UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number: 811-2341
Montgomery Street Income Securities, Inc.
(Exact name of registrant as specified in charter)
225 W. Wacker Drive, Suite 950
Chicago, IL 60606
(Address of principal executive offices)
Mark D. Nerud, President
225 W. Wacker Drive, Suite 950
Chicago, IL 60606
(Name and address of agent for service)
Registrant's telephone number, including area code: (312) 338-5801
Date of fiscal year end: December 31
Date of reporting period: January 1, 2006 - June 30, 2006
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss.3507.
Item 1. Reports to Stockholders.
(MONTGOMERY LOGO)
Montgomery Street
Income Securities, Inc.
SEMIANNUAL REPORT TO STOCKHOLDERS
JUNE 30, 2006 (UNAUDITED)
Portfolio Management Review
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The investments of Montgomery Street Income Securities, Inc. ("Fund") provided a
total return based on net asset value ("NAV") of -0.85% for the six-month period
ended June 30, 2006.(1) The total return of the Fund based on the market price
of its New York Stock Exchange-traded shares was -0.90% for the same period. The
total NAV return of the Fund underperformed the return of the unmanaged Lehman
Brothers Aggregate Bond Index, which the Fund uses as a benchmark and which
posted a total return of -0.73% for the six-month period.(2) Past results are
not necessarily indicative of the future performance of the Fund. Investment
return and principal value will fluctuate.
The Fund paid a quarterly dividend of $0.25 on April 28, 2006. The Fund's market
price stood at $16.51 as of June 30, 2006, compared with $16.91 on December 31,
2005. The market price discount of the shares, as a percentage of NAV, was
11.00% on June 30, 2006. Shares of closed-end funds frequently trade at a
discount to NAV. The price of the Fund's shares is determined by a number of
factors, several of which are beyond the control of the Fund. The Fund,
therefore, cannot predict whether its shares will trade at, below or above its
NAV.
Continued economic expansion and elevated energy prices kept the Federal Open
Market Committee ("FOMC") active during the first half of 2006. At its most
recent meeting in June, the FOMC raised the Fed Funds rate another 25 basis
points, their 17th consecutive increase, to a level of 5.25%. Employment, in the
form of job creation, claims for unemployment insurance, and the overall
unemployment rate, all suggested some tightness in the U.S. Labor market.
- ------------------------
(1) Total return based on net asset value reflects changes in the Fund's net
asset value during the period. Total return based on market price reflects
changes in market price. Each figure assumes that dividend and capital
gains, if any, were reinvested. These figures will differ depending upon
the level of any discount from or premium to NAV at which the Fund's shares
traded during the period.
(2) The Lehman Brothers Aggregate Bond Index is an unmanaged index representing
domestic taxable investment-grade bonds, consisting of government and
corporate securities, mortgage pass- through securities, and asset-backed
securities with average maturities of one year or more. Index returns
assume reinvestment of dividends and, unlike Fund returns, do not reflect
fees or expenses. It is not possible to invest directly in an index.
2 Montgomery Street Income Securities, Inc.
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Furthermore, continued strength in energy and commodity prices had begun to
apply moderate upward pressure to core prices.
Overall, rising interest rates were detrimental to the performance of the Fund's
holdings during the first half of 2006. For the first two quarters of 2006, the
U.S. Treasury and investment grade bond sectors posted negative returns. In
contrast, the "riskier" high yield bond sector fared better, posting solid
gains. High yield bond outperformance during the first quarter was driven
largely by investor optimism about the economy. Cash, as measured by three month
Treasury bills, outperformed most bond sectors for the period. Although the
yields of all maturities rose during the period, the yield curve remained fairly
flat, with short-term instruments paying yields that approached the levels of
longer-maturity issues. The following chart details the change in level of
interest rates for Treasury securities over the course of the first half:
Months
12/31/2005 6/30/2006
1 Month 4.0317256 4.952558
6 Months 4.3750896 5.224555
1 Year 4.3866518 5.200009
2 Years 4.3999635 5.167
3 Years 4.3662895 5.132162
5 Years 4.3553675 5.103
10 Years 4.4001228 5.143287
20 Years 4.4912675 5.166064
30 Years 4.538 5.188
Effective as of the close of business on June 9, 2006, Hartford Investment
Management Company ("Hartford") became the investment adviser of the Fund, and
Jackson Fund Services ("JFS"), a division of Jackson National Asset Management,
LLC, became the administrator of the Fund. Hartford and JFS succeeded Deutsche
Investment Management Americas Inc., which managed and administered the Fund
through June 9, 2006. Stockholders of the Fund approved a new investment
advisory agreement with Hartford at the Fund's Annual Meeting of Stockholders
that was held on July 13, 2006.
Montgomery Street Income Securities, Inc. 3
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In assuming the portfolio management responsibilities of the Fund on June 9,
2006, Hartord's immediate goal was to increase the income and yield of the
portfolio while maintaining a high overall average credit quality. The
structural changes to the portfolio in June were made in an effort to achieve a
balance between the overall credit quality of the Fund and the yield it was able
to generate to support dividend payments.
At the end of the second quarter, the Fund was positioned defensively with
respect to interest rate risk relative to the benchmark. During June, Hartford
reduced the duration of the portfolio by 0.36 years, from 4.61 on June 9, 2006
to 4.25 on June 30, 2006. Most of this risk was taken out of the 10 to 15 year
segments of the yield curve. This move positioned the portfolio closer to
neutral in terms of yield curve exposure relative to the benchmark and was
driven by the "flatness" of the yield curve and consensus expectations for
moderating, non-recessionary economic growth.
On June 9, 2006, the Fund held approximately 50% of its assets in the mortgage
and asset-backed securities sector and less than 1% allocated to high yield
securities. Approximately 13% of the portfolio's assets were moved from the
mortgage sector into high yield during the second half of June. The reduction in
mortgage holdings and a concomitant increase in the portfolio's high yield
exposure improved the yield of the portfolio with a moderate impact to overall
average credit quality. Portfolio yield was increased over the period to 6.44%
(from 5.95% at inception) with an ending portfolio quality rating of A1/AA-
(down from Aa1/AA+ on June 9th).
As of June 30, 2006, the portfolio was defensively positioned for higher
interest rates due to the expectation of trend-like growth in the U.S. economy
and a typical late cycle up-tick in inflation over the next few months.
Hartford also increased the portfolio's allocation to the credit sector. The
steady move to higher rates over the second quarter increased risk premiums
among most sectors of the fixed income market. Following this re-pricing,
Hartford now finds the valuation in the credit sector reasonably attractive on a
risk-reward basis. Some risks remain, of course, particularly to corporations
exposed to merger or share
4 Montgomery Street Income Securities, Inc.
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repurchase activity, or, more generally, to the credit sector as a whole should
the Fed over-tighten and send the economy into a sharper than expected slowdown.
On the whole, though, Hartford sees reasonable opportunities in this sector and
expects to further increase its exposure over the coming quarter. Given
Hartford's outlook for slightly higher interest rates and continued global
economic growth, Hartford also continues to see opportunities in the high yield
and emerging market sectors.
<Table>
<Caption>
JUNE 30, 2006
QUALITY DISTRIBUTION PORTFOLIO BENCHMARK
GOV* 34.26% 71.06%
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Aaa 20.67 7.91
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Aa 2.40 5.28
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A 14.37 8.26
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Baa 14.53 7.48
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Ba 3.81 0.01
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B and Lower 9.96 0.00
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TOTAL 100% 100%
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</Table>
* GOV includes Cash, U.S. Treasury, and U.S. Agency.
<Table>
<Caption>
JUNE 30, 2006
SECTOR DISTRIBUTION PORTFOLIO BENCHMARK
U.S. Treasury 2.55% 25.03%
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U.S. TIPS 2.68 0.00
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U.S. Agency 0.09 11.29
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Credit 36.69 22.05
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Agency MBS* 35.68 34.93
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Asset-Backed Securities 5.51 1.23
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Commercial MBS* 1.77 4.45
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High Yield 13.46 0.01
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Emerging Market 0.65 1.01
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Non-Dollar 0.00 0.00
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Cash 0.92 0.00
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TOTAL 100% 100%
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</Table>
* MBS = Mortgage-Backed security
Montgomery Street Income Securities, Inc. 5
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The views expressed in this report reflect those of the investment adviser only
through the end of the period of the report as stated on the cover. The
investment adviser's views are subject to change at any time based on market and
other conditions and should not be construed as a recommendation.
Investment in the Fund involves risk. The Fund invests in individual bonds whose
yields and market value fluctuate so that your investment may be worth more or
less than its original cost. Bond investments are subject to interest rate risk
such that when interest rates rise, the price of the bonds, and thus the value
of the Fund, can decline and the investor can lose principal value.
Additionally, investing in foreign securities presents certain unique risks not
associated with domestic investments, such as currency fluctuation, political
and economic changes, and market risks. All of these factors may result in
greater share price volatility. Closed-end funds, unlike open-end funds, are not
continuously offered. The Fund, as a closed-end fund, can 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. The Fund,
therefore, cannot predict whether its shares will trade at, below or above net
asset value.
NOT FDIC/NCUA INSURED. NO BANK GUARANTEE. MAY LOSE VALUE. NOT A DEPOSIT. NOT
INSURED BY ANY FEDERAL GOVERNMENT AGENCY.
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.
6 Montgomery Street Income Securities, Inc.
Other Information
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DIVIDEND DECLARED
The Fund declared a dividend of $0.25 per share on April 6, 2006. The decrease
in the dividend from prior periods reflected diminished current income received
by the Fund, due in large part to a significant reduction in the high yield
portion of the portfolio and the elimination of leverage in the form of mortgage
dollar rolls. In addition, the duration of the portfolio was shortened and
liquidity increased. These actions were undertaken in keeping with a belief that
a more conservative investment posture was warranted during the first half of
2006, as well as in anticipation of the transition to a new investment adviser
which occurred at the close of business on June 9, 2006.
