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Hatteras Income Securities, Inc.One NCNB Plaza
Charlotte, North Carolina 28255
(704) 333-7808
Proxy Statement
February 9, 1987
SOLICITATION OF PROXIES
The following statement, first mailed to stockholders on February 9, 1987, is furnished in connection
with the solicitation by the Board of Directors of Hatteras Income Securities, Inc. (the "Company") of
proxies to be used at the Annual Meeting of Stockholders of the Company to be held on March 26, 1987
at 10:00 o'clock a.m. in the auditorium on the 12th Floor of NCNB Plaza, Charlotte, North Carolina, and
at any adjournment or adjournments thereof.
The accompanying form of proxy is for use at the meeting if a stockholder will be unable to attend in
person. The proxy may be revoked by the person giving it at any time before it is exercised either by
written instrument filed with the Secretary of the Company or by vote in person at the meeting of the
person executing the proxy. All shares represented by valid proxies received pursuant to this solicitation,
and not revoked before they are exercised, will be voted in the manner specified therein unless a
stockholder indicates that he or she abstains from voting. Where specifications are not made, proxies
will be voted in favor of (i) electing as directors of the Company the five persons named in this Proxy
Statement, (ii) approval of the continuance of the Management and Investment Advisory Agreement
with NCNB National Bank of North Carolina (the "Bank"), and (iii) approval of the selection by the
Board of Directors of Deloitte Haskins & Sells as independent public accountants for fiscal year 1987.
The entire cost of soliciting these proxies will be borne by the Company. In following up the original
solicitation of the proxies by mail, the Company may request brokers and others to send proxies and
proxy material to the beneficial owners of the stock and may reimburse them for their expense in so
doing. If necessary, proxies may be solicited by mail, telephone, telegraph and personal interview.
VOTING SECURITIES OUTSTANDING
The number of shares of Capital Stock entitled to vote at the meeting is 3,013,080. Pursuant to the
provisions of the North Carolina Business Corporation Act, January 29, 1987, has been fixed as the
record date for the determination of stockholders entitled to notice of and to vote at such Annual
Meeting, and, accordingly, only holders of Capital Stock of record at the close of business on that date
will be entitled to notice of and to vote at such Annual Meeting.
Each share of Capital Stock is entitled to one vote, except that, in the election of directors, stockhol ders
may cumulate their votes, provided that before voting thereon, some stockholder or person named as
proxy for a stockholder announces in open meeting his intention to vote cumulatively. No stockholder
who is part of the Management has any present intention of initiating such a method of voting, but if
cumulative voting occurs at the meeting, shares represented by proxies in the accompanying form may
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be voted cumulatively for less than the entire number of the nominees for directors listed herein if any
situation arises which, in the opinion of the persons named as proxies, makes such action necessary or
desirable. In the case of cumulative voting a stockholder may give one candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall equal, or by distributing
such votes on the same principle among any number of such candidates.PROPOSAL 1: ELECTION OF DIRECTORS
It is intended that the persons named in the accompanying form of proxy will vote for the five nominees
listed below for directors, unless authority so to vote is withheld, each director to serve until the next
Annual Meeting of Stockholders or until his successor shall be elected and shall qualify. Each nominee
is at present a member of the Board of Directors and each nominee has consented to his nomination and
to serve if elected. Although the Board of Directors expects that each of the nominees will be available
for election, in the event a vacancy in the slate of nominees is occasioned by death or other unexpected
occurrence, it is intended that shares represented by proxies in the accompanying form will be voted for
the election of a substitute nominee selected by the persons named in the proxy.
The name of each nominee for election to the Board of Directors, his age, his current principal
occupation and the name and principal business of the corporation in which his occupation is carried on,
the year each was first elected to the Board of Directors of the Company, and his directorships in other
publicly held companies are as follows:
HENRY CRAGG, age 75, former Chairman, Minute Maid Corporation, (now part of the Coca-Cola
Company). Retired Chairman, Trust Company of Florida. Mr. Cragg has been a director since the
Company was organized in February, l973. Mr. Cragg is a director of Koger Properties, Inc. and The
Koger Company.
WILLIAM H. GRIGG, age 54, Executive Vice President, Finance and Administration, and Chief
Financial Officer, Duke Power Company, Charlotte, North Carolina, a public utility. Mr. Grigg has been
in his current position since May, 1982 and prior thereto was Senior Vice President, Legal and Finance.
He has been a director of the Company since March, 1980. Mr. Grigg is also a director of Duke Power
Company. He owns 300 shares (.010%) of Capital Stock of the Company.
THOMAS F. KELLER, age 55, R. J. Reynolds Industries Professor of Business Administration, and
Dean, Fuqua School of Business, Duke University, Durham, North Carolina, since 1974. He has been a
director of the Company since March, 1985. Mr. Keller is also a director of Ladd Furniture, Inc.,
PennWalt Corporation and Southeastern Growth Fund, Inc. He owns 300 shares (.010%) of Capital
Stock of the Company.
