[MONTGOMERY LOGO]
MONTGOMERY
STREET
INCOME
SECURITIES
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4
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Annual Report
December 31, 1999
SCUDDER
<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 0.37% for the quarter
ended December 31, 1999. The total NAV return of the fund outperformed the
unmanaged Lehman Brothers Aggregate Bond Index, an index we use for comparative
purposes, which had a total return of -0.12% for the quarter. The December 31,
1999 NAV per share was $18.37 versus $18.99 at the end of the third quarter.
During the quarter, the fund paid two dividends of $0.34 per share, which
accounted for the decline in per share NAV.
The market price of the fund's shares, which trade on the New York Stock
Exchange, was $15.50 per share at the end of December, which compared with
$16.06 at the end of September 1999. The market price discount of the shares as
a percentage of the NAV remained slightly over 15% at quarter-end, where it has
been for much of the latter half of 1999. As discussed in our last shareholder
letter, closed-end funds, in general, are trading at substantial discounts to
NAV.
For the year ended December 31, the fund returned (.05%) based on NAV, compared
to the Lehman Brothers Aggregate Bond Index's (8.2%). The fund's heavy
allocation to corporate bonds, which performed well for the year, helped returns
relative to the Index.
On December 10, 1999, the Board of Directors declared a $0.34 dividend payable
on December 30, 1999, to shareholders of record on December 21, 1999.
The Market and Economic Conditions
Interest rates moved sharply higher during the fourth quarter, with yields
rising 40 to 80 basis points along the yield curve. Much of the increase came in
December, as it became apparent that any liquidity concerns surrounding Year
2000 (Y2K) related events were unfounded. The market correctly predicted that
there would be no need for the Federal Reserve to deviate from its "tightening"
trend in response to any year-end shocks. In fact, the Federal Reserve raised
the overnight Federal funds rate for the third time in 1999 on November 16, to
5.5%. In justifying the rate rise, the Fed cited the pace of economic growth in
excess of its potential and the tightness of the labor markets. Given the Fed's
vigilance on containing inflation, the yield curve continued its flattening
trend, as shown in the following graph:
U.S. Treasury Yield Curve
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
Years to Fed Funds Fed Funds
Maturity 9/30/99 12/31/99
0.25 4.846 5.312
0.5 4.958 5.726
1 5.178 5.962
2 5.60 6.235
5 5.5756 6.342
10 5.877 6.435
30 6.053 6.479
2
<PAGE>
The removal of Y2K-related concerns proved to be a boon to the mortgage,
corporate, and asset-backed sectors in which the fund primarily invests. In the
fourth quarter these sectors continued their recovery from earlier woes and
posted higher returns than their U.S. Treasury counterparts. The corporate
market benefited from the strength of the economy and general health of
corporations, as well as reduced issuance of corporate bonds. The high yield
market, in particular, posted impressive returns for the quarter as investor
demand returned to the sector and yield spreads contracted. The mortgage market
also performed well versus Treasury securities as the higher interest rate
environment reduced the supply of bonds and kept prepayments subdued.
The fund's overweighted position in these sectors accounted for the relative
outperformance of the fund versus the Lehman Aggregate Index for the quarter.
This performance came despite the fund's slightly longer duration than the
Index.
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".
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
Source: Lehman Brothers
Corporate bonds had a very good quarter, relative to Treasuries, adding over 100
basis points to Treasury returns on a duration-adjusted basis. Limited supply,
continued strong economic growth, and a rising stock market contributed to
renewed investor confidence in the sector and a subsequent compression of yield
spreads. Valuations remain reasonable relative to historical norms, but we
continue to place increased scrutiny on individual holdings at this late stage
of the economic cycle. Credit quality has peaked, and event risk has notably
increased -- largely in response to earnings disappointments and merger and
acquisition activity. With regard to market technicals, the supply/demand
characteristics of the corporate bond marketplace are overwhelmingly favorable.
Corporate issuance is expected to decline as interest rates trend higher and
investor demand remains robust.