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 12,000 shares repurchased during the
first quarter of 2006 and 12,000 shares repurchased during the second quarter.
Up to 11,000 shares may be repurchased during the third quarter.
DIVIDEND REINVESTMENT AND CASH PURCHASE OPTION
The Fund maintains an optional Dividend Reinvestment and Cash Purchase Plan
("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.
Effective June 9, 2006, Mellon Bank, N.A. became the new Plan Agent.
Montgomery Street Income Securities, Inc. 7
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INVESTMENT PORTFOLIO
Following the Fund's first and third quarter-end, a complete portfolio holdings
listing is filed with the U.S. Securities and Exchange Commission ("SEC") on
Form N-Q. The form will be available on our website at
www.montgomerystreetincome.com, or on the SEC's website at www.sec.gov, and it
also may be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the SEC's Public Reference Room
may be obtained by calling 1-202-551-8090.
PROXY VOTING
Information about how the Fund voted any proxies related to its portfolio
securities during the most recent 12-month period ended June 30 is available on
our website at www.montgomerystreetincome.com or on the SEC's website at
www.sec.gov. A description of the policies that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request by calling (877) 437-3938.
REPORTS TO STOCKHOLDERS
Those stockholders who wish to view the Fund's complete portfolio holdings
listing for the first and third quarters may view the Form N-Q, as described
above in the "Investment Portfolio" section of this report. The Fund's annual
and semiannual reports to stockholders will be mailed to stockholders, and are
also available on our website at www.montgomerystreetincome.com.
NET ASSET VALUE
The Fund's NAV is available daily on our website at
www.montgomerystreetincome.com. The Fund's NAV and market value are published
weekly on Monday in the Wall Street Journal under the heading "Closed End
Funds". The Fund's NAV and market value also are published weekly in Barron's.
8 Montgomery Street Income Securities, Inc.
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TRANSITION TO NEW INVESTMENT MANAGER AND OTHER SERVICE PROVIDERS
At its April 18, 2006 meeting, the Board of Directors concluded its search for a
new investment adviser and administrator of the Fund. Effective at the close of
business on June 9, 2006, Hartford became the investment adviser of the Fund
pursuant to an interim investment advisory agreement that was approved by the
Board of Directors. A definitive investment advisory agreement was approved by
the stockholders of the Fund at the Annual Meeting of Stockholders held on July
13, 2006. For a description of the considerations of the Board of Directors
please refer to the Investment Management Agreement Approval section beginning
on page 38 of this report.
Also effective on June 9, 2006, JFS became the administrator of the Fund. Under
the new administration agreement, JFS is required to provide the Fund's
officers, fund accounting, fund administration, Board support, investor
servicing, and oversight of the Fund's other service providers.
Also effective on June 9, 2006, Mellon Bank, N.A. ("Mellon Bank") became the new
custodian of the Fund. Under the new custody agreement between the Fund and
Mellon Bank, Mellon Bank has custody of the Fund's assets and acts as the Fund's
foreign custody manager and primary custodian. In addition, Mellon Bank became
the new plan agent of the Fund's Dividend Reinvestment and Cash Purchase Plan.
Mellon Bank will delegate certain of its responsibilities under the Plan to its
affiliates, Mellon Investor Services LLC and Mellon Securities LLC.
Also effective on June 9, 2006, Mellon Investor Services LLC became the new
transfer agent, registrar and dividend disbursing agent of the Fund.
CHANGE IN PORTFOLIO MANAGERS
Due to the transition of investment advisers described above, as of the close of
business on June 9, 2006, the following individuals of Hartford assumed
portfolio management responsibility for the Fund: Jeffrey S. MacDonald, Charles
Moon and Nasri A. Toutoungi.
Montgomery Street Income Securities, Inc. 9
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CHANGE IN OFFICERS
Due to the transition of administrators for the Fund described above, the
following individuals of JFS have been elected officers of the Fund, effective
June 9, 2006:
<Table>
Mark D. Nerud President and Chief Executive Officer
Jeffrey C. Nellessen Treasurer and Chief Financial Officer
Susan S. Rhee Secretary and Chief Legal Officer
Toni M. Bugni Chief Compliance Officer
</Table>
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
At a meeting held on July 13, 2006, based on Audit Committee recommendations and
approvals, the full Board of Directors of the Fund approved Deloitte & Touche
LLP as the Fund's registered public accounting firm for the fiscal year ending
December 31, 2006.
10 Montgomery Street Income Securities, Inc.
Investment Objectives and Policies
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INVESTMENT OBJECTIVES
Your Fund is a closed-end diversified management investment company registered
under the Investment Company Act of 1940, as amended ("1940 Act"), 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)
At least 70% of total assets must be invested in: straight debt securities
(other than municipal securities), including U.S. dollar-denominated debt
securities of foreign issuers, rated within the four highest grades assigned by
Moody's Investors Service, Inc. or Standard & Poor's Corporation; bank debt of
comparable quality; U.S. government or agency securities; commercial paper;
cash; cash equivalents; or Canadian government, provincial, or municipal
securities (not in excess of 25% of total assets).
Up to 30% of total assets ("30% basket") may be invested in other U.S. or
foreign straight debt securities; convertible securities; and preferred stocks.
Not more than 25% of total assets may be invested in securities of any one
industry (finance companies as a whole are not considered an "industry" for the
purposes of this limitation).
Not more than 5% of total assets may be invested in securities of any one
issuer, other than U.S. government or agency securities.
- ------------------------
(1) The Fund will provide stockholders with at least 60 days' notice prior to
making any changes to this 80% investment policy. The Fund invests in
mortgage dollar rolls, which are treated as a borrowing for reporting
purposes.
Montgomery Street Income Securities, Inc. 11
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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 lend its portfolio securities to the extent permitted under the
1940 Act, as it may be amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
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 less, and 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 which are
excluded from the 30% basket.
It is the intention of the Fund to invest exclusively in non-voting securities.
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.
12 Montgomery Street Income Securities, Inc.
Investment Portfolio AS OF JUNE 30, 2006 (UNAUDITED)
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<Table>
<Caption>
PRINCIPAL
AMOUNT ($) VALUE ($)
-----------------------------------
CORPORATE BONDS 41.5%
CONSUMER DISCRETIONARY 8.0%
Affinion Group, Inc., 144A, 10.13%, 10/15/2013 400,000 402,000
Altria Group, Inc., 7.00%, 11/4/2013 250,000 263,750
AMFM, Inc., 8.00%, 11/1/2008 750,000 779,775
ArvinMeritor, 8.75%, 3/1/2012 950,000 926,250
Asbury Automotive Group, Inc., 9.00%, 6/15/2012 250,000 247,500
Charter Communications Operating LLC, 144A, 8.00%,
4/30/2012 500,000 497,500
COX Communications, Inc., 5.45%, 12/15/2014 500,000 462,299
DaimlerChrysler NA Holding Corp., 4.75%, 1/15/2008 1,000,000 983,649
Dex Media West LLC/Dex Media Finance Co., 9.88%,
8/15/2013 450,000 487,685
ERAC USA Finance Co., 144A, 5.90%, 11/15/2015 429,000 415,668
Foot Locker, Inc., 8.50%, 1/15/2022 155,000 156,356
Fortune Brands, Inc., 5.38%, 1/15/2016 250,000 231,257
General Motors Corp., 6.38%, 5/1/2008 750,000 714,375
Goodyear Tire & Rubber Co., 11.25%, 3/1/2011 500,000 548,750
Harrah's Operating Co., Inc., 5.63%, 6/1/2015 1,000,000 924,924
Hertz Corp., 144A, 10.50%, 1/1/2016 460,000 487,600
Hilton Hotels Corp., 7.63%, 12/1/2012 610,000 628,806
Inergy LP, 8.25%, 3/1/2016 450,000 454,500
JC Penney Co., Inc., 8.00%, 3/1/2010 500,000 532,701
Mediacom LLC, 9.50%, 1/15/2013 500,000 497,500
MGM Mirage, Inc., 8.50%, 9/15/2010 500,000 519,375
Neiman-Marcus Group, Inc., 144A, 10.38%, 10/15/2015 450,000 478,125
Pokagon Gaming Authority, 144A, 10.38%, 6/15/2014 210,000 217,088
TCI Communications, Inc., 8.75%, 8/1/2015 35,000 39,990
Tele-Communications-TCI Group, 10.13%, 4/15/2022 1,291,000 1,641,602
Time Warner, Inc., 6.75%, 4/15/2011 800,000 820,166
Town Sports International, Inc., 9.63%, 4/15/2011 450,000 464,625
Viacom, Inc., 144A, 6.88%, 4/30/2036 480,000 463,229
Wal-Mart Stores, Inc., 5.25%, 9/1/2035 250,000 218,132
------------------
15,505,177
CONSUMER STAPLES 2.1%
Anheuser-Busch Cos., Inc., 5.75%, 4/1/2036 400,000 375,115
Archer-Daniels-Midland Co., 5.38%, 9/15/2035 400,000 354,710
Coca-Cola Enterprises, Inc., 8.50%, 2/1/2022 500,000 613,465
Delhaize America, Inc., 9.00%, 4/15/2031 450,000 493,475
Dole Food Co., Inc., 8.63%, 5/1/2009 950,000 907,250
</Table>
The accompanying notes are an integral part of the financial statements.
