SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMAION
Proxy Statement Pursuant to Section 1-4(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 Charter)
(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)(1) 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 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:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
MONTGOMERY STREET
INCOME SECURITIES, INC.
101 CALIFORNIA STREET, SUITE 4100
SAN FRANCISCO, CALIFORNIA 94111
(415) 981-8191
NOTICE OF
2004
ANNUAL MEETING
OF STOCKHOLDERS
AND
PROXY STATEMENT
[MONTGOMERY LOGO]
MONTGOMERY STREET
INCOME SECURITIES, INC.
This page
intentionally
left blank.
June 1, 2004
To the Stockholders:
The Annual Meeting of Stockholders of Montgomery Street Income Securities,
Inc. (the "Fund") is to be held at 10:00 a.m. (Pacific time) on Friday, July 16,
2004 at the offices of the Fund, 101 California Street, Suite 4100, San
Francisco, California. A Proxy Statement regarding the meeting, a proxy card for
your vote at the meeting and an envelope -- postage prepaid -- in which to
return your proxy card are enclosed.
At the Annual Meeting, the stockholders will elect the Fund's Directors;
consider approval of the continuance of the Management and Investment Advisory
Agreement between the Fund and Deutsche Investment Management Americas Inc.; and
consider approval of the modification of the Fund's fundamental investment
policies regarding securities lending and investments in other investment
companies. In addition, the stockholders present will hear a report of the Fund.
There will be an opportunity to discuss matters of interest to you as a
stockholder.
The enclosed Proxy Statement provides greater detail about each proposal.
THE BOARD OF DIRECTORS OF THE FUND RECOMMENDS THAT THE STOCKHOLDERS VOTE IN
FAVOR OF EACH PROPOSAL.
To vote, simply fill out the enclosed proxy card -- be sure to sign and
date it -- and return it to us in the enclosed postage-prepaid envelope. Your
vote is very important to us. Thank you for your response and for your continued
investment with the Fund.
Respectfully,
/s/ James C. Van Horne /s/ Richard T. Hale
James C. Van Horne Richard T. Hale
Chairman of the Board President
MONTGOMERY STREET INCOME SECURITIES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of
Montgomery Street Income Securities, Inc.:
Please take notice that the Annual Meeting of Stockholders (the "Annual
Meeting") of Montgomery Street Income Securities, Inc. (the "Fund") has been
called to be held at the offices of the Fund, 101 California Street, Suite 4100,
San Francisco, California 94111, on Friday, July 16, 2004 at 10:00 a.m. (Pacific
time), for the following purposes:
Item 1 To elect five Directors of the Fund to hold office until the next
Annual Meeting or until their respective successors shall have been
duly elected and qualified.
Item 2 To approve the continuance of the Management and Investment
Advisory Agreement between the Fund and Deutsche Investment
Management Americas Inc.
Item 3 To approve the modification or elimination of the following
fundamental investment policies of the Fund:
Item 3.1 Securities Lending
Item 3.2 Investments in Other Investment Companies
Those present and the appointed proxies will also transact such other
business, if any, as may properly come before the Annual Meeting or any
adjournments or postponements thereof.
Holders of record of the shares of common stock of the Fund at 5:00 p.m.
(Eastern time), on May 14, 2004 are entitled to vote at the Annual Meeting or
any adjournments or postponements thereof.
In the event that the necessary quorum to transact business or the vote
required to approve any proposal is not obtained at the Annual Meeting, the
persons named as proxies on the enclosed proxy card may propose one or more
adjournments of the Annual Meeting to permit, in accordance with applicable law,
further solicitation of proxies with respect to that proposal. Any such
adjournment as to a matter will require the affirmative vote of the holders of a
majority of the shares present in person or by proxy at the session of the
Annual Meeting to be adjourned. The persons named as proxies on the enclosed
proxy card will vote FOR any such adjournment those proxies which they are
entitled to vote in favor of the proposal for which further solicitation of
proxies is to be made. They will vote AGAINST any such adjournment those proxies
required to be voted against such proposal.
By order of the Board of Directors,
/s/ Maureen E. Kane
June 1, 2004 Maureen E. Kane, Secretary
- --------------------------------------------------------------------------------
IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD 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 MAY SAVE THE
FUND THE NECESSITY OF FURTHER SOLICITATIONS TO ENSURE A QUORUM AT THE ANNUAL
MEETING. IF YOU CAN ATTEND THE ANNUAL MEETING AND WISH TO VOTE YOUR SHARES IN
PERSON AT THAT TIME, YOU WILL BE ABLE TO DO SO.
- --------------------------------------------------------------------------------
MONTGOMERY STREET INCOME SECURITIES, INC.
101 CALIFORNIA STREET, SUITE 4100
SAN FRANCISCO, CALIFORNIA 94111
(415) 981-8191
PROXY STATEMENT
RECORD DATE: May 14, 2004 MAILING DATE: June 1, 2004
INTRODUCTION
The Board of Directors of Montgomery Street Income Securities, Inc. (the
"Fund") is soliciting proxies for use at the Annual Meeting of Stockholders (the
"Annual Meeting"). The Annual Meeting will be held at the offices of the Fund,
101 California Street, Suite 4100, San Francisco, California 94111, on Friday,
July 16, 2004 at 10:00 a.m. (Pacific time). The Board of Directors is also
soliciting proxies for use at any adjournment or postponement of the Annual
Meeting. This Proxy Statement is furnished in connection with this solicitation.
The Fund may solicit proxies by mail, telephone, telegram, and personal
interview. Georgeson Shareholder Communications, Inc., 17 State Street, New
York, New York 10004, has been engaged to assist in the solicitation of proxies
for the Fund, at an estimated cost of $8,000, plus expenses. The Fund will pay
the cost of soliciting proxies. In addition, the Fund may request personnel of
Deutsche Investment Management Americas Inc. (the "Investment Manager") to
assist in the solicitation of proxies for no separate compensation. It is
anticipated that the Fund will request brokers, custodians, nominees, and
fiduciaries who are record owners of stock to forward proxy materials to their
principals and obtain authorization for the execution of proxies. Upon request,
the Fund will reimburse the brokers, custodians, nominees, and fiduciaries for
their reasonable expenses in forwarding proxy materials to their principals.
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 Scudder Investments Service Company, P.O.
Box 219066, Kansas City, MO 64121-9066, 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 Annual Meeting and voting your shares in person.
In order to hold the Annual Meeting, a majority of the shares entitled to
be voted must have been received by proxy or be present at the Annual Meeting.
Proxies that are returned marked to abstain from or withhold voting, as well as
proxies returned by brokers or others who have not received voting instructions
on some matters and do not have discretion to vote for their clients on those
matters ("broker non-votes"), will be counted towards this majority of shares.
Stockholders will vote separately on Proposal 1, Proposal 2 and Proposals
3.1 and 3.2. On Proposal 1, abstentions and broker non-votes will not be counted
in favor of, but will have no other effect on, the result of the vote. On
Proposals 2, 3.1 and 3.2, abstentions will have the effect of a "no" vote. If
Proposal 2, 3.1 or 3.2 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 have the effect of a "no" vote. If Proposal 2, 3.1 or 3.2 is determined on
the basis of obtaining the affirmative vote of 67% of the voting securities of
the Fund present at the Annual Meeting, broker non-votes will be counted in
determining the voting securities "present," but will not constitute "yes" or
"no" votes. Broker non-votes are likely to be relevant to the Annual Meeting
because the Fund has been advised by the New York Stock Exchange that Proposals
3.1 and 3.2 are not considered to be routine matters as to which brokers would
have discretion to vote for their clients. Accordingly, stockholders are urged
to forward their voting instructions promptly.
In the event that the necessary quorum to transact business or the vote
required to approve any proposal is not obtained at the Annual Meeting, the
persons named as proxies on the enclosed proxy card may propose one or more
adjournments of the Annual Meeting to permit, in accordance with applicable law,
further solicitation of proxies with respect to that proposal. Any such
adjournment as to a matter will require the affirmative vote of the holders of a
majority of the shares present in person or by proxy at the session of the
Annual Meeting to be adjourned. The persons named as proxies on the enclosed
proxy card will vote FOR any such adjournment those proxies which they are
entitled to vote in favor of the proposal for which further solicitation of
proxies is to be made. They will vote AGAINST any such adjournment those proxies
required to be voted against such proposal.