The mortgage market also rebounded from its poor mid-year performance to post
strong relative returns for the quarter. With interest rates rising throughout
the year, the underpinnings for this showing have been in
3
<PAGE>
place for some time. Only with the improvement of other sectors, however, has
the focus returned to these fundamentals. The higher mortgage rates experienced
throughout the year have muted prepayments and thus contributed to mortgage
returns since mortgage valuations are adversely affected by higher prepayments.
With little refinancing activity taking place, the supply of mortgage securities
has also been reduced, painting a favorable technical picture for the sector.
The Fund
The duration of the fund as of December 31 was 5.5 years, slightly lower than
5.6 years at the end of the third quarter. (Duration is a measure of a
portfolio's sensitivity to interest rates. If interest rates were to rise by 1%,
the value of a portfolio with a duration of 5.5 years would decline by about
5.5%.) In 1999, the fund initiated the use of leverage. For the quarter, the
fund maintained its leveraged position of about 16%, which continues to be
implemented via the use of mortgage dollar rolls. This leverage is intended to
capture the higher spreads of the securities in the portfolio. The average yield
advantage to the fund over its cost of funds declined to 2.6% from 3.0% in the
prior period, resulting in about $0.01 per share in income. The decrease in the
benefit of the leverage was due to the rising cost of funds at year-end.
The bar chart below shows the fund's sector weightings at the end of December,
with the negative cash balance reflecting the leverage of the fund.
Sector Weightings
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
Asset-Backed 3.9%
Industrial 52.2%
Utility 5.9%
Finance 23.2%
Mortgage 26.3%
Treasury 3.0%
Preferred Stock 1.5%
Cash -16.0%
Corporate securities represented 81% of the fund as of year-end, with the
remainder invested in government agency-backed mortgages, asset-backed
securities, U.S. Treasuries, and a small weighting in preferred stock. New
investment grade issues purchased during the quarter included: Cox
Communications, Williams Companies, Park Place Entertainment, Lockheed Martin,
and Tyco. Investment grade issues sold during the quarter included
Telecommunications Inc., Unocal, Cendant, ATT Capital, and Sprint. In the high
yield sector, Comcast UK and International Gaming were added, and Allied Waste
and Intermedia Communication were sold.
The fund's holdings in the oil and gas sectors (about 15% of the fund) continued
to benefit from rising oil prices and strong year-over-year earnings released
during the quarter. The media/cable sector (14% of the fund) also posted strong
relative performance for the quarter. Bank and finance securities comprise
roughly
4
<PAGE>
20% of the fund, and are diversified across finance companies, brokerage firms,
and domestic and Yankee banks. Although rising interest rate environments are
not traditionally favorable for bank and finance companies, fourth quarter
earnings have come in very solidly and we remain comfortable with the
fundamentals of the sector. The defense sector came under pressure during the
quarter in reaction to missed earnings targets for both Lockheed and Raytheon.
Lockheed was purchased for the fund when valuations became very attractive at
the height of the bad news. We feel that the worst is over and that Lockheed
remains a solid company as the world's largest defense contractor.
The fund's mortgage position totaled 26% at the end of the fourth quarter, with
approximately 21% of this total in government issued residential pass-through
certificates and the balance in commercial mortgage-backed securities. Of the
pass-through securities, approximately 16% were used in a mortgage roll strategy
to achieve leverage in the portfolio. Besides providing an attractive source of
funds, these securities also provided good relative returns during the quarter.
The commercial mortgage-backed bonds the fund held benefited from renewed
interest in that sector, given their high credit quality, prepayment stability
and attractive yields.
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
just over 24% of its assets in these categories. Borden, Inc. (BB+ rated)
remained the largest below investment grade holding. The company, which produces
packaged food, adhesives, and housewares, represented 2.0% of the total fund.
Average quality for the overall fund was A3, and the quality breakdown at the
end of December is depicted in the bar graph below.
Quality Breakdown
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
AAA 6.5%
AA 11.1%
A 17.5%
BBB 33.6%
BB 16.1%
B 7.4%
Cash -16.0%
Gov't/Agency 23.8%
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
5
<PAGE>
calendar quarter. There were 15,000 shares repurchased during the fourth quarter
of 1999, representing .15% of the outstanding shares of the fund. Up to 15,000
shares may be repurchased during the first 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 21 of this report.
