<PAGE> 1
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:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-2.
</TABLE>
Montgomery Street Income Securities, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than 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 0-12.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] 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 identify 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
PRELIMINARY PROXY MATERIALS DATED: OCTOBER 13, 1998
October , 1998
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 some matters affecting your Fund that will
be the subject of a stockholder vote.
Q & A: QUESTIONS AND ANSWERS
Q: WHAT IS HAPPENING?
A: Zurich Insurance Company ("Zurich"), which is the majority owner of your
Fund's investment manager, Scudder Kemper Investments, Inc. ("Scudder
Kemper"), has combined its businesses with the financial services businesses
of B.A.T Industries p.l.c. ("B.A.T"). The resulting company, Zurich
Financial Services ("Zurich Financial Services"), has become Zurich's parent
company. Although this transaction will have virtually no effect on the
operations of Scudder Kemper or your Fund, we are asking the Fund's
stockholders to approve a new management and investment advisory agreement
to assure that there is no interruption in the services Scudder Kemper
provides to your Fund. The following pages give you additional information
about Zurich Financial Services, the new management and investment advisory
agreement and certain other matters. THE BOARD OF YOUR FUND, NONE OF WHOSE
MEMBERS IS AFFILIATED WITH THE FUND, SCUDDER KEMPER OR ZURICH, RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE NEW MANAGEMENT AND INVESTMENT ADVISORY
AGREEMENT.
Q: WHY AM I BEING ASKED TO VOTE ON THE NEW INVESTMENT MANAGEMENT AGREEMENT?
A: As a result of the Zurich-B.A.T transaction, the former shareholders of
B.A.T indirectly own a 43% interest in Zurich through a new holding company,
Allied Zurich p.l.c. This change in ownership of Zurich may be deemed to
have caused a "change in control" of Scudder Kemper, even though Scudder
Kemper's operations will not change as a result. The Investment Company Act
of 1940, which regulates investment companies such as your Fund, requires
that fund stockholders approve a new investment management agreement
whenever there is a change in control of a fund's investment manager (even
in the most technical sense). Pursuant to an exemptive order issued by the
Securities and Exchange Commission, your Fund entered into a new management
and investment advisory agreement,
<PAGE> 3
subject to receipt of stockholder approval within 150 days. Accordingly, we
are seeking stockholder approval of the new management and investment
advisory agreement with your Fund.
Q: HOW WILL THE ZURICH-B.A.T TRANSACTION AFFECT ME AS A FUND STOCKHOLDER?
A: We do not expect the transaction to affect you as a Fund stockholder. Your
Fund and your Fund's investment objectives will not change as a result of
the transaction. You will still own the same shares in the same Fund. The
new management and investment advisory agreement is substantially identical
to the former management and investment advisory agreement, except for the
dates of execution and termination. If stockholders do not approve the new
management and investment advisory agreement, the agreement will terminate
and the Board Members of your Fund will take such action as they deem to be
in the best interests of your Fund and its stockholders.
Q: WILL THE MANAGEMENT AND INVESTMENT ADVISORY FEES INCREASE?
A: No, the management and investment advisory fee rates paid by your Fund will
remain the same.
Q: HOW DOES THE BOARD OF MY FUND RECOMMEND THAT I VOTE?
A: After careful consideration, the Board of your Fund, none of whose members
is affiliated with the Fund, Scudder Kemper or Zurich, recommends that you
vote FOR the Proposal on the enclosed proxy card(s).
Q: WILL THE FUND PAY FOR THIS PROXY SOLICITATION?
A: No, Zurich or its affiliates will bear these costs.
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. 429.
<PAGE> 4
MONTGOMERY STREET INCOME SECURITIES, INC.
101 California Street, Suite 4100
San Francisco, California 94111
October , 1998
Dear Stockholders:
Zurich Insurance Company, the majority owner of Scudder Kemper Investments,
Inc., has combined its businesses with the financial services businesses of
B.A.T Industries p.l.c. The resulting company, Zurich Financial Services, has
become the parent company of Zurich and the majority owner of Scudder Kemper. As
a result of this transaction, we are asking the stockholders of each of the
funds for which Scudder Kemper acts as investment manager, including your Fund,
to approve a new investment management agreement with Scudder Kemper.
The Zurich-B.A.T transaction should not affect you as a Fund stockholder.
Your Fund shares will not change, the management and investment advisory fee
rates and expenses paid by your Fund will not increase and the investment
objectives of your Fund will remain the same.
AFTER CAREFUL REVIEW, THE MEMBERS OF YOUR FUND'S BOARD HAVE APPROVED THE
NEW MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT. THE BOARD MEMBERS OF YOUR FUND
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.
Because all of the funds for which Scudder Kemper acts as investment
manager are holding 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.
<PAGE> 5
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.
Respectfully,
/s/ John T. Packard /s/ James C. Van Horne
John T. Packard James C. Van Horne
President Chairman of the Board
WE URGE YOU TO SIGN AND RETURN YOUR PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID
ENVELOPE TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT REGARDLESS OF
THE NUMBER OF SHARES YOU OWN.
