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 Company
AGENT 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, 1997
SCUDDER (logo)
Investment Adviser
<PAGE>
101 California Street, Suite 4100
San Francisco, CA 94111
(415) 981-8191
Dear Shareholder:
The investments of Montgomery Street Income Securities, Inc. (the Fund) produced
a total return based on net asset value (NAV) for the quarter ended June 30,
1997 of 4.55%. This reflects an improvement in bond prices and the $0.35
dividend paid in April. The total return of the Fund compared favorably with the
unmanaged Lehman Brothers Aggregate Bond Index, an index we use for comparative
purposes, which had a total return of 3.67%. The June 30 NAV per share was
$20.00, a nice increase from the $19.51 at the end of the first quarter. The
market price of the Fund's shares, which trade on the New York Stock Exchange,
was $17.9375 on June 30, which compared with $17.75 on March 31, 1997.
On July 10, 1997, the Board of Directors declared a $0.36 per share dividend
payable on July 31, 1997 to shareholders of record on July 21, 1997.
The Market and Economic Conditions
The strength of domestic markets, both stock and bond, during the second quarter
was a bit of a surprise. Late in March, the Federal Reserve, responding to news
of strong economic growth and low unemployment, raised the Fed Funds rate from
5.25% to 5.50%. Initially, both markets reacted quite negatively, with stocks
quickly retreating by close to 10% and bonds breaking through the important 7%
threshold for long maturities. In the bond market, lower quality issues also
came under severe pressure. However, the weakness did not last long, and a
dramatic recovery began in mid-April and continued to quarter-end. The table
below shows a comparison of market levels from the time of the Fed tightening on
March 24 until the end of June:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Yields 3/24/97 to 6/30/97
------ ------------------
Maturity 3/24/97 3/31/97 4/11/97 6/30/97 Yield Total
Change Return
-----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1 Year 5.81% 6.00% 6.01% 5.65% -0.16% 1.81%
2 Years 6.24 6.41 6.52 6.06 -0.18 2.07
3 Years 6.41 6.56 6.68 6.21 -0.20 2.26
5 Years 6.56 6.75 6.85 6.37 -0.19 2.47
10 Years 6.70 6.91 6.98 6.49 -0.21 3.29
30 Years 6.92 7.10 7.17 6.78 -0.14 3.64
-----------------------------------------------------------------------------------------------------------
</TABLE>
Why did the markets shrug off the central bank's message so easily? Primarily,
the rapid first quarter growth in real GDP of 5.8% was seen as an aberration.
The flow of economic data showed moderation prior to the close of the quarter,
and subsequent measures have indicated that second quarter growth might fall
below 2%. Added to this was the fact that inflation, although of concern to
almost every investor, was nowhere to be seen. The Producer Price Index (PPI)
actually was down for the first half of the year, and the CRB Index, a widely
watched index of commodity prices, collapsed, as did gold.
2
<PAGE>
The news from overseas was interesting, too. Japanese industrial production
remained in the doldrums, relieving fears of an early rate hike by the Bank of
Japan. (Anything that might keep Japanese savings at home is viewed as a threat
to market values in the rest of the world.) Then, the elections in the U.K. and
France moved the European political balance decidedly to the left, at a critical
time in the European Monetary Union (EMU) preparations. It was a widely held
view that the new Euro currency unit would be a hard (DM-like) currency, but the
French election placed this in serious doubt. Suddenly the higher yields in the
U.S. Treasury market, coupled with the strong dollar, gained some real investor
appeal. The table below shows a comparison of 5 and 10 year government bond
yields from selected countries as of June 30:
Yields on 6/30/97
------------------------------------------------------------
Country 5-Year 10-Year
------------------------------------------------------------
United Kingdom 7.05% 7.09%
United States 6.37 6.49
Italy 6.24 6.86
Canada 5.81 6.34
Sweden 5.77 6.64
Spain 5.51 6.37
Germany 4.56 5.70
France 4.55 5.58
Japan 1.71 2.64
------------------------------------------------------------
The Portfolio
There were no fundamental changes in portfolio strategy during the quarter. As
the market rallied, the larger than usual short term position that had been
built in anticipation of Federal Reserve action was redeployed into longer
maturities. This increased portfolio duration from 5.6 years to almost 6 years.
