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 EquiServe
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
/4/
Annual Report
December 31, 1998
SCUDDER
Investment Adviser (Logo)
<PAGE>
101 California Street, Suite 4100
San Francisco, CA 94111
(415) 981-8191
Dear Stockholder:
The investments of Montgomery Street Income Securities, Inc. (the "Fund")
produced a total return based on net asset value (NAV) of 0.44% for the quarter
ended December 31, 1998. This reflected a downward turn in bond prices being
offset by dividend distributions of $0.34 and $0.37 paid in October and
December, respectively. The total return of the Fund based on NAV, slightly
outperformed the unmanaged Lehman Brothers Aggregate Bond Index, an index we use
for comparative purposes, which had a total return of 0.34% for the quarter. The
December 31, 1998, NAV per share was $19.93 versus $20.56 at the end of
September. The decline in the Fund's NAV was due in large measure to
distributions paid during the quarter. The market price of the Fund's shares,
which trade on the New York Stock Exchange, was $19.75 per share at the end of
December, compared with $19.31 at the end of September, 1998.
For the year ended December 31, the Fund returned 5.46% based on NAV, compared
to the Lehman Brothers Aggregate Bond Index's 8.69%. Because the Fund is
weighted more heavily toward corporate bonds than the Index, and corporates
performed less well than Treasuries, our return was less than the index for the
past year. The market price discount of the Fund as a percentage of its NAV fell
to less than 1% at year end, an improvement over the Fund's 6.1% discount at the
end of the third quarter.
On December 11, 1998, the Fund's Board of Directors declared a $0.37 per share
dividend payable on December 31, 1998 to stockholders of record on December 21,
1998. ($0.02 of the $0.37 was derived from net short-term capital gains. This
short-term gain is treated as ordinary income for tax purposes.) This dividend
was $0.03 higher than the prior two dividends because it included the capital
gain and the distribution of a modest excess accumulation at year end.
Accordingly, the amount of the dividend should not be taken as the norm. The
Fund's next dividend is expected to be paid in late April.
Market and Economic Conditions
The fourth quarter of 1998 served as a period of retrenchment for the markets
after a disconcerting summertime, during which Russia defaulted on its debt and
some aggressive hedge funds were forced to close their doors. We entered the
quarter worried about the health of our financial system, and questioning the
ability of some banks and brokerages to survive the tumult. The stock market was
slipping, with the S&P 500 off over 14% from its highs of only two months
before. A panic of buying had seized the Treasury market, due to both a flight
to quality and a forced reduction of leverage. The 5-year Treasury Note had
rallied from 5.34% in mid-August to 4.22%, a move of over 100 basis points. Not
all bonds had moved upward; in fact, many sectors of the bond market were barely
trading. The liquidity normally supplied by the broker/dealer community, had
almost completely dried up. Bonds with credit risk were priced at yield
advantages to Treasuries not seen since the last deep recession. Added to these
woes were worries about an impending financial crisis in Brazil, and doubts
about whether the U.S. economy could withstand the shocks being administered to
its financial sector.
The Fed finally intervened in late September with a rate cut, from 5.5% to
5.25%, on Fed Funds. Though widely seen as too little, too late, it seemed to
have a positive effect. The Treasury market peaked in frenzied trading on
October 5, and the stock market bottomed three days later. Less noticed here in
the U.S. was the other major revaluation that took place during this hectic
period, that of the Yen versus the Dollar. This revaluation was driven by
2
<PAGE>
leveraged investors who had been enjoying the very low borrowing rates in Japan.
From a high of over 136 Y/$ on October 5, the Yen rallied to below 112 Y/$ on
October 8, a startling move of over 20% in three days between two of the world's
three largest currencies. Since many of the fundamentals did not support a
stronger Yen, the urgency and substantial force behind the unwinding of hedge
fund leverage was realized.
From today's calmer perspective, it can be seen that it was the Treasury market
that had been pushed most out of shape, and that it would spend the rest of the
quarter drifting higher in yield, trying to find the right balancing point for
the underlying economic fundamentals. Despite an interim move by the Fed to 5.0%
on Fed Funds on October 15 and a further drop to 4.75% in mid-November, bonds
could not make further progress. The stock market and the consumer, however, did
apparently take heart. The stock market recovered dramatically, reaching its
previous highs in late November, and never looked back. The consumer, too,
proceeded to shake off any negative effects and went on a spending spree that
saw final sales grow at a surprising 6% annual rate during the fourth quarter.