Portfolio Management Team
On July 30, 1999, the fund announced that Kelly D. Babson, Kristin L. Bradbury,
and Almond G. Goduti had been named co-lead portfolio managers of the fund, and
that Steven A. Wohler, formerly the lead portfolio manager of the fund, had
retired from Scudder Kemper Investments. Ms. Babson has been associated with
Scudder Kemper Investments since 1994 and is currently a Managing Director of
the Firm. Ms. Bradbury has been associated with Scudder Kemper Investments since
1993 and is currently a Vice President of the Firm. Mr. Goduti has been
associated with Scudder Kemper Investments since 1996 and is currently a Senior
Vice President of the Firm. Prior to 1996, he was a Vice President and portfolio
manager of an unaffiliated investment management company. Ms. Bradbury and Mr.
Goduti have been members of the fund's portfolio management team since 1995 and
1998, respectively.
Thank you for being a stockholder.
Sincerely,
/s/John T. Packard /s/Kelly D. Babson
John T. Packard Kelly D. Babson
President Co-Lead Portfolio Manager
/s/Almond G. Goduti /s/Kristin L. Bradbury
Almond G. Goduti Kristin L. Bradbury
Co-Lead Portfolio Manager Co-Lead Portfolio Manager
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.
6
<PAGE>
INVESTMENT OBJECTIVES
Your Fund is a closed-end diversified management investment company registered
under the Investment Company Act of 1940, investing and reinvesting its assets
in a portfolio of selected securities. The Fund's primary investment objective
is to seek as high a level of current income as is consistent with prudent
investment risks, from a diversified portfolio primarily of debt securities.
Capital appreciation is a secondary objective.
PRINCIPAL INVESTMENT POLICIES
Investment of your Fund is guided by the following principal investment
policies:
At least 70% of total assets must be invested in: straight debt securities
(other than municipal securities) rated within the four highest grades assigned
by Moody's Investors Service, Inc. or Standard & Poor's Corporation; bank debt
of comparable quality; U.S. government or agency securities; commercial paper;
cash; cash equivalents; or Canadian government, provincial, or municipal
securities (not in excess of 25% of total assets).
Up to 30% of total assets (the "30% basket") may be invested in U.S. or foreign
securities that are straight debt securities, whether or not rated, convertible
securities, preferred stocks, or dividend-paying utility company common stock.
Not more than 25% of total assets may be invested in securities of any one
industry (neither utility companies as a whole nor finance companies as a whole
are considered an "industry" for the purposes of this limitation).
Not more than 5% of total assets may be invested in securities of any one
issuer, other than U.S. government or agency securities.
The Fund may invest money pursuant to repurchase agreements so long as the Fund
is initially wholly secured with collateral consisting of securities in which
the Fund can invest under its investment objectives and policies. In addition,
investment in repurchase agreements must not, at the time of any such loan, be
as a whole more than 20% -- and be as to any one borrower more than 5% -- of the
Fund's total assets.
The Fund may loan portfolio securities so long as the Fund is continuously
secured by collateral at least equal to the market value of the securities
loaned. In addition, loans of securities must not, at the time of any such loan,
be as a whole more than 10% of the Fund's total assets.
The Fund may borrow funds to purchase securities, provided that the aggregate
amount of such borrowings may not exceed 30% of the Fund's assets (including
aggregate borrowings), less liabilities (excluding such borrowings).
The Fund may enter into forward foreign currency sale contracts to hedge
portfolio positions, provided, among other things, that such contracts have a
maturity of one year or that at the time of purchase, the Fund's obligations
under such contracts do not exceed either the market value of portfolio
securities denominated in the foreign currency or 15% of the Fund's total
assets.
Subject to adoption of Board guidelines, the Fund may enter into interest rate
futures contracts and purchase or write options on interest rate futures
contracts, provided, among other things, that the Fund's obligations under such
instruments may not exceed the market value of the Fund's assets not subject to
the 30% basket.