The record date for determination of stockholders entitled to receive
notice of the Annual Meeting and to vote at the Annual Meeting or any
adjournments or postponements thereof, was May 14, 2004 at 5:00 p.m., Eastern
time (the "Record Date").
As of the Record Date, there were issued and outstanding 10,381,076 shares
of common stock of the Fund, constituting all of the Fund's then outstanding
securities. Each share of common stock is entitled to one vote. The following
table sets forth, for each Director, the chief executive officer of the Fund and
the Directors and executive officers as a group, as of May 14, 2004, the amount
of shares beneficially owned in the
2
Fund, the dollar range of securities owned in the Fund, and the aggregate dollar
range of all shareholdings in all funds advised by the Investment Manager and
holding themselves out as related for purposes of investment and investor
services ("Family of Investment Companies"). Each Director's and the chief
executive officer's individual beneficial shareholdings in the Fund constituted
less than 1% of the outstanding shares of the Fund, and, as a group, the
Directors and executive officers owned beneficially less than 1% of the
outstanding shares of the Fund.
<Table>
<Caption>
AGGREGATE DOLLAR
RANGE OF EQUITY
AMOUNT OF SECURITIES IN ALL
SHARES FUNDS OVERSEEN
BENEFICIALLY DOLLAR RANGE OF IN FAMILY OF
OWNED IN EQUITY SECURITIES INVESTMENT
POSITION THE FUND IN THE FUND(1) COMPANIES(4)
-------- ------------ ----------------- -----------------
INDEPENDENT DIRECTORS
James C. Van Horne Chairman and 2,500 $10,000 - $50,000 $10,000 - $50,000
Director
Richard J. Bradshaw(2) Director 6,475 Over $100,000 Over $100,000
Maryellie K. Johnson Director 11,360 Over $100,000 Over $100,000
Wendell G. Van Auken Director 19,782 Over $100,000 Over $100,000
INTERESTED DIRECTOR(3)
John T. Packard Director 500 $1 - $10,000 $1 - $10,000
CHIEF EXECUTIVE OFFICER
Richard T. Hale President 1,000 $10,000 - $50,000 Over $100,000
All Directors and
Executive Officers as a
Group(4)
41,617 Over $100,000 Over $100,000
</Table>
- ---------------------
(1) The information as to beneficial ownership is based on statements furnished
to the Fund by each Director and officer. Unless otherwise indicated, each
person has sole voting and investment power over the shares reported.
(2) Sole voting and investment power over the shares reported.
(3) Mr. Packard may be considered an "interested person" of the Fund, as defined
in the Investment Company Act of 1940, as amended (the "1940 Act"), by
reason of his past relationships with the Fund and the Investment Manager.
(4) The total for the group included 39,512 shares held with sole voting and
investment power and 2,105 shares held with shared voting and investment
power.
To the Fund's knowledge, as of May 14, 2004, no person owned beneficially
more than 5% of the Fund's outstanding shares.
3
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and Section 30(h) of the 1940 Act, as applied to a closed-end fund,
require a fund's officers and directors, investment manager, affiliated persons
of the investment manager, and persons who beneficially own more than ten
percent of a registered class of the fund's outstanding securities ("reporting
persons"), to file reports of ownership of the fund's securities and changes in
such ownership with the Securities and Exchange Commission (the "SEC") and any
exchange on which the fund's securities are traded. Such persons are required by
SEC regulations to furnish the fund with copies of all such reports.
Based on a review of reports filed by the Fund's reporting persons, and
written representations by the reporting persons that no year-end reports were
required for such persons, all filings required by Section 16(a) of the 1934 Act
for the fiscal year ended December 31, 2003, were timely.
THE FUND PROVIDES PERIODIC REPORTS TO ALL STOCKHOLDERS WHICH HIGHLIGHT
RELEVANT INFORMATION, INCLUDING INVESTMENT RESULTS AND A REVIEW OF PORTFOLIO
STRATEGY. YOU MAY RECEIVE AN ADDITIONAL COPY OF THE ANNUAL REPORT FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2003, WITHOUT CHARGE, BY CALLING 1-800-349-4281 OR
1-800-294-4366 OR WRITING THE FUND AT 101 CALIFORNIA STREET, SUITE 4100, SAN
FRANCISCO, CA 94111.
PROPOSAL 1 -- ELECTION OF DIRECTORS
At the Annual Meeting, stockholders will be asked to elect five individuals
to constitute the Board of Directors of the Fund. Each Director so elected will
hold office until the next annual meeting or until the election and
qualification of a successor. The five individuals listed below under
"Information Concerning Nominees" were nominated for election as Directors of
the Fund by the Fund's present Board of Directors. The five nominees are
currently Directors of the Fund and each was elected to serve as a Director at
the 2003 Annual Meeting of Stockholders.
The persons named as proxies on the enclosed proxy card intend to vote for
all of the nominees named below, unless authority to vote for any or all of the
nominees is withheld. In the unanticipated event that any nominee for Director
cannot be a candidate at the Annual Meeting, the appointed proxies will vote
their proxy in favor of the remainder of the nominees and, in addition, in favor
of such substitute nominee(s) (if any) as the Board of Directors shall
designate. Alternatively, the proxies may vote in favor of a resolution reducing
the number of Directors to be elected at the Annual Meeting.
4
INFORMATION CONCERNING NOMINEES
Each of the nominees is listed below. The address of each nominee is c/o
Montgomery Street Income Securities, Inc., 101 California Street, Suite 4100,
San Francisco, California 94111. Each nominee has consented to be nominated and
to serve if elected.
<Table>
<Caption>
PRINCIPAL OCCUPATION OR EMPLOYMENT YEAR FIRST
DURING PAST FIVE YEARS AND DIRECTORSHIPS BECAME A
NOMINEE (AGE) IN PUBLICLY HELD COMPANIES DIRECTOR
- -------------------- ----------------------------------------------- ----------
INDEPENDENT DIRECTORS
---------------------
RICHARD J. BRADSHAW Mr. Bradshaw is the Executive Director of 1991
(55) Cooley Godward LLP (law firm).
MARYELLIE K. JOHNSON Ms. Johnson is a private investor. From 1989 to 1989
(68) 1998, she was a Director of London and Overseas
Freighters, Ltd. (oil tanker operator).
WENDELL G. VAN AUKEN Mr. Van Auken is a General Partner of several 1994
(59) venture capital funds affiliated with Mayfield
Fund. He also serves as a Director of Advent
Software (portfolio software company).
JAMES C. VAN HORNE Dr. Van Horne is the A.P. Giannini Professor of 1985
(68) Finance, Graduate School of Business, Stanford
University. He also serves as a Director of
Suntron Corp. (electronic manufacturing
services) and Bailard, Biehl & Kaiser
Opportunity Fund Group, Inc. (registered
investment company).
INTERESTED DIRECTOR
-------------------
JOHN T. PACKARD Mr. Packard has been a Managing Director of 2001
(70) Weiss, Peck & Greer Investments (investment
adviser and broker-dealer) since January 2002
and was an Advisory Managing Director of the
same firm from February 2000 to January 2002.
From 1985 to 1998, he was a Managing Director,
and from 1999 to 2000, he was an Advisory
Managing Director, of the Investment Manager,
serving as the President of the Fund from 1988
to February 2000.
</Table>
Mr. Packard may be considered an "interested person" of the Fund as defined
in the 1940 Act (an "Interested Person") by reason of his past relationships
with the Fund and
5
the Investment Manager. He is referred to as an "Interested Director." Each of
the remaining four nominees is not an Interested Person and is referred to as an
"Independent Director."
A majority of the board members of a registered investment company must not
be Interested Persons for the company to take advantage of certain exemptive
rules under the 1940 Act. If the nominees proposed for election as Directors of
the Fund are elected, 80% of the Board of Directors will be composed of
Independent Directors. As required, each of the nominees who will be considered
an Independent Director, if elected, was selected and nominated solely by the
current Independent Directors of the Fund.
Each nominee serves as a board member of one portfolio in the complex of
funds that hold themselves out as related companies for purposes of investment
or investor services or are managed by the Investment Manager or its affiliated
persons (the "Fund Complex").
As of December 31, 2003, none of the nominees beneficially owned securities
of the Investment Manager or any person directly or indirectly controlling,
controlled by or under common control with the Investment Manager.
BOARD OF DIRECTORS; NOMINATIONS; BOARD AND COMMITTEE MEETINGS
The primary responsibility of the Board of Directors is to represent the
interests of the stockholders of the Fund and to provide oversight of the
management of the Fund.