<PAGE> 6
MONTGOMERY STREET INCOME SECURITIES, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Please take notice that a Special Meeting of Stockholders (the "Special
Meeting") of Montgomery Street Income Securities, Inc. (the "Fund") will be held
at the offices of Scudder Kemper Investments, Inc., 101 California Street, Suite
4100, San Francisco, California 94111, on December 11, 1998 at 9:00 a.m.,
Pacific time, for the following purposes:
PROPOSAL: To approve a new management and investment advisory
agreement for the Fund with Scudder Kemper Investments,
Inc.
The appointed proxies will vote in their discretion on any other business
as may properly come before the Special Meeting or any adjournments thereof.
Holders of record of shares of the Fund at the close of business on October
19, 1998 are entitled to vote at the Special Meeting and at any adjournments
thereof.
In the event that the necessary quorum to transact business or the vote
required to approve the Proposal is not obtained at the Special Meeting, the
persons named as proxies may propose one or more adjournments of the Special
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 Special
Meeting. The persons named as proxies will vote in favor of such adjournment
those proxies which they are entitled to vote in favor of the Proposal and will
vote against such adjournment those proxies to be voted against the Proposal.
By Order of the Board of Directors,
/s/ Thomas F. McDonough
Thomas F. McDonough
Secretary
October , 1998
IMPORTANT--WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND RETURN IT
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 SPECIAL 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 of
the Fund, to be held at the offices of Scudder Kemper Investments, Inc.
("Scudder Kemper"), 101 California Street, Suite 4100, San Francisco, California
94111, on December 11, 1998 at 9:00 a.m., Pacific time, and at any and all
adjournments thereof (the "Special 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 cards are
first being mailed to stockholders on or about October , 1998 or as soon as
practicable thereafter. Any stockholder giving a proxy has the power to revoke
it by mail (addressed to the Fund, 101 California Street, Suite 4100, San
Francisco, California 94111 or addressed to the Fund, c/o State Street Bank and
Trust Company, P.O. Box 8200, Boston, Massachusetts 02266-8200, Attn.: Manager,
Proxy Department) or in person at the Special Meeting, by executing a
superseding proxy or ballot or by submitting a notice of revocation to the Fund.
All properly executed proxies received in time for the Special 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 Special Meeting, in person or by proxy, of the holders
of a majority of the shares of the Fund 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 the Proposal is not obtained at the Special Meeting, the persons named
as proxies may propose one or more adjournments of the Special 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 Special Meeting. The
persons named as proxies will vote in favor of such adjournment those proxies
which they are entitled to vote in favor of the Proposal and will vote against
such adjournment those proxies to be voted against the Proposal. For purposes of
determining the presence of a quorum for transacting business at the Special
Meeting, abstentions and broker "non-votes" will be treated as shares that are
present but which have not been voted. Broker non-votes are proxies received by
the Fund from brokers or nominees when the broker or nominee has neither
received instruc-
<PAGE> 8
tions 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.
The Proposal 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 affirmative vote of the lesser of (1) 67% of the voting securities of the
Fund present at the meeting if more than 50% of the outstanding voting
securities of the Fund are present in person or by proxy or (2) more than 50% of
the outstanding voting securities of the Fund.
Abstentions will have the effect of a "no" vote on the Proposal. Broker
non-votes will have the effect of a "no" vote on the Proposal, which requires
the approval of a specified percentage of the outstanding shares of the Fund, if
such vote is determined on the basis of obtaining the affirmative vote of more
than 50% of the outstanding voting securities 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
Special Meeting.
Holders of record of the shares of the Fund at the close of business on
October 19, 1998 (the "Record Date"), will be entitled to one vote per share on
all business of the Special Meeting. As of June 30, 1998, there were shares
of the Fund outstanding.
To the best of the Fund's knowledge, as of June 30, 1998, no person owned
beneficially more than 5% of the Fund's outstanding shares.
Appendix 1 hereto sets forth the number of shares of the Fund owned
directly or beneficially by the Directors of the Board and by John T. Packard,
the President 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, at 101 California Street,
Suite 4100, San Francisco, California 94111.
PROPOSAL: APPROVAL OF NEW
INVESTMENT MANAGEMENT AGREEMENT
INTRODUCTION
Scudder Kemper acts as the investment adviser to and manager and
administrator for the Fund pursuant to a management and investment advisory
<PAGE> 9
agreement entered into by the Fund and Scudder Kemper. The management
and investment advisory agreement in effect between the Fund and Scudder Kemper
prior to the consummation of the transaction between Zurich Insurance Company
("Zurich") and B.A.T Industries p.l.c. ("B.A.T") (the "Zurich-B.A.T Transaction"
or the "Transaction"), which is described below, is referred to in this Proxy
Statement as the "Former Investment Management Agreement." The management and
investment advisory agreement currently in effect between the Fund and Scudder
Kemper, which is also described below, was executed as of the consummation of
the Zurich-B.A.T Transaction and is referred to in this Proxy Statement as the
"New Investment Management Agreement," together with the Former Investment
Management Agreement, the "Investment Management Agreements." (Scudder Kemper is
sometimes referred to in this Proxy Statement as the "Investment Manager.")
The information set forth in this Proxy Statement and the accompanying
materials concerning the Transaction, Scudder Kemper, Zurich, B.A.T and their
respective affiliates has been provided to the Fund by Scudder Kemper based upon
information that Scudder Kemper received from Zurich and its affiliates.
