DIRECTORS JOHN C. ATWATER
RICHARD J. BRADSHAW
OTTO W. BUTZ
MARYELLIE K. MOORE
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE
Chairman
OFFICERS JOHN T. PACKARD
President
DANIEL PIERCE
Vice President
EDWARD J. O'CONNELL
Vice President and
Assistant Treasurer
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 State Street Bank and Trust
AGENT Company
P.O. Box 8200
Boston, MA 02266-8200
CUSTODIAN Chase Manhattan Bank, N.A.
4 Chase Metro Tech Center
18th Floor
Brooklyn, NY 11245
LEGAL COUNSEL Howard, Rice, Nemerovski,
Canady, Falk & Rabkin
Three Embarcadero Center
Seventh Floor
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, 1996
Scudder
Investment
Adviser
<PAGE>
101 California Street, Suite 4100
San Francisco, CA 94111
(415) 981-8191
Dear Shareholder:
The portfolio of Montgomery Street Income Securities, Inc. (the Fund) produced a
total return of 0.49% for the quarter ended June 30, 1996. The net asset value
(NAV) per share at the end of June was $19.35, a decline from $19.63 at the end
of March, as a result of a general decrease in bond prices and a dividend
payment of $0.35 per share in April. The market price of the Fund's shares,
which trade on the New York Stock Exchange, was $17.375 on June 30, 1996
compared to $18.25 at the beginning of the quarter, reflecting both the decline
in NAV and a slight increase in the discount of the market value to the NAV to
10.2%. The 0.49% total return of the Fund for the second quarter based on NAV
was slightly lower than the unmanaged Lehman Brothers Aggregate Bond Index, an
index we use for comparative purposes, which had a total return of 0.57%.
However, for the six months ended June 30, 1996 the Fund's total return of
- -1.12% is slightly more favorable than the Lehman Brothers Aggregate Bond Index
return of -1.21%.
On July 11, 1996 the Board of Directors declared a $0.34 per share dividend
payable on July 31, 1996 to shareholders of record on July 22, 1996. While this
is one cent lower than the prior quarter's payment, the rate of income earned
for dividends in the Fund has declined slightly and the amount available this
quarter was between $0.34 and $0.35. The directors voted to pay the more
conservative amount in order to give the portfolio more flexibility to make
investment shifts.
Economic Conditions
Spring unfolded a growth surprise. The economy shot forward after effortlessly
overcoming the strikes and storms of winter. Consumers confidently snapped up
big-ticket items from computers to cars to houses. Companies added to payroll
and upgraded their technology. This exuberance has forced us to revise our 1996
gross domestic product (GDP) expectation upward, from under 1% to over 2%.
Better growth will benefit profits, which could be approximately flat for this
year, instead of declining sharply. We expect second quarter GDP to come in
above 4%, a level that could trouble the bond market.
These events have not altered our view that this expansion has reached an age
euphemistically called "mature." The excessive doses of credit required to keep
it going tell us that. Consumers are borrowing heavily on credit cards, and the
economy as a whole continues to get its fix through the current account deficit
funded by foreign central banks. Rising interest rates and bankruptcies suggest
that the borrowing game is nearer the end than the beginning. The point of
maximum impact should come around the turn of the year. The slowdown in the
economy that we expect should head off any meaningful acceleration of inflation.
We look for consumer prices to rise 3% this year, about the same as 1995, with a
step down to around 2.5% in 1997.
Market Conditions
Despite further reports of strong economic numbers, the bond market continued to
vacillate within the trading range established in April. Retail sales, auto
sales and housing activity all exceeded expectations and caused the long bond
yield to rise as high as 7.21%. However, benign producer prices caused investors
to once again focus on the relatively high real interest rates, allowing bonds
to rally. The rally was sustained through June as the market consensus shifted
to an expectation of no Fed tightening at its July 3 meeting. The 30-year
Treasury bond ended June at a yield of 6.88%, the low end of its three month
range.