The Board of Directors does not have a nominating committee or a charter
relating to the nomination of Directors. The full Board considers possible
candidates to fill vacancies on the Board of Directors, reviews the
qualifications of candidates recommended by stockholders and others, and
recommends the slate of nominees to be proposed for election by stockholders at
the annual meeting. As noted above, individuals who would be considered
Independent Directors, if elected, are selected and nominated solely by the
Independent Directors of the Fund (currently, Messrs. Bradshaw, Van Auken and
Van Horne and Ms. Johnson). In light of the fact that 80% of the Board of
Directors is composed of Independent Directors and the remaining Director (Mr.
Packard) is not presently affiliated with the Investment Manager, the Board
believes that it is appropriate for the full Board to participate in the
consideration of Director candidates. Stockholders wishing to recommend any
Director candidate should submit in writing a brief description of the
candidate's business experience and other information relevant to the
candidate's qualifications to serve as a Director. Submissions should be
addressed to the Chairman of the Board of Directors, Montgomery Street Income
Securities, Inc., 101 California Street, Suite 4100, San Francisco, CA 94111. In
order to be considered at the 2005 annual meeting, submission should be made by
January 24, 2005.
The Board of Directors has an Executive Committee, a Valuation Committee
and an Audit Committee. In 2003, the Board of Directors held five meetings, the
Audit Committee
6
held four meetings, and the Valuation Committee held one meeting. The Executive
Committee did not meet in 2003. Each Director attended at least 75% of the total
number of meetings of the Board of Directors and of all Committees of the Board
on which he or she served in 2003.
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
The Board of Directors provides a process for stockholders to send
communications to the Board. Correspondence should be sent by U.S. mail or
courier service to the Chairman of the Board of Directors, Montgomery Street
Income Securities, Inc., 101 California Street, Suite 4100, San Francisco, CA
94111. It is the general policy of the Fund that the Directors should be
represented at the Annual Meeting. All of the Directors attended the last Annual
Meeting, which was held on July 10, 2003.
EXECUTIVE COMMITTEE
The Executive Committee is authorized to exercise all powers of the Board
of Directors permitted to be exercised under the Maryland General Corporation
Law. The Committee is composed of two Independent Directors (Messrs. Van Horne
and Bradshaw).
VALUATION COMMITTEE
The Valuation Committee reviews Valuation Procedures adopted by the Board
of Directors, determines the fair value of the portfolio assets of the Fund as
needed in accordance with the Valuation Procedures and performs such other tasks
as the full Board of Directors deems necessary. The Committee is composed of
three Independent Directors (Ms. Johnson and Messrs. Van Auken and Van Horne).
AUDIT COMMITTEE
The Audit Committee oversees the accounting and financial reporting
policies and practices of the Fund, its internal controls over financial
reporting and, as the Audit Committee deems appropriate, the internal controls
of certain service providers to the Fund. The Audit Committee also oversees the
quality, objectivity and integrity of the Fund's financial statements and the
independent audit thereof, exercises direct responsibility for the appointment,
compensation, retention and oversight of the work performed by the independent
auditors, reviews the independent auditors' qualifications and independence, and
acts as a liaison between the Fund's independent auditors and the full Board of
Directors.
The Audit Committee is composed of three Independent Directors (Messrs. Van
Auken and Bradshaw and Ms. Johnson). Each Committee member meets the
independence requirements of the New York Stock Exchange listing standards. The
Audit Committee is governed by a written charter adopted by the Board of
Directors that sets
7
forth in greater detail the Committee's purposes, duties and powers. A copy of
the charter is attached hereto as Exhibit A.
AUDIT COMMITTEE REPORT
At a special meeting of the Audit Committee held on February 25, 2004, the
Committee reviewed the Fund's audited financial statements and discussed the
financial statements with the Investment Manager and the independent auditors.
The Committee discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communication with Audit
Committees). In addition, the Committee discussed with the independent auditors
the auditors' independence from management and reviewed the written disclosures
and letter required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees). Based on those reviews and discussions, the
Committee recommended to the Board of Directors that the audited financial
statements be included in the Fund's annual report to stockholders for the 2003
fiscal year.
The Audit Committee:
Wendell G. Van Auken, Chair
Richard J. Bradshaw
Maryellie K. Johnson
8
INDEPENDENT AUDITORS
At a meeting held on April 16, 2004, the Independent Directors and the full
Board of Directors, voting separately, unanimously selected Ernst & Young LLP
("E&Y") as the Fund's independent auditors, for the fiscal year ending December
31, 2004, to examine the Fund's books and accounts and to certify the Fund's
financial statements. The Fund's financial statements for the fiscal years ended
December 31, 2002 and 2003 were audited by E&Y. The following table shows fees
billed by E&Y during the 2002 and 2003 fiscal years: (i) for audit,
audit-related, tax and other services provided to the Fund, and (ii) for audit,
audit-related, tax and other services provided to the Investment Manager and
entities controlling, controlled by, or under common control with the Investment
Manager that provide ongoing services to the Fund (the "Advisor Entities").
<Table>
<Caption>
AUDIT RELATED
FEES(2) TAX FEES(3) ALL OTHER FEES(4)(5)
AUDIT FEES(1) --------------- ----------------- ---------------------
------------- ADVISOR ADVISOR ADVISOR
FISCAL YEAR ENDED FUND FUND ENTITIES FUND ENTITIES FUND ENTITIES
- ----------------- ------------- ---- -------- ------ -------- ------ ------------
December 31, 2003 $46,800 $0 $112,900 $7,500 $0 $0 $3,742,000
December 31, 2002 $59,459 $0 $212,800 $8,250 $0 $0 $ 963,492
</Table>
- ---------------------
(1) "Audit Fees" are the aggregate fees billed for professional services
rendered for the audit of the Fund's annual financial statements and
services provided in connection with statutory and regulatory filings or
engagements.
(2) "Audit Related Fees" are the aggregate fees billed for services in
connection with the assessment of internal controls and additional related
procedures that are reasonably related to the performance of the audit or
review of financial statements and are not reported under "Audit Fees."
(3) "Tax Fees" are the aggregate fees billed for professional services for tax
advice, tax compliance and tax planning.
(4) "All Other Fees" are the aggregate fees billed for products and services
other than "Audit Fees," "Audit Related Fees" and "Tax Fees," and include
fees for services in connection with risk management and process improvement
initiatives for the Investment Manager and other related entities that
provide support for the operations of the Fund.
(5) In addition to the amounts shown in the table, E&Y received an aggregate
amount of $3,532,290 in the 2003 fiscal year and $3,318,645 in the 2002
fiscal year for all services performed on behalf of other funds advised by
the Investment Manager.
Audit Committee Pre-Approval Procedures. The Audit Committee has adopted
procedures for the pre-approval by the Audit Committee of (i) the engagement of
the Fund's independent auditors to provide audit and non-audit services to the
Fund and (ii) the engagement of the Fund's independent auditors to provide
non-audit services to the Investment Manager or the Advisor Entities that relate
directly to the Fund's operations and financial reporting. If time does not
permit, the Chairman of the Audit Committee is authorized to pre-approve the
engagement of the independent auditors on behalf of the
9
Audit Committee. The independent auditors and the Investment Manager are
required to report on the initiation of any such engagement at the next regular
Audit Committee meeting.
All Non-Audit Fees. The aggregate non-audit fees billed by E&Y for
services rendered to the Fund, the Investment Manager and the Advisor Entities
during the 2002 and 2003 fiscal years were $971,742 and $3,749,500,
respectively. The Audit Committee considered whether E&Y's provision of
non-audit services to the Investment Manager and the Advisor Entities that were
not pre-approved by the Audit Committee was compatible with maintaining E&Y's
independence.
Representatives of E&Y are not expected to be present at the Annual
Meeting, but will be available by telephone to respond to appropriate questions
posed by stockholders or management and to make a statement if they desire to do
so.
OFFICERS OF THE FUND
The following table sets forth certain information concerning each officer
of the Fund. The address of each officer is c/o Montgomery Street Income
Securities, Inc., 101 California Street, Suite 4100, San Francisco, CA 94111.
