As filed with the Securities and Exchange Commission on October 17, 1997
File Nos. 33-69686
811-8064
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 24
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25
THE MONTGOMERY FUNDS II
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
(415) 572-3863
(Registrant's Telephone Number, Including Area Code)
JOHN E. PELLETIER, Secretary
60 State Street, Suite 1300
Boston, Massachusetts, 02109
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to Rule 485(b)
____ on _________________ pursuant to Rule 485(b)
____ 60 days after filing pursuant to Rule 485(a)(1)
____ 75 days after filing pursuant to Rule 485(a)(2)
X on December 31, 1997 pursuant to Rule 485(a)
----
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1997 was filed on August 29, 1997.
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
Total number of pages _____. Exhibit Index appears at _____.
<PAGE>
THE MONTGOMERY FUNDS II
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross-Reference Sheet for Prospectus for Class A, Class B, Class C and
Class D shares of Montgomery Concentrated Emerging Markets Fund
and Montgomery Global Partners Fund
Cross-Reference Sheet for Statement of Additional Information for Class
A, Class B, Class C and Class D shares of Montgomery Emerging
Markets Fund and Montgomery Global Partners Fund
Part A - Prospectus for Class A, Class B, Class C and Class D shares of
Montgomery Concentrated Emerging Markets Fund
Part A - Prospectus for Class A, Class B, Class C and Class D shares of
Montgomery Global Partners Fund
Part B - Statement of Additional Information for Class A, Class B,
Class C and Class D shares of Montgomery Concentrated Emerging
Markets Fund
Part B - Statement of Additional Information for Class A, Class B,
Class C and Class D shares of Montgomery Global Partners Fund
Part C - Other Information
Signature Page
Exhibits
ii
<PAGE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
Part A: Information Required in Prospectus
(Each Prospectus for Each Class of
Montgomery Each Concentrated Emerging Markets Fund and
Montgomery Global Partners Fund)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "The Montgomery Funds," "Fees and Expenses of the
Fund"
3. Condensed Financial Financial Highlights
Information
4. General Description Cover Page, "The Montgomery Funds,""The Fund's
Investment Objective and Policies," "Portfolio
Securities," "Other Investment Practices," "Risk
Considerations" and "General Information"
5. Management of "The Fund's Investment Objective and Policies,"
the Fund "Management of the Fund" and
"How to Invest in the Fund"
5A. Management's Discussion Not Applicable
of Fund Performance
6. Capital Stock and "The Montgomery Funds," "Dividends and Distributions,"
Other Securities "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Fund,"
Being Offered "How Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the Fund" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
</TABLE>
iii
<PAGE>
<TABLE>
PART B: Information Required in
Statement of Additional Information
(Each Statement of Additional Information for
Montgomery Concentrated Emerging Markets Fund and
Montgomery Global Partners Fund)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information "The Trust" and "General Information"
and History
13. Investment Objectives "Investment Objectives and Policies of the Fund,"
"Risk Considerations" and "Investment Restrictions"
14. Management of the "Trustees and Officers"
Registrant
15. Control Persons and "Trustees and Officers" and
Principal Holders of "General Information"
Securities
16. Investment Advisory "Investment Management and Other Services"
and Other Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and "The Trust" and "General Information"
Other Securities
19. Purchase, Redemption "Additional Purchase and Redemption Information"
and Pricing of and "Determination of Net Asset Value"
Securities Being
Offered
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
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PART A
PROSPECTUS FOR CLASS A, B, C AND D SHARES
MONTGOMERY CONCENTRATED EMERGING MARKETS FUND
---------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may any
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities law of any State.
Subject to Completion Dated October __, 1997
The Montgomery Focus Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
www.montgomeryfunds.com
Montgomery Concentrated Emerging Markets Fund Prospectus
December 31, 1997
Class A, Class B, Class C and Class D shares of the Montgomery Concentrated
Emerging Markets Fund (the "Fund") are offered in this prospectus.
This Fund will invest a larger percentage of its assets in fewer countries than
other general emerging markets mutual funds. As a result, the value of an
investment in this Fund may be more volatile and subject to higher risks than
investments in other foreign stock mutual funds. You should read this prospectus
carefully and consult your financial adviser before investing.
