DIRECTORS JOHN C. ATWATER
RICHARD J. BRADSHAW
OTTO W. BUTZ
MARYELLIE K. MOORE
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE
Chairman
HONORARY JOHN A. WHITE
DIRECTOR
OFFICERS JOHN T. PACKARD
President
DANIEL PIERCE
Vice President and
Assistant Treasurer
EDWARD J. O'CONNELL
Vice President
THOMAS F. McDONOUGH
Vice President and
Secretary
PAMELA A. McGRATH
Vice President and
Treasurer
KATHRYN L. QUIRK
Vice President and
Assistant Secretary
STEPHEN A. WOHLER
Vice President
MARK S. BOYADJIAN
Vice President
INVESTMENT Scudder, Stevens & Clark, Inc.
MANAGER 101 California Street, Suite 4100
San Francisco, CA 94111
TRANSFER The First National Bank
AGENT of Boston
Shareholder Services
Division
P.O. Box 644
Boston, MA 02102
CUSTODIAN Chase Manhattan Bank, N.A.
4 Chase Metro Tech Center
18th Floor
Brooklyn, NY 11245
LEGAL COUNSEL Orrick, Herrington & Sutcliffe
400 Sansome Street
San Francisco, CA 94111
INDEPENDENT Ernst & Young LLP
AUDITORS 200 Clarendon Street
Boston, MA 02116
--------------
MONTGOMERY
--------------
MONTGOMERY
STREET
INCOME
SECURITIES
2
Semiannual Report
June 30, 1995
Scudder
Investment
Adviser
<PAGE>
101 California Street, Suite 4100
San Francisco, CA 94111
(415) 981-8191
Dear Shareholder:
For the quarter ended June 30, 1995 the Montgomery Street Income Securities,
Inc. portfolio produced a total return of 7.5% based on change in net asset
value (NAV) and dividends. The NAV per share of the Fund at the end of the
quarter was $19.58 compared to $18.59 at the end of the first quarter. Dividends
during the quarter were $0.34 per share, paid on April 28, 1995. The unmanaged
Lehman Brothers Aggregate Bond Index produced a return of 6.09% during the
quarter. The market value of the Fund's shares, which trade on the New York
Stock Exchange, was $17.25 on June 30, 1995 versus $17.125 on March 31, 1995. As
of the end of the second quarter, the discount of market value on the New York
Stock Exchange to NAV was 11.9%.
On July 13, 1995 the Board of Directors declared a $0.35 dividend per share
payable on July 31, 1995 to shareholders of record on July 24, 1995, a $0.01 per
share increase over the previous quarter dividend.
Economic Conditions
The economic statistics released during the second quarter were weaker than
expected. That was confirmed in late July by the issuance of the preliminary
Gross Domestic Product (GDP) figures reflecting growth of 0.5% for the trailing
three month period. Measures of inflation were stable and were referenced by
Federal Reserve Chairman Greenspan as the primary reason the Fed reduced
inter-bank lending rates from 6% to 5.75% on July 6. Similar patterns of modest
economic growth and subdued inflation overseas, combined with the weakness in
the U.S., provide a favorable environment for bond investors. While we expect
some rebound from the levels of the second quarter GDP, we believe we are
nearing the end of the economic cycle of positive growth. It is possible that
the economy will be flat if not slipping into recession by the second half of
1996. The Fed's move to ease monetary policy in July could be the first of a
series of cuts to reduce short term rates further.
Consequently, interest rates have room to fall over the next 12-18 months. Both
the Administration and Congress appear committed to a balanced Federal budget,
which will tend to retard economic growth. Consumers remain cautious in an
environment of weak economic activity and job insecurity. Thus, without
underlying pressures from labor or business, inflation should remain under
control and, in fact, might begin to decline slightly later in 1996.
Market Conditions and Outlook
Reflecting the sluggish business activity, interest rates fell sharply in the
second quarter as presented in the table below.
-----------------------------------------------------
U.S. Treasury Interest Rate Quarterly Review
Rate 3/31/95 6/30/95 Change
-----------------------------------------------------
-----------------------------------------------------
3 months 5.85% 5.56% -0.29
1 year 6.48 5.62 -0.86
2 years 6.78 5.79 -0.99
5 years 7.07 5.97 -1.10
10 years 7.19 6.20 -0.99
30 years 7.43 6.62 -0.81
-----------------------------------------------------
2
<PAGE>
The majority of the move occurred in May, following four months of relatively
strong foreign central bank buying of short to intermediate maturities. The
rally continued in early June as more signs of a slowdown in economic activity
were reported. The U.S. bond market in the second quarter outperformed all of
the major European and Asian bond markets, i.e., the G-7 community.