(Duration is a measure of the portfolio's sensitivity to interest rates. If
interest rates were to drop by 1% from present levels, the value of Montgomery
Street's portfolio would advance by about 6%. Alternatively, if rates were to
increase by 1%, the value of the portfolio would decrease by about 6%.)
Portfolio maturity also increased from 14.3 years to 15.3 years as the cash
equivalents were put to work. This lengthening of duration and maturity helped
the portfolio, as the market rallied from mid-April through the end of the
quarter, and income was enhanced.
As has recently been the case, the Fund's outperformance was due primarily to
specific company selection within the Corporate sector. The Corporate sector
also outperformed Treasuries for the quarter, although, for a change, high grade
issues did as well as lower quality issues. Before expenses, the investment
grade portion of the portfolio returned about 4.59%. The below investment grade
portion of the portfolio had a total return before expenses of 4.37% for the
quarter, having better income, but less maturity exposure in the strong market.
3
<PAGE>
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
PIE CHART TITLE:
The Portfolio
PIE CHART DATA:
--------------------------------
Mortgage 22.6%
Treasury 10.9%
Cash 1.1%
Yankee 5.6%
International 0.8%
Finance 16.0%
Utility 9.4%
Industrial 29.7%
Asset-Backed 3.9%
--------------------------------
100%
====
The pie graph above shows the portfolio's sector weightings at the end of the
half. Our Corporate bond position increased to 60.8% of the portfolio, including
the preferred issues. Note that "Yankees", of which we hold 5.6%, are U.S.
dollar denominated bonds issued by foreign companies. The portfolio's only
foreign currency exposure is in a long Canadian Government bond, which makes up
0.8% of the total portfolio. Belden & Blake, ComCast Cellular, LCI
International, NGC Corp., NRG Energy, Pride Petroleum, and Profitts, were new
additions to the Fund, while ADT, Atlantic Richfield, Continental Bank, Federal
Realty Investors, First USA Bank, Forest Oil, and Tenneco were sold. Federal
Realty Investors, a convertible issue, had done quite well, outperforming like
duration Treasuries by 3.95% over the 27 month holding period. First USA Bank
was another good performer due to its being purchased by the higher rated Banc
One. ADT and Continental Bank were also buyout stories that had reached
fruition, in our judgment.
The Mortgage component of the portfolio remained constant at 22.6% over the
quarter. Technical conditions in the mortgage market continued to be attractive
for mortgage "rolls". A mortgage roll is a transaction where mortgages are sold
for settlement on one date and simultaneously purchased for a future settlement
date. At the Fund's option, the future purchase can be for a lower price or at
the same price with a corresponding income amount for the intervening period.
When conditions are favorable, this technique augments the income we receive
from our mortgage holdings. As of the end of the quarter, a little less than
half of our mortgage pass-through position had been rolled forward from June to
July. At its July 10 meeting, the Board of Directors increased the percentage of
the Fund's total assets the adviser may commit to mortgage rolls from 15% to
20%, or up to 30% with the approval of the Chairman of the Board.
4
<PAGE>
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
PIE CHART TITLE:
Quality
PIE CHART DATA:
--------------------------------
Cash 1.7%
Government 10.7%
Agency 22.4%
AA 4.9%
A 10.4%
BBB 28.7%
BB 12.9%
B 8.3%
--------------------------------
100%
====
The Fund's investment policy allows the portfolio to hold up to 30% of total
assets in foreign denominated securities, preferreds, convertibles, and below
investment grade debt securities. As of quarter end, the Fund held 24.2% of its
assets in these categories, similar to the 24.9% held three months prior. In
terms of credit rating 22.3% of the portfolio was below investment grade. The
largest below investment grade position remained Borden Inc., a packaging
company, at 2.0% of the total. Average quality for the overall portfolio was
"A", with the quality breakdown shown in the pie graph above.
Annual Meeting Results
At the July 10, 1997 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, 1997 was
ratified. At a Board meeting held immediately prior to the Annual Meeting, the
directors removed the third proposal to be considered at the Annual Meeting --
Approval or disapproval of the continuance of the current Management and
Investment Advisory Agreement between the Fund and Scudder, Stevens & Clark,
Inc. This was done because Scudder had just signed a definitive agreement to
enter into a strategic alliance with the Zurich Group. This alliance will
include the formation of a new investment management entity, to be called
Scudder Kemper Investments, Inc., as a subsidiary of the Zurich Group. The Board
has scheduled a meeting in late August to review the new organization and make a
recommendation to the shareholders regarding a new Management and Investment
Advisory Agreement. Another meeting of stockholders is likely to be set for
October to vote on the Board's recommendation.