2
<PAGE>
The Portfolio
We remained cautious during the second quarter, extending duration slightly to
5.5 years as the bond market sought a firmer foundation after the first
quarter's sharp decline. The cash equivalent position was built up to 3.6% in
hopes of a finding a good buying opportunity where higher yields could be locked
in for a longer term. Average maturity remained constant at 12.9 years.
Corporate bonds, which comprise the majority of the Fund's portfolio, did
reasonably well during the quarter compared to Treasuries, although many of the
spread relationships were static. During the quarter, the important differences
in performance were due primarily to company selection. Intermediate bonds
slightly underperformed a mix of longer and shorter bonds, as fears of a Fed
tightening hurt the 5 to 10 year maturity area. Lower quality bonds continued
their outperformance as investors' appetite for yield overcame perceptions of
risk in an improving economy.
Our corporate bond position remained relatively stable at 59.3% of the
portfolio, including the preferred issues. We did increase our holdings of
Industrials at the expense of the mortgage sector. Continental Cablevision,
Lockheed Martin, News America Holdings, and Teleport Communications were new
names in the portfolio at quarter end, while El Paso Electric and McDonnell
Douglas were sold as value objectives were achieved. Digital Equipment was also
sold at favorable levels due to credit concerns. We augmented existing positions
in TCI Communications and Federated Department Stores.
The mortgage component of the portfolio was reduced from 25.4 % to 20.6% over
the quarter, as we sold our interest only (IO) securities and most of our
premium coupon pass-throughs. We initiated new positions in 7.5% 15-year GNMAs
and 6.0% 30-year FNMAs. These moves were consistent with our outlook for a
steeper yield curve and with our expectation that discount mortgages might
perform better in the volatile environment we are experiencing.
The bar graph shows the changes that occurred during the quarter in the sector
allocation.
3/31/96 6/30/96
------- -------
Cash 14 % 3.7%
Treasury and Agency (Gov't) 7.1 7
Mortgage 25.4 20.6
Asset-Backed 4 4
Industrial 38.1 41.3
Utility 3.1 3.2
Finance 15.7 14.8
Foreign 5.2 5.4
3
<PAGE>
The Fund's investment policies allow the portfolio to hold up to 30% of total
assets in foreign denominated securities, preferreds, convertibles, private
placements, and below investment grade debt securities, and, as of the end of
June, the Fund held 27.1% of its assets in these categories, 22.5% of which was
below investment grade in terms of credit rating. The largest holding in this
area remains Safeway, a supermarket chain, at 2.0% of the total. Average quality
for the portfolio at quarter end was 'A', with the quality breakdown shown in
the pie graph below.
Quality Allocation
------------------
Cash 4.0%
Government 27.0%
AA 6.0%
A 10.0%
BBB 30.0%
BB 19.0%
B/NR 4.0%
------
100.0%
======
Our 3.5% commitment in U.S. dollar denominated Mexican corporates turned in
another great quarter, returning 3.8%, as the emerging markets outpaced other
market sectors. The Fund's only foreign currency exposure is the 1.9% committed
to Canadian long bonds. We sold one of our two structured note positions, the
General Electric Capital instrument whose coupon depended on Swedish and Italian
short term rates. Declines in these rates over recent months allowed us to exit
this holding at a much improved price of $99.90. Our remaining structured note
holding is a Student Loan Marketing Association (SLMA) note whose coupon depends
inversely on German 5-year rates, with a minimum coupon of 4%. We expect that it
will outperform Treasuries over its remaining 1.7 years to maturity, although we
will stay alert for selling opportunities caused by moves in German rates.
Annual Meeting Results
At the July 11, 1996 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, 1996 was
ratified. Shareholders also approved the continuance of the Management and
Investment Advisory Agreement between the Fund and Scudder, Stevens & Clark,
Inc. And finally, the shareholders approved an Agreement and Articles of Merger
to facilitate a change in the Fund's state of incorporation from Delaware to
Maryland. This latter change became effective on July 23, 1996 and was done to
reduce franchise fees paid by the Fund. You, as a shareholder, are not required
to do anything. It is not necessary to exchange your share certificates, and
there is no change in the day-to-day administration or the investment policies
of the Fund from those which existed when the Fund was a Delaware corporation.