The Portfolio
The effective maturity of the Fund's portfolio at mid-year was approximately 13
years and the duration 5.2 years, both slightly higher than last quarter end,
and also slightly longer than our benchmark bond index. Our investment strategy
continues to favor industrial bonds which have good call protection if interest
rates drop. The yield to maturity on the portfolio was 7.75%, which was about
1.5% better than the yield on Treasury bonds having approximately the same
maturity as the portfolio.
The Fund's investment policies allow the portfolio to hold up to 30% of total
assets in U.S. or foreign securities that are straight debt securities, whether
or not rated, convertible securities, preferred stocks, or dividend-paying
utility company common stock. At quarter end, the Fund held 26.6% of its assets
in this category. The largest holding in the below investment grade area was
Safeway, a supermarket chain, representing 2.0% of the total portfolio. Overall,
19.5% of the portfolio was rated below investment grade and the average quality
rating for the portfolio was `A'. The bar graph below shows the sector
allocation at the end of the second quarter, and highlights the fact that
industrial bonds comprise nearly one-half of the portfolio because of their call
protection.
Percent of Portfolio
as of 6/30/95
Cash 3.0
Treasury and Agency (Gov't) 11.9
Mortgage 22.8
Asset-Backed 4.0
Industrial 37.9
Utility 4.6
Finance 8.2
Foreign 2.9
Emerging Markets 3.0
The Fund had 23% in mortgage investments at the end of the second quarter, down
from 24% at the end of the first quarter. Those consisted of conventional
mortgages, pass-throughs such as Freddie Macs, premium Ginnie Mae mortgages, and
principal only mortgages. The market prices of mortgage securities increased at
a slower rate than those in the industrial and treasury sectors of the portfolio
during the quarter. However, the mortgage pass-throughs produce high income to
the Fund with little corresponding price volatility and, therefore, are deemed
attractive to continue holding.
3
<PAGE>
The Fund, as of June 30, had 3.0% of its assets in U.S. Dollar-denominated
Mexican bonds and 2.9% in long Canadian Governments (denominated in Canadian
Dollars). Unlike the first quarter, these two investment areas contributed
significantly to the Fund's performance in the second quarter.
Annual Meeting Election Results
At the July 13, 1995 Annual Meeting, the shareholders elected the six directors
which appeared in your proxy statement. The selection of Ernst & Young LLP as
the Fund's independent auditors for the fiscal year ending December 31, 1995 was
ratified. Shareholders also approved the continuance of the management and
investment advisory agreement between the Fund and Scudder, Stevens & Clark,
Inc. At the Board meeting later that day, James C. Van Horne was re-elected
Chairman of the Board. Please see the table entitled "Shareholder Meeting
Results" on page 17 for more information.
We look forward to working with you in the period ahead.
Sincerely,
/s/John T. Packard /s/Stephen A. Wohler
John T. Packard Stephen A. Wohler
President Vice President
Portfolio Manager of the Fund
August 15, 1995
This report is sent to shareholders of Montgomery Street Income Securities, Inc.
for their information. It is not a prospectus, circular, or representation
intended for use in the purchase or sale of shares of the Fund or of any
securities mentioned in the report.
4
<PAGE>
INVESTMENT OBJECTIVES
Your Fund is a closed-end diversified management investment company registered
under the Investment Company Act of 1940, investing and reinvesting its assets
in a portfolio of selected securities. The Fund's primary investment objective
is to seek as high a level of current income as is consistent with prudent
investment risks, from a diversified portfolio primarily of debt securities.
Capital appreciation is a secondary objective.
PRINCIPAL INVESTMENT POLICIES
Investment of your Fund is guided by the following principal investment
policies:
At least 70% of total assets must be invested in: straight debt securities
(other than municipal securities) rated within the four highest grades assigned
by Moody's Investors Service, Inc. or Standard & Poor's; bank debt of comparable
quality; U.S. government or agency securities; commercial paper; cash; cash
equivalents; or Canadian government, provincial, or municipal securities (not in
excess of 25% of total assets).
Up to 30% of total assets (the "30% basket") may be invested in U.S. or foreign
securities that are straight debt securities, whether or not rated, convertible
securities, preferred stocks, or dividend-paying utility company common stock.
Not more than 25% of total assets may be invested in securities of any one
industry (neither utility companies as a whole nor finance companies as a whole
are considered an "industry" for the purposes of this limitation).
Not more than 15% of total assets may be invested in securities which are
restricted as to resale.
Not more than 5% of total assets may be invested in securities of any one
issuer, other than U.S. government or agency securities.