Unfortunately this ebullience did not carry over to the investment-grade
corporate bond market, where the path to higher valuations was still blocked by
a damaged dealer community and fears of an imminent recession. Many of these
fears have abated in the new year, and the Brazilian crisis has not yet proven
contagious, so corporate bonds have started 1999 on a positive note.
The lack of retail pricing power and weak commodity prices have kept measured
inflation very low over the past year, 1.6% for CPI, and just 0.9% for the GDP
Deflator. The Treasury Inflation Indexed notes tell the same story, that
expected inflation is about 1%. If this is true, corporate bonds with yields of
5.5% to 6.5% should prove to be excellent investments, providing a real return
in excess of historical norms. Even if inflation were to drift back up to the 2%
range, bonds could do quite well. At present, there is nothing to suggest
significant inflationary pressures are around the corner and in fact some
economists are worried about deflation, which carries with it the danger of
destabilization as creditors have trouble making repayments. However, while
aware of potential deflationary problems, we think the return to normalcy of the
past three months has pushed them away for a while, and we place some weight on
the probability that inflation will tend to creep back into the financial
system.
Implications of Current Economic Conditions on the Bond Market
The strength of the stock market in the fourth quarter spilled over into the
high yield area of the corporate bond market. The weakness in the emerging
markets area due to worries about Brazil did not translate into forced sales in
high yield funds, and the success of the Korean financial recovery somewhat
ameliorated the negative tone. Still, Brazil remains a wild card because of the
demands it might place on international funding sources, notably the U.S.
However, now that we are in the middle of the devaluation process, the most dire
predictions of financial panic and contagion seem overwrought. The engine of our
domestic economy seems capable of pulling the U.S. and the rest of the Americas
through any Brazilian slowdown.
Corporate bonds entered the year at attractive valuations versus their Treasury
benchmarks. As the clouds of recession have dissipated, corporates have come
into better focus, although investors are still placing premiums on large issues
with household names, seeking liquidity along with yield. The graph on the next
page shows the history of the yield advantage of a 10-year maturity, A-rated
Industrial note versus a 10-year maturity Treasury note. Corporate bonds have
the most value when their yield advantage is wide, and the prospects for the
economy are for slow and profitable economic growth. Too rapid growth, while
3
<PAGE>
good for profits, might cause interest rates to rise for all bonds, hurting
prices. In structuring the Fund's portfolio, our current strategy is to try to
take advantage of the attractiveness of corporate yields, while helping to
protect the principal of the Fund from interest rate fluctuations by focusing
more on intermediate (3- to 10-year) maturities.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE
The Yield Advantage of 10-Year Industrial vs. 10-Year Treasury in basis points
LINE CHART DATA:
- -----------------------------
1995 63
60
58
49
65
58
57
58
61
59
65
1996 60
58
58
59
60 Corporate Bonds Less Attractive
55
56
59
58
58
58
60
1997 59
58
54
62
50
48
46
46
46
48
51
72
75
1998 75
72
67
60
70
84 Corporate Bonds More Attractive
82
95
115
135
105
120
100
1999 98
- -----------------------------
The Portfolio
The duration of the portfolio was shortened noticeably during the quarter from
5.7 years to 5.2 years, as longer-maturity corporates were sold and redeployed
into intermediate and shorter-term corporates. (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 5.2 years would decline by about
5.2%.) The sense of crisis and risk that affected the corporate market at the
beginning of the quarter abated somewhat, and the yield advantage of
intermediate corporate bonds over like maturity Treasuries appeared quite
attractive. We also expect that liquidity will improve first in the short and
intermediate term area, and so feel that these maturities will have an advantage
over the longer issues. The average maturity of the Fund also decreased from
13.0 years to 10.1 years, as a number of longer-term commitments were sold.
Besides the relative attractiveness of 3- to10-year corporate securities, the
interest rate risk of the portfolio was reduced in preparation for taking on a
degree of leverage in the portfolio. As was announced in December, the Fund
plans to make use of leverage, achieved by the use of mortgage rolls, to
increase the income flow from the portfolio. At year-end the Fund was not
levered, but it is anticipated that some leverage will be used in the near
future as the yields on corporate bonds are above average when compared to
Treasuries and the expected cost of borrowing.