On June 26, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") entered into
an agreement with Zurich pursuant to which Scudder and Zurich agreed to form an
alliance. On December 31, 1997, Zurich acquired a majority interest in Scudder,
and Zurich Kemper Investments, Inc. ("Kemper"), a Zurich subsidiary, became part
of Scudder. Scudder's name was changed to Scudder Kemper Investments, Inc. The
transaction between Scudder and Zurich (the "Scudder-Zurich Transaction")
resulted in the termination of the Fund's management and investment advisory
agreement with Scudder and the entry by the Fund into the Former Investment
Management Agreement with Scudder Kemper as of December 31, 1997. The Former
Investment Management Agreement between the Fund and Scudder Kemper was last
approved by the Fund's Board on April 10, 1998 and by the Fund's stockholders on
July 9, 1998.
The Zurich-B.A.T Transaction. On December 22, 1997, Zurich and B.A.T
entered into a definitive agreement (the "Merger Agreement") pursuant to which
businesses of Zurich (including Zurich's almost 70% ownership interest in
Scudder Kemper) were to be combined with the financial services businesses of
B.A.T. On October 12, 1997, Zurich and B.A.T had confirmed that they were
engaged in discussions concerning a possible business combination; on October
16, 1997, Zurich and B.A.T announced that they had entered into an Agreement in
Principle, dated as of October 15, 1997 (the "Agreement in Principle"), to merge
B.A.T's financial services businesses with Zurich's businesses. The Merger
Agreement superseded the Agreement in Principle.
In order to effect this combination, Zurich and B.A.T first reorganized
their respective operations. Zurich became a subsidiary of a new Swiss holding
company, Zurich Allied AG, and Zurich shareholders became Zurich Allied AG
<PAGE> 10
shareholders. At the same time, B.A.T separated its financial services business
from its tobacco-related businesses by spinning off to its shareholders a new
British company, Allied Zurich p.l.c., 22 Arlington Street, London, England SW1A
1RW, which held B.A.T's financial services businesses.
Zurich Allied AG then contributed its interest in Zurich, and Allied Zurich
p.l.c. contributed the B.A.T financial services businesses, to a jointly owned
company, Zurich Financial Services ("Zurich Financial Services"), in each case
in exchange for shares of Zurich Financial Services. These transactions were
completed on September 7, 1998. As a result, upon the completion of the
Transaction, the former Zurich shareholders became the owners (through Zurich
Allied AG) of 57% of the voting stock of Zurich Financial Services, and former
B.A.T shareholders initially became the owners (through Allied Zurich p.l.c.) of
43% of the voting stock of Zurich Financial Services. Zurich Financial Services
now owns Zurich and the financial services businesses previously owned by B.A.T.
<PAGE> 11
Below is a simplified chart showing the corporate structure of Zurich
Financial Services after these transactions:
[ZURICH ORGANZATIONAL CHART]
Corporate Governance. At the closing of the Zurich-B.A.T Transaction, the
parties entered into a Governing Agreement that establishes the corporate
governance structure for Zurich Allied AG, Allied Zurich p.l.c. and Zurich
Financial Services.
The Board of Directors of Zurich Financial Services consists of ten
members, five of whom were initially selected by Zurich and five by B.A.T. Mr.
Rolf Huppi, Zurich's Chairman and Chief Executive Officer, became Chairman and
Chief Executive Officer of Zurich Financial Services. In addition to his vote by
virtue of
<PAGE> 12
his position on the Board of Directors, as Chairman, Mr. Huppi will have a tie-
breaking vote on all matters except recommendations of the Audit Committee,
recommendations of the Remuneration Committee in respect of the remuneration of
the Chairman and the CEO, appointment and removal of the Chairman and CEO,
appointments to the Nominations, Audit and Remuneration Committees and
nominations to the Board of Directors not made through the Nominations
Committee.
The Group Management Board of Zurich Financial Services has been given
responsibility by the Board of Directors for the executive management of Zurich
Financial Services and has wide authority for such purpose. Of the 11 initial
members of the Group Management Board, eight were members of the Corporate
Executive Board of Zurich (including Mr. Edmond D. Villani, CEO of Scudder
Kemper, who is responsible for Global Asset Management for Zurich Financial
Services), and three were B.A.T executives.
The Board of Directors of Zurich Allied AG initially consists of 11
members, eight of whom were Zurich directors and three of whom were proposed by
B.A.T. The Board of Directors of Allied Zurich p.l.c. also initially consists of
11 members, eight of whom were B.A.T directors and three of whom were proposed
by Zurich. The parties have agreed that, as soon as possible, the Boards of
Directors of Zurich Financial Services, Zurich Allied AG and Allied Zurich
p.l.c. will have identical membership.
Shareholder resolutions of Zurich Financial Services in general require
approval by at least 58% of all shares outstanding.
The Governing Agreement also contains provisions relating to dividend
equalization and provisions intended to ensure equal treatment of Zurich Allied
AG and Allied Zurich p.l.c. shareholders in the event of a takeover bid for
either company.
The B.A.T financial services businesses, which, since the closing of the
Transaction, are owned by Zurich Financial Services, include: the Farmers Group
of Insurance companies; Eagle Star Reinsurance Company Ltd., U.K. (which Zurich
Financial Services has agreed to sell to GE Capital); Allied-Dunbar, one of the
leading U.K. unit-linked life insurance and pensions companies; and Threadneedle
Asset Management, which was formed initially to manage the investment assets of
Eagle Star and Allied-Dunbar, and which, at December 31, 1997, had $58.8 billion
under management. Overall, at year-end 1997, the financial services businesses
of B.A.T had $79 billion in assets under management, including $18 billion in
third party assets.
