UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-CSR
Investment Company Act file number 811-2341
MONTGOMERY STREET INCOME 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: (617) 295-2663
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Salvatore Schiavone
Two International Place
Boston, Massachusetts 02110
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(Name and Address of Agent for Service)
Date of fiscal year end: 12/31
Date of reporting period: 12/31/03
ITEM 1. REPORT TO STOCKHOLDERS
Montgomery Street
Income Securities Annual Report to StockholdersDecember 31, 2003 |
Portfolio Management Review |
|
|
In the following interview, Portfolio Manager Gary Bartlett discusses the recent market environment and strategy in managing Montgomery Street Income Securities during its most recent fiscal year ended December 31, 2003.
The investments of Montgomery Street Income Securities Inc. (the "fund") provided a total return based on net asset value (NAV) of 8.22% for its most recent fiscal year ended December 31, 2003.1 The return of the fund's NYSE-traded shares was 4.53% for the same period.
The total NAV return of the fund exceeded the return of the unmanaged Lehman Brothers Aggregate Bond Index, which posted a total return of 4.10% for the 12-month period.2 The fund underperformed the 12.70% average return of the Lipper Corporate Debt Funds BBB-Rated category for closed-end funds.3 However, the fund remains ahead of the average return of its peer group for the three-, five- and 10-year periods. The fund ranked 14, 7, 4 and 7 for the one- three-, five- and 10-year periods, respectively. There were 17 funds in the category for the one-year period and 14 funds for the three-, five- and 10-year periods.4 Rankings are based on the fund's total return with distributions reinvested. Past results are not necessarily indicative of future performance of the fund. Investment return and principal value will fluctuate.
1 Total investment returns reflect changes in net asset value per share during each period and assume that dividends and capital gain distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's investment in the funds based on market price.2 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.3 The Lipper Corporate Debt BBB-Rated Funds category is comprised of closed-end funds that invest primarily in corporate and government debt issues rated in the top four grades.4 Source: Lipper Inc. Rankings are historical and do not guarantee future results.The fund's market price stood at $18.55 as of December 31, 2003, compared to $19.02 at the close of 2002. The market price discount of the shares, as a percentage of NAV, was 5.5% on December 31, 2003. Shares of closed-end funds frequently trade at a discount to net asset value. The price of the fund's shares is determined by a number of factors, several of which are beyond the control of the fund. Therefore, the fund cannot predict whether its shares will trade at, below, or above net asset value.
For 2003, the fund paid quarterly dividends of $0.31, $0.31, $0.32 and $0.35 on April 30, July 31, October 31 and December 31, respectively. The December dividend was higher than the October dividend because of a special year-end dividend of $0.03 per share, which included income that had accumulated over the year. Future dividends may not include this special dividend.
Q: How did the bond market perform during 2003?
A: Bonds, which provided strong gains for investors during the previous three calendar years, again provided solid returns in 2003. US Treasury securities returned 2.24% for the period, supported during the first half of the year by mixed economic data as well as heightened geopolitical concerns leading up to war in Iraq. In May, Treasuries were boosted by the Federal Open Market Committee's warning concerning deflationary risks. The Federal Reserve Board's May statement eventually drove yields of 10-year Treasury notes to a 45-year intra-day low yield of 3.11% on June 13. However, yields subsequently climbed as the FOMC disappointed investors by cutting the fed funds rate by only a quarter of a percentage point at its June 25 meeting. Treasury yields continued to rise in the third quarter as the US economy began to show signs of an improvement, and remained range-bound in the fourth quarter.
Most of the so-called "spread sectors" of the bond market outperformed Treasuries during the year.5 Corporate bonds - especially lower quality corporates - were among the strongest fixed-income performers for 2003. Corporates as measured by the Lehman Brothers Credit Index outperformed Treasuries by 527 basis points (duration-adjusted excess returns). The Lehman Brothers Credit Index narrowed in spread versus Treasuries from 169 basis points at the start of the year to 89 basis points by year's end.
5 Spread sectors are the areas of the bond market that typically offer yields higher than Treasuries. "Spread" refers the difference in yield between the individual non-Treasury sectors compared with the yields of Treasury securities. Treasury securities are guaranteed by the full faith and credit of the US government as to timely payment of principal and interest.The year 2003 was an extraordinary one due to the rally and rebound in lower-rated credits. Throughout the year, BBB-rated securities performed strongest within the investment-grade category, with spreads versus Treasuries narrowing from 259 to 127 basis points in 2003; within high yield, lower-rated bonds outperformed as the spread between single B-rated bonds and Treasuries narrowed from 848 to 456 basis points. Due to a difficult third quarter, mortgage-backed securities performed only marginally better than equal-duration Treasuries during 2003.
Q: How did the fund perform in 2003?
A: The fund's outperformance compared with its benchmark was due mainly to its holdings of lower-quality bonds, within both the investment grade and high yield components of the portfolio. While the Lehman Brothers Aggregate Bond Index does not hold high-yield bonds and contains only 11% of BBB-rated bonds, as of December 31 the fund held 18% of its assets in high-yield bonds and 16% in BBB-rated bonds. The fund's allocation to lower-quality bonds gave it a distinct performance advantage over its benchmark. At the same time, the fund's holdings continued to be of higher quality than those of many of its peers within the Lipper Closed-End Corporate Debt Funds BBB-Rated category. Thus, our maintenance of higher average portfolio quality compared with the fund's peers detracted from comparative performance versus its Lipper peer group. The fund's lower comparative risk profile versus its peers is by design, as we seek to avoid volatile year-over-year performance, and provide a more consistent level of return over the long term.
Q: How is the fund positioned?
A: Corporate bonds continue to constitute the fund's largest sector weighting, at 46% of assets as of December 31, 2003. As previously mentioned, our most significant shift in strategy during the period was our decision to increase the fund's allocation in credits rated BBB or below. With investors searching for higher yields, default rates declining and corporations removing
Treasury Bond Yield Curve (as of 12/31/02 and 12/30/03) |
 |
|
Source: Deutsche Asset Management
Performance is historical and does not guarantee future results.
debt from their balance sheets, we found a number of attractively valued bond issues within this area of the market. During the year, we added to the fund's positions in the electric utility, media/telecom and automotive sectors.
Sector Distribution |
 |
[] [] [] [] | Corporate Bonds
US Government Agency
Sponsored Pass-Throughs
US Government Backed
Asset Backed
| 39%
23%
12%
8%
| [] [] [] [] | Foreign Bond - US$ Denominated
Municipal Investments
Cash Equivalents
CMO
| 6%
6%
4%
2%
|
As of December 31, 2003.
Sector distribution is subject to change.
Quality Distribution |
|  |
[] [] [] [] [] [] [] [] | AAA
AA
A
BBB
BB
B or below
Treasuries
Agency
| 15%
2%
10%
16%
9%
9%
13%
26%
|
|
As of December 31, 2003.
Quality distribution is subject to change.
We also continue to hold positions in asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS), both of which offer the potential to earn extra return compared with Treasuries. Within this sector, our portfolio management and research staff seeks individual securities that offer relatively low levels of risk. Our focus on identifying ABS and CMBS issues that offer both attractive value and quality enabled the portfolio to generate solid performance from these sectors in 2003.
During the year, we also increased the fund's position in taxable municipal bonds. We often employ these bonds as a surrogate for government agency notes, since taxable municipal bonds offer a combination of high quality and attractive yield. Our position in this sector grew during the year as an increased supply of issuance, beginning with the $10 billion Illinois pension obligation issue in June, created opportunities within the sector.
The portfolio continues to be managed with leverage, which was approximately 21.6% of total assets as of December 31, 2003. This is achieved utilizing the mortgage roll market. The year 2003 proved to be an opportune period to use leverage, as interest rates were little changed, the yield curve remained historically steep and credit spreads tightened. The steep yield curve allows the fund to borrow at low short-term interest rates, and to reinvest the proceeds in higher yielding, longer maturity issues. At the mid-point of the year we reduced the fund's holdings in mortgage-backed securities as valuations became full relative to other fixed-income sectors, which reduced the fund's level of leverage and duration. The fund invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Yields will fluctuate in response to changing interest rates and may be affected by the prepayment of mortgage-backed securities. The fund's investments in foreign securities are subject to currency fluctuation, political climate and economic changes, and risk of loss of principal and interest. All of these factors may result in greater share price volatility.
The views expressed in this report reflect those of the portfolio manager only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions and should not be construed as a recommendation.
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.
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. |
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 13,000 shares repurchased during the fourth quarter of 2003. Up to 13,000 shares may be repurchased during the first quarter of 2004.
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 37 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 and preferred stocks.
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.
