DIRECTORS JOHN C. ATWATER
RICHARD J. BRADSHAW
MARYELLIE K. MOORE
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE
Chairman
OFFICERS JOHN T. PACKARD
President
DANIEL PIERCE
Vice President
STEPHEN A. WOHLER
Vice President
BRUCE H. GOLDFARB
Vice President and
Assistant Secretary
JOHN R. HEBBLE
Treasurer
THOMAS F. McDONOUGH
Vice President, Secretary
and Assistant Treasurer
KATHRYN L. QUIRK
Vice President and
Assistant Secretary
INVESTMENT Scudder Kemper Investments, 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
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MONTGOMERY
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MONTGOMERY
STREET
INCOME
SECURITIES
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2
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Semiannual Report
June 30, 1998
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) of 2.14% for the quarter
ended June 30, 1998. The total NAV return of the Fund slightly lagged the
unmanaged Lehman Brothers Aggregate Bond Index, an index we use for comparative
purposes, which had a total return of 2.34%. The June 30, 1998 NAV per share was
$20.67 versus $20.60 at the end of March. The market price of the Fund's shares,
which trade on the New York Stock Exchange, was $19.56 at the end of June, which
compared with $19.88 on March 31, 1998. The market price discount of the shares
as a percentage of the NAV widened slightly to 5.4%.
On July 9, 1998, the Board of Directors declared a $0.34 per share dividend
payable on July 31, 1998 to shareholders of record on July 20, 1998. This was
the same amount paid to shareholders as a dividend in April.
During the second quarter, interest rates for intermediate and long term bonds
continued to move lower, extending the rally that began over a year ago. While a
strong bond market makes for good total returns, it does make it more difficult
over time to maintain a minimum dividend level. The dividend the Fund can pay
reflects the yields available in the market, albeit on a smoothed basis.
As we have previously stated, the tax loss carryforward the Fund has enjoyed for
a number of years has been exhausted as gains have been realized within the
portfolio. The final tally on 1998 distributions still depends on market levels
and the specific transactions which occur. It seems likely, however, that net
capital gains will be created this year unless the bond market is quite weak
during the second half of 1998.
Market and Economic Conditions
The Asian crisis, which failed to slow the economy in the first quarter, seemed
to take hold in the most recent quarter. Real gross domestic product (GDP)
decelerated from an overheated 5.4% annual growth rate last quarter to just 1.4%
in the second quarter -- a cooldown which was brought about in large part by
slowing exports, inventory corrections, and the strike at General Motors.
However, retail sales held up very well as consumers continued to spend heavily.
The pricing environment remained benign, with commodities prices falling and
cheap imports limiting pricing power in the domestic market. The labor markets,
on the other hand, continue very tight, with low unemployment and with labor
costs creeping up at a 3.5% annual rate.
Against this mixed environment, the bond market rallied. The strong dollar and
relatively high rates in the United States supported the purchase of bonds by
foreign investors. The Federal Reserve Board (Fed) continued to talk tough, but
was undermined by the Treasury's decision to defend the yen via currency
intervention. We believe that the domestic environment in terms of inflation or
economic growth will have to be more extreme than today's figures indicate
before the Fed will act to further increase the rate differential between the
United States and Japan.
2
<PAGE>
The extreme weakness in Asia did spread to other emerging markets, causing some
flight into dollar-denominated investments. While the U.S. bond market has been
the beneficiary of this international transfer of assets, it is not known
whether some of these flows may soon have to be reversed for solvency reasons if
the Asian economies continue to slow. Japan, in particular, has been ineffective
in addressing its structural problems, and seems caught in a credit crunch
caused by a very unhealthy banking sector. In fact, jump-starting its economy,
and perhaps risking inflation, is a tough decision for a nation that saves so
much of its income. However, for Asia to make a sustainable recovery, Japan
needs to participate.