MACON G. PATTON,* age 50, Chairman and Chief Executive Officer, Cosmos Broadcasting
Corporation, a subsidiary of The Liberty Corporation, Greenville, South Carolina, an insurance holding
company. Mr. Patton has been in his current position since September, 1981, and was President, the
Liberty Corporation, from January, 1979. He has been a director of the Company since March, 1977.
Mr. Patton is also a director of The Liberty Corporation, PCA International and Interstate Securities
Corporation.
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A. MAX WALKER, age 64, Vice President, Merrill Lynch, Pierce, Fenner & Smith, Inc. since April,
1982. Prior thereto he was Vice President and Treasurer, Southern Bell Telephone and Telegraph
Company, Atlanta, Georgia, a public utility. He is Chairman of the Board and has been a director since
the Company was organized in February, 1973.
No nominee, other than Messrs. Grigg and Keller, owns beneficially, either directly or indirectly, shares
of Capital Stock of the Company.
Messrs. Patton and Walker are "interested persons" (as defined in the Investment Company Act of 1940)
of the Company and the investment adviser. Mr. Patton is deemed an interested person by reason of his
being a director of Interstate Securities Corporation, a broker-dealer registered under the Securities
Exchange Act of 1934. Mr. Walker is deemed an "interested person" by reason of his being an officer of
Merrill Lynch, Pierce, Fenner & Smith, Inc., a broker-dealer registered under the Securities Exchange
Act of 1934.
The Company pays the Chairman of the Board $11,000 per year and each other director $7,000 per year,
and reimburses each for travel and other out-of-pocket disbursements incurred in connection with
attending meetings. During 1986 payments to directors aggregated $39,000.
Some of the Company's directors and their affiliates have been customers of the Bank. All extensions of
credit to such persons have been made in the ordinary course of business on substantially the sam e
terms, including interest rates and collateral, as those prevailing in comparable transactions with others,
and did not involve more than normal risk of collectibility or present other unfavorable features.
The Board of Directors meets quarterly and in addition holds telephone conferences once ea ch of the
eight months that meetings are not held. In addition, the Board has an Audit and a Nom inating
Committee. The Audit Committee is composed of Messrs. Patton (Chairman), Grigg and W alker. The
function of the Audit Committee is to (i) review the audit procedures and methods of ke eping records
followed by the Company and require that the procedures followed be sufficient in scope and de tail to
insure that proper and sound practices are being followed, (ii) review and approve stockholder reports
prior to delivery to stockholders, (iii) nominate the independent public accountants to be e ngaged for the
Company, subject to the approval of the Board of Directors and the stockholders, and (iv) re view with
the independent public accountants the proposed scope of the annual audit and the results of their
examination, the financial statements and their opinion thereon. The Audit Commi ttee meets in
December of each year and holds a telephone conference in January. The Nominating Commi ttee is
composed of Messrs. Grigg (Chairman), Cragg and Keller. The function of the Nominating Committee
is to review information assembled for the purpose of selecting candidates for nomination to
membership on the Board and to recommend nominees for election as directors. The Board ha s no
standing compensation committee or committee performing a similar function. Each nominee attended
at least 75% of the regular meetings of the Board and those committees of the Board on which he serves.
All actions of the Board of Directors of the Company described in the proposals below were approved
by a majority of all directors, including all directors who are not "interested persons" of the Company or
the investment adviser.
PROPOSAL 2: APPROVAL OF THE CONTINUANCE OF THE
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MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT
INFORMATION PERTAINING TO THE MANAGEMENT AND INVESTMENT ADVISORY
AGREEMENT
At a meeting of the Board of Directors held on December 5, 1986, the Board approved the c ontinuance
of the Management and Investment Advisory Agreement (the "Agreement") with NCNB National B ank
of North Carolina (the "Bank") dated April 1, 1984, for an additional period of one year from April 1,
1987, and voted that this continuance be submitted to stockholders of the Company. A copy of the
Agreement is attached hereto as Exhibit A.
Under the Agreement, the Bank is obligated to provide investment management and a dvisory services to
the Company. The Bank advises the Company on the composition of its portfolio and bears the cost of
research, statistical analysis and continuous supervision of the Company's investment portfolio. In
addition to providing management and investment advisory services, the Bank pays for office space,
facilities and simple business equipment and the costs of keeping the Company's account s and records.
The Bank compensates all personnel and officers of the Company other than directors. For providi ng
these services, the Bank receives an annual investment advisory fee composed of a pe rcentage of
average net asset value plus a percentage of gross income. This fee is computed and a ccrued weekly,
and paid monthly, and is the sum of (i) .45 of 1% per annum of the Company's average net assets up to
$75 million, .40 of 1% of the next $50 million and .30 of 1% thereafter, and (ii) 1.5% of gross income
accrued for each weekly period.
