UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-CSR
Investment Company Act file number 811-2341
MONTGOMERY STREET SECURITIES, INC.
----------------------------------
(Exact Name of Registrant as Specified in Charter)
101 California Street, Suite 4100
San Francisco, CA 94111
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (6l7) 295-2572
--------------
John Millette
Deutsche Investment Management Americas Inc.
Two International Place, Boston, MA 02110
-----------------------------------------
(Name and Address of Agent for Service)
Date of fiscal year end: 12/31
Date of reporting period: 6/30/03
ITEM 1. REPORT TO STOCKHOLDERS
Montgomery Street
Income Securities
Semiannual Report to Stockholders
June 30, 2003
[Scudder Investments Logo]
Portfolio Management Review |
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In the following interview, Portfolio Managers Gary Bartlett and J. Christopher Gagnier discuss the recent market environment and their strategy in managing Montgomery Street Income Securities during the six-month period ended June 30, 2003.
The investments of Montgomery Street Income Securities, Inc. (the "fund") produced a total return based on net asset value (NAV) of 6.58% for the six-month period ended June 30, 2003. The return of the fund's NYSE-traded shares was 4.93%.
The total NAV return of the fund outperformed the return of the unmanaged Lehman Brothers Aggregate Bond Index1, which posted a return of 3.93% for the six-month period. The fund underperformed the 10.26% average return of the funds in its Lipper peer group (Closed-End Corporate Debt Funds BBB-Rated category).2 However, the fund remains ahead of the average return of funds in its peer group for the three-, five- and 10-year periods.3
1 The Lehman Brothers Aggregate Bond Index is a total-return index including fixed-rate debt issues rated investment grade or better. It contains government, corporate and mortgage securities and is generally considered representative of the market for investment-grade bonds as a whole.2 The Lipper Closed-End Corporate Debt Funds BBB-Rated category includes funds that invest at least 65% of their assets in corporate and government debt issues rated in the top four grades. It is not possible to invest directly into an index or category.3 The fund ranked 9 of 16, 5 of 14, 6 of 14 and 7 of 14 funds in the Lipper Closed-End Corporate Debt Funds BBB-Rated category for the 1, 3, 5 and 10 year periods, respectively. Ranking is based on the fund's total return during the period cited. Performance includes reinvestment of all distributions and is not a guarantee of future results. Source: Lipper Inc.The fund's market price stood at $19.65 as of June 30, 2003, compared to $19.02 at the close of 2002. The market price discount of the shares, as a percentage of NAV, was 3.7% on June 30, 2003. The fund paid a quarterly dividend of $0.31 on April 30, 2003.
Q: How did the bond market perform during the first half of the year?
A: Bonds, which have delivered solid gains for investors during the past three calendar years, continued to produce strong performance during the first six months of 2003. The Lehman Brothers Aggregate Bond Index returned 3.93% for the six-month period ended June 30, 2003. US Treasury securities returned 3.75% for the period, supported initially by mixed economic figures and heightened geopolitical concerns prior to the Iraqi conflict. Then later, Treasuries were aided by the Federal Open Market Committee's overt reference to deflationary risks as a part of its May monetary policy statement. This latter point drove 10-year Treasury notes to a 45-year intra-day low yield of 3.11% (ironically) on Friday, June 13. But yields subsequently climbed, as the Fed cut the federal funds rate by a quarter-point to 1% at the June meeting, which fell short of market expectations.
Other parts of the bond market, the so-called "spread sectors"4, outperformed Treasuries during the period. Corporate bonds were among the strongest performance portions of the market and, in the investment-grade market, outperformed Treasuries by over 700 basis points (duration-adjusted excess returns). Treasuries are guaranteed by the full faith and credit of the US government as to timely payment of principal and interest. In fact, the Lehman Brothers Credit Index narrowed in spread vs. Treasuries from an all-time high of 241 basis points last fall to 114 basis points on June 30. Lower-rated securities provided some of the strongest returns. BBB-rated bonds were among the strongest in the investment-grade universe and the high-yield sector
4 Spread sectors are generally considered those areas of the bond market which usually offer yields higher than Treasuries.US Treasury Yield Curve: Recent History |
-- 6/30/03
- - - 12/31/02
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 |
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Source: Bloomberg
Performance is historical and does not guarantee future results.
declined dramatically in terms of spread vs. Treasuries (from 947 to 676 basis points) during the first half of this year according to Lehman Brothers. All other "spread sectors" outperformed comparable duration Treasuries as investors sought extra yield during a period of low absolute rate levels, but some sectors only marginally so. Commercial mortgage-backed and asset-backed securities enjoyed a significant performance advantage relative to Treasuries while single-family mortgage securities, after excellent relative performance in 2002, had a period of lesser outperformance in the period ended June 30.
Q: How is the fund positioned?
A: The fund's outperformance vs. its benchmark was due largely to our increased (but selective) use of lower-quality corporate bonds. While the Lehman Brothers Aggregate Bond Index held no high-yield bonds and has only 9.5% in those rated BBB, the fund holds 13% of assets in high-yield corporate bonds and 17% in bonds rated BBB
as of June 30, 2003.5 During the most recent period when lower-quality corporate bonds outperformed other sectors of the bond market, this positioning gave the fund a distinct advantage versus the benchmark. However, the fund's holdings in the corporate area tend to be of higher quality than those of other funds within the Lipper peer group. While this strategy has helped performance vs. the peer group at the times when lower-quality bonds were not performing well, it hurt the fund's showing vs. comparable funds during the most recent period.
5 Source: Deutsche Investment Management Americas Inc.The fund's largest sector weighting continues to be corporate bonds, at about 32% of assets. Our most significant move in this area of late was our decision to increase the fund's position in credits rated BBB or below. With default rates declining and some corporations deleveraging their balance sheets, we have found a number of value opportunities in this area of the market. During the first half, we added to the fund's position in the
Sector Distribution |
|  |
[] [] [] [] [] [] [] [] | Corporate
Agency
Treasury
Asset Backed
Foreign
Municipal
Mortgage
Short-Term Investments
| 32%
29%
14%
9%
5%
5%
3%
3%
|
|
As of June 30, 2003.
Holdings are subject to change.
Quality Distribution |
|  |
[] [] [] [] [] [] [] [] | AAA
AA
A
BBB
BB
B
Treasury
Agency
| 19%
4%
4%
17%
8%
5%
14%
29%
|
|
As of June 30, 2003.
Quality distribution is subject to change.
telecommunications, utilities and cable/media sectors. We continued to add bonds that offered attractive valuations and that are issued by companies with strong fundamentals.
The fund continues to hold positions in asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS), both of which offer the opportunity to earn extra yield in comparison with Treasuries. And for investors who do their fundamental research, as we do, we believe it is possible to find individual securities that offer relatively low levels of risk. Our focus on finding CMBSs and ABSs that offer this combination of value and quality allowed us to generate solid performance from this portion of the portfolio over the past six months.
We also increased the fund's position in taxable municipal bonds. We use the fund's position in taxable municipal bonds as something of a surrogate for government agency notes, since the sector offers a combination of high quality and attractive yields. It is possible that this position could grow in the quarters ahead, since it appears that many states will follow the lead of Illinois, which issued $10 billion of bonds to fund pension obligations in June.
The portfolio continues to hold a leveraged position in mortgage-backed securities, which are financed with borrowed money. The current period has proven to be a very opportune time to hold this leveraged position, since short term interest rates are unusually low. As a result, the difference between the rate at which the fund can borrow and the rate it earns on its mortgage-backed investments is higher than historical levels. We therefore maintained a relatively large holding in this sector, amounting to about 32% of the assets.
Fund shares are not FDIC-insured and are not deposits or other obligations of, or guaranteed by, any bank. Fund shares involve investment risk, including possible loss of principal.