5
<PAGE>
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
Meeting Results" on page 19 for more detailed information about the votes cast
at the Annual Meeting.
Thank you for being a shareholder.
Sincerely,
/s/John T. Packard /s/Stephen A. Wohler
John T. Packard Stephen A. Wohler
President Vice President
Portfolio Manager of the Fund
August 18, 1997
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
6
<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.
7
<PAGE>
SCHEDULE OF INVESTMENTS
June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($)* Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 12.3%
(under 1 year)
American Express, 5.54%, 7/14/97 (c) ................................... 9,800,000 9,800,000
Ford Motor Credit Co., 5.54%, 7/14/97 (c) .............................. 5,200,000 5,200,000
General Electric Capital Corp., 5.54%, 7/14/97 (c) ..................... 2,980,000 2,980,000
Prudential Funding Corp., 5.53%, 7/2/97 (c) ............................ 6,963,000 6,963,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $24,943,000) ........................ 24,943,000
-----------
- ---------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BONDS -- 18.9%
(1 - 8 years)
U.S. TREASURY AND AGENCY -- 10.5%
U.S. Treasury Note, 8.875%, 2/15/99 (c) ................................ 8,000,000 8,347,520
U.S. Treasury Note, 9.125%, 5/15/99 (c) ................................ 2,900,000 3,053,613
U.S. Treasury Note, 6.5%, 5/31/02 (c) .................................. 10,000,000 10,040,600
-----------
21,441,733
-----------
CONSUMER DISCRETIONARY -- 0.6%
Specialty Retail
Profitts Inc., 8.125%, 5/15/04 ......................................... 1,250,000 1,253,125
-----------
FINANCIAL -- 3.2%
Banks -- 1.7%
Conti Financial Corp., senior note, 8.375%, 8/15/03 .................... 1,950,000 2,003,625
First Nationwide Holding Corp., 10.625%, 10/1/03 ....................... 1,250,000 1,368,750
-----------
3,372,375
-----------
Real Estate -- 1.5%
Taubman Realty Group LP, medium-term note, 7.5%, 6/15/02 ............... 3,000,000 3,045,000
-----------
MANUFACTURING -- 1.0%
Diversified Manufacturing
Borden Chemicals and Plastics L.P., note, 9.5%, 5/1/05 ................. 2,000,000 2,105,000
-----------
MEDIA -- 2.6%
Cable Television
Rogers Cablesystems Ltd., senior secured note, 9.63%, 8/1/02 ........... 3,000,000 3,165,000
Tele-Communications Inc., 8.25%, 1/15/03 ............................... 2,000,000 2,069,660
-----------
5,234,660
-----------
TRANSPORTATION -- 1.0%
Airlines
Continental Airlines, Inc., 9.5%, 12/15/01 ............................. 2,000,000 2,098,400
-----------
TOTAL INTERMEDIATE-TERM BONDS (Cost $37,973,627) ....................... 38,550,293
-----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($)* Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM BONDS -- 75.8%
(over 8 years)
U.S. TREASURY & AGENCY -- 22.1%
Federal Home Loan Mortgage Corp., 7.5%, 9/1/27 ......................... 20,000,000 20,075,000
Federal National Mortgage Association, pass-thru certificate,
7.5%, to 9/1/27 (b) ................................................. 15,000,000 15,032,700
Government National Mortgage Association, pass-thru certificate,
7.5%, 8/15/26 (c) ................................................... 9,737,893 9,771,294
-----------
44,878,994
-----------
FOREIGN GOVERNMENT -- 0.8%
Government of Canada, 8%, 6/1/23 ....................................... CAD 2,000,000 1,643,796
-----------
METALS & MINERALS -- 0.8%
Steel & Metals
AK Steel Holding Corp., 9.125%, 12/15/06 ............................... 1,500,000 1,530,000
-----------
CONSTRUCTION -- 1.0%
Building Materials
USG Corp., senior note, 8.5%, 8/1/05 ................................... 2,000,000 2,080,000
-----------
CONSUMER DISCRETIONARY -- 0.8%
Specialty Retail
Cole National Group, 9.875%, 12/31/06 .................................. 1,500,000 1,571,250
-----------
CONSUMER STAPLES -- 3.7%
Food & Beverage
Borden Inc., debenture, 9.2%, 3/15/21 .................................. 4,000,000 4,083,200
Coca Cola Co., Inc., debenture, 7.38%, 7/29/2093 ....................... 3,500,000 3,464,440
-----------
7,547,640
-----------
COMMUNICATIONS -- 5.5%
Cellular Telephone
ComCast Cellular, 9.5%, 5/1/07 ......................................... 2,000,000 2,010,000
LCI International, Inc., 7.25%, 6/15/07 ................................ 4,000,000 3,962,000