Average net asset values for the years ended December 31, 1984, 1985 and 1986 were $42,854,125,
$47,487,365 and $53,052,143, respectively. Gross income for the years ended December 31, 1984, 1985
and 1986 was $5,722,220, $5,752,847 and. $5,804,470, respectively. During the three years ended
December 31, 1984, 1985 and 1986, advisory fees paid amounted to $278,272, $299,551 and $325,415,
respectively.
The Company bears all operating expenses other than the expenses specifically a ssumed by the Bank
under the Agreement. The Agreement provides that in the event operating expenses exceed 11/2% of the
first $30,000,000 of average net assets and 1% of the excess of average net assets annually, the B ank's
investment advisory fee is reduced to the extent of the excess. For this purpose, the Agre ement provides
that operating expenses are the investment advisory fee, directors' fees and expenses, corporat e franchise
taxes, stock exchange listing fees, insurance premiums, fees of the transfer agent, registrar and
custodian, annual auditing and legal fees, cost of information obtained from sources other than t he Bank
or its affiliates relating to the valuation of portfolio securities, expenses, including postage, of
stockholder reports, proxy materials, and other regulatory filings and expenses of the dividend reinvest -
ment plan. The Company bears all other expenses, such as interest on borrowed funds, other taxes, other
legal expenses, expenses incident to any additional public offering of shares of the Company, broke rage
commissions and all expenses of the Company not specifically assumed by the Bank as provided in the
Agreement. The Company has agreed to hold the Bank harmless from judgments against the B ank
resulting from specific acts or omissions in the performance of its obligations under the Agreem ent
which are the result of written instructions of a majority of the Board of Directors of the Company, so
long as there is an express finding that such acts or omissions did not constitute willful misfeasance, bad
faith, gross negligence or reckless disregard of duties or a breach of fiduciary duty.
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Under the Agreement, the Bank is obligated to advise with respect to the Company's portfolio with the
same skill and care with which it administers its other fiduciary accounts and to conform to applicable
laws and regulations, including the regulations and rulings of the Comptroller of the Currenc y of the
United States relating to fiduciary powers of national banks. These regulations provide, in gene ral, that
assets managed by a national bank as fiduciary shall not be invested in stock or obl igations of, or
property acquired from, the Bank, its affiliates or their directors, officers or employees or other
individuals with whom there exists such a connection, or organization in which there exist s such an
interest, as might affect the exercise of the best judgment of the Bank. They furt her provide that
fiduciary assets shall not be sold or transferred, by loan or otherwise, to the Bank or persons connect ed
with the Bank as described above. In addition, the Agreement states that the Bank will not invest other
fiduciary accounts in Company shares, make loans for the purpose of purchasing or carrying shares of
the Company, or make loans to the Company. The Agreement also provides that the Bank wi ll maintain
its policy and practice of conducting the business of its Trust Department independently of its
commercial banking group. Therefore, the investment decisions of the Trust Department are made
without consideration of customer relationships with the commercial banking group and informa tion is
not sought or obtained from the commercial banking group regarding any issuer of securities. The
Company will not acquire securities from or sell securities to fiduciary accounts ma naged by the Trust
Department.
The holders of a majority of the Company's outstanding securities must approve any new Agreeme nt or
any amendment to an existing Agreement. By its terms, the Agreement continues from year to year so
long as its continuation is specifically approved at least annually either by (i) the Board of Directors of
the Company or (ii) the vote of a majority of the outstanding voting securities of the Company,
provided, however, that in either event the continuance must also be approved by the vote of a majority
of the directors of the Company who are not "interested persons" (as defined in the Investment C ompany
Act of 1940) of either party to the Agreement, cast in person at a meeting called for the purpose of
voting upon such approval. The Agreement is automatically terminated if assigned, and t he Company
has the right to terminate the Agreement at any time without penalty on 60 days' notice by vote of its
Board of Directors or by vote of the holders of a majority oi its outstanding shares'. The Bank may
terminate the Agreement on 90 days' written notice without cause. The term "majori ty" as used herein
means the lesser of (i) 67% of the Company's outstanding shares present at a meeting of the holders if
more than 50% of the outstanding shares are present in person or by proxy or (ii) more than 50% of the
Company's outstanding shares.
INFORMATION PERTAINING TO THE BANK
NCNB National Bank of North Carolina, One NCNB Plaza, Charlotte, North Carolina 28255, through
its Trust Division and Investment Management Division (herein collectively called t he "Trust
Department"), acts as adviser to the Company under a Management and Investment Advisory
Agreement (the "Agreement"), dated April 1, 1984. The Agreement was approved by the affirmative
vote of the majority of the outstanding shares of Capital Stock of the Company at the Annual Meeting of
Stockholders held on March 19, 1986.