Past performance is no guarantee of future results.
The views expressed in this report reflect those of the portfolio managers only through the end of the period of the report as stated on the cover. The managers' view is subject to change at any time based on market and other conditions and should not be construed as a recommendation.
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. |
Dividend Declared
The fund paid a dividend of $0.31 per share on July 31, 2003.
Annual Meeting of Stockholders
At the fund's Annual Meeting of Stockholders on July 10, 2003, stockholders of the fund approved the continuance of the Management and Investment Advisory Agreement for the fund and elected five Directors of the fund. Please see page 36 for stockholder meeting results.
Election of Officers
On July 10, 2003, the Board elected Andrew Cestone as vice president of the fund, succeeding J. Christopher Gagnier. Mr. Cestone, a managing Director of Deutsche Asset Management, joined Deutsche Asset Management in 1998. Prior to 1998, Mr. Cestone was an investment analyst at Phoenix Investment Partners and a credit officer in the asset-based lending group at Fleet Bank.
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 no shares repurchased during the six-month period ended June 30, 2003. Up to 14,000 shares may be repurchased during the third quarter of 2003.
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 gain distributions in the shares of the fund. Stockholders who participate in the Plan can also purchase additional shares of the fund through the Plan's voluntary cash investment feature. We recommend that you consider enrolling in the Plan to build your investment. The Plan's features, including the voluntary cash investment feature, are described beginning on page 34 of this report.
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:
Under normal circumstances, the fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in income producing securities.1 1 The fund will provide stockholders with at least 60 days' notice prior to making any changes to this 80% investment policy.
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; US 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 US 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 US 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.
Investment Portfolio as of June 30, 2003 (Unaudited) | |
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|
| Principal
Amount ($) | Value ($) |
|
|
Corporate Bonds 41.4% |
Consumer Discretionary 7.0%
|
American Achieve Corp., 11.625%, 1/1/2007
| 140,000
| 149,800
|
Ameristar Casino, Inc., 10.75%, 2/15/2009
| 70,000
| 79,363
|
AOL Time Warner, Inc., 6.75%, 4/15/2011
| 775,000
| 882,367
|
Aviall, Inc., 7.625%, 7/1/2011
| 55,000
| 55,756
|
Boyd Gaming Corp., 7.75%, 12/15/2012
| 80,000
| 84,900
|
Buffets, Inc., 11.25%, 7/15/2010
| 80,000
| 79,200
|
Central Garden & Pet Co., 9.125%, 2/1/2013
| 75,000
| 79,875
|
Choctaw Resort Development Enterprises, 9.25%, 4/1/2009
| 200,000
| 215,750
|
Chumash Casino & Resort Enterprise, 9.0%, 7/15/2010
| 95,000
| 102,600
|
Circus & Eldorado, 10.125%, 3/1/2012
| 135,000
| 132,638
|
Comcast Cable Communications:
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|
|
6.375%, 1/30/2006
| 750,000
| 818,432
|
6.875%, 6/15/2009
| 430,000
| 497,138
|
Cox Communications, Inc., 7.5%, 8/15/2004
| 1,000,000
| 1,061,348
|
CSC Holdings, Inc., 7.875%, 12/15/2007
| 215,000
| 219,838
|
Dex Media East LLC/ Financial, 12.125%, 11/15/2012
| 195,000
| 230,588
|
DIMON, Inc., Series B, 9.625%, 10/15/2011
| 555,000
| 610,500
|
EchoStar Communications Corp., 9.375%, 2/1/2009
| 260,000
| 277,225
|
Finlay Fine Jewelry Corp., 8.375%, 5/1/2008
| 165,000
| 170,775
|
General Motors Corp.:
|
|
|
7.125%, 7/15/2013
| 50,000
| 49,870
|
8.25%, 7/15/2023
| 140,000
| 139,913
|
8.375%, 7/15/2033
| 50,000
| 49,055
|
Hard Rock Hotel, Inc., 8.875%, 6/1/2013
| 50,000
| 52,250
|
Herbst Gaming, Inc., 10.75%, 9/1/2008
| 340,000
| 374,850
|
Hines Horticulture, Inc., Series B, 12.75%, 10/15/2005
| 165,000
| 173,250
|
HLI Operating Co., Inc., 10.5%, 6/15/2010
| 50,000
| 52,500
|
International Game Technology, 8.375%, 5/15/2009
| 335,000
| 410,980
|
Intrawest Corp., 10.5%, 2/1/2010
| 145,000
| 155,875
|
Jacobs Entertainment Co., 11.875%, 2/1/2009
| 85,000
| 90,419
|
Jacuzzi Brands, Inc., 9.625%, 7/1/2010
| 75,000
| 75,000
|
Jafra Cosmetics International, Inc., 10.75%, 5/15/2011
| 80,000
| 83,600
|
Kellwood Co., 7.625%, 10/15/2017
| 80,000
| 77,200
|
Kindercare Learning Centers, Inc., 9.5%, 2/15/2009
| 50,000
| 50,375
|
Laidlaw International, Inc., 10.75%, 6/15/2011
| 95,000
| 99,750
|
Lin Television Corp., 6.5%, 5/15/2013
| 65,000
| 64,838
|
MGM Mirage, Inc., 9.75%, 6/1/2007
| 330,000
| 374,550
|
MTR Gaming Group, 9.75%, 4/1/2010
| 50,000
| 51,500
|
Park Place Entertainment Corp.:
|
|
|
7.0%, 4/15/2013
| 50,000
| 53,500
|
8.875%, 9/15/2008
| 2,020,000
| 2,227,050
|
PRIMEDIA, Inc., 7.625%, 4/1/2008
| 150,000
| 151,500
|
Remington Arms Co., 10.5%, 2/1/2011
| 95,000
| 99,275
|
Schuler Homes, Inc.:
|
|
|
9.375%, 7/15/2009
| 495,000
| 559,350
|
10.5%, 7/15/2011
| 160,000
| 184,000
|
Scientific Games Corp., 12.5%, 8/15/2010
| 72,000
| 82,800
|
Service Corp. International, 7.7%, 4/15/2009
| 85,000
| 86,700
|
Sinclair Broadcast Group, Inc.:
|
|
|
8.0%, 3/15/2012
| 105,000
| 111,038
|
8.75%, 12/15/2011
| 360,000
| 395,100
|
Six Flags, Inc., 8.875%, 2/1/2010
| 200,000
| 192,000
|
Sonic Automotive, Inc., 11.0%, 8/1/2008