There are worries that the "Asian Contagion" will spread to other economies,
including Europe, and that a global slowdown might ensue. Traditionally, this
has been good for bonds in countries that did not have to run large deficits or
print money to pull themselves back out of the trough. In that context, the
rally of the long end of the domestic Treasury market to new lows in yields
makes sense. It should be noted that, although the federal fund rate has been
held steady at 5.5%, investors have been willing to purchase U.S. Treasury
securities at lower yields. For example, one year yields were roughly 5.25% as
of quarter-end.
While the economic slowdown and flight to quality aided Treasuries, the
corporate bond market suffered through another quarter of poor relative
performance. Fears of recession and reduced corporate profitability combined
with technical factors to widen corporate yield spreads. A shortfall of newly
issued Treasury securities, due to both the fiscal surplus and municipal bond
defeasance, has been more than made up for by new corporate debt, as
corporations refinanced their balance sheets. Although the lower interest costs
will ultimately benefit corporations, corporate bonds have returned to the
cheapest valuations seen in four years. While there is no clear sign of when
these negative technical conditions will correct themselves, corporate bonds do
appear attractive at current levels, unless the economic downturn becomes deeper
and more extended than we currently foresee.
The Portfolio
Reflecting the better market tone of the second quarter, the duration of the
portfolio was extended from 5.6 years to 6.0 years as attractive opportunities
appeared. (Duration is a measure of the portfolio's sensitivity to interest
rates. If interest rates were to rise by 1%, the value of a portfolio with a
duration of 6.0 years would decline by about 6%.) The average maturity of the
Fund also increased slightly from 13.5 years to 13.9 years. The portion of the
portfolio committed to corporate bond investments was increased by 4.5% during
the quarter in response to the widening yield spreads. The yield curve fanned
downward in the longer maturities during the quarter, so having a maturity
greater than that of the market and a low cash position did help portfolio
returns by about 0.6%.
Because corporate yield spreads widened during the quarter, most corporate bonds
underperformed like maturity Treasuries. The Fund's corporate issues did
slightly worse than average for the overall corporate sector, reflecting the
relative weakness in the BBB industrial area. Before expenses, the
investment-grade portion of the portfolio, including mortgages, returned about
2.3%. The below investment-grade portion of the portfolio had a total return
before expenses of 1.7% for the quarter, as the woes of the emerging markets
adversely affected the high yield bond market.
3
<PAGE>
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
CHART TITLE:
The Portfolio Structure
- ---------------------------
CHART DATA:
Mortgage 19.5%
Treasury 5.0%
Cash 2.1%
Yankee 2.9%
International 0.9%
Finance 12.9%
Utility 4.3%
Industrial 48.6%
Asset-Backed 3.8%
- ---------------------------
100%
===========================
The pie graph shows the portfolio's sector weightings at the end of June. Our
corporate bond position was 68.8%, as we reduced cash and mortgages slightly to
take advantage of the widening corporate yield spreads. (Note that "Yankees" are
U.S. dollar-denominated bonds issued by foreign corporations or governmental
entities.) The portfolio's only foreign currency exposure was in a long Canadian
government bond, which made up 0.9% of the total portfolio. Columbia HCA, TRICON
Global Restaurants, Fred Meyer, USA Waste Services, and Phillips Petroleum were
new holdings at the end of the quarter, while Rogers Cantel, Rogers
Cablesystems, Tracor, and Simon Debartolo were sold. The purchases reflected our
continued interest in owning bonds with less cyclical exposure. Rogers Cantel
and Rogers Cablesystems, both rated below investment grade, were sold when it
appeared that their results were not sufficient to support an improving credit
trend. Tracor was sold after its purchase by a foreign company, which resulted
in a nice upward revaluation in the bonds that left little remaining upside.
Simon Debartolo was sold due to fears that the poor supply/demand conditions in
the real estate investment trust (REIT) sector would continue.