Montgomery Street Income Securities, Inc. 13
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<Table>
<Caption>
PRINCIPAL
AMOUNT ($) VALUE ($)
-----------------------------------
Fred Meyer, Inc., 7.45%, 3/1/2008 750,000 768,407
Kraft Foods, Inc., 6.25%, 6/1/2012 500,000 505,834
Pliant Corp., 11.63%, 6/15/2009 (c) 5 5
------------------
4,018,261
ENERGY 1.8%
Hess Corp., 7.13%, 3/15/2033 450,000 466,701
Energy Transfer Partners LP, 5.95%, 2/1/2015 2,000,000 1,925,936
Pemex Project Funding Master Trust, 144A, 5.75%,
12/15/2015 696,000 641,016
Valero Energy Corp., 7.50%, 4/15/2032 430,000 466,854
------------------
3,500,507
FINANCIALS 13.5%
Allstate Corp., 6.13%, 02/15/12 1,000,000 1,016,469
American General Institute C, 144A, 7.57%, 12/1/2045 250,000 280,058
American International Group, Inc., 144A, 6.25%,
5/1/2036 350,000 335,451
Bank One Corp., 10.00%, 8/15/2010 827,000 944,126
Citigroup, Inc., 6.00%, 10/31/2033 500,000 473,671
Citizens Property Insurance Corp., 144A, 7.13%,
2/25/2019 2,000,000 2,160,331
Dow Jones CDX North America High Yield Trust, 144A,
8.625%, 6/29/2011 (b) 7,000,000 6,868,750
ERP Operating LP, 5.38%, 8/1/2016 333,000 312,530
Farm Credit Bank, 7.56%, 11/30/2049 170,000 177,548
Ford Capital BV, 9.50%, 6/1/2010 1,000,000 905,000
GE Business Loan Trust:
Interest Only 0.62%, 5/15/2034 35,480,000 504,905
6.28%, 5/15/2034 500,000 500,000
General Electric Capital Corp., 6.75%, 3/15/2032 750,000 800,568
General Motors Acceptance Corp.:
6.15%, 4/5/2007 80,000 79,532
6.13%, 8/28/2007 335,000 331,497
6.88%, 9/15/2011 750,000 715,620
Goldman Sachs Group, Inc.:
5.35%, 1/15/2016 505,000 476,923
6.45%, 5/1/2036 400,000 383,208
HSBC Bank USA NA, 5.63%, 8/15/2035 315,000 278,045
HSBC Holdings Plc, 6.50%, 5/2/2036 500,000 491,539
JPMorgan Chase Capital XV, 5.88%, 3/15/2035 205,000 181,911
JSG Funding Plc, 9.63%, 10/1/2012 450,000 463,500
Merrill Lynch & Co., Inc., 4.79%, 8/4/2010 329,000 317,836
</Table>
The accompanying notes are an integral part of the financial statements.
14 Montgomery Street Income Securities, Inc.
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<Table>
<Caption>
PRINCIPAL
AMOUNT ($) VALUE ($)
-----------------------------------
PNC Funding Corp., 6.88%, 7/15/2007 1,109,000 1,117,560
Powercor Australia LLC, 144A, 6.15%, 1/15/2008 1,000,000 1,006,247
Residential Capital Corp., 6.00%, 2/22/2011 450,000 436,039
Simon Property Group LP, 6.10%, 5/1/2016 600,000 595,367
Wachovia Capital Trust III, 5.80%, 3/15/2011 2,000,000 1,940,804
Washington Mutual, Inc., 5.12%, 12/25/2035 1,320,000 1,273,620
Washington Mutual Preferred Funding Delaware, 144A,
6.53%, 12/31/2049 600,000 574,836
------------------
25,943,491
HEALTH CARE 1.1%
Genentech, Inc., 4.40%, 7/15/2010 1,250,000 1,193,993
HCA, Inc., 8.75%, 9/1/2010 475,000 500,776
Wyeth, 6.50%, 2/1/2034 400,000 400,486
------------------
2,095,255
INDUSTRIALS 0.4%
Systems 2001 Asset Trust, 144A, 7.16%, 12/15/2011 342,856 351,380
United Technologies Corp., 7.50%, 9/15/2029 350,000 405,530
------------------
756,910
INFORMATION TECHNOLOGY 0.4%
International Business Machines Corp., 8.38%,
11/1/2019 250,000 301,578
UGS Corp., 10.00%, 6/1/2012 450,000 483,750
------------------
785,328
MATERIALS 2.2%
Chaparral Steel Co., 10.00%, 7/15/2013 450,000 490,500
Equistar Chemicals LP, 8.75%, 2/15/2009 850,000 877,625
Honeywell International, Inc., 5.70%, 3/15/2036 250,000 233,743
Koppers, Inc., 9.88%, 10/15/2013 450,000 482,625
Monsanto Co., 4.00%, 5/15/08 1,000,000 969,640
Newmont Mining Corp., 5.88%, 4/1/2035 395,000 353,516
US Concrete, Inc., 144A, 8.38%, 4/1/2014 240,000 235,824
Weyerhaeuser Co., 5.95%, 11/1/2008 600,000 600,477
------------------
4,243,950
TELECOMMUNICATION SERVICES 3.4%
AT&T Inc., 6.15%, 9/15/2034 500,000 458,876
Cisco Systems Inc., 5.50%, 2/22/2016 308,000 295,750
Insight Midwest LP/Insight Capital, Inc.:
9.75%, 10/1/2009 105,000 107,100
10.50%, 11/1/2010 425,000 443,063
Intelsat Bermuda Ltd., 144A, 9.25%, 6/15/2016 255,000 263,288
</Table>
The accompanying notes are an integral part of the financial statements.
Montgomery Street Income Securities, Inc. 15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
PRINCIPAL
AMOUNT ($) VALUE ($)
-----------------------------------
MobiFon Holdings BV, 12.50%, 7/31/2010 191,000 216,308
Nortel Networks Ltd., 144A, 9.73%*, 7/15/2011 1,000,000 1,017,500
Powercor Australia LLC, 144A, 9.00%, 6/15/2016 500,000 507,500
Sprint Capital Corp., 7.63%, 1/30/2011 1,000,000 1,064,423
Verizon Global Funding Corp., 7.75%, 12/1/2030 195,000 210,317
Verizon New Jersey, Inc., 5.88%, 1/17/2012 542,000 530,381
Vodafone Group Plc, 5.00%, 12/16/2013 750,000 693,198
Windstream Corp., 144A, 8.63%, 8/01/2016 670,000 685,075
------------------
6,492,779
UTILITIES 8.6%
American Electric Power Co., Inc., 5.38%, 3/15/2010 1,000,000 984,340
Consolidated Edison Co., 8.13%, 5/1/2010 1,115,000 1,208,879
Dominion Resources, Inc., 7.20%, 9/15/2014 750,000 787,993
DTE Energy Co., 6.65%, 4/15/2009 1,275,000 1,297,988
Duke Energy Corp., 7.38%, 3/1/2010 1,500,000 1,574,597
FirstEnergy Corp., 6.45%, 11/15/2011 500,000 508,761
New York State Electric & Gas Corp., 4.38%,
11/15/2007 1,240,000 1,215,060
Nisource Finance Corp., 7.88%, 11/15/2010 1,500,000 1,604,742
Northern States Power Co., 6.25%, 6/1/2036 400,000 397,345
NRG Energy, Inc., 7.38%, 2/1/2016 950,000 926,250
PSI Energy, Inc., 8.85%, 1/15/2022 1,225,000 1,516,311
Puget Energy, Inc., 7.02%, 12/1/2027 1,000,000 1,097,361
Rochester Gas & Electric Corp., 6.38%, 9/1/2033 1,600,000 1,638,150
TXU Energy Co. LLC, 7.00%, 3/15/2013 1,740,000 1,776,084
------------------
16,533,861
- -----------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost $82,734,360) 79,875,519
FOREIGN BONDS -- US$ DENOMINATED 4.3%
FINANCIALS 2.6%
Royal Bank of Scotland Group Plc, 9.12%, 3/31/2010 1,200,000 1,317,840
Mizuho Financial Group (Cayman), 8.38%, 12/29/2049 1,405,000 1,472,721
Mizuho JGB Investment LLC, 144A, 9.87%, 12/30/2049 2,000,000 2,141,480
------------------
4,932,041
CONSUMER DISCRETIONARY 0.2%
Royal Caribbean Cruises Ltd., 8.75%, 2/2/2011 347,000 373,041
</Table>
The accompanying notes are an integral part of the financial statements.
16 Montgomery Street Income Securities, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
PRINCIPAL
AMOUNT ($) VALUE ($)
-----------------------------------
TELECOMMUNICATION SERVICES 0.5%
Telecom Italia Capital SA:
4.00%, 1/15/2010 360,000 336,879
5.25%, 11/15/2013 330,000 305,074
4.95%, 9/30/2014 365,000 326,769
------------------
968,722
UTILITIES 1.0%
SPI Electricity & Gas Australia Holdings Property
Ltd., 144A, 6.15%, 11/15/2013 2,000,000 1,989,440
- -----------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS -- US$DENOMINATED (Cost $8,557,806) 8,263,244
ASSET BACKED 9.9%
AUTOMOBILE ASSET BACKED SECURITIES 0.0%
MMCA Automobile Trust, 4.30%, 3/15/2010 92,627 92,545
COMMERCIAL AND RESIDENTIAL MORTGAGE-BACKED
SECURITIES 3.0%
DLJ Mortgage Acceptance Corp., 144A, 6.82%,
10/15/2030 434,694 437,594
GMAC Commercial Mortgage Securities, Inc., 6.87%,
7/15/2029 150,229 151,427
JPMorgan Chase Commercial Mortgage Securities Corp.,
4.90%, 1/12/2037 1,900,000 1,777,946
Mortgage Capital Funding, Inc., 7.29%, 7/20/2027 25,130 25,146
Prudential Securities Secured Financing Corp.,
7.19%, 6/16/2031 962,741 992,256
Wells Fargo Mortgage-Backed Securities Trust, 5.24%,
4/25/2036 2,379,585 2,351,053
------------------
5,735,422
OTHER ASSET BACKED SECURITIES 6.9%
Banc of America Mortgage Securities, 4.82%*,
9/25/2035 1,065,000 1,029,712
Citigroup Mortgage Loan Trust, Inc., 6.75%,
8/25/2034 808,601 812,644
Countrywide Alternative Loan Trust:
5.50%, 8/25/2034 625,102 617,895
6.00%, 2/25/2035 471,309 469,407
6.00%, 8/25/2035 951,068 947,748
PG&E Energy Recovery Funding LLC, 5.03%, 3/25/2014 1,900,000 1,859,886
Residential Asset Securities Corp., 7.91%, 2/25/2031 801,382 798,445
Residential Asset Securitization Trust, 5.50%,
4/25/2035 2,500,000 2,353,318
</Table>
The accompanying notes are an integral part of the financial statements.