New Investment Policies Effective December 31, 2003
On December 12, 2003, the Board approved certain amendments to the fund's investment policies:
Effective December 31, 2003, it is the intention of the fund to invest exclusively in non-voting securities. The fund's registration statement previously provided that the fund was authorized to exercise conversion rights, warrants or other rights to purchase common stocks or other equity securities. Henceforth, under normal circumstances, the fund does not intend to exercise conversion, exchange or other rights to purchase common stock or other equity securities, or otherwise to hold voting securities. In the unlikely event that the fund does come into possession of any voting securities, the fund intends to dispose of such securities as soon as it is reasonably practicable and prudent to do so.
In addition, the fund was authorized to invest in the common stocks of utility companies. In light of the fund's intention to invest exclusively in non-voting securities, the fund's ability to invest in common stocks of utility companies has been eliminated.
Investment Portfolio as of December 31, 2003 | |
|
|
| Principal
Amount ($) | Value ($) |
|
|
Corporate Bonds 46.4% |
Consumer Discretionary 7.6%
|
American Achieve Corp., 11.625%, 1/1/2007
| 140,000
| 154,000
|
Bally Total Fitness Holdings, 144A, 10.5%, 7/15/2011
| 125,000
| 125,625
|
Boca Resorts, Inc., 9.875%, 4/15/2009
| 220,000
| 234,300
|
Buffets, Inc., 11.25%, 7/15/2010
| 180,000
| 193,050
|
Carrols Corp., 9.5%, 12/1/2008
| 65,000
| 65,975
|
Central Garden & Pet Co., 9.125%, 2/1/2013
| 90,000
| 99,900
|
Choctaw Resort Development Enterprises, 9.25%, 4/1/2009
| 190,000
| 206,150
|
Cinemark USA, Inc., 8.5%, 8/1/2008
| 155,000
| 161,394
|
Circus & Eldorado, 10.125%, 3/1/2012
| 190,000
| 197,125
|
Comcast Cable Communications:
|
|
|
6.375%, 1/30/2006 | 750,000
| 807,411
|
6.875%, 6/15/2009 | 430,000
| 484,755
|
Cox Communications, Inc., 7.5%, 8/15/2004
| 1,000,000
| 1,033,435
|
CSC Holdings, Inc., 7.875%, 12/15/2007
| 580,000
| 611,900
|
Dex Media East LLC/Financial, 12.125%, 11/15/2012
| 630,000
| 774,900
|
Dex Media West LLC/Finance Co., 144A, 9.875%, 8/15/2013
| 250,000
| 290,625
|
DIMON, Inc.:
|
|
|
144A, 7.75%, 6/1/2013 | 265,000
| 272,950
|
Series B, 9.625%, 10/15/2011 | 580,000
| 646,700
|
EchoStar DBS Corp., 144A, 6.375%, 10/1/2011
| 305,000
| 312,625
|
El Pollo Loco, Inc., 144A, 9.25%, 12/15/2009
| 65,000
| 65,813
|
Finlay Fine Jewelry Corp., 8.375%, 5/1/2008
| 300,000
| 310,500
|
General Motors Corp., 8.25%, 7/15/2023
| 150,000
| 170,311
|
Group 1 Automotive, Inc., 8.25%, 8/15/2013
| 130,000
| 139,100
|
Herbst Gaming, Inc., 10.75%, 9/1/2008
| 400,000
| 450,000
|
Host Marriott LP, 144A, 7.125%, 11/1/2013
| 200,000
| 204,000
|
International Game Technology, 8.375%, 5/15/2009
| 335,000
| 401,014
|
Intrawest Corp., 10.5%, 2/1/2010
| 170,000
| 187,850
|
J.C. Penney Co., Inc., 6.875%, 10/15/2015
| 90,000
| 94,613
|
Jacobs Entertainment Co., 11.875%, 2/1/2009
| 100,000
| 112,000
|
Jafra Cosmetics International, Inc., 10.75%, 5/15/2011
| 225,000
| 246,937
|
Kellwood Co., 7.625%, 10/15/2017
| 80,000
| 84,200
|
Keystone Automotive Operation, 144A, 9.75%, 11/1/2013
| 65,000
| 69,875
|
Krystal, Inc., 10.25%, 10/1/2007
| 65,000
| 65,325
|
Laidlaw International, Inc., 144A, 10.75%, 6/15/2011
| 135,000
| 152,550
|
Liberty Media Corp., Series A, 2.67%*, 9/17/2006
| 1,000,000
| 1,010,870
|
Lin Television Corp., 144A, 6.5%, 5/15/2013
| 80,000
| 80,100
|
Mediacom LLC, 7.875%, 2/15/2011
| 110,000
| 110,000
|
Meritage Corp., 9.75%, 6/1/2011
| 50,000
| 55,875
|
MGM Mirage, Inc., 6.0%, 10/1/2009
| 115,000
| 118,162
|
Norcraft Co./Finance, 144A, 9.0%, 11/1/2011
| 60,000
| 64,800
|
Penn National Gaming, Inc., 8.875%, 3/15/2010
| 60,000
| 65,100
|
PRIMEDIA, Inc., 7.625%, 4/1/2008
| 230,000
| 232,300
|
Remington Arms Co., 10.5%, 2/1/2011
| 190,000
| 202,350
|
River Rock Entertainment, 144A, 9.75%, 11/1/2011
| 150,000
| 161,250
|
Schuler Homes, Inc., 10.5%, 7/15/2011
| 260,000
| 301,600
|
Scientific Games Corp., 12.5%, 8/15/2010
| 72,000
| 85,140
|
Sealy Mattress Co., Series B, 9.875%, 12/15/2007
| 50,000
| 51,750
|
Sinclair Broadcast Group, Inc.:
|
|
|
8.0%, 3/15/2012 | 110,000
| 118,800
|
8.75%, 12/15/2011 | 475,000
| 527,250
|
Six Flags, Inc., 8.875%, 2/1/2010
| 280,000
| 287,350
|
Sonic Automotive, Inc.:
|
|
|
8.625%, 8/15/2013 | 265,000
| 279,575
|
144A, 8.625%, 8/15/2013 | 25,000
| 26,375
|
Time Warner, Inc., 8.11%, 8/15/2006
| 1,250,000
| 1,415,039
|
Transwestern Publishing, Series F, 9.625%, 11/15/2007
| 370,000
| 382,950
|
Venetian Casino Resort LLC, 11.0%, 6/15/2010
| 85,000
| 98,600
|
Wheeling Island Gaming, Inc., 10.125%, 12/15/2009
| 205,000
| 217,300
|
Williams Scotsman, Inc., 9.875%, 6/1/2007
| 170,000
| 172,125
|
Worldspan LP/ WS Finance Corp., 144A, 9.625%, 6/15/2011
| 110,000
| 113,300
|
| 15,604,869 |
Consumer Staples 0.6%
|
Agrilink Foods, Inc., 11.875%, 11/1/2008
| 46,000
| 48,875
|
Elizabeth Arden, Inc., Series B, 11.75%, 2/1/2011
| 181,000
| 215,390
|
General Nutrition Center, 144A, 8.5%, 12/1/2010
| 60,000
| 61,500
|
Michael Foods, Inc., 144A, 8.0%, 11/15/2013
| 80,000
| 83,400
|
National Beef Pack, 144A, 10.5%, 8/1/2011
| 60,000
| 61,800
|
Pilgrim's Pride Corp., 9.625%, 9/15/2011
| 90,000
| 99,000
|
Pinnacle Foods Holding Corp., 144A, 8.25%, 12/1/2013
| 100,000
| 103,500
|
PPC Escrow Corp., 144A, 9.25%, 11/15/2013
| 50,000
| 51,750
|
Salton, Inc., 10.75%, 12/15/2005
| 65,000
| 66,300
|
Stater Brothers Holdings, Inc., 10.75%, 8/15/2006
| 300,000
| 316,125
|
United Agri Products, 144A, 8.25%, 12/15/2011
| 115,000
| 118,162
|
| 1,225,802 |
Energy 5.6%
|
Avista Corp., 9.75%, 6/1/2008
| 700,000
| 833,000
|
Citgo Petroleum Corp., 11.375%, 2/1/2011
| 590,000
| 684,400
|
Devon Energy Corp., 7.95%, 4/15/2032
| 1,600,000
| 1,929,219
|