Zurich has informed the Fund that the financial services businesses of
B.A.T do not include any of B.A.T's tobacco businesses and that, after careful
review, Zurich has concluded that the tobacco-related liabilities connected with
B.A.T's tobacco business should not adversely affect Zurich or the present
Zurich subsidiaries, including Scudder Kemper.
<PAGE> 13
Governance arrangements that were put in place at the time of the
acquisition of Zurich's 70% interest in Scudder Kemper (which are discussed
below under "Investment Manager") remain unaffected by the Transaction. These
arrangements preclude the making of certain major decisions affecting Scudder
Kemper without the approval of Scudder Kemper directors elected by the
non-Zurich shareholders of Scudder Kemper.
Consummation of the Zurich-B.A.T Transaction may be deemed to have
constituted an "assignment," as that term is defined in the 1940 Act, of the
Fund's Former Investment Management Agreement with Scudder Kemper. As required
by the 1940 Act, the Former Investment Management Agreement provided for its
automatic termination in the event of its assignment. Accordingly, a New
Investment Management Agreement between the Fund and Scudder Kemper was approved
by the Board members of the Fund and is now being proposed for approval by
stockholders of the Fund. Scudder Kemper has received an exemptive order from
the Securities and Exchange Commission (the "SEC" or the "Commission")
permitting the Fund to obtain stockholder approval of its New Investment
Management Agreement within 150 days after the consummation of the Transaction,
which occurred on September 7, 1998 (and, consequently, within 150 days after
the termination of its Former Investment Management Agreement), instead of
before the consummation of the Transaction. Pursuant to the exemptive order, the
Fund's management and investment advisory fees are being held in escrow until
the earlier of stockholder approval of the Fund's New Investment Management
Agreement or the expiration of the 150 day period. A form of the New Investment
Management Agreement is attached hereto as Exhibit A. THE NEW INVESTMENT
MANAGEMENT AGREEMENT IS SUBSTANTIALLY IDENTICAL TO THE FORMER INVESTMENT
MANAGEMENT AGREEMENT, EXCEPT FOR THE DATES OF EXECUTION AND TERMINATION. In
addition, the portfolio managers for the Fund will not change as a result of the
Transaction. The material terms of the Investment Management Agreements are
described under "Description of the Investment Management Agreements" below.
BOARD'S RECOMMENDATION
On July 9, 1998, the Board of the Fund, none of whose members are parties
to such agreement or "interested persons" (as defined under the 1940 Act) of any
such party, voted to approve the New Investment Management Agreement and to
recommend its approval to the stockholders of the Fund.
For information about the Board's deliberations and the reasons for its
recommendation, please see "Board's Evaluation" below.
BOARD'S EVALUATION
The Board members of the Fund were informed by Scudder Kemper of the
announcement of the Agreement in Principle in October, 1997 and of the execution
of the Merger Agreement in December, 1997.
<PAGE> 14
At the Board meeting held on July 9, 1998, Scudder Kemper furnished the
Board members with detailed information regarding the proposed Transaction,
including information provided to the shareholders of Zurich and B.A.T and
information regarding the structure of the Transaction, the resulting ownership
and governance arrangements of Scudder Kemper and the integration of the asset
management business of B.A.T with Scudder Kemper. The Board members had the
opportunity to consider this information with the assistance of their
independent counsel and to ask questions of Scudder Kemper representatives. In
the course of these deliberations, Scudder Kemper advised the Board members that
the proposed Transaction would not have a material effect on the operations of
the Fund or on its stockholders.
The Board of the Fund was advised by Scudder Kemper that Zurich intends to
rely on Section 15(f) of the 1940 Act, which 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 the investment company's
investment adviser or its predecessor adviser. Since the consummation of the
Transaction, the Board of the Fund has been 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 Transaction.
Zurich or its affiliates will 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 Transaction, including the fees
and expenses of legal counsel to the Fund.
In evaluating the Transaction and its effect on the Fund, the Board
considered (i) the assurances of Scudder Kemper that the Transaction should not
affect Scudder Kemper'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 Kemper that no unfair burden would be imposed upon the
Fund as a result of the Transaction, and (iii) the fact that the New Investment
Management Agreement is on the same terms in all material respects
<PAGE> 15
as the Former Investment Management Agreement, except for the dates of execution
and termination. The Board also considered that the New Investment Management
Agreement would be reviewed again by the Board in April, 1999.
The Board noted that it had recently approved the continuation of the
Former Investment Management Agreement in April, 1998. In connection with that
approval, the Board reviewed, among other information, extensive written and
oral reports and compilations from the Investment Manager, including comparative
data from independent sources as to investment performance, advisory fees and
other expenses. The Board also received a separate written and oral report from
Gifford Fong Associates, an independent investment consultant engaged by the
Board specializing in quantitative fixed-income investment analysis. Among the
factors considered in approving the continuation of the Former Investment
Management Agreement 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 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; possible indirect benefits to the
Investment Manager from serving as adviser of the Fund; and the effects of the
recent alliance between the Investment Manager and Zurich.