| 215,000
| 227,900
|
Time Warner, Inc., 8.11%, 8/15/2006
| 1,250,000
| 1,437,110
|
Transwestern Publishing, Series F, 9.625%, 11/15/2007
| 225,000
| 234,563
|
Unisys Corp., 6.875%, 3/15/2010
| 165,000
| 171,600
|
Venetian Casino Resort LLC, 11.0%, 6/15/2010
| 50,000
| 56,375
|
Wheeling Island Gaming, Inc., 10.125%, 12/15/2009
| 190,000
| 191,188
|
Worldspan LP/ WS Finance Corp., 9.625%, 6/15/2011
| 115,000
| 118,450
|
| 14,753,367 |
Consumer Staples 0.4%
|
Agrilink Foods, Inc., 11.875%, 11/1/2008
| 185,000
| 199,338
|
Elizabeth Arden, Inc., Series B, 11.75%, 2/1/2011
| 210,000
| 234,150
|
Merisant Corp., 9.5%, 7/15/2013
| 60,000
| 60,647
|
Salton, Inc., 10.75%, 12/15/2005
| 65,000
| 65,325
|
Stater Brothers Holdings, Inc., 10.75%, 8/15/2006
| 190,000
| 199,975
|
Swift & Co., 10.125%, 10/1/2009
| 95,000
| 98,800
|
| 858,235 |
Energy 5.6%
|
ANR Pipeline Co., 8.875%, 3/15/2010
| 55,000
| 60,088
|
Avista Corp., 9.75%, 6/1/2008
| 700,000
| 812,000
|
Chesapeake Energy Corp., 8.125%, 4/1/2011
| 50,000
| 53,875
|
Citgo Petroleum Corp., 11.375%, 2/1/2011
| 470,000
| 524,050
|
Devon Energy Corp., 7.95%, 4/15/2032
| 1,600,000
| 2,059,491
|
Devon Financing Corp., 7.875%, 9/30/2031
| 430,000
| 546,018
|
FirstEnergy Corp., Series B, 6.45%, 11/15/2011
| 2,000,000
| 2,194,720
|
Frontier Escrow Corp., 8.0%, 4/15/2013
| 50,000
| 52,250
|
Gulfterra Energy Partner, 6.25%, 6/1/2010
| 50,000
| 50,000
|
Houston Exploration Co., 7.0%, 6/15/2013
| 100,000
| 103,250
|
Key Energy Services, Inc., 6.375%, 5/1/2013
| 50,000
| 50,750
|
Louis Dreyfus Natural Gas Corp., 9.25%, 6/15/2004
| 2,000,000
| 2,122,286
|
National Fuel Gas Co., 6.7%, 11/21/2011
| 1,000,000
| 1,138,848
|
Newpark Resources, Inc., 8.625%, 12/15/2007
| 90,000
| 92,250
|
Panhandle Eastern Pipe Line:
|
|
|
7.2%, 8/15/2024
| 60,000
| 61,800
|
7.95%, 3/15/2023
| 50,000
| 51,750
|
Parker Drilling Co., Series B, 10.125%, 11/15/2009
| 185,000
| 199,800
|
Pioneer Natural Resources Co.:
|
|
|
7.5%, 4/15/2012
| 105,000
| 120,249
|
9.625%, 4/1/2010
| 250,000
| 309,968
|
Southern Natural Gas, 8.875%, 3/15/2010
| 80,000
| 87,200
|
Stone Energy Corp., 8.75%, 9/15/2007
| 150,000
| 155,625
|
Trico Marine Services, 8.875%, 5/15/2012
| 100,000
| 86,000
|
Westar Energy, Inc., 7.875%, 5/1/2007
| 230,000
| 257,025
|
Westport Resources Corp., 8.25%, 11/1/2011
| 390,000
| 427,050
|
Williams Cos., Inc., 8.625%, 6/1/2010
| 165,000
| 172,425
|
Williams Holdings of Delaware, Inc., 6.5%, 12/1/2008
| 50,000
| 48,750
|
| 11,837,518 |
Financials 9.6%
|
Agfirst Farm Credit Bank, 8.393%, 12/15/2016
| 1,170,000
| 1,404,156
|
Ahold Finance USA, Inc., 6.25%, 5/1/2009
| 250,000
| 233,125
|
Americredit Corp.:
|
|
|
9.25%, 5/1/2009
| 90,000
| 85,050
|
9.875%, 4/15/2006
| 130,000
| 127,400
|
Arch Western Finance, 6.75%, 7/1/2013
| 95,000
| 97,375
|
ASIF Global Finance, 4.9%, 1/17/2013
| 1,635,000
| 1,702,593
|
Bank of America Corp., 7.125%, 3/1/2009
| 1,100,000
| 1,311,720
|
CBRE Escrow, Inc., 9.75%, 5/15/2010
| 140,000
| 147,175
|
CitiFinancial, 8.7%, 6/15/2009
| 1,000,000
| 1,274,753
|
Citigroup, Inc., 6.875%, 2/15/2098
| 1,675,000
| 2,007,965
|
Enterprise Rent-A-Car USA Finance Co., 7.35%, 6/15/2008
| 1,975,000
| 2,311,321
|
Farmers Exchange Capital, 7.2%, 7/15/2048
| 50,000
| 41,228
|
Farmers Insurance Exchange, 8.625%, 5/1/2024
| 120,000
| 117,000
|
Ford Motor Credit Co., 6.875%, 2/1/2006
| 860,000
| 912,116
|
General Electric Capital Corp., 6.0%, 6/15/2012
| 235,000
| 265,260
|
Household Finance Corp., 6.5%, 1/24/2006
| 475,000
| 526,843
|
IOS Capital LLC, 7.25%, 6/30/2008
| 70,000
| 68,425
|
LaBranche & Co., Inc., 12.0%, 3/2/2007
| 360,000
| 410,400
|
LNR Property Corp., 7.625%, 7/15/2013
| 125,000
| 126,429
|
Ohio National Life Insurance, 8.5%, 5/15/2026
| 215,000
| 263,815
|
PEI Holdings, Inc., 11.0%, 3/15/2010
| 105,000
| 115,763
|
Pemex Project Funding Master Trust, 8.5%, 2/15/2008
| 1,896,000
| 2,213,580
|
PNC Funding Corp., 5.75%, 8/1/2006
| 895,000
| 987,494
|
R.H. Donnelly Finance Corp., 10.875%, 12/15/2012
| 115,000
| 133,975
|
TCI Communication Finance, 9.65%, 3/31/2027
| 50,000
| 59,500
|
Thornburg Mortgage, Inc., 8.0%, 5/15/2013
| 250,000
| 255,000
|
Verizon Global Funding Corp., 7.25%, 12/1/2010
| 1,650,000
| 1,981,543
|
Wachovia Corp., 7.5%, 7/15/2006
| 155,000
| 179,355
|
Wells Fargo & Co., 7.55%, 6/21/2010
| 800,000
| 986,181
|
| 20,346,540 |
Health Care 1.2%
|
AmerisourceBergen Corp., 7.25%, 11/15/2012
| 250,000
| 271,250
|
Health Care Service Corp., 7.75%, 6/15/2011
| 1,500,000
| 1,788,912
|
Sybron Dental Specialties, 8.125%, 6/15/2012
| 50,000
| 52,750
|
Tenet Healthcare Corp.:
|
|
|
6.375%, 12/1/2011
| 210,000
| 194,250
|
7.375%, 12/1/2011
| 250,000
| 241,250
|
| 2,548,412 |
Industrials 5.1%
|
Allied Waste North America, Inc.:
|
|
|
7.875%, 4/15/2013
| 100,000
| 104,625
|
Series B, 8.5%, 12/1/2008
| 330,000
| 354,750
|
9.25%, 9/1/2012
| 75,000
| 82,688
|
Series B, 10.0%, 8/1/2009
| 485,000
| 515,313
|
Ami Semiconductor, Inc., 10.75%, 2/1/2013
| 50,000
| 56,500
|
AutoNation, Inc., 9.0%, 8/1/2008
| 340,000
| 377,400
|
Avondale Mills, Inc., 10.25%, 7/1/2013
| 190,000
| 190,000
|
Browning-Ferris Industries:
|
|
|
7.4%, 9/15/2035
| 50,000
| 46,000
|
9.25%, 5/1/2021
| 50,000
| 54,563
|
Collins & Aikman Floor Cover, Series B, 9.75%, 2/15/2010
| 65,000
| 67,925
|
Corrections Corp. of America:
|
|
|
7.5%, 5/1/2011
| 50,000
| 52,250
|
9.875%, 5/1/2009
| 135,000
| 150,694
|
CP Ships Ltd., 10.375%, 7/15/2012
| 170,000
| 189,763
|
Dana Corp.:
|
|
|
7.0%, 3/1/2029
| 215,000
| 187,319
|