On December 31, 1986, the Bank had total assets of $14.5 billion, total deposits of $9.8 billi on and
capital of $668 million. The Bank offers complete banking service in the commerci al and retail banking,
savings and trust fields, and international services. Within the Bank, the Investment Manage ment
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Division has responsibility with respect to the Company's portfolio. This Division, which is responsible
for the management of the trust assets of the Bank, at December 31, 1986, held clients' a ssets having a
market value of $4.5 billion in accounts for which the Division had full or shared investment
responsibility.
The principal executive officers and directors of NCNB National Bank of North Carolina, together with
their principal occupations, are as follows:
Name Address Principal Occupation
Dr. Robert L. Albright* Charlotte, North Carolina President, Johnson C. Smith University
F. James Becher, Jr.* Greensboro, North Carolina President, Geneva Corporation
James M. Berry* Charlotte, North Carolina Corporate Executive Vice President, NCNB Corporation
Ralph M. Carestio, Jr. Charlotte, North Carolina Executive Vice President, NCNB National Bank of
North Carolina
Dr. G. John Coli* Enka, North Caroline Chairman and Chief Executive Officer, Armira, Inc.
Charles J. Cooley Charlotte, North Carolina Executive Vice President, NCNB National Bank of North Carolina
William C. Covington, Jr. Charlotte, North Carolina Executive Vice President, NCNB National Bank of
North Carolina
Marvin W. Griffin, Jr.* Charlotte, North Carolina President and Chief Executive Officer, Coca-Cola
Bottling Co. Consolidated
John W. Harris* Charlotte, North Carolina President, The Bissell Companies, Inc.
Timothy P. Hartman* Charlotte, North Carolina Corporate Executive Vice President, NCNB Corporation
Charles W. Howard, Jr.* Greenville, North Carolina President, Greenville Tobacco Company, Inc.
Robert L. Jones* Raleigh, North Carolina President, Davidson & Jones Corporation
Francis B. Kemp* Charlotte, North Carolina President, NCNB Corporation and NCNB National Bank of North Carolina
Robert L. Kirby Charlotte, North Carolina Executive Vice President, NCNB National Bank of
North Carolina
William L. Maxwell Charlotte, North Carolina Executive Vice President, NCNB National Bank
Hugh L. McColl, Jr.* Charlotte, North Carolina Chairman of the Board and Chief Executive Officer, NCNB Corporation, NCNB National Bank of North
Carolina and NCNB National Bank of Florida
Harold M. Messmer, Jr.* San Francisco, California President and Chief Operating Officer, Booth Financial Corporation
William P. Middlemas Charlotte, North Carolina Executive Vice President, NCNB National Bank of North Carolina
Jerome J. Richardson* Spartanburg, North Carolina Chief Executive Officer, Spartan Food Systems, Inc.
A. Pope Shuford* Hickory, North Carolina President, Shuford Mills, Inc.
0. Darwin Smith Charlotte, North Carolina Executive Vice President, NCNB National Bank of North Carolina
W.J. Smith, Jr. Charlotte, North Carolina Chairman, Loan Policy Committee, NCNB National Bank of North Carolina and NCNB National Bank
Florida
James B. Sommers Charlotte, North Carolina Executive Vice President, NCNB Corporation, and Private Banking Group Executive, NCNB National
Bank of North Carolina
Robin W. Sternbergh* Charlotte, North Carolina Group Director, Planning, Information Systems
Group IBM Corporation
James W. Thompson* Charlotte, North Carolina Vice Chairman, NCNB Corporation
F. William Vandiver, Jr. Charlotte, North Carolina Executive Vice President, NCNB National Bank of
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North Carolina
John T. Warmath, Jr.* Greensboro, North Carolina Executive Vice President-Investments, Jefferson- Pilot Life Insurance Company
Sidney R. Warner Charlotte, North Carolina Executive Vice President, NCNB National Bank of
North Carolina
____________
*Directors of Bank.
REMUNERATION
The Company does not pay compensation to officers for their services to the Company.
The Company's officers, all of whom are officers of the Bank, are as follows:
Name Position With Company
Charles G. Smith, IV......................... President
Steven W. Duff .................................Vice President and Assistant Secretary
Gladys M. Young.............................. Secretary and Treasurer
The Bank extends Visa credit card privileges to its directors, officers and employees. The Bank does not
lend directly to its top executive officers.
PORTFOLIO TRANSACTIONS
The Bank, as investment adviser, makes investment decisions and arranges for the pla cement of buy and
sell orders and the execution of portfolio transactions for the Company, subject to periodic review by the
Board of Directors of the Company. The Bank, in selecting brokers and dealers to be used i n portfolio
transactions, gives primary consideration to the broker's or dealer's ability to obtain the be st net price
and to provide the most favorable execution. When such transactions involve listed securi ties, the Bank
takes into consideration the advisability of effecting such transaction with a broker or dealer which is not
a member of the securities exchange on which such security is listed, i.e., a "third market" transaction, or
effecting such transaction in the institutional or "fourth market".