The Fund may invest money pursuant to repurchase agreements so long as the Fund
is initially wholly secured with collateral consisting of securities in which
the Fund can invest under its investment objectives and policies. In addition,
investment in repurchase agreements must not, at the time of any such loan, be
as a whole more than 20%--and be as to any one borrower more than 5%--of the
Fund's total assets.
The Fund may loan portfolio securities so long as the Fund is continuously
secured by collateral at least equal to the market value of the securities
loaned. In addition, loans of securities must not, at the time of any such loan,
be as a whole more than 10% of the Fund's total assets.
The Fund may borrow funds to purchase securities, provided that the aggregate
amount of such borrowings may not exceed 30% of the Fund's assets (including
aggregate borrowings), less liabilities (excluding such borrowings).
The Fund may enter into forward foreign currency sale contracts to hedge
portfolio positions, provided, among other things, that such contracts have a
maturity of one year or less and at the time of purchase, the Fund's obligations
under such contracts may not exceed either the market value of portfolio
securities denominated in the foreign currency or 15% of the Fund's total
assets.
Subject to adoption of Board guidelines, the Fund may enter into interest rate
futures contracts and purchase or write options on interest rate futures
contracts, provided, among other things, that the Fund's obligations under such
instruments may not exceed the market value of the Fund's assets not subject to
the 30% basket.
5
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
JUNE 30, 1995 (UNAUDITED)
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.8%
(UNDER 1 YEAR)
Ford Motor Credit Co., 5.981%, 7/7/95............................................. 1,807,000 1,807,000
Ford Motor Credit Co., 6.008%, 7/7/95............................................. 1,696,000 1,696,000
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,503,000).................................... 3,503,000
----------
- --------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BONDS -- 29.5%
(1 - 8 years)
U.S. TREASURY AND AGENCY -- 13.2%
Federal National Mortgage Association, 8%, with various maturities to 12/1/01..... 5,074,133 5,194,644
Federal Home Loan Mortgage Corp., Separate Trading Registered Interest and
Principal, 167-A, principal only certificate, 5/15/99........................... 3,531,988 2,995,568
Federal Home Loan Mortgage Corp., REMIC, 1724-PO, principal only
certificate, 5/15/01............................................................ 3,646,469 2,928,570
Student Loan Marketing Association, floating rate debenture, coupon
inversely indexed to 5 year German Swap Rate, 4%, 3/23/98**..................... 2,500,000 2,356,250
U.S. Treasury Note, 8.875%, 2/15/99............................................... 9,000,000 9,843,750
U.S. Treasury Note, 9.125%, 5/15/99............................................... 2,400,000 2,656,488
----------
25,975,270
----------
FOREIGN GOVERNMENT -- 0.8%
Nacional Financiera SNC, 9.375%, 7/15/02.......................................... 2,000,000 1,580,000
----------
METALS & MINERALS -- 1.7%
Precious Metals
Alatief Freeport Financial Co., note, 9.75%, 4/15/01.............................. 3,000,000 3,270,000
----------
CONSUMER DISCRETIONARY -- 3.1%
Department and Chain Stores -- 1.1%
Federated Department Stores, Inc., senior note, 10%, 2/15/01...................... 2,000,000 2,150,000
----------
Retail -- 2.0%
Safeway Stores Inc., senior subordinated note, 10%, 12/1/01....................... 3,500,000 3,911,250
----------
CONSUMER STAPLES -- 1.4%
Food & Beverage
Empresa La Moderna S.A., 10.25%, 11/12/97......................................... 1,000,000 900,000
Fomento Economico Mexicano, S.A. (FEMSA), 9.5%, 7/22/97........................... 1,000,000 952,500
Gruma, 9.75%, 3/9/98.............................................................. 1,000,000 900,000
----------
2,752,500
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL -- 3.5%
Banks -- 1.9%
Continental Bank, subordinate note, 12.5%, 4/1/01....................................... 3,000,000 3,759,300
----------
Other Financial Companies -- 1.6%
General Electric Capital Corp., medium-term basket structured note, coupon inversely
indexed to 6 month Italian LIBOR and Swedish STIBOR, 3.1289%, 5/21/98**............... 2,000,000 1,732,500
Health Care Properties Investors Inc., 6%, 11/8/00...................................... 1,500,000 1,417,500
----------
3,150,000
----------
MEDIA -- 1.5%
Cable Television
Rogers Cablesystems Ltd., senior secured note, 9.625%, 8/1/02........................... 3,000,000 3,022,500
----------
ENERGY -- 1.7%
Chemicals
Lyondell Petrochemical Co., note, 10%, 6/1/99........................................... 3,000,000 3,291,360
----------
TECHNOLOGY -- 2.6%
Electronic Data Processing
Digital Equipment Corp., global note, 7.125%, 10/15/02.................................. 2,000,000 1,923,660
Unisys Corp., debenture, 13.5%, 7/1/97.................................................. 1,000,000 1,105,000
Unisys Corp., senior note, 10.625%, 10/1/99............................................. 2,000,000 2,150,000
----------
5,178,660
----------
TOTAL INTERMEDIATE-TERM BONDS (Cost $57,015,487)........................................ 58,040,840
----------
- ----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM BONDS -- 64.1%