10.125%, 3/15/2010
| 185,000
| 203,963
|
Delta Airlines, Inc., Series 02-1, 6.417%, 7/2/2012
| 1,510,000
| 1,633,677
|
Esterline Technologies, 7.75%, 6/15/2013
| 75,000
| 76,875
|
Flextronics International Ltd., 6.5%, 5/15/2013
| 305,000
| 293,563
|
Golden State Petroleum Transportation, 8.04%, 2/1/2019
| 125,000
| 120,316
|
Hercules, Inc., 11.125%, 11/15/2007
| 475,000
| 553,375
|
Hornbeck Offshore Services, Inc., 10.625%, 8/1/2008
| 60,000
| 66,150
|
ISP Chemco, Inc., Series B, 10.25%, 7/1/2011
| 285,000
| 322,050
|
ISP Holdings, Inc., Series B, 10.625%, 12/15/2009
| 50,000
| 53,125
|
Kansas City Southern:
|
|
|
7.5%, 6/15/2009
| 265,000
| 274,606
|
9.5%, 10/1/2008
| 145,000
| 161,131
|
Lyondell Chemicals Co., 10.5%, 6/1/2013
| 50,000
| 50,000
|
Meritage Corp., 9.75%, 6/1/2011
| 50,000
| 55,250
|
Metaldyne Corp., 11.0%, 6/15/2012
| 65,000
| 53,950
|
Millennium America, Inc.:
|
|
|
7.0%, 11/15/2006
| 715,000
| 722,150
|
7.625%, 11/15/2026
| 70,000
| 65,100
|
9.25%, 6/15/2008
| 150,000
| 161,250
|
Mobile Mini, Inc., 9.5%, 7/1/2013
| 115,000
| 119,025
|
Overseas Shipholding Group, 8.75%, 12/1/2013
| 75,000
| 80,250
|
Raytheon Co., 8.2%, 3/1/2006
| 970,000
| 1,119,146
|
Systems 2001 Asset Trust LLC "G", Series 2001, 6.664%, 9/15/2013
| 1,657,537
| 1,866,024
|
Tech Olympic USA, Inc., 10.375%, 7/1/2012
| 80,000
| 85,200
|
Xerox Corp., 9.75%, 1/15/2009
| 275,000
| 309,375
|
| 10,875,341 |
Information Technology 0.1%
|
Cooperative Computing, 10.5%, 6/15/2011
| 70,000
| 71,750
|
Titan Corp., 8.0%, 5/15/2011
| 105,000
| 111,300
|
| 183,050 |
Materials 2.7%
|
Abitibi-Consolidated Finance, 7.875%, 8/1/2009
| 165,000
| 183,136
|
ARCO Chemical Co.:
|
|
|
9.8%, 2/1/2020
| 305,000
| 268,400
|
10.25%, 11/1/2010
| 75,000
| 72,000
|
Caraustar Industries, Inc., 9.875%, 4/1/2011
| 220,000
| 234,300
|
Cascades, Inc., 7.25%, 2/15/2013
| 250,000
| 263,125
|
CBD Media/CBD Finance, 8.625%, 6/1/2011
| 80,000
| 82,400
|
Dow Chemical Co., 7.0%, 8/15/2005
| 425,000
| 464,283
|
Equistar Chemical/ Funding Corp., 10.625%, 5/1/2011
| 70,000
| 71,750
|
Equistar Chemicals LP, 8.75%, 2/15/2009
| 1,020,000
| 989,400
|
Fibermark, Inc., 10.75%, 4/15/2011
| 65,000
| 65,000
|
Georgia-Pacific Corp.:
|
|
|
7.7%, 6/15/2015
| 810,000
| 779,625
|
8.0%, 1/15/2014
| 50,000
| 50,938
|
8.875%, 2/1/2010
| 180,000
| 195,300
|
8.875%, 5/15/2031
| 155,000
| 151,900
|
9.375%, 2/1/2013
| 120,000
| 132,300
|
Louisiana Pacific Corp., 10.875%, 11/15/2008
| 80,000
| 91,200
|
Owens-Brockway Glass Container, 8.25%, 5/15/2013
| 165,000
| 172,425
|
Owens-Illinois, Inc., 7.5%, 5/15/2010
| 55,000
| 53,900
|
Texas Industries, Inc., 10.25%, 6/15/2011
| 185,000
| 193,325
|
Toll Corp.:
|
|
|
8.0%, 5/1/2009
| 280,000
| 299,950
|
8.25%, 2/1/2011
| 50,000
| 55,750
|
United States Steel LLC, 9.75%, 5/15/2010
| 70,000
| 71,050
|
Weyerhaeuser Co., 5.95%, 11/1/2008
| 685,000
| 766,405
|
| 5,707,862 |
Telecommunication Services 1.2%
|
Continental Cable, 9.0%, 9/1/2008
| 750,000
| 932,147
|
DirecTV Holdings, 8.375%, 3/15/2013
| 110,000
| 122,650
|
Nextel Communications, Inc., 9.5%, 2/1/2011
| 355,000
| 393,163
|
Qwest Services Corp., 5.625%, 11/15/2008
| 515,000
| 494,400
|
Shaw Communications, Inc., 8.25%, 4/11/2010
| 190,000
| 211,375
|
Sprint Capital Corp., 8.375%, 3/15/2012
| 215,000
| 257,423
|
Triton PCS, Inc., 8.5%, 6/1/2013
| 60,000
| 64,500
|
US West Communication, Inc., 7.25%, 9/15/2025
| 80,000
| 75,200
|
| 2,550,858 |
Utilities 8.5%
|
AEP Texas North Co., 5.5%, 3/1/2013
| 2,000,000
| 2,134,142
|
AES Corp., 9.0%, 5/15/2015
| 50,000
| 52,250
|
American Electric Power, 6.125%, 5/15/2006
| 2,000,000
| 2,192,304
|
Cincinnati Gas & Electric Co., Series A, 5.4%, 6/15/2033
| 700,000
| 672,931
|
CMS Energy Corp., 8.5%, 4/15/2011
| 190,000
| 198,313
|
Consolidated Edison, Inc., 8.125%, 5/1/2010
| 1,115,000
| 1,410,006
|
Consumers Energy Co., 6.25%, 9/15/2006
| 1,500,000
| 1,665,366
|
Duke Energy Corp., Series D, 7.375%, 3/1/2010
| 1,500,000
| 1,761,735
|
El Paso Production Holding Corp., 7.75%, 6/1/2013
| 205,000
| 204,488
|
Entergy Gulf States, 6.2%, 7/1/2033
| 1,600,000
| 1,555,262
|
MSW Energy Holdings/Finance, 8.5%, 9/1/2010
| 70,000
| 71,925
|
Nevada Power Co., Series E, 10.875%, 10/15/2009
| 50,000
| 56,000
|
PG&E Corp., 6.875%, 7/15/2008
| 95,000
| 98,563
|
Progress Energy, Inc., 6.75%, 3/1/2006
| 1,050,000
| 1,166,935
|
Psi Energy, Inc., 8.85%, 1/15/2022
| 1,225,000
| 1,703,314
|
Reliant Resources, Inc.:
|
|
|
9.25%, 7/15/2010
| 95,000
| 96,010
|
9.5%, 7/15/2013
| 50,000
| 50,625
|
TNP Enterprises, Inc., Series B, 10.25%, 4/1/2010
| 280,000
| 280,000
|
Western Resources, Inc., 9.75%, 5/1/2007
| 280,000
| 313,600
|
Xcel Energy, Inc., 7.0%, 12/1/2010
| 2,000,000
| 2,287,320
|
| 17,971,089 |
Total Corporate Bonds (Cost $81,842,028)
| 87,632,272 |
|
Foreign Bonds - US$ Denominated 6.1% |
Bluewater Finance Ltd., 10.25%, 2/15/2012
| 50,000
| 49,500
|
British Sky Broadcasting PLC, 6.875%, 2/23/2009
| 800,000
| 904,000
|
Burns, Philp & Co., Ltd., 9.5%, 11/15/2010
| 50,000
| 52,500
|
Conproca SA de CV, 12.0%, 6/16/2010
| 100,000
| 130,000
|
Crown Euro Holdings SA, 10.875%, 3/1/2013
| 55,000
| 59,950
|
Deutsche Telekom International Finance BV, 8.25%, 6/15/2005
| 1,500,000
| 1,672,692
|
Euramax International PLC, 11.25%, 10/1/2006
| 115,000
| 118,450
|
Fage Dairy Industry SA, 9.0%, 2/1/2007
| 140,000
| 138,600
|
Federative Republic of Brazil, 8.0%*, 4/15/2014
| 110,827
| 97,805
|
France Telecom, 9.25%*, 3/1/2011
| 245,000
| 308,348
|
Grupo Elektra SA de CV, 12.0%, 4/1/2008
