<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
MONTGOMERY STREET INCOME SECURITIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Articles of Incorporation)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identity the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[Scudder Logo]
September 10, 1997
MONTGOMERY STREET INCOME SECURITIES, INC.
IMPORTANT NEWS
FOR MONTGOMERY STREET INCOME SECURITIES, INC. STOCKHOLDERS
While we encourage you to read the full text of the enclosed proxy
statement, here's a brief overview of a change affecting your Fund which
requires a stockholder vote.
Q & A: QUESTIONS AND ANSWERS
Q. WHAT IS HAPPENING?
A. Scudder, Stevens & Clark, Inc. ("Scudder"), your Fund's investment manager,
has agreed to form an alliance with Zurich Insurance Company ("Zurich").
Zurich is a leading international insurance and financial services
organization. As a result of the proposed alliance, there will be a change
in ownership of Scudder. In order for Scudder to continue to serve as
investment manager of your Fund, it is necessary for the Fund's stockholders
to approve a new management and investment advisory agreement.
The following pages give you additional information on Zurich and the
proposed new management and investment advisory agreement. Approval of the
new management and investment advisory agreement is an important matter to
be voted on by you. THE BOARD MEMBERS OF YOUR FUND, NONE OF WHOM IS
AFFILIATED WITH SCUDDER, RECOMMEND THAT YOU VOTE FOR THIS PROPOSAL.
Q. WHY AM I BEING ASKED TO VOTE ON THE PROPOSED NEW MANAGEMENT AND INVESTMENT
ADVISORY AGREEMENT?
A. The Investment Company Act of 1940, which regulates investment companies,
such as the Fund, requires a vote whenever there is a change in control of a
fund's investment manager. Zurich's alliance with Scudder will result in
such a change of control and requires stockholder approval of a new
management and investment advisory agreement with the Fund.
MSIS
<PAGE> 3
Q. HOW WILL THE SCUDDER-ZURICH ALLIANCE AFFECT ME AS A FUND STOCKHOLDER?
A. Your Fund and your Fund's investment objective will not change. You will
still own the same shares in the same Fund. The terms of the new management
and investment advisory agreement are the same in all material respects as
the current management and investment advisory agreement. You should
continue to receive the same level of services that you have come to expect
from Scudder over the years. If stockholders do not approve the new
management and investment advisory agreement, the current management and
investment advisory agreement will terminate upon the closing of the
transaction and the Board of Directors will take such action as it deems to
be in the best interests of your Fund and its stockholders.
Q. WHY HAS SCUDDER DECIDED TO ENTER INTO THIS ALLIANCE?
A. Scudder believes that the Scudder-Zurich alliance will enable Scudder to
enhance its capabilities as a global asset manager. Scudder further believes
that the alliance will enable it to enhance its ability to deliver the level
of services currently provided to you and your Fund and to fulfill its
obligations under the new management and investment advisory agreement
consistent with current practices.
Q. WILL THE INVESTMENT MANAGEMENT FEES BE THE SAME?
A. Yes, the investment management fees paid by your Fund will remain the same.
Q. HOW DO THE BOARD MEMBERS OF MY FUND RECOMMEND THAT I VOTE?
A. After careful consideration, the Board members of your Fund, none of whom is
affiliated with Scudder, recommend that you vote in favor of the proposal on
the enclosed proxy card.
Q. WHOM DO I CALL FOR MORE INFORMATION?
A. Please call Shareholder Communications Corporation, your Fund's information
agent, at 1-800-733-8481, ext. 488.
Q. WILL THE FUND PAY FOR THE PROXY SOLICITATION AND LEGAL COSTS ASSOCIATED WITH
THIS TRANSACTION?
A. No, Scudder will bear these costs.
ABOUT THE PROXY CARD
If you have more than one account in the Fund in your name at the same
address, you will receive separate proxy cards for each account, but only one
proxy statement for the Fund. Please vote all issues on each proxy card that you
receive.
THANK YOU FOR MAILING YOUR PROXY CARD(S) PROMPTLY.
MSIS
<PAGE> 4
[SCUDDER LOGO]
For more information please call Shareholder Communications Corporation, your
Fund's information agent, at 1-800-733-8481, ext. 488.
MSIS
<PAGE> 5
MONTGOMERY STREET INCOME SECURITIES, INC.
101 California Street, Suite 4100
San Francisco, California 94111
September 10, 1997
[MONTGOMERY LOGO]
Dear Stockholder:
Scudder, Stevens & Clark, Inc. ("Scudder") has entered into an agreement
with Zurich Insurance Company ("Zurich") pursuant to which Scudder and Zurich
have agreed to form an alliance. Under the terms of the agreement, Zurich will
acquire a majority interest in Scudder, and Zurich Kemper Investments, Inc., a
Zurich subsidiary, will become part of Scudder. Scudder's name will be changed
to Scudder Kemper Investments, Inc. As a result of this transaction, it is
necessary for the stockholders of each of the funds for which Scudder acts as
investment manager, including your Fund, to approve a new management and
investment advisory agreement.
Scudder and Zurich have advised your Fund and its Board of Directors as to
the following important facts about the transaction:
- The transaction has no effect on the number of shares you own or the net
asset value of those shares.
- The advisory fees and expenses paid by your Fund will not increase as a
result of this transaction.
- The investment objectives of your Fund will remain the same.
- The transaction should cause no reduction in the quality of services
provided to your Fund and should enhance Scudder's ability to provide
such services.
THE BOARD MEMBERS OF YOUR FUND, ALL OF WHOM ARE INDEPENDENT OF SCUDDER,
BELIEVE THAT THE PROPOSAL SET FORTH IN THE NOTICE OF MEETING FOR YOUR FUND IS
IMPORTANT AND RECOMMEND THAT YOU READ THE ENCLOSED MATERIALS CAREFULLY AND THEN
VOTE FOR THE PROPOSAL.
Since all of the funds for which Scudder acts as investment manager are
required to conduct stockholder meetings, if you own shares of more than one
fund, you will receive more than one proxy card. Please sign and return each
proxy card you receive.
Your vote is important. PLEASE TAKE A MOMENT NOW TO SIGN AND RETURN YOUR
PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. If we do not receive
your executed proxy card(s) after a reasonable amount of time you may receive a
telephone call from our proxy solicitor, Shareholder Communications Corporation,
reminding you to vote your shares.
Thank you for your cooperation and continued support.
Respectfully,
/s/ John T. Packard /s/ James C. Van Horne
John T. Packard James C. Van Horne
President Chairman of the Board
STOCKHOLDERS ARE URGED TO SIGN AND RETURN THE PROXY CARD(S) IN THE POSTAGE-PAID
ENVELOPE SO AS TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT
REGARDLESS OF THE SIZE OF YOUR SHAREHOLDINGS.
<PAGE> 6
MONTGOMERY STREET INCOME SECURITIES, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders of
Montgomery Street Income Securities, Inc.:
Please take notice that a Special Meeting of Stockholders of Montgomery
Street Income Securities, Inc. (the "Fund") will be held at the offices of
Scudder, Stevens & Clark, Inc., 101 California Street, Suite 4100, San
Francisco, California 94111, on October 10, 1997, at 9:30 a.m., Pacific time,
for the following purpose:
(1) To approve or disapprove a new management and investment advisory
agreement between the Fund and Scudder Kemper Investments, Inc.
The appointed proxies will vote on any other business as may properly come
before the meeting or any adjournments thereof.
Holders of record of shares of common stock of the Fund at the close of
business on August 29, 1997 are entitled to vote at the meeting and at any
adjournments thereof.