The mortgage pass-through component of the portfolio was reduced to 17.1%, or by
about 3% over the quarter, by selling a portion of the GNMA 7.5% position. We
selected the pools which were showing the most prepayments for sale, retaining
the slower paying pools. A portion of the proceeds was reinvested in a
collateralized mortgage obligation (CMO) backed by commercial property, DLJ
Commercial Mortgage Trust 1998-CG1 A1A, an AAA-rated bond with a 5-year average
life. The Fund's GNMA 7.5% returned about 2.10% for the quarter, outperforming
short maturity Treasuries.
The Fund's investment policy allows the portfolio to hold up to 30% of total
assets in foreign-denominated securities, preferreds, convertibles, private
placements, and below investment-grade debt securities. As of quarter end, the
Fund held 27.7% of its assets in these categories, up from the 26.5% held three
months ago. 25.8% of the portfolio was below investment-grade in terms of credit
rating. Borden, Inc., the largest below investment-grade holding, maintained a
BB+ rating. The company, which produces packaged food, adhesives, and housewares
(Corning Ware), represented 2.1% of the total portfolio. Average quality for the
overall portfolio was A-, with the quality breakdown shown in the pie graph on
the following page.
4
<PAGE>
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
CHART TITLE:
Quality Distribution
- ---------------------------
CHART DATA:
Government 22.1%
Cash 2.1%
B 7.6%
BB 18.3%
BBB 30.2%
A 14.5%
AA 1.9%
AAA 3.3%
- ---------------------------
100%
===========================
Annual Meeting Results
At the July 9, 1998 annual meeting, the shareholders elected the five 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, 1998 was
ratified. Shareholders approved the continuance of the management and investment
advisory agreement between the Company and Scudder Kemper Investments, Inc.
Finally, shareholders approved the elimination of a fundamental policy with
respect to investment in restricted securities. At the board meeting held
immediately after the annual meeting, the Board adopted a non-fundamental policy
with respect to illiquid securities which will replace the fundamental policy
with respect to restricted securities, eliminated earlier in the day.
At the July 8, 1998 Board Meeting, James C. Van Horne was re-elected Chairman of
the Board and John R. Hebble was appointed Treasurer, to succeed Thomas F.
McDonough. Mr. McDonough, Secretary, was appointed to an additional post,
Assistant Treasurer, and Bruce H. Goldfarb, Vice President and Assistant
Secretary, was added as a new officer.
Otto Butz, a Director of the Fund for more than 23 years, retired from the Board
of Directors at the meeting. We thank Dr. Butz for his diligence and dedication
to the Fund and to the interest of its shareholders. He has had a profound
influence, and will be missed.
Year 2000 Issue
Like other registered investment companies and financial and business
organizations worldwide, the Fund could be adversely affected if computer
systems on which the Fund relies, which primarily include those used by Scudder
Kemper Investments, Inc., its affiliates or other service providers, are unable
to correctly process date-related information on and after January 1, 2000. This
risk is commonly called the Year 2000 Issue. Failure to successfully address the
Year 2000 Issue could result in interruptions to and other material adverse
effects on the Fund's business and operations. Scudder Kemper Investments, Inc.
has commenced a review of the Year 2000 Issue as it may affect the Fund and is
taking steps it believes are reasonably designed to address the Year 2000 Issue,
5
<PAGE>
although there can be no assurances that these steps will be sufficient. In
addition, there can be no assurances that the Year 2000 Issue will not have an
adverse effect on the companies whose securities are held by the Fund or on
global markets or economies generally.
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
- --------------------------------------------------------------------------------
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 Corporation; bank debt
of comparable quality; U.S. government or agency securities; commercial paper;
cash; cash equivalents; or Canadian government, provincial, or municipal
securities (not in excess of 25% of total assets).
Up to 30% of total assets (the "30% basket") may be invested in U.S. or foreign
securities that are straight debt securities, whether or not rated, convertible
securities, preferred stocks, or dividend-paying utility company common stock.
Not more than 25% of total assets may be invested in securities of any one
industry (neither utility companies as a whole nor finance companies as a whole
are considered an "industry" for the purposes of this limitation).
Not more than 15% of net assets may be invested in securities which are deemed
illiquid.