7
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ----------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BONDS -- 56.7%
(1 - 8 years)
<S> <C> <C>
U.S. Treasury Obligations -- 2.9%
U.S. Treasury Note, 5.625%, 2/15/2006 ............................... 2,750,000 2,630,980
U.S. Treasury Note, 6.25%, 2/15/2007 ................................ 650,000 639,542
U.S. Treasury Bond, 9.375%, 2/15/2006 ............................... 2,000,000 2,276,560
-----------
5,547,082
-----------
Collaterized Mortgage Obligations -- 4.2%
DLJ Commercial Mortgage Corp., Series 1998-CG1 A1A, 6.11%, 12/10/2007 4,538,632 4,351,414
First Union-Lehman Brothers-Bank of America , Series 1998-C2, 6.28%,
6/18/2007 (d) ..................................................... 3,793,545 3,660,919
-----------
8,012,333
-----------
Asset Backed -- 1.0%
MBNA Master Credit Card Trust, Series 1999-I, 6.4%, 1/18/2005 ....... 2,000,000 1,979,688
-----------
Consumer Discretionary -- 2.3%
Hotels & Casinos
Harrah's Operating Co., Inc., 7.875%, 12/15/2005 .................... 2,000,000 1,925,000
Park Place Entertainment, 8.5%, 11/15/2006 .......................... 2,500,000 2,473,800
-----------
4,398,800
-----------
Consumer Staples -- 2.0%
Food & Beverage
The Great Atlantic & Pacific Tea Company, Inc., 7.7%, 1/15/2004 ..... 3,825,000 3,673,301
-----------
Communications -- 2.5%
Telephone/Communications
LCI International Inc., 7.25%, 6/15/2007 ............................ 2,000,000 1,922,940
WorldCom, Inc., 6.400%, 8/15/2005 ................................... 3,000,000 2,873,490
-----------
4,796,430
-----------
Durables -- 2.4%
Automobiles -- 1.5%
Lear Corp., 7.96%, 5/15/2005 ........................................ 3,000,000 2,860,200
-----------
Aerospace -- 0.9%
Lockheed Martin Corp. 7.95%, 12/1/2005 .............................. 1,700,000 1,701,360
-----------
Energy -- 4.5%
Oilfield Services/Equipment -- 1.6%
Petroleum Geo-Services, 7.5%, 3/31/2007 ............................. 3,000,000 2,932,830
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Oil & Gas Production -- 2.9%
Canadian Forest Oil Ltd., 8.75%, 9/15/2007 ......... 2,000,000 1,940,000
Louis Dreyfus Natural Gas Corp., 9.25%, 6/15/2004 .. 2,000,000 2,030,000
Osprey Trust, 8.31%, 1/15/2003 ..................... 1,500,000 1,489,800
-----------
5,459,800
-----------
Financial -- 15.8%
Banks -- 8.9%
Associates Corp. of North America, 5.75%, 11/01/2003 3,000,000 2,861,430
Bank of America, 9.875%, 6/1/2001 .................. 2,500,000 2,597,950
Capital One Bank, 6.57%, 1/27/2003 (d) ............. 3,000,000 2,908,200
CIT Group Holdings Inc., 7.125%, 10/15/2004 ........ 2,000,000 1,983,960
Den Danske Bank, 6.55%, 9/15/2006 .................. 2,500,000 2,424,850
Wachovia Corp., 6.7%, 6/21/2004 .................... 4,000,000 3,930,000
-----------
16,706,390
-----------
Consumer Finance -- 4.7%
Ford Motor Credit Co., 7.5%, 1/15/2003 (d) ......... 3,000,000 3,031,230
IBM Credit Corp., 6.4%, 8/13/2001 .................. 3,000,000 2,978,100
Sears Roebuck Acceptance, 6.38%, 11/21/2001 ........ 3,000,000 2,938,110
-----------
8,947,440
-----------
Real Estate -- 2.2%
GS Escrow Corp., 7%, 8/1/2003 ...................... 3,000,000 2,755,253
ProLogis Trust (REIT), 7.05%, 7/15/2006 ............ 1,500,000 1,413,285
-----------
4,168,538
-----------
Manufacturing -- 1.5%
Diversified Manufacturing
Tyco International Group S.A., 6.25%, 6/15/2003 .... 3,000,000 2,880,330
-----------
Media -- 5.3%
Cable Television