At the Board meeting following the Annual Meeting, James C. Van Horne was
re-elected Chairman of the Board. Please see the table entitled "Shareholder
4
<PAGE>
Meeting Results" on page 18 for more detailed information about the votes cast
at the Annual Meeting.
We appreciate the confidence the shareholders have placed in us and we look
forward to working for and 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, 1996
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.
5
<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.
6
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 3.6%
(under 1 year)
Beneficial Corp., 5.306%, 7/2/96 .............................................. 3,854,000 3,854,000
Chevron Oil Finance Co., 5.258%, 7/1/96 ....................................... 1,937,000 1,937,000
General Electric Capital Corp., 5.356%, 7/3/96 ................................ 1,315,000 1,315,000
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $7,106,000) ................................ 7,106,000
----------
- ------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BONDS - 29.3%
(1 - 8 YEARS)
U.S. TREASURY AND AGENCY - 8.2%
Federal Home Loan Mortgage Corp., REMIC, 1724, principal only certificate,
5/15/01 ........................................................................ 3,241,357 2,584,983
Student Loan Marketing Association, floating rate debenture, coupon
inversely indexed to 5 year German Swap Rate, 4.53%, 3/23/98** ................. 2,500,000 2,396,875
U.S. Treasury Note, 8.875%, 2/15/99 ............................................. 8,000,000 8,498,720
U.S. Treasury Note, 9.125%, 5/15/99 ............................................. 2,400,000 2,574,384
----------
16,054,962
----------
FOREIGN GOVERNMENT - 1.8%
Banco Nacional de Comercio Exterior SNC, 8%, 8/5/03 ............................. 2,000,000 1,707,500
Nacional Financiera SNC, 9.375%, 7/15/02 ........................................ 2,000,000 1,905,000
----------
3,612,500
----------
METALS & MINERALS - 1.6%
Precious Metals
Alatief Freeport Financial Co. note, 9.75%, 4/15/01 ............................. 3,000,000 3,154,200
----------
CONSUMER DISCRETIONARY - 3.6%
Department and Chain Stores - 1.6%
Federated Department Stores, Inc., senior note, 10%, 2/15/01 .................... 2,000,000 2,147,600
Federated Department Stores, Inc., 8.5%, 6/15/03 ................................ 1,000,000 997,070
----------
3,144,670
----------
Retail - 2.0%
Safeway Stores Inc., senior subordinated note, 10%, 12/1/01 ..................... 3,500,000 3,806,250
----------
CONSUMER STAPLES - 1.6%
Food & Beverage
Empresa La Moderna S.A., 10.25%, 11/12/97 ....................................... 1,000,000 1,020,000
Fomento Economico Mexicano, S.A. (FEMSA), 9.5%, 7/22/97 ......................... 1,000,000 1,015,000
Gruma, 9.75%, 3/9/98 ............................................................ 1,000,000 1,006,250
----------
3,041,250
----------
</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>
FINANCIAL - 7.1%
Banks - 2.9%
Continental Bank, subordinated note, 12.5%, 4/1/01 ............................... 3,000,000 3,665,700
First USA Bank, global subordinated note, 7.65%, 8/1/03 .......................... 2,000,000 1,955,700
----------
5,621,400
----------
Other Financial Companies - 2.6%
Olympic Financial Ltd., 13%, 5/1/00 .............................................. 2,000,000 2,190,000
Taubman Realty Group LP, medium-term note, 7.5%, 6/15/02 ......................... 3,000,000 2,906,250
----------
5,096,250
----------
Real Estate - 1.6%