Devon Financing Corp., 7.875%, 9/30/2031
| 430,000
| 513,679
|
Dynegy Holdings, Inc., 144A, 9.875%, 7/15/2010
| 50,000
| 56,250
|
FirstEnergy Corp., Series B, 6.45%, 11/15/2011
| 1,545,000
| 1,601,312
|
Gulfterra Energy Partner, 6.25%, 6/1/2010
| 65,000
| 67,600
|
Hanover Compressor Co., 8.625%, 12/15/2010
| 125,000
| 130,000
|
Lone Star Technologies, Inc., Series B, 9.0%, 6/1/2011
| 170,000
| 168,300
|
National Fuel Gas Co., 6.7%, 11/21/2011
| 1,000,000
| 1,131,563
|
Newpark Resources, Inc., 8.625%, 12/15/2007
| 190,000
| 196,650
|
Parker Drilling Co.:
|
|
|
144A, 9.625%, 10/1/2013 | 85,000
| 88,400
|
Series B, 10.125%, 11/15/2009 | 185,000
| 196,100
|
Pioneer Natural Resources Co., 9.625%, 4/1/2010
| 565,000
| 703,098
|
Southern Natural Gas, 8.875%, 3/15/2010
| 130,000
| 146,250
|
Stone Energy Corp., 8.25%, 12/15/2011
| 330,000
| 359,700
|
Tri-State Generation & Trans Association, 144A, 7.144%, 7/31/2033
| 2,000,000
| 2,128,420
|
Westport Resources Corp., 8.25%, 11/1/2011
| 155,000
| 170,500
|
Williams Cos., Inc.:
|
|
|
1.0%, 3/15/2012 | 50,000
| 55,500
|
8.75%, 3/15/2032 | 135,000
| 152,550
|
Williams Holdings of Delaware, Inc., 6.5%, 12/1/2008
| 115,000
| 118,881
|
| 11,431,372 |
Financials 10.0%
|
Agfirst Farm Credit Bank, 8.393%*, 12/15/2016
| 1,170,000
| 1,333,426
|
Ahold Finance USA, Inc., 6.25%, 5/1/2009
| 420,000
| 421,050
|
AmeriCredit Corp.:
|
|
|
9.25%, 5/1/2009 | 305,000
| 320,250
|
9.875%, 4/15/2006 | 270,000
| 283,500
|
AMSouth Bank NA, 2.82%, 11/3/2006
| 1,495,000
| 1,499,931
|
CBRE Escrow, Inc., 144A, 9.75%, 5/15/2010
| 140,000
| 155,400
|
Couche-Tard US/ Finance, 144A, 7.5%, 12/15/2013
| 55,000
| 57,613
|
Dollar Financial Group, Inc., 144A, 9.75%, 11/15/2011
| 190,000
| 196,650
|
Farmers Insurance Exchange, 144A, 8.625%, 5/1/2024
| 260,000
| 271,700
|
Ford Motor Credit Co.:
|
|
|
5.8%, 1/12/2009 | 805,000
| 829,032
|
6.875%, 2/1/2006 | 1,425,000
| 1,520,914
|
7.0%, 10/1/2013 | 50,000
| 52,734
|
General Motors Acceptance Corp.:
|
|
|
6.875%, 9/15/2011 | 875,000
| 942,486
|
7.75%, 1/19/2010 | 729,000
| 826,364
|
Household Finance Corp., 6.5%, 1/24/2006
| 475,000
| 513,701
|
IOS Capital LLC, 7.25%, 6/30/2008
| 200,000
| 213,000
|
iStar Financial, Inc.:
|
|
|
6.0%, 12/15/2010 | 85,000
| 86,700
|
6.5%, 12/15/2013 | 125,000
| 127,500
|
Kraton Polymers LLC, 144A, 8.125%, 1/15/2014
| 50,000
| 52,000
|
Mantis Reef Ltd., 144A, 4.692%, 11/14/2008
| 1,925,000
| 1,934,602
|
NiSource Finance Corp., 7.875%, 11/15/2010
| 1,500,000
| 1,784,086
|
OneAmerica Financial Partners, 144A, 7.0%, 10/15/2033
| 680,000
| 673,159
|
PEI Holding, Inc., 11.0%, 3/15/2010
| 105,000
| 121,800
|
Pemex Project Funding Master Trust, 8.5%, 2/15/2008
| 1,896,000
| 2,161,440
|
PNC Funding Corp., 5.75%, 8/1/2006
| 895,000
| 960,880
|
Poster Financial Group, 144A, 8.75%, 12/1/2011
| 50,000
| 52,875
|
PXRE Capital Trust I, 8.85%, 2/1/2027
| 115,000
| 106,087
|
R.H. Donnelly Finance Corp.:
|
|
|
10.875%, 12/15/2012 | 155,000
| 183,868
|
144A, 10.875%, 12/15/2012 | 115,000
| 136,419
|
Thornburg Mortgage, Inc., 8.0%, 5/15/2013
| 250,000
| 262,500
|
Universal City Development, 144A, 11.75%, 4/1/2010
| 90,000
| 105,300
|
US West Communications, Inc., 7.25%, 10/15/2035
| 50,000
| 49,750
|
Verizon Global Funding Corp., 7.25%, 12/1/2010
| 1,650,000
| 1,899,789
|
Wachovia Corp., 7.5%, 7/15/2006
| 155,000
| 174,846
|
| 20,311,352 |
Health Care 1.6%
|
AmerisourceBergen Corp., 7.25%, 11/15/2012
| 240,000
| 258,600
|
Biovail Corp., 7.875%, 4/1/2010
| 195,000
| 198,900
|
Genesis Healthcare Corp., 144A, 8.0%, 10/15/2013
| 50,000
| 52,125
|
Health Care Service Corp., 144A, 7.75%, 6/15/2011
| 1,500,000
| 1,755,829
|
Neighbor, Inc., 144A, 6.875%, 11/15/2013
| 55,000
| 55,963
|
Norcross Safety Products, 144A, 9.875%, 8/15/2011
| 80,000
| 87,800
|
Tenet Healthcare Corp.:
|
|
|
6.375%, 12/1/2011 | 515,000
| 494,400
|
7.375%, 2/1/2013 | 410,000
| 412,050
|
| 3,315,667 |
Industrials 5.1%
|
Allied Waste North America, Inc.:
|
|
|
Series B, 8.5%, 12/1/2008 | 210,000
| 233,625
|
Series B, 8.875%, 4/1/2008 | 275,000
| 308,000
|
AMI Semiconductor, Inc., 10.75%, 2/1/2013
| 72,000
| 85,860
|
Amsted Industries, Inc., 144A, 10.25%, 10/15/2011
| 50,000
| 55,250
|
Atrium Companies, Inc., 144A, 10.5%, 5/1/2009
| 75,000
| 80,250
|
AutoNation, Inc., 9.0%, 8/1/2008
| 115,000
| 131,963
|
Avondale Mills, Inc., 10.25%, 7/1/2013
| 190,000
| 119,700
|
Browning-Ferris Industries:
|
|
|
7.4%, 9/15/2035 | 50,000
| 47,375
|
9.25%, 5/1/2021 | 50,000
| 55,313
|
Collins & Aikman Floor Cover, Series B, 9.75%, 2/15/2010
| 270,000
| 288,900
|
Collins & Aikman Products, 10.75%, 12/31/2011
| 225,000
| 221,063
|
Corrections Corp. of America, 9.875%, 5/1/2009
| 270,000
| 301,387
|
CP Ships Ltd., 10.375%, 7/15/2012
| 255,000
| 295,800
|
Dana Corp., 7.0%, 3/1/2029
| 290,000
| 288,187
|
Delta Air Lines, Inc.:
|
|
|
Series 02-1, 6.417%, 7/2/2012 | 1,510,000
| 1,618,498
|
7.7%, 12/15/2005 | 255,000
| 240,656
|
Eagle-Picher, Inc., 144A, 9.75%, 9/1/2013
| 85,000
| 91,800
|
Equistar Chemicals LP, 144A, 10.625%, 5/1/2011
| 50,000
| 55,250
|
Golden State Petroleum Transportation, 8.04%, 2/1/2019
| 125,000
| 121,615
|
Hercules, Inc., 11.125%, 11/15/2007
| 635,000
| 760,412
|
Hornbeck Offshore Services, Inc., 10.625%, 8/1/2008
| 170,000
| 187,850
|
ISP Chemco, Inc., Series B, 10.25%, 7/1/2011
| 150,000
| 168,750
|
ISP Holdings, Inc., Series B, 10.625%, 12/15/2009
| 100,000
| 110,000
|
Kansas City Southern:
|
|
|
7.5%, 6/15/2009 | 240,000
| 246,000
|
9.5%, 10/1/2008 | 170,000
| 188,700
|
Metaldyne Corp., 144A, 10.0%, 11/1/2013
| 125,000
| 126,250
|
Millennium America, Inc.:
|
|
|
7.625%, 11/15/2026 | 130,000
| 120,900
|
9.25%, 6/15/2008 | 720,000
| 784,800
|
144A, 9.25%, 6/15/2008 | 95,000
| 103,550
|
Mobile Mini, Inc., 9.5%, 7/1/2013
| 140,000
| 154,000
|
Overseas Shipholding Group, 8.75%, 12/1/2013
| 75,000
| 82,219
|