Charter Communication Holdings LLC, 8.25%, 4/1/2007 2,500,000 2,312,500
Presterto NTL Inc., 11.20%, 11/15/2007 ............. 2,000,000 1,880,000
Cox Communications, Inc., 7.75%, 8/15/2006 ......... 2,000,000 2,019,440
TCI-Communications, Inc., 8%, 8/1/2005 ............. 3,500,000 3,603,635
-----------
9,815,575
-----------
Service Industries -- 6.8%
Environmental Services -- 1.3%
Waste Management Inc., 8%, 4/30/2004 ............... 2,500,000 2,351,500
-----------
Miscellaneous Commercial Services -- 2.6%
Comdisco Inc., 6%, 1/30/2002 (d) ................... 3,000,000 2,907,750
Hertz Corp., 7.625%, 8/15/2007 ..................... 2,000,000 2,002,600
-----------
4,910,350
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments -- 2.9%
Lehman Brothers Holdings, Inc., 7.25%, 10/15/2003 .............................. 3,000,000 2,961,900
Merrill Lynch & Co., 5.71%, 1/15/2002 .......................................... 2,750,000 2,609,200
-----------
5,571,100
-----------
Transportation -- 3.3%
Airlines -- 2.5%
Continental Airlines Inc., 9.5%, 12/15/2001 .................................... 2,000,000 2,007,500
Northwest Airlines Corp., 8.52%, 4/7/2004 ...................................... 3,000,000 2,757,270
-----------
4,764,770
-----------
Railroads -- 0.8%
Union Pacific Corp., 6.7%, 12/1/2006 ........................................... 1,500,000 1,423,575
-----------
Utilities -- 2.2%
Electric Utilities
CalEnergy Co., Inc, 7.23%, 9/15/2005 ........................................... 2,000,000 1,944,959
Niagara Mohawk Power Corp., 7.25%, 10/1/2002 ................................... 2,268,293 2,257,661
-----------
4,202,620
-----------
TOTAL INTERMEDIATE-TERM BONDS (Cost $110,478,674) .............................. 107,104,012
-----------
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM BONDS -- 56.1%
(over 8 years)
U.S. Government Pass-Thru -- 20.7%
Federal Home Loan Mortgage Corp., 7%, 1/15/2029 (c) (e) ........................ 7,500,000 7,258,594
Federal National Mortgage Association, 6.5%, 1/1/2029 (c) (e) .................. 14,000,000 13,203,750
Federal National Mortgage Association, 7.5%, 1/1/2029 (c) (e) .................. 10,000,000 9,890,625
Government National Mortgage Association Pass-thru, 7.5% with various maturities
to 11/15/2027 (b) (d) ........................................................ 8,915,592 8,815,291
-----------
39,168,260
-----------
Asset Backed -- 2.9%
Greentree Financial Corp., Series 1993-4 B1, 7.2%, 1/15/2019 (d) ............... 5,697,328 5,429,598
-----------
Collaterized Mortgage Obligation -- 1.2%
LB Commercial Conduit Mortgage Trust, Series 1998-C4, 6.21%, 10/15/2008 ........ 2,500,000 2,300,781
-----------
Communications -- 4.0%
Telephone/Communications
Crown Castle International Corp., 9.5%, 8/1/2011 ............................... 500,000 500,000
Crown Castle International Corp., 9.5%, 8/1/2011 ............................... 1,500,000 1,500,000
Level 3 Communications, 9.125%, 5/1/2008 ....................................... 2,000,000 1,882,500
McLeodUSA Inc., 8.125%, 2/15/2009 .............................................. 2,500,000 2,318,750
Sprint Capital Corp., 6.125%, 5/1/2009 ......................................... 4,000,000 1,450,688
-----------
7,651,938
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- --------------------------------------------------------------------------------
<S> <C> <C>
Consumer Discretionary -- 2.3%
Hotels & Casinos
International Game Technology, 8.375%, 5/15/2009 1,500,000 1,440,000