In a mortgage roll transaction, the Fund sells a mortgage security held in its
portfolio and simultaneously agrees to purchase a substantially similar mortgage
security from the same counterparty for future settlement, typically in the
following month. On or before the settlement date, the Fund may renew, or
"roll," its position by selling the security it initially agreed to purchase and
entering into a new agreement to purchase a substantially similar security at a
later date. The obligation of the Fund to purchase a security for future
settlement is considered a borrowing by the Fund and results in a leveraging of
the Fund's portfolio.
4
<PAGE>
The Fund's investment adviser may now commit up to 30% of the Fund's assets to
mortgage rolls and other borrowings. Previously, the approval of the Chairman of
the Board was required for borrowings over 20%. The investment adviser does not
expect to commit the maximum amount of the Fund's assets to the new strategy at
all times, and any additional income that the new strategy may generate will
vary from period to period.
Accordingly, while it is anticipated that the new strategy will generally result
in increased dividends to Fund stockholders over time, the actual dividends
declared by the Fund from quarter to quarter are likely to become less stable.
The investment of mortgage roll proceeds in longer term securities also
magnifies the Fund's risks. The primary risk here is that if interest rates rose
the market value of the longer term securities would fall. To help maintain the
overall interest rate risk of the Fund at historical norms, the investment
adviser intends to shorten the duration of the portfolio when the Fund is
leveraged. The use of leverage will also magnify other risks the Fund is
normally exposed to, including credit risk. However, our intent is to carefully
manage overall risk in our quest for a moderately higher dividend.
As the portfolio was shortened during the quarter, the portion of the portfolio
committed to corporate bond investments decreased by 4.5%. The proceeds were
invested in short term securities awaiting redeployment into attractive
intermediate term corporates. Consistent with our defensive strategy, new
purchases remained focused in domestically oriented and defensive sectors.
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
PIE CHART TITLE:
Sector Distribution
PIE CHART DATA:
Asset-Backed 3.9%
Mortgage 18.5%
Treasury 5.0%
Cash 5.9%
Yankee 4.2%
Finance 11.3%
Utility 7.0%
Industrial 44.2%
- ------------------
100%
==================
Corporate bonds outperformed Treasuries during the quarter after a rough start,
as some liquidity returned when the forced selling by hedge funds abated. Most
of the Corporate securities in the Fund did well, with the exception of energy
related issues. Continued weakness in the price of oil caused this sector to
underperform. The Fund benefited from favorable rebounds in the cable, media,
and telecommunications areas, and banking and finance also performed well.
The accompanying pie chart shows the Fund's sector weightings at the end of
December. Our Corporate bond position was 66.7%. Fred Meyer, Transocean
Offshore, Centaur Funding (AirTouch), Seagrams, and Allied Waste were new
holdings at the end of the quarter, while Tenet Healthcare, Fairchild
Semiconductor, First Nationwide, AK Steel, Hilton Hotels, Borden Chemical,
Harcourt General, Pioneer Natural Resources, and Coca-Cola were sold. Also sold
was our holding of a long maturity Canadian Government issue, leaving the Fund
with no foreign currency exposure.
5
<PAGE>
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE
PIE CHART TITLE:
Quality Distribution
PIE CHART DATA:
Government 19.7%
Cash 5.9%
B 7.1%
BB 15.5%
BBB 31.6%
A 16.5%
AAA 3.7%
- ------------------
100%
==================
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 25.1% of its assets in these categories, down from the 28.7% held
three months prior. 22.6% of the portfolio was below investment grade in terms
of credit rating. Borden, Inc. (BB+ rated) remained the largest
below-investment-grade holding. The company, which produces packaged food,
adhesives, and housewares (Corning Ware), represented 1.9% of the total
portfolio. Average quality for the overall portfolio was A. The Fund's quality
breakdown appears in the pie chart above.
Limited Share Repurchases Authorization
On August 5, 1998, the Board of Directors authorized the Fund to repurchase a
limited number of shares of the Fund's common stock from time to time when the
shares are trading at less than 95% of their NAV. Repurchases will be limited to
a number of shares each calendar quarter approximately equal to the number of
new shares issued under the Fund's Dividend Reinvestment and Cash Purchase Plan
(the "Plan") with respect to dividends paid for the second preceding calendar
quarter. There were 14,015 shares issued under the Plan during the third quarter
of 1998, representing 0.14% of the outstanding shares of the Fund. There were no
repurchases during the fourth quarter as the shares of the Fund traded at a
discount of less than 5% during all periods during which repurchases were
allowable.