Rogers Cantel Mobile Communications Inc., 9.375%, 6/1/08 ............... 1,000,000 1,055,000
Teleport Communications Group Inc., senior note, 9.875%, 7/1/06 ........ 2,000,000 2,130,000
WorldCom Inc., 7.75%, 4/1/27 ........................................... 2,000,000 2,045,060
-----------
11,202,060
-----------
FINANCIAL -- 17.6%
Banks -- 6.9%
ABN-AMRO Bank NV, subordinated note, 7.13%, 10/15/2093 (c) ............. 5,000,000 4,680,650
Bank United Financial Corp., 10.25%, 12/31/26 .......................... 1,500,000 1,485,000
CoreStates Bank, 8%, 12/15/26 .......................................... 5,000,000 4,950,650
Royal Bank of Scotland, 7.375%, 4/29/49 (c) ............................ 3,000,000 2,984,010
-----------
14,100,310
-----------
Other Financial Companies -- 7.7%
Commercial Credit Corp., debenture, 10%, 5/15/09 ....................... 3,000,000 3,641,910
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Principal Market
Amount ($)* Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Greentree Financial Corp., asset-backed, senior subordinated
pass-thru certificate, Series 1993-4 B1, 7.2%, 1/15/19 (c) .......... 8,000,000 7,862,500
NGC Corp, 8.32%, 6/1/27 ................................................ 3,000,000 4,136,400
-----------
15,640,810
-----------
Real Estate -- 3.0%
ERP Operating L.P. Note, 7.57%, 8/15/26 ................................ 3,000,000 3,087,750
Meditrust SBI, 7.82%, 9/10/26 .......................................... 3,000,000 3,101,160
-----------
6,188,910
-----------
MEDIA -- 5.4%
Broadcasting & Entertainment -- 3.0%
Paramount Communications, Inc., senior debenture, 7.5%, 7/15/23 ........ 2,000,000 1,757,740
Time Warner Inc., debenture, 9.125%, 1/15/13 (c) ....................... 4,000,000 4,422,880
-----------
6,180,620
-----------
Cable Television -- 2.4%
British Sky Broadcasting Co., 7.3%, 10/15/06 ........................... 1,600,000 1,601,184
Tele-Communications Inc., 8.75%, 8/1/15 ................................ 2,000,000 3,144,300
-----------
4,745,484
-----------
DURABLES -- 2.8%
Aerospace -- 1.5%
Lockheed Martin Corp., 7.2%, 5/1/36 .................................... 3,000,000 3,077,460
-----------
Miscellaneous-- 1.3%
Newport News Shipbuilding Co., senior note, 9.25%, 12/1/06 ............. 2,500,000 2,612,500
-----------
ENERGY -- 10.3%
Chemicals -- 1.4%
Lyondell Petrochemical Co., note, 7.55%, 2/15/26 ....................... 3,000,000 2,887,680
-----------
Oil & Gas Production -- 6.8%
Lasmo U.S.A. Inc., note, 8.38%, 6/1/23 ................................. 3,000,000 3,045,900
Nuevo Energy Co., senior subordinated note, 9.5%, 4/15/06 .............. 2,000,000 2,080,000
Saga Petroleum A.S., note, 9.125%, 7/15/14 ............................. 3,000,000 3,280,500
Unocal Corp., debenture, 9.4%, 2/15/11 ................................. 3,000,000 3,504,630
Belden & Blake Corp., 9.875%, 6/15/07 .................................. 2,000,000 1,995,000
-----------
13,906,030
-----------
Oil Companies -- 0.6%
Pride Petroleum Services, Inc., 9.375%, 05/1/07 ........................ 1,200,000 1,246,800
-----------
Miscellaneous -- 1.5%
NRG Energy Inc, 7.5%, 6/14/07 .......................................... 3,000,000 3,016,080
-----------
MANUFACTURING -- 0.3%
Industrial Specialty
Pierce Leahy Corp., senior subordinated note, 11.125%, 7/15/06 ......... 500,000 545,000
-----------
TECHNOLOGY -- 1.0%
Semiconductors
Fairchild Semiconductor Inc., 10.125%, 3/15/07 ......................... 2,000,000 2,110,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($)* Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION -- 1.0%
Airlines
Northwest Airlines, Corp., 8.7%, 3/15/07 ............................... 2,000,000 2,038,000
-----------
UTILITIES -- 2.7%
Natural Gas Distributors -- 1.2%
ANR Pipeline, debenture, 9.625%, 11/1/21 ............................... 2,000,000 2,444,640
-----------
Electric Utilities -- 1.5%
Southern Co. Capital Trust I, 8.19%, 2/1/37 ............................ 3,000,000 3,037,770
-----------
TOTAL LONG-TERM BONDS (Cost $151,863,558) .............................. 154,231,834
-----------
- ----------------------------------------------------------------------------------------------------------------
WARRANTS -- 0.1%
Shares
FINANCIAL ------
Real Estate
Walden Residential Properties, Inc. Warrants (expire 1/1/02) ........... 80,000 150,000
-----------
- ---------------------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 2.0%
FINANCIAL