Tricon Global Restaurants, 7.65%, 5/15/2008 (d) 3,000,000 2,827,500
-----------
4,267,500
-----------
Consumer Staples -- 1.9%
Food & Beverage
Borden Inc., 9.2%, 3/15/2021 ................... 4,000,000 3,597,040
-----------
Energy -- 4.5%
Oil & Gas Production -- 3.2%
Anadarko Petroleum Corp., 7%, 11/15/2027 ....... 3,000,000 2,623,620
Unocal Corp., 9.4%, 2/15/2011 .................. 3,000,000 3,334,890
-----------
5,958,510
-----------
Oilfield Services/Equipment -- 1.3%
Transocean Offshore, Inc., 8%, 4/15/2027 ....... 2,500,000 2,523,425
-----------
Financial -- 5.8%
Banks -- 4.2%
Bank of America Corp., 8.06%, 12/1/2026 ........ 2,500,000 2,348,100
Bank United Capital Trust, 10.25%, 12/31/2026 .. 1,500,000 1,335,000
Merrill Lynch & Co., Inc., 6%, 2/17/2009 ....... 1,500,000 1,344,765
Royal Bank of Scotland, 7.375%, 4/29/2049 ...... 3,000,000 2,881,560
-----------
7,909,425
-----------
Real Estate -- 1.6%
ERP Operating L.P. Note, 7.57%, 8/15/2026 (d) .. 3,000,000 2,935,710
-----------
Media -- 7.9%
Broadcasting and Entertainment -- 0.9%
Paramount Communications, Inc., 7.5%, 7/15/2023 2,000,000 1,780,480
-----------
Cable Television -- 4.7%
AMFM Inc., 8.125%, 7/15/2009 ................... 2,000,000 2,005,000
CSC Holdings, Inc., 8.125%, 7/15/2009 .......... 2,500,000 2,488,500
Time Warner Inc., 9.125%, 1/15/2013 (d) ........ 4,000,000 4,380,640
-----------
8,874,140
-----------
Print Media -- 2.3%
News America Holdings Inc., 9.25%, 2/1/2013 (d) 4,000,000 4,353,120
-----------
Technology -- 1.4%
Military Electronics
Raytheon Co, 6.15%, 11/1/2008 .................. 3,000,000 2,665,650
-----------
Transportation -- 0.7%
Airlines
Continental Airlines, 6.545%, 2/2/2019 ......... 1,499,357 1,362,705
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities -- 2.8%
Natural Gas Distributors
ANR Pipeline Co., debenture, 9.625%, 11/1/2021 ................................. 2,000,000 2,329,240
Williams Companies, Inc., 6.25%, 7/15/2019 ..................................... 3,000,000 2,882,820
-----------
5,212,060
-----------
TOTAL LONG-TERM BONDS (Cost $109,973,750) ...................................... 105,990,342
-----------
- ---------------------------------------------------------------------------------------------------------------------
WARRANTS -- 0.0%
Walden Residential Properties, Inc. Warrants* (cost $0) ........................ 80,000 800
-----------
- ---------------------------------------------------------------------------------------------------------------------
Shares
------
PREFERRED STOCK -- 0.6%
Walden Residential Properties Inc., preferred (Cost $2,000,000) ................ 80,000 1,245,000
-----------
- ---------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK -- 0.8%
United Dominion Realty Trust Inc. "A" (REIT), 9.25%, 4/24/2000 (Cost $2,000,000) 80,000 1,560,000
-----------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO-- 114.2% (Cost $224,452,424) (a) .................... 215,900,154
OTHER ASSETS AND LIABILITIES, NET-- (14.2%) .................................... (26,879,805)
-----------
NET ASSETS-- 100.0% ............................................................ 189,020,349
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing
(a) The cost for federal income tax purposes was $224,588,864. At December
31, 1999, net unrealized depreciation for all securities based on tax
cost was $8,688,710. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $665,811 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax
cost over market value of $9,354,521.
