DIRECTORS
JOHN C. ATWATER
RICHARD J. BRADSHAW
OTTO W. BUTZ
MARYELLIE K. MOORE
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE Chairman
HONORARY DIRECTOR
JOHN A. WHITE
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 MANAGER
Scudder, Stevens & Clark, Inc.
101 California Street, Suite 4100 San Francisco, CA 94111
TRANSFER AGENT
The First National Bank of Boston
Shareholder Services Division
P.O. Box 1681
Boston, MA 02105
CUSTODIAN
Chase Manhattan Bank, N.A.
1211 Avenue of the Americas
New York, NY 10036
LEGAL COUNSEL
Orrick, Herrington & Sutcliffe
400 Sansome Street
San Francisco, CA 94111
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
MONTGOMERY STREET INCOME SECURITIES
ANNUAL REPORT
DECEMBER 31, 1994
Dear Shareholder:
The 1994 year represented the 21st full calendar year in which Montgomery
Street Income Securities, Inc. has been in existence. While the bond
markets have changed significantly over periods of time during these two
decades, the change from October 1993 to October 1994 represented the
largest yield increase/price decline in any 12 month period during the
Fund's history. Obviously, total returns were low during this period, but
we believe the extent of the decline was kept in check given the Fund's
primary objective of seeking a high level of current income, consistent
with prudent investment risks.
In this environment the Fund's portfolio produced a flat total return for
the quarter ended December 31, 1994 of 0.0% based on reinvested income and
change in net asset value (NAV). The NAV per share was $17.72, a decline
from $18.49 at the end of September, reflecting slightly lower bond prices
and the payment of a $0.34 dividend in both October and December. The
market price of the shares, which trade on the New York Stock Exchange
(NYSE), was $15.75 compared to $16.25 at the beginning of the quarter,
evidencing both the decline in NAV and the continuing discount of market
value to NAV.
For the full year, the change in NAV from $20.13 to $17.72 represented a
decline of 11.9%. When the dividend of $1.36 for the year is taken into
consideration, the total return from the Fund was -4.5%. The Lehman Bros.
Aggregate Bond Index produced a total return of -2.95% during the same
period. However, the NYSE share price fell from $19.75 at the prior year
end to $15.75 per share at year end 1994, a drop of 20.2%. Thus, the market
value on the NYSE declined approximately 10% more than the NAV, reflecting
the fact that the market discount to NAV increased from 1.9% on December
31, 1993 to 11.1% on December 31, 1994. The discount has recovered to 7.2%
as of January 27, 1995. The discount from NAV reflects the selling pressure
that Montgomery Street and many other mutual funds (both closed-end and
open-end) have experienced during this difficult year in the bond market.
The low trading volume in the Fund's shares magnifies this selling pressure
causing the discount to increase until buy and sell orders balance. This
mechanism provides a good opportunity for long term investors to purchase
shares at a discount, but also makes it difficult to sell shareholdings at
good prices during periods of market stress.
The total return based on NAV, which reflects the performance of the
underlying portfolio, has been competitive. Annualized total returns (based
on NAV) vs. the Lehman Bros. Aggregate Bond Index for longer time periods
are shown below:
(CHART DATA)
<TABLE>
<CAPTION>
Montgomery Lehman Bros. Aggregate
Street Bond Index
<S> <C> <C>
2 years 3.63% 3.22%
3 years 6.25 4.60
4 years 10.05 7.34
5 years 9.25 7.66
</TABLE>
In the past we had been comparing the Fund's return to the Lehman Bros.
Government/Corporate Index. Beginning with this report we are changing our
benchmark index to the Lehman Bros. Aggregate Bond Index which we believe
is more reflective of the type of securities held in the portfolio. As an
example, the Lehman Bros. Government/Corporate Bond Index has no mortgages
in its portfolio; the Lehman Bros. Aggregate Bond Index has approximately
30% in mortgage-related securities. For the most recent year the Lehman
Bros. Aggregate Bond Index showed a better performance than the Lehman
Bros. Government/Corporate Bond Index, but for the two, three and four year
periods the Lehman Bros. Government/Corporate Bond Index outperformed the
Lehman Bros. Aggregate Bond Index. 0.3% of 1% On a five year basis the
Lehman Bros. Government/Corporate Index had a very small advantage over the
Lehman Bros. Aggregate Bond Index.
