DIRECTORS JOHN C. ATWATER [MONTGOMERY LOGO]
RICHARD J. BRADSHAW
MARYELLIE K. JOHNSON
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE MONTGOMERY
Chairman STREET
OFFICERS VICTOR L. HYMES INCOME
President SECURITIES
ROBERT S. CESSINE
Vice President
BRUCE H. GOLDFARB ---
Vice President and | 2 |
Assistant Secretary ---
JOHN R. HEBBLE
Treasurer Semiannual Report
MAUREEN E. KANE June 30, 2000
Vice President and Secretary
ANN M. McCREARY
Vice President
KATHRYN L. QUIRK
Vice President and
Assistant Secretary
HARRY E. RESIS
Vice President
RICHARD L. VANDENBERG
Vice President
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 SCUDDER
Three Embarcadero Center INVESTMENTS(SM)
Seventh Floor [LOGO]
San Francisco, CA 94111
INDEPENDENT Ernst & Young LLP
AUDITORS 200 Clarendon Street
Boston, MA 02116
<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 1.39% for the quarter
ended June 30, 2000. The total NAV return of the Fund underperformed the
unmanaged Lehman Brothers Aggregate Bond Index, an index we use for comparative
purposes, which had a total return of 1.73% for the quarter. The Fund's
continued emphasis on corporate bonds, which underperformed Treasuries for the
quarter, restrained returns relative to the Index.
The June 30, 2000 NAV per share was $18.55, versus $18.68 at the end of the
first quarter. On July 13, 2000, the Board of Directors declared a $0.34
dividend payable on July 31, 2000, to shareholders of record on July 24, 2000.
The market price of the Fund's shares, which trade on the New York Stock
Exchange, was $16.125 per share at the end of June, which compared with $15.3125
at the end of March. The market price discount of the shares as a percentage of
the NAV was slightly over 13% at quarter-end, which is a narrower discount from
the prior quarter.
The Market and Economic Conditions
While economic conditions remain robust in the U.S., data released in the second
quarter allowed for a more favorable environment for fixed income securities.
Gross Domestic Product (GDP) rose 5.5% during the first quarter, a strong pace
but slower than that of the fourth quarter. While there were signs early in the
second quarter that inflation was creeping higher, slower retail sales and
housing starts provided evidence that the rate hikes engineered by the Federal
Reserve Board were having their intended effect of cooling off the economy. The
Federal Reserve Board took another swing at slowing the economy by raising the
Federal Funds rate by 50 basis points, to 6.5%, in May. This move, the largest
in five years, brought the cumulative rate hikes over the past year to 1.75%,
leading many market participants to conclude that the Fed is nearing the end of
its rate hike spree. The Fed opted for a wait and see approach in June by
leaving rates unchanged. Armed with this confidence, the market pushed
shorter-term interest rates lower. The U.S. Treasury yield curve remains
inverted, although less so than at the end of the first quarter. The curve can
be seen in the following graph:
THE ORIGINAL DOCUMENT CONTAINS A LINE GRAPH HERE
LINE GRAPH DATA:
U.S. Treasury Yield Curve
Yield to Maturity (%)
-------------------------
Fed Funds Fed Funds
6/30/00 3/31/00
------- -------
3 Mos. 5.886 5.860
6 Mos. 6.140 6.215
1 Yr. 6.239 6.062
2 Yrs. 6.483 6.358
5 Yrs. 6.320 6.179
10 Yrs. 6.015 6.023
30 Yrs. 5.837 5.896
Yield to Maturity (%)
2
<PAGE>
Once again, investment grade corporate bonds underperformed Treasuries for the
quarter, as corporate yield spreads widened early in the period. In June, the
growing perception that the Fed was nearly finished raising rates provided the
catalyst for spreads to reverse course and tighten, and for the corporate market
to outperform Treasuries for the first time in 2000.
High yield securities turned in a mixed performance versus Treasuries during the
second quarter. Securities rated BB provided the best returns among high yield
bonds, returning 44 basis points more than comparable duration Treasuries.
Securities rated B and lower continued to lag Treasury returns. Yield spreads
remain historically attractive, although default rates have risen this year.
The technical picture for corporates improved somewhat over the quarter, as
inflows into funds turned positive and the new issue calendar showed signs of
reviving. We reiterate the themes that economic and profit growth remain robust,
fundamentals remain sound, bond origination has declined, and valuations are
attractive. We continue to be selective with respect to securities purchased and
are mindful of the impact of higher rates on the credits we own.