Quintiles Transnational Corp., 144A, 10.0%, 10/1/2013
| 110,000
| 118,800
|
Seabulk International, Inc., 9.5%, 8/15/2013
| 150,000
| 156,000
|
Ship Finance International Ltd., 144A, 8.5%, 12/15/2013
| 350,000
| 346,500
|
System 2001 Asset Trust LLC:
"B", Series 2001, 144A, 7.156%, 12/15/2011 | 710,592
| 775,640
|
"G", Series 2001, 144A, 6.664%, 9/15/2013 | 562,697
| 621,893
|
Tech Olympic USA, Inc., 10.375%, 7/1/2012
| 105,000
| 117,600
|
The Brickman Group, Ltd., 11.75%, 12/15/2009
| 100,000
| 116,500
|
Westlake Chemical Corp., 144A, 8.75%, 7/15/2011
| 305,000
| 333,975
|
| 10,260,831 |
Information Technology 0.1%
|
Activant Solutions, Inc., 10.5%, 6/15/2011
| 50,000
| 53,813
|
DigitalNet, Inc., 9.0%, 7/15/2010
| 84,000
| 90,930
|
Mediacom Broadband LLC, 11.0%, 7/15/2013
| 50,000
| 56,125
|
Telex Communications, Inc., 144A, 11.5%, 10/15/2008
| 55,000
| 58,437
|
| 259,305 |
Materials 2.7%
|
ARCO Chemical Co., 9.8%, 2/1/2020
| 455,000
| 457,275
|
Buckeye Technologies, Inc., 8.5%, 10/1/2013
| 50,000
| 53,500
|
Caraustar Industries, Inc., 9.875%, 4/1/2011
| 145,000
| 156,600
|
Cascades, Inc., 7.25%, 2/15/2013
| 250,000
| 263,750
|
Dayton Superior Corp., 144A, 10.75%, 9/15/2008
| 110,000
| 112,750
|
Dow Chemical Co., 7.0%, 8/15/2005
| 425,000
| 454,628
|
Equistar Chemicals LP, 8.75%, 2/15/2009
| 755,000
| 788,975
|
Georgia-Pacific Corp.:
|
|
|
7.375%, 12/1/2025 | 85,000
| 82,556
|
7.7%, 6/15/2015 | 710,000
| 738,400
|
144A, 8.0%, 1/15/2024 | 160,000
| 163,200
|
8.875%, 2/1/2010 | 200,000
| 228,000
|
9.375%, 2/1/2013 | 145,000
| 166,750
|
Huntsman Advanced Materials LLC, 144A, 11.0%, 7/15/2010
| 155,000
| 171,275
|
Huntsman International LLC, 144A, 11.625%, 10/15/2010
| 70,000
| 71,400
|
IMC Global, Inc., 144A, 10.875%, 8/1/2013
| 270,000
| 295,650
|
Owens-Brockway Glass Container, 8.25%, 5/15/2013
| 305,000
| 327,494
|
Pliant Corp., 11.125%, 9/1/2009
| 205,000
| 221,400
|
Rockwood Specialties Corp., 144A, 10.625%, 5/15/2011
| 75,000
| 83,625
|
Tekni-Plex, Inc., 144A, 8.75%, 11/15/2013
| 85,000
| 88,613
|
Texas Industries, Inc., 144A, 10.25%, 6/15/2011
| 80,000
| 90,400
|
TriMas Corp., 9.875%, 6/15/2012
| 165,000
| 172,012
|
United States Steel LLC, 9.75%, 5/15/2010
| 260,000
| 292,500
|
| 5,480,753 |
Telecommunication Services 2.0%
|
ACC Escrow Corp., 144A, 10.0%, 8/1/2011
| 450,000
| 501,750
|
Cincinnati Bell, Inc., 144A, 8.375%, 1/15/2014
| 475,000
| 510,625
|
Continental Cable, 9.0%, 9/1/2008
| 750,000
| 904,343
|
General Cable Corp., 144A, 9.5%, 11/15/2010
| 50,000
| 53,500
|
Insight Midwest:
|
|
|
9.75%, 10/1/2009 | 50,000
| 52,875
|
10.5%, 11/1/2010 | 50,000
| 54,375
|
144A, 10.5%, 11/1/2010
| 150,000
| 163,125
|
Nortel Networks Corp., 6.125%, 2/15/2006
| 380,000
| 384,750
|
Northern Telecom Capital, 7.875%, 6/15/2026
| 100,000
| 100,000
|
PCCW Capital Ltd., 144A, 6.0%, 7/15/2013
| 280,000
| 285,835
|
Qwest Services Corp., 5.625%, 11/15/2008
| 940,000
| 930,600
|
Shaw Communications, Inc., 8.25%, 4/11/2010
| 65,000
| 73,613
|
Triton PCS, Inc., 8.5%, 6/1/2013
| 50,000
| 53,750
|
US West Communication, Inc., 7.25%, 9/15/2025
| 80,000
| 80,000
|
| 4,149,141 |
Utilities 11.1%
|
AES Corp., 144A, 9.0%, 5/15/2015
| 70,000
| 79,100
|
American Electric Power, 6.125%, 5/15/2006
| 2,000,000
| 2,155,174
|
Appalachian Power Co., 6.8%, 3/1/2006
| 1,000,000
| 1,077,665
|
Cincinnati Gas & Electric Co., Series A, 5.4%, 6/15/2033
| 700,000
| 631,177
|
Cleveland Electric Illuminating Co., 144A, 5.65%, 12/15/2013
| 635,000
| 625,025
|
CMS Energy Corp., 8.5%, 4/15/2011
| 190,000
| 205,200
|
Consolidated Edison, Inc., 8.125%, 5/1/2010
| 1,115,000
| 1,364,858
|
Consumers Energy Co., 6.25%, 9/15/2006
| 1,500,000
| 1,619,640
|
Duke Energy Corp., Series D, 7.375%, 3/1/2010
| 1,500,000
| 1,728,366
|
El Paso Production Holding Corp., 144A, 7.75%, 6/1/2013
| 565,000
| 556,525
|
Entergy Gulf States, 144A, 6.2%, 7/1/2033
| 1,600,000
| 1,521,503
|
Illinova Corp., 11.5%, 12/15/2010
| 200,000
| 240,000
|
Kansas City Power & Light Co., 7.125%, 12/15/2005
| 1,300,000
| 1,416,037
|
MSW Energy Holdings/Finance, 144A, 8.5%, 9/1/2010
| 55,000
| 59,950
|
NRG Energy, Inc., 144A, 8.0%, 12/15/2013
| 345,000
| 362,681
|
PP&L Capital Funding, 7.75%, 4/15/2005
| 2,000,000
| 2,142,066
|
Progress Energy, Inc., 6.75%, 3/1/2006
| 1,050,000
| 1,138,354
|
PSI Energy, Inc.:
|
|
|
8.57%, 12/27/2011 | 1,250,000
| 1,544,950
|
8.85%, 1/15/2022 | 1,225,000
| 1,611,108
|
TNP Enterprises, Inc., Series B, 10.25%, 4/1/2010
| 280,000
| 305,200
|
Xcel Energy, Inc., 7.0%, 12/1/2010
| 2,000,000
| 2,267,900
|
| 22,652,479 |
Total Corporate Bonds (Cost $90,358,108)
| 94,691,571 |
|
Foreign Bonds - US$ Denominated 7.3% |
Arcel Finance Ltd., 144A, 7.048%, 9/1/2011
| 540,000
| 556,200
|
Axtel SA, 144A, 11.0%, 12/15/2013
| 245,000
| 249,900
|
Brazilian Merchant Voucher, 144A, 5.911%, 6/15/2011
| 500,000
| 487,500
|
Burns, Philip & Co., Ltd., 144A, 9.75%, 7/15/2012
| 105,000
| 112,350
|
Conproca SA de CV, 12.0%, 6/16/2010
| 225,000
| 289,125
|
Crown Euro Holdings SA, 10.875%, 3/1/2013
| 235,000
| 276,419
|
Deutsche Telekom International Finance BV, 8.25%, 6/15/2005
| 1,500,000
| 1,627,132
|
Eircom Funding, 8.25%, 8/15/2013
| 210,000
| 232,575
|
Fage Dairy Industry SA, 9.0%, 2/1/2007
| 140,000
| 142,975
|
Gazprom OAO, 144A, 9.625%, 3/1/2013
| 200,000
| 220,500
|
Gerdau Ameristeel Corp., 144A, 10.375%, 7/15/2011
| 50,000
| 55,250
|
Hutchinson Whamp International Ltd., 144A, 7.45%, 11/24/2033
| 165,000
| 171,851
|
Innova S. de R.L.:
|
|
|
144A, 9.375%, 9/19/2013 | 235,000
| 241,169
|
12.875%, 4/1/2007 | 18,539
| 18,863
|
LeGrand SA, 8.5%, 2/15/2025
| 190,000
| 200,688
|
Luscar Coal Ltd., 9.75%, 10/15/2011
| 210,000
| 237,825
|
Millicom International Cellular SA, 144A, 10.0%, 12/1/2013
| 195,000
| 205,725
|
Mobile Telesystems Financial SA, 144A, 8.375%, 10/14/2010
| 190,000
| 193,800
|
PacifiCorp Australia LLC, 144A, 6.15%, 1/15/2008