In the event that the necessary quorum to transact business or the vote
required to approve or reject the proposal is not obtained at the meeting, the
persons named as proxies may propose one or more adjournments of the meeting in
accordance with applicable law, to permit further solicitation of proxies. Any
such adjournment will require the affirmative vote of the holders of a majority
of the Fund's shares present in person or by proxy at the meeting. The persons
named as proxies will vote in favor of such adjournment those proxies which they
are entitled to vote in favor and will vote against any such adjournment those
proxies to be voted against the proposal.
By order of the Board of Directors,
Thomas F. McDonough, Secretary
September 10, 1997
IMPORTANT--WE URGE YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD(S)
IN THE ENCLOSED ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE AND IS INTENDED FOR
YOUR CONVENIENCE. YOUR PROMPT RETURN OF THE ENCLOSED PROXY CARD(S) MAY SAVE THE
NECESSITY AND EXPENSE OF FURTHER SOLICITATIONS TO ENSURE A QUORUM AT THE SPECIAL
MEETING. IF YOU CAN ATTEND THE MEETING AND WISH TO VOTE YOUR SHARES IN PERSON AT
THAT TIME, YOU WILL BE ABLE TO DO SO.
<PAGE> 7
MONTGOMERY STREET INCOME SECURITIES, INC.
101 CALIFORNIA STREET, SUITE 4100, SAN FRANCISCO, CALIFORNIA 94111
PROXY STATEMENT
GENERAL
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board") of Montgomery Street Income
Securities, Inc. (the "Fund") for use at the Special Meeting of Stockholders, to
be held at the offices of Scudder, Stevens & Clark, Inc. ("Scudder"), 101
California Street, Suite 4100, San Francisco, California 94111, on October 10,
1997, at 9:30 a.m., Pacific time, and at any and all adjournments thereof (the
"Meeting"). (In the description of the proposal below, the word "fund" is
sometimes used to mean investment companies or series thereof in general, and
not the Fund whose proxy statement this is.)
This proxy statement, the Notice of Special Meeting and the proxy card are
first being mailed to stockholders on or about September 10, 1997 or as soon as
practicable thereafter. You may revoke the enclosed proxy at any time insofar as
it has not yet been exercised by the appointed proxies. You may do so by:
- written notice to the Fund, c/o State Street Bank and Trust Company, P.O.
Box 8200, Boston, MA 02266-8200, Attn: Manager, Proxy Department;
- written notice to the Fund at the address set forth under the above
letterhead;
- giving a later proxy; or
- attending the Meeting and voting your shares in person.
All properly executed proxies received in time for the Meeting will be
voted as specified in the proxy or, if no specification is made, in favor of the
proposal referred to in the proxy statement. The presence at the Meeting, in
person or by proxy, of the holders of a majority of the shares entitled to be
cast shall be necessary and sufficient to constitute a quorum for the
transaction of business. In the event that the necessary quorum to transact
business or the vote required to approve or reject the proposal is not obtained
at the Meeting, the persons named as proxies may propose one or more
adjournments of the Meeting in accordance with applicable law, to permit further
solicitation of proxies. Any such adjournment will require the affirmative vote
of the holders of a majority of the Fund's shares present in person or by proxy
at the Meeting. The persons named as proxies will vote in favor of such
adjournment those proxies which they are entitled to vote in favor and will vote
against any such adjournment those proxies to be voted against the proposal. For
purposes of determining the presence of a quorum for transacting business at the
Meeting, abstentions and broker "non-votes" will be treated as shares that are
present but which have not
<PAGE> 8
been voted. Broker non-votes are proxies received by the Fund from brokers or
nominees when the broker or nominee has neither received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter. Accordingly, stockholders are urged to forward
their voting instructions promptly.
Proposal 1 requires the affirmative vote of a "majority of the outstanding
voting securities" of the Fund. The term "majority of the outstanding voting
securities," as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), and as used in this proxy statement, means: the lesser of (1) 67%
of the voting securities of the Fund present at the Meeting if more than 50% of
the outstanding shares of the Fund are present in person or by proxy or (2) more
than 50% of the outstanding shares of the Fund.
Abstentions will have the effect of a "no" vote for Proposal 1. Broker non-
votes will have the effect of a "no" vote on Proposal 1 if such vote is
determined on the basis of obtaining the affirmative vote of more than 50% of
the outstanding shares of the Fund. Broker non-votes will not constitute "yes"
or "no" votes and will be disregarded in determining the voting securities
"present" if such vote is determined on the basis of the affirmative vote of 67%
of the voting securities of the Fund present at the Meeting with respect to
Proposal 1.
Holders of record of the shares of the common stock of the Fund at the
close of business on August 29, 1997 (the "Record Date"), will be entitled to
one vote per share on all business of the Meeting. The number of shares
outstanding as of June 30, 1997 was 10,190,250.
The table below sets forth the number of shares of the Fund owned
beneficially by the Directors and the President of the Fund as of June 30, 1997.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED ON
NAME POSITION JUNE 30, 1997(1)
- ------------------------------ ------------------------- -------------------
<S> <C> <C>
James C. Van Horne Chairman of the Board and 1,500
Director
John T. Packard President 500
John C. Atwater Director 100
Richard J. Bradshaw Director 2,240(2)
Otto W. Butz Director 325(3)
Maryellie K. Moore Director 2,360
Wendell G. Van Auken Director 9,008
All Directors and Officers as
a group (14 in number) 22,635(4)
</TABLE>
- ---------------
(1) The information as to beneficial ownership is based on statements furnished
to the Fund by each person named. Unless otherwise noted, beneficial
ownership is based on sole voting and investment power. Each person's
individual shareholdings of the Fund constituted less than 1/4
2
<PAGE> 9
of 1% of the shares outstanding of the Fund. As a group, the Directors and
Officers owned less than 1/4 of 1% of the shares of the Fund.
(2) Mr. Bradshaw's shares are held with shared voting and investment power.
(3) Mr. Butz's shares are held with shared voting and investment power.
(4) As of June 30, 1997, the shares held by the Directors and Officers included
8,167 shares held with shared investment and voting power.
To the best of the Fund's knowledge, as of June 30, 1997, no person owned
beneficially more than 5% of the outstanding shares of the Fund.
The Fund provides periodic reports to all of its stockholders which
highlight relevant information including investment results and a review of
portfolio changes. You may receive an additional copy of the most recent annual
report for the Fund, and a copy of any more recent semi-annual report, without
charge, by calling 1-800-552-2556 or writing the Fund, 101 California Street,
Suite 4100, San Francisco, California 94111.
PROPOSAL 1: APPROVAL OR DISAPPROVAL OF NEW
MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT
INTRODUCTION
Scudder acts as the investment adviser to and manager for the Fund pursuant
to a Management and Investment Advisory Agreement dated July 23, 1996 (the
"Current Investment Management Agreement"). (Scudder is sometimes referred to in
this proxy statement as the "Investment Manager.")
On June 26, 1997, Scudder entered into a Transaction Agreement (the
"Transaction Agreement") with Zurich Insurance Company ("Zurich") pursuant to
which Scudder and Zurich have agreed to form an alliance. Under the terms of the
Transaction Agreement, Zurich will acquire a majority interest in Scudder, and
Zurich Kemper Investments, Inc. ("ZKI"), a Zurich subsidiary, will become part
of Scudder. Scudder's name will be changed to Scudder Kemper Investments, Inc.