Montgomery Street Income Securities, Inc. 17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
PRINCIPAL
AMOUNT ($) VALUE ($)
-----------------------------------
Wells Fargo Mortgage-Backed Securities Trust:
5.00%, 3/25/2021 2,429,893 2,316,752
4.11%*, 6/25/2035 2,079,924 2,014,121
------------------
13,219,928
- -----------------------------------------------------------------------------------------
TOTAL ASSET BACKED (Cost $19,559,127) 19,047,895
COLLATERALIZED MORTGAGE OBLIGATIONS 31.5%
Federal Home Loan Mortgage Corp.:
5.50%, 12/15/2016 590,000 582,906
5.00%, 5/15/2023 1,540,000 1,521,666
4.50%, 2/15/2026 815,000 795,791
5.50%, 7/15/2027 767,532 761,561
6.00%, 5/15/2030 790,000 786,272
4.50%, 4/15/2032 1,375,000 1,259,483
4.50%, 7/15/2032 410,000 375,752
5.00%, 12/15/2032 895,000 833,686
5.00%, 10/15/2033 1,175,000 1,092,846
5.00%, 8/15/2034 1,245,000 1,154,263
6.50%, 10/1/2035 6,776,420 6,817,580
Federal National Mortgage Association:
9.00%, 5/1/2009 207,639 213,404
5.50%, 3/25/2017 855,000 847,552
6.50%, 5/1/2017 221,360 224,570
5.50%, 1/1/2021 3,859,031 3,788,623
6.00%, 1/1/2023 573,317 570,762
4.50%, 10/1/2023 749,851 694,471
5.50%, 5/1/2025 2,598,462 2,521,032
7.00%, 3/1/2031 4,730,039 4,902,578
5.00%, 8/25/2033 295,000 273,540
5.00%, 12/25/2033 1,060,000 984,360
5.00%, 6/25/2034 1,105,000 1,089,805
7.00%, 9/1/2035 3,215,380 3,289,865
7.00%, 10/1/2035 4,489,136 4,593,128
7.00%, 10/1/2035 9,913,309 10,142,953
6.50%, 12/1/2035 689,304 692,988
6.00%, 3/1/2036 3,885,225 3,805,699
6.50%, 5/1/2036 599,216 602,418
6.00%, 8/25/2044 780,757 772,921
</Table>
The accompanying notes are an integral part of the financial statements.
18 Montgomery Street Income Securities, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
PRINCIPAL
AMOUNT ($) VALUE ($)
-----------------------------------
Government National Mortgage Association:
6.50%, 8/20/2034 1,217,848 1,228,871
6.50%, 8/20/2035 3,402,381 3,432,817
- -----------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $62,167,798) 60,654,163
MUNICIPAL BONDS AND NOTES 5.6%
Delaware, NJ, Port Authority Revenue, Port District
Project, 7.46%, 1/1/2011 (a) 1,000,000 1,071,650
Fultondale, AL, Core City, General Obligation,
6.40%, 2/1/2022 (a) 1,340,000 1,376,247
Guin, AL, County General Obligation, Series B,
8.25%, 6/1/2027 (a) 1,515,000 1,691,301
Idaho, Higher Education Revenue, Nazarene College
Facilities, 8.34%, 11/1/2016 (d) 1,000,000 1,008,590
Metropolitan Washington, DC, Apartment Authority
System, Series C, 5.39%, 10/1/2015 (a) 1,365,000 1,327,176
Pell City, AL, Core City General Obligation, 5.40%,
8/1/2017 (a) 1,385,000 1,329,226
St. Paul, MN, Sales & Special Tax Revenue, Series A,
6.94%, 11/1/2020 (a) 2,000,000 2,115,820
Washington, Industrial Development Revenue, 4.00%,
10/1/2012 (a) 915,000 837,206
- -----------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES (Cost $11,069,941) 10,757,216
U.S. TREASURY OBLIGATIONS 5.1%
U.S. Treasury Bond, 5.38%, 2/15/2031 2,597,000 2,641,840
U.S. Treasury Inflation Index Note, 3.63%, 01/15/08 4,000,000 5,074,751
U.S. Treasury Note:
4.50%, 2/28/2011 1,465,000 1,428,489
4.50%, 2/15/2016 105,000 99,898
5.13%, 5/15/2016 665,000 664,220
- -----------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $10,019,236) 9,909,198
</Table>
The accompanying notes are an integral part of the financial statements.
Montgomery Street Income Securities, Inc. 19
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
PRINCIPAL
AMOUNT ($) VALUE ($)
-----------------------------------
SHORT-TERM INVESTMENTS 3.6%
COMMERCIAL PAPER 3.6%
Cargill Inc., 5.25%, 7/5/2006 1,998,833 1,998,833
Merrill Lynch & Co., Inc., 5.30%, 7/5/2006 974,426 974,426
Rabobank, 5.26%, 7/5/2006 1,998,831 1,998,831
UBS Finance Delaware LLC, 5.27%, 7/5/2006 1,998,829 1,998,829
- -----------------------------------------------------------------------------------------
TOTAL SHORT TERM INVESTMENTS (Cost $6,970,919) 6,970,919
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO (Cost $201,079,187)+ 101.5% 195,478,154
OTHER ASSETS AND LIABILITIES, NET (1.5%) (2,988,755)
- -----------------------------------------------------------------------------------------
TOTAL NET ASSETS 100% 192,489,399
- -----------------------------------------------------------------------------------------
</Table>
Notes to the Schedule of Investments
(a) Bond is insured by one of these companies:
<Table>
<Caption>
AS A % OF TOTAL
INSURANCE COVERAGE INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------------
Financial Guaranty Insurance Company 0.7
- --------------------------------------------------------------------------------------
Financial Security Assurance Inc. 1.7
- --------------------------------------------------------------------------------------
First Security Bank 0.5
- --------------------------------------------------------------------------------------
MBIA Corporation 1.8
- --------------------------------------------------------------------------------------
RaDain Asset Assurance 0.9
- --------------------------------------------------------------------------------------
</Table>
(b) Certificates of beneficial interest in a Trust that has entered into a
Repurchase Agreement and Credit Default Swap Agreements to track the Dow
Jones CDX NA High Yield Index.
(c) Security is in default.
(d) Security incorporates a letter of credit from First Security Bank.
* Floating rate notes 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, 2006.
+ The cost for federal income tax purposes was $205,565,338. At June 30, 2006,
net unrealized depreciation for all securities based on tax cost was
$10,087,184. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$147,975 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value of $10,235,159.
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.
144A: Security is 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.
20 Montgomery Street Income Securities, Inc.
Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES as of June 30, 2006 (Unaudited)
<Table>
ASSETS
- ----------------------------------------------------------------------------------
Investments:
Investments in securities, at value (cost $201,079,187) $ 195,478,154
- ----------------------------------------------------------------------------------
Cash 98,809
- ----------------------------------------------------------------------------------
Receivable for investments sold 3,652,412
- ----------------------------------------------------------------------------------
Interest receivable 2,042,972
- ----------------------------------------------------------------------------------
Other assets 240,383
- ----------------------------------------------------------------------------------
Total assets 201,512,730
- ----------------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------------
Payable for investments purchased 8,545,507
- ----------------------------------------------------------------------------------
Accrued administrative fee 22,602
- ----------------------------------------------------------------------------------
Accrued management and investment advisory fee 104,685
- ----------------------------------------------------------------------------------
Other accrued expenses and payables 350,537
- ----------------------------------------------------------------------------------
Total liabilities 9,023,331
- ----------------------------------------------------------------------------------
NET ASSETS, AT VALUE $ 192,489,399
- ----------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------
Net assets consist of:
Paid-in capital $ 202,652,085
- ----------------------------------------------------------------------------------
Undistributed investment income 1,946,685
- ----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (5,601,033)
- ----------------------------------------------------------------------------------
Accumulated net realized gain (loss) (6,508,338)
- ----------------------------------------------------------------------------------
NET ASSETS, AT VALUE $ 192,489,399
- ----------------------------------------------------------------------------------
NET ASSET VALUE per share ($192,489,399/10,374,075 shares of
common stock outstanding, $.01 par value, 30,000,000 shares
authorized) $ 18.55
- ----------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of the financial statements.