| 1,000,000
| 1,085,961
|
PTC International Finance II SA, 11.25%, 12/1/2009
| 110,000
| 121,000
|
QBE Insurance Group Ltd., 144A, Step-Up Coupon, 5.647% to 7/1/2013, 3-month LIBOR plus 3.18% to 7/1/2023
| 750,000
| 714,746
|
Royal Bank of Scotland, 9.118%, 3/31/2049
| 2,000,000
| 2,497,922
|
Sappi Papier Holding AG, 144A, 7.5%, 6/15/2032
| 470,000
| 528,428
|
Stena AB:
|
|
|
144A, 7.5%, 11/1/2013 | 80,000
| 82,400
|
9.625% , 12/1/2012 | 50,000
| 56,375
|
Tembec Industries, Inc., , 8.5%, 2/1/2011
| 575,000
| 595,125
|
TFM SA de CV:
|
|
|
10.25%, 6/15/2007 | 310,000
| 323,950
|
11.75%*, 6/15/2009 | 310,000
| 318,525
|
12.5%, 6/15/2012 | 175,000
| 199,500
|
Tyco International Group SA:
|
|
|
5.8%, 8/1/2006 | 1,240,000
| 1,311,300
|
144A, 6.0%, 11/15/2013 | 25,000
| 25,750
|
6.375%, 2/15/2006 | 650,000
| 692,250
|
Vicap SA, 11.375%, 5/15/2007
| 180,000
| 176,400
|
Vitro SA de CV, Series A, 144A, 11.75%, 11/1/2013
| 140,000
| 135,800
|
Vivendi Universal SA:
|
|
|
144A, 6.25%, 7/15/2008 | 110,000
| 116,463
|
144A, 9.25%, 4/15/2010 | 320,000
| 379,200
|
Yell Finance BV, Step-up Coupon, 0% to 8/1/2006, 13.5% to 8/1/2011
| 32,000
| 29,440
|
Total Foreign Bonds - US$ Denominated (Cost $14,388,570)
| 14,910,382 |
Asset Backed 9.8% |
Automobile Receivables 2.8%
|
AmeriCredit Automobile Receivables Trust, "A4", Series 2001-C, 5.01%, 7/14/2008
| 1,580,000
| 1,628,995
|
Capital One Auto Finance Trust, "A4", Series 2003-B, 3.18%, 9/15/2010
| 795,000
| 795,869
|
MMCA Automobile Trust, "A4", Series 2002-2, 4.3%, 3/15/2010
| 1,610,000
| 1,627,986
|
WFS Financial Owner Trust, "A4", Series 2002-2, 4.5%, 2/20/2010
| 1,540,000
| 1,593,940
|
| 5,646,790 |
Credit Card Receivables 3.9%
|
Bank One Issuance Trust, "A1", Series 2002-A1, 1.23%*, 1/15/2010
| 8,000,000
| 8,016,219 |
Home Equity Loans 2.1%
|
Asset Backed Securities Corp. Home Equity, "A", Series 2003-HE2, 144A, 7.0%, 4/17/2033
| 693,201
| 682,803
|
Countrywide Home Loans, "NIM", Series 2002-3, 144A, 9.0%, 9/25/2032
| 110,325
| 110,879
|
Renaissance NIM Trust, "NOTE", Series 2002-C, 144A, 8.353%, 12/25/2032
| 227,266
| 228,055
|
Residential Asset Securities Corp., "AI6", Series 2000-KS1, 7.905%, 2/25/2031
| 1,511,557
| 1,608,804
|
Southern Pacific Secured Assets Corp., "A8", Series 1998-2, 6.37%, 7/25/2029
| 1,594,486
| 1,627,589
|
| 4,258,130 |
Miscellaneous 1.0%
|
US Airways Aircraft Certificate Owner Trust, "C", Series 2003-1A, 144A, 5.551%, 9/20/2022
| 2,000,000
| 2,067,640 |
Total Asset Backed (Cost $19,855,592)
| 19,988,779 |
|
US Government Backed 14.3% |
US Treasury Bond:
|
|
|
5.375%, 2/15/2031 | 235,000
| 245,070
|
6.0%, 2/15/2026 | 740,000
| 820,620
|
US Treasury Note:
|
|
|
4.0%, 11/15/2012 | 250,000
| 247,598
|
5.0%, 8/15/2011 | 1,296,000
| 1,386,922
|
6.125%, 8/15/2007 | 3,455,000
| 3,866,767
|
7.0%, 7/15/2006 | 20,065,000
| 22,475,147
|
Total US Government Backed (Cost $29,482,785)
| 29,042,124 |
|
US Government Agency Sponsored Pass-Thrus 28.6% |
Federal Home Loan Mortgage Corp., 6.0%, 5/1/2017
| 3,531,044
| 3,705,344
|
Federal National Mortgage Association:
|
|
|
4.5%, 1/1/2034 (c) | 9,000,000
| 9,008,442
|
5.0%, 1/1/2034 (c) | 13,000,000
| 13,255,944
|
5.5%, 1/1/2034 (c) | 9,000,000
| 9,115,308
|
6.0% with various maturities from 1/1/2023 until 1/1/2034 (c) | 14,213,033
| 14,695,222
|
6.061%, 5/1/2012 | 1,248,146
| 1,370,147
|
6.5% with various maturities from 11/1/2024 until 7/1/2032 | 3,567,933
| 3,748,576
|
6.53%, 2/1/2016 | 1,654,965
| 1,799,089
|
7.5%, 2/1/2033 | 781,216
| 834,774
|
9.0%, 5/1/2009 | 835,489
| 914,267
|
Total US Government Agency Sponsored Pass-Thrus (Cost $58,106,293)
| 58,447,113 |
|
Collateralized Mortgage Obligations 2.2% |
Federal Home Loan Mortgage Corp.:
|
|
|
"CH", Series 2390, 5.5%, 12/15/2016 | 590,000
| 612,420
|
"LA", Series 1343, 8.0%, 8/15/2022 | 631,480
| 665,672
|
Federal National Mortgage Association:
|
|
|
"QC", Series 2002-11, 5.5%, 3/25/2017 | 855,000
| 888,777
|
"A5", Series 2002-W4, 7.5%, 5/25/2042 | 1,025,446
| 1,119,659
|
Federal National Mortgage Association Grantor Trust, "A2", Series 2002-T19, 7.0%, 7/25/2042
| 436,218
| 470,707
|
Structured Asset Securities Corp., "2A1", Series 2003-1, 6.0%, 2/25/2018
| 576,746
| 595,040
|
Washington Mutual Mortgage Securities Corp., "A22", Series 2001-S9, 6.75%, 9/25/2031
| 172,559
| 172,979
|
Total Collateralized Mortgage Obligations (Cost $4,507,723)
| 4,525,254 |
|
Municipal Investments 7.2% |
Delaware, NJ, Port Authority Revenue, Port District Project, Series A, 7.46%, 1/1/2011 (b)
| 1,000,000
| 1,180,010
|
Fultondale, AL, Core City, GO, 6.4%, 2/1/2022 (b)
| 1,340,000
| 1,443,609
|
Guin, AL, County GO, Series B, 8.25%, 6/1/2027 (b)
| 1,515,000
| 1,802,744
|
Idaho, Higher Education Revenue, Nazarene College Facilities, 8.34%, 11/1/2016 (d)
| 1,000,000
| 1,123,500
|
Illinois:
|
|
|
State GO, General Obligation, 4.95%, 6/1/2023 | 665,000
| 620,212
|
State GO, Taxable Pension, 5.1%, 6/1/2033 | 550,000
| 503,074
|
Pell City, AL, Core City GO, 5.4%, 8/1/2017 (b)
| 1,385,000
| 1,372,452
|
Reeves County, TX, County (GO) Lease, Certificate of Participation, Series IBC, 7.25%, 6/1/2011 (b)
| 1,150,000
| 1,161,040
|
St. Paul, MN, Sales & Special Tax Revenue, Series A, 6.94%, 11/1/2019 (b)
| 2,000,000
| 2,135,840
|
Texas, Multi Family Housing Revenue, Housing & Community Affairs Multi-Family, 6.85%, 12/1/2020 (b)
| 1,500,000
| 1,592,895
|
Washington, Industrial Development Revenue, 4.0%, 10/1/2012 (b)
| 915,000
| 866,907
|
Wisconsin, State GO, General Revenue, Series A, 5.7%, 5/1/2026 (b)
| 700,000
| 705,901
|
Total Municipal Investments (Cost $14,844,927)
| 14,508,184 |
|
Convertible Bond 0.1% |
DIMON, Inc., 6.25%, 3/31/2007 (Cost $96,087)
| 110,000
| 103,400 |
|
Shares
| Value ($) |
|
|
Preferred Stock 0.3% |
Farm Credit Bank of Texas,
| 490,000
| 491,352
|
TNP Enterprises, Inc.