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 that at the time of purchase, the Fund's obligations
under such contracts do 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, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($)* Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 4.1%
(under 1 year)
Ford Motor Credit Co., 5.615%, 7/6/98................................... 125,000 125,000
General Electric Capital Corp., 5.601%, 7/1/98.......................... 8,517,000 8,517,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $8,642,000).......................... 8,642,000
-----------
- ---------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BONDS -- 16.1%
(1 - 8 years)
U.S. TREASURY & AGENCY -- 4.9%
U.S. Treasury Note, 6.5%, 5/31/02....................................... 10,000,000 10,332,800
-----------
CONSUMER STAPLES -- 1.9%
Alcohol & Tobacco
Bass America Inc., 6.625%, 3/1/03....................................... 4,000,000 4,063,880
-----------
HEALTH -- 1.0%
Hospital Management
Tenet Healthcare Corp., senior note, 7.875%, 1/15/03.................... 2,000,000 2,035,000
-----------
FINANCIAL -- 1.9%
Banks
Conti Financial Corp., senior note, 8.375%, 8/15/03..................... 2,450,000 2,549,348
First Nationwide Holding Corp., 10.625%, 10/1/03........................ 1,250,000 1,412,500
-----------
3,961,848
-----------
MEDIA -- 0.5%
Broadcasting & Entertainment
Viacom Inc., senior note, 7.75%, 6/1/05................................. 1,000,000 1,065,450
-----------
MANUFACTURING -- 0.9%
Diversified Manufacturing
Borden Chemicals and Plastics L.P., note, 9.5%, 5/1/05.................. 2,000,000 2,000,000
-----------
ENERGY -- 1.1%
Oil & Gas Production
Nuevo Energy Co., senior subordinated note, 9.5%, 4/15/06............... 2,000,000 2,090,000
-----------
SERVICE INDUSTRIES -- 1.5%
Investment
Lehman Brothers Holdings, Inc., 7.25%, 10/15/03......................... 3,000,000 3,132,090
-----------
TRANSPORTATION -- 1.0%
Airlines
Continental Airlines, Inc., 9.5%, 12/15/01.............................. 2,000,000 2,108,200
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($)* Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- 1.4%
Electric Utilities
Niagara Mohawk Power Corp., 7.25%, 10/1/02.............................. 3,000,000 2,996,250
-----------
TOTAL INTERMEDIATE-TERM BONDS (Cost $33,100,580)........................ 33,785,518
-----------
- ---------------------------------------------------------------------------------------------------------------
LONG-TERM BONDS -- 78.4%
(over 8 years)
U.S. TREASURY & AGENCY -- 16.8%
Government National Mortgage Association, 7.5%, with various
maturities to 11/15/27 (b)............................................ 34,618,248 35,580,981
-----------
FOREIGN GOVERNMENT -- 0.9%
Government of Canada, 8%, 6/1/23........................................ CAD 2,000,000 1,811,695
-----------
CONSUMER DISCRETIONARY -- 4.7%
Department & Chain Stores -- 1.4%
Fred Meyer, Inc., 7.45%, 3/1/08......................................... 3,000,000 3,020,040
-----------
Hotels & Casinos -- 1.9%
Hilton Hotels Corp., senior note, 7.95%, 4/15/07........................ 2,000,000 2,090,140
Royal Caribbean International, senior note, 7%, 10/15/07................ 2,000,000 2,048,120
-----------
4,138,260
-----------
Restaurants -- 1.4%
Tricon Global Restaurants, 7.65%, 5/15/08............................... 3,000,000 3,022,500
-----------
CONSUMER STAPLES -- 4.1%
Food & Beverage
Borden Inc., debenture, 9.2%, 3/15/21................................... 4,000,000 4,441,120
Coca-Cola Co., Inc., debenture, 7.375%, 7/29/93......................... 3,500,000 4,054,470
-----------
8,495,590
-----------
HEALTH -- 1.4%
Hospital Management
Columbia/HCA Healthcare Corp., 6.63%, 7/15/45........................... 3,000,000 2,930,160
-----------
COMMUNICATIONS -- 1.0%
Cellular Telephone
ComCast Cellular, 9.5%, 5/1/07.......................................... 2,000,000 2,075,000
-----------
FINANCIAL -- 15.0%
Banks -- 3.6%
Bank United Financial Corp., 10.25%, 12/31/26........................... 1,500,000 1,612,500
CoreStates Bank, 8%, 12/15/26........................................... 2,500,000 2,738,200
Royal Bank of Scotland, 7.375%, 4/29/49................................. 3,000,000 3,176,940
-----------
7,527,640
-----------
</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>