<Table>
<Caption>
PRESENT OFFICE WITH THE FUND;
PRINCIPAL OCCUPATION OR YEAR FIRST BECAME
NAME (AGE) EMPLOYMENT(1) AN OFFICER(2)
---------- ------------- -------------
Richard T. Hale(3)(58) President and Chief Executive Officer 2002
(until June 18, 2004); Managing
Director, Deutsche Investment
Management Americas Inc. (2003 to
present), Deutsche Bank Securities
Inc. (formerly Deutsche Banc Alex.
Brown Inc.) and Deutsche Asset
Management, Inc. (1999 to present);
Director and President, Investment
Company Capital Corp. (registered
investment advisor) (since 1996);
Director, Deutsche Global Funds, Ltd.
(since 2000) and Scudder Global
Opportunities Funds SICAV (since
2003); Director/Officer Deutsche/
Scudder Mutual Funds (various dates)
(registered investment companies);
formerly, Director, ISI Family of
Funds (registered investment
companies) (1992-1999).
</Table>
10
<Table>
<Caption>
PRESENT OFFICE WITH THE FUND;
PRINCIPAL OCCUPATION OR YEAR FIRST BECAME
NAME (AGE) EMPLOYMENT(1) AN OFFICER(2)
---------- ------------- -------------
Julian F. Sluyters(4)(43) President and Chief Executive Officer 2004
(as of June 18, 2004); Managing
Director, Deutsche Asset
Management(5) (May 2004 to present);
Director/Officer Scudder Mutual Funds
(May 2004 to present) (registered
investment companies); President and
Chief Executive Officer, UBS Fund
Services (2001-2003); Chief
Administrative Officer (1998-2001)
and Senior Vice President and
Director of Mutual Fund Operations
(1991 to 1998), UBS Global Asset
Management.
Gary W. Bartlett (44) Vice President; Managing Director, 2002
Deutsche Asset Management.
Andrew P. Cestone (34) Vice President; Managing Director, 2003
Deutsche Asset Management.
Maureen E. Kane (42) Vice President and Secretary; Vice 1999
President, Deutsche Asset Management.
Charles A. Rizzo (46) Treasurer and Chief Financial 2003
Officer; Managing Director (2000 to
present); Vice President and
Department Head, BT Alex. Brown
Incorporated (now Deutsche Bank
Securities Inc.) (1998-1999).
</Table>
- ---------------------
(1) Unless otherwise stated, all officers have been associated with the
Investment Manager for more than five years, although not necessarily in the
same capacity. All officers (except Ms. Kane) are also officers or directors
of other funds advised by the Investment Manager. All officers (except Mr.
Hale and Mr. Sluyters) own securities of Deutsche Bank AG, the ultimate
parent of the Investment Manager.
(2) All officers are appointed annually by, and serve at the discretion of, the
Board of Directors.
(3) Mr. Hale will be retiring from the Investment Manager on June 18, 2004 and,
accordingly, he will resign as President and Chief Executive Officer of the
Fund effective as of that date.
(4) Mr. Sluyters has been appointed as President and Chief Executive Officer of
the Fund effective as of June 18, 2004, succeeding Mr. Hale.
11
(5) Deutsche Asset Management is the marketing name in the U.S. for the asset
management activities of Deutsche Bank AG, Deutsche Bank Trust Company
Americas, Deutsche Bank Securities Inc., Deutsche Asset Management Inc.,
Deutsche Asset Management Investment Services Ltd., Deutsche Investment
Management Americas Inc. and Scudder Trust Company.
REMUNERATION OF DIRECTORS AND OFFICERS
Each Director receives remuneration from the Fund for his or her services.
The Fund does not compensate its officers or employees, since the Investment
Manager makes these individuals available to the Fund to serve without
compensation from the Fund. For the fiscal year ended December 31, 2003, the
Directors' remuneration consisted of a quarterly retainer of $2,000 (except for
the Chairman of the Board, whose quarterly retainer was $6,000) and a fee of
$500 for each Board meeting attended and $250 for each committee meeting
attended, plus any related expenses. Effective January 1, 2004, the quarterly
retainers were increased to $7,000 for the Chairman of the Board, $4,000 for the
Chairman of the Audit Committee, and $3,000 for each of the other Directors, and
the meeting fees were increased to $750 for each Board meeting attended and $500
for each committee meeting attended. For the fiscal year ended December 31,
2003, total compensation (including reimbursement of expenses) for all Directors
as a group was $74,435.
12
The Compensation Table below provides the following data:
Column (1) Each Director who received compensation from the Fund.
Column (2) Aggregate compensation received by a Director from the Fund.
Column (3) Total compensation received by a Director from the Fund and Fund
Complex. No member of the Board serves as a Director for any other fund in
the Fund Complex nor does any Director receive any pension or retirement
benefits from the Fund.
COMPENSATION TABLE
for the fiscal year ended December 31, 2003
<Table>
<Caption>
----------------------------------------------------------
(1) (2) (3)
----------------------------------------------------------
TOTAL COMPENSATION
AGGREGATE FROM FUND
NAME OF PERSON, COMPENSATION AND FUND COMPLEX
POSITION FROM FUND PAID TO DIRECTOR
----------------------------------------------------------
INDEPENDENT DIRECTORS
----------------------------------------------------------
Richard J. Bradshaw $11,000 $11,000
Director
Maryellie K. Johnson $10,250 $10,250
Director
Wendell G. Van Auken $11,250 $11,250
Director
James C. Van Horne $26,500 $26,500
Chairman
----------------------------------------------------------
INTERESTED DIRECTOR
----------------------------------------------------------
John T. Packard $10,500 $10,500
Director
----------------------------------------------------------
</Table>
BOARD RECOMMENDATION AND REQUIRED VOTE
Election of the nominees for Director requires the affirmative vote of a
plurality of the votes cast in person or by proxy at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF THE FUND VOTE
FOR THE ELECTION OF EACH OF THE NOMINEES FOR DIRECTOR.
PROPOSAL 2 -- APPROVAL OF THE CONTINUANCE OF THE MANAGEMENT AND INVESTMENT
ADVISORY AGREEMENT FOR THE FUND WITH DEUTSCHE INVESTMENT
MANAGEMENT AMERICAS INC.
Deutsche Investment Management Americas Inc., 345 Park Avenue, New York,
New York, acts as manager for and investment adviser to the Fund pursuant to a
Management and Investment Advisory Agreement dated August 15, 2002 (the
"Agreement"). The
13
Agreement was first approved by a vote of the stockholders on August 15, 2002,
in connection with the acquisition of the Fund's former investment manager by
Deutsche Bank AG on April 5, 2002 (the "Transaction"). A copy of the Agreement
is attached hereto as Exhibit B.
The Agreement was last approved by the Board of Directors on April 16,
2004. The Agreement continues in effect until July 31 of each year, provided its
continuance is specifically approved at least annually by the vote of a majority
of the Directors who are not parties to the Agreement or Interested Persons of
the Fund or the Investment Manager cast in person at a meeting called for the
purpose of voting on such approval, and by the vote of either the Board of
Directors or a majority of the Fund's outstanding voting securities. The
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.
SERVICES PROVIDED
The Agreement requires the Investment Manager to provide management and
investment advisory services to the Fund. It requires the Investment Manager to
provide 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
Board of Directors. In addition to providing management and investment advisory
services, the Investment Manager pays for office space, all necessary office
facilities, basic business equipment, supplies, utilities, property casualty
insurance, telephone services and the costs of keeping the Fund's general
accounts and records. The 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
Directors, officers or employees of the Fund.
The Agreement provides that, with the prior approval of the Board of
Directors, including a majority of the Independent Directors, and to the extent
permissible by law, the Investment Manager may appoint certain of its affiliates
as sub-advisers to perform certain of the Investment Manager's duties. If such
an appointment were made, the Investment Manager would be authorized to adjust
the duties to be performed, the amount of assets to be managed and the fees to
be paid to any such sub-advisers. Any such appointment would not result in an
increase in the fee rate paid by the Fund; fees incurred by any such sub-adviser
would be paid by the Investment Manager.
The Agreement provides that the Investment Manager will not be liable or
responsible for any acts or omissions of any predecessor manager and neither the
Investment Manager nor any director, officer, agent or employee of the
Investment Manager will be
14
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 Agreement also provides that the Fund will hold the
Investment Manager harmless from judgments, but not expenses of defense or
settlements, rendered against it resulting from acts or omissions in the
performance of its obligations under the Agreement which are specifically the
result of written instructions of the President, any Vice President or of a
majority of the Board of Directors. There must, however, have been an express
finding that such acts or omissions did not constitute willful misfeasance, bad
faith, gross negligence or reckless disregard of the Investment Manager's
duties.