| 115,000
| 115,575
|
IPSCO, Inc., 8.75%, 6/1/2013
| 50,000
| 51,000
|
LeGrand SA, 8.5%, 2/15/2025
| 70,000
| 72,100
|
Luscar Coal Ltd., 9.75%, 10/15/2011
| 120,000
| 137,100
|
Norske Skog Canada, 8.625%, 6/15/2011
| 100,000
| 104,500
|
OAO Gazprom, 9.625%, 3/1/2013
| 125,000
| 137,813
|
PacifiCorp Australia LLC, 6.15%, 1/15/2008
| 1,000,000
| 1,129,182
|
PTC International Finance II SA, 11.25%, 12/1/2009
| 110,000
| 124,300
|
Royal Bank of Scotland, 9.118%, 3/31/2049
| 1,200,000
| 1,547,330
|
Royal Caribbean Cruises Ltd., 7.25%, 3/15/2018
| 110,000
| 99,275
|
Sappi Papier Holding AG, 7.5%, 6/15/2032
| 470,000
| 552,627
|
Stena AB:
|
|
|
8.75%, 6/15/2007
| 95,000
| 97,850
|
9.625%, 12/1/2012
| 165,000
| 181,294
|
Telus Corp., 8.0%, 6/1/2011
| 425,000
| 490,875
|
Tembec Industries, Inc.:
|
|
|
8.5%, 2/1/2011
| 215,000
| 212,850
|
8.625%, 6/30/2009
| 155,000
| 153,063
|
TFM SA de CV:
|
|
|
11.75%*, 6/15/2009
| 310,000
| 316,200
|
10.25%, 6/15/2007
| 165,000
| 168,713
|
12.5%, 6/15/2012
| 175,000
| 189,000
|
Tyco International Group SA:
|
|
|
5.8%, 8/1/2006
| 1,240,000
| 1,280,300
|
6.125%, 11/1/2008
| 575,000
| 600,875
|
6.375%, 2/15/2006
| 650,000
| 677,625
|
6.375%, 10/15/2011
| 230,000
| 242,650
|
Vicap SA, 11.375%, 5/15/2007
| 235,000
| 211,500
|
Vivendi Universal SA, 9.25%, 4/15/2010
| 445,000
| 506,188
|
Yell Finance BV, Step-up Coupon, 0% to 8/1/2006, 13.5% to 8/1/2011
| 55,000
| 47,025
|
Total Foreign Bonds - US$ Denominated (Cost $11,916,007)
| 12,978,655 |
|
Asset Backed 11.9% |
Automobile Receivables 2.3%
|
AmeriCredit Automobile Receivables Trust "A4",
Series 2001-C, 5.01%, 7/14/2008
| 1,580,000
| 1,655,155
|
MMCA Automobile Trust "A4", Series 2002-2, 4.3%, 3/15/2010
| 1,610,000
| 1,637,035
|
WFS Financial Owner Trust "A4", Series 2002-2, 4.5%, 2/20/2010
| 1,540,000
| 1,619,820
|
| 4,912,010 |
Credit Card Receivables 3.8%
|
Bank One Issuance Trust "A1", Series 2002-A1, 1.25%*, 1/15/2010
| 8,000,000
| 8,012,478 |
Home Equity Loans 2.7%
|
Asset Backed Securities Corp. Home Equity "A", Series 2003-HE2, 7.0%, 2/25/2018
| 848,013
| 831,053
|
Countrywide Home Loans "2002-3", Series NIM, 9.0%, 9/25/2032
| 524,067
| 526,746
|
Renaissance NIM Trust "NOTE", Series 2002-C, 8.353%, 12/25/2032
| 585,832
| 585,832
|
Residential Asset Securities Corp. "AI6", Series 2000-KS1, 7.905%, 2/25/2031
| 1,681,888
| 1,822,675
|
Southern Pacific Secured Assets Corp. "A8", Series 1998-2, 6.37%, 7/25/2029
| 1,917,452
| 2,007,163
|
| 5,773,469 |
Miscellaneous 3.1%
|
Detroit Edison Securitization Funding LLC "A6", Series 2001-1, 6.62%, 3/1/2016
| 1,520,000
| 1,810,868
|
PSE&G Transition Funding LLC "A8", Series 2001-1, 6.89%, 12/15/2017
| 2,100,000
| 2,555,785
|
US Airways Aircraft Certificate Owner Trust "C", Series 2003-1A, 5.551%, 9/20/2022
| 2,000,000
| 2,096,000
|
| 6,462,653 |
Total Asset Backed (Cost $24,559,807)
| 25,160,610 |
|
US Treasury Obligations 18.1% |
US Treasury Bond:
|
|
|
5.375%, 2/15/2031
| 210,000
| 236,472
|
6.0%, 2/15/2026
| 359,000
| 429,131
|
8.125%, 8/15/2021
| 6,035,000
| 8,824,775
|
10.75%, 8/15/2005
| 1,605,000
| 1,920,169
|
US Treasury Note:
|
|
|
6.125%, 8/15/2007
| 950,000
| 1,098,920
|
7.0%, 7/15/2006
| 22,200,000
| 25,658,338
|
US Treasury STRIPS, Principal Only, 3.88%**, 5/15/2013
| 120,000
| 82,115
|
Total US Treasury Obligations (Cost $37,833,129)
| 38,249,920 |
|
US Government Agency Pass-Thrus 37.6% |
Federal Home Loan Mortgage Corp., 6.0%, 5/1/2017
| 5,989,611
| 6,228,776
|
Federal National Mortgage Association:
|
|
|
4.5%, 7/1/2018 (c)
| 22,000,000
| 22,440,000
|
5.0% with various maturities until 7/1/2033 (c)
| 27,500,000
| 28,157,657
|
5.5%, 7/1/2033 (c)
| 9,000,000
| 9,300,942
|
6.0%, 1/1/2023
| 1,582,599
| 1,650,143
|
6.061%, 5/1/2012
| 1,484,822
| 1,704,724
|
6.5% with various maturities until 7/1/2032
| 5,751,868
| 6,021,687
|
6.53%, 2/1/2016
| 1,664,556
| 1,934,967
|
7.5%, 2/1/2033
| 950,271
| 1,009,662
|
9.0%, 5/1/2009
| 1,060,357
| 1,157,198
|
Total US Government Agency Pass-Thrus (Cost $79,530,103)
| 79,605,756 |
Collateralized Mortgage Obligations 3.4% |
ABM AMRO Mortgage Corp., "A7", Series 1999-6, 7.0%, 9/25/2029
| 940,934
| 943,593
|
Federal Home Loan Mortgage Corp.:
|
|
|
"CH", Series 2390, 5.5%, 12/15/2016
| 590,000
| 624,678
|
"LA", Series 1343, 8.0%, 8/15/2022
| 922,559
| 973,294
|
Federal National Mortgage Association:
|
|
|
"QC", Series 2002-11, 5.5%, 3/15/2017
| 855,000
| 904,276
|
"A5", Series 2002-W4, 7.5%, 5/25/2042
| 1,252,230
| 1,397,410
|
"1A3", Series 2003-W3, 7.5%, 8/25/2042
| 527,294
| 588,428
|
Structured Asset Securities Corp., "2A1", Series 2003-1, 6.0%, 2/25/2018
| 852,545
| 879,869
|
Washington Mutual, "A22", Series 2001-S9, 6.75%, 9/25/2031
| 757,080
| 773,062
|
Total Collateralized Mortgage Obligations (Cost $6,994,767)
| 7,084,610 |
|
Municipal Investments 6.0% |
Fultondale, AL, Core City GO, 6.4%, 2/1/2022 (b)
| 1,340,000
| 1,520,913
|
Guin, AL, County GO, Series B, 8.25%, 6/1/2027 (b)
| 1,515,000
| 1,843,043
|
Idaho, Higher Education Revenue, Nazarene College Facilities, 8.34%, 11/1/2016 (d)
| 1,000,000
| 1,156,370
|
Illinois, State GO, General Obligation, 4.95%, 6/1/2023
| 665,000
| 663,364
|
Pell City, AL, Core City GO, 5.4%, 8/1/2017 (b)
| 1,385,000
| 1,412,146
|
Reeves County, TX, County (GO) Lease, Certificate of Participation, Series IBC, 7.25%, 6/1/2011 (b)
| 1,200,000
| 1,353,204
|
St. Paul, MN, Sales & Special Tax Revenue, Sales Tax Revenue, Series A, 6.94%, 11/1/2019 (b)
| 2,000,000
| 2,221,280
|