("Scudder Kemper"). The foregoing are referred to as the "Transactions." ZKI, a
Chicago-based investment adviser and the adviser to the Kemper funds, has
approximately $80 billion under management. The headquarters of Scudder Kemper
will be in New York. Edmond D. Villani, Scudder's Chief Executive Officer, will
continue as Chief Executive Officer of Scudder Kemper and will become a member
of Zurich's Corporate Executive Board.
Consummation of the Transactions would constitute an "assignment," as that
term is defined in the 1940 Act, of the Fund's Current Investment Management
Agreement with Scudder. As required by the 1940 Act, the Current Investment
Management Agreement provides for its automatic termination in the event of its
assignment. In anticipation of the Transactions, a new management and investment
advisory agreement (the "New Investment Management Agreement") between the Fund
and Scudder Kemper is being proposed for approval by stockholders of the Fund. A
copy of the form of the New Investment Management Agreement is attached hereto
as Exhibit A. THE NEW INVESTMENT MANAGEMENT AGREEMENT FOR THE FUND IS ON THE
SAME TERMS IN ALL MATERIAL RESPECTS AS THE CURRENT INVESTMENT MAN-
3
<PAGE> 10
AGEMENT AGREEMENT. The material terms of the Current Investment Management
Agreement are described under "Description of the Current Investment Management
Agreement" below.
BOARD OF DIRECTORS RECOMMENDATION
On August 26, 1997, the Board of the Fund, including Directors who are not
parties to such agreement or "interested persons" (as defined under the 1940
Act) ("Non-interested Directors") of any such party, voted to approve the New
Investment Management Agreement and to recommend its approval to stockholders.
For information about the Board's deliberations and the reasons for its
recommendation, please see "Board of Directors Evaluation" below.
The Board of the Fund recommends that stockholders vote in favor of the
approval of the New Investment Management Agreement.
BOARD OF DIRECTORS EVALUATION
On July 10, 1997, the Board of Directors of the Fund convened in person to
begin giving consideration to the Transactions contemplated by the Transaction
Agreement with Zurich and the advisability of entering into the New Investment
Management Agreement with Scudder Kemper. At this time, Scudder representatives
described Scudder's objectives in entering into the Transaction Agreement and
indicated their expectations for the Transactions' effects on Scudder, the Fund,
and the other funds under Scudder management. Scudder subsequently furnished the
Board additional information regarding the proposed Transactions, including
information regarding the terms of the proposed Transactions, the Zurich and ZKI
organizations, the new Scudder Kemper organization, the future plans of the
parties, and the funds currently managed by Scudder and ZKI. At a special,
in-person meeting held on August 26, 1997, the Directors discussed the
information among themselves and with representatives of Scudder and Zurich. In
reviewing the terms of the New Investment Management Agreement, the Board of
Directors of the Fund was advised by the Fund's independent counsel.
In the course of these discussions, Scudder and Zurich advised the Board
that they did not expect that the proposed Transactions would have a material
effect on the operations of the Fund or its stockholders. Scudder noted that the
Transaction Agreement, by its terms, does not contemplate any changes in the
structure or operations of the Fund. Scudder and Zurich informed the Directors
that they intend to maintain the separate existence of the Fund and that,
although they expect that various portions of the ZKI organization would be
combined with Scudder's operations, the senior executives of Scudder over-seeing
those operations will remain largely unchanged. It was also noted that the
senior investment and administrative personnel providing services to the Fund
were not expected to change as a result of the Transactions. In their
discussions
4
<PAGE> 11
with the Board, Scudder and Zurich representatives emphasized the strengths of
the Zurich organization and their commitment to provide the new Scudder Kemper
organization with the resources necessary to continue to provide high quality
services to the Fund and the other investment advisory clients of the new
Scudder Kemper organization.
The Board was advised that, under the Transaction Agreement, Scudder and
ZKI have agreed that they will use their commercially reasonable efforts to
ensure the satisfaction of the conditions set forth in Section 15(f) of the 1940
Act. Section 15(f) provides a non-exclusive safe harbor for an investment
adviser to an investment company or any of the investment adviser's affiliated
persons (as defined under the 1940 Act) to receive any amount or benefit in
connection with a change in control of the investment adviser so long as two
conditions are met. First, for a period of three years after the transaction, at
least 75% of the board members of the investment company must not be "interested
persons" of such investment adviser or its successor. The Board is currently in
compliance with this provision of Section 15(f). Second, an "unfair burden" must
not be imposed upon the investment company as a result of such transaction or
any express or implied terms, conditions or understandings applicable thereto.
The term "unfair burden" is defined in Section 15(f) to include any arrangement
during the two-year period after the transaction whereby the investment adviser,
or any interested person of any such adviser, receives or is entitled to receive
any compensation, directly or indirectly, from the investment company or its
stockholders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than bona fide ordinary compensation as principal underwriter for such
investment company). No such compensation agreements are contemplated in
connection with the Transactions. Scudder has undertaken to pay the costs of
preparing and distributing proxy materials to, and of holding the meeting of,
the Fund's stockholders as well as other fees and expenses in connection with
the Transactions, including the fees and expenses of legal counsel to the Fund.
In evaluating the Transactions and their effect on the Fund, the Board
considered (i) the assurances of Scudder and Zurich that the alliance should not
affect Scudder's ability to deliver the level of services currently provided to
the Fund and its stockholders and fulfill its obligations under the New
Investment Management Agreement consistent with current practices, (ii) the
undertaking by Scudder and Zurich that no unfair burden would be imposed upon
the Fund as a result of the Transactions, and (iii) that the New Investment
Management Agreement for the Fund, including the terms relating to the services
to be provided to, and the fees and expenses payable by, the Fund, is on the
same terms in all material respects as the Current Investment Management
Agreement. The Board also considered that continuance of the New Investment
Management Agreement would be reviewed again by the Board in 1998. The Board
noted that, in previously approving the continuation of the Current
5
<PAGE> 12
Investment Management Agreement, the Board, including the Non-interested
Directors, had considered a number of other factors. Among such factors were:
the long-term investment record of the Investment Manager in advising the Fund;
the experience and research capabilities of the Investment Manager in
fixed-income instruments, including mortgage-related securities and private
placements; the relatively low expenses and expense ratio of the Fund; the
Investment Manager's access to quality service providers at reasonable cost due
to the size of its assets under management; the quality of the administrative
services to the Fund; the experience of the Investment Manager in administering
other open- and closed-end funds; the availability and responsiveness of the
Investment Manager and its attention to internal controls and procedures; the
extent and quality of information provided to the Board of Directors and
stockholders; the continuity in the Fund's investment and administrative
personnel; the financial resources of the Investment Manager and its ability to
retain capable personnel; the Investment Manager's financial condition,
profitability and assets under management; and possible indirect benefits to the
Investment Manager from serving as adviser of the Fund.
INFORMATION CONCERNING THE TRANSACTIONS AND ZURICH
Under the Transaction Agreement, Zurich will pay $866.7 million in cash to
acquire two-thirds of Scudder's outstanding shares and will contribute ZKI to
Scudder for additional shares, following which Zurich will have a 79.1% fully
diluted equity interest in the combined business. Zurich will then transfer a
9.6% fully diluted equity interest in Scudder Kemper to a compensation pool for
the benefit of Scudder and ZKI employees, as well as cash and warrants on Zurich
shares for award to Scudder employees, in each case subject to five-year vesting
schedules. After giving effect to the Transactions, current Scudder stockholders
will have a 29.6% fully diluted equity interest in Scudder Kemper and Zurich
will have a 69.5% fully diluted interest in Scudder Kemper. Scudder's name will
be changed to Scudder Kemper Investments, Inc.
