 American General Corp. .............. 9.625 07/15/00 3,668,315
-----------
Major Banks (4.1%)
6,000 Continental Bank N.A. ............... 12.50 04/01/01 6,752,460
2,000 First National Bank of Boston........ 8.00 09/15/04 2,161,500
-----------
8,913,960
-----------
Major U.S. Telecommunications (5.7%)
7,000 AT&T Corp. .......................... 8.625 12/01/31 7,765,030
2,000 Sprint Capital Corp. ................ 6.875 11/15/28 1,971,180
2,500 WorldCom, Inc. ...................... 6.95 08/15/28 2,543,875
-----------
12,280,085
-----------
Managed Health Care (0.7%)
2,000 MedPartners, Inc. ................... 7.375 10/01/06 1,580,000
-----------
Media Conglomerates (6.0%)
3,300 News America Holdings, Inc. ......... 8.25 08/10/18 3,654,552
2,900 News America Holdings, Inc. ......... 7.75 02/01/24 3,051,554
3,000 Time Warner Entertainment Co. ....... 9.625 05/01/02 3,308,010
2,500 Time Warner Entertainment Co. ....... 8.375 07/15/33 2,918,350
-----------
12,932,466
-----------
Mid-Sized Banks (1.1%)
2,349 Capital One Bank..................... 6.70 05/15/08 2,310,171
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Motor Vehicles (3.9%)
$2,600 Ford Motor Co. ...................... 8.875% 11/15/22 $ 2,914,990
5,000 General Motors Corp. ................ 8.10 06/15/24 5,384,200
-----------
8,299,190
-----------
Natural Gas (0.5%)
1,000 Panhandle Eastern Corp. ............. 8.625 04/15/25 1,100,860
-----------
Non-U.S. Utilities (1.3%)
3,000 United Utilities Corp.
(United Kingdom).................... 6.875 08/15/28 2,877,630
-----------
Office Equipment/Supplies (1.1%)
2,000 Ikon Office Solutions, Inc. ......... 6.75 12/01/25 1,544,280
1,000 Ikon Office Solutions, Inc. ......... 7.30 11/01/27 824,550
-----------
2,368,830
-----------
Oil & Gas Production (2.2%)
5,200 Lasmo (USA), Inc. ................... 8.375 06/01/23 4,753,164
-----------
Oil Refining/Marketing (1.8%)
3,500 Diamond Shamrock Corp. .............. 8.00 04/01/23 3,474,100
500 Pennzoil - Quaker State.............. 7.375 04/01/29 494,920
-----------
3,969,020
-----------
Oilfield Services/Equipment (1.3%)
3,000 Petro Geo-Services................... 7.125 03/30/28 2,794,050
-----------
Other Metals/Minerals (2.1%)
5,000 Cyprus Amax Minerals Co. ............ 8.375 02/01/23 4,639,250
-----------
Other Specialty Stores (1.0%)
2,000 Staples, Inc. ....................... 7.125 08/15/07 2,053,960
-----------
Packaged Foods (1.3%)
3,000 Borden, Inc. ........................ 9.20 03/15/21 2,911,920
-----------
Paper (1.3%)
3,000 Abitibi-Consolidated Inc. (Canada)... 7.50 04/01/28 2,809,410
-----------
Railroads (4.0%)
3,500 Burlington Northern Santa Fe......... 6.875 12/01/27 3,488,660
4,975 Union Pacific Corp. ................. 7.875 02/01/23 5,123,703
-----------
8,612,363
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Specialty Chemicals (3.2%)
$5,000 Equistar Chemical LP................. 7.55 % 02/15/26 $ 4,195,300
3,200 Millennium America, Inc. ............ 7.625 11/15/26 2,791,296
------------
6,986,596
------------
Steel/Iron Ore (1.1%)
2,000 Pohang Iron & Steel Co.