Texas, Multi Family Housing Revenue, Housing & Community Affairs Multi-Family, 6.85%, 12/1/2020 (b)
| 1,500,000
| 1,644,450
|
Washington, Industrial Development Revenue, 4.0%, 10/1/2012 (b)
| 915,000
| 907,268
|
Total Municipal Investments (Cost $12,520,188)
| 12,722,038 |
|
Convertible Bonds 0.1% |
DIMON, Inc., 6.25%, 3/31/2007 (Cost $96,088)
| 110,000
| 102,300 |
|
Shares
| Value ($) |
|
|
Preferred Stocks 0.0% |
TNP Enterprises, Inc. (Cost $37,250)
| 500
| 37,500 |
|
Convertible Preferred Stocks 0.0% |
Hercules Trust II (Cost $55,060)
| 90
| 57,540 |
|
Repurchase Agreements 4.1% |
State Street Bank, 1.1% dated 6/30/2003 to be repurchased at $8,588,262 on 7/1/2003 (Cost $8,588,000) (e)
| 8,588,000
| 8,588,000 |
| % of Net Assets | Value ($) |
|
|
Total Investment Portfolio (Cost $263,972,427) (a)
| 128.7 | 272,219,201 |
Other Assets and Liabilities, Net
| (28.7) | (60,733,938) |
Net Assets - 100.0%
| 100.0 | 211,485,263 |
* Floating rate securities are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate. These securities are shown at their current rate as of June 30, 2003.** Bond equivalent yield to maturity; not a coupon rate.(a) The cost for federal income tax purposes was $264,491,526. At June 30, 2003, net unrealized appreciation for all securities based on tax cost was $7,727,675. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $8,534,948 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $807,273.(b) Bond is insured by one of these companies:AMBAC
| AMBAC Assurance Corp.
|
FSA
| Financial Security Assurance
|
MBIA
| Municipal Bond Investors Assurance
|
RADIAN
| RADIAN Asset Assurance Incorporated
|
(c) Mortgage dollar rolls included.(d) Security incorporates a letter of credit or line of credit from a major bank.(e) Repurchase agreements are fully collateralized by US Treasury and Government agency securities.Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in the investment portfolio.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities as of June 30, 2003 (Unaudited) |
Assets
|
Investments in securities, at value (cost $263,972,427)
| $ 272,219,201 |
Cash
| 701 |
Receivable for investments sold
| 2,115,611 |
Interest receivable
| 3,104,699 |
Dividends receivable
| 1,463 |
Other assets
| 1,844 |
Total assets
| 277,443,519 |
Liabilities
|
Payable for investments purchased
| 5,223,148 |
Payable for investments purchased - mortgage dollar rolls
| 60,399,679 |
Deferred mortgage dollar roll income
| 86,809 |
Accrued management and investment advisory fee
| 82,115 |
Other accrued expenses and payables
| 166,505 |
Total liabilities
| 65,958,256 |
Net assets, at value
| $ 211,485,263 |
Net Assets
|
Net assets consist of:
Undistributed net investment income
| 2,752,209 |
Net unrealized appreciation (depreciation) on investments
| 8,246,774 |
Accumulated net realized gain (loss)
| (2,094,727) |
Paid-in capital
| 202,581,007 |
Net assets, at value
| $ 211,485,263 |
Net Asset Value per share ($211,485,263 / 10,369,029 shares of common stock outstanding, $.01 par value, 30,000,000 shares authorized)
| $ 20.40 |
The accompanying notes are an integral part of the financial statements.
Statement of Operations for the six months ended June 30, 2003 (Unaudited) |
Investment Income
|
Income:
Interest
| $ 5,385,756 |
Mortgage dollar roll income
| 1,149,521 |
Dividends
| 2,925 |
Total Income
| 6,538,202 |
Expenses:
Management and investment advisory fee
| 468,235 |
Services to shareholders
| 20,218 |
Custodian fees
| 11,164 |
Auditing
| 27,345 |
Legal
| 10,897 |
Directors' fees and expenses
| 37,957 |
Reports to shareholders
| 34,764 |
NYSE listing fee
| 16,745 |
Other
| 16,562 |
Total expenses
| 643,887 |
Net investment income
| 5,894,315 |
Realized and Unrealized Gain (Loss) on Investment Transactions
|
Net realized gain (loss) from investments
| 5,842,123 |
Net unrealized appreciation (depreciation) during the period on investments
| 1,524,832 |
Net gain (loss) on investment transactions
| 7,366,955 |
Net increase (decrease) in net assets resulting from operations
| $ 13,261,270 |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets |
Increase (Decrease) in Net Assets
| Six Months Ended June 30, 2003 (Unaudited) | Year Ended December 31, 2002 |
Operations:
Net investment income
| $ 5,894,315 | $ 12,559,369 |
Net realized gain (loss) on investment transactions
| 5,842,123 | (108,172) |
Net unrealized appreciation (depreciation) on investment transactions during the period
| 1,524,832 | 5,726,881 |
Net increase (decrease) in net assets resulting from operations
| 13,261,270 | 18,178,078 |
Dividends to shareholders from net investment income
| (3,210,798) | (13,730,435) |
Fund share transactions:
Reinvestment of dividends from net investment income
| 230,188 | 1,277,976 |
Net increase (decrease) in net assets from Fund share transactions
| 230,188 | 1,277,976 |
Increase (decrease) in net assets
| 10,280,660 | 5,725,619 |
Net assets at beginning of period
| 201,204,603 | 195,478,984 |
Net assets at end of period (including undistributed net investment income of $2,752,209 and $68,692, respectively)
| $ 211,485,263 | $ 201,204,603 |
Other Information
|
Shares outstanding at beginning of period
| 10,357,412 | 10,289,119 |
Shares issued to shareholders in reinvestment of dividends from net investment income
| 11,617 | 68,293 |
Net increase (decrease) in Fund shares
| 11,617 | 68,293 |
Shares outstanding at end of period
| 10,369,029 | 10,357,412 |
The accompanying notes are an integral part of the financial statements.