The purchase price for Scudder or for ZKI in the Transactions is subject to
adjustment based on the impact to revenues of non-consenting clients, and will
be reduced if the annualized investment management fee revenues (excluding the
effect of market changes, but taking into account new assets under management)
from clients at the time of closing, as a percentage of such revenues as of June
30, 1997 (the "Revenue Run Rate Percentage"), is less than 90%.
At the closing, Zurich and the other stockholders of Scudder Kemper will
enter into a Second Amended and Restated Security Holders Agreement (the "New
SHA"). Under the New SHA, Scudder stockholders will be entitled to designate
three of the seven members of the Scudder Kemper board and two of the four
members of an Executive Committee, which will be the primary management-level
committee of Scudder Kemper. Zurich will be entitled to designate the other four
members of the Scudder Kemper board and the other two members of the Executive
Committee.
6
<PAGE> 13
The names, addresses and principal occupations of the initial Scudder-
designated directors of Scudder Kemper are as follows: Lynn S. Birdsong, 345
Park Avenue, New York, New York, Managing Director of Scudder; Cornelia M.
Small, 345 Park Avenue, New York, New York, Managing Director of Scudder; and
Edmond D. Villani, 345 Park Avenue, New York, New York, President, Chief
Executive Officer and Managing Director of Scudder.
The names, addresses and principal occupations of the initial Zurich-
designated directors of Scudder Kemper are as follows: Lawrence W. Cheng,
Mythenquai 2, Zurich, Switzerland, Chief Investment Officer for Investments and
Institutional Asset Management and the corporate functions of Securities and
Real Estate for Zurich; Steven M. Gluckstern, Mythenquai 2, Zurich, Switzerland,
responsible for Reinsurance, Structured Finance, Capital Market Products and
Strategic Investments, and a member of the Corporate Executive Board of Zurich;
Rolf Hueppi, Mythenquai 2, Zurich, Switzerland, Chairman of the Board and Chief
Executive Officer of Zurich; and Markus Rohrbasser, Mythenquai 2, Zurich,
Switzerland, Chief Financial Officer and member of the Corporate Executive Board
of Zurich.
The initial Scudder-designated Executive Committee members of Scudder
Kemper will be Messrs. Birdsong and Villani (Chairman). The initial Zurich-
designated Executive Committee members will be Messrs. Cheng and Rohrbasser.
The New SHA requires the approval of a majority of the Scudder-designated
directors for certain decisions, including changing the name of Scudder Kemper,
effecting a public offering before April 15, 2005, causing Scudder Kemper to
engage substantially in non-investment management and related business, making
material acquisitions or divestitures, making material changes in Scudder
Kemper's capital structure, dissolving or liquidating Scudder Kemper, or
entering into certain affiliated transactions with Zurich. The New SHA also
provides for various put and call rights with respect to Scudder Kemper stock
held by current Scudder employees, limitations on Zurich's ability to purchase
other asset management companies outside of Scudder Kemper, rights of Zurich to
repurchase Scudder Kemper stock upon termination of employment of Scudder Kemper
personnel, and registration rights for stock held by continuing Scudder
stockholders.
The Transactions are subject to a number of conditions, including approval
by Scudder stockholders; the Revenue Run Rate Percentages of Scudder and ZKI
each being at least 75%; Scudder and ZKI having obtained director and
stockholder approvals from U.S.-registered funds representing at least 90% of
assets of such funds under management as of June 30, 1997; the absence of any
restraining order or injunction preventing the Transactions, or any litigation
challenging the Transactions that is reasonably likely to result in an
injunction or invalidation of the Transactions; and the continued accuracy of
the representations and warranties contained in the Transaction Agreement. The
Transactions are expected to close during the fourth quarter of 1997.
7
<PAGE> 14
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services,
and have branch offices and subsidiaries in more than 40 countries throughout
the world. The Zurich Insurance Group is particularly strong in the insurance of
international companies and organizations. Over the past few years, Zurich's
global presence, particularly in the United States, has been strengthened by
means of selective acquisitions.
The information set forth in this proxy statement and the accompanying
materials concerning the Transactions, Scudder Kemper and Scudder has been
provided to the Fund by Scudder, and the information concerning Zurich and ZKI
has been provided to the Fund by Zurich.
DESCRIPTION OF THE CURRENT INVESTMENT MANAGEMENT AGREEMENT
Under the Current Investment Management Agreement, Scudder provides the
Fund with continuing investment management services. The Current Investment
Management Agreement provides that the Investment Manager provides statistical
and research facilities and services, supervises the composition of the Fund's
portfolio, determines the nature and timing of changes therein and the manner of
effectuating such changes, and causes the purchase and sale of portfolio
securities, subject to control by the Board of Directors. In addition to
providing investment management and advisory services, the Current Investment
Management Agreement provides that the Investment Manager assists in the
administration of the Fund and furnishes office space, all necessary office
facilities, basic business equipment, supplies, utilities, property casualty
insurance and telephone service for managing the affairs of the Fund and keeping
the books and records. The Current Investment Management Agreement requires the
Investment Manager to arrange, if desired by the Board of Directors, for
officers or employees of the Investment Manager to serve, with or without
compensation from the Fund, as officers, directors or employees of the Fund.
The Current Investment Management Agreement provides that the Fund bear all
expenses incurred in the operation of the Fund--except those that the Investment
Manager expressly assumes in the Current Investment Management Agreement. Such
expenses borne by the Fund include (a) all costs and expenses incident to: (i)
the registration of the Fund under the 1940 Act, or (ii) any public offering of
shares of the Fund, for cash or otherwise, including those costs and expenses
relating to the registration of shares under the Securities Act of 1933, as
amended (the "Securities Act"), the qualification of shares of the Fund under
state securities laws, the printing or other reproduction and distribution of
any registration statement (and all amendments thereto) under the Securities
Act, the preliminary and final prospectuses included therein, and any other
necessary documents incident to any public offering, the
8
<PAGE> 15
advertising of shares of the Fund and the review by the National Association of
Securities Dealers, Inc. of any underwriting arrangements; (b) the charges and
expenses of any registrar or any custodian appointed by the Fund for the
safekeeping of its cash, portfolio securities and other property; (c) the
charges and expenses of auditors (including the preparation of tax returns); (d)
the charges and expenses of any stock transfer, dividend agent or registrar
appointed by the Fund; (e) broker's commissions chargeable to the Fund in
connection with portfolio securities transactions to which the Fund is a party;
(f) all taxes, including securities issuance and transfer taxes, and corporate
fees payable by the Fund to federal, state or other governmental agencies; (g)
the cost and expense of engraving or printing stock certificates representing
shares of the Fund; (h) fees involved in registering and maintaining
registrations of the Fund and of its shares with the Securities and Exchange
Commission (the "SEC") and various states and other jurisdictions; (i) all
expenses of stockholders' and directors' meetings and of preparing, printing and
mailing proxy statements and quarterly, semiannual and annual reports to
stockholders; (j) fees and travel expenses of Directors of the Fund who are not
directors, officers or employees of the Investment Manager or its "affiliates"
(as defined in the 1940 Act); (k) all fees and expenses incident to any dividend
or distribution reinvestment program; (l) charges and expenses of outside legal
counsel in connection with matters relating to the Fund, including without
limitation, legal services rendered in connection with the Fund's corporate and
financial structure and relations with its stockholders, issuance of Fund
shares, and registrations and qualifications of securities under federal, state
and other laws; (m) association dues; (n) interest payable on Fund borrowings;
(o) fees and expenses incident to the listing of Fund shares on any stock
exchange; (p) costs of information obtained from sources other than the
Investment Manager or its "affiliates" (as defined in the 1940 Act) relating to
the valuation of portfolio securities; and (q) postage.