DESCRIPTION OF THE INVESTMENT MANAGEMENT AGREEMENTS
Except as disclosed below, the Former and New Investment Management
Agreements are substantially identical. Under each Investment Management
Agreement, Scudder Kemper provides the Fund with continuing investment
management services. Each 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. In addition to providing investment management and advisory services,
each 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. Each Investment Management Agreement
<PAGE> 16
requires the Investment Manager to arrange, if desired by the Board, 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.
Each 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 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 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 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, and the
expenses it assumes under each Investment Management Agreement, the Fund pays
the Investment Manager a monthly fee which, on an annual basis, is equal
<PAGE> 17
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, 1997, the fees paid to the Investment Manager amounted to $991,937.
Each 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.
Each Investment Management Agreement provides that extraordinary expenses, such
as litigation expenses and the cost of issuing new shares, are 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.
Each 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, 1997, the Fund's expenses did not
exceed these limitations.
Each Investment Management Agreement may be terminated on 60 days' written
notice, without penalty, by a majority vote of the Board, 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.
Each 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. Each
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 Investment Management
Agreement which are specifically the result of written instructions of the
<PAGE> 18
President, any Vice President or a majority of the Board members 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.
THE NEW INVESTMENT MANAGEMENT AGREEMENT
The New Investment Management Agreement, which is currently in effect, is
dated the date of the consummation of the Transaction, which occurred on
September 7, 1998. The New Investment Management Agreement will be in effect for
an initial term ending on July 31, 1999, 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 Board members who are not parties
to the New Investment Management Agreement or "interested persons" (as defined
in the 1940 Act) of any such party, 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, it will terminate. In such event, the Board
will take such action as it deems to be in the best interests of the Fund and
its stockholders.
DIFFERENCES BETWEEN THE FORMER AND NEW INVESTMENT MANAGEMENT AGREEMENTS
The New Investment Management Agreement is substantially identical to the
Former Investment Management Agreement, except for the dates of execution and
termination.
INVESTMENT MANAGER
Scudder Kemper, which resulted from the combination of the businesses of
Scudder and Kemper, an indirect subsidiary of Zurich, in connection with the
Scudder-Zurich Transaction, is one of the largest and most experienced
investment counsel firms in the United States. Scudder was established in 1919
as a partnership and was restructured as a Delaware corporation in 1985. Scudder
launched its first fund in 1928. Kemper launched its first fund in 1948. Since
December 31, 1997, Scudder Kemper has served as investment adviser to both
Scudder and Kemper funds. As of August 31, 1998, Scudder Kemper has more than
$241.1 billion in assets under management. The principal source of Scudder
Kemper's income is professional fees received from providing continuing
investment advice. Scudder Kemper provides investment counsel for many
individuals and institutions, including insurance companies, endowments,
industrial corporations and financial and banking organizations.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office (and the home offices of Zurich
Financial Services and Zurich Allied AG) 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
<PAGE> 19
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. Zurich
owns approximately 70% of the Investment Manager, with the balance owned by the
Investment Manager's officers and employees.
As stated above, Scudder Kemper is a Delaware corporation. Rolf Huppi* is
the Chairman of the Board and Director, Edmond D. Villani(#) is the President,
Chief Executive Officer and Director, Stephen R. Beckwith(#) is the Treasurer
and Chief Financial Officer, Kathryn L. Quirk(#) is the General Counsel, Chief
Compliance Officer and Secretary, Lynn S. Birdsong(#) is a Corporate Vice
President and Director, Cornelia M. Small(#) is a Corporate Vice President and
Director, and Laurence Cheng* is a Director of the Investment Manager. The
principal occupation of each of Edmond D. Villani, Stephen R. Beckwith, Kathryn
L. Quirk, Lynn S. Birdsong and Cornelia M. Small is serving as a Managing
Director of the Investment Manager; the principal occupation of Rolf Huppi is
serving as an officer of Zurich; the principal occupation of Laurence Cheng is
serving as a senior partner of Capital Z Partners, an investment fund. Appendix
2 includes information regarding each officer of the Fund who is associated with
Scudder Kemper.
The outstanding voting securities of the Investment Manager are held of
record 36.63% by Zurich Holding Company of America ("ZHCA"), a subsidiary of
Zurich; 32.85% by ZKI Holding Corp. ("ZKIH"), a subsidiary of Zurich; 20.86% by
Stephen R. Beckwith, Lynn S. Birdsong, Kathryn L. Quirk, Cornelia M. Small and
Edmond D. Villani, in their capacity as representatives (the "Management
Representatives") of the Investment Manager's management holders and retiree
holders pursuant to a Second Amended and Restated Security Holders Agreement
(the "Security Holders Agreement") among the Investment Manager, Zurich, ZHCA,
ZKIH, the Management Representatives, the management holders, the retiree
holders and Edmond D. Villani, as trustee of Scudder Kemper Investments, Inc.
Executive Defined Contribution Plan Trust (the "Plan Trust"); and 9.66% by the
Plan Trust. There are no outstanding non-voting securities of the Investment
Manager.
Pursuant to the Security Holders Agreement (which was entered into in
connection with the Scudder-Zurich Transaction), the Board of Directors of the
Investment Manager consists of four directors designated by ZHCA and ZKIH and
three directors designated by Management Representatives.