FEES AND EXPENSES
The Agreement provides that the Investment Manager be paid an annual fee,
payable monthly, equal to 0.50 of 1% of the value of the net assets of the Fund
up to and including $100 million; 0.45 of 1% of the value of the net assets of
the Fund over $100 million and up to and including $150 million; 0.40 of 1% of
the value of the net assets of the Fund over $150 million and up to and
including $200 million; and 0.35 of 1% of the value of the net assets of the
Fund over $200 million. For purposes of computing the monthly fee, the value of
net assets of the Fund is determined as of the close of business on the last
business day of each month. For the fiscal year ended December 31, 2003, the
Fund paid the Investment Manager an aggregate fee of $942,258.
The 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 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
15
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) ("Affiliates"); (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 relating to the valuation of portfolio
securities; and (q) postage.
EXPENSE LIMITATIONS
The 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 1/2% of the first $30 million of the Fund's average net assets plus 1% of the
Fund's average net assets in excess of $30 million. The 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 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.
The Agreement also provides for a second expense limitation, relating to
the Fund's gross income (including gains from the sale of securities without
offset or deduction for losses, unpaid interest on debt securities in 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; provided, however, that the
Investment Manager will 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 year.
16
For the fiscal year ended December 31, 2003, the Fund's expenses did not
exceed these limitations.
RELATED AGREEMENTS
Pursuant to a Sub-Administration and Sub-Accounting Agreement dated April
1, 2003 (the "Sub-Administration Agreement"), between the Investment Manager,
Scudder Fund Accounting Corporation and State Street Bank and Trust Company
("State Street"), the Investment Manager has delegated certain fund accounting
services and certain record keeping and other administrative services to State
Street. In accordance with the terms of the Sub-Administration Agreement, State
Street is compensated by the Investment Manager, not by the Fund, for providing
such services.
Scudder Investments Service Company ("SISC"), an affiliate of the
Investment Manager, serves as the Fund's transfer agent and dividend disbursing
agent pursuant to an agreement dated November 17, 2000, as amended (the "Agency
Agreement"). The Agency Agreement provides that the Fund pay SISC a minimum
annual fee of $16,200 or, if the Fund exceeds the minimum annual fee, an annual
account charge of $7.50 per open account and $2.50 per closed account. The Fund
also pays a transaction fee per certificate processed of $1.50, plus
out-of-pocket expenses and fees for special projects. For the fiscal year ended
December 31, 2003, the amount charged to the Fund by SISC aggregated $36,304, of
which $14,489 was unpaid as of December 31, 2003. It is expected that SISC will
continue to provide these services after the Agreement is approved.
Pursuant to an Agency Agreement dated January 15, 2003 (the "Agency
Agreement") between SISC and DST Systems, Inc. ("DST"), SISC has appointed DST
to serve as the Fund's Sub-Transfer Agent and Sub-Dividend Disbursing Agent. In
accordance with the terms of the Agency Agreement, DST is compensated by SISC,
not by the Fund, for providing such services.
INVESTMENT MANAGER
The Investment Manager is one of the largest and most experienced
investment management firms in the United States. As of December 31, 2003, the
firm had more than $174 billion in assets under management. The principal source
of the Investment Manager's income is professional fees received from providing
continuing investment advice. The Investment Manager provides investment counsel
for many individuals and institutions, including insurance companies,
endowments, industrial corporations and financial and banking organizations.
The Investment Manager is a Delaware corporation. William N. Shiebler is
the principal executive officer of the Investment Manager. The directors are Mr.
Shiebler, Jeffrey S. Wallace and Evelyn B. Tressitt. The principal occupations
of the principal
17
executive officer and each director are as follows: Mr. Shiebler is Chief
Executive Officer of Deutsche Asset Management Americas; Mr. Wallace is Chief
Financial Officer of Deutsche Asset Management Americas; and Ms. Tressitt is
Chief Operating Officer of Deutsche Asset Management Americas. The business
address of the principal executive officer and each director, as it relates to
his or her duties at the Investment Manager, is 345 Park Avenue, New York, New
York 10154.
As of April 30, 2004, 100% of the voting securities of the Investment
Manager were held indirectly by Deutsche Bank AG. The Investment Manager is a
wholly-owned subsidiary of Deutsche Bank Americas Holding Corp., which, in turn,
is a wholly-owned subsidiary of Taunus Corporation. Taunus Corporation is a
wholly-owned subsidiary of Deutsche Bank AG.
Deutsche Bank AG, Taunusalage 12, D-60262, Frankfurt am Main, Federal
Republic of Germany, is an international commercial and investment banking group
and a leading integrated provider of financial services to institutions and
individuals throughout the world. It is organized in Germany and is a publicly
traded entity. Its shares trade on many exchanges including the New York Stock
Exchange and Xetra (German Stock Exchange). It is engaged in a wide range of
financial services, including retail, private and commercial banking, investment
banking and insurance. Deutsche Asset Management is the marketing name for the
global asset management services of several affiliated entities that are
separately incorporated and registered as investment advisers, including the
Investment Manager.
Exhibit C sets forth the fees and other information regarding investment
companies advised by the Investment Manager that have similar investment
objectives to those of the Fund.
INVESTMENT AND BROKERAGE DISCRETION
The Investment Manager places orders for portfolio transactions with
issuers and with underwriters or other brokers and dealers. In selecting brokers
and dealers with which to place portfolio transactions for the Fund, the
Investment Manager seeks to achieve the most favorable net results.
For the fiscal year ended December 31, 2003, the Fund did not pay any
brokerage commissions to an "affiliated broker," as defined in Item 22(a)(1)(ii)
of Schedule 14A under the Securities Exchange Act of 1934, as amended.
BOARD RECOMMENDATION AND REQUIRED VOTE
At a meeting held on April 16, 2004, the Board of Directors, including the
Independent Directors, voted to continue the Agreement until July 31, 2005 and
to recommend that the stockholders of the Fund approve its continuance at the
Annual Meeting. Although approval by stockholders of the continuance of the
Agreement is not required by the
18
terms of the Agreement or by applicable law, it has been the Fund's custom to
submit this matter to the stockholders at the Annual Meeting. The Fund may
discontinue this practice in the future in its discretion.
In approving the continuance of the Agreement, the Board of Directors,
considering the best interests of the stockholders of the Fund, took into
account a number of factors. Among such factors were: the terms of the
Agreement, including the fees charged and the ability to terminate the Agreement
on 60 days' notice; 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,
high-yield bonds 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 financial resources of the Investment Manager
and its ability to retain capable personnel; the Investment Manager's financial
condition, profitability and assets under management; the provision of transfer
agency and related services to the Fund by an affiliate of the Investment
Manager; the purchase from time to time of portfolio securities underwritten by
affiliates of the Investment Manager; possible indirect benefits to the
Investment Manager from serving as the investment manager of the Fund; the
results of the Board's review of alternative investment managers in connection
with the Transaction; the effects of the Transaction and the related changes to
the investment, management and administrative personnel of the Fund and to the
investment strategy of the Fund; the outsourcing of the transfer agency and fund
accounting services formerly provided to the Fund by the Investment Manager and
its affiliates; and the involvement or potential involvement of the Investment
Manager in regulatory or other legal proceedings.
In considering the continuance of the Agreement, the Board of Directors
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 of Directors also received a separate written and oral
report from Gifford Fong Associates, an independent investment consultant
engaged by the Board of Directors specializing in quantitative fixed-income
investment analysis.
Approval of the continuance of the Agreement by stockholders requires the
affirmative vote of the holders of a majority of the Fund's outstanding shares.
In this context, "majority" means the lesser of two votes: (1) 67% of the Fund's
outstanding shares
19
present at the Annual Meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy, and (2) more than 50% of all of the
Fund's outstanding shares. If continuance of the Agreement is approved at the
Annual Meeting, the Agreement will continue until annual review of the question
of continuance by the Board or the stockholders in 2005. If continuance is not
approved at the Annual Meeting, the Board of Directors will make such
arrangements for the management of the Fund, including continuance of the
Agreement, as it believes appropriate and in the best interests of the Fund.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF THE FUND VOTE
FOR THE CONTINUANCE OF THE AGREEMENT.