Market Conditions
During the fourth quarter bonds across the entire maturity spectrum
continued to react to the relentless monetary tightening of the Federal
Reserve. As the U.S. Treasury yield curve flattened dramatically late in
the year, rates stabilized in the 7.85% area. In late December, the pick-up
in yield from 3-years to 30-years was only 0.10%, and the yield of the
5-year Treasury Note temporarily rose above that of the Treasury 30-year
bond. A flat yield curve sometimes portends the end of a business cycle.
(CHART DATA)
<TABLE>
<CAPTION>
Yield to Maturity
<S> <C> <C>
12/31/93 9/30/94 12/31/94
3.08 4.77 5.68
3.58 5.94 7.16
4.23 6.59 7.69
4.5 6.87 7.79
5.2 7.27 7.83
5.34 7.29 7.83
5.79 7.6 7.83
6.35 7.82 7.88
</TABLE>
The market was shaken by a number of events during the year. The unwinding
of excess hidden leverage caused much turmoil during the first half of
1994, and came to the fore again with the Orange County debacle. Although
one would hope that most of the leverage is now out of the market, there
still may be risk because of financial sector exposure to credit guarantees
and the various building blocks of structured notes. The market also had to
contend with synchronized growth in the U.S., Europe and Japan, as compared
to two of those three economic areas being in recession in 1993. This
synchronization could cause strains on the savings/investment balance as
the worldwide demand for capital increases. This in turn could force real
interest rates higher, and if it goes on long enough, lead to inflationary
pressures. It was this fear of inflation, not the realization of it, that
drove the world's bond markets lower in 1994. Then, in late December, there
was turmoil in Latin America and other emerging markets when the Mexican
peso was devalued. Many investors who had become comfortable with the high
return prospects these developing economies offer received a nasty jolt.
This could result in a reduced desire of U.S. investors to move their money
abroad until confidence is restored.
While the U.S. economy remains strong, the bond market will most likely
remain under pressure. This pressure will ease only as the market senses
that the Federal Reserve is nearing success in its program to slow the
economy. Since we think that this will happen by mid-year, a case can be
made for a better bond market during the second half of the year.
Bond Policy in 1994
At the beginning of 1994 the bond market had a steep yield curve in which
the longest maturity bonds provided substantially higher yields than the
shorter term maturities. Thus the Montgomery Street portfolio, in its
effort to maximize income, had at the beginning of the period a slightly
longer maturity than the market average. The technical measure of the
interest rate risk of the Fund is duration, which was 6.7 years at the
beginning of the year. The duration of the Fund has been reduced gradually
throughout the year as the yield curve flattened, allowing us to reduce
risk without harming the dividend. The Fund's duration now stands at 5.6
years (this means that if interest rates were to advance by 1%, the Fund's
NAV would drop by about 5.6%).
During the fourth quarter we moved the portfolio shorter from an average
maturity of 15.5 years to 14.3 years. In doing so, the average coupon was
raised from slightly below 8% to almost 8.7%. We reduced our long corporate
bond position and added to mortgage pass-throughs, although our position in
mortgages remains lower than that of the general market indices. The Fund's
investment policy allows the portfolio to hold up to 30% of total assets in
foreign securities or non-investment grade debt securities and the Fund
currently holds 20.8% of its assets in this category. The largest holding
in this area is Safeway, a supermarket chain, 2.0% of the total. Average
quality for the portfolio at year end was 'A'. The comparative bar graph
below shows the changes that occurred during the quarter in the sector
allocation.
<TABLE>
<S> <C> <C>
12/31/94 9/30/94
Cash 2.6 1.3
Treasury and Agency (Gov't) 7.9 9.6
Mortgage 15.8 22.4
Asset-Backed 4 4
Industrial 41.2 38
Utility 9.7 8.3
Finance 11.1 8.5
Foreign 3 2.9
Emerging Markets 4 4.3
</TABLE>
We should note that 3.9% of the portfolio is committed to U.S. dollar
denominated Mexican bonds. The disruption in the Latin American markets
attendant to Mexico's devaluation has affected the valuation of these
instruments, even though they do not have direct peso exposure. We have
decided to maintain and add slightly to our position in Mexico as the
yields have reached compelling levels. Although confidence in Mexico's
leadership has been severely shaken, efforts by the U.S. Government and
other institutions have put in place a loan guaranty program which should
help stabilize Latin American currency and capital markets.