Statement of Cash Flows for the six months ended June 30, 2003 (Unaudited) |
Cash flows from operating activities
| |
Investment income received
| $ 5,256,960 |
Mortgage dollar roll income
| 1,149,521 |
Payment of operating expenses
| (635,921) |
Proceeds from sale and maturities of investments
| 880,434,019 |
Purchases of investments
| (882,182,454) |
Net (purchases) sales of short-term investments
| (1,910,000) |
Cash provided (used) by operating activities
| $ 2,112,125 |
Cash flows from financing activities
| |
Net increase (decrease) in payable for investments purchased - mortgage dollar rolls
| $ 868,273 |
Distributions paid (net of reinvestment of distributions)
| (2,980,610) |
Cash provided (used) by financing activities
| (2,112,337) |
Increase (decrease) in cash
| (212) |
Cash at beginning of period
| 913 |
Cash at end of period | $ 701 |
Reconciliation of net increase (decrease) in net assets from operations to cash provided (used) by operating activities
|
Net increase (decrease) in net assets resulting from operations
| $ 13,261,270 |
Net (increase) decrease in cost of investments
| (13,777,701) |
(Increase) decrease in dividends and interest receivable
| (626,702) |
(Increase) decrease in other assets
| (1,844) |
Increase (decrease) in deferred mortgage dollar roll income
| (23,094) |
(Increase) decrease in receivable for investments sold
| (1,897,205) |
Increase (decrease) in payable for investments purchased
| 5,169,435 |
Increase (decrease) in accrued expenses and payables
| 7,966 |
Cash provided (used) by operating activities
| $ 2,112,125 |
Years Ended December 31, | 2003a | 2002 | 2001b | 2000 | 1999 | 1998 |
Selected Per Share Data
|
Net asset value, beginning of period
| $ 19.43 | $ 19.00 | $ 18.83 | $ 18.37 | $ 19.93 | $ 20.29 |
Income (loss) from investment operations:
Incomec
| .63 | 1.36 | 1.45 | 1.48 | 1.49 | 1.51 |
Operating expensesc
| (.06) | (.14) | (.14) | (.13) | (.14) | (.14) |
Net investment incomec
| .57 | 1.22 | 1.31 | 1.35 | 1.35 | 1.37 |
Net realized and unrealized gain (loss) on investment transactions
| .71 | .54 | .20 | .46 | (1.55) | (.34) |
Total from investment operations | 1.28 | 1.76 | 1.51 | 1.81 | (.20) | 1.03 |
Less distributions from:
Net investment income
| (.31) | (1.33) | (1.34) | (1.35) | (1.36) | (1.37) |
Net realized gains on investment transactions
| - | - | - | - | - | (.02) |
Total distributions | (.31) | (1.33) | (1.34) | (1.35) | (1.36) | (1.39) |
Net asset value, end of period
| $ 20.40 | $ 19.43 | $ 19.00 | $ 18.83 | $ 18.37 | $ 19.93 |
Per share market value, end of period
| $ 19.65 | $ 19.02 | $ 18.53 | $ 17.38 | $ 15.50 | $ 19.75 |
Price range on New York Stock Exchange for each share of Common Stock outstanding during the period (Unaudited):
High ($)
| 20.45 | 19.67 | 19.95 | 17.38 | 19.94 | 20.38 |
Low ($)
| 19.00 | 17.91 | 17.65 | 15.06 | 15.06 | 18.75 |
Total Return
|
Based on market value (%)d
| 4.93** | 10.12 | 14.57 | 21.65 | (14.90) | 8.74 |
Based on net asset value (%)d
| 6.58** | 9.71 | 8.49 | 11.21 | (.05) | 5.46 |
Ratios to Average Net Assets and Supplemental Data
|
Net assets, end of period ($ millions)
| 211 | 201 | 196 | 193 | 189 | 205 |
Ratio of expenses (%)
| .63* | .72 | .71 | .69 | .70 | .70 |
Ratio of net investment income (%)
| 5.77* | 6.36 | 6.78 | 7.32 | 7.01 | 6.83 |
Portfolio turnover rate (%)
| 429* | 259e | 143e | 131e | 82e | 50 |
a For the six months ended June 30, 2003 (Unaudited).b As required, effective January 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premiums on debt securities. In addition, paydowns on mortgage-backed securities which were included in realized gain/loss on investment transactions prior to January 1, 2001 are included as interest income. The effect of this change for the period ended December 31, 2001 was to decrease net investment income by $0.03, increase net realized and unrealized gains and losses per share by $0.03, and decrease the ratio of net investment income to average net assets from 6.92% to 6.78%. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation.c Based on average shares outstanding during the period.d Total return based on net asset value reflects changes in the Fund's net asset value during the period. Total return based on market value reflects changes in market value. Each figure includes reinvestment of dividends. These figures will differ depending upon the level of any discount from or premium to net asset value at which the Fund's shares trade during the period.e The portfolio turnover rates excluding mortgage dollar roll transactions are stated in the Financial Highlights. The portfolio turnover rates including mortgage dollar roll transactions were 726%, 520%, 356%, 335%, 209% and 218%, for the six months ended June 30, 2003 and the periods ended December 31, 2002, December 31, 2001, December 31, 2000, December 31, 1999 and December 31, 1998, respectively.* Annualized** Not annualizedNotes to Financial Statements (Unaudited) |
|
|
A. Significant Accounting Policies
Montgomery Street Income Securities, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, (the "1940 Act"), as a closed-end, diversified management investment company.
The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements.
Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading. Debt securities are valued by independent pricing services approved by the Directors of the Fund. If the pricing services are unable to provide valuations, the securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from one or more broker-dealers. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes.
Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par, are valued at amortized cost.
Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Directors.
Repurchase Agreements. The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund, through its custodian or sub-custodian bank, receives delivery of the underlying securities, the amount of which at the time of purchase and each subsequent business day is required to be maintained at such a level that the market value is equal to at least the principal amount of the repurchase price plus accrued interest.
Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in which the Fund sells to a bank or broker/dealer (the "counterparty") mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities on a fixed date. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. The Fund receives compensation as consideration for entering into the commitment to repurchase. The compensation is paid in the form of a lower price for the security upon its repurchase, or alternatively, a fee. Mortgage dollar rolls may be renewed with a new sale and repurchase price and a cash settlement made at each renewal without physical delivery of the securities subject to the contract.
Mortgage dollar rolls may be treated for purposes of the 1940 Act as borrowings by the Fund because they involve the sale of a security coupled with an agreement to repurchase. A mortgage dollar roll involves costs to the Fund. For example, while the Fund receives compensation as consideration for agreeing to repurchase the security, the Fund forgoes the right to receive all principal and interest payments while the counterparty holds the security. These payments to the counterparty may exceed the compensation received by the Fund, thereby effectively charging the Fund interest on its borrowing. Further, although the Fund can estimate the amount of expected principal prepayment over the term of the mortgage dollar roll, a variation in the actual amount of prepayment could increase or decrease the cost of the Fund's borrowing.
Certain risks may arise upon entering into mortgage dollar rolls from the potential inability of counterparties to meet the terms of their commitments. Additionally, the value of such securities may change adversely before the Fund is able to repurchase them. There can be no assurance that the Fund's use of the cash that it receives from a mortgage dollar roll will provide a return that exceeds its borrowing costs.
Delayed Delivery Securities. The Fund may purchase securities with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The price of such security and the date when the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. No interest accrues to the Fund until payment takes place. At the time the Fund enters into this type of transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment.
Certain risks may arise upon entering into delayed delivery securities from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.
Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required.