In over-the-counter transactions, the Bank attempts to deal with primary market make rs. However, when
execution through some other broker is, in the Bank's judgment, likely to result in a saving to the
Company, such broker is used.
Unless it has been determined that better price and execution are available elsewhere, the Bank may in
the allocation of such investment transaction business consider the general research and investment
information, assistance in pricing the Company's portfolio securities and other services provide d by
brokers and dealers, although it has adopted no formula for such allocation. Such services include
analyses and reports concerning issues, industries, securities, economic factors and trends, yiel ds and
yield spreads and portfolio strategy. These research and investment information services make available
to the Bank for its analysis and consideration as investment adviser to the Company a nd to the Bank's
other accounts the views and information of individuals and research staffs of many securiti es firms.
Although such information is useful to the Bank, its value is not determinable and it does not necessarily
reduce expenses to the Bank and will not reduce the advisory fee payable to the Bank by the Company.
In addition, certain of the information, although beneficial to other clients of the Ba nk, is not of benefit
to the Company.
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In selecting brokers, no recognition is given to the fact that a broker does or does not maintain deposit
balances with the Bank or transact other business with the Trust Department or other departments or
affiliates of the Bank.
On occasions when the Bank deems the purchase or sale of a security to be in the best interests of the
Company as well as other customers, the Bank, to the extent permitted by applica ble laws and
regulations, may aggregate the securities to be so purchased or sold in order to obtain best execution and
price. In such event, allocation of the securities, as well as the expenses incurred in the transaction, will
be made by the Bank in the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Company.
The Company manages its portfolio actively rather than holding its entire portfolio to maturity. The
turnover of its portfolio during 1984, 1985 and 1986 amounted to 31%, 41% and 31%, respectively. This
portfolio turnover rate is calculated by dividing the lesser of portfolio purchases or sales for t he year by
the monthly average of the value of the portfolio securities for such year. For 1984 the calc ulation
excluded securities having a maturity of one year or less and all U.S. Government obli gations. For 1985
and 1986 the calculation excluded only securities having a maturity of one year or less. The effect of this
change is immaterial.
The Company is limited substantially in its ability to engage in certain broke rage transactions with
Merrill Lynch, Pierce, Fenner & Smith, Inc. or any subsidiary thereof or any subsidiary of Merrill Lync h
& Co., Inc. (collectively referred to as "Merrill Lynch") and with Interstate Securitie s Corporation
(herein referred to as "Interstate") because of the affiliations of Messrs. Walker and Pa tton, respectively,
with these companies. A. Max Walker, Chairman of the Board of the Company, is a Vice President of
Merrill Lynch, Pierce, Fenner & Smith, Inc. Macon G. Patton, director of the Company, is a lso a
director of Interstate Securities Corporation. The Company is prohibited from purchasing any security
from Merrill Lynch or Interstate during the existence of any underwriting or selling syndicat e for such
security and is restricted as to purchases which may be made from non-affiliated underwri ters during the
existence of any underwriting or selling syndicate in which either Merrill Lynch or Interst ate is a
principal underwriter. The Board of Directors has established procedures to monitor purchases of
portfolio securities during the existence of any underwriting or selling syndicate in which Merril l Lynch
or Interstate are principal underwriters to assure that such purchases meet the criteria of the Securities
and Exchange Commission regulations relating to such transactions. The Company engages in
brokerage transactions with Merrill Lynch and Interstate from time to time and duri ng 1986 transactions
with Merrill Lynch amounted to $842,500 and there were no transactions with Interstate. No
commissions were paid Merrill Lynch as these transactions were with Merrill Lynch acting as principal.
The Company paid brokerage commissions on portfolio investments of $1,500 in 1984 and none in 1985
and 1986 as substantially all of its transactions are with dealers as principals. Underwri ting discounts in
principal transactions for 1984, 1985 and 1986 amounted to $47,250, $79,875 and $42,810, respectively.
During 1984 the Company did not enter into any transactions in interest rate futures contrac ts or options
on debt securities. In 1985 and 1986 the Company entered into certain transactions in intere st rate
futures contracts. Commissions paid or accrued on these transactions amounted to $1,380 and $600,
respectively.
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PROPOSAL 3: APPROVAL OF SELECTION OFINDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of its Audit Committee, has selected Deloi tte Haskins &
Sells as independent public accountants of the Company to examine the financial sta tements of the
Company for its fiscal year ending December 11, 1987, and to report thereon to the Board and the
stockholders. Although not required to submit this selection to the stockholders for ratification, t he
Board of Directors believes it is desirable to submit this matter for an expression of st ockholder opinion.