Real Estate
United Dominion Realty Trust Inc., "A", 9.25% .......................... 80,000 2,085,000
Walden Residential Properties, Inc. .................................... 80,000 2,060,000
-----------
TOTAL PREFERRED STOCK (Cost $4,000,000) ................................ 4,145,000
-----------
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 109.1% (Cost $218,780,185) (a) ............ 222,020,127
OTHER ASSETS AND LIABILITIES, NET -- (9.1%) ............................. (18,517,350)
-----------
NET ASSETS -- 100.0% .................................................... 203,502,777
===========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $218,780,185. At June 30,
1997, net unrealized appreciation for all securities based on tax cost
was $3,239,942. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $4,045,894 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax
cost over market value of $805,952.
(b) Mortgage Dollar Roll
(c) At June 30,1997, these securities, in part or in whole, have been
segregated to cover Mortgage Dollar Rolls.
* Principal amount is stated in U.S. dollars unless otherwise specified.
Currency abbreviations used in this portfolio:
CAD Canadian Dollar
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market (identified cost $218,780,185) ............... $222,020,127
Receivable for investments sold ..................................... 23,687,651
Interest and dividends receivable ................................... 3,127,510
Other assets ........................................................ 4,275
------------
Total Assets 248,839,563
LIABILITIES
Investments purchased ............................................... $30,270,727
Investments purchased-mortgage dollar rolls ......................... 14,800,781
Due to custodian bank ............................................... 82,712
Accrued management fee .............................................. 82,418
Deferred income on mortgage dollar rolls ............................ 13,510
Other payables and accrued expenses ................................. 86,638
----------
Total Liabilities 45,336,786
------------
NET ASSETS, at market value ...................................... $203,502,777
============
NET ASSETS Net assets consist of:
Undistributed net investment income .............................. $ 3,785,328
Net unrealized appreciation (depreciation) on:
Investments ................................................... 3,239,942
Foreign currency related transactions ......................... 17
Accumulated net realized loss .................................... (2,413,940)
Paid-in capital .................................................. 198,891,430
------------
NET ASSETS, at market value ...................................... $203,502,777
============
Net Asset Value Per Share ($203,502,777 / 10,174,992 shares
of common stock outstanding, $.001 par value,
30,000,000 shares authorized) ....................................... $20.00
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest .......................................................... $ 7,802,046
Dividends ......................................................... 171,268
------------
7,973,314
Expenses:
Management and investment advisory fee ............................ $ 487,524
Directors' fees and expenses ...................................... 39,639
Services to shareholders .......................................... 45,167
Reports to shareholders ........................................... 37,035
Auditing .......................................................... 38,663
Legal ............................................................. 10,946
Custodian fees .................................................... 7,458
Other ............................................................. 29,967 696,399
---------- ------------
Net Investment Income 7,276,915
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investment securities ............................................. 958,194
Foreign currency related transactions ............................. (433)
------------
957,761
Net unrealized appreciation (depreciation) during the period on:
Investments ....................................................... 74,840
Foreign currency related transactions ............................. 69
------------
74,909
------------
Net gain (loss) on investments ....................................... 1,032,670