PROPOSAL 3 -- APPROVAL OF THE MODIFICATION OR ELIMINATION OF FUNDAMENTAL
INVESTMENT POLICIES OF THE FUND REGARDING SECURITIES LENDING AND
INVESTMENTS IN OTHER INVESTMENT COMPANIES.
The 1940 Act requires an investment company to adopt investment policies
governing certain specified activities, which can be changed only by a
stockholder vote. The 1940 Act also permits an investment company to designate
other activities which can be changed only by a stockholder vote. Policies that
cannot be changed without a stockholder vote are referred to in this Proxy
Statement as "fundamental" policies.
The Investment Manager has proposed that the Fund participate in a
securities lending program with other funds for which the Investment Manager
acts as adviser. The Fund's current fundamental policies on securities lending
and investments in other investment companies effectively preclude the Fund's
participation in the program. In order to allow the Fund to participate in the
securities lending program, the Investment Manager has proposed that the
securities lending policy be modified and the policy on investments in other
investment companies be eliminated.
PROPOSAL 3.1 -- MODIFICATION OF THE FUNDAMENTAL POLICY ON LENDING TO ALLOW
SECURITIES LENDING TO THE EXTENT PERMITTED UNDER THE 1940 ACT,
AS AMENDED, AND AS INTERPRETED OR MODIFIED BY REGULATORY
AUTHORITY HAVING JURISDICTION, FROM TIME TO TIME.
The Fund is required under the 1940 Act to adopt a fundamental policy with
respect to the making of loans. The Fund's current policy prohibits the Fund
from making loans, except that the Fund may (i) purchase debt securities, (ii)
lend its portfolio securities in any amount not greater than 10% of its assets,
at market value computed at the time of making such a loan, provided that such
loans are continuously secured by collateral at least equal to the market value
for securities loaned, and (iii) lend funds pursuant to repurchase agreements,
initially on a wholly secured basis, provided that the collateral
20
securing such loans falls within one or more of the categories of securities in
which the Fund can invest under its investment objectives and policies and
provided further that such loans must not, at the time of any such loan, be as a
whole more than 20% -- and be as to any one borrower more than 5% -- of the
Fund's total assets at market value.
It is proposed that clause (ii) of the policy regarding lending be modified
to allow the Fund to lend its portfolio securities to the extent permitted under
the 1940 Act, as it may be amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time. The Fund would continue to be
permitted to purchase debt securities and to lend funds pursuant to repurchase
agreements, as provided in clauses (i) and (iii) of the current policy.
If stockholders approve the proposed modification to the current securities
lending policy, the Fund would be able to lend its portfolio securities in
amounts greater than 10% of its assets, subject to the requirements of the 1940
Act and the rules and interpretations thereunder. Pursuant to an exemptive order
granted to the Fund by the SEC in 1977 (the "Fund Order"), the Fund may not make
a securities loan if more than 33 1/3% of its total assets (at market value at
the time of making the loan) would be on loan. Accordingly, the proposed
modification to the Fund's current securities lending policy will effectively
increase the securities lending capacity of the Fund from 10% to 33 1/3% of
total assets.
If Proposals 3.1 and 3.2 are approved, the Investment Manager intends to
ask the Board to approve the Fund's participation in the Investment Manager's
securities lending program and to authorize the Fund to lend its portfolio
securities in any amount up to the limit permissible by law. The increase in the
Fund's securities lending capacity from 10% to 33 1/3% is being sought to make
it cost-effective for the Fund to participate in this securities lending
program.
Under the proposed securities lending program, the Fund may lend its
investment securities to approved institutional borrowers who need to borrow
securities in order to complete certain transactions, such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its investment securities, the Fund attempts to increase
its net investment income through the receipt of interest or the investment of
cash collateral on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan belongs to the
Fund. There may be risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans will be made only to borrowers selected by the Fund's delegate
after a commercially reasonable review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pursuant to an exemptive order granted to an affiliate of the Investment
Manager by the SEC (the "Investment Manager Order"), cash collateral on the loan
received by the Fund may be invested in a money market fund managed by the
Investment Manager. The
21
Investment Manager will receive advisory and other fees for managing the cash
collateral invested in the money market fund.
If stockholders approve the proposed modification to the current securities
lending policy, the policy will no longer require that any loans be continuously
secured by collateral at least equal to the market value for securities loaned.
However, the Fund Order contains a similar requirement. The Fund Order also
requires, among other things, that the Fund receive all dividends, interest or
other distributions on loaned securities; that the Fund receive a reasonable
return on the loan either from a loan fee or premium or from investment of the
cash collateral; that the Fund pay no fees except reasonable fees to a custodian
or loan broker subject to certain conditions; and that the Fund call the loan in
time to vote on any material event affecting the Fund's investment. Since the
granting of the Fund Order, the guidelines of the SEC staff on the securities
lending activities of funds have evolved. The Fund may elect to follow those
guidelines or other rules or interpretations under the 1940 Act in lieu of the
Fund Order, even if those guidelines or other rules or interpretations are less
restrictive than the Fund Order.
PROPOSAL 3.2 -- ELIMINATION OF THE FUNDAMENTAL POLICY PROHIBITING INVESTMENTS IN
OTHER INVESTMENT COMPANIES.
The Fund's current policy prohibits the Fund from purchasing the securities
of any other investment company, except in connection with a merger,
consolidation, acquisition of assets or other reorganization approved by the
Fund's stockholders. At the time it was adopted, the current policy was required
by the securities laws of various states. Since that time, federal law has
pre-empted the authority of the states to impose additional requirements on
investment companies. As a result, the current policy is no longer necessary to
comply with state law.
It is proposed that the current policy be eliminated. If stockholders
approve the elimination of the current policy, the Fund would be authorized to
invest in other investment companies to the extent permitted by the 1940 Act and
the rules and interpretations thereunder. Under the 1940 Act, the Fund normally
may not hold more than 3% of the outstanding voting stock of another investment
company and may not invest more than 5% of its total assets in any one
investment company or more than 10% of its total assets in other investment
companies as a group. In addition, the Fund, together with other investment
companies advised by the Investment Manager, normally may not hold more than 10%
of the outstanding voting stock of any closed-end investment company. The 1940
Act also prohibits the Fund from making loans to persons who control or are
under common control with the Fund.
As noted above, if Proposals 3.1 and 3.2 are approved, the Investment
Manager intends to ask the Board to approve the Fund's participation in a
securities lending program pursuant to which cash collateral received by the
Fund may be invested in a
22
money market fund managed by the Investment Manager. The elimination of the
Fund's current restriction on investments in other investment companies will
permit the Fund to invest cash collateral in the Investment Manager's money
market fund within the limits of the 1940 Act and the rules and interpretations
thereunder and subject to the Investment Manager Order. The Investment Manager
has represented to the Fund that the fees for its services under the program
would be no higher than the fees charged by the Investment Manager for services
of the same nature and quality provided to unaffiliated third parties. The
Investment Manager has also represented to the Fund that it would not be cost-
effective for the Fund to participate in a standalone securities lending program
that does not involve the investment of cash collateral in the Investment
Manager's money market fund.
If stockholders approve Proposal 3.2, the Fund will be permitted to invest
in investment companies other than the Investment Manager's money market fund
for purposes other than the investment of cash collateral from securities loans.
Although the Investment Manager has stated that it does not currently intend to
make any such investments, it may do so in the future, subject to the limits of
the 1940 Act and the rules and interpretations thereunder. The Fund's investment
in the securities of another investment company will result in the layering of
expenses, so that Fund stockholders will bear the expenses of the Fund and a
proportionate share of the expenses of the other investment company.
BOARD RECOMMENDATION AND REQUIRED VOTE
Approval of Proposals 3.1 and 3.2 by stockholders requires the affirmative
vote of the holders of a majority of the Fund's outstanding shares on each
Proposal. In this context, "majority" means the lesser of two votes: (1) 67% of
the Fund's outstanding shares present at the Annual Meeting if the holders of
more than 50% of the outstanding shares are present in person or by proxy, and
(2) more than 50% of all of the Fund's outstanding shares. If the stockholders
fail to approve Proposals 3.1 and 3.2, the current fundamental policies will
remain in effect.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF THE FUND VOTE
FOR THE APPROVAL OF PROPOSALS 3.1 AND 3.2.