At December 31, 2002, the Fund had a net tax basis capital loss carryforward of approximately $7,551,000, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2007 ($1,142,000), December 31, 2008 ($4,007,000) and December 31, 2010 ($2,402,000), the respective expiration dates, whichever occurs first.
Distribution of Income and Gains. Distributions of net investment income, if any, 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 accounting principles generally accepted in the United States of America. These differences primarily relate to investments in mortgage-backed securities, foreign-denominated securities and premium amortization on debt securities. As a result, net investment income (loss) 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.
At December 31, 2002, the Fund's components of distributable earnings (accumulated losses) on a tax basis were as follows:
Undistributed ordinary income*
| $ 178,595 |
Undistributed net long-term capital gains
| $ - |
Capital loss carryforwards
| $ (7,551,000) |
Unrealized appreciation (depreciation) on investments
| $ 6,336,214 |
In addition, the tax character of distributions paid to shareholders by the Fund were as follows:
Years Ended December 31,
| Years Ended December 31,
|
2002
| 2001
|
Distributions from ordinary income*
| $ 13,730,435 | $ 13,774,286 |
* For tax purposes short-term capital gains distributions are considered ordinary income distributions.The tax character of current distributions, if any, will be determined at the end of the current fiscal year.
Statement of Cash Flows. Information on financial transactions which have been settled through the receipt and disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows represents the cash position in the Fund's custodian bank at June 30, 2003. Significant non-cash activity from market discount accretion has been excluded from the Statement of Cash Flows.
Other. Investment transactions are accounted for on the trade date. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. All premiums and discounts, with the exception of mortgage-backed securities, are amortized/accreted for financial reporting purposes.
B. Purchases and Sales of Securities
During the six months ended June 30, 2003, purchases and sales (excluding US Treasury obligations, short-term investments and mortgage dollar roll transactions) of investment securities aggregated $420,706,081 and $431,383,910, respectively. Purchases and sales of US Treasury obligations, aggregated $105,260,921 and $89,611,923, respectively. Purchases and sales of mortgage dollar roll transactions aggregated $361,335,391 and $361,335,391, respectively.
C. Related Parties
Management and Investment Advisory Agreement. Under the Management and Investment Advisory Agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor"), the Fund agrees to pay the Advisor for the services rendered, an annual fee, payable monthly, equal to 0.50 of 1% of the value of net assets of the Fund up to and including $100 million; 0.45 of 1% of the value of the net assets of the Fund over $100 million and up to and including $150 million; 0.40% of 1% of the value of the net assets of the Fund over $150 million and up to and including $200 million; and 0.35 of 1% of the value of the net assets of the Fund over $200 million.
The Agreement also provides that the Advisor 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 Advisor.
For the six months ended June 30, 2003, the fees pursuant to the Agreement amounted to $468,235, equivalent to an effective annualized rate of 0.46% of the Fund's average monthly net assets.
Service Provider Fees. Scudder Investments Service Company ("SISC"), an affiliate of the Advisor, is the transfer, dividend-paying and shareholder service agent for the Fund. Effective January 15, 2003, pursuant to a sub-transfer agency agreement between SISC and DST Systems, Inc. ("DST"), SISC has delegated certain transfer agent and dividend paying agent functions to DST. SISC compensates DST out of shareholder servicing fee it receives from the Fund. For the six months ended June 30, 2003, the amount charged to the Fund by SISC aggregated $13,195, of which $8,778 is unpaid at June 30, 2003.
Directors' Fees and Expenses. The Fund pays each Director not affiliated with the Advisor retainer fees plus specified amounts for attended board and committee meetings.
D. Share Repurchases
The Fund is authorized to effect periodic repurchases of its shares in the open market from time to time when the Fund's shares trade at a discount to their NAV. There were no shares repurchased during the six months ended June 30, 2003. Up to 14,000 shares may be repurchased during the third quarter of 2003.
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. UMB Bank, N.A. 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 $5,000 (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, to Scudder Investments Service Company, the Fund's transfer agent or its delegate (the "Transfer Agent"). 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 Transfer 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 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 Transfer Agent to instruct the Plan Agent to sell any full shares and remit the proceeds, less a $2.50 service fee and less brokerage commissions. The sale of shares (including fractional shares) will be a taxable event for federal income tax purposes and may be taxable for state and local tax purposes.
The Plan may be amended by the fund 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 by the Transfer Agent 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 Transfer Agent by writing Scudder Investments Service Company, P.O. Box 219066, Kansas City, MO 64121-9066, or by calling (800) 294-4366.
For annual report requests, please call Shareholder Services at 800-349-4281 or the Transfer Agent at 800-294-4366.
Stockholder Meeting Results |
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The Annual Meeting of Stockholders of Montgomery Street Income Securities, Inc. (the "fund") was held on July 10, 2003, at the office of the fund, 101 California Street, Suite 4100, San Francisco, California. At the meeting, the following matters were voted upon by the stockholders:
1. The election of five Directors of the fund to hold office until the next Annual Meeting or until their respective successors shall have been duly elected and qualified.
| Number of Votes: |
Directors | For | Withheld |
Richard J. Bradshaw | 8,925,279 | 142,861 |
Maryellie K. Johnson | 8,921,430 | 146,710 |
John T. Packard | 8,844,125 | 224,015 |
Wendell G. Van Auken | 8,925,929 | 142,211 |
James C. Van Horne | 8,920,509 | 147,631 |
2. Approval of the continuance of the Management and Investment Advisory Agreement for the fund with Deutsche Investment Management Americas Inc.
| Number of Votes: |
For | Against | Abstain |
8,878,974 | 77,580 | 114,583 |
DIRECTORS as of June 30, 2003
JOHN C. ATWATER
RICHARD J. BRADSHAW
MARYELLIE K. JOHNSON
JOHN T. PACKARD
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE
Chairman
OFFICERS as of June 30, 2003
RICHARD T. HALE
President
GARY W. BARTLETT
Vice President
J. CHRISTOPHER GAGNIER
Vice President
JUDITH A. HANNAWAY
Vice President
MAUREEN E. KANE
Vice President and Secretary
CHARLES A. RIZZO
Treasurer and Chief Financial Officer
|
Investment Manager | Deutsche Investment Management Americas Inc.
101 California Street, Suite 4100
San Francisco, CA 94111 |
Transfer Agent | Scudder Investments Service Company
P.O. Box 219066
Kansas City, MO 64121-9066 |
Custodian | State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110 |
Legal Counsel | Howard, Rice, Nemerovski, Canady, Falk & Rabkin PC
Three Embarcadero Center
Seventh Floor
San Francisco, CA 94111 |
Independent Auditors | Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116 |
ITEM 2. CODE OF ETHICS.
Not currently applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not currently applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not currently applicable.
ITEM 5. [RESERVED]
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The Chief Executive and Financial Officers concluded that the
Registrant's Disclosure Controls and Procedures are effective based on the
evaluation of the Disclosure Controls and Procedures as of a date within 90 days
of the filing date of this report.
(b) During the six month period ended June 30, 2003, management identified
an issue related to a different registrant within the Scudder fund complex.
Management discussed the issue with the Registrant's Audit Committee and
auditors and instituted additional procedures to enhance its internal controls
over financial reporting.
Form N-CSR Item F
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: Montgomery Street Income Securities
By: /s/Richard T. Hale
-------------------------------------
Richard T. Hale
Chief Executive Officer
Date: August 19, 2003
-------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Registrant: Montgomery Street Income Securities
By: /s/Richard T. Hale
-------------------------------------
Richard T. Hale
Chief Executive Officer
Date: August 19, 2003
-------------------------------------
By: /s/Charles A. Rizzo
-------------------------------------
Charles A. Rizzo
Chief Financial Officer
Date: August 19, 2003
-------------------------------------