Federal Realty Investment Trust, convertible bond, 5.25%, 10/28/03 ............... 2,000,000 1,700,000
Health Care Properties Investors Inc., 6%, 11/8/00 ............................... 1,500,000 1,430,625
----------
3,130,625
----------
SERVICE INDUSTRIES - 1.1%
Service Industries
ADT Operations, senior subordinated note, 9.25%, 8/1/03 .......................... 2,000,000 2,065,000
----------
MEDIA - 2.6%
Cable Television
Continental Cablevision, Inc., 8.625%, 8/15/03 ................................... 2,000,000 2,108,500
Rogers Cablesystems Ltd., senior secured note, 9.625%, 8/1/02 .................... 3,000,000 2,970,000
----------
5,078,500
----------
ENERGY - 1.7%
Chemicals
Lyondell Petrochemical Co., note, 10%, 6/1/99 .................................... 3,000,000 3,240,300
----------
TOTAL INTERMEDIATE-TERM BONDS (Cost $52,863,526) .............................. 57,045,907
----------
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM BONDS - 63.8%
(OVER 8 YEARS)
U.S. TREASURY & AGENCY - 19.0%
Federal Home Loan Mortgage Corp., 6%, 12/1/10 .................................. 4,967,812 4,700,792
Federal Home Loan Mortgage Corp., 8%, 7/1/25 ................................... 6,852,910 6,910,680
Federal National Mortgage Association, pass-thru certificate, 5.5%,
with various maturities to 7/1/09 ............................................. 17,131,689 15,979,258
Federal National Mortgage Association, 6%, 6/1/26 .............................. 5,049,999 4,584,440
Government National Mortgage Association, pass-thru certificate, 7.5%,
with various maturities to 4/15/11 ............................................ 4,935,364 4,991,815
----------
37,166,985
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN GOVERNMENT - 1.8%
Government of Canada, 8%, 6/1/23 ................................................ CAD 5,000,000 3,618,385
----------
CONSTRUCTION - 1.0%
USG Corp., senior note, 8.5%, 8/1/05 ............................................ 2,000,000 1,935,000
----------
CONSUMER DISCRETIONARY - 1.0%
Hotels & Casinos
Marriott Corp., debenture, 9.375%, 6/15/07 ...................................... 2,000,000 1,971,320
----------
CONSUMER STAPLES - 3.6%
Food & Beverage
Borden Inc., debenture, 9.2%, 3/15/21 ........................................... 4,000,000 3,669,600
Coca Cola Co., Inc., debenture, 7.375%, 7/29/2093 ............................... 3,500,000 3,457,125
----------
7,126,725
----------
FINANCIAL - 9.6%
Banks - 3.8%
ABN-AMRO Bank N.V., subordinated note, 7.125%, 10/15/2093 ....................... 5,000,000 4,533,450
Royal Bank of Scotland, 7.375%, 4/29/49 ......................................... 3,000,000 2,919,930
----------
7,453,380
----------
Other Financial Companies - 5.8%
Commercial Credit Corp., debenture, 10%, 5/15/09 ................................ 3,000,000 3,577,260
Greentree Financial Corp., asset-backed, senior subordinated pass-thru
certificate, 7.2%, 1/15/19 .................................................... 8,000,000 7,773,750
----------
11,351,010
----------
MEDIA - 7.6%
Broadcasting & Entertainment - 4.2%
News America Holdings, Inc., 10.125%, 10/15/12 .................................. 2,000,000 2,249,000
Paramount Communications, Inc., senior debenture, 7.5%, 7/15/23 ................. 2,000,000 1,714,120
Time Warner Inc., debenture, 9.125%, 1/15/13 .................................... 4,000,000 4,177,520
----------
8,140,640
----------
Cable Television - 3.4%
Tele-Communications Inc., 7.785%, 2/15/26 ....................................... 3,000,000 2,642,220