If a majority of the shares of the Company's Capital Stock represented at the meeti ng is voted against
ratification of the selection of Deloitte Haskins & Sells, the selection of audi tors will be reconsidered by
the Board of Directors. To the best knowledge of management, the firm of Deloitte Haski ns & Sells has
no direct or material indirect financial interest in the Company. The Board of Di rectors recommends that
the stockholders vote in favor of approving this action.
A representative of Deloitte Haskins & Sells will be present at the Annual Meeting, will be available t o
respond to questions from stockholders and will have the opportunity to make a statement if he so
desires.
STOCKHOLDER PROPOSALS
In the event any stockholder wishes to present a proposal to stockholders of the Company at the 1988
Annual Meeting of Stockholders, such proposal must be received by the Company for inclusion in the
proxy statement and form of proxy relating to such meeting on or before October 11, 1987.
OTHER MATTERS
The Board of Directors knows of no other business which will be presented for consideration at the
meeting. However, if other matters are properly presented to the meeting, including any matters the
Board of Directors was not aware would be presented, it is the intention of the proxy holders nam ed in
the accompanying form of proxy to vote the proxies in accordance with their best judgment.
By Order of the Board of Directors.
GLADYS M. YOUNG
Secretary
Dated: February 9, 1987
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Exhibit A
MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT between
HATTERAS INCOME SECURITIES, INC. and
NCNB NATIONAL BANK OF NORTH CAROLINA
INVESTMENT ADVISORY AGREEMENT, made as of the 1st day of April, 1984, by and between
HATTERAS INCOME SECURITIES, INC., a corporation organized and existing under the laws of the
State of North Carolina (hereinafter called the "Company"), and NCNB NATIONAL BANK OF
NORTH CAROLINA a national banking association (hereinafter called the “Adviser");
WITNESSETH:
WHEREAS, the Company is engaged in business as a closed-end management investment c ompany and
is registered as such under the Investment Company Act of 1940; and
WHEREAS, the Company desires to retain the Adviser to render investment supervisory and corpora te
administrative services to the Company in the manner and on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, the
parties hereto agree as follows:
1. The Adviser shall act as investment adviser and render investment supervisory and corporate
administrative services to the Company, subject to and upon the terms and conditions se t forth in this
Agreement.
2. In acting as investment adviser and rendering investment supervisory services to the Company, the
Adviser shall obtain and evaluate such information relating to the economy, industries, busine sses,
securities markets and securities as it may deem necessary or useful in the discharge of its obligations
hereunder; shall formulate a continuing program for the management of the assets and resource s of the
Company in a manner consistent with its investment objectives; shall from time to time make
recommendations and furnish advice to the Company regarding securities to be purchased and sold by
the Company, and the portion of its assets to be held in cash or cash equivalents, in orde r to carry out
such program; and generally shall take such other steps as the Adviser may deem necessary or
appropriate to supervise the implementation by the Company of such program, recommendations and
advice. The Adviser shall also furnish to or place at the disposal of the Company such of the
information, reports, evaluations, analyses and opinions formulated or obtained by the Adviser in the
discharge of its duties hereunder as the Company may, at any time or from time to time, reasonably
request or as the Adviser may deem helpful to the Company.
3. In rendering corporate administrative services to the Company, the Adviser, at its expense, shall:
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(a) Furnish or provide to the Company such office space, facilities, simple business equipment,
personnel, and such clerical and bookkeeping services (exclusive of and in addition to any such services
provided or furnished by any custodian, transfer agent or other institutional agent retained by the
Company), as the Company may reasonably require in the conduct of its business, including the
maintenance of the Company I s accounts and records and the performance of all other functions
necessary for the maintenance of its corporate existence and its shareholder relations; and
(b) Furnish the services of individuals competent to perform all executive and administrat ive
functions for the Company, including without limitation such functions related to the exec ution of
portfolio transactions on its behalf as are not assigned to any other institutional agent retained by the
Company; and the Adviser agrees that if any such individuals, or any other individuals who are
members of the Adviser's organization, shall be elected or appointed as officers, directors, m embers of
any committee or directors or members of any advisory board or committee of the Company, the y shall
serve subject to any applicable statutes or rules or regulations thereunder relating to banking or invest-
ment companies.
If at any time or from time to time the Adviser shall determine that the performance of its obligations
hereunder would be facilitated by its payment or assumption of any expenses that the Company would
or might otherwise be required to bear, the Adviser shall be authorized to pay or assume such expense;
provided, however, that the payment or assumption by the Adviser of any such expense on one or more
occasions shall neither relieve the Company of any obligation to the Adviser pursuant to Paragraph 5(b)
hereof nor obligate the Adviser to pay or assume the same or any similar expense of the Company on
any subsequent occasion.