Montgomery Street Income Securities, Inc. 21
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS for the six months ended June 30, 2006 (Unaudited)
<Table>
INVESTMENT INCOME
- ---------------------------------------------------------------------------------
Income:
Interest $ 5,135,434
- ---------------------------------------------------------------------------------
Securities lending income 1,044
- ---------------------------------------------------------------------------------
Total Income 5,136,478
- ---------------------------------------------------------------------------------
Expenses:
Management and investment advisory fee 425,656
- ---------------------------------------------------------------------------------
Administrative fee 22,602
- ---------------------------------------------------------------------------------
Services to shareholders 17,837
- ---------------------------------------------------------------------------------
Custodian fees 7,974
- ---------------------------------------------------------------------------------
Auditing 22,806
- ---------------------------------------------------------------------------------
Legal 69,720
- ---------------------------------------------------------------------------------
Directors' fees and expenses 63,987
- ---------------------------------------------------------------------------------
Reports to shareholders 31,071
- ---------------------------------------------------------------------------------
NYSE listing fee 11,317
- ---------------------------------------------------------------------------------
Other 54,123
- ---------------------------------------------------------------------------------
Total expenses 727,093
- ---------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,409,385
- ---------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENT TRANSACTIONS
- ---------------------------------------------------------------------------------
Net realized loss from investment transactions (2,022,187)
- ---------------------------------------------------------------------------------
Net change in unrealized depreciation during the period on
investments (4,350,250)
- ---------------------------------------------------------------------------------
NET LOSS ON INVESTMENT TRANSACTIONS (6,372,437)
- ---------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,963,052)
- ---------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of the financial statements.
22 Montgomery Street Income Securities, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS for the six months ended June 30, 2006 (Unaudited)
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------------------------------------
Investment income received $ 5,137,925
- -----------------------------------------------------------------------------------
Payment of operating expenses (457,422)
- -----------------------------------------------------------------------------------
Proceeds from sales and maturities of investments 166,383,340
- -----------------------------------------------------------------------------------
Purchases of investments (165,404,450)
- -----------------------------------------------------------------------------------
Net purchases, sales and maturities of short-term
investments 3,980,081
- -----------------------------------------------------------------------------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 9,639,474
- -----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -----------------------------------------------------------------------------------
Distributions paid $ (5,119,732)
- -----------------------------------------------------------------------------------
Cost of shares repurchased (408,411)
- -----------------------------------------------------------------------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES (5,528,143)
- -----------------------------------------------------------------------------------
Increase (decrease) in cash 4,111,331
- -----------------------------------------------------------------------------------
Cash at the beginning of period (4,012,522)
- -----------------------------------------------------------------------------------
CASH AT THE END OF PERIOD $ 98,809
- -----------------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS TO CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
- -----------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations $ (1,963,052)
- -----------------------------------------------------------------------------------
Net increase (decrease) in cost of investments 2,324,937
- -----------------------------------------------------------------------------------
Net increase (decrease) in unrealized appreciation
(depreciation) on investments 4,350,250
- -----------------------------------------------------------------------------------
(Increase) decrease in receivable for investments sold (3,580,770)
- -----------------------------------------------------------------------------------
(Increase) decrease in interest receivables 1,447
- -----------------------------------------------------------------------------------
Increase (decrease) in payable for investment purchased 8,545,507
- -----------------------------------------------------------------------------------
Increase (decrease) in other accrued expenses and payables 190,132
- -----------------------------------------------------------------------------------
(Increase) decrease in other assets (228,977)
- -----------------------------------------------------------------------------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 9,639,474
- -----------------------------------------------------------------------------------
NON-CASH FINANCING ACTIVITIES:
- -----------------------------------------------------------------------------------
REINVESTMENT OF DISTRIBUTIONS $ 180,000
- -----------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of the financial statements.
Montgomery Street Income Securities, Inc. 23
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2006 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2005
- --------------------------------------------------------------------------------------
Operations:
Net investment income $ 4,409,385 $ 10,330,361
- --------------------------------------------------------------------------------------
Net realized loss on investment transactions (2,022,187) (459,728)
- --------------------------------------------------------------------------------------
Net change in unrealized depreciation during
the period on investments (4,350,250) (4,541,940)
- --------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (1,963,052) 5,328,693
- --------------------------------------------------------------------------------------
Distributions to shareholders from net
investment income (2,593,824) (11,828,415)
- --------------------------------------------------------------------------------------
Fund share transactions:
Reinvestment of distributions 180,000 810,869
- --------------------------------------------------------------------------------------
Cost of shares repurchased (408,411) (841,458)
- --------------------------------------------------------------------------------------
Net decrease in net assets from Fund share
transactions (228,411) (30,589)
- --------------------------------------------------------------------------------------
DECREASE IN NET ASSETS (4,785,287) (6,530,311)
- --------------------------------------------------------------------------------------
Net assets at beginning of period 197,274,686 203,804,997
- --------------------------------------------------------------------------------------
Net assets at end of period (including
undistributed net investment income of
$1,946,685 and $131,124, respectively) $ 192,489,399 $ 197,274,686
- --------------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------------
Shares outstanding at beginning of period 10,387,297 10,388,517
- --------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 10,778 46,780
- --------------------------------------------------------------------------------------
Shares repurchased (24,000) (48,000)
- --------------------------------------------------------------------------------------
Net decrease in Fund shares (13,222) (1,220)
- --------------------------------------------------------------------------------------
Shares outstanding at end of period 10,374,075 10,387,297
- --------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of the financial statements.
24 Montgomery Street Income Securities, Inc.
Financial Highlights
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEARS ENDED DECEMBER 31, 2006(A) 2005 2004 2003 2002 2001
SELECTED PER SHARE DATA
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.99 $ 19.62 $ 19.64 $ 19.43 $ 19.00 $ 18.83
- ---------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Income(b) 0.50 1.14 1.18 1.20 1.36 1.45
- ---------------------------------------------------------------------------------------------------
Operating expenses(b) (0.07) (0.14) (0.14) (0.12) (0.14) (0.14)
- ---------------------------------------------------------------------------------------------------
Net investment income(b) 0.43 1.00 1.04 1.08 1.22 1.31
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions (0.62) (0.49) 0.17 0.42 0.54 0.20
- ---------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.19) 0.51 1.21 1.50 1.76 1.51
- ---------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.25) (1.14) (1.23) (1.29) (1.33) (1.34)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.55 $ 18.99 $ 19.62 $ 19.64 $ 19.43 $ 19.00
- ---------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD $ 16.51 $ 16.91 $ 18.36 $ 18.55 $ 19.02 $ 18.53
- ---------------------------------------------------------------------------------------------------
Price range on New York Stock Exchange
for each share of Common Stock
outstanding during the period
(Unaudited):
High ($) 17.57 18.85 19.39 20.45 19.67 19.95
- ---------------------------------------------------------------------------------------------------
Low ($) 16.30 16.55 16.55 17.50 17.91 17.65
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN
- ---------------------------------------------------------------------------------------------------
Based on market value (%)(c) (0.90)** (1.69) 5.82 4.53 10.12 14.57
- ---------------------------------------------------------------------------------------------------
Based on net asset value (%)(c) (0.85)** 3.31 6.86(e) 8.22 9.71 8.49
- ---------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 192 197 204 204 201 196
- ---------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 0.75* 0.74 0.75 0.63 0.72 0.71
- ---------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 0.75* 0.74 0.72 0.63 0.72 0.71
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 4.56* 5.11 5.26 5.47 6.36 6.78
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate (%)(d) 175* 157 149 160 259 143
- ---------------------------------------------------------------------------------------------------
</Table>
Montgomery Street Income Securities, Inc. 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) For the six months ended June 30, 2006 (Unaudited)
(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 for
those periods that had mortgage dollar roll transactions were 349%, 376%,
426%, 520% and 356% for the years ended December 31, 2005, December 31,
2004, December 31, 2003, December 31, 2002 and December 31, 2001,
respectively.
(e) Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
26 Montgomery Street Income Securities, Inc.
Notes to the Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
Montgomery Street Income Securities, Inc. ("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, or at the discretion of, the Board of 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 a
broker/dealer. 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 and short-term investments 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 Board of
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
Montgomery Street Income Securities, Inc. 27
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 ("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 purpose of the 1940 Act as borrowings by the Fund
because they involve the sale of the security coupled with an agreement to
repurchase.
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.
WHEN ISSUED/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 when-issued or delayed delivery
securities from the potential inability of counterparties to meet the terms of
28 Montgomery Street Income Securities, Inc.
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- --------------------------------------------------------------------------------
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.
SECURITIES LENDING. The Fund may lend securities to financial institutions. The
Fund retains beneficial ownership of the securities it has loaned and continues
to receive interest and dividends paid by the securities and to participate in
any changes in their market value. The Fund requires the borrowers of the
securities to maintain collateral with the Fund consisting of liquid,
unencumbered assets having a value at least equal to the value of the securities
loaned. The Fund receives compensation for lending its securities either in the
form of fees or by earning interest on invested cash collateral net of fees paid
to the lending agent. The Fund is subject to all investment risks associated
with the value of any cash collateral received, including, but not limited to,
interest rate, credit and liquidity risk associated with such investments.
LOAN PARTICIPATIONS/ASSIGNMENTS. The Fund may invest in U.S. dollar-denominated
fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign sovereign entity and one or more financial institutions
("Lenders"). The Fund invests in such Loans in the form of participations in
Loans ("Participations") or assignments of all or a portion of loans from third
parties. Participations typically result in the Fund having a contractual
relationship only with the Lender, not with the sovereign borrower. The Fund has
the right to receive payments of principal, interest and any fees to which it is
entitled from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. In connection with purchasing
Participations, the Fund generally has no right to enforce compliance by the
borrower with the terms of the loan agreement relating to the Loan, nor any
rights of set-off against the borrower, and the Fund will not benefit directly
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund assumes the credit risk of both the
borrower and the Lender that is selling the Participation.
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.
Montgomery Street Income Securities, Inc. 29
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- --------------------------------------------------------------------------------
At December 31, 2005, the Fund had a net tax basis capital loss carryforward of
approximately $2,653,707, which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2010 ($781,347) and December 31, 2013 ($1,872,360), the respective expiration
dates, whichever occurs first.