| 644
| 69,820 |
Total Preferred Stock (Cost $537,926)
| 561,172 |
|
Convertible Preferred Stock 0.0% |
Hercules Trust II (Cost $55,060)
| 90
| 70,200 |
|
Short-Term Investment 2.9% |
US Treasury Bill, 0.895** 1/8/2004 (Cost $5,999,244)
| 6,000,000
| 5,999,244 |
| Principal Amount ($) | Value ($) |
|
|
Repurchase Agreements 1.5% |
State Street Bank and Trust Co., 0.78%, dated 12/31/2003 to be repurchased at $2,997,130 on 1/2/2004 (Cost $2,997,000) (e)
| 2,997,000
| 2,997,000 |
| % of Net Assets | Value ($) |
|
|
Total Investment Portfolio (Cost $241,229,315) (a)
| 120.6 | 245,844,423 |
Other Assets and Liabilities, Net
| (20.6) | (41,945,230) |
Net Assets
| 100.0 | 203,899,193 |
* 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 December 31, 2003.** Annualized yield at time of purchase; not a coupon rate.(a) The cost for federal income tax purposes was $242,581,935. At December 31, 2003, net unrealized appreciation for all securities based on tax cost was $3,262,488. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $5,167,715 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $1,905,227.(b) Bond is insured by one of these companies:Insurance coverage
| As a % of total
investment portfolio
|
AMBAC
| AMBAC Assurance Corp.
| 0.6 |
FSA
| Financial Security Assurance
| 1.6 |
MBIA
| Municipal Bond Investors Assurance
| 2.0 |
RADIAN
| RADIAN Asset Assurance Incorporated
| 0.8 |
(c) Mortgage dollar rolls included.(d) Security incorporates a letter of credit or line of credit from a major bank.(e) Repurchase agreements are collateralized by $3,050,000 US Treasury Note, maturing on 9/30/2005 with a value of $3,059,598.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.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities as of December 31, 2003 |
Assets
|
Investments in securities, at value (cost $241,229,315)
| $ 245,844,423 |
Foreign currency, at value (cost $5,553)
| 5,630 |
Receivable for investments sold
| 182,047 |
Interest receivable
| 3,066,720 |
Other assets
| 3,257 |
Total assets
| 249,102,077 |
Liabilities
|
Due to custodian bank
| 81,759 |
Payable for investments purchased
| 11,513 |
Payable for investments purchased - mortgage dollar rolls
| 44,801,097 |
Deferred mortgage dollar roll income
| 76,665 |
Accrued management and investment advisory fee
| 82,856 |
Dividends payable
| 1,067 |
Other accrued expenses and payables
| 147,927 |
Total liabilities
| 45,202,884 |
Net assets, at value
| $ 203,899,193 |
Net Assets
|
Net assets consist of:
Undistributed net investment income
| 134,519 |
Net unrealized appreciation (depreciation) on investments
| 4,615,108 |
Accumulated net realized gain (loss)
| (3,618,691) |
Paid-in capital
| 202,768,257 |
Net assets, at value
| $ 203,899,193 |
Net Asset Value per share ($203,899,193 / 10,383,340 shares of common stock outstanding, $.01 par value, 30,000,000 shares authorized)
| $ 19.64 |
The accompanying notes are an integral part of the financial statements.
Statement of Operations for the year ended December 31, 2003 |
Investment Income
|
Income:
Interest
| $ 10,374,579 |
Mortgage dollar roll income
| 2,118,078 |
Dividends
| 7,563 |
Total Income
| 12,500,220 |
Expenses:
Management and investment advisory fee
| 942,258 |
Services to shareholders
| 36,304 |
Custodian fees
| 28,075 |
Auditing
| 57,898 |
Legal
| 27,715 |
Directors' fees and expenses
| 74,435 |
Reports to shareholders
| 62,364 |
NYSE listing fee
| 33,489 |
Other
| 23,906 |
Total expenses
| 1,286,444 |
Net investment income
| 11,213,776 |
Realized and Unrealized Gain (Loss) on Investment Transactions
|
Net realized gain (loss) from investments
| 6,475,254 |
Net unrealized appreciation (depreciation) during the period on investments
| (2,106,834) |
Net gain (loss) on investment transactions
| 4,368,420 |
Net increase (decrease) in net assets resulting from operations
| $ 15,582,196 |
The accompanying notes are an integral part of the financial statements.
Statement of Cash Flows for the year ended December 31, 2003 |
Cash flows from operating activities
| |
Investment income received
| $ 11,751,246 |
Mortgage dollar roll income
| 2,151,316 |
Payment of operating expenses
| (1,296,315) |
Proceeds from sale and maturities of investments
| 1,034,036,105 |
Purchases of investments
| (1,031,780,620) |
Net sales of short-term investments
| 12,678,074 |
Cash provided (used) by operating activities
| $ 27,539,806 |
Cash flows from financing activities
| |
Net decrease in payable for investments purchased - mortgage dollar rolls
| $ (14,730,309) |
Distributions paid (net of reinvestment of distributions)
| (12,426,526) |
Cost of shares repurchased
| (460,013) |
Cash provided (used) by financing activities
| (27,616,848) |
Decrease in cash
| (77,042) |
Cash at beginning of period
| 913 |
Cash at end of period | $ (76,129) |
Reconciliation of net increase (decrease) in net assets from operations to cash provided (used) by operating activities
|
Net increase in net assets resulting from operations
| $ 15,582,196 |
Net increase in cost of investments
| 10,490,243 |
Net increase in unrealized appreciation (depreciation) on investments
| 2,106,834 |
Decrease in receivable for investments sold
| 36,359 |
Increase in dividends and interest receivable
| (587,260) |
Increase in other assets
| (3,257) |
Decrease in payable for investments purchased
| (42,200) |
Decrease in deferred mortgage dollar roll income
| (33,238) |
Decrease in accrued expenses and payables
| (9,871) |
Cash provided (used) by operating activities
| $ 27,539,806 |
Non-cash financing activities
|
Reinvestment of distributions
| 485,382 |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets |
Increase (Decrease) in Net Assets
| Years Ended December 31, |
2003 | 2002 |
Operations:
Net investment income
| $ 11,213,776 | $ 12,559,369 |
Net realized gain (loss) on investment transactions
| 6,475,254 | (108,172) |
Net unrealized appreciation (depreciation) on investment transactions during the period
| (2,106,834) | 5,726,881 |
Net increase (decrease) in net assets resulting from operations
| 15,582,196 | 18,178,078 |
Dividends to shareholders from net investment income
| (13,372,988) | (13,730,435) |
Fund share transactions:
Reinvestment of dividends from net investment income
| 945,395 | 1,277,976 |
Cost of shares repurchased
| (460,013) | - |
Net increase (decrease) in net assets from Fund share transactions
| 485,382 | 1,277,976 |
Increase (decrease) in net assets
| 2,694,590 | 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 $134,519 and $68,692, respectively)
| $ 203,899,193 | $ 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
| 51,228 | 68,293 |
Shares repurchased
| (25,300) | - |
Net increase (decrease) in Fund shares
| 25,928 | 68,293 |
Shares outstanding at end of period
| 10,383,340 | 10,357,412 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | 2003 | 2002 | 2001a | 2000 | 1999 |
Selected Per Share Data
|
Net asset value, beginning of period
| $ 19.43 | $ 19.00 | $ 18.83 | $ 18.37 | $ 19.93 |
Income (loss) from investment operations:
Incomeb
| 1.20 | 1.36 | 1.45 | 1.48 | 1.49 |
Operating expensesb
| (.12) | (.14) | (.14) | (.13) | (.14) |
Net investment incomeb
| 1.08 | 1.22 | 1.31 | 1.35 | 1.35 |
Net realized and unrealized gain (loss) on investment transactions
| .42 | .54 | .20 | .46 | (1.55) |
Total from investment operations | 1.50 | 1.76 | 1.51 | 1.81 | (.20) |
Less distributions from:
Net investment income
| (1.29) | (1.33) | (1.34) | (1.35) | (1.36) |
Net asset value, end of period
| $ 19.64 | $ 19.43 | $ 19.00 | $ 18.83 | $ 18.37 |
Per share market value, end of period
| $ 18.55 | $ 19.02 | $ 18.53 | $ 17.38 | $ 15.50 |
Price range on New York Stock Exchange for each share of Common Stock outstanding during the period (Unaudited):
High ($)
| 20.45 | 19.67 | 19.95 | 17.38 | 19.94 |
Low ($)
| 17.50 | 17.91 | 17.65 | 15.06 | 15.06 |
Total Return
|
Based on market value (%)c
| 4.53 | 10.12 | 14.57 | 21.65 | (14.90) |
Based on net asset value (%)c
| 8.22 | 9.71 | 8.49 | 11.21 | (.05) |
Ratios to Average Net Assets and Supplemental Data
|
Net assets, end of period ($ millions)
| 204 | 201 | 196 | 193 | 189 |
Ratio of expenses (%)
| .63 | .72 | .71 | .69 | .70 |
Ratio of net investment income (%)
| 5.47 | 6.36 | 6.78 | 7.32 | 7.01 |
Portfolio turnover rate (%)d
| 160 | 259 | 143 | 131 | 82 |
a 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.b Based on average shares outstanding during the period.c 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.d 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 426%, 520%, 356%, 335% and 209%, for the periods ended December 31, 2003, December 31, 2002, December 31, 2001, December 31, 2000 and December 31, 1999, respectively.Notes to Financial Statements |
|
|
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. The custodian or agent bank holds the collateral in a separate account until the agreement matures. If the value of the securities falls below the principal amount of the repurchase agreement plus accrued interest, the financial institution deposits additional collateral by the following business day. If the financial institution either fails to deposit the required additional collateral or fails to repurchase the securities as agreed, the Fund has the right to sell the securities and recover any resulting loss from the financial institution. If the financial institution enters into bankruptcy, the Fund's claims on the collateral may be subject to legal proceedings.