STOCKHOLDER PROPOSALS FOR 2004 PROXY STATEMENT
Stockholders wishing to submit proposals for inclusion in a proxy statement
for the 2005 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 28, 2005. 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 2005 meeting of stockholders which are not
included in the proxy
23
statement and form of proxy, if notice of such proposals is not received by the
Fund at the above address by April 7, 2005. 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
The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than those mentioned in this Proxy Statement. The appointed
proxies will vote on any other business that comes before the Annual Meeting or
any adjournments or postponements thereof in accordance with their best
judgment.
Please complete and sign the enclosed proxy card and return it in the
envelope provided so that the Annual Meeting may be held and action may be taken
on the matters described in this Proxy Statement with the greatest possible
number of shares participating. This will not preclude your voting in person if
you attend the Annual Meeting.
/s/ Maureen E. Kane
Maureen E. Kane
June 1, 2004 Secretary
24
INDEX OF EXHIBITS
<Table>
EXHIBIT A: AUDIT COMMITTEE CHARTER
EXHIBIT B: MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT
EXHIBIT C: MANAGEMENT FEE RATES FOR FUNDS ADVISED BY THE INVESTMENT
MANAGER WITH SIMILAR INVESTMENT OBJECTIVES
</Table>
EXHIBIT A
MONTGOMERY STREET INCOME SECURITIES, INC.
AUDIT COMMITTEE CHARTER
This document constitutes the Charter of the Audit Committee (the
"Committee") of the Board of Directors of Montgomery Street Income Securities,
Inc. (the "Fund"). The Committee was established by the Board of Directors of
the Fund to provide oversight with respect to the accounting and financial
reporting policies and practices of the Fund.
1. Organization. The Committee shall be composed of three or more members of
the Fund's Board of Directors who are not "interested persons" (as defined
in the Investment Company Act of 1940) of the Fund, who do not accept
directly or indirectly any consulting, advisory or other compensatory fees
from the Fund or from the Fund's investment adviser(1) or its affiliates
(except fees for services as a Director), and who satisfy any requirements
with respect to independence, expertise and/or availability established by
the exchange on which the Fund's shares are traded.
2. Meetings. The Committee shall meet on a regular basis as necessary or
appropriate and is empowered to hold special meetings as circumstances
require.
3. Committee Purposes. The purposes of the Committee are as follows:
(a) To review the Fund's accounting and financial reporting policies and
practices, the Fund's internal controls over financial reporting
(including disclosure controls and procedures) and, as the Committee
deems appropriate, the internal controls over financial reporting of
certain Fund service providers;
(b) To review the quality, objectivity and integrity of the Fund's financial
statements and the independent audit thereof;
(c) To review the Fund's compliance with legal and regulatory requirements
that relate to the Fund's accounting and financial reporting, internal
controls over financial reporting, and independent audits;
(d) To exercise direct responsibility for the appointment, compensation,
retention and oversight of the work performed by the Fund's independent
auditors for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for the Fund, and, in
connection therewith, to review the independent auditors' qualifications
and independence; and
(e) To act as a liaison between the independent auditors and the full Board
of Directors; and
- ---------------------
(1) Deutsche Investment Management Americas Inc.
A-1
(f) To prepare an audit committee report to be included in the Fund's annual
proxy statement.
The function of the Audit Committee is oversight; it is management's
responsibility to maintain or arrange for the maintenance of appropriate
systems for accounting and internal controls (including disclosure controls
and procedures), and the auditor's responsibility to plan and carry out a
proper audit.
4. Duties and Powers. To carry out the purposes specified in Paragraph 3
above, the Committee shall have the following duties and powers:
(a) To approve the selection, retention or termination of the independent
auditors, to review and approve the terms and scope of the annual audit
of the Fund and any special audits, and to approve the fees and other
compensation to be paid to the independent auditors by or on behalf of
the Fund;
(b) To request and evaluate on an annual basis a formal written statement
from the independent auditors delineating all significant relationships
that the independent auditors have with the Fund and the investment
adviser and its affiliates, and to consider whether the provision of
non-audit services rendered by the independent auditors to the Fund and
the Fund's investment adviser and its affiliates is compatible with the
independent auditors' independence;
(c) To obtain and review, at least annually, a report by the independent
auditors describing: the audit firm's internal quality-control
procedures; any material issues raised by the most recent internal
quality-control review, or peer review, of the audit firm, or by any
inquiry or investigation by governmental or professional authorities,
within the preceding five years, respecting one or more independent
audits carried out by the audit firm, and any steps taken to deal with
any such issues; and (to assess the auditor's independence) all
relationships between the independent auditor and the Fund;
(d) (i) To review and discuss with management and the independent auditors
the Fund's annual audited financial statements and any interim financial
statement, including management's discussion of the Fund's performance,
and discuss any matters of concern relating thereto, including any
adjustments to such statements recommended by the auditors, regulatory
and tax compliance matters considered in the preparation of the
financial statements, or other results of said audit(s); (ii) to review
with the independent auditor any audit problems or difficulties and
management's response; (iii) to consider the auditors' comments with
respect to the Fund's financial policies and procedures, internal
accounting controls and disclosure controls and procedures, and
management's responses thereto; (iv) to review the form of the opinion
the auditors propose to render to
A-2
the Board of Directors and the shareholders of the Fund; (v) to review
any other reports, representations or communications from the
independent auditors regarding matters within the scope of the
Committee's responsibilities under this Charter; and (vi) to consider,
at the Committee's discretion, such other information that the Committee
believes may be relevant to the audit and the Fund's financial policies
and procedures, internal accounting controls and disclosure controls and
procedures;
(e) To determine whether to recommend to the Board of Directors that the
Fund's audited financial statements be included in the Annual Report and
to perform such additional functions as may be required under rules and
regulations promulgated by the Securities and Exchange Commission and
the New York Stock Exchange;
(f) To meet separately, periodically, with management and with the
independent auditors to discuss any matters that the Committee or such
parties believe necessary or appropriate to raise, and to review and
consider any reports or communications from any such parties relating
to the operations of the Fund;
(g) To establish procedures for the approval, in advance, of the engagement
of the independent auditors to provide (i) audit or permissible
non-audit services to the Fund, and (ii) non-audit services to the
Fund's investment adviser (and any affiliate that provides services to
the Fund) that relate directly to the Fund's operations and financial
reporting;
(h) To review, annually, with Fund management and the independent auditors,
the Fund's disclosure controls and procedures, a report by Fund
management covering any Form N-CSR filed, and any required certification
of such filing, along with the results of Fund management's most recent
evaluation of the Fund's disclosure controls and procedures; and
(i) To establish procedures for the receipt, retention and treatment of
complaints received by the Fund regarding accounting, internal
accounting controls or auditing matters and the confidential, anonymous
submission by officers of the Fund or employees of the investment
adviser, administrator, principal underwriter, or any other provider of
accounting related services to the Fund of concerns regarding suspected
fraud of any type related to the Fund, including without limitation
questionable accounting or auditing matters.
(j) To report its activities to the full Board of Directors on a regular
basis and to make such recommendations with respect to the above and
other matters as the Committee may deem necessary or appropriate.
A-3
5. Other Responsibilities. The Committee shall (i) discuss generally the
Fund's policies with respect to risk assessment and risk management; (ii)
set clear hiring policies for the Fund and the investment adviser with
respect to employees or former employees of the independent auditors; (iii)
review the Fund's policy with respect to earnings press releases, as well as
to financial information and earnings guidance provided to analysts and
rating agencies; and (iv) review, annually, the performance of the
Committee.
6. Role of Independent Auditors. The Fund's independent auditors are
ultimately accountable to the Committee and must report directly to the
Committee.
7. Resources and Authority. The Committee shall have the resources and
authority appropriate for purposes of discharging its responsibilities under
this Charter, including the authority to engage independent counsel and/or
to retain, at the Fund's expense, such experts or consultants as the
Committee deems necessary or appropriate to fulfill such responsibilities.
8. Periodic Review of Charter. The Committee shall review this Charter at
least annually and recommend any changes to the full Board of Directors.
Amended as of May 13, 2004
A-4
EXHIBIT B
MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT
BETWEEN
MONTGOMERY STREET INCOME SECURITIES, INC.
AND
DEUTSCHE INVESTMENT MANAGEMENT AMERICAS INC.
AGREEMENT made and effective as of the 15th day of August 2002 by and
between Montgomery Street Income Securities, Inc., a Maryland corporation
(hereinafter called the "Fund"), and Deutsche Investment Management Americas
Inc. (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
B-1
purchase. It shall also furnish to the Fund such information 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 stockholders 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.
B-2
(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.