The Security Holders Agreement requires the approval of a majority of the
Scudder-designated directors for certain decisions, including changing the name
of Scudder Kemper, effecting an initial public offering before April 15, 2005,
causing Scudder Kemper to engage substantially in non-investment manage-
- ------------------------------
* Mythenquai 2, Zurich, Switzerland.
(#) 345 Park Avenue, New York, New York.
<PAGE> 20
ment 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 Security Holders Agreement also provides for various put and
call rights with respect to Scudder Kemper stock held by persons who were
employees of Scudder at the time of the Scudder-Zurich Transaction, 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 stockholders of Scudder continuing after the Scudder-Zurich
Transaction.
Directors, officers and employees of Scudder Kemper from time to time may
enter into transactions with various banks, including the Fund's custodian bank.
It is Scudder Kemper'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 (as of each fund's last fiscal year end, unless
otherwise noted) the fees and other information regarding investment companies
advised by Scudder Kemper that have similar investment objectives to the Fund.
(See "Description of the Investment Management Agreements" above for information
regarding the management and investment advisory fee rate, net assets and
aggregate management and investment advisory fee paid for the Fund.)
BROKERAGE COMMISSIONS ON PORTFOLIO TRANSACTIONS
To the maximum extent feasible, Scudder Kemper places orders for portfolio
transactions through Scudder Investor Services, Inc. ("SIS"), Two International
Place, Boston, Massachusetts 02110, which in turn places orders on behalf of the
Fund with issuers, underwriters or other brokers and dealers. SIS is a
corporation registered as a broker/dealer and a subsidiary of Scudder Kemper.
SIS does not receive any commissions, fees or other remuneration from the Fund
for this service. In selecting brokers and dealers with which to place portfolio
transactions for the Fund, Scudder Kemper will not consider sales of shares of
funds currently advised by Scudder Kemper as a decision-making factor, although
it may place such transactions with brokers and dealers that sell shares of
funds currently advised by Scudder Kemper. Allocation of portfolio transactions
is supervised by Scudder Kemper.
THE BOARD MEMBERS OF THE FUND RECOMMEND THAT THE STOCKHOLDERS
OF THE FUND VOTE IN FAVOR OF THIS PROPOSAL.
<PAGE> 21
ADDITIONAL INFORMATION
GENERAL
The cost of preparing, printing and mailing the enclosed proxy card 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 Zurich or its affiliates. In addition to solicitation
by mail, certain officers and representatives of the Fund, officers and
employees of Scudder Kemper 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 Special Meeting date approaches, certain
stockholders of the Fund may receive a telephone call from a representative of
SCC if their votes have not yet been received. 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 materials 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 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 a stockholder wishes to participate in the Special Meeting, but does not
wish to give a 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. 429. Any
proxy given by a stockholder, whether in writing or by telephone, is revocable
until voted at the Special Meeting.
<PAGE> 22
PROPOSALS OF STOCKHOLDERS
Stockholders wishing to submit proposals for inclusion in a proxy statement
for the 1999 meeting of stockholders of the Fund, should send their written
proposals to the Fund, at 101 California Street, Suite 4100, San Francisco,
California 94111, by January 22, 1999. The timely submission of a proposal does
not guarantee its inclusion.
The Fund may exercise discretionary voting authority with respect to
stockholder proposals for the 1999 meeting of stockholders which are not
included in the proxy statement and form of proxy, if notice of such proposals
is not received by the Fund at the above address on or before April 6, 1999.
Even if timely notice is received, the Fund may exercise discretionary voting
authority in certain other circumstances. Discretionary voting authority is the
ability to vote proxies that stockholders have executed and returned to the Fund
on matters not specifically reflected on the form of proxy.
OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING
The Board of the Fund is aware of any matters that will be presented for
action at the Special Meeting other than the matters 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 CARD(S) 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
<PAGE> 23
EXHIBIT A
FORM OF
NEW INVESTMENT MANAGEMENT AGREEMENT
MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT
BETWEEN
MONTGOMERY STREET INCOME SECURITIES, INC.
AND
SCUDDER KEMPER INVESTMENTS, INC.
AGREEMENT made as of this 7th day of September, 1998 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
W I T N E S S E T H:
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
A-1
<PAGE> 24
as may be appropriate concerning developments which may affect issuers 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> 25
(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> 26
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> 27
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> 28
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, 1999, 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> 29
telexed and confirmed in writing to the Manager at 345 Park Avenue, New York,
New York 10154, Attn: Kathryn L. Quirk, 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:
----------------------------
A-7
<PAGE> 30
EXHIBIT B
INVESTMENT OBJECTIVES AND ADVISORY FEES
FOR FUNDS NOT INCLUDED IN THIS PROXY STATEMENT AND
ADVISED BY SCUDDER KEMPER INVESTMENTS, INC.
SCUDDER FUNDS+
<TABLE>
<CAPTION>
FUND OBJECTIVE FEE RATE NET ASSETS
---- --------- -------- ----------
<S> <C> <C> <C>
U.S. INCOME FUNDS
Scudder Corporate Bond Fund A high level of current income 0.650% of net assets N/A*
through investment primarily
in investment-grade corporate
debt securities.
Scudder GNMA Fund High current income primarily 0.650% to $200 million $ 392,444,820
from U.S. Government 0.600% next $300 million
guaranteed mortgage-backed 0.550% thereafter
Ginnie Mae securities.