Our position in the structured note area remains unchanged. The General
Electric Capital Corp. inverse floating rate note's coupon was reset to
4.387% in November where it provides an expected yield of over 12% based on
year end pricing. The Student Loan Marketing Association inverse floater
remains set at its floor of 4%, and will provide an agency-like return of
8.5% if held to maturity.
Our position in the Government of Canada long bonds remains unchanged.
Payment is denominated in Canadian dollars, and as a result has suffered
from the currency weakness there, despite its attractive yield. At the
December Board meeting, the Board authorized the use of foreign currency
hedging by the Fund when the manager feels that a foreign bond market is
attractive, but the underlying currency less so. This authorization is
subject to certain guidelines and should allow the Fund greater freedom to
use foreign bonds in the future without incurring significant currency risk
in the bargain. A description of the foreign currency hedging authorization
is contained under "Principal Investment Policies" on page 7 of this
report.
Portfolio Management Responsibilities and Team
The Fund continues to be managed by Scudder, Stevens & Clark, Inc. The
Investment Manager employs a team of investment professionals who provide a
dynamic variety of experience and expertise. Team members collaborate
regularly to set investment strategies and shape the Fund's portfolio. They
also work closely with the Investment Manager's global network of
dedicated, professional researchers, analysts, and traders. We believe the
team's combined talents work to shareholders' long-term benefit and give
the Fund an advantage over investments managed by just one person or the
consensus of a committee.
Stephen Wohler, a Managing Director of the Investment Manager, leads the
Fund's portfolio management team, having assumed responsibility for
day-to-day management in 1988. Stephen has over 15 years' experience
managing fixed income investments. Mark Boyadjian, a Vice President of the
Investment Manager, has been a member of the Fund's portfolio management
team for three and one-half years. Mark has seven years' experience in
investment management and has been employed by the Investment Manager since
1989. Mark and Steve are assisted by Kristin Bradbury, C.F.A., who is
responsible for quantitative analysis and trading for the portfolio. Ms.
Bradbury has 9 years of investment related experience and has been employed
by the Investment Manager since 1993.
Dividend Reinvestment Option
The Fund maintains an optional Dividend Reinvestment and Cash Purchase Plan
(the "Plan") for the automatic reinvestment of your dividends and capital
gains distributions in the shares of the Fund. This Plan also allows you to
make additional cash investments in Fund shares. We recommend that you
consider enrolling in the Plan to build your investments. First National
Bank of Boston is the Fund's Plan Agent and the Plan's features are
described beginning on page 20 of this report.
Director Retiring
Mr. Fred Drexler has decided to step down from his role as an Honorary
Director of Montgomery Street. Fred has served the Fund with exceptional
dedication, providing leadership and guidance through the last seventeen
years. His abiding interest in the welfare of the Fund's shareholders has
set a standard of which we are very proud and which we are committed to
continue.
Thank you for being a shareholder this year.
Sincerely,
/S/John T. Packard /S/Stephen A. Wohler
John T. Packard Stephen A. Wohler
President Vice President
Portfolio Manager of the Fund
February 1, 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.
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
Corporation; 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.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1994
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- - - - - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.8%
(UNDER 1 YEAR)
Barclays U.S. Funding Corp., 5.474%, 1/3/95 (Cost $1,495,000) . . . . . . . . . . . . . 1,495,000 1,495,000
----------
- - - - - ----------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BONDS -- 32.3%
(1 - 8 YEARS)
U.S. TREASURY AND AGENCY -- 13.9%
Federal National Mortgage Association, 8%, with various maturities to 12/1/01 . . . . . 5,096,176 5,021,313
Federal Home Loan Mortgage Corp., Separate Trading Registered Interest and