Other Financial Companies -- 6.1%
DLJ Commercial Mortgage Corp., 6.11%, 12/10/07.......................... 5,000,000 4,987,500
Greentree Financial Corp., asset-backed, senior subordinated pass-thru
certificate, Series 1993-4 B1, 7.2%, 1/15/19.......................... 8,000,000 7,997,188
-----------
12,984,688
-----------
Real Estate -- 5.3%
ERP Operating L.P. Note, 7.57%, 8/15/26................................. 3,000,000 3,198,720
Meditrust SBI, 7.82%, 9/10/26........................................... 3,000,000 3,080,820
Spieker Properties, Inc., 7.5%, 10/1/27................................. 2,000,000 2,017,760
Taubman Realty Group LP, 7%, 8/1/07..................................... 3,000,000 2,990,070
-----------
11,287,370
-----------
MEDIA -- 8.5%
Broadcasting & Entertainment -- 3.2%
Paramount Communications, Inc., senior debenture, 7.5%, 7/15/23......... 2,000,000 2,005,820
Time Warner Inc., debenture, 9.125%, 1/15/13............................ 4,000,000 4,868,200
-----------
6,874,020
-----------
Cable Television -- 2.2%
Cablevision Systems Corp., senior note, 7.875%, 2/15/18................. 2,500,000 2,618,750
Cox Communications, Inc., 6.85%, 1/15/18................................ 2,000,000 2,010,000
-----------
4,628,750
-----------
Print Media -- 3.1%
Harcourt General, Inc., 7.3%, 8/1/2097.................................. 2,500,000 2,491,675
News America Inc., 7.125%, 4/8/28....................................... 4,000,000 3,998,440
-----------
6,490,115
-----------
SERVICE INDUSTRIES -- 1.4%
Environmental Services
USA Waste Services, Inc., 7.125%, 12/15/07.............................. 3,000,000 3,062,430
-----------
DURABLES -- 2.5%
Aerospace
Argo-Tech Corp., 8.625%, 10/1/07........................................ 2,000,000 2,000,000
Lockheed Martin Corp., 7.2%, 5/1/36..................................... 3,000,000 3,276,840
-----------
5,276,840
-----------
MANUFACTURING -- 1.8%
Industrial Specialty -- 1.1%
Hutchison Whampoa, Ltd., 7.45%, 8/1/17.................................. 3,000,000 2,380,230
-----------
Diversified Manufacturing -- 0.7%
United Defense Industries Inc., senior subordinated note, 8.75%,
11/15/07.............................................................. 1,500,000 1,520,625
-----------
TECHNOLOGY -- 1.0%
Semiconductors
Fairchild Semiconductor Inc., 10.125%, 3/15/07.......................... 2,000,000 2,040,000
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($)* Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY -- 13.1%
Chemicals -- 1.5%
Lyondell Petrochemical Co., note, 7.55%, 2/15/26........................ 3,000,000 3,116,400
-----------
Oil & Gas Production -- 10.2%
Apache Corp., debenture, 7.7%, 3/15/26.................................. 3,310,000 3,633,386
Belden & Blake Corp., 9.875%, 6/15/07................................... 2,000,000 1,955,000
Canadian Forest Oil, 8.75%, 9/15/07..................................... 2,000,000 1,930,000
ENSCO International Inc., note, 6.75%, 11/15/07......................... 4,000,000 4,039,040
Phillips Petroleum Corp., 6.65%, 7/15/18................................ 3,000,000 2,990,700
Pioneer Natural Resources Co., 7.2%, 1/15/28............................ 3,500,000 3,408,125
Unocal Corp., debenture, 9.4%, 2/15/11.................................. 3,000,000 3,781,590
-----------
21,737,841
-----------
Oilfield Services/Equipment -- 1.4%
Petroleum Geo-Services, 6.625%, 3/30/08................................. 3,000,000 3,005,400
-----------
METALS & MINERALS -- 0.7%
Steel & Metals
AK Steel Holding Corp., 9.125%, 12/15/06................................ 1,500,000 1,567,500
-----------
TRANSPORTATION -- 2.8%
Airlines 1.5%
Northwest Airlines Corp., 8.7%, 3/15/07................................. 3,000,000 3,149,370
-----------
Miscellaneous -- 1.3%
Newport News Shipbuilding Co., senior note, 9.25%, 12/1/06.............. 2,500,000 2,662,500
-----------
UTILITIES -- 2.7%
Natural Gas Distributors -- 1.2%
ANR Pipeline, debenture, 9.625%, 11/1/21................................ 2,000,000 2,634,860
-----------
Electric Utilities -- 1.5%
Southern Co. Capital Trust I, 8.19%, 10/1/27............................ 3,000,000 3,244,980
-----------
TOTAL LONG-TERM BONDS (Cost $160,649,853)............................... 166,265,785
-----------