Special Stockholders Meeting
There was a special meeting of stockholders of the Fund on December 11, 1998. At
this meeting the Fund's stockholders approved a new Management and Investment
Advisory Agreement between Scudder Kemper Investments, Inc. and the Fund. This
approval was necessary because Zurich Insurance Company, which is the majority
owner of Scudder Kemper Investments, your Fund's investment manager, combined
its business on September 7, 1998, with the financial services business of B.A.T
Industries. The resulting company, Zurich Financial Services, has become Zurich
Insurance Company's parent company. It is anticipated that this transaction will
have little impact on the operations of your Fund. Please see the table entitled
"Stockholders Meeting Results" on page for more detailed information about the
votes cast at the special meeting.
6
<PAGE>
Year 2000 Readiness
Like other registered investment companies and financial business organizations
worldwide, the Fund could be adversely affected if computer systems on which the
Fund relies, which primarily include those used by the Fund's Adviser, 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 (Y2K Issue). Failure to successfully address the Y2K
Issue could result in interruptions to and other material adverse effects on the
Fund's business and operations. The Adviser has told the Fund that it is taking
steps it believes are reasonably designed to address the Y2K Issue, although
there can be no assurances that these steps will be sufficient. In addition,
there can be no assurances that the Y2K Issue will not have any adverse effect
on the companies whose securities are held by the Fund or on global markets or
economies generally. (The foregoing is a year 2000 readiness disclosure under
the Year 2000 Information and Readiness Disclosure Act.)
Dividend Reinvestment and Cash Purchase Option
The Fund maintains an optional Dividend Reinvestment and Cash Purchase Plan (the
"Plan") for the automatic reinvestment of your dividends and capital gains
distributions in the shares of the Fund. The Plan also allows you to make
additional cash investments in Fund shares. We recommend that you consider
enrolling in the Plan to build your investments. State Street Bank and Trust
Company is the Fund's Plan Agent, and the Plan's features are described
beginning on page of this report.
Thank you for being a stockholder.
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 stockholders 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.
- --------------------------------------------------------------------------------
7
<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 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.
8
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 5.7%
(under 1 year)
American Express Credit Corp., 6.1%, 1/4/1999 ........................ 3,416,000 3,416,000
Ford Motor Credit Corp., 5.35%, 1/4/1999 ............................. 145,000 145,000
General Electric Capital Corp., 5.662%, 1/4/1999 ..................... 2,145,000 2,145,000
Household Finance Corp., 5.812%, 1/5/1999 ............................ 5,950,000 5,950,000
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $11,656,000) ...................... 11,656,000
------------
- ---------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BONDS -- 24.1%
(1 - 8 years)
U.S. TREASURY & AGENCY -- 4.3%
U.S. Treasury Note, 6.5%, 5/31/2002 .................................. 6,000,000 6,334,680
U.S. Treasury Bond, 9.375%, 2/15/2006 ................................ 2,000,000 2,549,380
------------
8,884,060
------------
CONSUMER DISCRETIONARY -- 1.5%
Department & Chain Stores
Fred Meyer, Inc., 7.375%, 3/1/2005 ................................... 3,000,000 3,173,520
------------
CONSUMER STAPLES -- 3.9%
Alcohol & Tobacco -- 1.9%
J. Seagram & Sons, 6.625%, 12/15/2005 ................................ 4,000,000 3,983,200
Food & Beverage -- 2.0%
Bass America Inc., 6.625%, 3/1/2003 .................................. 4,000,000 4,034,520