Principal, 167-A, principal only certificate, 5/15/99 . . . . . . . . . . . . . . . . 3,716,868 2,931,680
Federal Home Loan Mortgage Corp., REMIC, 1724-PO, principal only
certificate, 5/15/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,789,011 2,652,308
Student Loan Marketing Association, floating rate debenture, coupon
inversely indexed to 5 year German Swap Rate, 4%, 3/23/98** . . . . . . . . . . . . . 2,500,000 2,187,500
U.S. Treasury Note, 8.875%, 2/15/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000,000 9,315,000
U.S. Treasury Note, 9.125%, 5/15/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400,000 2,509,488
----------
24,617,289
----------
FOREIGN GOVERNMENT -- 1.0%
Nacional Financiera SNC, 9.375%, 7/15/02 . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 1,690,000
----------
METALS & MINERALS -- 1.6%
Precious Metals
Alatief Freeport Financial Co., note, 9.75%, 4/15/01 . . . . . . . . . . . . . . . . . 3,000,000 2,910,000
----------
CONSUMER DISCRETIONARY -- 2.0%
Retail
Safeway Stores Inc., senior subordinated note, 10%, 12/1/01 . . . . . . . . . . . . . . 3,500,000 3,605,000
----------
CONSUMER STAPLES -- 2.6%
Food & Beverage
Empresa La Moderna S.A., 10.25%, 11/12/97 . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 870,000
Fomento Economico Mexicano, S.A. (FEMSA), 9.5%, 7/22/97 . . . . . . . . . . . . . . . . 1,000,000 895,000
Gruma, 9.75%, 3/9/98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 915,000
RJR Nabisco Capital Corp., senior note, 6.8%, 9/1/01 . . . . . . . . . . . . . . . . . 2,000,000 1,895,440
----------
4,575,440
----------
FINANCIAL -- 4.9%
Banks -- 2.0%
Continental Bank, subordinate note, 12.5%, 4/1/01 . . . . . . . . . . . . . . . . . . . 3,000,000 3,555,510
----------
Other Financial Companies -- 2.9%
General Electric Capital Corp., medium-term basket structured note, coupon inversely
indexed to 6 month Italian LIBOR and Swedish STIBOR, 4.3875%, 5/21/98** . . . . . . . 2,000,000 1,575,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- - - - - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care Properties Investors Inc., 6%, 11/8/00 . . . . . . . . . . . . . . . . . 1,000,000 875,000
Household International Netherland Financial Co., senior note, 6%, 3/15/99 . . . . . 3,000,000 2,740,650
----------
5,190,650
----------
MEDIA -- 1.6%
Cable Television
Rogers Cablesystems Ltd., senior secured note, 9.625%, 8/1/02 . . . . . . . . . . . 3,000,000 2,880,000
----------
ENERGY -- 1.8%
Chemicals
Lyondell Petrochemical Co., note, 10%, 6/1/99 . . . . . . . . . . . . . . . . . . . . 3,000,000 3,111,630
----------
TECHNOLOGY -- 1.1%
Technology
Unisys Corp., senior note, 10.625%, 10/1/99 . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,020,000
----------
UTILITIES -- 1.8%
Natural Gas Distributors
Transco Energy Co., senior note, 11.25%, 7/1/99 . . . . . . . . . . . . . . . . . . . 3,000,000 3,191,250
----------
TOTAL INTERMEDIATE-TERM BONDS (Cost $60,048,822) . . . . . . . . . . . . . . . . . . 57,346,769
----------
- - - - - --------------------------------------------------------------------------------------------------------------------------
LONG-TERM BONDS -- 64.8%
(OVER 8 YEARS)
U.S. TREASURY & AGENCY -- 17.8%
Federal Home Loan Mortgage Corp., 9.5%, 8/1/24 . . . . . . . . . . . . . . . . . . . 19,000,000 19,443,080
Federal Home Loan Mortgage Corp., pass-thru certificate, G 00275, 9.5%, 11/1/24 . . . 7,021,993 7,207,022
Government National Mortgage Association, pass-thru certificate, 8.5%, with
various maturities to 9/15/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,019,435 1,984,095
U.S. Treasury Bond, 11.625%, 11/15/04 . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 3,131,250
----------
31,765,447
----------
FOREIGN GOVERNMENT -- 4.2%
Banco National de Comercio Exterior, 8%, 8/5/03 . . . . . . . . . . . . . . . . . . . 2,000,000 1,460,000
Government of Canada, 8%, 6/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . . CAD 8,000,000 5,025,386
United Mexican States Collateralized Par Bond, 6.25%, 12/31/19 . . . . . . . . . . . 2,000,000 1,087,500
----------
7,572,886
----------
CONSUMER DISCRETIONARY -- 1.1%
Hotels & Casinos
Marriott Corp., debenture, 9.375%, 6/15/07 . . . . . . . . . . . . . . . . . . . . . 2,000,000 1,902,500
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- - - - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER STAPLES -- 3.6%
Food & Beverage