The following graph shows the yield advantage of ten-year A-rated industrial
bonds over ten-year Treasury notes. Wider spreads indicate the relative
attractiveness of corporate issues.
Corporate Yield Spreads
10-Year Corporates versus 10-Year Treasury
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE REFLECTING THE YEARS FROM 1994
TO 2000. HIGHER NUMBERS INDICATE "CORPORATE BONDS MORE ATTRACTIVE". LOWER
NUMBERS INDICATE "CORPORATE BONDS LESS ATTRACTIVE".
LINE CHART DATA:
Yield Spread (basis points)
69
69
55
58
62
67
67
61
60
58
56
49
49
65
58
59
56
62
65
60
60
59
60
58
59
59
55
56
59
58
58
58
59
56
58
54
59
50
48
45
46
44
46
48
48
58
72
75
79
73
72
68
62
62
65
82
82
82
90
110
117
135
110
125
95
90
90
90
95
100
115
120
117
127
126
128
128
126
123
117
116
114
116
115
118
118
114
119
125
122
126
131
126
133
143
144
153
149
Source: Lehman Brothers
The mortgage market posted positive returns over Treasury securities in the
second quarter. Given this market's perceived high credit quality, it was less
affected by concerns of a hard landing. That, coupled with the lower volatility
of rate changes during the period, allowed the higher yields of mortgages to
translate into higher total returns.
The Fund
The duration of the Fund as of June 30 was 5.4 years, slightly less than the
duration at the end of the year. (Duration is a measure of a portfolio's
sensitivity to interest rates. If interest rates were to rise by 1%, the
3
<PAGE>
value of a portfolio with a duration of 5.4 years would decline by about 5.4%.)
The Fund use of approximately 20% leverage was unchanged during the quarter.
(Note: Prior reports have described the benefit of leverage to the portfolio.)
The Fund earned an extra 1.89% due to leverage. That average spread was lower
than in recent periods due to higher funding costs.
The bar chart below shows the Fund's sector weightings at the end of June, with
the negative cash balance reflecting the leverage of the Fund.
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
Sector Weightings
Asset-Backed 3.4%
Industrial 45.9%
Utility 13.4%
Finance 22.2%
Mortgage 27.4%
Treasury 3.0%
Agency 3.7%
Preferred Stock 1.5%
Cash -20.5%
Corporate securities represented 67.6% of the Fund's gross assets as of
quarter-end, with the remainder invested in government agency-backed mortgages,
asset-backed securities, U.S. Treasuries, and a small weighting in preferred
stock. Much of the activity in the second quarter focused on improving the
income of the Fund. Several swaps within the capital structure of corporations
or within fixed income sectors helped to increase the average coupon of the
portfolio. New issues purchased during the quarter included Lennar Corporation,
Heller Financial, Tenneco Automotive, Avis Group and Conoco. Issues sold during
the quarter included Northwest Airlines, Associates Corp. of North America and
Borden.
Corporate bond holdings continue to be focused in the 3- to 10-year area of the
yield curve, where yields are the most attractive. The yield advantage of the
Fund over comparable duration Treasuries increased to nearly 270 basis points.
The Fund's mortgage position totaled 22.7% of the gross assets at the end of the
second quarter, with approximately 4/5 of this total in government issued
residential pass-through certificates and the balance in commercial
mortgage-backed securities. Most of the pass-through securities were used in a
mortgage roll strategy to achieve leverage in the portfolio. The Fund's exposure
to the commercial mortgage-backed sector added to returns during the quarter, as
the sector's high credit quality, attractive yields, and diminished supply
attracted investors.
The Fund's investment policy allows the Fund 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
27.8% of its assets in these categories. (Note: Prior letters have described
certain holdings and included a quality breakdown bar graph.)
4
<PAGE>
Limited Share Repurchases
The Fund is authorized 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 are 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 with respect to income earned for the second
preceding calendar quarter. There were 15,000 shares repurchased during the
second quarter of 2000, representing 0.15% of the outstanding shares of the
Fund. Up to 15,000 shares may be repurchased during the third quarter of 2000.