TCI Communications, Inc., 8.65%, 9/15/04 ........................................ 2,000,000 2,038,500
Teleport Communications Group Inc., 9.875%, 7/1/06 .............................. 2,000,000 2,000,000
----------
6,680,720
----------
ENERGY - 9.9%
Oil & Gas Production - 8.0%
Lasmo U.S.A. Inc., note, 8.375%, 6/1/23 ......................................... 3,000,000 2,989,800
Louis Dreyfus Natural Gas Corp., senior note, 9.25%, 6/15/04 .................... 3,000,000 3,094,740
Saga Petroleum A.S., debenture, 9.125%, 7/15/14 ................................. 3,000,000 3,188,910
Seagull Energy, senior subordinated note, 8.625%, 8/1/05 ........................ 3,000,000 2,812,500
Unocal Corp., debenture, 9.4%, 2/15/11 .......................................... 3,000,000 3,417,300
----------
15,503,250
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (CONTINUED)
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($)* VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Oil Companies - 1.9%
Atlantic Richfield, medium-term note, 9.875%, 3/1/16 ........................... 3,000,000 3,694,770
-----------
MANUFACTURING - 5.6%
Diversified Manufacturing - 2.2%
Borden Chemicals and Plastics, Ltd., 9.5%, 5/1/05 .............................. 2,000,000 1,995,000
Tenneco Inc., debenture, 10%, 3/15/08 .......................................... 2,000,000 2,381,780
-----------
4,376,780
-----------
Industrial Speciality - 3.4%
Lockheed Martin Corp., 7.2%, 5/1/36 ............................................ 3,000,000 2,991,120
Seagram Co. Ltd. Debenture, 6.875%, 9/1/23 ..................................... 2,000,000 1,784,860
360 Communications Co., 7.5%, 3/1/06 ........................................... 2,000,000 1,897,560
-----------
6,673,540
-----------
TECHNOLOGY - 0.8%
Military Electronics
Loral Corp., note, 8.375%, 6/15/24 ............................................. 1,500,000 1,594,155
-----------
TRANSPORTATION - 0.9%
Airlines
American Airlines, Inc., medium-term note, 10.45%, 3/10/11 ..................... 1,500,000 1,777,110
-----------
UTILITIES - 3.0%
Natural Gas Distributors
ANR Pipeline, debenture, 9.625%, 11/1/21 ....................................... 2,000,000 2,385,660
Coastal Corp., debenture, 9.625%, 5/15/12 ...................................... 3,000,000 3,417,570
-----------
5,803,230
-----------
TOTAL LONG-TERM BONDS (Cost $130,977,145) ...................................... 124,867,000
-----------
- ------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - 1.7%
SHARES
------
FINANCIAL
Banks - 0.7%
First Nationwide Bank, non-cumulative 11.5% .................................... 12,500 1,368,750
-----------
Real Estate - 1.0%
United Dominion Realty Trust Inc., "A", 9.25% ................................. 80,000 2,030,000
-----------
TOTAL PREFERRED STOCK (Cost $3,250,000) ....................................... 3,398,750
-----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 98.4% (Cost $194,196,671)(a) ..................... 192,417,657
OTHER ASSETS AND LIABILITIES, NET - 1.6% ...................................... 3,178,858
-----------
NET ASSETS - 100.0% ........................................................... 195,596,515
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $194,196,671. At June 30,
1996, net unrealized depreciation for all securities based on tax cost was
$1,779,014. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $2,976,580 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$4,755,594.
* 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, 1996.