RECENT ACCOUNTING PRONOUNCEMENTS. On July 13, 2006, the Financial Accounting
Standards Board (FASB) released FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how
uncertain tax positions should be recognized, measured, presented and disclosed
in the financial statements. FIN 48 requires the evaluation of tax positions
taken or expected to be taken in the course of preparing the Fund's tax returns
to determine whether the tax positions are "more-likely-than-not" of being
sustained by the applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold would be recorded as a tax benefit or expense in
the current year. Adoption of FIN 48 is required for fiscal years beginning
after December 15, 2006 and is to be applied to all open tax years as of the
effective date. At this time, management is evaluating the implications of FIN
48 and its impact on the financial statements has not yet been determined.
DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income, if
any, are made quarterly. 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 stockholders at least
annually. 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.
30 Montgomery Street Income Securities, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the fiscal year ended December 31, 2005, there was no change to the
undistributed net investment income capital account on a tax basis, the
accumulated realized gain (loss) account on a tax basis was decreased by
$940,418, and the paid-in-capital account on a tax basis was increased by
$940,418.
The tax character of current year distributions, if any, will be determined at
the end of the fiscal year. For the fiscal year ended December 31, 2005, the
Fund distributed $11,790,015 of ordinary income.
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 positions in the Fund's custodian bank at June 30, 2006.
Significant non-cash activity from market discount accretion and premium
amortization has been excluded from the Statement of Cash Flows.
CONTINGENCIES. In the normal course of business, the Fund may enter into
contracts with service providers that contain general indemnification clauses.
The Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet been
made. However, based on experience, the Fund expects the risk of loss to be
remote.
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. Interest income is
recorded on the accrual basis. Dividend income is recorded on the ex-dividend
date. All premiums and discounts are amortized/accreted for financial reporting
purposes.
B. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 2006, purchases and sales of investment
securities (excluding U.S. Treasury obligations and short-term investments)
aggregated $141,943,910 and $119,516,866, respectively. Purchases and sales of
U.S. Treasury obligations aggregated $23,460,540 and $46,866,474, respectively.
Montgomery Street Income Securities, Inc. 31
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- --------------------------------------------------------------------------------
C. RELATED PARTIES
MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT. Under the Management and
Investment Advisory Agreement ("Previous Agreement") with Deutsche Investment
Management Americas, Inc. ("DeIM"), an indirect, wholly owned subsidiary of
Deutsche Bank AG, for the period from January 1, 2006 through June 9, 2006, the
Fund agreed to pay DeIM for the services rendered, an annual fee, payable
monthly, equal to 0.50% of the value of net assets of the Fund up to and
including $100 million, 0.45% of the value of the net assets of the Fund over
$100 million and up to and including $150 million; 0.40% of the value of the net
assets of the Fund over $150 million and up to and including $200 million; and
0.35% of the value of the net assets of the Fund over $200 million.
The Previous Agreement also provided, for the period from January 1, 2006
through June 9, 2006, that DeIM reimburse the Fund for all expenses (excluding
interest, taxes, brokerage commissions and extraordinary expense) borne by the
Fund in any fiscal year in excess of 1.50% of the first $30 million of average
net assets and in excess of 1.00% of average net assets in excess of $30
million. Further, if annual expenses, as defined in the Previous Agreement,
exceeded 25% of the Fund's annual gross income, the excess would be reimbursed
by DeIM.
For the period January 1, 2006 through June 9, 2006, the fees pursuant to the
Previous Agreement amounted to $401,752, equivalent to an effective annualized
rate of 0.46% of the Fund's average monthly net assets.
Effective June 9, 2006, under an Interim Advisory Agreement ("Interim
Agreement") with Hartford Investment Management Company ("Adviser"), the Fund
agreed to pay the Adviser for the services rendered, a quarterly fee equal to
the product of (a) one quarter of 0.25%, times (b) the average of the net assets
of the Fund on the last business day of each calendar month of the then ended
calendar quarter; provided, however, that the compensation received by the
Adviser under the Interim Agreement, when added to the compensation received by
Jackson Fund Services ("JFS") under the Fund Accounting and Administration
Services Agreement between the Fund and JFS, shall in no event exceed the
compensation DeIM would have received under the Previous Agreement.
FUND ACCOUNTING AND ADMINISTRATION SERVICES AGREEMENT. Effective June 9, 2006,
under a Fund Accounting and Administration Services Agreement
32 Montgomery Street Income Securities, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
("Administration Agreement") between the Fund and JFS, the Fund agreed to pay
JFS for the services rendered, a daily fee, payable monthly, equal to 0.25% of
the value of net assets of the Fund up to $100 Million; 0.20% of the value of
the net assets of the Fund from $100 million to $200 million; and 0.15% of the
value of the net assets of the Fund over $200 million.
For the period June 9, 2006 through June 30, 2006, the fees pursuant to the
Administration Agreement amounted to $22,602, equivalent to an effective
annualized rate of 0.23% of the Fund's average daily net assets.
SERVICE PROVIDER FEES. For the period January 1, 2006 through June 9, 2006, DWS
Scudder Investment Service Company ("DWS-SISC"), an affiliate of DeIM, was the
transfer, dividend paying, and shareholder services agent for the Fund. During
this period, the amount charged to the Fund by DWS-SISC aggregated $15,690.
Effective June 9, 2006, Mellon Investor Services LLC replaced DWS-SISC as the
transfer, dividend paying, and shareholder services agent for the Fund.
DIRECTORS' FEES AND EXPENSES. The Fund pays each Director retainer fees plus
specified amounts for each Board and Committee meeting attended.
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 net
asset value. During the six months ended June 30, 2006, the Fund purchased
24,000 shares of common stock on the open market at a total cost of $408,411.
E. SUBSEQUENT EVENTS
On July 13, 2006, the Board of Directors approved Deloitte & Touche LLP as the
independent registered public accounting firm of the Fund for the fiscal year
ending December 31, 2006.
Effective July 13, 2006, the Interim Investment Advisory Agreement with Hartford
Investment Management Company was replaced by a definitive Agreement with the
Adviser. There were no significant changes to the terms in the new definitive
Agreement.
Montgomery Street Income Securities, Inc. 33
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. Mellon 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 Mellon Investor Services
LLC, the Fund's transfer agent (the "Transfer Agent"). Such additional shares
will be purchased on the open market by the Plan Agent or its delegate. 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 or its delegate on the date such purchases are
effected. In addition, stockholders may
34 Montgomery Street Income Securities, Inc.
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- --------------------------------------------------------------------------------
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 or its delegate 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 Mellon Investor Services LLC, P.O. Box 3315, South Hackensack, NJ
07606-1915, or by calling (877) 437-3938.
For annual report requests, please call the Transfer Agent at (877) 437-3938.
Montgomery Street Income Securities, Inc. 35
Stockholder Meeting Results
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Annual Meeting of Stockholders of the Fund was held on July 13, 2006 at 101
California Street, 5th Floor, San Francisco, California. At the meeting, the
following matters were voted upon and approved by the stockholders:
1. To elect 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.
<Table>
<Caption>
NUMBER OF VOTES:
----------------------
DIRECTORS FOR WITHHELD
- ----------------------------------------------------------------------
Richard J. Bradshaw 7,319,558 276,558
- ----------------------------------------------------------------------
Victor L. Hymes 7,395,732 200,384
- ----------------------------------------------------------------------
John T. Packard 7,387,252 208,864
- ----------------------------------------------------------------------
Wendell G. Van Auken 7,324,537 271,579
- ----------------------------------------------------------------------
James C. Van Horne 7,319,882 276,234
- ----------------------------------------------------------------------
</Table>
2. To approve a new investment advisory agreement between the Fund and Hartford
Investment Management Company.
<Table>
FOR 5,628,223
- -----------------------------------------------------------
AGAINST 151,548
- -----------------------------------------------------------
ABSTAIN 206,976
- -----------------------------------------------------------
</Table>
36 Montgomery Street Income Securities, Inc.
Directors and Officers
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS
RICHARD J. BRADSHAW
Chairman
VICTOR L. HYMES
JOHN T. PACKARD
WENDELL G. VAN AUKEN
JAMES C. VAN HORNE
OFFICERS
MARK D. NERUD*
President and Chief Executive Officer
JEFFREY C. NELLESSEN*
Treasurer and Chief Financial Officer
SUSAN S. RHEE*
Secretary and Chief Legal Officer
TONI M. BUGNI*
Chief Compliance Officer
* Elected as of June 9, 2006.
Montgomery Street Income Securities, Inc. 37
Investment Management Agreement Approval
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At a meeting held on April 18, 2006, at the conclusion of its search for a new
investment advisor and administrator, the Board of Directors of the Fund,
including the Directors of the Fund who were not parties to the agreement or
"interested persons" of any such party as defined in the Investment Company Act
of 1940, as amended (the "Independent Directors"), voted to approve an interim
advisory agreement and a new advisory agreement between the Fund and Hartford
Investment Management Company ("Hartford") and to recommend that the
stockholders of the Fund approve the new advisory agreement at the Annual
Meeting of Stockholders to be held on July 13, 2006 (the "Annual Meeting"). The
interim advisory agreement went into effect on June 9, 2006 and remained in
effect until stockholders of the Fund approved the new advisory agreement at the
Annual Meeting.
In reviewing the interim and new advisory agreements at the April 18 meeting,
the Board of Directors considered, among other information, the written and oral
reports and compilations provided by Hartford, including comparative data from
independent sources as to investment performance, advisory fees and other
expenses. The Board also considered the written and oral advice of its
independent consultant, Callan Associates ("Callan"), in connection with the
search process, the Board's interviews and negotiations with the search
candidates, and the written and oral presentations of JFS as to the
administration of the Fund.