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. This Plan also allows you to make
additional cash investments in Fund shares. We recommend that you consider
enrolling in the Plan to build your investments. State Street Bank and Trust
Company is the Fund's Plan Agent, and the Plan's features are described
beginning on page 10 of this report.
Portfolio Manager Team
Harry E. Resis, Robert S. Cessine, and Richard L. Vandenberg have been appointed
as the portfolio managers for the Fund, replacing the current portfolio
managers, Kristin L. Bradbury and Almond G. Goduti. The Chairman of the Board of
the Fund and I wish to thank Ms. Bradbury and Mr. Goduti for their years of
dedicated service to the Fund and its shareholders. Messrs. Resis, Cessine, and
Vandenberg are senior portfolio managers in Scudder Kemper's North America Fixed
Income Group, who have a wealth of experience in fixed income investing. We are
confident that they will continue the legacy of solid performance.
At the July 13, 2000 Board meeting, the Board of Directors elected Messrs.
Resis, Cessine, and Vandenberg and Ann M. McCreary as vice presidents of the
Fund.
Thank you for being a stockholder.
Sincerely,
/s/Victor L. Hymes
Victor L. Hymes
President
5
<PAGE>
INVESTMENT OBJECTIVES
Your fund is a closed-end diversified management investment company registered
under the Investment Company Act of 1940, investing and reinvesting its assets
in a portfolio of selected securities. The fund's primary investment objective
is to seek as high a level of current income as is consistent with prudent
investment risks, from a diversified portfolio primarily of debt securities.
Capital appreciation is a secondary objective.
PRINCIPAL INVESTMENT POLICIES
Investment of your fund is guided by the following principal investment
policies:
At least 70% of total assets must be invested in: straight debt securities
(other than municipal securities) rated within the four highest grades assigned
by Moody's Investors Service, Inc. or Standard & Poor's 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.
6
<PAGE>
SCHEDULE OF INVESTMENTS
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
---------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.3%
(under 1 year)
Ford Motor Credit Corp., 6.65%, 7/5/2000 (Cost $535,000) ........ 535,000 535,000
---------
---------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BONDS -- 56.5%
(1-8 years)
U.S. Treasury Obligations -- 3.0%
U.S. Treasury Bond, 9.375%, 2/15/2006 ........................... 2,000,000 2,287,500
U.S. Treasury Note, 6.875%, 5/15/2006 ........................... 3,250,000 3,344,965
---------
5,632,465
---------
U.S. Government Pass-Thru -- 3.6%
Federal Home Loan Mortgage Corp., 6.875%, 1/15/2005 (b) ......... 7,000,000 6,956,250
---------
Collaterized Mortgage Obligations -- 1.8%
First Union National Bank Commercial Mortgage, Series 2000-C1 A1,
7.739%, 7/15/2009 ............................................. 3,477,790 3,524,524
---------
Asset Backed -- 1.0%
MBNA Master Credit Card Trust, Series 1999-1, 6.4%, 1/18/2005 ... 2,000,000 1,973,120
---------
Communications -- 2.8%
Telephone/Communications
LCI International, Inc., 7.25%, 6/15/2007 ....................... 700,000 662,781
Level 3 Communications, 9.125%, 5/1/2008 ........................ 2,000,000 1,795,000
WorldCom, Inc., 6.4%, 8/15/2005 ................................. 3,000,000 2,855,760
---------
5,313,541
---------
Consumer Discretionary -- 3.7%
Hotels & Casinos
Harrah's Operating Co., Inc., 7.875%, 12/15/2005 ................ 2,000,000 1,880,000
Park Place Entertainment, 8.5%, 11/15/2006 ...................... 2,500,000 2,456,475
Tricon Global Restaurants, 7.65%, 5/15/2008 ..................... 3,000,000 2,694,660
---------
7,031,135
---------
Consumer Staples -- 1.9%
Food & Beverage
The Great Atlantic & Pacific Tea Company, Inc., 7.7%, 1/15/2004 . 3,825,000 3,657,312
---------
Durables -- 2.4%
Automobiles -- 1.5%
Lear Corp., 7.96%, 5/15/2005 .................................... 3,000,000 2,813,820
---------
Aerospace-- 0.9%
Lockheed Martin Corp., 7.95%, 12/1/2005 ......................... 1,700,000 1,709,690
---------
Energy -- 4.3%
Oilfield Services/Equipment-- 1.5%
Petroleum Geo-Services, 7.5%, 3/31/2007 ......................... 3,000,000 2,879,730
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Oil & Gas Production -- 2.8%
Canadian Forest Oil Ltd., 8.75%, 9/15/2007 ....................... 2,000,000 1,880,000
Louis Dreyfus Natural Gas Corp., 9.25%, 6/15/2004 ................ 2,000,000 2,005,000
Osprey Trust, 8.31%, 1/15/2003 ................................... 1,500,000 1,503,225