------------
COMMUNICATIONS -- 1.5%
Telephone/Communications
Worldcom, Inc. 6.40%, 8/15/2005 ...................................... 3,000,000 3,117,960
------------
DURABLES -- 1.3%
Aerospace
Newport News Shipbuilding Co., 9.25%, 12/1/2006 ...................... 2,500,000 2,643,750
------------
FINANCIAL -- 2.9%
Banks -- 0.7%
Conti Financial Corp., 7.5%, 3/15/2002 ............................... 2,000,000 1,400,000
------------
Real Estate -- 2.2%
GS Escrow Corp., 7%, 8/1/2003 ........................................ 3,000,000 2,948,400
ProLogis Trust (REIT), 7.05%, 7/15/2006 .............................. 1,500,000 1,463,625
------------
4,412,025
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDIA -- 2.0%
Cable Television
TCI-Communications, Inc., 8%, 8/1/2005 ............................... 3,500,000 3,940,265
------------
ENERGY -- 1.0%
Oil & Gas Production
Nuevo Energy Co., senior subordinated note, 9.5%, 4/15/2006 .......... 2,000,000 1,950,000
------------
SERVICE INDUSTRIES -- 2.2%
Environmental Services -- 0.7%
Allied Waste North America, 7.375%, 1/1/2004 ......................... 1,500,000 1,507,500
Investment-- 1.5%
Lehman Brothers Holdings, Inc., 7.25%, 10/15/2003 .................... 3,000,000 3,088,320
------------
TRANSPORTATION -- 1.0%
Airlines
Continental Airlines, Inc., 9.5%, 12/15/2001 ......................... 2,000,000 2,105,000
------------
UTILITIES -- 2.5%
Electric Utilities
CalEnergy Co., Inc., 7.23%, 9/15/2005 ................................ 2,000,000 2,065,000
Niagara Mohawk Power Corp., 7.25%, 10/1/2002 ......................... 3,000,000 3,048,750
------------
5,113,750
------------
TOTAL INTERMEDIATE-TERM BONDS (Cost $48,659,363) ..................... 49,353,870
------------
- ---------------------------------------------------------------------------------------------------------------
LONG-TERM BONDS -- 65.4%
(over 8 years)
U.S. TREASURY & AGENCY -- 16.3%
Government National Mortgage Association, 7.5%, with various
maturities to 11/15/2027 (b) ....................................... 31,251,453 32,218,061
U.S. Treasury Note, 5.625%, 5/15/2008 ................................ 1,150,000 1,227,085
------------
33,445,146
------------
ASSET BACKED -- 3.8%
Greentree Financial Corp., senior subordinated pass-thru
certificate, Series 1993-4 B1, 7.2%, 1/15/2019 ..................... 8,000,000 7,850,312
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 2.4%
DLJ Commercial Mortgage Corp., Series 1998-CG1 A1A, 6.11%,
12/10/2007 ......................................................... 4,853,373 4,972,281
------------
CONSUMER DISCRETIONARY -- 2.5%
Hotels & Casinos -- 1.0%
Royal Caribbean International, senior note, 7%, 10/15/2007 ........... 2,000,000 2,002,780
------------
Restaurants -- 1.5%
Tricon Global Restaurants, 7.65%, 5/15/2008 .......................... 3,000,000 3,120,000
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER STAPLES -- 1.9%
Food & Beverage
Borden Inc., debenture, 9.2%, 3/15/2021 .............................. 4,000,000 3,909,680
------------
COMMUNICATIONS -- 1.0%
Cellular Telephone
ComCast Cellular, 9.5%, 5/1/2007 ..................................... 2,000,000 2,130,000
------------
FINANCIAL -- 6.6%
Banks -- 3.7%
Bank United Capital Trust, 10.25%, 12/31/2026 ........................ 1,500,000 1,500,000
CoreStates Bank, 8%, 12/15/2026 ...................................... 2,500,000 2,872,800
Royal Bank of Scotland, 7.375%, 4/29/2049 ............................ 3,000,000 3,162,150
------------
7,534,950
------------
Real Estate -- 2.9%
ERP Operating L.P. Note, 7.57%, 8/15/2026 ............................ 3,000,000 3,085,590
Meditrust SBI, 7.82%, 9/10/2026 ...................................... 3,000,000 2,862,060
------------
5,947,650
------------
MEDIA -- 7.7%
Cable Television -- 5.7%
Cablevision Systems Corp., senior note, 7.875%, 2/15/2018 ............ 2,500,000 2,545,075
Cox Communications, Inc., 6.85%, 1/15/2018 ........................... 2,000,000 2,110,000