In return for the services provided by the Investment Manager as investment
manager, and the expenses it assumes under the Current Investment Management
Agreement, the Fund pays the Investment Manager a monthly fee which, on an
annual basis, is equal to 0.50 of 1.00% of the value of the net assets of the
Fund up to and including $150 million, 0.45 of 1.00% of the value of the net
assets of the Fund over $150 million and up to and including $200 million, and
0.40 of 1.00% of the value of the net assets of the Fund over $200 million.
During the fiscal year ended December 31, 1996, the fees paid to the Investment
Manager amounted to $959,376.
The Current Investment Management Agreement provides that if expenses of
the Fund (including the advisory fee but excluding interest, taxes, brokerage
commissions and extraordinary expenses) in any fiscal year exceed a specified
expense limitation, the Investment Manager will pay the excess to the Fund. The
specified limitation is 1.50% of the first $30 million of the Fund's average net
assets plus 1.00% of the Fund's average net assets in excess of $30 million. The
Current Investment Management Agreement provides that extraordinary expenses,
such as litigation expenses and the cost of issuing new shares, are
9
<PAGE> 16
excluded expenses for purposes of the expense limitations described in this
paragraph and the immediately succeeding paragraph and that the Investment
Manager will not be obliged to pay any amount to the Fund during any fiscal year
in excess of the amount of the advisory fee for such fiscal year.
The Current Investment Management Agreement also provides for a second
expense limitation, relating to the Fund's gross income (including gains from
the sale of securities without offset for losses, unpaid interest on debt
securities of the Fund's portfolio, and dividends declared but not paid on
equity securities in the Fund's portfolio). This limitation provides that if,
for any fiscal year, the expenses of the Fund described in the preceding
paragraph, less any amount payable by the Investment Manager to the Fund on
account of the first expense limitation, exceed 25% of the Fund's gross income
for the year, the Investment Manager will promptly pay the excess to the Fund.
For the fiscal year ending December 31, 1996, the Fund's expenses did not
exceed these limitations.
The Current Investment Management Agreement may be terminated on 60 days'
written notice, without penalty, by a majority vote of the Board of Directors,
by the vote of a majority of the Fund's outstanding voting securities, or by the
Investment Manager, and automatically terminates in the event of its assignment.
The Current Investment Management Agreement provides that the Investment
Manager will not be liable for any acts or omissions of any predecessor adviser
and neither the Investment Manager nor any director, officer, agent or employee
of the Investment Manager will be liable or responsible to the Fund or its
stockholders except for willful misfeasance, bad faith, gross negligence or
reckless disregard of their respective duties or breach of fiduciary duty. The
Current Investment Management Agreement also provides that the Fund will hold
the Investment Manager harmless from judgments against it resulting from acts or
omissions in the performance of its obligations under the Current Investment
Management Agreement which are specifically the result of written instructions
of the President, any Vice President or a majority of the Board of Directors of
the Fund. There must, however, be an express finding that such acts or omissions
did not constitute willful misfeasance, bad faith, gross negligence or reckless
disregard of duties.
Scudder has acted as the Investment Manager for the Fund since October 6,
1988. The Current Investment Management Agreement is dated July 23, 1996, and
was last approved by the Board of Directors on April 11, 1997 and by the
stockholders of the Fund on July 11, 1996 and continues until July 8, 1998. The
Current Investment Management Agreement was last submitted to stockholders in
connection with the reincorporation of the Fund in Maryland.
THE NEW INVESTMENT MANAGEMENT AGREEMENT
The New Investment Management Agreement for the Fund will be dated as of
the date of the consummation of the Transactions, which is expected to occur
10
<PAGE> 17
in the fourth quarter of 1997, but in no event later than February 28, 1998. The
New Investment Management Agreement will be in effect until July 31, 1998, and
may continue thereafter from year to year only if specifically approved at least
annually by the vote of "a majority of the outstanding voting securities" of the
Fund, or by the Board and, in either event, the vote of a majority of the Non-
interested Directors, cast in person at a meeting called for such purpose. In
the event that stockholders of the Fund do not approve the New Investment
Management Agreement, the Current Investment Management Agreement will remain in
effect until the closing of the Transactions, at which time it would terminate.
In such event, the Board of Directors of the Fund will take such action as it
deems to be in the best interest of the Fund and its stockholders. In the event
the Transactions are not consummated, Scudder will continue to provide services
to the Fund in accordance with the terms of the Current Investment Management
Agreement for such periods as may be approved at least annually by the Board,
including a majority of the Non-interested Directors.
DIFFERENCES BETWEEN THE CURRENT AND NEW INVESTMENT MANAGEMENT
AGREEMENTS
The New Investment Management Agreement is the same as the Current
Investment Management Agreement in all material respects. The only changes that
have been made are to change the name of the Investment Manager under the New
Investment Management Agreement to Scudder Kemper Investments, Inc. and to
modify the effective and termination dates.
INVESTMENT MANAGER
Scudder is one of the most experienced investment counsel firms in the
United States. It was established in 1919 as a partnership and was restructured
as a Delaware corporation in 1985. The principal source of Scudder's income is
professional fees received from providing continuing investment advice. Scudder
provides investment counsel for many individuals and institutions, including
insurance companies, endowments, industrial corporations and financial and
banking organizations.
Scudder is a Delaware corporation. Daniel Pierce* is the Chairman of the
Board of Scudder, Edmond D. Villani# is President and Chief Executive Officer of
Scudder, Stephen R. Beckwith#, Lynn S. Birdsong#, Nicholas Bratt#, E. Michael
Brown*, Mark S. Casady*, Linda C. Coughlin*, Margaret D. Hadzima*, Jerard K.
Hartman#, Richard A. Holt@, John T. Packard+, Kathryn L. Quirk#, Cornelia M.
Small# and Stephen A. Wohler* are the other members of the Board of Directors of
Scudder (see footnote for symbol key). The principal occupation of each of the
above named individuals is serving as a Managing Director of Scudder.
- ------------------------------
* Two International Place, Boston, Massachusetts
# 345 Park Avenue, New York, New York
+ 101 California Street, San Francisco, California
@ Two Prudential Plaza, 180 North Stetson, Suite 5400, Chicago, Illinois
11
<PAGE> 18
All of the outstanding voting and nonvoting securities of Scudder are held
of record by Stephen R. Beckwith, Juris Padegs#, Daniel Pierce, and Edmond D.
Villani in their capacity as the representatives of the beneficial owners of
such securities (the "Representatives"), pursuant to a Security Holders'
Agreement among Scudder, the beneficial owners of securities of Scudder and such
Representatives. Pursuant to the Security Holders' Agreement, the
Representatives have the right to reallocate shares among the beneficial owners
from time to time. Such reallocations will be at net book value in cash
transactions. All Managing Directors of Scudder own voting and nonvoting stock
and all Principals of Scudder own nonvoting stock.
Directors, officers and employees of Scudder from time to time may enter
into transactions with various banks, including the Fund's custodian bank. It is
Scudder's opinion that the terms and conditions of those transactions will not
be influenced by existing or potential custodial or other Fund relationships.
Exhibit B sets forth the fees and other information relating to other
investment companies with similar investment objectives advised by Scudder.