----------
5,388,225
----------
Financial -- 12.2%
Banks -- 8.5%
Capital One Bank, 6.57%, 1/27/2003 ............................... 3,000,000 2,878,890
CIT Group Holdings, Inc., 7.125%, 10/15/2004 ..................... 2,000,000 1,940,280
Den Danske Bank, 6.55%, 9/15/2003 ................................ 2,500,000 2,422,575
Heller Financial, Inc., 7.875%, 5/15/2003 ........................ 3,000,000 2,995,680
Limestone Electronic Trust, 8.625%, 3/15/2003 .................... 2,000,000 2,004,480
Wachovia Corp., 6.7%, 6/21/2004 .................................. 4,000,000 3,903,360
----------
16,145,265
----------
Consumer Finance -- 1.5%
Sears Roebuck Acceptance, 6.38%, 11/21/2001 ...................... 3,000,000 2,953,500
----------
Real Estate -- 2.2%
GS Escrow Corp., 7%, 8/1/2003 .................................... 3,000,000 2,740,560
ProLogis Trust (REIT), 7.05%, 7/15/2006 .......................... 1,500,000 1,415,070
----------
4,155,630
----------
Manufacturing -- 1.5%
Diversified Manufacturing
Tyco International Group S.A., 6.25%, 6/15/2003 .................. 3,000,000 2,864,340
----------
Media -- 5.1%
Cable Television
Charter Communication Holdings LLC, 8.25%, 4/1/2007 .............. 2,500,000 2,212,500
Comcast UK Cable Partners, Ltd., Step-up Coupon, 0% to 11/15/2000,
11.2% to 11/15/2007 ............................................ 2,000,000 1,885,000
Cox Communications, Inc., 7.75%, 8/15/2006 ....................... 2,000,000 1,992,860
TCI-Communications, Inc., 8%, 8/1/2005 ........................... 3,500,000 3,573,850
----------
9,664,210
----------
Service Industries -- 6.9%
Environmental Services -- 1.3%
Waste Management, Inc., 8%, 4/30/2004 ............................ 2,500,000 2,428,050
----------
Miscellaneous Commercial Services -- 2.6%
Comdisco, Inc., 6%, 9/1/2002 ..................................... 3,000,000 2,897,820
Hertz Corp., 7.625%, 8/15/2007 ................................... 2,000,000 1,976,760
----------
4,874,580
----------
Investments -- 3.0%
Lehman Brothers Holdings, Inc., 7.25%, 10/15/2003 ................ 3,000,000 2,943,150
Morgan Stanley Dean Witter & Co., 7.125%, 1/15/2003 .............. 2,750,000 2,732,372
----------
5,675,522
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transportation -- 3.3%
Airlines -- 1.1%
Continental Airlines, Inc., 9.5%, 12/15/2001 ............................. 2,000,000 2,029,000
----------
Marine Transportation -- 1.5%
Royal Caribbean Cruises, 7.125%, 9/18/2002 ............................... 3,000,000 2,890,980
----------
Railroads -- 0.7%
Union Pacific Corp., 6.7%, 12/1/2006 ..................................... 1,500,000 1,413,225
----------
Utilities -- 3.0%
Electric Utilities -- 2.4%
CalEnergy Co., Inc, 7.23%, 9/15/2005 ..................................... 2,000,000 1,937,720
Niagara Mohawk Power Corp., 7.25%, 10/1/2002 ............................. 2,268,294 2,241,438
NRG Northeast Generating, Inc., 8.065%, 12/15/2004 ....................... 400,000 399,548
----------
4,578,706
----------
Water Supply -- 0.6%
Azurix Corp., 10.375%, 2/15/2007 ......................................... 1,225,000 1,182,125
-----------
TOTAL INTERMEDIATE-TERM BONDS (Cost $111,117,328) ........................ 107,734,945
-----------
---------------------------------------------------------------------------------------------------------------
LONG-TERM BONDS -- 60.9%
(over 8 years)
U.S. Government Pass-Thru -- 21.5%
Federal Home Loan Mortgage Corp., 7%, 7/15/2029 (c) (d) .................. 7,500,000 7,243,360
Federal National Mortgage Association, 7%, 7/1/2029 (b) .................. 2,229,387 2,151,359
Federal National Mortgage Association, 7.5%, 7/1/2030 (c) (d) ............ 11,965,000 11,785,525
Federal National Mortgage Association, 8%, 7/1/2030 (c) (d) .............. 13,000,000 13,044,687
Government National Mortgage Association Pass-thru, 7.5%, 7/1/2029 (c) (d) 6,830,000 6,774,506
----------
40,999,437
----------
Asset Backed -- 4.5%
Asset Securitization Corporation, Series 1997-D4 A1C, 7.42%, 4/14/2029 ... 4,250,000 4,248,672
Green Tree Financial Corp., Series 1993-4 B1, 7.2%, 1/15/2019 ............ 4,834,359 4,414,374
----------
8,663,046
----------
Collaterized Mortgage Obligation -- 1.2%
LB Commercial Conduit Mortgage Trust, Series 1998-C4, 6.21%, 10/15/2008 .. 2,500,000 2,286,719
----------
Communications -- 4.5%
Telephone/Communications
Crown Castle International Corp., 9.5%, 8/1/2011 ......................... 2,000,000 1,900,000
McLeodUSA, Inc., 8.125%, 2/15/2009 ....................................... 2,500,000 2,256,250
Sprint Capital Corp., 6.125%, 11/15/2008 ................................. 1,600,000 1,426,192