(OVER 8 YEARS)
U.S. TREASURY & AGENCY -- 20.9%
Federal Home Loan Mortgage Corp., 9.5%, with various maturities to 2/1/25............... 26,292,335 27,601,785
Government National Mortgage Association, pass-thru certificate, 10%, 2/15/25........... 4,836,097 5,263,753
U.S. Treasury Bond, 8.125%, 8/15/19..................................................... 7,000,000 8,144,080
----------
41,009,618
----------
FOREIGN GOVERNMENT -- 3.6%
Banco National de Comercio Exterior, 8%, 8/5/03......................................... 2,000,000 1,445,000
Government of Canada, 8%, 6/1/23........................................................ CAD 8,000,000 5,628,391
----------
7,073,391
----------
CONSTRUCTION -- 1.0%
Georgia-Pacific Corp., 7.7%, 6/15/15.................................................... 2,000,000 1,970,000
----------
CONSUMER DISCRETIONARY -- 1.0%
Hotels & Casinos
Marriott Corp., debenture, 9.375%, 6/15/07.............................................. 2,000,000 2,010,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER STAPLES -- 4.0%
Food & Beverage
Borden Inc., debenture, 9.2%, 3/15/21................................................. 4,000,000 4,281,560
Coca Cola Co., Inc., debenture, 7.375%, 7/29/2093..................................... 3,500,000 3,562,965
----------
7,844,525
----------
FINANCIAL -- 10.1%
Banks -- 2.3%
ABN-AMRO Bank N.V., subordinated note, 7.125%, 10/15/2093............................. 5,000,000 4,557,200
----------
Other Financial Companies -- 6.9%
Commercial Credit Corp., debenture, 10%, 5/15/09...................................... 3,000,000 3,756,570
First USA Bank, global subordinated note, 7.65%, 8/1/03............................... 2,000,000 2,006,060
Greentree Financial Corp., asset-backed, senior subordinated pass-thru certificate,
7.2%, 1/15/19....................................................................... 8,000,000 7,802,480
----------
13,565,110
----------
Real Estate -- 0.9%
Federal Realty Investment Trust, 5.25%, 10/28/03...................................... 2,000,000 1,735,000
----------
MEDIA -- 3.0%
Broadcasting & Entertainment
Paramount Communications, Inc., 7.5%, 7/15/23......................................... 2,000,000 1,785,180
Time Warner Inc., debenture, 9.125%, 1/15/13.......................................... 4,000,000 4,157,160
----------
5,942,340
----------
DURABLES -- 2.4%
Aerospace
McDonnell Douglas, debenture, 9.75%, 4/1/12........................................... 4,000,000 4,779,960
----------
ENERGY -- 10.1%
Oil & Gas Production -- 8.1%
Lasmo U.S.A. Inc., note, 8.375%, 6/1/23............................................... 3,000,000 3,084,870
Louis Dreyfus Natural Gas Corp., senior note, 9.25%, 6/15/04.......................... 3,000,000 3,138,600
Saga Petroleum A.S., note, 9.125%, 7/15/14............................................ 3,000,000 3,302,250
Seagull Energy, senior subordinated note, 8.625%, 8/1/05.............................. 3,000,000 2,820,000
Unocal Corp., debenture, 9.4%, 2/15/11................................................ 3,000,000 3,542,310
----------
15,888,030
----------
Oil Companies -- 2.0%
Atlantic Richfield, medium-term note, 10.875%, 7/15/05................................ 3,000,000 3,850,740
----------
MANUFACTURING -- 2.3%
Diversified Manufacturing
Borden Chemicals and Plastics, Ltd., 9.5%, 5/1/05..................................... 2,000,000 2,030,000
Tenneco Inc., debenture, 10%, 3/15/08................................................. 2,000,000 2,473,140
----------
4,503,140
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
SERVICE INDUSTRIES -- 1.0%
Service Industries
ADT Operations, senior subordinated note, 9.25%, 8/1/03............... 2,000,000 2,065,000
-----------
TECHNOLOGY -- 0.8%
Military Electronics
Loral Corp., note, 8.375%, 6/15/24.................................... 1,500,000 1,595,850
-----------
TRANSPORTATION -- 0.9%
Airlines
American Airlines, Inc., medium-term note, 10.45%, 3/10/11............ 1,500,000 1,803,645
-----------
UTILITIES -- 3.0%
Natural Gas Distributors
ANR Pipeline, debenture, 9.625%, 11/1/21.............................. 2,000,000 2,426,280
Coastal Corp., debenture, 9.625%, 5/15/12............................. 3,000,000 3,409,890
-----------
5,836,170
-----------
TOTAL LONG-TERM BONDS (Cost $124,803,402)............................. 126,029,719
-----------
- -----------------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 1.7%
SHARES
---------
FINANCIAL
Banks -- 0.7%
First Nationwide Bank, non--cumulative 11.5%.......................... 12,500 1,350,000
-----------
Real Estate -- 1.0%
United Dominion Realty Trust Inc., "A", 9.25%......................... 80,000 2,030,000
-----------
TOTAL PREFERRED STOCK (Cost $3,250,000)............................... 3,380,000
-----------
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 97.1% (Cost $188,571,889)(a)............ 190,953,559
OTHER ASSETS AND LIABILITIES, NET -- 2.9%............................. 5,625,113
-----------
NET ASSETS -- 100.0%.................................................. 196,578,672
===========
<FN>
________________
(a) The cost for federal income tax purposes was $188,571,889. At June 30, 1995, net unrealized appreciation
for all securities based on tax cost was $2,381,670. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market value over tax cost of $5,915,415
and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost
over market value of $3,533,745.