BROKERAGE COMMISSIONS ON PORTFOLIO TRANSACTIONS
To the maximum extent feasible, Scudder places orders for portfolio
transactions through Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110 (a corporation registered as a broker/dealer and a
subsidiary of Scudder), which in turn places orders on behalf of the Fund with
issuers, underwriters or other brokers and dealers. In selecting brokers and
dealers with which to place portfolio transactions for the Fund, Scudder will
not consider sales of shares of funds advised by Scudder and ZKI, although it
may place such transactions with brokers and dealers that sell shares of funds
advised by ZKI. Scudder Investor Services, Inc. receives no commissions, fees or
other remuneration from the Fund for this service. Allocation of portfolio
transactions is supervised by Scudder.
REQUIRED VOTE
Approval of this Proposal requires the affirmative vote of a "majority of
the outstanding voting securities" of the Fund. The Directors recommend that the
stockholders vote in favor of this Proposal 1.
ADDITIONAL INFORMATION
GENERAL
The cost of preparing, printing and mailing the enclosed proxy,
accompanying notice and proxy statement and all other costs incurred in
connection with the solicitation of proxies, including any additional
solicitation made by letter, telephone or telegraph, will be paid by Scudder. In
addition to solicitation by mail, certain officers and representatives of the
Fund, officers and employees of
12
<PAGE> 19
Scudder and certain financial services firms and their representatives, who will
receive no extra compensation for their services, may solicit proxies by
telephone, telegram or personally.
Shareholder Communications Corporation ("SCC") has been engaged to assist
in the solicitation of proxies. As the Meeting date approaches, certain
stockholders of the Fund may receive a telephone call from a representative of
SCC if their vote has not yet been received. To the extent legally permitted,
authorization to permit SCC to execute proxies may be obtained by telephonic or
electronically transmitted instructions from stockholders of the Fund. Proxies
that are obtained telephonically will be recorded in accordance with the
procedures set forth below. These procedures have been designed to ensure that
the identity of the stockholder casting the vote is accurately determined and
that the voting instructions of the stockholder are accurately determined.
In all cases where a telephonic proxy is solicited, the SCC representative
is required to ask for each stockholder's full name, address, social security or
employer identification number, title (if the stockholder is authorized to act
on behalf of an entity, such as a corporation), and the number of shares owned
and to confirm that the stockholder has received the proxy statement and card in
the mail. If the information solicited agrees with the information provided to
SCC, then the SCC representative has the responsibility to explain the process,
read the proposal listed on the proxy card, and ask for the stockholder's
instructions on the proposal. The SCC representative, although he or she is
permitted to answer questions about the process, is not permitted to recommend
to the stockholder how to vote, other than to read any recommendation set forth
in the proxy statement. SCC will record the stockholder's instructions on the
card. Within 72 hours, the stockholder will be sent a letter or mailgram to
confirm his or her vote and asking the stockholder to call SCC immediately if
his or her instructions are not correctly reflected in the confirmation.
If the stockholder wishes to participate in the Meeting, but does not wish
to give his or her proxy by telephone, the stockholder may still submit the
proxy card originally sent with the proxy statement or attend in person. Should
stockholders require additional information regarding the proxy or replacement
proxy cards, they may contact SCC toll-free at 1-800-733-8481, ext. 488. Any
proxy given by a stockholder, whether in writing or by telephone, is revocable.
PROPOSALS OF STOCKHOLDERS
A rule of the SEC provides for a deadline by which stockholders must submit
any proposals to be considered for inclusion in the Fund's proxy statement for
next year's annual meeting. Unless you are otherwise notified, the deadline for
receiving stockholders' proposals for that meeting is January 23, 1998.
13
<PAGE> 20
OTHER MATTERS TO COME BEFORE THE MEETING
The Board of Directors of the Fund is not aware of any matters that will be
presented for action at the Meeting other than the matter set forth herein.
Should any other matters requiring a vote of stockholders arise, the proxy in
the accompanying form will confer upon the person or persons entitled to vote
the shares represented by such proxy the discretionary authority to vote the
shares as to any such other matters in accordance with their best judgment in
the interest of the Fund.
PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED STATES.
By order of the Board of Directors,
/s/ Thomas F. McDonough
Thomas F. McDonough
Secretary
14
<PAGE> 21
EXHIBIT A
FORM OF NEW
MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT
BETWEEN
MONTGOMERY STREET INCOME SECURITIES, INC.
AND
SCUDDER KEMPER INVESTMENTS, INC.
AGREEMENT made as of this day of 1997 by and
between Montgomery Street Income Securities, Inc., a Maryland corporation
(hereinafter called the "Fund"), and Scudder Kemper Investments, Inc., a
Delaware corporation (hereinafter called the "Manager").
WHEREAS, the Fund engages in business as a closed-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended; and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940 and is engaged in the business of providing
investment advice; and
WHEREAS, the Fund desires to retain the Manager to render such services in
the manner and on the terms and conditions hereinafter set forth; and
WHEREAS, the Manager desires to perform such services in the manner and on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, this Agreement
WITNESSETH:
that in consideration of the foregoing and of the premises and covenants
hereinafter contained, the Fund and the Manager agree as follows:
1. The Fund hereby employs the Manager to provide investment advisory,
statistical and research facilities and services, to supervise the composition
of the Fund's portfolio, to determine the nature and timing of changes therein
and the manner of effectuating such changes and to cause the purchase and sale
of portfolio securities, subject to overall supervision by the Fund's Board of
Directors, all for the period and on the terms set forth in this Agreement. The
Manager hereby accepts such employment and agrees to render the services and to
assume the obligations herein set forth, for the compensation herein provided.
2. The Manager shall, at its expense:
(a) Furnish to the Fund research and statistical and other factual
information and reports with respect to securities held by the Fund or
which the Fund might purchase. It shall also furnish to the Fund such
information as may be appropriate concerning developments which may affect
issuers
<PAGE> 22
of securities held by the Fund or which the Fund might purchase or the
business in which such issuers may be engaged. Such statistical and other
factual information and reports shall include information and reports on
industries, businesses, corporations and all types of securities which the
Fund is empowered to purchase, whether or not the Fund has at any time any
holdings in such industries, businesses, corporations or securities.
(b) Furnish to the Fund, from time to time, advice, information and
recommendations with respect to the acquisition, holding or disposal by the
Fund of securities in which the Fund is permitted to invest in accordance
with its investment objectives, policies and limitations ("Eligible
Securities"), and subject to overall supervision of the Board of Directors
of the Fund, arrange purchases and sales of Eligible Securities on behalf
of the Fund.
(c) Furnish to the Fund necessary assistance in, as reasonably
requested by the Fund:
(i) The preparation and filing of all reports (including Form
N-SAR) now or hereafter required by Federal or other laws or
regulations.
(ii) The preparation and filing of prospectuses and registration
statements (including Form N-2) and amendments thereto that may be
required by Federal or other laws or by the rule or regulation of any
duly authorized commission or administrative body. However, the Manager
shall not be obligated to pay the costs of preparation, printing or
mailing of prospectuses being used in connection with sales of the
Fund's shares or otherwise, unless otherwise provided herein.
(iii) The preparation and filing of all proxy materials.
(iv) Making arrangements for all Board and stockholder meetings
and, to the extent requested by the Board of Directors of the Fund,
participating in those meetings.
(v) The preparation and filing of quarterly, semiannual and annual
reports and other communications to stockholders.
(vi) Responding to questions and requests from stockholders, the
financial press and the financial services community.
(vii) Providing data to the various publications and services which
track fund performance.
(viii) Providing information and reports to the New York Stock
Exchange and any other exchange on which the Fund's shares are listed.
(ix) The valuation of the Fund's portfolio on a weekly basis.
A-2
<PAGE> 23
(x) The maintenance of the accounting records (including book and
tax) of the Fund required by Federal and other laws and regulations.
(xi) Providing information to and answering questions of the Fund's
auditors.