Teleglobe, Inc., 7.2%, 7/20/2009 ......................................... 3,000,000 2,870,550
----------
8,452,992
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
----------------------------------------------------------------------------------
<S> <C> <C>
Consumer Discretionary -- 0.8%
Hotels & Casinos
International Game Technology, 8.375%, 5/15/2009 1,500,000 1,413,750
----------
Durables -- 1.3%
Construction/Agricultural Equipment
Lennar Corp., 9.95%, 5/1/2010 .................. 2,450,000 2,413,250
----------
Energy -- 5.8%
Oil & Gas Production -- 4.5%
Anadarko Petroleum Corp., 7%, 11/15/2027 ....... 3,000,000 2,584,740
Conoco, Inc., 6.35%, 4/15/2009 ................. 2,750,000 2,558,105
Unocal Corp., 9.4%, 2/15/2011 .................. 3,000,000 3,356,610
----------
8,499,455
----------
Oilfield Services/Equipment -- 1.3%
Transocean Offshore, Inc., 8%, 4/15/2027 ....... 2,500,000 2,485,325
----------
Financial -- 8.3%
Banks -- 5.3%
Abbey National PLC, 7.35%, 10/29/2049 .......... 3,000,000 2,797,350
Bank United Capital Trust, 10.25%, 12/31/2026 .. 1,500,000 1,260,000
Barnett Capital I, 8.06%, 12/1/2026 ............ 2,500,000 2,252,150
Merrill Lynch & Co., Inc., 6%, 2/17/2009 ....... 1,500,000 1,337,505
National Westminster Bank PLC, 7.375%, 10/1/2009 2,500,000 2,429,725
----------
10,076,730
----------
Consumer Finance -- 1.5%
Ford Motor Credit Co., 7.375%, 10/28/2009 ...... 3,000,000 2,901,810
----------
Real Estate -- 1.5%
ERP Operating L.P. Note, 7.57%, 8/15/2026 ...... 3,000,000 2,932,470
----------
Manufacturing -- 0.9%
Machinery/Components/Controls
Tenneco Automotive, Inc., 11.625%, 10/15/2009 .. 2,000,000 1,775,000
----------
Media -- 7.6%
Broadcasting and Entertainment -- 1.9%
British Sky Broadcasting, 6.875%, 2/23/2009 .... 2,000,000 1,757,020
Paramount Communications, Inc., 7.5%, 7/15/2023 2,000,000 1,789,680
----------
3,546,700
----------
Cable Television -- 4.6%
AMFM, Inc., 8%, 11/1/2008 ...................... 2,000,000 2,007,500
CSC Holdings, Inc., 8.125%, 7/15/2009 .......... 2,500,000 2,425,000
Time Warner, Inc., 9.125%, 1/15/2013 ........... 4,000,000 4,383,600
----------
8,816,100
----------
Print Media -- 1.1%
News America Holdings, Inc., 9.25%, 2/1/2013 ... 2,000,000 2,161,220
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Service Industries -- 1.1%
Miscellaneous Commercial Services
Avis Group Holdings, Inc., 11.00%, 5/1/2009 ............... 2,000,000 2,085,000
-----------
Transportation -- 0.7%
Airlines
Continental Airlines, 6.545%, 2/2/2019 .................... 1,460,833 1,315,524
-----------
Utilities -- 2.7%
Natural Gas Distributors
ANR Pipeline Co., debenture, 9.625%, 11/1/2021 ............ 2,000,000 2,284,020
Williams Companies, Inc., 5.625%, 7/15/2019 ............... 3,000,000 2,865,030
-----------
5,149,050
-----------
TOTAL LONG-TERM BONDS (Cost $117,702,603) ................. 115,973,578
-----------
----------------------------------------------------------------------------------------------------
Shares
------
CONVERTIBLE PREFERRED STOCK -- 0.8%
HSBC Bank PLC, 10.25%, 9/1/2000 (Cost $1,515,000) ......... 60,000 1,541,250
-----------
----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO-- 118.5% (Cost $230,869,931) (a) 225,784,773
OTHER ASSETS AND LIABILITIES, NET-- (18.5%) ............... (35,174,574)
-----------
NET ASSETS -- 100.0% ...................................... 190,610,199
===========
----------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $231,006,371. At June 30,
2000, net unrealized depreciation for all securities based on tax cost
was $5,221,598. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of value
over tax cost of $1,228,292 and aggregate gross unrealized depreciation
for all securities in which there was an excess of tax cost over value
of $6,449,890.
(b) Effective maturities will be shorter due to prepayments.
(c) Mortgage dollar roll
(d) When-issued or forward delivery pools included.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (identified cost $230,869,931) ................... $ 225,784,773
Cash ................................................................... 65,356
Interest receivable .................................................... 3,893,987
Other assets ........................................................... 882
--------------
Total Assets 229,744,998
--------------
LIABILITIES
Payables for investments purchased -- mortgage dollar roll ............. $ 38,920,341
Accrued management fee ................................................. 82,372
Accrued expenses and payables .......................................... 132,086
--------------