(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. Subject to the prior approval of a majority of the members of the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons," as defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act"), the Manager may, through a
sub-advisory agreement or other arrangement, delegate to any other company
that the Manager controls, is controlled by, or is under common control
with, or to specified employees of any such company, or to more than one
such company, to the extent permitted by applicable law, certain of the
Manager's duties enumerated in paragraph 2 hereof; provided, that the
Manager shall continue to supervise the services provided by such companies
or employees and any such delegation shall not relieve the Manager of any of
its obligations hereunder.
Subject to the provisions of this Agreement, the duties of any sub-adviser
or delegate, the portion of portfolio assets of the Fund that the
sub-adviser or delegate shall manage and the fees to be paid to the
sub-adviser or delegate by the Manager under and pursuant to any
sub-advisory agreement or other arrangement entered into in accordance with
this Agreement may be adjusted from time to time by the
B-3
Manager, subject to the prior approval of a majority of the members of the
Fund's Board of Directors, including a majority of the Directors who are not
"interested persons," as defined in the Investment Company Act.
4. 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, 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, 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
B-4
"affiliates" (as defined in the Investment Company Act) relating to the
valuation of portfolio securities; and (q) postage.
5. 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 $100 million; .45 of 1% of the value of the net
assets of the Fund over $100 million and up to and including $150 million;
.40 of 1% of the value of the net assets of the Fund over $150 million up to
and including $200 million; and .35 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.
6. (a) In the event the expenses of the Fund, including amounts payable to the
Manager pursuant to paragraph 5 hereof (but excluding interest, taxes,
brokerage commissions and extraordinary expenses, such as litigation
expenses and the cost of issuing new shares), 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 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
B-5
paragraph 6 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 6 will be exceeded for such fiscal year, the
Manager's fee for such month, as provided in paragraph 5 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 6 (but reduced by an amount, if any, payable by the Manager
pursuant to subparagraph (a) of this paragraph 6), 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.
7. 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.
8. Subject to paragraph 9 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
B-6
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.
9. 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.
10. 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.
11. This Agreement shall remain in effect until July 31, 2003, 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 members 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 telexed
and confirmed in
B-7
writing to the Manager at 345 Park Avenue, New York, New York 10154, Attn:
General Counsel, 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: Fund Secretary, or at such other address as the Fund
shall have communicated in writing to the Manager.
12. 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.
13. 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.
MONTGOMERY STREET INCOME
SECURITIES, INC.
By: /s/ MAUREEN E. KANE
-----------------------------------
Maureen E. Kane, Vice President
DEUTSCHE INVESTMENT MANAGEMENT
AMERICAS INC.
By: /s/ CAROLINE PEARSON
-----------------------------------
Caroline Pearson, Managing Director
B-8
EXHIBIT C
MANAGEMENT FEE RATES FOR FUNDS ADVISED BY THE INVESTMENT MANAGER
WITH SIMILAR INVESTMENT OBJECTIVES
<Table>
<Caption>
OBJECTIVE FEE RATE(+) NET ASSETS*
--------- ----------- -----------
CLOSED-END FUNDS
Montgomery Street High level of 0.500% to $100 million $ 203,580,915
Income Securities, current income 0.450% next $50 million
Inc. consistent with 0.400% next $50 million
prudent investment 0.35% over $200 million(2)
risks through a
diversified
portfolio primarily
of debt securities.
Scudder High Income Highest current 0.850% to $250 million $ 185,849,332
Trust income obtainable 0.750% over $250
consistent with million(1)
reasonable risk
with capital gains
secondary.
Scudder Strategic High current 0.850% of net assets(1) $ 45,784,126
Income Trust income.
</Table>
C-1
<Table>
<Caption>
OBJECTIVE FEE RATE(+) NET ASSETS*
--------- ----------- -----------
OPEN END FUNDS
Scudder High Income Highest level of 0.580% to $250 million $2,625,394,911
Fund current income 0.550% next $750 million
obtainable from a 0.530% next $1.5 billion
diversified 0.510% next $2.5 billion
portfolio of 0.480% next $2.5 billion
fixed-income 0.460% next $2.5 billion
securities which 0.440% next $2.5 billion
the fund's 0.420% over $12.5 billion
investment manager
considers
consistent with
reasonable risk. As
a secondary
objective, the fund
will seek capital
gain where
consistent with its
primary objective.
Scudder Income Fund High income while 0.550% to $250 million $ 949,280,036
managing its 0.520% next $750 million
portfolio in a way 0.500% next $1.5 billion
that is consistent 0.480% next $2.5 billion
with the prudent 0.450% next $2.5 billion
investment of 0.430% next $2.5 billion
shareholders' 0.410% next $2.5 billion
capital. 0.400% over $12.5 billion
</Table>
C-2
<Table>
<Caption>
OBJECTIVE FEE RATE(+) NET ASSETS*
--------- ----------- -----------
Scudder Short Term High income while 0.450% to $1.5 billion $1,090,542,567
Bond Fund managing its 0.425% next $500 million
portfolio in a way 0.400% next $1 billion
that is consistent 0.385% next $1 billion
with maintaining a 0.370% next $1 billion
high degree of 0.355% next $1 billion
stability of 0.340% over $6 billion
shareholders'
capital.
</Table>
- ---------------------
* The information provided in the chart is shown as of December 31, 2003.
(+) Unless otherwise noted, the investment management fee rates provided above
are based on the average daily net assets of a fund. For Scudder High
Income Fund, Scudder Income Fund, and Scudder Short Term Bond Fund, the
Investment Manager has waived, reduced, or otherwise agreed to reduce its
compensation under its applicable contract.
(1) Based on average weekly net assets.
(2) Based on average monthly net assets.
C-3
MONTGOMERY STREET INCOME SECURITIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Annual Meeting of Stockholders -- July 16, 2004
The undersigned hereby appoints Richard T. Hale, Maureen E. Kane and Charles A.
Rizzo, each with the power of substitution, as proxies for the undersigned, to
vote all shares of Montgomery Street Income Securities, Inc. (the "Fund") which
the undersigned is entitled to vote at the Annual Meeting of Stockholders of the
Fund to be held at the offices of the Fund, 101 California Street, Suite 4100,
San Francisco, California 94111, on Friday, July 16, 2004 at 10:00 a.m., Pacific
time, and at any adjournments or postponements thereof.
The undersigned hereby revokes any and all proxies with respect to such shares
previously given by the undersigned. The undersigned acknowledges receipt of the
Proxy Statement relating to the Annual Meeting.
This instruction may be revoked at any time prior to its exercise at the Annual
Meeting by execution of a subsequent proxy card, by written notice to the Fund's
Secretary or by voting in person at the Annual Meeting.
This proxy, if properly executed, will be voted in the manner directed. If no
instructions are indicated on a properly executed proxy, the undersigned's vote
will be cast FOR Proposal 1, FOR Proposal 2, and FOR Proposals 3.1 and 3.2.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY ON THE REVERSE SIDE.
(Continued, and to be signed, on the reverse side.)
X To vote, mark blocks
below in blue or black
ink as indicated at left
The Board of Directors of the Fund recommends that stockholders vote FOR the Proposals.
(1) To elect five Directors of FOR all nominees WITHHELD from
the Fund to hold office listed below (except all nominees
until the next Annual as noted below) listed below
Meeting or until their
respective successors /___/ /___/
shall have been duly
elected and qualified.
Nominees: Richard J. Bradshaw, Maryellie K. Johnson,
Wendell G. Van Auken, James C. Van Horne,
John T. Packard
(INSTRUCTION: To withhold authority to vote for any individual
nominee, write that nominee's name on the space provided below.)
- -------------------------------------------------------
FOR AGAINST ABSTAIN
(2) To approve the continuance of the Management and
Investment Advisory Agreement for the Fund with /___/ /___/ /___/
Deutsche Investment Management Americas Inc.
(3.1) To approve the modification of the fundamental
investment policy regarding securities lending. /___/ /___/ /___/
(3.2) To approve the elimination of the fundamental
investment policy regarding investments in other /___/ /___/ /___/
investment companies.
The proxies are authorized to vote in their discretion on
any other business which may properly come before the Annual
Meeting and any adjournments or postponements thereof.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED.
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(Signature of Stockholder)
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(Signature of joint owner, if any)
Dated __________________________________________ , 2004
Please sign exactly as your name or names appear. When signing as
an attorney, executor, administrator, trustee or guardian, please
give your full title as such.