Paramount Communications, Inc., senior debenture, 7.5%, 7/15/2023 .... 2,000,000 2,024,220
Time Warner Inc., debenture, 9.125%, 1/15/2013 ....................... 4,000,000 5,063,840
------------
11,743,135
------------
Print Media -- 2.0%
News America Inc., 7.125%, 4/8/2028 .................................. 4,000,000 3,991,040
------------
SERVICE INDUSTRIES -- 1.5%
Environmental Services
USA Waste Services, Inc., 7.125%, 12/15/2017 ......................... 3,000,000 3,154,680
------------
DURABLES -- 3.3%
Aerospace
Argo-Tech Corp., 8.625%, 10/1/2007 ................................... 2,000,000 1,890,000
Lockheed Martin Corp., 7.2%, 5/1/2036 ................................ 3,000,000 3,317,280
United Defense Industries Inc., senior subordinated note, 8.75%,
11/15/2007 ......................................................... 1,500,000 1,515,000
------------
6,722,280
------------
MANUFACTURING -- 2.5%
Diversified Manufacturing -- 1.2%
Hutchison Whampoa, Ltd., 7.5%, 8/1/2027 .............................. 3,000,000 2,426,850
------------
Chemicals -- 1.3%
Equistar Chemical Corporation, 7.55%, 2/15/2026 ...................... 3,000,000 2,608,860
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY -- 11.5%
Oil & Gas Production -- 6.8%
Apache Corp., debenture, 7.7%, 3/15/2026 ............................. 3,310,000 3,456,136
Belden & Blake Corp., 9.875%, 6/15/2007 .............................. 2,000,000 1,620,000
Canadian Forest Oil, 8.75%, 9/15/2007 ................................ 2,000,000 1,830,000
Louisiana Land and Exploration Co., 7.65%, 12/1/2023 ................. 3,000,000 3,157,830
Unocal Corp., debenture, 9.4%, 2/15/2011 ............................. 3,000,000 3,862,440
------------
13,926,406
------------
Oilfield Services/Equipment -- 4.7%
ENSCO International Inc., note, 6.75%, 11/15/2007 .................... 4,000,000 3,986,480
Petroleum Geo-Services, 6.625%, 3/30/2008 ............................ 3,000,000 2,928,630
Transocean Offshore, Inc., 8%, 4/15/2007 ............................. 2,500,000 2,710,225
------------
9,625,335
------------
TRANSPORTATION -- 1.5%
Airlines
Northwest Airlines Corp., 8.7%, 3/15/2007 ............................ 3,000,000 2,956,500
------------
UTILITIES -- 2.9%
Natural Gas Distributors -- 1.3%
ANR Pipeline, debenture, 9.625%, 11/1/2021 ........................... 2,000,000 2,573,760
------------
Electric Utilities -- 1.6%
Southern Co. Capital Trust I, 8.19%, 2/1/2037 ........................ 3,000,000 3,317,310
------------
TOTAL LONG-TERM BONDS (Cost $130,454,691) ............................ 133,958,955
------------
- ---------------------------------------------------------------------------------------------------------------
WARRANTS -- 0.0%
Shares
----------
Walden Residential Properties, Inc. Warrants (expire 1/1/2002) ....... 80,000 50,000
------------
- ---------------------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 0.8%
Walden Residential Properties, Inc. (Cost $2,000,000) ................ 80,000 1,740,000
------------
- ---------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK -- 2.5%
Centaur Funding Corp., 9.08%, 4/21/2020 .............................. 3,000 3,112,500
United Dominion Realty Trust Inc., "A", 9.25%, 4/24/2000 ............. 80,000 1,960,000
------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $5,000,000) .................. 5,072,500
------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Market
Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
TOTAL INVESTMENT PORTFOLIO -- 98.5% (Cost $197,770,054) (a) .......... 201,831,325
OTHER ASSETS AND LIABILITIES, NET -- 1.5% ............................ 2,938,107
------------
NET ASSETS -- 100.0% ................................................. 204,769,432
============
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $197,770,054. At December 31,
1998, net unrealized appreciation for all securities based on tax cost was
$4,061,271. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $6,055,752 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,994,481.