Total Liabilities 39,134,799
--------------
NET ASSETS, at value ................................................ 190,610,199
--------------
NET ASSETS Net assets consist of:
Undistributed net investment income ................................. $ 3,572,659
Net unrealized appreciation (depreciation) on investments ........... (5,085,158)
Accumulated net realized gain (loss) ................................ (8,695,555)
Paid-in capital ..................................................... 200,818,253
--------------
NET ASSETS, at value ................................................ $ 190,610,199
--------------
NetAsset Value Per Share ($190,610,199 / 10,275,635 shares of
common stock outstanding, $.001 par value, 30,000,000
shares authorized) ..................................................... $18.55
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME
Income:
<S> <C> <C>
Interest ............................................................ $ 7,522,030
Dividends ........................................................... 114,555
-----------
7,636,585
-----------
Expenses:
Management and investment advisory fee .............................. $ 460,588
Services to shareholders ............................................ 44,408
Custodian ........................................................... 6,552
Directors' fees and expenses ........................................ 36,036
Reports to shareholders ............................................. 56,238
Auditing ............................................................ 16,380
Legal ............................................................... 16,380
Other ............................................................... 22,689 659,271
----------- -----------
Net Investment Income 6,977,314
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss)
from:
Investments ......................................................... (5,249,393)
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments ......................................................... 3,467,112
-----------
Net gain (loss) on investments ......................................... (1,782,281)
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS ........................................................ $ 5,195,033
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, 2000 December 31,
INCREASE (DECREASE) IN NET ASSETS (Unaudited) 1999
--------------- ---------------
Operations:
<S> <C> <C>
Net investment income ............................................. $ 6,977,314 $ 13,902,285
Net realized gain (loss) from investment transactions and foreign
currency related transactions during the period ................ (5,249,393) (3,315,571)
Net unrealized appreciation (depreciation) on investments and
foreign currency related transactions during the period ........ 3,467,112 (12,613,541)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations ... 5,195,033 (2,026,827)
--------------- ---------------
Net investment income .......................................... (3,390,875) (13,971,722)
--------------- ---------------
Fund share transactions:
Reinvestment of dividends from net investment income ........... 234,922 985,139
Cost of shares repurchased ..................................... (449,230) (735,673)
--------------- ---------------
Net increase (decrease) in net assets from Fund share
transactions ................................................... (214,308) 249,466
--------------- ---------------
Increase (decrease) in net assets ................................. 1,589,850 (15,749,083)
Net assets at beginning of period ................................. 189,020,349 204,769,432
--------------- ---------------
Net assets at end of period (including undistributed net investment
income of $3,572,659 and accumulated distributions in excess of
net investment income of $13,780, respectively) ............... $ 190,610,199 $ 189,020,349
=============== ===============
Other Information
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ......................... 10,289,694 10,273,464
--------------- ---------------
Shares issued to shareholders in reinvestment of dividends
from net investment income ..................................... 14,941 59,232
Shares repurchased ................................................ (29,000) (43,002)
--------------- ---------------
Net increase (decrease) in Fund shares ............................ (14,059) 16,230
--------------- ---------------
Shares outstanding at end of period ............................... 10,275,635 10,289,694
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements and market price data.