Borden Inc., debenture, 9.2%, 3/15/21 . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 3,349,280
Coca Cola Co., Inc., debenture, 7.375%, 7/29/2093 . . . . . . . . . . . . . . . . . . . 3,500,000 3,030,090
----------
6,379,370
----------
FINANCIAL -- 8.1%
Banks -- 2.3%
ABN-AMRO Bank N.V., subordinated note, 7.125%, 10/15/2093 . . . . . . . . . . . . . . . 5,000,000 4,016,350
----------
Other Financial Companies -- 5.8%
Commercial Credit Corp., debenture, 10%, 5/15/09 . . . . . . . . . . . . . . . . . . . 3,000,000 3,207,150
Greentree Financial Corp., asset-backed, senior subordinated pass-thru certificate,
7.2%, 1/15/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000 7,174,960
----------
10,382,110
----------
MEDIA -- 3.5%
Broadcasting & Entertainment -- 2.0%
Time Warner Inc., debenture, 9.125%, 1/15/13 . . . . . . . . . . . . . . . . . . . . . 4,000,000 3,603,760
----------
Print Media -- 1.5%
News America Holdings, debenture, 8.25%, 8/10/18 . . . . . . . . . . . . . . . . . . . 3,000,000 2,626,830
----------
DURABLES -- 2.4%
Aerospace
McDonnell Douglas, debenture, 9.75%, 4/1/12 . . . . . . . . . . . . . . . . . . . . . . 4,000,000 4,216,400
----------
ENERGY -- 12.5%
Oil & Gas Production -- 10.5%
Lasmo U.S.A. Inc., note, 8.375%, 6/1/23 . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,705,070
Louis Dreyfus Natural Gas Corp., senior note, 9.25%, 6/15/04 . . . . . . . . . . . . . 3,000,000 2,850,000
Saga Petroleum A.S., note, 9.125%, 7/15/14 . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,948,160
Seagull Energy, senior subordinated note, 8.625%, 8/1/05 . . . . . . . . . . . . . . . 3,000,000 2,557,500
Tenneco Inc., debenture, 10%, 3/15/08 . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,188,800
Tosco Corp., 1st mortgage note, 8.25%, 5/15/03 . . . . . . . . . . . . . . . . . . . . 2,500,000 2,350,000
Unocal Corp., debenture, 9.4%, 2/15/11 . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,109,830
----------
18,709,360
----------
Oil Companies -- 2.0%
Atlantic Richfield, medium-term note, 10.875%, 7/15/05 . . . . . . . . . . . . . . . . 3,000,000 3,494,700
----------
MANUFACTURING -- 1.9%
Chemicals -- 0.9%
Eastman Chemical, debenture, 7.25%, 1/15/24 . . . . . . . . . . . . . . . . . . . . . . 2,000,000 1,660,860
----------
Industry Specialty -- 1.0%
Koppers Industries Inc., senior note, 8.5%, 2/1/04 . . . . . . . . . . . . . . . . . . 2,000,000 1,770,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<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 1,850,000
-----------
TECHNOLOGY -- 0.8%
Military Electronics
Loral Corp., note, 8.375%, 6/15/24 . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 1,386,420
-----------
TRANSPORTATION -- 2.9%
Airlines -- 1.6%
Delta Airlines, debenture, 9.75%, 5/15/21 . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,757,660
-----------
Railroads -- 1.3%
Burlington Northern Railroad Co., consolidated mortgage bond, 9.25%, 10/1/06 . . . . 2,250,000 2,293,851
-----------
UTILITIES -- 5.0%
Natural Gas Distributors
ANR Pipeline, debenture, 9.625%, 11/1/21 . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,110,880
Coastal Corp., debenture, 9.625%, 5/15/12 . . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,088,170
Nova Corp. of Alberta, debenture, 7.875%, 4/1/23 . . . . . . . . . . . . . . . . . . 4,000,000 3,627,800
-----------
8,826,850
-----------
TOTAL LONG-TERM BONDS (Cost $125,361,672) . . . . . . . . . . . . . . . . . . . . . . 115,215,354
-----------
- - - - - ---------------------------------------------------------------------------------------------------------------------------
SHARES
---------
PREFERRED STOCK -- 0.7%
FINANCIAL
Banks
First Nationwide Bank, non-cumulative 11.5%, (Cost $1,250,000) . . . . . . . . . . . 12,500 1,223,439
-----------
- - - - - ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 98.6% (Cost $188,155,494)(a) . . . . . . . . . . . . . 175,280,562
OTHER ASSETS AND LIABILITIES, NET -- 1.4% . . . . . . . . . . . . . . . . . . . . . . 2,401,710
-----------
NET ASSETS -- 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,682,272
===========
- - - - - ---------------
<FN>
(a) The cost for federal income tax purposes was $188,155,494. At December 31, 1994, net unrealized depreciation for
all securities based on tax cost was $12,874,932. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of $282,750 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost over market value of $13,157,682.