(b) Effective maturities will be shorter due to prepayments.
(c) Mortgage dollar roll
(d) At December 31, 1999, these securities and pools, in part or in whole,
have been segregated to cover mortgage dollar rolls.
(e) When-issued or forward delivery pools included.
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at market (identified cost $224,452,424) ....................... $ 215,900,154
Cash ........................................................................ 428,757
Interest and dividends receivable ........................................... 4,782,496
Other assets ................................................................ 32,534
-------------
Total Assets 221,143,941
-------------
LIABILITIES
Payables for investments purchased --
mortgage dollar roll ...................................... $ 31,843,938
Accrued management fee ....................................... 84,114
Other payables and accrued expenses .......................... 195,540
-------------
Total Liabilities 32,123,592
-------------
NET ASSETS, at market value .............................................. 189,020,349
=============
NET ASSETS Net assets consist of:
Accumulated distributions in excess of net investment
income ................................................................... $ (13,780)
Net unrealized appreciation (depreciation) on investments ................ (8,552,270)
Accumulated net realized gain (loss) ..................................... (3,446,162)
Paid-in capital .......................................................... 201,032,561
-------------
NET ASSETS, at market value .............................................. $ 189,020,349
=============
NetAsset Value Per Share ($189,020,349 / 10,289,694 shares of
common stock outstanding, $.001 par value, 30,000,000
shares authorized) .......................................................... $ 18.37
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1999
INVESTMENT INCOME
Income:
Interest ....................................... $14,922,790
Dividends ...................................... 369,000
-----------
15,291,790
Expenses:
Management and investment advisory fee ....... $ 967,539
Directors' fees and expenses ................. 69,402
Services to shareholders ..................... 84,167
Custodian .................................... 13,618
Reports to shareholders ...................... 103,495
Auditing ..................................... 60,198
Legal ........................................ 47,916
State franchise tax .......................... 172
Other ........................................ 42,998 1,389,505
--------- -----------
Net Investment Income 13,902,285
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investment securities ........................ (3,315,571)
-----------
Net unrealized appreciation (depreciation) during
the period on:
Investment securities ........................ (12,613,541)
-----------
Net gain (loss) on investments .................. (15,929,112)
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS ................................. $ (2,026,827)
================
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31,
INCREASE (DECREASE) IN NET ASSETS 1999 1998
------------------ ------------------
Operations:
<S> <C> <C>
Net investment income ............................................. $ 13,902,285 $ 13,969,899
Net realized gain (loss) from investment transactions and foreign
currency related transactions during the period ................ (3,315,571) 182,309
Net unrealized appreciation (depreciation) on investments and
foreign currency related transactions during the period ........ (12,613,541) (3,515,703)
-------------- --------------
Net increase (decrease) in net assets resulting from operations ... (2,026,827) 10,636,505
-------------- --------------
Dividends to shareholders from:
Net investment income .......................................... (13,971,722) (14,027,923)
-------------- --------------
Net realized gains on investment transactions .................. -- (205,189)
-------------- --------------
Fund share transactions:
Reinvestment of dividends from net investment income ........... 985,139 1,050,337
Cost of shares repurchased ..................................... (735,673) --
-------------- --------------
Net increase (decrease) in net assets from Fund share
transactions ................................................... 249,466 1,050,337
-------------- --------------
Increase (decrease) in net assets ................................. (15,749,083) (2,546,270)
Net assets at beginning of period ................................. 204,769,432 207,315,702
-------------- --------------
Net assets at end of period (including accumulated distributions in
excess of net investment income of $13,780 and undistributed net
investment income of $247,069, respectively) ................... $ 189,020,349 $ 204,769,432
============== ==============
Other Information
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ......................... 10,273,464 10,219,267
-------------- --------------
Shares issued to shareholders in reinvestment of dividends
from net investment income ..................................... 59,232 54,197