- ---------------------------------------------------------------------------------------------------------------
Shares
--------
WARRANTS -- 0.0%
Walden Residential Properties, Inc. Warrants (expire 1/1/02)............ 80,000 80,000
-----------
- ---------------------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 1.0%
Walden Residential Properties, Inc. (Cost $2,000,000)................... 80,000 2,030,000
-----------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK -- 1.0%
United Dominion Realty Trust Inc., "A", 9.25%, 4/24/00
(Cost $2,000,000)..................................................... 80,000 2,060,000
-----------
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.6% (Cost $206,392,433) (a)............ 212,863,303
OTHER ASSETS AND LIABILITIES, NET -- (0.6%)............................. (1,352,984)
-----------
NET ASSETS -- 100.0%.................................................... 211,510,319
===========
</TABLE>
(a) The cost for federal income tax purposes was $206,392,433. At June 30,
1998, net unrealized appreciation for all securities based on tax cost
was $6,470,870. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $7,108,330 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax
cost over market value of $637,460.
(b) Effective maturities will be shorter due to prepayments.
* 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.
12
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (Unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market (identified cost $206,392,433)................ $212,863,303
Cash................................................................. 1,148
Receivable for investments sold...................................... 3,752,577
Interest and dividends receivable.................................... 3,085,559
Other assets......................................................... 2,265
------------
Total Assets 219,704,852
------------
LIABILITIES
Payable for investments purchased.................................... $8,003,658
Accrued management fee............................................... 85,366
Other payables and accrued expenses.................................. 105,509
----------
Total Liabilities 8,194,533
------------
NET ASSETS, at market value $211,510,319
============
NET ASSETS
Net assets consist of:
Undistributed net investment income............................... $ 3,650,545
Net unrealized appreciation (depreciation) on:
Investments.................................................... 6,470,870
Foreign currency related transactions.......................... (42)
Accumulated net realized gain (loss).............................. 1,399,965
Paid-in capital................................................... 199,988,981
------------
NET ASSETS, at market value....................................... $211,510,319
============
Net Asset Value Per Share ($211,510,319 / 10,232,751 shares of common stock
outstanding, $.001 par value, 30,000,000
shares authorized)................................................... $20.67
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest........................................................... $ 7,493,055
Dividends.......................................................... 184,499
------------
7,677,554
Expenses:
Management and investment advisory fee............................. $ 505,319
Directors' fees and expenses....................................... 39,096
Services to shareholders........................................... 48,146
Reports to shareholders............................................ 43,802
Auditing........................................................... 32,399
Legal.............................................................. 12,851
Custodian fees..................................................... 7,421
State franchise tax................................................ 362
Other.............................................................. 31,326 720,722
---------- ------------
Net Investment Income 6,956,832
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investment securities.............................................. 1,563,189
Foreign currency related transactions.............................. (992)
------------
1,562,197
Net unrealized appreciation (depreciation) during the period on:
Investment securities.............................................. (1,106,123)