(South Korea) 7.125 11/01/06 1,838,520
590 Weirton Steel Corp. ................. 10.875 10/15/99 595,163
------------
2,433,683
------------
Tools/Hardware (2.1%)
5,000 Toro Co. ............................ 7.80 06/15/27 4,591,950
------------
TOTAL CORPORATE BONDS
(Identified Cost $193,561,844)............................ 195,177,618
------------
U.S. GOVERNMENT OBLIGATIONS (7.6%)
4,000 U.S. Treasury Note................... 7.75 11/30/99 4,076,600
9,825 U.S. Treasury Note................... 8.50 02/15/00 10,128,298
2,000 U.S. Treasury Note................... 8.50 11/15/00 2,107,640
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Identified Cost $16,649,976)............................. 16,312,538
------------
SHORT-TERM INVESTMENT (0.0%)
REPURCHASE AGREEMENT
102 The Bank of New York (dated 03/31/99;
proceeds $101,954) (a)
(Identified Cost $101,940)........... 4.875% 04/01/99 $ 101,940
------------
TOTAL INVESTMENTS
(Identified Cost $210,313,760) (b)................. 98.0% 211,592,096
OTHER ASSETS IN EXCESS OF LIABILITIES............... 2.0 4,392,851
----- ------------
NET ASSETS........................................ 100.0% $215,984,947
===== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited) continued
- ---------------------
(a) Collateralized by $15,000 U.S. Treasury Bond 11.625% due 11/15/02 valued at
$18,760, $13,929 U.S. Treasury Bond 10.75% due 08/15/05 valued at $18,050,
$19,000 U.S. Treasury Bond 6.00% due 02/15/26 valued at $19,394, $14,000
U.S. Treasury Note 6.25% due 06/30/02 valued at $14,662, $10,000 U.S.
Treasury Note 5.875% due 08/31/99 valued at $10,095, $1,512 U.S. Treasury
Note 4.75% due 11/15/08 valued at $1,482, $4,000 U.S. Treasury Note 5.25%
due 01/31/01 valued at $4,050 and $17,000 U.S. Treasury Note 5.875% due
11/15/99 valued at $17,487.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $6,763,139 and the
aggregate gross unrealized depreciation is $5,484,803, resulting in net
unrealized appreciation of $1,278,336.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1999 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $210,313,760)............................. $211,592,096
Interest receivable......................................... 4,619,574
Prepaid expenses and other assets........................... 4,951
------------
TOTAL ASSETS............................................ 216,216,621
------------
LIABILITIES:
Investment management fee payable........................... 97,788
Accrued expenses and other payables......................... 133,886
------------
TOTAL LIABILITIES....................................... 231,674
------------
NET ASSETS.............................................. $215,984,947
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $233,798,943
Net unrealized appreciation................................. 1,278,336
Accumulated undistributed net investment income............. 981,065
Accumulated net realized loss............................... (20,073,397)
------------
NET ASSETS.............................................. $215,984,947
============
NET ASSET VALUE PER SHARE,
11,845,218 shares outstanding
(15,000,000 shares authorized of $.01 par value)........ $18.23
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended March 31, 1999 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 8,625,128
------------
EXPENSES
Investment management fee................................... 548,818
Transfer agent fees and expenses............................ 89,636
Professional fees........................................... 34,440
Shareholder reports and notices............................. 19,120
Directors' fees and expenses................................ 10,615
Registration fees........................................... 8,766
Custodian fees.............................................. 8,688
Other....................................................... 9,521
------------
TOTAL EXPENSES.......................................... 729,604
------------
NET INVESTMENT INCOME................................... 7,895,524
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain........................................... 907,044
Net change in unrealized appreciation....................... (10,491,761)
------------
NET LOSS................................................ (9,584,717)
------------
NET DECREASE................................................ $ (1,689,193)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
MARCH 31, ENDED
1999 SEPTEMBER 30, 1998
- ----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................. $ 7,895,524 $ 16,028,564
Net realized gain................................. 907,044 3,695,308
Net change in unrealized appreciation............. (10,491,761) 3,397,794
------------ ------------
NET INCREASE (DECREASE)....................... (1,689,193) 23,121,666
Dividends from net investment income.............. (7,818,031) (15,708,371)
Net decrease from capital stock transactions...... (90,463) (1,589,247)
------------ ------------
NET INCREASE (DECREASE)....................... (9,597,687) 5,824,048
NET ASSETS:
Beginning of period............................... 225,582,634 219,758,586
------------ ------------
END OF PERIOD
(Including undistributed net investment income
of $981,065 and $903,572, respectively)....... $215,984,947 $225,582,634
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Income Securities, Inc. (the "Fund"), formerly
InterCapital Income Securities Inc., 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"), 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
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
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 Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) 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 six months ended March 31, 1999 aggregated
$33,406,215 and $33,351,722, respectively. Included in the aforementioned are
purchases and sales of U.S. Government securities of $14,279,838 and
$16,390,625, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Fund's transfer agent. At March 31, 1999, the Fund had transfer agent fees
and expenses payable of approximately $1,500.