Scudder High Yield Bond Fund A high level of current income 0.700% of net assets++ $ 176,221,237
and, secondarily, capital
appreciation through
investment primarily in below
investment-grade domestic debt
securities.
Scudder Income Fund A high level of income, 0.650% to $200 million $ 695,255,717
consistent with the prudent 0.600% next $300 million
investment of capital, through 0.550% thereafter
a flexible investment program
emphasizing high-grade bonds.
Scudder Short Term Bond Fund High level of income 0.600% to $500 million $1,165,531,162
consistent with a high degree 0.500% next $500 million
of principal stability by 0.450% next $500 million
investing primarily in high 0.400% next $500 million
quality short-term bonds 0.375% next $1 billion
0.350% thereafter
Scudder Zero Coupon 2000 Fund As high an investment return 0.600% of net assets++ $ 20,453,972
over a selected period as is
consistent with investment in
U.S. Government securities and
the minimization of
reinvestment risk.
ASSET ALLOCATION FUNDS
Scudder Pathway Conservative Current income and, There will be no fee as $ 16,971,681
Portfolio secondarily, long term growth the Manager will receive
of capital by investing a fee from the
substantially in Scudder bond underlying funds.
mutual funds, but will have
some exposure to Scudder
equity mutual funds.
CLOSED-END FUNDS
Scudder Global High Income High level of current income 1.200% of net assets $ 80,721,844
Fund, Inc. (formerly The and, secondarily, capital
Latin America Dollar Income appreciation through
Fund, Inc.) investment principally in
dollar-denominated Latin
American debt instruments.
</TABLE>
B-1
<PAGE> 31
<TABLE>
<CAPTION>
FUND OBJECTIVE FEE RATE NET ASSETS
---- --------- -------- ----------
<S> <C> <C> <C>
INSURANCE PRODUCTS
Scudder Variable Life High level of income from a 0.475% of net assets $ 81,387,032
Investment Fund Bond high quality portfolio of
Portfolio bonds.
AARP FUNDS
AARP Bond Fund for Income High level of current income, 0.350% to $2 billion $ 58,324,146
consistent with greater share 0.330% next $2 billion
price stability than other 0.300% next $2 billion
long term bond mutual funds, 0.280% next $2 billion
through investment primarily 0.260% next $3 billion
in investment-grade debt 0.250% next $3 billion
securities. 0.240% thereafter++
INDIVIDUAL FUND FEE
0.280% of net assets
AARP Diversified Income with Current income with modest There will be no fee as $ 43,446,418
Growth Portfolio long term appreciation through the manager will receive
investment primarily in AARP a fee
bond mutual funds.
</TABLE>
- ------------------------------
+ The information provided below is shown as of the end of each Fund's last
fiscal year, unless otherwise noted.
++ Subject to waivers and/or expense limitations.
* Fee information is not available for Scudder Corporate Bond Fund, which
commenced operations on August 31, 1998.
B-2
<PAGE> 32
KEMPER FUNDS+
<TABLE>
<CAPTION>
TRUST/FUND OBJECTIVE FEE RATE NET ASSETS
---------- --------- -------- ----------
<S> <C> <C> <C>
ASSET ALLOCATION FUNDS
Kemper Horizon 5 Portfolio Income consistent with 0.580% to $250 million $ 55,335,000
preservation of capital and, 0.550% next $750 million
secondarily, growth of 0.530% next $1.5 billion
capital. 0.510% next $2.5 billion
0.480% next $2.5 billion
0.460% next $2.5 billion
0.440% next $2.5 billion
0.420% thereafter
INCOME FUNDS
Kemper Adjustable Rate U.S. High current income 0.550% to $250 million $ 81,967,000
Government Fund consistent with low 0.520% next $750 million
volatility of principal. 0.500% next $1.5 billion
0.480% next $2.5 billion
0.450% next $2.5 billion
0.430% next $2.5 billion
0.410% next $2.5 billion
0.400% thereafter
Kemper Diversified Income High current return. 0.580% to $250 million $ 861,543,000
Fund 0.550% next $750 million
0.530% next $1.5 billion
0.510% next $2.5 billion
0.480% next $2.5 billion
0.460% next $2.5 billion
0.440% next $2.5 billion
0.420% thereafter
Kemper High Yield Fund The highest level of current 0.580% to $250 million $4,939,302,000
income from a professionally 0.550% next $750 million
managed, diversified 0.530% next $1.5 billion
portfolio of fixed income 0.510% next $2.5 billion
securities consistent with 0.480% next $2.5 billion
reasonable risk. 0.460% next $2.5 billion
0.440% next $2.5 billion
0.420% thereafter
Kemper High Yield Total return through high 0.650% to $250 million $ 16,188,000
Opportunity Fund current income and capital 0.620% next $750 million
appreciation. 0.600% next $1.5 billion
0.580% next $2.5 billion
0.550% next $2.5 billion
0.530% next $2.5 billion
0.510% next $2.5 billion
0.490% thereafter
Kemper Income and Capital As high a level of current 0.550% to $250 million $ 613,470,000
Preservation Fund income as is consistent with 0.520% next $750 million
preservation of capital. 0.500% next $1.5 billion