* 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 December 31, 1994.
CURRENCY ABBREVIATIONS USED IN THIS PORTFOLIO:
CAD Canadian Dollar
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<S> <C> <C>
ASSETS
Investments, at market (identified cost $188,155,494)
(Note A) . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,280,562
Receivables:
Investments sold . . . . . . . . . . . . . . . . . . . . . . . 23,046,480
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,427,277
------------
TOTAL ASSETS 201,754,319
LIABILITIES
Investments purchased . . . . . . . . . . . . . . . . . . . . . . $23,889,992
Accrued management fee (Note B) . . . . . . . . . . . . . . . . . 72,780
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . 109,275
-----------
TOTAL LIABILITIES 24,072,047
------------
NET ASSETS, at market value . . . . . . . . . . . . . . . . . . $177,682,272
============
NET ASSETS
Net assets consist of:
Undistributed net investment income . . . . . . . . . . . . . . $ 93,446
Unrealized depreciation on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . (12,874,932)
Foreign currency related transactions . . . . . . . . . . . (396)
Accumulated net realized loss . . . . . . . . . . . . . . . . . (5,799,766)
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . 10,024,589
Additional paid-in capital . . . . . . . . . . . . . . . . . . 186,239,331
------------
NET ASSETS, at market value . . . . . . . . . . . . . . . . . . $177,682,272
============
NET ASSET VALUE PER SHARE ($177,682,272 / 10,024,589 shares
of common stock outstanding, $1.00 par value, 15,000,000
shares authorized) . . . . . . . . . . . . . . . . . . . . . . . . $17.72
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,034,282
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,550
------------
15,059,832
EXPENSES:
Management and investment advisory fee (Note B) . . . . . . . . $920,799
Directors' fees (Note B) . . . . . . . . . . . . . . . . . . . 77,551
Transfer agent and dividend disbursing agent fees . . . . . . . 110,894
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . 10,517
Reports to shareholders . . . . . . . . . . . . . . . . . . . . 46,943
Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,764
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,277
State franchise tax . . . . . . . . . . . . . . . . . . . . . . 39,205
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,678 1,345,628
-------- ------------
NET INVESTMENT INCOME 13,714,204
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss from investment and foreign currency
related transactions . . . . . . . . . . . . . . . . . . . . . (5,045,581)
Net unrealized depreciation during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . (19,014,786)
Foreign currency related transactions . . . . . . . . . . . . . (396)
------------
Net loss on investments . . . . . . . . . . . . . . . . . . . . . (24,060,763)
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,346,559)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Years Ended December 31,
------------------------------
INCREASE (DECREASE) IN NET ASSETS 1994 1993
------------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . . . $ 13,714,204 $ 15,161,513
Net realized gain (loss) from investment transactions . . . . . . (5,045,581) 5,990,624
Net unrealized appreciation (depreciation) on investment
transactions during the period . . . . . . . . . . . . . . . . (19,015,182) 2,338,401
------------- ------------
Net increase (decrease) in net assets resulting from operations . . . (10,346,559) 23,490,538
------------- ------------
Dividends to shareholders from net investment income
($1.36 and $1.54 per share, respectively) . . . . . . . . . . . . (13,575,510) (15,302,575)
------------- ------------
Fund share transactions:
Reinvestment of dividends from net investment income . . . . . . . 1,106,625 1,267,324
------------- ------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . (22,815,444) 9,455,287
Net assets at beginning of period . . . . . . . . . . . . . . . . . . $200,497,716 $191,042,429
------------- ------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $93,446 and $43,613, respectively) . . . . . $177,682,272 $200,497,716
============ ============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period . . . . . . . . . . . . . . 9,958,150 9,896,796
Shares issued to shareholders in reinvestment of dividends
from net investment income . . . . . . . . . . . . . . . . . . . 66,439 61,354
------------- ------------
Shares outstanding at end of period . . . . . . . . . . . . . . . . . 10,024,589 9,958,150
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<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>
Years Ended December 31,