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS ........................................................... $ 8,309,585
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, 1997 December 31,
INCREASE (DECREASE) IN NET ASSETS (Unaudited) 1996
------------------ ------------------
<S> <C> <C>
Operations:
Net investment income .................................................. $ 7,276,915 $ 13,940,795
Net realized gain from investment transactions ......................... 957,761 2,330,201
Net unrealized appreciation (depreciation) on investment and
foreign currency related transactions during the period ............. 74,909 (6,065,303)
-------------- --------------
Net increase (decrease) in net assets resulting from operations ........ 8,309,585 10,205,693
-------------- --------------
Dividends to shareholders from net investment income ................... (3,555,593) (14,163,424)
-------------- --------------
Fund share transactions:
Reinvestment of dividends from net investment income ................ 282,963 1,176,267
-------------- --------------
Increase (decrease) in net assets ...................................... 5,036,955 (2,781,464)
Net assets at beginning of period ...................................... 198,465,822 201,247,286
-------------- --------------
Net assets at end of period (including undistributed net
investment income of $3,785,328 and $64,006,
respectively) ....................................................... $ 203,502,777 $ 198,465,822
============== ==============
Other Information
Increase in Fund shares
Shares outstanding at beginning of period .............................. 10,158,937 10,091,241
Shares issued to shareholders in reinvestment of dividends
from net investment income .......................................... 16,055 67,696
-------------- --------------
Shares outstanding at end of period .................................... 10,174,992 10,158,937
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
FINANCIAL HIGHLIGHTS
The following table includes selected data (a) for a share outstanding
throughout each period and other performance information derived from the
financial statements and market price data.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
1997 --------------------------------------------
(Unaudited) 1996 1995 1994 1993 1992
--------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $19.54 $19.94 $17.72 $20.13 $19.30 $19.17
------ ------ ------ ------ ------ ------
Income from investment operations:
Income ................................. .78 1.53 1.57 1.51 1.68 1.84
Operating expenses ..................... (.07) (.15) (.14) (.14) (.15) (.15)
------ ------ ------ ------ ------ ------
Net investment income .................. .71 1.38 1.43 1.37 1.53 1.69
Net realized and unrealized
gain (loss) ........................... .10 (.38) 2.19 (2.42) .84 .47
------ ------ ------ ------ ------ ------
Total from investment operations ......... .81 1.00 3.62 (1.05) 2.37 2.16
------ ------ ------ ------ ------ ------
Dilution resulting from the rights
offering ............................... -- -- -- -- -- (.36)
Less distributions:
From net investment income ............. (.35) (1.40) (1.40) (1.36) (1.54) (1.67)
------ ------ ------ ------ ------ ------
Net asset value, end of period ........... $20.00 $19.54 $19.94 $17.72 $20.13 $19.30
====== ====== ====== ====== ====== ======
Per share market value, end of period .... $17.94 $17.38 $18.00 $15.75 $19.75 $20.88
====== ====== ====== ====== ====== ======
Price range on New York Stock Exchange
for each share of Common Stock
outstanding during the period
(Unaudited):
High .................................. $18.63 $19.50 $19.13 $20.25 $22.38 $21.00
Low ................................... $17.25 $16.75 $15.75 $15.25 $19.25 $19.00
Total Investment Return
Per share market value (%) ............. 5.29(e) 4.54 23.69 (13.54) 2.02 17.98
Per share net asset value (%) (b) ...... 4.39(e) 6.08 21.78 (4.51) 12.47 11.67
Ratios and Supplemental Data
Net assets, end of period ($ millions) ... 204 198 201 178 200 191
Ratio of operating expenses to
average net assets (%) ................. .70(d) .76 .73 .71 .73 .75
Ratio of net investment income to
average net assets (%) ................. 7.34(d) 7.07 7.45 7.28 7.53 8.69
Portfolio turnover rate (%) .............. 112.9(c)(d) 92.1 76.4 137.0 122.8 137.6
</TABLE>
- ----------
(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 value.