(b) Effective maturities will be shorter due to prepayments.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments, at market (identified cost $197,770,054) ............... $ 201,831,325
--------------
Cash ................................................................ 286,160
Interest and dividends receivable ................................... 2,845,137
Other assets ........................................................ 1,524
--------------
Total Assets 204,964,146
--------------
LIABILITIES
Accrued management fee .............................................. $ 87,065
Other payables and accrued expenses ................................. 107,649
------------
Total Liabilities 194,714
--------------
NET ASSETS, at market value ...................................... 204,769,432
==============
NET ASSETS Net assets consist of:
Undistributed net investment income .............................. $ 247,069
Net unrealized appreciation (depreciation) on investments ........ 4,061,271
Accumulated net realized gain (loss) ............................. (153,798)
Paid-in capital .................................................. 200,614,890
--------------
NET ASSETS, at market value ...................................... $ 204,769,432
==============
NetAsset Value Per Share ($204,769,432 / 10,273,464 shares of common
stock outstanding, $.001 par value, 30,000,000 shares authorized) ... $19.93
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest .......................................................... $ 15,036,819
Dividends ......................................................... 368,998
-------------
15,405,817
Expenses:
Management and investment advisory fee ............................ $ 1,009,881
Directors' fees and expenses ...................................... 74,398
Services to shareholders .......................................... 69,956
Custodian fees .................................................... 15,867
Reports to shareholders ........................................... 90,393
Auditing .......................................................... 46,797
Legal ............................................................. 63,932
State franchise tax ............................................... 816
Other ............................................................. 63,878 1,435,918
------------- -------------
Net Investment Income 13,969,899
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investment securities ............................................. 181,236
Foreign currency related transactions ............................. 1,073
-------------
182,309
Net unrealized appreciation (depreciation) during the period on:
Investment securities ............................................. (3,515,722)
Foreign currency related transactions ............................. 19
-------------
(3,515,703)
-------------
Net gain (loss) on investments ....................................... (3,333,394)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS ...................................................... $ 10,636,505
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1998 1997
------------------ ------------------
<S> <C> <C>
Operations:
Net investment income ................................................... $ 13,969,899 $ 14,425,572
Net realized gain (loss) from investment transactions and foreign
currency related transactions during the period ...................... 182,309 3,550,623
Net unrealized appreciation (depreciation) on investments and
foreign currency related transactions during the period .............. (3,515,703) 4,411,924
--------------- --------------
Net increase (decrease) in net assets resulting from operations ......... 10,636,505 22,388,119
--------------- --------------
Dividends to shareholders from:
Net investment income ................................................ (14,027,923) (14,662,530)
--------------- --------------
Net realized gains on investment transactions ........................ (205,189) --
--------------- --------------
Fund share transactions:
Reinvestment of dividends from net investment income ................. 1,050,337 1,124,291
--------------- --------------
Increase (decrease) in net assets ....................................... (2,546,270) 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 $247,069 and $168,202, respectively) ....................... $ 204,769,432 $ 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 ........................................... 54,197 60,330
--------------- --------------
Shares outstanding at end of period ..................................... 10,273,464 10,219,267
=============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<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>
Years Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............... $20.29 $19.54 $19.94 $17.72 $20.13
------ ------ ------ ------ ------
Income from investment operations:
Income ........................................... 1.51 1.56 1.53 1.57 1.51
Operating expenses ............................... (.14) (.14) (.15) (.14) (.14)
------ ------ ------ ------ ------
Net investment income ............................ 1.37 1.42 1.38 1.43 1.37
Net realized and unrealized
gain (loss) ..................................... (.34) .77 (.38) 2.19 (2.42)
------ ------ ------ ------ ------
Total from investment operations ................... 1.03 2.19 1.00 3.62 (1.05)
------ ------ ------ ------ ------
Less distributions from:
Net investment income ............................ (1.37) (1.44) (1.40) (1.40) (1.36)
Net Realized gains from investment
transactions .................................... (.02) -- -- -- --
------ ------ ------ ------ ------
(1.39) (1.44) (1.40) (1.40) (1.36)
------ ------ ------ ------ ------
Net asset value, end of period ..................... $19.93 $20.29 $19.54 $19.94 $17.72
====== ====== ====== ====== ======
Per share market value, end of period .............. $19.75 $19.50 $17.38 $18.00 $15.75
====== ====== ====== ====== ======
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
Low ............................................. $18.75 $17.25 $16.75 $15.75 $15.25
Total Investment Return
Per share market value (%) ....................... 8.74 21.15 4.54 23.69 (13.54)
Per share net asset value (%) (b) ................ 5.46 12.09 6.08 21.78 (4.51)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............. 205 207 198 201 178
Ratio of operating expenses to
average daily net assets (%) ..................... .70 .71 .76 .73 .71
Ratio of net investment income to
average daily net assets (%) ..................... 6.83 7.17 7.07 7.45 7.28
Portfolio turnover rate (%) ........................ 49.8 162.2(c) 92.1 76.4 137.0
</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.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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,
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 at their fair value as determined
in good faith by the Valuation Committee 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.
18
<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 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.
From November 1 through December 31, 1998, the Fund incurred approximately
$190,000 of net realized capital losses. As permitted by tax regulations,
the Fund intends to elect to defer these losses and treat them as arising
in the fiscal year ended December 31, 1999.