* Principal amount is stated in U.S. dollars unless otherwise specified.
** Inverse floating rate notes are instruments whose yields have an inverse relationship to benchmark interest
rates. These securities are shown at their rate as of June 30, 1995.
CURRENCY ABBREVIATIONS USED IN THIS PORTFOLIO:
CAD Canadian Dollar
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1995 (UNAUDITED)
<S> <C> <C>
ASSETS
Investments, at market (identified cost $188,571,889)
(Note A)................................................ $190,953,559
Cash...................................................... 182
Receivables:
Investments sold........................................ 2,327,854
Interest................................................ 3,437,864
------------
TOTAL ASSETS 196,719,459
LIABILITIES
Accrued management fee (Note B)........................... $74,737
Other accrued expenses.................................... 66,050
-------
TOTAL LIABILITIES 140,787
------------
NET ASSETS, at market value............................. $196,578,672
============
NET ASSETS
Net assets consist of:
Undistributed net investment income..................... $ 3,954,431
Net unrealized appreciation on:
Investments........................................... 2,381,670
Foreign currency related transactions................. 117
Accumulated net realized loss........................... (6,302,263)
Common stock............................................ 10,041,290
Additional paid-in capital.............................. 186,503,427
------------
NET ASSETS, at market value............................. $196,578,672
============
NET ASSET VALUE PER SHARE ($196,578,672 / 10,041,290 shares
of common stock outstanding, $1.00 par value, 15,000,000
shares authorized)........................................ $19.58
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest............................................. $ 7,885,488
Dividends............................................ 71,875
-----------
7,957,363
EXPENSES:
Management and investment advisory fee (Note B)...... $453,520
Directors' fees (Note B)............................. 41,008
Transfer agent and dividend disbursing agent fees.... 55,087
Auditing............................................. 31,294
Reports to shareholders.............................. 30,510
Legal................................................ 17,160
State franchise tax.................................. 16,885
Custodian fees....................................... 8,753
Other................................................ 33,807 688,024
-------- -----------
NET INVESTMENT INCOME 7,269,339
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from investment and foreign currency
related transactions................................. (502,497)
Net unrealized appreciation during the period on:
Investments.......................................... 15,256,602
Foreign currency related transactions................ 513
-----------
Net gain on investments................................ 14,754,618
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................................. $22,023,957
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Six Months Year
Ended Ended
June 30, 1995 December 31,
INCREASE (DECREASE) IN NET ASSETS (Unaudited) 1994
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 7,269,339 $ 13,714,204
Net realized loss from investment transactions................. (502,497) (5,045,581)
Net unrealized appreciation (depreciation) on investment
transactions during the period............................... 15,257,115 (19,015,182)
------------ ------------
Net increase (decrease) in net assets resulting from operations... 22,023,957 (10,346,559)
------------ ------------
Dividends to shareholders from net investment income
($.34 and $1.36 per share, respectively)....................... (3,408,354) (13,575,510)
------------ ------------
Fund share transactions:
Reinvestment of dividends from net investment income........... 280,797 1,106,625
------------ ------------
INCREASE (DECREASE) IN NET ASSETS................................. 18,896,400 (22,815,444)
Net assets at beginning of period................................. 177,682,272 200,497,716
------------ ------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $3,954,431 and $93,446, respectively)..... $196,578,672 $177,682,272
============ ============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period......................... 10,024,589 9,958,150
Shares issued to shareholders in reinvestment of dividends
from net investment income..................................... 16,701 66,439
------------ ------------
Shares outstanding at end of period............................... 10,041,290 10,024,589
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS AND MARKET PRICE DATA.