4. The Adviser agrees to use its best efforts to achieve the Company's objectives in acting as investment
adviser and rendering investment supervisory and corporate administrative services to the Company as
provided in this Agreement, and to this end shall cause its Trust Division and Investment Ma nagement
Division (herein collectively called the "Trust Department") to maintain, without cost to the Company,
such staff and facilities as it shall consider requisite for such purposes; but nothing herein contained
shall be deemed to preclude the Adviser, at its own expense, from employing, retaining or othe rwise
availing itself of the services of other persons or organizations for the purpose of providing the Adviser
or the Company with such statistical and other factual information, such advice regardi ng economic
factors and trends, such advice as to occasional transactions in specific securities or such other
information, advice or assistance as the Adviser may deem necessary, appropriate or conveni ent for the
discharge of its obligations hereunder or otherwise helpful to the Company. The Company shall furnish
or otherwise make available to the Adviser such financial reports, proxy statements and other
information relating to the business and affairs of the Company as the Adviser may, at any time or from
time to time, reasonably require in order to discharge its obligations hereunder. .
5. (a) The Company agrees to pay the Adviser at the end of each month, and the Adviser agrees to
accept, as full compensation for all services rendered, a fee computed and accrue d weekly calculated as
the sum of- (i) .45 of 1% per annum of the Company's average net assets for such month up to
$75,000,000, .40 of 1% of the next $50,000,000 and .30 of 1% per annum thereafter and (ii) 1.5% of
gross income accrued for such month. Average net assets of the Company during any month means the
average of the values of the Company's assets at the close of business on the last busine ss day on which
the New York Stock Exchange is open of each week ending within the month, less any liabi lities. In
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determining net assets, portfolio securities listed on an exchange will be valued at the closing sales price
on the day the valuation is made and such closing price will be taken from the exc hange where the
security is primarily traded unless the Adviser decides that market quotations are not readily available
for institutional size holdings, in which case such securities will be valued in good fa ith at fair value
under the direction of the Company's Board of Directors. Listed securities for which there is no sale on
the valuation date and securities traded in only the over-the-counter market will be valued at the most
recent closing bid price or in good faith at fair value under the direction of the C ompany's Board of
Directors. Other assets and securities, including restricted securities and other debt obligations
purchased in private transactions for which no quotations are readily available will be va lued in good
faith at fair value by or under the direction of the Company's Board of Directors. Gross incom e accrued
for any month means the total of all daily accruals of income on the books of the Company for such
month. If the Company's assets are initially delivered to the Adviser for management under this
Agreement subsequent to the first day of a month, or if this Agreement terminates before the last day of
a month, the Adviser's compensation for the fraction of the month will be determined by a pplying a
fraction of the foregoing percentages proportional to the fraction of the month to the average net asset
value of the Company and gross income accrued for the month during the fraction of the month
determined in such reasonable manner as the Company's Board of Directors shall deem appropriate.
(b) The Company will pay directly, or reimburse the Adviser for, all out-of-pocket expenses incurred i n
the administration of the Company, including without limitation, (i) directors' fees and expenses, (ii)
corporate franchise taxes, (iii) stock exchange listing fees, (iv) insurance premiums, (v) fee s of the
transfer agent, dividend disbursing agent, registrar and custodian (all or any of which may be NCNB
National Bank of North Carolina), (vi) annual auditing and legal fees, (vii) cost of i nformation obtained
from sources other than the Adviser or its affiliates relating to the valuation of portfolio securities, (viii)
expenses, including postage, of shareholder reports, proxy materials and other regulatory filings a nd
expenses of the dividend reinvestment plan, (ix) interest on borrowed funds, (x) other taxes, (xi) other
legal expenses, (xii) expenses incident to any additional public offering of shares of the C ompany, (xiii)
brokerage commissions and (xiv) all expenses of the Company not specifically assumed by the Advise r
as provided in this Agreement.
(c) The, foregoing notwithstanding, the Adviser agrees that if and to the extent that the aggregate of (i)
the fee specified in Paragraph 5(a) hereof and (ii) the operating expenses specified in c lauses (i) through
and including (viii) of Paragraph 5(b) hereof in any fiscal year (or fraction of a year) exceeds 11/ 2% of
the first $30,000,000 of average net assets, and 1% of average net assets in excess thereof (or pro rata
portion thereof for any fraction of a year), computed in the manner provided in Paragraph 5(a) he reof for
such year (or fraction), the fee specified in Paragraph 5(a) hereof will be reduced to the extent of the
excess. The Adviser shall be indebted to the Company as of the last day of such fiscal year, and shall
remit payment to the Company not later than the last day of the first month of & next succeeding fiscal
year, in an amount equal to such excess.
6. The Adviser agrees that:
(a) Neither the Adviser nor any of its officers or directors shall, as principal, purchase or se ll any
portfolio securities from or to the Company, or receive any commission in connection with purchases
and sales of portfolio securities for the account of the Company.