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
June 30, 2000 ------------------------------------------------------
(Unaudited) 1999 1998 1997 1996 1995
----------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $18.37 $19.93 $20.29 $19.54 $19.94 $17.72
Income from investment operations:
Income (a) ............................ .74 1.49 1.51 1.56 1.53 1.57
Operating expenses .................... (.06) (.14) (.14) (.14) (.15) (.14)
------ ------ ------ ------ ------ ------
Net investment income ................. .68 1.35 1.37 1.42 1.38 1.43
Net realized and unrealized
gain (loss) .......................... (.17) (1.55) (.34) .77 (.38) 2.19
------ ------ ------ ------ ------ ------
Total from investment operations ........ .51 (.20) 1.03 2.19 1.00 3.62
[GRAPHIC OMITTED] Less distributions from:
Net investment income ................. (.33) (1.36) (1.37) (1.44) (1.40) (1.40)
Net realized gains from investment
transactions ......................... -- -- (.02) -- -- --
------ ------ ------ ------ ------ ------
(.33) (1.36) (1.39) (1.44) (1.40) (1.40)
------ ------ ------ ------ ------ ------
Net asset value, end of period .......... $18.55 $18.37 $19.93 $20.29 $19.54 $19.94
====== ====== ====== ====== ====== ======
Per share market value, end of period ... $16.13 $15.50 $19.75 $19.50 $17.38 $18.00
====== ====== ====== ====== ====== ======
Price range on New York Stock Exchange
for each share of Common Stock
outstanding during the period (Unaudited):
High ................................. $16.13 $19.94 $20.38 $19.94 $19.50 $19.13
Low .................................. $15.06 $15.06 $18.75 $17.25 $16.75 $15.75
Total Investment Return
Per share market value (%) ............ 6.22 (14.90) 8.74 21.15 4.54 23.69
Per share net asset value (%) (b) ..... 3.16 (.05) 5.46 12.09 6.08 21.78
Ratios and Supplemental Data
Net assets, end of period ($ millions) .. 191 189 205 207 198 201
Ratio of operating expenses to
average daily net assets (%) .......... .70 .70 .70 .71 .76 .73
Ratio of net investment income to
average daily net assets (%) .......... 7.42 7.01 6.83 7.17 7.07 7.45
Portfolio turnover rate (%) ............. 71.6(c) 82.2(c) 49.8 162.2(c) 92.1 76.4
</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 assume 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 rates including mortgage dollar roll
transactions were 262.3%, 208.9% and 218.1%, for the periods ended June
30, 2000, December 31, 1999 and December 31, 1997, respectively.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 (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 purchased with
remaining maturities greater than sixty days are valued by pricing
agents approved by the officers of the Fund, whose quotations 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 a
remaining maturity of sixty days or less are valued at amortized cost.