(c) The portfolio turnover rate including mortgage dollar roll transactions
aggregated 200.4% (annualized) for the six months ended June 30, 1997.
(d) Annualized
(e) Not annualized
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (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. The Fund's
financial statements are prepared in accordance with generally accepted
accounting principles which require the use of management estimates.
Significant accounting policies are summarized as follows:
Valuation of Investments--Portfolio debt securities with remaining
maturities greater than sixty days upon purchase 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 upon purchase 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.
Mortgage Dollar Rolls--The Fund may enter into mortgage dollar rolls in
which the Fund sells mortgage securities for delivery in the current month
and simultaneously contracts to repurchase similar, but not identical,
securities at the same price on a fixed date. The Fund receives
compensation as consideration for entering into the commitment to
repurchase. The compensation is recorded as deferred income and amortized
to income over the roll period. The counterparty receives all principal and
interest payments, including prepayments, made in respect of the security
while it is the holder. Mortgage dollar rolls may be renewed with a new
purchase and repurchase price fixed and a cash settlement made at each
renewal without physical delivery of the securities subject to the
contract.
16
<PAGE>
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, 1996, the Fund had a net tax basis capital loss
carryforward of approximately $3,372,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully
utilized or until December 31, 2002 ($1,124,000) and December 31, 2003
($2,248,000), the respective expiration dates, whichever occurs first.
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 and foreign denominated 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, 1997, the fee pursuant to the Agreement amounted to $487,524.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
On June 26, 1997, the Adviser entered into an agreement with The Zurich
Insurance Company ("Zurich"), an international insurance and financial services
organization, pursuant to which Zurich will acquire a majority interest in the
Adviser, and the Adviser will form a new global investment organization by
combining with Zurich's subsidiary, Zurich Kemper Investments, Inc. and change
its name to Scudder Kemper Investments, Inc. Subject to the receipt of the
required regulatory and shareholder approvals, the transaction is expected to
close in the fourth quarter of 1997.
None of the Directors are affiliated with the Adviser. For the six months ended
June 30, 1997, Directors' fees and expenses aggregated $39,639.
Note C--PURCHASES AND SALES OF INVESTMENTS. For the six months ended June 30,
1997, purchases and sales of investment securities (excluding U.S. direct
government obligations, short-term investments, and mortgage dollar roll
transactions) aggregated $121,866,466 and $101,105,828, respectively. Purchases
and sales of direct U.S. Government obligations aggregated $10,063,316 and
$162,151, respectively. Purchases and sales of mortgage dollar roll transactions
aggregated $59,431,286 and $89,176,637, respectively.
Note D--SUBSEQUENT EVENT. On July 10, 1997, the Board of Directors declared a
dividend of $0.36 per share, payable on July 31, 1997 to shareholders of record
on July 21, 1997.
18
<PAGE>
SHAREHOLDER MEETING RESULTS
The Annual Meeting of Shareholders of Montgomery Street Income Securities, Inc.
(the "Company") was held on Thursday, July 10, 1997, at the offices of the
Company, 101 California Street, Suite 4100, San Francisco, California. The two
matters voted upon by Shareholders and the resulting votes for each matter are
presented below.
1. The election of six Directors to hold office until the next Annual
Meeting or until their respective successors shall have been duly
elected and qualified.
Director: Number of Votes:
--------- ----------------
For Withheld Broker Non-Votes*
--- -------- -----------------
John C. Atwater 6,591,391 140,420 0
Richard J. Bradshaw 6,622,795 109,016 0
Otto W. Butz 6,616,418 115,393 0
Maryellie K. Moore 6,624,339 107,472 0
Wendell G. Van Auken 6,592,857 138,954 0
James C. Van Horne 6,617,661 114,150 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, 1997.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
6,597,931 45,364 88,515 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.
19
<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 $1 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 and less brokerage
commissions. The sale of shares (including fractional shares) will be a taxable
20
<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 8200, Boston, MA
02266-8200, or by calling (800) 426-5523.
21
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22
<PAGE>
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23