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.
19
<PAGE>
Note B--MANAGEMENT AND INVESTMENT ADVISORY FEE. Under the Fund's Management
Agreement (the "Agreement") with Scudder Kemper Investments, Inc. ("Scudder
Kemper" or the "Adviser"), the Fund agrees to pay the Adviser for services
rendered, an annual fee, payable monthly, equal to 0.50 of 1% of the value of
the net assets of the Fund up to and including $150 million; 0.45 of 1% of the
value of the net assets of the Fund over $150 million and up to and including
$200 million; and 0.40 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 year ended December 31, 1998, the fees pursuant to the
Management Agreement amounted to $1,009,881, equivalent to an effective
annualized rate of 0.5% of the Fund's average monthly net assets.
Effective September 7, 1998, Zurich Insurance Company ("Zurich"), majority owner
of the Adviser, entered into an agreement with B.A.T Industries PLC ("B.A.T")
pursuant to which the financial services businesses of B.A.T were combined with
Zurich's businesses to form a new global insurance and financial services
company known as Zurich Financial Services. Upon consummation of the
transaction, the Fund's Management Agreement with Scudder Kemper was deemed to
have been assigned and, therefore, terminated. In December 1998, the Board of
Directors and the shareholders of the Fund approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the former
Management Agreement, except for the dates of execution and termination.
None of the Directors are affiliated with the Adviser. For the year ended
December 31, 1998, Directors' fees and expenses aggregated $74,398.
Note C--PURCHASES AND SALES OF INVESTMENTS. For the year ended December 31,
1998, purchases and sales of investment securities (excluding direct U.S.
government obligations and short-term investments) aggregated $85,696,040 and
$84,215,931, respectively. Purchases and sales of direct U.S. Government
obligations aggregated $13,173,010 and $13,598,109, respectively.
20
<PAGE>
Report of Ernst & Young LLP,
Independent Auditors
To the Shareholders and Board of Directors
Montgomery Street Income Securities, Inc.
San Francisco, California
We have audited the accompanying statement of assets and liabilities of
Montgomery Street Income Securities, Inc. (the "Fund"), including the
schedule of investments, as of December 31, 1998, and the related statement
of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements and financial highlights. Our procedures
included confirmation of securities owned as of December 31, 1998, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Montgomery Street Income Securities, Inc. at December 31, 1998, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended,
in conformity with generally accepted accounting principles.
Boston, Massachusetts /s/Ernst & Young LLP
February 8, 1999
21
<PAGE>
STOCKHOLDER MEETING RESULTS
A Special Meeting of Stockholders of Montgomery Street Income Securities, Inc.
(the "Fund") was held on Friday, December 11, 1998, at the offices of Scudder
Kemper Investments, Inc., 101 California Street, Suite 4100, San Francisco,
California. The following matter was voted upon by Stockholders (the resulting
votes for this matter are presented below).
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
6,981,662 96,829 116,473 0
- --------------------------------------------------------------------------------
* Broker non-votes are proxies received by the Fund 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.
22
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
All registered stockholders of the Fund's Common Stock are offered the
opportunity of participating in a Dividend Reinvestment and Cash Purchase Plan
(the "Plan"). Registered stockholders, on request or on becoming registered
stockholders, 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. EquiServe is the agent (the "Plan Agent")
for stockholders who elect to participate in the Plan.
If a stockholder chooses to participate in the Plan, the stockholder's
dividends and capital gains distributions will be promptly invested,
automatically increasing the stockholder'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 stockholder 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 stockholder 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 stockholder at the market price
per share on the Valuation Date. In either case, for federal income tax purposes
the stockholder 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 stockholder 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.
Stockholders 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 stockholder'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, stockholders may be charged a
service fee in an amount up to 5% of the value of the Voluntary Cash Investment.
Although subject to change, stockholders are currently charged $1 for each
Voluntary Cash Investment.
Stockholders 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 stockholders 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, stockholders 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 event for
23
<PAGE>
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 stockholders
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 EquiServe, P.O. Box 8209, Boston, MA 02266-8209, or by calling (800)
426-5523.
24
<PAGE>
This Page
intentionally
left blank.
<PAGE>
This Page
intentionally
left blank.
<PAGE>
This Page
intentionally
left blank.
<PAGE>
(blank back cover)