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 six months ended March 31, 1999
included in Directors' fees and expenses in the Statement of Operations amounted
to $3,072. At March 31, 1999, the Fund had an accrued pension liability of
$52,042 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, 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
Treasury shares purchased and retired (weighted average
discount 5.04%)*........................................... (5,000) (50) (90,413)
---------- -------- ------------
Balance, March 31, 1999..................................... 11,845,218 $118,450 $233,680,493
========== ======== ============
</TABLE>
- ---------------------
* The Directors have voted to retire the shares purchased.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER INCOME SECURITIES INC.
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
5. DIVIDENDS
On March 31, 1999, the Fund declared the following dividends from net investment
income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- ------------- --------------
<S> <C> <C>
$0.11 April 9, 1999 April 23, 1999
$0.11 May 7, 1999 May 21, 1999
$0.11 June 4, 1999 June 18, 1999
</TABLE>
6. FEDERAL INCOME TAX STATUS
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>
AMOUNT IN THOUSANDS
- ------------------------------------------------------
1999 2000 2003 2004
- --------------------- -------- -------- --------
<S> <C> <C> <C>
$9,218 $2,391 $6,713 $2,634
====== ====== ====== ======
</TABLE>
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER 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 SIX FOR THE YEAR ENDED SEPTEMBER 30
MONTHS ENDED ----------------------------------------------------
MARCH 31, 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period...................... $19.04 $18.40 $ 17.42 $ 18.02 $16.93 $ 19.11
------ ------ ------- ------- ------ -------
Income (loss) from investment operations:
Net investment income.................................... 0.67 1.35 1.37 1.41 1.51 1.62
Net realized and unrealized gain (loss).................. (0.82) 0.60 0.91 (0.64) 1.08 (2.18)
------ ------ ------- ------- ------ -------
Total income (loss) from investment operations............ (0.15) 1.95 2.28 0.77 2.59 (0.56)
------ ------ ------- ------- ------ -------
Less dividends and distributions from:
Net investment income.................................... (0.66) (1.32) (1.32) (1.14) (1.49) (1.62)
Paid-in-capital.......................................... -- -- -- (0.24) (0.01) --
------ ------ ------- ------- ------ -------
Total dividends and distributions......................... (0.66) (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............................ $18.23 $19.04 $ 18.40 $ 17.42 $18.02 $ 16.93
====== ====== ======= ======= ====== =======
Market value, end of period............................... $18.50 $17.75 $16.688 $15.875 $16.25 $16.875
====== ====== ======= ======= ====== =======
TOTAL RETURN+............................................. 8.02%(1) 14.75% 14.06% 6.39% 5.24% (14.12)%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................. 0.66%(2) 0.65% 0.65% 0.65% 0.69% 0.68%
Net investment income..................................... 7.12%(2) 7.19% 7.69% 8.03% 8.75% 9.02%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands................... $215,985 $225,583 $219,759 $210,675 $219,892 $206,526
Portfolio turnover rate................................... 15%(1) 42% 63% 88% 50% 82%
</TABLE>
- ---------------------
+ 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.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE> 18
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<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
BOARD OF DIRECTORS
- ----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
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
The financial statements included herein have been taken
from the records of the Fund without examination by the
independent accountants and accordingly they do not express
an opinion thereon.
MORGAN STANLEY
DEAN WITTER
INCOME
SECURITIES INC.
Semiannual Report
March 31, 1999