Foreign currency related transactions.............................. (23)
------------
(1,106,146)
------------
Net gain (loss) on investments........................................ 456,051
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS....................................................... $ 7,412,883
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, 1998 December 31,
INCREASE (DECREASE) IN NET ASSETS (Unaudited) 1997
------------------ ------------------
<S> <C> <C>
Operations:
Net investment income.................................................... $ 6,956,832 $ 14,425,572
Net realized gain (loss) from investment transactions and foreign
currency related transactions during the period....................... 1,562,197 3,550,623
Net unrealized appreciation (depreciation) on investment and
foreign currency related transactions during the period............... (1,106,146) 4,411,924
------------- -------------
Net increase (decrease) in net assets resulting from operations.......... 7,412,883 22,388,119
------------- -------------
Dividends to shareholders from net investment income..................... (3,474,489) (14,662,530)
------------- -------------
Fund share transactions:
Reinvestment of dividends from net investment income.................. 256,223 1,124,291
------------- -------------
Increase (decrease) in net assets........................................ 4,194,617 8,849,880
Net assets at beginning of period........................................ 207,315,702 198,465,822
------------- -------------
Net assets at end of period (including undistributed net investment
income of $3,650,545 and $168,202, respectively)...................... $ 211,510,319 $ 207,315,702
============= =============
Other Information
Increase (decrease) in Fund shares
Shares outstanding at beginning of period................................ 10,219,267 10,158,937
Shares issued to shareholders in reinvestment of dividends
from net investment income............................................ 13,484 60,330
------------- -------------
Shares outstanding at end of period...................................... 10,232,751 10,219,267
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<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 Years Ended December 31,
June 30, 1998 -----------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $20.29 $19.54 $19.94 $17.72 $20.13 $19.30
------ ------ ------ ------ ------ ------
Income from investment operations:
Income................................. .75 1.56 1.53 1.57 1.51 1.68
Operating expenses..................... (.07) (.14) (.15) (.14) (.14) (.15)
------ ------ ------ ------ ------ ------
Net investment income.................. .68 1.42 1.38 1.43 1.37 1.53
Net realized and unrealized
gain (loss)........................... .04 .77 (.38) 2.19 (2.42) .84
------ ------ ------ ------ ------ ------
Total from investment operations......... .72 2.19 1.00 3.62 (1.05) 2.37
------ ------ ------ ------ ------ ------
Less distributions:
From net investment income............ (.34) (1.44) (1.40) (1.40) (1.36) (1.54)
------ ------ ------ ------ ------ ------
Net asset value, end of period........... $20.67 $20.29 $19.54 $19.94 $17.72 $20.13
====== ====== ====== ====== ====== ======
Per share market value, end of period.... $19.56 $19.50 $17.38 $18.00 $15.75 $19.75
====== ====== ====== ====== ====== ======
Price range on New York Stock
Exchange for each share of
Common Stock outstanding during
the period (Unaudited):
High.................................. $20.38 $19.94 $19.50 $19.13 $20.25 $22.38
Low................................... $18.75 $17.25 $16.75 $15.75 $15.25 $19.25
Total Investment Return
Per share market value (%)............. 2.12** 21.15 4.54 23.69 (13.54) 2.02
Per share net asset value (%) (b)...... 3.70** 12.09 6.08 21.78 (4.51) 12.47
Ratios and Supplemental Data
Net assets, end of period ($ millions)... 212 207 198 201 178 200
Ratio of operating expenses to
average daily net assets (%)........... .69* .71 .76 .73 .71 .73
Ratio of net investment income to
average daily net assets (%)........... 6.68* 7.17 7.07 7.45 7.28 7.53
Portfolio turnover rate (%).............. 50.38(d)* 162.2(c) 92.1 76.4 137.0 122.8
- -----------------
</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. 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 218.1% for the year ended December 31, 1997.