CURRENCY ABBREVIATIONS USED IN THIS PORTFOLIO:
CAD Canadian Dollar
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996 (UNAUDITED)
ASSETS
<S> <C> <C>
Investments, at market (identified cost $194,196,671)
(Note A) ............................................................... $192,417,657
Cash ...................................................................... 924
Receivables:
Dividends and interest ................................................. 3,364,036
Investments sold ....................................................... 1,998,000
------------
TOTAL ASSETS 197,780,617
LIABILITIES
Investments purchased ............................................... $2,000,000
Accrued management fee (Note B) ..................................... 79,544
Other accrued expenses .............................................. 104,558
----------
TOTAL LIABILITIES 2,184,102
------------
NET ASSETS, at market value.................................. $195,596,515
NET ASSETS
Net assets consist of:
Undistributed net investment income ..................................... $ 3,572,932
Net unrealized depreciation on investments .............................. (1,779,014)
Accumulated net realized loss ........................................... (3,925,824)
Common stock ............................................................ 10,108,105
Additional paid-in capital .............................................. 187,620,316
------------
NET ASSETS, at market value ............................................. $195,596,515
============
NET ASSET VALUE PER SHARE ($195,596,515 [divided by sign] 10,108,105 shares
of common stock outstanding, $1.00 par value, 15,000,000
shares authorized) ........................................................ $ 19.35
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest .................................................................. $ 7,498,931
Dividends ................................................................. 164,375
------------
7,663,306
EXPENSES:
Management and investment advisory fee (Note B) ........................... $477,812
Directors' fees (Note B) .................................................. 40,901
Transfer agent and dividend disbursing agent fees ......................... 52,930
Reports to shareholders ................................................... 47,985
Auditing .................................................................. 27,407
State franchise tax ....................................................... 23,633
Legal ..................................................................... 12,179
Custodian fees ............................................................ 10,831
Other ..................................................................... 71,191 764,869
-------- ------------
NET INVESTMENT INCOME 6,898,437
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) from:
Investment transactions ................................................... 1,696,474
Foreign currency related transactions ..................................... (554)
------------
1,695,920
------------
Net unrealized depreciation during the period on
investments ............................................................... (11,009,367)
------------
Net loss on investments ..................................................... (9,313,447)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................................................. $ (2,415,010)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Six Months Year
Ended Ended
June 30, 1996 December 31,
INCREASE (DECREASE) IN NET ASSETS (Unaudited) 1995
------------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income .......................................... $ 6,898,437 $ 14,339,953
Net realized gain from investment transactions ................. 1,695,920 20,961
Net unrealized appreciation (depreciation) on investment
transactions during the period ............................... (11,009,367) 22,105,681
------------ ------------
Net increase (decrease) in net assets resulting from operations... (2,415,010) 36,466,595
------------ ------------
Dividends to shareholders from net investment income
($.35 and $1.40 per share, respectively) ....................... (3,531,982) (14,069,861)
------------ ------------
Fund share transactions:
Reinvestment of dividends from net investment income ........... 296,221 1,168,280
------------ ------------
INCREASE (DECREASE) IN NET ASSETS ................................ (5,650,771) 23,565,014
Net assets at beginning of period ................................ 201,247,286 177,682,272
------------ ------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $3,572,932 and $206,477, respectively) .... $195,596,515 $201,247,286
============ ============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period ........................ 10,091,241 10,024,589
Shares issued to shareholders in reinvestment of dividends
from net investment income ..................................... 16,864 66,652
------------ ------------
Shares outstanding at end of period .............................. 10,108,105 10,091,241
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
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,
1996 (a) --------------------------------------
(Unaudited) 1995(a) 1994(a) 1993(a) 1992(a) 1991