In approving the interim advisory agreement and the new advisory agreement, the
Board of Directors considered the following factors, among others:
NATURE, EXTENT AND QUALITY OF SERVICES. The Board examined the nature, extent
and quality of the advisory services to be provided to the Fund by Hartford. The
Board considered the terms of the interim advisory agreement and the new
advisory agreement, the experience and qualifications of Hartford and its
personnel in managing fixed-income instruments, and the proposed investment
strategy to be employed by Hartford. The Board also considered the experience of
Hartford in managing open- and closed-end funds, the availability of Hartford's
personnel, the extent and quality of information provided by Hartford to the
Board, Hartford's compliance policies and procedures and attention to compliance
matters, and the extent of any regulatory issues relating to Hartford or its
affiliates. Further, the Board considered the stability of the Hartford
organization and turnover in its personnel, the overall commitment of Hartford
to the Fund, and the general financial condition, resources and reputation of
Hartford and its parent. The
38 Montgomery Street Income Securities, Inc.
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- --------------------------------------------------------------------------------
Board was generally satisfied with the nature, extent and quality of the
advisory services to be provided to the Fund.
INVESTMENT PERFORMANCE. The Board reviewed the investment performance of
Hartford over various periods, as compared to the performance of relevant
indices, of the Fund and of other similar funds. The Board also had reviewed
with Callan the ways in which the investment strategies employed by Hartford had
contributed to its investment performance. The performance data showed, among
other things, that Hartford's core plus fixed income strategy outperformed the
Fund's benchmark index, the Lehman Brothers Aggregate Bond Index, for the 1, 3,
5 and 7 year periods, and the Fund's historical performance for the 1, 5 and 7
year periods, ended December 31, 2005. The performance data also showed that
Hartford's core plus fixed income strategy achieved top quartile performance for
the 5 year period ended December 31, 2005 relative to a universe of other core
plus fixed income managers. The Board was generally satisfied with the
investment performance of Hartford.
COST OF SERVICES. The Board examined the cost of the services to be provided to
the Fund by Hartford, including comparable expense information concerning other
similar funds and certain non-fund accounts of Hartford employing similar
investment strategies. The advisory fee to be charged by Hartford appeared to be
comparable to that charged to the non-fund accounts and below that charged to
other similar funds, although the services provided to the other similar funds
may have included administration in some cases. It was noted that, in connection
with its search, the Board had solicited fee proposals from several potential
investment adviser candidates and that the fee to be charged by Hartford for
advisory services was among the lowest fees proposed. The Board concluded that
the advisory fee to be charged by Hartford was generally competitive.
PROFITS REALIZED. The Board considered the profits to be realized by Hartford
from its relationship with the Fund. The Board was comforted by the fact that
Hartford was selected as a result of a competitive search process and that the
advisory fee to be charged by Hartford was among the lowest fees proposed. The
Board recognized that Hartford was entitled to earn a profit for the services it
furnishes and concluded, based on the information provided, that the profit
expected to be earned by Hartford would not be excessive.
ECONOMIES OF SCALE. The Board considered the extent to which economies of scale
could be realized as the Fund grows and whether the advisory fee to be
Montgomery Street Income Securities, Inc. 39
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
charged by Hartford reflects these economies of scale for the benefit of Fund
investors. It was noted that, as a closed-end fixed income fund making regular
dividend distributions, the assets of the Fund were not expected to increase
materially. Accordingly, the Board negotiated with Hartford a fixed fee rate
taking into account the current size of the Fund. In the event the size of the
Fund does increase materially in the future, the Board will consider whether the
advisory fee should be adjusted to reflect any economies of scale.
OTHER BENEFITS. The Board recognized that Hartford and its affiliates may derive
other benefits from its relationship with the Fund, including the use of the
Fund's performance record in marketing other products, the inclusion of the Fund
on its client list, the aggregation of the Fund's purchase orders with other
accounts, and the potential use of soft dollars generated by the Fund to acquire
research and brokerage services for Hartford as permitted by applicable law.
In addition to the foregoing factors, among others, the Board considered its
ability to terminate the interim advisory agreement and the new advisory
agreement on 60 days' notice, the conduct and results of the independent search
process, and the alternatives available, including a sale or liquidation of the
Fund. In its deliberations, the Board did not identify any particular factor or
factors that were all-important or controlling, and each Director assigned
different weights to the various factors considered.
40 Montgomery Street Income Securities, Inc.
General Information
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
INVESTMENT MANAGER Hartford Investment Management Company
55 Farmington Avenue
Hartford, CT 06105
- ---------------------------------------------------------------------
ADMINISTRATOR Jackson Fund Services
225 West Wacker Drive
Chicago, IL 60606
- ---------------------------------------------------------------------
TRANSFER AGENT Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1915
(Tel) 1-877-437-3938
- ---------------------------------------------------------------------
CUSTODIAN Mellon Bank, N.A.
One Mellon Center
Pittsburgh, PA 15258
- ---------------------------------------------------------------------
LEGAL COUNSEL Howard Rice Nemerovski Canady Falk & Rabkin
PC
Three Embarcadero Center
San Francisco, CA 94111
- ---------------------------------------------------------------------
</Table>
Montgomery Street Income Securities, Inc. 41
Privacy Policy
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Montgomery Street Income Securities, Inc. (the "Fund") considers the privacy of
its stockholders to be of fundamental importance and has established a policy to
maintain the privacy of the information you share with us. In addition, the Fund
relies on the privacy and customer information protection policies and
procedures of its other service providers.
PERSONAL INFORMATION WE COLLECT
We do not sell any information to any third parties. However, we may, in limited
instances, collect and retain certain nonpublic personal information about you,
including:
- Information we receive from broker-dealers, investment advisers, the
Fund's transfer agent, and the Fund's dividend reinvestment plan
administrator (such as a stockholder's name, address and tax
identification number);
- An address received from a third party when a stockholder has moved; and
- Account balance and transaction activity.
PERSONAL INFORMATION WE MAY DISCLOSE
We may occasionally disclose nonpublic personal information about you to
affiliates and non-affiliates as permitted by law. Instances when we may share
information include:
- Disclosing information to a third party in order to process account
transactions that you request or authorize;
- Disclosing your name and address to companies that mail Fund-related
materials, such as stockholder reports and proxy materials; and
- Disclosing information in connection with regulatory inquiries and legal
proceedings, such as responding to a request for information or subpoena.
When information is shared with third parties, they are not permitted to use the
information for any purpose other than to assist our servicing of your
account(s) or as permitted by law. If you close your account(s) or if we lose
42 Montgomery Street Income Securities, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
contact with you, we will continue to share information in accordance with our
current privacy policy and practices. We restrict access to your nonpublic
personal information to authorized agents. We maintain physical, electronic and
procedural safeguards that comply with federal standards to guard your nonpublic
personal information.
These measures reflect our commitment to maintaining the privacy of your
nonpublic personal information. We appreciate the confidence you have shown by
entrusting us with your assets.
If you would like to learn more or have any questions about our privacy
practices, please contact the Fund at the following address:
Montgomery Street Income Securities, Inc.
c/o Jackson Fund Services
225 W. Wacker Drive, Suite 950
Chicago, IL 60606
Effective: June 9, 2006
Montgomery Street Income Securities, Inc. 43
(Montgomery logo)
225 West Wacker Drive Suite 950
Chicago, Illinois 60606
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Included in Reports to Stockholders under Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a) Not applicable.
(b) As of the close of business on June 9, 2006 and through the present,
Nasri Toutoungi, Jeff MacDonald and Charles Moon are primarily and
jointly responsible for the day-to-day management of the Fund. Please
see the tables below for descriptions of each individual's role, as
well as prior business experience over the last 5 years.
PORTFOLIO MANAGEMENT TEAM
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
Years At Years In
Name Title Position Firm Industry
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
Nasri Toutoungi Managing Director Senior Portfolio Manager 3 18
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Current Employer Title/Function Start Date End Date
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Hartford Investment Management Managing Director/Senior Portfolio January 2003 Present
Manager
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Previous Employer Title/Function Start Date End Date
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
BlackRock, Inc. Managing Director 1998 January 2002
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
Name Title Position Years At Years In
Firm Industry
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
Jeff MacDonald Vice President Portfolio Manager 1 14
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Current Employer Title/Function Start Date End Date
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Hartford Investment Management Vice President/Portfolio Manager January 2005 Present
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Previous Employer Title/Function Start Date End Date
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Wellington Management Company Assistant Vice President/ Fixed Income December 2002 December 2004
Portfolio Analyst
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Wellington Management Company Senior Performance Analyst December 1999 December 2002
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
Name Title Position Years At Years In
Firm Industry
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
Charles Moon Executive Vice President Senior Portfolio Manager 1 15
- ------------------------- ---------------------------------- --------------------------------- ------------- -------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Current Employer Title/Function Start Date End Date
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Hartford Investment Management Executive Vice President/ Director March 2006 Present
Investment Grade Credit
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Previous Employer Title/Function Start Date End Date
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
OFI Institutional Asset Management Co-Head Investment Grade Credit/ April 2002 February 2006
Portfolio Manager
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
Morgan Stanley Investment Management Executive Director/ Portfolio Manager June 1999 March 2002
- ----------------------------------------- ----------------------------------------- ------------------ -------------------
The other accounts managed by the Fund's portfolio managers are as
follows as of June 30, 2006:
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Number and Total Assets of Other Number and Total Assets of Other Other Accounts
Manager Registered Investment Company Pooled Investment Vehicle as of June 30, 2006
Accounts as of June 30, 2006 Accounts as of June 30, 2006
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Performance Asset Based Accounts Performance Asset Based Performance Asset Based Accounts
Based Accounts Based Accounts Accounts Based Accounts
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------
# $Assets # $Assets # $Assets # $Assets # $Assets # $Assets
- ----------------------------------------------------------------------------------------------------------------------------
Nasri Toutoungi 0 $0 4 $5,613,561,000 0 $0 1 $114,000,000 0 $0 11 $1,422,990,000
- ----------------------------------------------------------------------------------------------------------------------------
Jeff MacDonald 0 $0 0 $0 0 $0 0 $0 0 $0 4 $251,414,000
- ----------------------------------------------------------------------------------------------------------------------------
Charles Moon 0 $0 1 $99,200,000 0 $0 0 $0 0 $0 4 $27,570,788,000
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio managers, including assistant portfolio managers, at Hartford
Investment Management manage multiple portfolios for multiple clients. These
accounts may include mutual funds, separate accounts (assets managed on behalf
of institutions such as pension funds, insurance companies, foundations),
commingled trust accounts, and other types of funds. The portfolios managed by a
portfolio manager may have investment objectives, strategies and risk profiles
that differ from those of the Fund. Portfolio managers make investment decisions
for each portfolio, including the Fund, based on the investment objectives,
policies, practices and other relevant investment considerations applicable to
that portfolio. Consequently, the portfolio managers may purchase securities for
one portfolio and not another portfolio. Securities purchased in one portfolio
may perform better than the securities purchased for another portfolio, and vice
versa. A portfolio manager or other investment professionals at Hartford
Investment Management may place transactions on behalf of other accounts that
are directly or indirectly contrary to investment decisions made on behalf of
the Fund, or make investment decisions that are similar to those made for the
Fund, both of which have the potential to adversely impact the Fund depending on
market conditions. In addition, some of these portfolios have fee structures
that are or have the potential to be higher, in some cases significantly higher,
than the fees paid by the Fund. Because a portfolio manager's compensation is
affected by revenues earned by Hartford Investment Management, the incentives
associated with the Fund may be significantly higher or lower than those
associated with other accounts managed by a given portfolio manager.