0.480% next $2.5 billion
0.450% next $2.5 billion
0.430% next $2.5 billion
0.410% next $2.5 billion
0.400% thereafter
</TABLE>
B-3
<PAGE> 33
<TABLE>
<CAPTION>
TRUST/FUND OBJECTIVE FEE RATE NET ASSETS
---------- --------- -------- ----------
<S> <C> <C> <C>
Kemper Short-Intermediate High current income and 0.550% to $250 million $ 171,400,000
Government Fund preservation of capital, with 0.520% next $750 million
equal emphasis, from a 0.500% next $1.5 billion
portfolio primarily 0.480% next $2.5 billion
consisting of short-and 0.450% next $2.5 billion
intermediate-term U.S. 0.430% next $2.5 billion
Government securities. 0.410% next $2.5 billion
0.400% thereafter
Kemper U.S. Government High current income, 0.450% to $250 million $3,642,027,000
Securities Fund liquidity and security of 0.430% next $750 million
principal. 0.410% next $1.5 billion
0.400% next $2.5 billion
0.380% next $2.5 billion
0.360% next $2.5 billion
0.340% next $2.5 billion
0.320% thereafter
Kemper U.S. Mortgage Fund Maximum current return from 0.550% to $250 million $2,497,825,000
U.S. Government securities. 0.520% next $750 million
0.500% next $1.5 billion
0.480% next $2.5 billion
0.450% next $2.5 billion
0.430% next $2.5 billion
0.410% next $2.5 billion
0.400% thereafter
CLOSED-END FUNDS
Kemper High Income Trust Highest current income 0.850% of net assets(1) $ 222,919,000
obtainable consistent with
reasonable risk with capital
gains secondary.
Kemper Strategic Income Fund High current income by 0.850% of net assets(1) $ 53,129,000
investing its assets in a
combination of lower-rated
corporate fixed-income
securities, fixed-income
securities of emerging market
and other foreign issuers
and, fixed-income securities
of the U.S. Government and
its agencies and
instrumentalities and private
mortgage-backed issuers.
Kemper Strategic Municipal High level of current income 0.600% of net assets(1) $ 130,895,000
Income Trust exempt from federal income
tax by investing in a
diversified portfolio of
tax-exempt municipal
securities.
</TABLE>
B-4
<PAGE> 34
<TABLE>
<CAPTION>
TRUST/FUND OBJECTIVE FEE RATE NET ASSETS
---------- --------- -------- ----------
<S> <C> <C> <C>
ANNUITY PRODUCTS
Kemper Horizon 5 Portfolio Income consistent with 0.600% of net assets $ 14,258,000
preservation of capital, and
secondarily, growth.
Kemper Investment Grade Bond High current income by 0.600% of net assets $ 15,504,000
Portfolio investing primarily in a
diversified portfolio of
investment grade debt
securities.
</TABLE>
- ------------------------------
+ The information provided below is shown as of the end of each Fund's last
fiscal year, unless otherwise noted.
(1) Based on average weekly net assets.
B-5
<PAGE> 35
APPENDIX 1
FUND SHARES OWNED BY DIRECTORS
[TO BE PROVIDED]
<PAGE> 36
APPENDIX 2
OFFICERS ASSOCIATED
WITH SCUDDER KEMPER
<TABLE>
<CAPTION>
NAME POSITION WITH TRUST ASSOCIATION WITH SCUDDER KEMPER
---- ------------------- -------------------------------
<S> <C> <C>
John T. Packard President Managing Director of Scudder Kemper
Daniel Pierce Vice President Managing Director of Scudder Kemper
Bruce H. Goldfarb Vice President, Senior Vice President of Scudder Kemper
Assistant Secretary
Thomas F. McDonough Vice President, Senior Vice President of Scudder Kemper
Secretary, Assistant
Treasurer
Kathryn L. Quirk Vice President, Managing Director, Chief Legal Officer,
Assistant Secretary Chief Compliance Officer, Secretary of
Scudder Kemper
Stephen A. Wohler Vice President Managing Director of Scudder Kemper
John R. Hebble Treasurer Senior Vice President of Scudder Kemper
</TABLE>
<PAGE> 37
[BACK COVER]
For more information, please call Shareholder Communications Corporation,
your Fund's information agent, at 1-800-733-8481, ext. 429.
<PAGE> 38
PROXY MONTGOMERY STREET INCOME SECURITIES, INC. PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS--DECEMBER 11, 1998
The undersigned hereby appoints Bruce H. Goldfarb, Kathryn L. Quirk, Thomas
F. McDonough 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 Kemper Investments, Inc., 101 California Street, Suite 4100,
San Francisco, California 94111, on Friday, December 11, 1998 at 9:00 a.m.,
Pacific time, and at any adjournments thereof.
UNLESS OTHERWISE SPECIFIED IN THE SQUARES PROVIDED, THE UNDERSIGNED'S VOTE
WILL BE CAST FOR THE ITEM LISTED BELOW.
The Board members of your Fund, including those who are not affiliated with
the Fund or Scudder Kemper Investments, Inc., recommend that you vote FOR the
item.
To approve a the new management and investment advisory agreement between the
Fund and Scudder Kemper Investments, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
[CONTINUED ON OTHER SIDE]
<PAGE> 39
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 ---------------------- , 1998
PLEASE SIGN AND RETURN PROMPTLY IN ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED.