(xii) Monitoring the services, and reviewing the records, provided
by the transfer agent and registrar, the dividend disbursing agent and
the custodian.
(d) Furnish the necessary personnel to provide the services set forth
herein.
(e) Furnish to the Fund office space at such place as may be agreed
upon from time to time, and all necessary office facilities, basic business
equipment, supplies, utilities, property casualty insurance and telephone
service for managing the affairs and investments and keeping the general
accounts and records of the Fund (exclusive of the necessary records of any
transfer agent, registrar, dividend disbursing or reinvesting agent, or
custodian), and arrange, if desired by the Board of Directors of the Fund,
for officers or employees of the Manager to serve, without or with
compensation from the Fund, as officers, directors or employees of the
Fund.
(f) Advise the Board of Directors of the Fund promptly of any change
in any senior investment or administrative personnel providing services to
the Fund.
3. Except as otherwise expressly provided herein, the Fund assumes and
shall pay or cause to be paid all costs and expenses of the Fund, including,
without limitation: (a) all costs and expenses incident to: (i) the registration
of the Fund under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), or (ii) any public offering of shares of the Fund,
for cash or otherwise, including those costs and expenses relating to the
registration of shares under the Securities Act of 1933, as amended (the
"Securities Act"), the qualification of shares of the Fund under state
securities laws, the printing or other reproduction and distribution of any
registration statement (and all amendments thereto) under the Securities Act,
the preliminary and final prospectuses included therein, and any other necessary
documents incident to any public offering, the advertising of shares of the Fund
and the review by the National Association of Securities Dealers, Inc. of any
underwriting arrangements; (b) the charges and expenses of any registrar or any
custodian appointed by the Fund for the safekeeping of its cash, portfolio
securities and other property; (c) the charges and expenses of auditors
(including preparation of tax returns); (d) the charges and expenses of any
stock transfer, dividend agent or registrar appointed by the Fund; (e) broker's
commissions chargeable to the Fund in connection with portfolio securities
transactions to which the Fund is a party; (f) all taxes, including securities
issuance and transfer taxes, and corporate fees payable by the Fund to Federal,
A-3
<PAGE> 24
state or other governmental agencies; (g) the cost and expense of engraving or
printing of stock certificates representing shares of the Fund; (h) fees
involved in registering and maintaining registrations of the Fund and of its
shares with the Securities and Exchange Commission and various states and other
jurisdictions; (i) all expenses of stockholders' and directors' meetings and of
preparing, printing and mailing proxy statements and quarterly, semiannual and
annual reports to stockholders; (j) fees and travel expenses of directors of the
Fund who are not directors, officers or employees of the Manager or its
"affiliates" (as defined in the Investment Company Act); (k) all fees and
expenses incident to any dividend or distribution reinvestment program; (l)
charges and expenses of outside legal counsel in connection with matters
relating to the Fund, including without limitation, legal services rendered in
connection with the Fund's corporate and financial structure and relations with
its stockholders, issuance of Fund shares, and registrations and qualifications
of securities under Federal, state and other laws; (m) association dues; (n)
interest payable on Fund borrowings; (o) fees and expenses incident to the
listing of Fund shares on any stock exchange; (p) costs of information obtained
from sources other than the Manager or its "affiliates" (as defined in the
Investment Company Act) relating to the valuation of portfolio securities; and
(q) postage.
4. The Fund agrees to pay to the Manager, as full compensation for the
services to be rendered and expenses to be borne by the Manager hereunder, an
annual fee, payable monthly, equal to .50 of 1% of the value of the net assets
of the Fund up to and including $150 million; .45 of 1% of the value of the net
assets of the Fund over $150 million and up to and including $200 million; and
.40 of 1% of the value of the net assets of the Fund over $200 million. For
purposes of computing the monthly fee, the value of the net assets of the Fund
shall be determined as of the close of business on the last business day of each
month; provided, however, that the fee for the period from the end of the last
month ending prior to termination of this Agreement, for whatever reason, to the
date of termination shall be based on the value of the net assets of the Fund
determined as of the close of business on the date of termination, and the fee
for such period and for the period from the effective date of this Agreement
through the end of the month in which the effective date falls will be prorated
according to the proportion which such period bears to a full monthly period.
Each payment of a monthly fee to the Manager shall be made within the ten days
next following the day as of which such payment is so computed.
5. (a) In the event the expenses of the Fund, including amounts payable to
the Manager pursuant to paragraph 4 hereof (but excluding interest, taxes,
brokerage commissions and extraordinary expenses), exceed one and one-half
percent (1 1/2%) of the first thirty million dollars ($30,000,000) of the
average net assets of the Fund, plus one percent (1%) of the average net assets
of the Fund in excess of $30,000,000, in each case computed by dividing (i) the
sum of the net asset values of the Fund as of the last business day of each week
of such fiscal year or of each week during such fiscal year during which this
Agreement was in effect, as the case may be, by (ii) the number of weeks of
A-4
<PAGE> 25
such fiscal year or the number of weeks (including a partial week) during which
the Agreement is in effect during such fiscal year, as the case may be, the
Manager shall pay to the Fund the amount of such excess as soon as practicable
after the end of such fiscal year, and in all events prior to the publication of
the annual report of the Fund for such fiscal year; provided, however, that the
Manager shall not be obligated to pay any amount to the Fund during any fiscal
year in excess of the amount of the advisory fee for such fiscal year.
(b) At the end of each month of each fiscal year of the Fund, the Manager
shall review the expenses of the Fund as outlined in subparagraph (a) of this
paragraph 5 which have accrued to and including the period ending with such
month and shall estimate such contemplated expenses to the end of such fiscal
year. If, as a result of such review and estimate, it appears likely that the
expense limitation provided for in subparagraph (a) of this paragraph 5 will be
exceeded for such fiscal year, the Manager's fee for such month, as provided in
paragraph 4 hereof, shall be reduced, subject to later adjustment, by an amount
equal to a pro rata portion (prorated on the basis of the remaining months of
the year including the month just ending) of the amount by which the sum of such
expenses of the Fund for such fiscal year are expected to exceed the expense
limitation.
(c) If, for any fiscal year of the Fund ending on a date on which this
Agreement is in effect, the expenses of the Fund which are includable within the
expense limitation described in subparagraph (a) of this paragraph 5 (but
reduced by an amount, if any, payable by the Manager pursuant to subparagraph
(a) of this paragraph 5), exceed twenty-five percent (25%) of the gross income
of the Fund for such fiscal year, the Manager will pay the amount of such excess
to the Fund promptly and in all events prior to the publication of the Fund's
annual report for such fiscal year; provided, however, that the Manager shall
not be obligated to pay any amount to the Fund during any fiscal year in excess
of the amount of the advisory fee for such fiscal year. For purposes of this
subparagraph (c), "gross income of the Fund" shall include, but not be limited
to, gains from the sale of securities, without offset or deduction for losses
from the sale of securities, unpaid interest on debt securities in the Fund's
portfolio, accrued to and including the last day of such fiscal year, and
dividends declared but not paid on equity securities in the Fund's portfolio,
the record dates for which fall on or prior to the last day of such fiscal year.
6. The services of the Manager to the Fund are not to be deemed exclusive,
and the Manager shall be free to engage in any other business or to render
investment advisory or management services of any kind to any other corporation,
firm, trust, individual or association, including any other investment company,
so long as its services hereunder are not impaired thereby. Nothing in this
Agreement shall limit or restrict the right of any director, officer or employee
of the Manager to engage in any other business or to devote his time and
attention in part to the management or other aspects of any other business,
whether of a similar or dissimilar nature.