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $19.94 $17.72 $ 20.13 $19.30 $19.17 $17.21
------ ------ ------- ------ ------ ------
Income from investment operations:
Income ................................... .76 1.57 1.51 1.68 1.84 1.88
Operating expenses ....................... (.08) (.14) (.14) (.15) (.15) (.13)
------ ------ ------- ------ ------ ------
Net investment income .................... .68 1.43 1.37 1.53 1.69 1.75
Net realized and unrealized gain (loss) .. (.92) 2.19 (2.42) .84 .47 1.97
------ ------ ------- ------ ------ ------
Total from investment operations .......... (.24) 3.62 (1.05) 2.37 2.16 3.72
------ ------ ------- ------ ------ ------
Dilution resulting from the rights
offering ................................. -- -- -- -- (.36) --
Less distributions from net investment
income ................................... (.35) (1.40) (1.36) (1.54) (1.67) (1.76)
------ ------ ------- ------ ------ ------
Net asset value, end of period ............ $19.35 $19.94 $ 17.72 $20.13 $19.30 $19.17
====== ====== ======= ====== ====== ======
Per share market value, end of period ..... $17.38 $18.00 $ 15.75 $19.75 $20.88 $19.63
Price range on New York Stock ====== ====== ======= ====== ====== ======
Exchange for each share of
Common Stock outstanding during
the period (Unaudited):
High ..................................... $19.38 $19.13 $ 20.25 $22.38 $21.00 $20.25
Low ...................................... $17.13 $15.75 $ 15.25 $19.25 $19.00 $17.00
TOTAL INVESTMENT RETURN
Per share market value (%) ............... (1.55)(d) 23.69 (13.54) 2.02 17.98 23.11
Per share net asset value (%) (b) ........ (1.12)(d) 21.78 (4.51) 12.47 11.67 22.28
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) .... 196 201 178 200 191 157
Ratio of operating expenses to
average net assets (%) ................... .78(c) .73 .71 .73 .75 .69
Ratio of net investment income to
average net assets (%) ................... 6.99(c) 7.45 7.28 7.53 8.69 9.60
Portfolio turnover rate (%) ............... 68.7(c) 76.4 137.0 122.8 137.6 72.0
- ----------------
<FN>
(a) Based on monthly average shares outstanding during the period.
(b) Total investment returns reflect changes in net asset value per share during
each period and assumes that 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.
(c) Annualized
(d) Not annualized
</FN>
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 (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, 1995, the Fund had a net tax basis capital loss
carryforward of approximately $5,622,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully
utilized or until December 31, 1999 ($61,000), December 31, 2002
($3,313,000), and December 31, 2003 ($2,248,000), the respective expiration
dates, whichever occurs first.
16
<PAGE>
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. 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, 1996, the fee pursuant to the Agreement amounted to $477,812.
None of the Directors are affiliated with the Adviser. For the six months ended
June 30, 1996, Directors' fees aggregated $40,901.
Note C - PURCHASES AND SALES OF INVESTMENTS. For the six months ended June 30,
1996, purchases and sales of investment securities other than direct U.S.
government obligations and short-term investments aggregated $65,266,943 and
$67,441,150, respectively.
Note D - SUBSEQUENT EVENT. On July 11, 1996, the Board of Directors declared a
dividend of $0.34 per share (aggregating $3,436,756), payable on July 31, 1996
to shareholders of record on July 22, 1996.
17
<PAGE>
SHAREHOLDER MEETING RESULTS
The Annual Meeting of Shareholders of Montgomery Street Income Securities, Inc.
(the "Company") was held on Thursday, July 11, 1996, at the offices of the
Company, 101 California Street, Suite 4100, San Francisco, California. The four
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.
<TABLE>
<CAPTION>
Director: Number of Votes:
--------- ----------------
<S> <C> <C> <C>
For Withheld Broker Non-Votes*
--- -------- -----------------
John C. Atwater 7,752,562 120,915 0
Richard J. Bradshaw 7,769,067 104,409 0
Otto W. Butz 7,749,965 123,512 0
Maryellie K. Moore 7,770,569 102,907 0
Wendell G. Van Auken 7,772,609 100,867 0
James C. Van Horne 7,766,895 106,581 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, 1996.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,748,954 39,648 84,875 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*
--- ------- ------- -----------------
7,639,941 83,338 150,198 0
4. Approval or disapproval of the Agreement and Articles of Merger pursuant to which the Company's state of
incorporation would be changed from Delaware to Maryland.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
5,254,777 161,743 225,617 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.
</TABLE>
18
<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. State Street Bank and Trust Company 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. 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 $2.50 service fee less brokerage
commissions. The sale of shares (including fractional shares) will be a taxable
19
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (continued)
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 State Street Bank and Trust Company, P.O. Box 8209, Boston, MA
02266-8209, or by calling (800) 426-5523.