<CAPTION>
Six Months
Ended
June 30, Years Ended December 31,
1995 (a) ----------------------------------------
(Unaudited) 1994(a) 1993(a) 1992(a) 1991 1990
----------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............. $17.72 $ 20.13 $19.30 $19.17 $17.21 $17.97
------ ------- ------ ------ ------ ------
Income from investment operations:
Income........................................ .79 1.51 1.68 1.84 1.88 1.89
Operating expenses............................ (.07) (.14) (.15) (.15) (.13) (.10)
------ ------- ------ ------ ------ ------
Net investment income......................... .72 1.37 1.53 1.69 1.75 1.79
Net realized and unrealized gain (loss)....... 1.48 (2.42) .84 .47 1.97 (.77)
------ ------- ------ ------ ------ ------
Total from investment operations................. 2.20 (1.05) 2.37 2.16 3.72 1.02
------ ------- ------ ------ ------ ------
Dilution resulting from the rights offering...... -- -- -- (.36) -- --
Less distributions from net investment
income........................................ (.34) (1.36) (1.54) (1.67) (1.76) (1.78)
------ ------- ------ ------ ------ ------
Net asset value, end of period................... $19.58 $ 17.72 $20.13 $19.30 $19.17 $17.21
====== ======= ====== ====== ====== ======
Per share market value, end of period............ $17.25 $ 15.75 $19.75 $20.88 $19.63 $17.50
====== ======= ====== ====== ====== ======
Price range on New York Stock
Exchange for each share of Common
Stock outstanding during the period
(Unaudited):
High.......................................... $18.00 $ 20.25 $22.38 $21.00 $20.25 $19.00
Low........................................... $15.75 $ 15.25 $19.25 $19.00 $17.00 $15.00
TOTAL RETURN
Per share market value (%).................... 11.74(c) (13.54) 2.02 17.98 23.11 3.45
Per share net asset value (%) (b)............. 12.67(c) (4.51) 12.47 11.67 22.28 6.15
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions)........... 197 178 200 191 157 140
Ratio of operating expenses to
average net assets (%)........................ .74(d) .71 .73 .75 .69 .57
Ratio of net investment income to
average net assets (%)........................ 7.77(d) 7.28 7.53 8.69 9.60 10.20
Portfolio turnover rate (%)...................... 73.3(d) 137.0 122.8 137.6 72.0 69.1
<FN>
________________
(a) Based on monthly average shares outstanding during the period.
(b) Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during each period,
and assumes dividends and capital gains distributions, if any, were reinvested.
The dilution resulting from the rights offering in 1992 has been treated as a
distribution for the total return calculation. These percentages are not an
indication of the performance of a shareholder's investment in the Fund based
on market value due to differences between the market price of the stock and
the net asset value of the Fund during each period.
(c) Not annualized
(d) Annualized
</FN>
</TABLE>
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1995 (Unaudited)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES. Montgomery Street Income Securities,
Inc. (the "Fund") is registered under the Investment Company Act of 1940, as
amended, as a closed-end diversified management investment company.
Significant accounting policies are summarized as follows:
Valuation of Investments--Portfolio debt securities with remaining
maturities greater than sixty days are valued by pricing agents approved by
the Officers of the Fund, which prices reflect broker/dealer-supplied
valuations and electronic data processing techniques. If the pricing agents
are unable to provide such quotations, or if the Adviser does not believe
that the value supplied by the pricing agent represents fair market
value, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or
less are valued at amortized cost. Securities for which market quotations
are not available are valued as determined in good faith by or under the
direction of the Board of Directors of the Fund.
Foreign Currency Translations--The books and records of the Fund are
maintained in U.S. dollars. Foreign currency transactions are translated
into U.S. dollars on the following basis:
(i) market value of investment securities, other assets and
liabilities at the daily rates of exchange, and
(ii) purchases and sales of investment securities, interest income
and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are
included with the net realized and unrealized gains and losses from
investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the accrual and payment dates on
interest and foreign withholding taxes.
Federal Income Taxes--The Fund's policy is to comply with the requirements
of the Internal Revenue Code which are applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
The Fund, accordingly, paid no federal income taxes and no federal income
tax provision was required.