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, 2003, the Fund had a net tax basis capital loss carryforward of approximately $2,304,000, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2010, the expiration date, 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, 2003, the Fund's components of distributable earnings (accumulated losses) on a tax basis are as follows:
Undistributed ordinary income*
| $ 211,184 |
Undistributed net long-term capital gains
| $ - |
Capital loss carryforwards
| $ 2,304,000 |
Unrealized appreciation (depreciation) on investments
| $ 3,262,488 |
In addition, the tax character of distributions paid to shareholders by the Fund is as follows:
Years Ended December 31,
| 2003
| 2002
|
Distributions from ordinary income*
| $ 13,372,988 | $ 13,730,435 |
* For tax purposes short-term capital gains distributions are considered ordinary income distributions.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 December 31, 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 a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on 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 year ended December 31, 2003, purchases and sales (excluding US Treasury obligations, short-term investments and mortgage dollar roll transactions) of investment securities aggregated $287,376,382 and $245,776,469, respectively. Purchases and sales of US Treasury obligations aggregated $149,836,551 and $141,287,060, respectively. Purchases and sales of mortgage dollar roll transactions aggregated $594,525,487 and $646,973,903, 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 year ended December 31, 2003, the fees pursuant to the Agreement amounted to $942,258, 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 the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2003, the amount charged to the Fund by SISC aggregated $36,304, of which $14,489 is unpaid at December 31, 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. During the year ended December 31, 2003, the Fund purchased 25,300 shares of common stock on the open market at a total cost of $460,013.
Report of Ernst & Young LLP, Independent Auditors |
|
|
To the Shareholders and Board of Directors of
Montgomery Street Income Securities, Inc.
We have audited the accompanying statement of assets and liabilities of Montgomery Street Income Securities, Inc. (the "Fund"), including the investment portfolio, as of December 31, 2003, and the related statements of operations and cash flows 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, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. 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, 2003, the results of its operations and its cash flows 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
February 18, 2004 | /s/ Ernst & Young LLP
|
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.
The following table presents certain information regarding the Directors and Officers of Montgomery Street Income Securities, Inc. as of December 31, 2003. Each Director's and Officer's age as of December 31, 2003 is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Director and Officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Director is c/o Montgomery Street Income Securities, Inc., 101 California Street, Suite 4100, San Francisco, California 94111. The term of office for each Director is until the next annual meeting of stockholders or until the election and qualification of a successor. Officers are appointed annually by, and serve at the discretion of, the Board of Directors.
Non-Interested Directors |
Name, Age, Position(s) Held with the Fund and Length of Time Served1
| Principal Occupation(s) During Past 5 Years and
Other Directorships Held in Public Companies
| Number of Funds in Fund Complex Overseen
|
James C. Van Horne (68)
Chairman and Director
1985 to present
| A.P. Giannini Professor of Finance, Graduate School of Business, Stanford University. Directorships: Suntron Corporation (electronic manufacturing services) and Bailard, Biehl & Kaiser Opportunity Fund Group, Inc. (registered investment company)
| 1 |
Richard J. Bradshaw (55)
Director
1991 to present
| Executive Director, Cooley Godward LLP (law firm)
| 1 |
Maryellie K. Johnson (68)
Director
1989 to present
| Private investor; formerly, Director, London and Overseas Freighters, Ltd. (oil tanker operator) (1989-1998)
| 1 |
Wendell G. Van Auken (59)
Director
1994 to present
| General Partner of several venture capital funds affiliated with Mayfield Fund. Directorship: Advent Software (portfolio software company)
| 1 |
Interested Director |
Name, Age, Position(s) Held with the Fund and Length of Time Served
| Principal Occupation(s) During Past 5 Years and
Other Directorships Held
| Number of Funds in Fund Complex Overseen
|
John T. Packard1 (70)
Director
2001 to present
| Managing Director, Weiss, Peck & Greer LLC (investment adviser and broker-dealer) (2002-present); Advisory Managing Director of the same firm (2000-2002); formerly, Advisory Managing Director, Zurich Scudder Investments, Inc. (the Fund's Advisor) (1999-2000), Managing Director of the same firm (1985-1998), and President of the Fund (1988-2000)
| 1 |
Officers |
Name, Age, Position(s) Held with the Fund and Length of Time Served
| Principal Occupation(s) During Past 5 Years and
Other Directorships Held
| Number of Funds in Fund Complex Overseen
|
Richard T. Hale2 (58)
President
2002 to present
| Managing Director, Deutsche Investment Management Americas Inc. (2003-present); Managing Director, Deutsche Bank Securities Inc. (formerly Deutsche Banc Alex. Brown Inc.) and Deutsche Asset Management (1999-present); Director and President, Investment Company Capital Corp. (registered investment advisor) (1996-present); Director, Deutsche Global Funds, Ltd. (2000-present), CABEI Fund (2000-present), North American Income Fund (2000-present) (registered investment companies); Director, Scudder Global Opportunities Fund (since 2003); Director/Officer Deutsche/Scudder Mutual Funds (various dates) (registered investment companies); Vice President, Deutsche Asset Management, Inc. (2000-present); formerly, Director, ISI Family of Funds (registered investment companies; 4 funds overseen) (1992-1999)
| 201 |
Gary W. Bartlett3 (44)
Vice President
2002 to present
| Managing Director of Deutsche Asset Management
| n/a |
Andrew P. Cestone3 (34)
Vice President
2003 to present
| Managing Director, Deutsche Asset Management (1998-present); prior thereto, investment analyst, Phoenix Investment Partners (1997-1998), credit officer in asset-based lending group, Fleet Bank (1993-1997)
| n/a |
Maureen E.
Kane4 (41)
Vice President and Secretary
1999 to present
| Vice President of Deutsche Asset Management
| n/a |
Charles A. Rizzo4 (46)
Treasurer and Chief Financial Officer
2003 to present
| Director of Deutsche Asset Management (2000 to present); formerly, Vice President and Department Head, BT Alex. Brown Incorporated (now Deutsche Bank Securities Inc.) (1998-1999); Senior Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP) (1993-1998)
| n/a |
1 Mr. Packard may be considered an "interested person" of the Fund, as defined in the Investment Company Act of 1940, as amended, by reason of his past relationships with the Fund and the Advisor.2 Address: One South Street, Baltimore, Maryland3 Address: 150 South Independence Boulevard, Philadelphia, Pennsylvania4 Address: Two International Place, Boston, MassachusettsInvestment Manager | Deutsche Investment Management Americas Inc.
345 Park Avenue
New York, NY 10154 |
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
San Francisco, CA 94111 |
Independent Auditors | Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116 |
DIRECTORS
RICHARD J. BRADSHAW
MARYELLIE K. JOHNSON
JOHN T. PACKARD
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE
Chairman
OFFICERS
RICHARD T. HALE
President
GARY W. BARTLETT
Vice President
ANDREW P. CESTONE
Vice President
MAUREEN E. KANE
Vice President and Secretary
CHARLES A. RIZZO
Treasurer and Chief Financial Officer
|
ITEM 2. CODE OF ETHICS.
As of the end of the period, December 31, 2003, Montgomery Street Securities
Trust, Inc. has adopted a code of ethics, as defined in Item 2 of Form N-CSR,
that applies to its President and Treasurer and its Chief Financial Officer. A
copy of the code of ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Fund's Board of Directors has determined that the Fund has at least one
"audit committee financial expert" serving on its audit committee: Mr. John C.
Atwater, Mr. Richard J. Bradshaw, and Mr. Wendell G. Van Auken. Each of these
audit committee members is "independent," meaning that he is not an "interested
person" of the Fund (as that term is defined in Section 2(a)(19) of the
Investment Company Act of 1940) and he does not accept any consulting, advisory,
or other compensatory fee from the Fund (except in the capacity as a Board or
committee member).