Hartford Investment Management's goal is to provide high quality investment
services to all of its clients, while meeting its fiduciary obligation to treat
all clients fairly. Hartford Investment Management has adopted and implemented
policies and procedures, including brokerage and trade allocation policies and
procedures, that it believes address the conflicts associated with managing
multiple accounts for multiple clients. In addition, Hartford Investment
Management monitors a variety of areas, including compliance with applicable
laws and regulations, primary Fund guidelines, the allocation of securities, and
compliance with Hartford Investment Management's Code of Ethics. Furthermore,
senior investment and business personnel at Hartford Investment Management
periodically review the performance of Hartford Investment Management's
portfolio managers. Although the firm does not track the time a portfolio
manager spends on a single portfolio, it does periodically assess whether a
portfolio manager has adequate time and resources to effectively manage the
portfolio manager's overall book of business.
Material conflicts of interest may arise when allocating and/or aggregating
trades. Hartford Investment Management may aggregate into a single trade order
several individual contemporaneous client trade orders for a single security,
absent specific client directions to the contrary. It is the policy of Hartford
Investment Management that when a decision is made to aggregate transactions on
behalf of more than one account (including the Fund or other accounts over which
it has discretionary authority), such transactions will be allocated to all
participating client accounts in a fair and equitable manner in accordance with
Hartford Investment Management's trade allocation policy. The trade allocation
policy is described in Hartford Investment Management's Form ADV. Hartford
Investment Management's compliance unit monitors block transactions to assure
adherence to the trade allocation policy, and will inform Hartford Investment
Management's Issue Resolution Council of any non-compliant transactions.
The conflicts addressed in the foregoing paragraph are primarily dealt with
through strict adherence to Hartford Investment Management's Trade Allocation
Policy.
As of June 30, 2006, the compensation package for portfolio managers consists of
three components, which are base pay, annual incentive and long-term incentive.
The base pay program provides a level of base pay that is competitive with the
marketplace and reflects a portfolio manager's contribution to Hartford
Investment Management's success.
The annual incentive plan provides cash bonuses dependent on both the overall
performance of Hartford Investment Management and individual contributions. A
portion of the bonus pool is determined based on the aggregate portfolio pre-tax
performance results over three years relative to peer groups and benchmarks, and
the remaining portion is based on current year operating income relative to the
operating plan.
Bonuses for portfolio managers vary depending on the scope of accountability and
experience level of the individual portfolio manager. An individual's award is
based on qualitative and quantitative factors including the relative performance
of his/her assigned portfolios compared to a peer group or benchmark and is
primarily geared to reward top quartile performance on a trailing three-year
basis. The Montgomery Street Income Securities, Inc. Fund is a member of the
Lipper Corporate Debt Funds BBB-Rated Category and is benchmarked to the Lehman
Brothers Aggregate Bond Index. Qualitative factors such as leadership, teamwork
and overall contribution made during the year are also considered.
The long-term incentive plan provides an opportunity for portfolio managers and
other key contributors to Hartford Investment Management to be rewarded in the
future based on the continued profitable growth of Hartford Investment
Management. A designated portion of the Hartford Investment Management's net
operating income will be allocated to long-term incentive awards each year. The
size of the actual individual awards will vary greatly. The awards will vest
over three years for most participants and five years for Hartford Investment
Management's Managing Directors. The value of the awards will increase at the
growth rate of operating income each year during the vesting period. Awards will
be paid in cash at the end of the vesting period.
All portfolio managers are eligible to participate in The Hartford Financial
Services Group, Inc.'s standard employee health and welfare programs, including
retirement.
As of June 30, 2006, the Fund's portfolio managers owned the following
equity securities of the Fund:
Portfolio Dollar Range of Equity
Securities Beneficially Owned
as of
MANAGER JUNE 30, 2006
Nasri Toutoungi None
Jeff MacDonald None
Charles Moon None
The information in this Item 8(b) has been provided by Hartford Investment
Management Company.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
(c) (d)
Total Number of Maximum Number (or
(a) (b) Shares (or Units) Approximate Dollar Value) of
Total Number of Average Price Purchased as Part of Shares (or Units) that May
Shares (or Units) Paid per Share Publicly Announced Yet Be Purchased Under the
Period Purchased(1) (or Unit) Plans or Programs Plans or Programs
- ---------------------------------- ------------------- ----------------- ----------------------- ------------------------------
- ---------------------------------- ------------------- ----------------- ----------------------- ------------------------------
January 1 - January 31 12,000 17.35 n/a n/a
February 1 - February 28 0 0 n/a n/a
March 1 - March 31 0 0 n/a n/a
April 1 - April 30 5,200 16.69 n/a n/a
May 1 - May 31 6,800 16.60 n/a n/a
June 1 - June 30 0 0 n/a n/a
- ---------------------------------- ------------------- ----------------- ----------------------- ------------------------------
- ---------------------------------- ------------------- ----------------- ----------------------- ------------------------------
Total 24,000 16.88 n/a n/a
(1) All purchases were made on the open market pursuant to the Fund's Repurchase
Program and related guidelines.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which stockholders may
recommend nominees to the Fund's Board of Directors since the Fund last
disclosed such procedures in a Proxy Statement or Form N-CSR.
Item 11. Controls and Procedures.
(a) The President/Principal Executive Officer and the Treasurer/Principal
Financial Officer of the Fund have concluded, based on their evaluation of
the Fund's disclosure controls and procedures (as defined in Rule 30a-3(c)
under the Act) as of a date within ninety (90) days of the filing date of
this report on Form N-CSR, that such controls and procedures are effective
and that the design and operation of such procedures ensures that
information required to be disclosed by the Fund in this report on Form
N-CSR is recorded, processed, summarized, and reported within the time
periods specified in the U.S. Securities and Exchange Commission's rules
and forms.
(b) Effective June 9, 2006, certain changes were made to the Fund's internal
control over financial reporting in connection with the change of
investment adviser and administrator of the Fund. Prior to June 9, 2006,
Deutsche Investment Management Americas Inc. acted as investment adviser
and administrator to the Fund and was directly responsible for the Fund's
internal control over financial reporting, including those policies and
procedures that (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Fund; (2) provide reasonaHble assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Fund are being made
only in accordance with authorizations of management and Directors of the
Fund; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Fund's
assets that could have a material effect on the financial statements.
Beginning June 9, 2006, the responsibilities for the Fund's internal
control over financial reporting, including those policies and procedures
discussed above, were assumed by the new administrator of the Fund, Jackson
Fund Services, a division of Jackson National Asset Management, LLC,
subject to the supervision and oversight of the Fund, including its
principal executive officer and principal financial officer and other
officers of the Fund. This change in responsibilities did not result in any
changes that materially affect, or are reasonably likely to materially
affect, the Fund's internal control over financial reporting (as defined in
Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d))) for the quarter ended
June 30, 2006.
Item 12. Exhibits.
(a)(1) Not applicable.
(2) Certifications required by Rule 30a-2(a) under the Act.
(3) Not applicable.
(b) Certification required by Rule 30a-2(b) under the Act.
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.
Montgomery Street Income Securities, Inc.
/s/ Mark D. Nerud
By: Mark D. Nerud
President and Principal Executive Officer
Date: September 8, 2006
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.
/s/ Mark D. Nerud
By: Mark D. Nerud
President and Principal Executive Officer
Date: September 8, 2006
/s/ Daniel W. Koors
By: Daniel W. Koors
Treasurer and Principal Financial Officer
Date: September 8, 2006
EXHIBIT LIST
Exhibit 12(a)(2)(a): Certification of the Principal Executive Officer required
by Rule 30a-2(a) under the Act
Exhibit 12(a)(2)(b): Certification of the Principal Financial Officer required
by Rule 30a-2(a) under the Act
Exhibit 12(b): Certification required by Rule 30a-2(b) under the Act