As of December 31, 1994, the Fund had a net tax basis capital loss
carryforward of approximately $3,373,892, which may be applied against any
realized net taxable capital gains of each succeeding year until fully
utilized or until December 31, 1999 ($60,802), and December 31, 2002
($3,313,090), the respective expiration dates, whichever occurs first. In
addition, from November 1, 1994 through December 31, 1994, the Fund incurred
$2,425,874 of net realized capital losses. As permitted by tax
14
<PAGE>
regulations, the Fund intends to elect to defer these losses and treat them
as arising in the fiscal year ended December 31, 1995.
Distribution of Income and Gains--Distributions of net investment income are
made quarterly. During any particular year, net realized gains from
investment transactions, in excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed and, therefore will be
distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise
tax. The Fund uses the specific identification method for determining
realized gain or loss on investments sold for both financial and federal
income tax reporting purposes.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles
(GAAP). These differences relate primarily to investments in mortgage backed
securities, forward contracts and foreign currency denominated investments.
As a result, net investment income and net realized gain (loss) on
investment transactions for a reporting period may differ significantly
from distributions during such period. Accordingly, the Fund may
periodically make reclassifications among certain of its capital accounts
without impacting the net asset value of the Fund.
Other--Investment security transactions are accounted for on a trade-date
basis. Dividend income and distributions to shareholders are recorded
on the ex-dividend date. Interest income is recorded on the accrual basis.
NOTE B--MANAGEMENT AND INVESTMENT ADVISORY FEE. Under the Fund's Management
and Investment Advisory Agreement (the "Agreement") with Scudder, Stevens &
Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser for services
rendered, an annual fee, payable monthly, equal to .50 of 1% of the value of
the net assets of the Fund up to and including $150 million; .45 of 1% of the
value of the net assets of the Fund over $150 million and up to and including
$200 million; and .40 of 1% of the value of the net assets of the Fund over
$200 million. The Agreement also provides that the Adviser will reimburse the
Fund for all expenses (excluding interest, taxes, brokerage commissions, and
extraordinary expenses) borne by the Fund in any fiscal year in excess of the
sum of one and one-half percent of the first $30 million of average net assets
and one percent of average net assets in excess of $30 million. Further, if
annual expenses as defined in the Agreement exceed 25% of the Fund's annual
gross income, the excess will be reimbursed by the Adviser. For the six months
ended June 30, 1995, the fee pursuant to the Agreement amounted to $453,520.
None of the Directors are affiliated with the Adviser. For the six months ended
June 30, 1995, Directors' fees aggregated $41,008.
NOTE C--PURCHASES AND SALES OF INVESTMENTS. For the six months ended June 30,
1995, purchases and sales of investment securities other than direct U.S.
government obligations and short-term investments aggregated $53,985,722 and
$60,287,720, respectively. Purchases and sales of direct U.S. government
obligations aggregated $10,506,719 and $5,460,391, respectively.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
NOTE D--UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<CAPTION>
1995
-------------------------------------------
FIRST SECOND TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
Total investment income............. $3,950,161 $4,007,202 $ 7,957,363
Net investment income............... 3,615,759 3,653,580 7,269,339
Per share......................... $0.36 $0.36 $0.72
Net realized gains (losses) and
change in net unrealized
appreciation (depreciation) on
investments....................... 5,041,317 9,713,301 14,754,618
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------------------
FIRST SECOND TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
Total investment income............. $ 3,700,348 $ 3,757,881 $ 7,458,229
Net investment income............... 3,338,823 3,426,127 6,764,950
Per share......................... $0.34 $0.34 $0.68
Net realized gains (losses) and
change in net unrealized
appreciation (depreciation) on
investments....................... (9,979,259) (8,109,555) (18,088,814)
</TABLE>
NOTE E--SUBSEQUENT EVENT. On July 13, 1995, the Board of Directors declared
a dividend of $0.35 per share (aggregating $3,514,451), payable on July 31,
1995 to shareholders of record on July 24, 1995.
16
<PAGE>
SHAREHOLDER MEETING RESULTS
The Annual Meeting of Shareholders of Montgomery Street Income Securities, Inc.
(the "Company") was held on Thursday, July 13, 1995, at the Golden Gate
University Auditorium, San Francisco, California. The three matters voted upon
by Shareholders and the resulting votes for each matter are presented below.
1. The election of six Directors to hold office until the next Annual Meeting
or until their respective successors shall have been duly elected and
qualified.
Director: Number of Votes:
For Withheld Broker Non-Votes*
--- --------- -----------------
John C. Atwater 8,307,402 208,564 0
Richard J. Bradshaw 8,358,294 157,673 0
Otto W. Butz 8,311,879 204,087 0
Maryellie K. Moore 8,360,266 155,700 0
Wendell G. Van Auken 8,360,311 155,655 0
James C. Van Horne 8,356,932 159,035 0
2. Ratification or rejection of the action taken by the Board of Directors in
selecting Ernst & Young LLP as independent auditors for the fiscal year
ending December 31, 1995.