(d) Economic and market conditions necessitated less active trading, resulting
in a lower portfolio turnover rate.
* Annualized
** Not annualized
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (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 original
maturities greater than sixty days upon purchase are valued by pricing
agents approved by the Officers of the Fund, whose 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. Money market investments
purchased with an original 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.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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.
Federal Income Taxes--The Fund's policy is to comply with the requirements
of the Internal Revenue Code, as amended, 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, 1997, the Fund had a net tax basis capital loss
carryforward of approximately $30,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully
utilized or until December 31, 2003, the expiration date, 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.
18
<PAGE>
Note B--MANAGEMENT AND INVESTMENT ADVISORY FEE. Under the Fund's Management
Agreement (the "Management Agreement") with Scudder Kemper Investments, 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
Management 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 Management 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, 1998, the fees pursuant to the Management Agreement
amounted to $505,319, equivalent to an effective annualized rate of 0.49% of the
Fund's average monthly net assets.
None of the Directors are affiliated with the Adviser. For the six months ended
June 30, 1998, Directors' fees and expenses aggregated $39,096.
Note C--PURCHASES AND SALES OF INVESTMENTS. For the six months ended June 30,
1998, purchases and sales of investment securities (excluding direct U.S.
government obligations and short-term investments) aggregated $51,290,045 and
$39,873,305, respectively. Purchases and sales of direct U.S. Government
obligations aggregated $9,354,320 and 9,461,625, respectively.
19
<PAGE>
SHAREHOLDER MEETING RESULTS
The Annual Meeting of Shareholders of Montgomery Street Income Securities, Inc.
(the "Company") was held on Thursday, July 9, 1998, 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 five 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:
--------- ----------------
For Withheld Broker Non-Votes*
--- -------- -----------------
<S> <C> <C> <C>
John C. Atwater 8,300,032 124,775 0
Richard J. Bradshaw 8,304,260 120,547 0
Maryellie K. Moore 8,288,092 136,715 0
Wendell G. Van Auken 8,302,075 122,732 0
James C. Van Horne 8,296,404 128,403 0
</TABLE>
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, 1998.
<TABLE>
<CAPTION>
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
<S> <C> <C> <C>
8,292,073 39,425 93,309 0
3. Approval or disapproval of the continuance of the Management and
Investment Advisory Agreement between the Company and Scudder Kemper
Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
8,195,015 72,460 157,332 0
4. Approval or disapproval of the elimination of a fundamental policy with
respect to investment in restricted securities.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
5,176,518 434,629 357,286 2,456,374
</TABLE>
- --------------------------------------------------------------------------------
* 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.
20
<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. In addition, shareholders may be charged a
service fee in an amount up to 5% of the value of the Voluntary Cash Investment.
Although subject to change, shareholders are currently charged $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
21
<PAGE>
event for federal income tax purposes and may be taxable for state and local tax
purposes.
The Plan may be amended by the Fund or the Plan Agent at any time. Except
when required by law, written notice of any amendment will be mailed to
shareholders at least 30 days prior to its effective date. The amendment will be
deemed accepted unless written notice of termination is received prior to the
effective date.
An investor holding shares in its own name can participate directly in the
Plan. An investor holding shares in the name of a brokerage firm, bank or other
nominee should contact that nominee, or any successor nominee, to determine
whether the nominee can participate in the Plan on the investor's behalf and to
make any necessary arrangements for such participation.
Additional information, including a copy of the Plan and its Terms and
Conditions and an enrollment form, can be obtained from the Plan Agent by
writing State Street Bank and Trust Company, P.O. Box 8209, Boston, MA
02266-8209, or by calling (800) 426-5523.
22
<PAGE>
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intentionally
left blank
<PAGE>
(blank back cover)