Equity Securities which are traded on U.S. or foreign stock exchanges
are valued as of the close of regular trading on the New York Stock
Exchange at the most recent sale price reported on the exchange on
which the security is traded most extensively. If no sale occurred, the
security is then valued at the calculated mean between the most recent
bid and asked quotations. If there are no such bid and asked quotations
the most recent bid quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been sales are valued at
the most recent sale price reported. If there are no such sales, the
value is the most recent bid quotation. Securities which are not quoted
on Nasdaq but are traded in another over-the-counter market are valued
at the most recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and asked quotations on
such market. If there are no such bid and asked quotations, the most
recent bid quotation shall be used. All other securities are valued at
their fair value as determined in good faith by the Valuation Committee
of the Board of Directors of the Fund.
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 paid in the form of a fee which is 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 of 1986, 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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
At December 31, 1999, the Fund had a net tax basis capital loss
carryforward of approximately $4,433,000 which may be applied against
any realized net taxable capital gains of each succeeding year until
fully utilized or until December 31, 2007, the expiration date,
whichever occurs first.
From November 1, 1999 through December 31, 1999, the Fund incurred
approximately $43,000 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 year ending December 31, 2000.
Distribution of Income and Gains--Distributions of net investment
income are made quarterly. During any particular year, net realized
gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and,
therefore, will be distributed to shareholders. An additional
distribution may be made to the extent necessary to avoid the payment
of a four percent federal excise tax. The Fund uses the specific
identification method for determining realized gain or loss on
investments sold for both financial and federal income tax reporting
purposes.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting
principles (GAAP). These differences relate primarily to investments in
mortgage backed securities and foreign denominated securities. As a
result, net investment income and net realized gain (loss) on
investment transactions for a reporting period may differ significantly
from distributions during such period. Accordingly, the Fund may
periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of the Fund.
Other--Investment security transactions are accounted for on a
trade-date basis. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis.
Note B--MANAGEMENT AND INVESTMENT ADVISORY FEE. Under the Fund's Management
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 Agreement also provides that the Adviser will reimburse the
Fund for all expenses (excluding interest, taxes, brokerage commissions and
extraordinary expenses) borne by the Fund in any fiscal year in excess of the
sum of one and one-half percent of the first $30 million of average net assets
and one percent of average net assets in excess of $30 million. Further, if
annual expenses as defined in the Agreement exceed 25% of the Fund's annual
gross income, the excess will be reimbursed by the Adviser. For the six months
ended June 30, 2000, the fees pursuant to the Agreement amounted to $460,588,
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, 2000, Directors' fees and expenses aggregated $36,036.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Note C--PURCHASES AND SALES OF INVESTMENTS. For the six months ended June 30,
2000, purchases and sales of investment securities (excluding direct U.S.
government obligations, short-term investments and mortgage dollar roll
transactions) aggregated $84,579,403 and $75,392,296, respectively. Purchases
and sales of direct U.S. Government obligations aggregated $3,278,184 and
$3,247,418, respectively. Purchases and sales of mortgage dollar roll
transactions aggregated $218,226,840 and $209,557,564, respectively.
18
<PAGE>
STOCKHOLDER MEETING RESULTS (unaudited)
The Annual Meeting of Stockholders of Montgomery Street Income Securities, Inc.
(the "Company") was held on July 13, 2000, at the offices of the Company, 101
California Street, Suite 4100, San Francisco, California 94111. At the Meeting
the following matters were voted upon by the stockholders (the resulting votes
for each matter are presented below):
1. The election of five Directors of the Company to hold office until the
next Annual Meeting or until their respective successors shall have
been duly elected and qualified.
Director: Number of Votes:
--------- ---------------
For Withheld Broker Non-Votes*
--- -------- ----------------
John C. Atwater 8,701,411 134,766 0
Richard J. Bradshaw 8,702,302 133,875 0
Maryellie K. Johnson 8,702,908 133,269 0
Wendell G. Van Auken 8,703,876 132,301 0
James C. Van Horne 8,702,096 134,081 0
2. Ratification or rejection of the action taken by the Board of Directors
in selecting Ernst & Young LLP as the Company's independent auditors for
the fiscal year ending December 31, 2000.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- ----------------
8,701,715 46,176 88,287 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*
--- ------- ------- ----------------
8,614,397 91,899 129,881 0
--------------------------------------------------------------------------------
* Broker non-votes are proxies received by the Company from brokers or
nominees when the broker or nominee neither has received instructions from
the beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
19
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
All registered 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
20
<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
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.
21
<PAGE>
This Page
intentionally
left blank.
<PAGE>
This Page
intentionally
left blank.