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(b) Neither the Adviser nor any of its executive officers or directors shall take any long or short
position in the capital stock of the Company; but this prohibition shall not prevent the purchase or sale
by any of the Adviser's officers or directors of shares of the capital stock of the Company at t he price at
which such shares are available to the public at the moment of purchase or sale, provide d that (i) any
such purchase be made for investment purposes only, and (ii) if any shares of capital stock so purchased
are resold within two months after the date of purchase, or if any shares of capital stock are purchased
within two months after the date of a sale of such shares, such fact will immedia tely be reported to the
Company.
(c) It will use the same skill and care in the performance of its obligations hereunde r as it uses in the
administration of other fiduciary accounts for which it has investment responsibility.
(d) It will conform with applicable law, the rules and regulations of the Comptroller of the Currency
relating to fiduciary powers of national banks, and the regulations of the Securities and Excha nge
Commission 'relating to management of registered investment companies. It is understood that the
Adviser will not render any opinion as to the advisability of purchasing the Company's shares or enga ge
in any selling or promoting of the Company's shares.
(e) It will not invest the assets of other fiduciary accounts in Company shares, make loans for the
purpose of purchasing or carrying such shares, or make loans to the Company.
(f) It will maintain its policy and practice of conducting the business of its Trust Department
independently of the business of its commercial banking department. Accordingly, in making investment
decisions for the Company, the Adviser's Trust Department personnel will not inquire or take into
consideration whether the issuers of securities, or the brokers or dealers executing any portfolio
transaction, are customers of the commercial banking department. In dealing with commercial
customers, the Adviser's commercial banking department will not inquire or take into consideration
whether securities of those customers are held by the Company.
(g) In placing orders for purchases and sales of securities, it will attempt to selec t markets and
broker/dealers so as to obtain the best net price and the most favorable execution. When these factors
point to no clear choice between two or more broker/dealers, the Adviser will take int o account any
research or statistical information that they provide which is of benefit to the Company.
7. Nothing herein contained shall be deemed to require the Company to take any acti on contrary to its
Certificate of Incorporation or Bylaws, or any applicable statutory or regulatory requireme nt to which it
is subject or by which it is bound, or relieve or deprive the Board of Directors of the Company of the
responsibility for and control of the conduct of the affairs of the Company.
8. This Agreement shall become effective April 1, 1984, and will continue in effect from year to year
thereafter so long as such continuance is specifically approved at least annually e ither by (i) the Board of
Directors of the Company or (ii) the vote of a majority of the outstanding voting securities of the
Company; provided, however, that in either event the continuance must also be approved by t he vote of
a majority of the Directors of the Company, who are not "interested persons" (as defined in the
Investment Company Act of 1940) of either party to this Agreement, cast in person at a m eeting called
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for the purpose of voting upon such approval. If such annual approval is not obtained, the Agreement
shall expire 12 months after the date of the last approval.9. The Company has the right to terminate this Agreement at any time without penalty either by vote of
its Board of Directors or by "vote of a majority of its outstanding voting securities" (as de fined in the
Investment Company Act of 1940) on 60 days' written notice to the Adviser. The Adviser may term inate
this Agreement upon 90 days' written notice to the Directors of the Company.
10. This Agreement may not be amended, transferred, assigned, sold or in any manner hypothecated or
pledged, without the affirmative vote of a majority of the outstanding voting securities of the Company,
and this Agreement shall automatically and immediately terminate in the event of its "assignment" (as
defined in the Investment Company Act of 1940).
11. Nothing herein contained shall limit the freedom of the Adviser or any affiliated pe rson of the
Adviser to render investment supervisory and corporate administrative services to other investment
companies, to act as investment adviser or investment counselor to other persons, firms or corpora tions
and to engage in other business activities. As used with reference to the Adviser in Paragraph 11, the
term "affiliated person" shall have the meaning assigned thereto in the Investment Company Act of
1940.
12. The Company will hold the Adviser harmless from judgments against the Adviser resulting from
specific acts or omissions in the performance of its obligations under this Agreement which are the
result of written instructions of a majority of the Board of Directors of the Company, so long as there is
an express finding that such acts or omissions did not constitute willful misfeasance, ba d faith, gross
negligence or reckless disregard of its duties or a breach of fiduciary duty.
13. No provision of this Agreement shall be deemed to protect the Adviser against any l iability to the
Company or its shareholders to which it might otherwise be subject by reason of
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their
officers thereunto duly authorized as of the day and year first above written.
CAPSTEAD MORTGAGE CORPORATIONBy: /s/ RONN K. LYTLE
Ronn K. Lytle, President
CAPSTEAD ADVISERS, INC. By: /s/ JESS HAY
Jess Hay, Chairman of the Board
LOMAS MORTGAGE USA, INC. By: /s/ JESS HAY
Jess Hay, Chairman of the Board
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TYLER CABOT SECURITIES ADVISERS, INC.By: /s/ JESS HAY
Jess Hay, Chairman of the Board