An "audit committee financial expert" is not an "expert" for any purpose,
including for purposes of Section 11 of the Securities Act of 1933, as a result
of being designated as an "audit committee financial expert." Further, the
designation of a person as an "audit committee financial expert" does not mean
that the person has any greater duties, obligations, or liability than those
imposed on the person without the "audit committee financial expert"
designation. Similarly, the designation of a person as an "audit committee
financial expert" does not affect the duties, obligations, or liability of any
other member of the audit committee or board of directors.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
MONTGOMERY STREET INCOME SECURITIES FUND, INC.
FORM N-CSR DISCLOSURE RE: AUDIT FEES
The following table shows the amount of fees that Ernst & Young, LLP
("E&Y"), the Fund's auditor, billed to the Fund during the Fund's last two
fiscal years. For engagements with E&Y entered into on or after May 6, 2003,
the Audit Committee approved in advance all audit services and non-audit
services that E&Y provided to the Fund.
The Audit Committee has delegated certain pre-approval responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).
Services that the Fund's Auditor Billed to the Fund
- ----------- ------------------ ------------------- ------------------- -----------------
Fiscal Year All
Ended Audit Fees Billed Audit-Related Tax Fees Billed to Other Fees Billed
December 31 to Fund Fees Billed to Fund Fund to Fund
- ----------- ------------------ ------------------- ------------------- -----------------
- ----------- ------------------ ------------------- ------------------- -----------------
2003 $46,800 $0 $7,500 $0
- ----------- ------------------ ------------------- ------------------- -----------------
- ----------- ------------------ ------------------- ------------------- -----------------
2002 $59,459 $0 $8,250 $0
- ----------- ------------------ ------------------- ------------------- -----------------
The above "Tax Fees" were billed for professional services rendered for tax
compliance.
Services that the Fund's Auditor Billed to the Adviser and
Affiliated Fund Service Providers
The following table shows the amount of fees billed by E&Y to Deutsche
Investment Management Americas, Inc. ("DeIM" or the "Adviser"), and any entity
controlling, controlled by or under common control with DeIM ("Control
Affiliate") that provides ongoing services to the Fund ("Affiliated Fund Service
Provider"), for engagements directly related to the Fund's operations and
financial reporting, during the Fund's last two fiscal years.
- ----------- --------------------- ---------------------- -------------------
Audit-Related All
Fees Billed to Tax Fees Billed to Other Fees Billed
Fiscal Year Adviser and Adviser and to Adviser and
Ended Affiliated Fund Affiliated Fund Affiliated Fund
December 31 Service Providers Service Providers Service Providers
- ----------- --------------------- ---------------------- -------------------
2003 $112,900 $0 $0
- ----------- --------------------- ---------------------- -------------------
2002 $212,800 $0 $0
- ----------- --------------------- ---------------------- -------------------
The "Audit-Related Fees" were billed for services in connection with the
assessment of internal controls and additional related procedures.
Non-Audit Services
The following table shows the amount of fees that E&Y billed during the
Fund's last two fiscal years for non-audit services. For engagements entered
into on or after May 6, 2003, the Audit Committee pre-approved all non-audit
services that E&Y provided to the Adviser and any Affiliated Fund Service
Provider that related directly to the Fund's operations and financial reporting.
The Audit Committee requested and received information from E&Y about any
non-audit services that E&Y rendered during the Fund's last fiscal year to
the Adviser and any Affiliated Fund Service Provider. The Committee considered
this information in evaluating E&Y's independence.
- ----------- --------------- ----------------------- -------------------- -------------------
Total Non-Audit Fees
billed to Adviser and
Affiliated Fund
Service Providers Total Non-Audit Fees
(engagements related billed to Adviser
directly to the and Affiliated Fund
Total operations and Service Providers
Non-Audit Fees financial reporting (all other
Fiscal Year Billed to Fund of the Fund) engagements) Total of (A), (B)
Ended
December 31 (A) (B) (C) and (C)
- ----------- --------------- ----------------------- -------------------- -------------------
2003 $7,500 $0 $3,742,000 $3,749,500
- ----------- --------------- ----------------------- -------------------- -------------------
2002 $8,250 $0 $963,492 $971,742
- ----------- --------------- ----------------------- -------------------- -------------------
All other engagement fees were billed for services in connection with risk
management and process improvement initiatives for DeIM and other related
entities that provide support for the operations of the fund.
ITEM 5. [RESERVED]
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Proxy Voting Guidelines. The Fund has delegated proxy voting responsibilities to
its investment advisor, subject to the Board's general oversight. The Fund has
delegated proxy voting to the advisor with the direction that proxies should be
voted consistent with the Fund's best economic interests. The advisor has
adopted its own Proxy Voting Policies and Procedures ("Policies"), a Proxy
Voting Desktop Manual ("Manual"), and Proxy Voting Guidelines ("Guidelines") for
this purpose. The Policies address, among other things, conflicts of interest
that may arise between the interests of the Fund, and the interests of the
advisor and its affiliates, including the Fund's principal underwriter. The
Manual sets forth the procedures that the advisor has implemented to vote
proxies, including monitoring for corporate events, communicating with the
fund's custodian regarding proxies, considering the merits of each proposal, and
executing and recording the proxy vote. The Guidelines set forth the advisor's
general position on various proposals, such as:
o Shareholder Rights -- The advisor generally votes against proposals that
restrict shareholder rights.
o Corporate Governance -- The advisor generally votes for confidential and
cumulative voting and against supermajority voting requirements for charter
and bylaw amendments.
o Anti-Takeover Matters -- The advisor generally votes for proposals that
require shareholder ratification of poison pills or that request boards to
redeem poison pills, and votes "against" the adoption of poison pills if
they are submitted for shareholder ratification. The advisor generally
votes for fair price proposals.
o Routine Matters -- The advisor generally votes for the ratification of
auditors, procedural matters related to the annual meeting, and changes in
company name, and against bundled proposals and adjournment.
The general provisions described above do not apply to investment companies. The
advisor generally votes proxies solicited by investment companies in accordance
with the recommendations of an independent third-party, except for proxies
solicited by or with respect to investment companies for which the advisor or an
affiliate serves as investment advisor or principal underwriter ("affiliated
investment companies"). The advisor votes affiliated investment company proxies
in the same proportion as the vote of the investment company's other
shareholders (sometimes called "mirror" or "echo" voting). Master fund proxies
solicited from feeder funds are voted in accordance with applicable requirements
of the Investment Company Act of 1940.
Although the Guidelines set forth the advisor's general voting positions on
various proposals, the advisor may, consistent with the Fund's best interests,
determine under some circumstances to vote contrary to those positions.
The Guidelines on a particular issue may or may not reflect the view of
individual members of the board, or of a majority of the board. In addition, the
Guidelines may reflect a voting position that differs from the actual practices
of the public companies within the Deutsche Bank organization or of the
investment companies for which the advisor or an affiliate serves as investment
advisor or sponsor.
The advisor may consider the views of a portfolio company's management in
deciding how to vote a proxy or in establishing general voting positions for the
Guidelines, but management's views are not determinative.
As mentioned above, the Policies describe the way in which the advisor resolves
conflicts of interest. To resolve conflicts, the advisor, under normal
circumstances, votes proxies in accordance with its Guidelines. If the advisor
departs from the Guidelines with respect to a particular proxy or if the
Guidelines do not specifically address a certain proxy proposal, a committee
established by the advisor will vote the proxy. Before voting any such proxy,
however, the committee will exclude from the voting discussions and
determinations any member who is involved in or aware of a material conflict of
interest. If, after excluding any and all such members, there are fewer than
three voting members remaining, the advisor will engage an independent third
party to vote the proxy or follow the proxy voting recommendations of an
independent third party.
Under certain circumstances, the advisor may not be able to vote proxies or the
advisor may find that the expected economic costs from voting outweigh the
benefits associated with voting. For example, the advisor may not vote proxies
on certain foreign securities due to local restrictions or customs. The advisor
generally does not vote proxies on securities subject to share blocking
restrictions.
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 filing period of the report, management identified issues
relating to the overall fund expense payment and accrual process. Management
discussed these matters with the Registrant's Audit Committee and auditors,
instituted additional procedures to enhance its internal controls and will
continue to develop additional controls and redesign work flow to strengthen the
overall control environment associated with the processing and recording of fund
expenses.
ITEM 10. EXHIBITS.
(a)(1) Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached
hereto as EX-99.CODE ETH.
(a)(2) Certification pursuant to Rule 30a-2(a) under the Investment Company
Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as
Exhibit 99.CERT.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company
Act of 1940 (17 CFR 270.30a-2(b)) is furnished and attached hereto as
Exhibit 99.906CERT.
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: February 27, 2004
---------------------------
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: February 27, 2004
---------------------------
By: /s/Richard T. Hale
---------------------------
Charles A. Rizzo
Chief Financial Officer
Date: February 27, 2004
---------------------------