Shares repurchased ................................................ (43,002) --
-------------- --------------
Net increase (decrease) in Fund shares ............................ 16,230 54,197
-------------- --------------
Shares outstanding at end of period ............................... 10,289,694 10,273,464
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
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
Years Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...................... $19.93 $20.29 $19.54 $19.94 $17.72
Income from investment operations:
Income (a) .............................................. 1.49 1.51 1.56 1.53 1.57
Operating expenses ...................................... (.14) (.14) (.14) (.15) (.14)
------- ------- ------- ------- -------
Net investment income ................................... 1.35 1.37 1.42 1.38 1.43
Net realized and unrealized
gain (loss) ............................................ (1.55) (.34) .77 (.38) 2.19
------- ------- ------- ------- -------
Total from investment operations .......................... (.20) 1.03 2.19 1.00 3.62
------- ------- ------- ------- -------
Less distributions from:
Net investment income ................................... (1.36) (1.37) (1.44) (1.40) (1.40)
Net Realized gains from investment
transactions ........................................... -- (.02) -- -- --
------- ------- ------- ------- -------
(1.36) (1.39) (1.44) (1.40) (1.40)
------- ------- ------- ------- -------
Net asset value, end of period ............................ $18.37 $19.93 $20.29 $19.54 $19.94
======= ======= ======= ======= =======
Per share market value, end of period ..................... $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 ................................................... $19.94 $20.38 $19.94 $19.50 $19.13
Low .................................................... $15.06 $18.75 $17.25 $16.75 $15.75
Total Investment Return
Per share market value (%) .............................. (14.90) 8.74 21.15 4.54 23.69
Per share net asset value (%) (b) ....................... (.05) 5.46 12.09 6.08 21.78
Ratios and Supplemental Data
Net assets, end of period ($ millions) .................... 189 205 207 198 201
Ratio of operating expenses to
average daily net assets (%) ............................ .70 .70 .71 .76 .73
Ratio of net investment income to
average daily net assets (%) ............................ 7.01 6.83 7.17 7.07 7.45
Portfolio turnover rate (%) ............................... 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 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 rates including mortgage dollar roll transactions
were 208.9% and 218.1%, for the periods ended December 31, 1999, and
December 31, 1997, respectively.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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.
17
<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 year ended
December 31, 1999, the fees pursuant to the Agreement amounted to $967,539,
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 year ended
December 31, 1999, Directors' fees and expenses aggregated $69,402.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Note C--PURCHASES AND SALES OF INVESTMENTS. For the year ended December 31,
1999, purchases and sales of investment securities (excluding direct U.S.
government obligations, short-term investments and mortgage dollar roll
transactions) aggregated $214,107,514 and $168,215,010, respectively. Purchases
and sales of direct U.S. Government obligations aggregated $4,584,141 and
$8,521,059, respectively. Purchases and sales of mortgage dollar roll
transactions aggregated $272,321,875 and $272,623,906, respectively.
19
<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, 1999, and the related statement
of operations for the year then ended, the statements 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 auditing standards generally
accepted in the United States. 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, 1999, by correspondence with the custodian and
brokers. 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, 1999, 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 accounting principles generally accepted in the United
States.
Boston, Massachusetts /s/Ernst & Young LLP
February 14, 2000
20
<PAGE>
1.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 equalthe 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
21
<PAGE>
event for federal income tax purposes and may be taxable for state and local tax
purposes.
The Plan may be amended by the fund or the Plan Agent at any time. Except
when required by law, written notice of any amendment will be mailed to
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.
22
<PAGE>
This Page
intentionally
left blank.
<PAGE>
<PAGE>
DIRECTORS JOHN C. ATWATER
RICHARD J. BRADSHAW
MARYELLIE K. JOHNSON
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE
Chairman
OFFICERS JOHN T. PACKARD
President
KELLY D. BABSON
Vice President
KRISTIN L. BRADBURY
Vice President
ALMOND G. GODUTI
Vice President
BRUCE H. GOLDFARB
Vice President and
Assistant Secretary
JOHN R. HEBBLE
Treasurer
MAUREEN E. KANE
Vice President and Secretary
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