----------------------------------------------------
1994(a) 1993(a) 1992(a) 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . . . . . $20.13 $19.30 $19.17 $17.21 $17.97
------- ------- ------- ------- -------
Income from investment operations:
Income . . . . . . . . . . . . . . . . . . . . . . . . 1.51 1.68 1.84 1.88 1.89
Operating expenses . . . . . . . . . . . . . . . . . . (.14) (.15) (.15) (.13) (.10)
------- ------- ------- ------- -------
Net investment income . . . . . . . . . . . . . . . . . 1.37 1.53 1.69 1.75 1.79
Net realized and unrealized gain (loss) . . . . . . . . (2.42) .84 .47 1.97 (.77)
------- ------- ------- ------- -------
Total from investment operations . . . . . . . . . . . . (1.05) 2.37 2.16 3.72 1.02
------- ------- ------- ------- -------
Dilution resulting from the rights offering . . . . . . . -- -- (.36) -- --
Less distributions from net investment income . . . . . . (1.36) (1.54) (1.67) (1.76) (1.78)
------- ------- ------- ------- -------
Net asset value, end of period . . . . . . . . . . . . . $17.72 $20.13 $19.30 $19.17 $17.21
======= ======= ======= ======= =======
Per share market value, end of period . . . . . . . . . . $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 . . . . . . . . . . . . . . . . . . . . . . . . . $20.25 $22.38 $21.00 $20.25 $19.00
Low . . . . . . . . . . . . . . . . . . . . . . . . . . $15.25 $19.25 $19.00 $17.00 $15.00
TOTAL RETURN
Per share market value (%) . . . . . . . . . . . . . . (13.54) 2.02 17.98 23.11 3.45
Per share net asset value (%) (b) . . . . . . . . . . . (4.51) 12.47 11.67 22.28 6.15
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . 178 200 191 157 140
Ratio of operating expenses to average
net assets (%) . . . . . . . . . . . . . . . . . . . . .71 .73 .75 .69 .57
Ratio of net investment income to average
net assets (%) . . . . . . . . . . . . . . . . . . . . 7.28 7.53 8.69 9.60 10.20
Portfolio turnover rate (%) . . . . . . . . . . . . . . . 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.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
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
<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 foreign currency 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 year ended
December 31, 1994, the fee pursuant to the Agreement amounted to $920,799.
None of the Directors are affiliated with the Adviser. For the year ended
December 31, 1994, Directors' fees aggregated $77,551.
NOTE C--PURCHASES AND SALES OF INVESTMENTS. For the year ended December 31,
1994, purchases and sales of investment securities other than direct U.S.
government obligations and short-term investments aggregated $172,683,010 and
$167,905,597, respectively. Purchases and sales of direct U.S. government
obligations aggregated $79,249,859 and $83,142,070, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
NOTE D--UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<CAPTION>
1994
-----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total investment income . . $ 3,700,348 $ 3,757,881 $ 3,732,525 $ 3,869,078 $ 15,059,832
Net investment income . . . 3,338,823 3,426,127 3,394,951 3,554,303 13,714,204
Per share . . . . . . . . $0.34 $0.34 $0.34 $0.35 $1.37
Net realized gains
(losses) and change in
net unrealized
appreciation
(depreciation) on
investments . . . . . . . (9,979,259) (8,109,555) (1,656,208) (4,315,741) (24,060,763)
</TABLE>
<TABLE>
<CAPTION>
1993
-----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total investment income . . $4,448,767 $4,237,953 $4,114,803 $ 3,837,789 $16,639,312
Net investment income . . . 4,083,524 3,870,211 3,737,989 3,469,789 15,161,513
Per share . . . . . . . . $0.41 $0.39 $0.38 $0.35 $1.53
Net realized gains
(losses) and change in
net unrealized
appreciation
(depreciation) on
investments . . . . . . . 5,538,086 2,471,402 3,271,148 (2,951,611) 8,329,025
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Montgomery Street Income Securities, Inc.
San Francisco, California
We have audited the accompanying statement of assets and liabilities of
Montgomery Street Income Securities, Inc. (the "Fund"), including the schedule
of investments, as of December 31, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and by other appropriate
auditing procedures where a reply from brokers were not received. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Montgomery Street Income Securities, Inc. at December 31, 1994, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles.
Boston, Massachusetts
January 20, 1995 /s/Ernst & Young
<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 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, Shareholder Services-Customer
Service, Mail Stop 45-01-06, P.O. Box 1681, Boston, MA 02105-1681, or by
calling (617) 575-3120.