A-5
<PAGE> 26
7. Subject to paragraph 8 hereof, the Manager shall not be responsible for
any action of the Board of Directors of the Fund or any committee thereof in
following or declining to follow any advice or recommendation of the Manager.
The Manager shall be entitled to rely on express written instructions of the
President or any Vice President of the Fund or of a majority of the Board of
Directors of the Fund.
8. Neither the Manager, nor any director, officer, agent or employee of the
Manager shall be liable or responsible to the Fund or its stockholders except
for willful misfeasance, bad faith, gross negligence or reckless disregard of
their respective duties. The Fund will hold the Manager harmless against
judgments, but not expenses of defense or settlements, rendered against the
Manager which (a) result from specific actions or omissions by the Manager in
respect of the performance of its obligations hereunder, which specific acts or
omissions occur as a result of express written instructions of the President or
any Vice President of the Fund or of a majority of the Board of Directors of the
Fund, and (b) arise in actions in which there is an express finding that such
specific acts or omissions did not constitute willful misfeasance, bad faith,
gross negligence or reckless disregard of its duty.
9. The Manager shall not be liable or responsible for any acts or omissions
of any predecessor manager or of any other persons having responsibility for
matters to which this Agreement relates, nor shall the Manager be responsible
for reviewing any such acts or omissions. The Manager shall, however, be liable
for its own acts and omissions subsequent to assuming responsibility under this
Agreement as herein provided.
10. This Agreement shall remain in effect until July 31, 1998, unless
sooner terminated as hereinafter provided. This Agreement shall continue in
effect from year to year thereafter provided its continuance is specifically
approved at least annually by vote of a majority of the outstanding voting
securities of the Fund or by vote of the Board of Directors of the Fund, and by
a majority of the Board of Directors of the Fund who are not parties to this
Agreement or "interested persons" (as defined in the Investment Company Act) of
any party to this Agreement, which vote must be cast in person at a meeting
called for the purpose of voting on approval of the terms of this Agreement and
its continuance; provided, however, that (a) the Fund may, at any time and
without the payment of any penalty, terminate this Agreement upon sixty days'
written notice to the Manager either by majority vote of the Board of Directors
of the Fund or by the vote of a majority of the outstanding voting securities of
the Fund; (b) this Agreement shall immediately terminate in the event of its
assignment (within the meaning of the Investment Company Act) unless such
automatic termination shall be prevented by an exemptive order of the Securities
and Exchange Commission; and (c) the Manager may terminate this Agreement
without payment of penalty on sixty days' written notice to the Fund. All
notices or communications hereunder shall be in writing and if sent to the
Manager shall be mailed by first class mail, or delivered, or telegraphed or
A-6
<PAGE> 27
telexed and confirmed in writing to the Manager at 345 Park Avenue, New York,
New York 10154, Attn: Juris Padegs, or at such other address as the Manager
shall have communicated in writing to the Fund, and if sent to the Fund shall be
mailed by first class mail, or delivered, or telegraphed or telexed and
confirmed in writing to the Fund at 101 California Street, Suite 4100, San
Francisco, California 94111, Attn: John Packard, or at such other address as the
Fund shall have communicated in writing to the Manager.
11. For purposes of this Agreement, a "majority of the outstanding voting
securities of the Fund" shall be determined in accordance with the applicable
provisions of the Investment Company Act.
12. This Agreement shall be construed in accordance with the laws of the
State of California and the applicable provisions of the Investment Company Act.
To the extent applicable law of the State of California, or any of the
provisions herein, conflict with applicable provisions of the Investment Company
Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on the day and year first above written in San Francisco, California.
MONTGOMERY STREET INCOME
SECURITIES, INC.
By:
----------------------------------
President
SCUDDER KEMPER INVESTMENTS, INC.
By:
---------------------------------
Managing Director
A-7
<PAGE> 28
EXHIBIT B
COMPARABLE INVESTMENT COMPANIES
ADVISED BY THE INVESTMENT MANAGER
As of June 30, 1997 the Investment Manager or an affiliate managed in
excess of $115 billion in assets for individuals, funds and other organizations.
The following are open- and closed-end funds with investment objectives similar
to the Fund, for whom the Investment Manager provided investment management:
<TABLE>
<CAPTION>
MANAGEMENT COMPENSATION
ON AN ANNUAL BASIS BASED ON
TOTAL NET ASSETS THE
AS OF VALUE OF AVERAGE DAILY NET
NAME JUNE 30, 1997 ASSETS*
- ----------------------------- ---------------- ------------------------------
<S> <C> <C>
AARP High Quality Bond Fund $511,905,166 0.490% of net assets.**
Scudder Income Fund $578,519,502 0.650% to $200 million; 0.600%
next $300 million; 0.550%
thereafter.
Scudder Variable Life $ 65,769,421 0.475% of net assets.
Investment Fund--Bond
Portfolio
</TABLE>
- ---------------
* The Investment Manager has not waived, reduced or otherwise agreed to reduce
its compensation under any applicable contract.
** Consists of an Individual Fund Fee Rate of 0.19 of 1% plus an Annual Base Fee
in proportion to the ratio of the daily net assets of the fund to the daily
net assets of all of the funds (the "AARP Funds") in the AARP Investment
Program from Scudder (the "Program"). The Annual Base Fee Rate is 0.35 of 1%
on net assets of the Program up to and including $2 billion; 0.33 of 1% on
net assets of the Program in excess of $2 billion up to and including $4
billion; 0.30 of 1% on net assets of the Program in excess of $4 billion up
to and including $6 billion; 0.28 of 1% on net assets of the Program in
excess of $6 billion up to and including $8 billion; 0.26 of 1% on net assets
of the Program in excess of $8 billion up to and including $11 billion; 0.25
of 1% on net assets of the Program in excess of $11 billion up to and
including $14 billion; and 0.24 of 1% on net assets of the Program in excess
of $14 billion.
B-1
<PAGE> 29
PROXY MONTGOMERY STREET INCOME SECURITIES, INC. PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS -- OCTOBER 10, 1997
The undersigned hereby appoints Thomas F. McDonough, John T. Packard and
Daniel Pierce, and each of them, the proxies of the undersigned, with the power
of substitution to each of them, to vote all shares of Montgomery Street Income
Securities, Inc. (the "Fund") which the undersigned is entitled to vote at the
Special Meeting of Stockholders of the Fund to be held at the offices of
Scudder, Stevens & Clark, Inc., 101 California Street, Suite 4100, San
Francisco, California 94111, on Friday, October 10, 1997 at 9:30 a.m., Pacific
time, and at any adjournments thereof.
UNLESS OTHERWISE SPECIFIED IN THE SQUARES PROVIDED, THE UNDERSIGNED'S VOTE
WILL BE CAST FOR EACH NUMBERED ITEM LISTED BELOW.
The Board members of your Fund, including those who are not affiliated with
the Fund or Scudder, recommend that you vote FOR each item.
1. To approve the new Management and Investment Advisory Agreement between the
Fund and Scudder Kemper Investments, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
[continued on other side]
<PAGE> 30
The proxies are authorized to vote in their discretion on any other business
which may properly come before the meeting and any adjournments thereof.
Please sign exactly as your name or names
appear. When signing as attorney,
executor, administrator, trustee or
guardian, please give your full title as
such.
------------------------------------------
(Signature of Stockholder)
------------------------------------------
(Signature of joint owner, if any)
Dated , 1997
----------------------------------------
PLEASE SIGN AND RETURN PROMPTLY IN ENCLOSED ENVELOPE
NO POSTAGE IS REQUIRED