Number of Votes:
For Against Abstain Broker Non-Votes*
- --- ------- -------- -----------------
8,346,676 39,637 129,653 0
3. Approval or disapproval of the continuance of the Management and Investment
Advisory Agreement between the Company and Scudder, Stevens & Clark, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
- --- ------- -------- -----------------
8,239,750 104,438 171,779 0
- --------------------------------------------------------------------------------
* Broker non-votes are proxies received by the Company from brokers or
nominees when the broker or nominee neither has received instructions from
the beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
17
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
All registered shareholders of the Fund's Common Stock are offered the
opportunity of participating in a Dividend Reinvestment and Cash Purchase Plan
(the "Plan"). Registered shareholders, on request or on becoming registered
shareholders, are mailed information regarding the Plan, including a form by
which they may elect to participate in the Plan and thereby cause their future
net investment income dividends and capital gains distributions to be invested
in shares of the Fund's Common Stock. The First National Bank of Boston is the
agent (the "Plan Agent") for shareholders who elect to participate in the Plan.
If a shareholder chooses to participate in the Plan, the shareholder's
dividends and capital gains distributions will be promptly invested,
automatically increasing the shareholder's holdings in the Fund. If the Fund
declares a dividend or capital gains distributions payable either in cash or in
stock of the Fund, the shareholder will automatically receive stock. If the
market price per share on the payment date for the dividend (the "Valuation
Date") equals or exceeds the net asset value per share, the Fund will issue new
shares to the shareholder at the greater of the following on the Valuation Date:
(a) net asset value per share or (b) 95% of the market price per share. If the
market price per share on the Valuation Date is less than the net asset value
per share, the Fund will issue new shares to the shareholder at the market price
per share on the Valuation Date. In either case, for federal income tax purposes
the shareholder will be deemed to receive a distribution equal to the market
value on the Valuation Date of the new shares issued. If dividends or capital
gains distributions are payable only in cash, then the shareholder will receive
shares purchased on the New York Stock Exchange or otherwise on the open market.
In this event, for federal income tax purposes the amount of the distribution
will equal the cash distribution paid. State and local taxes may also apply. All
reinvestments are in full and fractional shares, carried to three decimal
places.
Shareholders participating in the Plan can also purchase additional shares
quarterly in any amount from $100 to $3,000 (a "Voluntary Cash Investment") by
sending in a check together with the cash remittance slip which will be sent
with each statement of the shareholder's account. Such additional shares will be
purchased on the open market by the Plan Agent. The purchase price of shares
purchased on the open market, whether pursuant to a reinvestment of dividends
payable only in cash or a Voluntary Cash Investment, will be the average price
(including brokerage commissions) of all shares purchased by the Plan Agent on
the date such purchases are effected. In addition, shareholders may be charged a
service fee in an amount up to 5% of the value of the Voluntary Cash Investment.
Although subject to change, shareholders are currently charged a minimum of $1
and maximum of $3, for each Voluntary Cash Investment.
Shareholders may terminate their participation in the Plan at any time and
elect to receive dividends and other distributions in cash by notifying the Plan
Agent in writing. Such notification must be received not less than 10 days prior
to the record date of any distribution. There is no charge or other penalty for
such termination. The Plan may be terminated by the Fund or the Plan Agent upon
written notice mailed to the shareholders at least 30 days prior to the record
date of any distribution. Upon termination, the Fund will issue certificates for
all full shares held under the Plan and cash for any fractional share.
Alternatively, shareholders may request the Plan Agent to sell any full
shares and remit the proceeds, less a 5% service fee up to $5 and less brokerage
commissions. The sale of shares (including fractional shares) will be a taxable
18
<PAGE>
event for federal income tax purposes and may be taxable for state and local tax
purposes.
The Plan may be amended by the Fund or the Plan Agent at any time. Except
when required by law, written notice of any amendment will be mailed to
shareholders at least 30 days prior to its effective date. The amendment will be
deemed accepted unless written notice of termination is received prior to the
effective date.
An investor holding shares in its own name can participate directly in the
Plan. An investor holding shares in the name of a brokerage firm, bank or other
nominee should contact that nominee, or any successor nominee, to determine
whether the nominee can participate in the Plan on the investor's behalf and to
make any necessary arrangements for such participation.
Additional information, including a copy of the Plan and its Terms and
Conditions and an enrollment form, can be obtained from the Plan Agent by
writing The First National Bank of Boston, Investor Relations Department, Mail
Stop 45-01-06, P.O. Box 1681, Boston, MA 02105-1681, or by calling (617)
575-3120.
19