The Fund's shares are sold primarily through financial intermediaries and
financial professionals. Certain classes of shares may be subject to a front-end
sales charge, a back-end contingent deferred sales charge and/or Rule 12b-1
distribution fees as described in this prospectus. In general, the minimum
initial investment in the Fund is $5,000 and subsequent investments must be at
least $500. The Manager or the Distributor, under any circumstances that either
deems appropriate, may waive these minimums. See "Sales Charge Reductions and
Waivers" and "How to Invest in the Fund."
The Fund, which is a separate series of The Montgomery Funds II, an open-end
management investment company, is managed by Montgomery Asset Management, LLC
(the "Manager"), and is distributed by Funds Distributor, Inc. (the
"Distributor").
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated December 31, 1997, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (800)
572-FUND (3863). If you are viewing the electronic version of this prospectus
through an on-line computer service, you may request a printed version free of
charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds II.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
1
<PAGE>
TABLE OF CONTENTS
The Montgomery Funds..........................................................1
Fees and Expenses of the Fund.................................................3
The Fund's Investment Objective and Policies..................................4
Portfolio Securities..........................................................4
Other Investment Practices....................................................6
Risk Considerations...........................................................9
Management of the Fund.......................................................11
Distribution of Shares.......................................................14
Sales Charge Reductions and Waivers..........................................16
How to Invest in the Fund....................................................17
How to Redeem an Investment in the Fund......................................20
Exchange Privileges and Restrictions.........................................21
Brokers and Other Intermediaries.............................................22
How Net Asset Value Is Determined............................................23
Dividends and Distributions..................................................23
Taxation.....................................................................23
General Information..........................................................24
Backup Withholding Instructions..............................................25
Glossary.....................................................................27
2
<PAGE>
Fees and Expenses of the Fund
Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay, either directly or indirectly, the following charges when
buying or redeeming shares of the Fund:
<CAPTION>
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS A(a) CLASS B(b) CLASS C CLASS D
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Maximum sales charge on purchases 5.25%(c) None None 5.25%(c)
(as a percentage of offering price)
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Sales charge on reinvested dividends None None None None
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Maximum deferred sales charge (as a percentage of None(d) 5.00%(e) 1.00% None(d)
redemption proceeds)
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Redemption fee(f) None None None None
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Exchange fee None None None None
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Management fees(g) 1.50% 1.50% 1.50% 1.50%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
12b-1 Distribution fees None 0.75% 0.75% 0.25%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Shareholder Servicing fees 0.25% 0.25% 0.25% 0.25%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Other expenses (after reimbursement)(g) 0.40% 0.40% 0.40% 0.40%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Total fund operating expenses(g) 2.15% 2.90% 2.90% 2.40%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
<FN>
The previous table is intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year. Because Rule
12b-1 distribution charges are accounted for on a class-level basis (and not on
an individual shareholder-level basis), individual long-term investors in the
Class B, Class C and Class D shares of the Fund may over time pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc. ("NASD"), even though all
shareholders of those Classes in the aggregate will not. This is recognized and
permitted by the NASD.
(a) Class A shares are sold to a limited group of investors, including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs.
(b) Class B shares convert to Class D shares automatically six years after
initial purchase.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with fee-based programs. Class A or Class D purchases of $1,000,000 or more
will not be subject to an initial sales charge.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.00% of amounts redeemed within the first year after purchase. Such
CDSC may be waived in connection with redemptions to fund participation in
certain fee-based programs.
(e) 5.00% during the first year, decreasing 1.00% annually thereafter to 0.00%
after the fifth year.
(f) Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. See "How to Redeem an Investment in the Fund."
(g) Expenses for the Fund are estimated. The Manager will reduce its fees and
may absorb or reimburse the Fund for certain expenses to the extent
necessary to limit total annual fund operating expenses to the amount
indicated in the table for the Fund. The Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the three years
following that reduction and only if such reimbursement can be achieved
within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the
Fund for fees and expenses for the current year. Absent the reduction,
actual total Fund operating expenses for the Fund (excluding 12b-1
distribution fees and shareholder servicing fees are estimated to be 3.10%
(1.60% other expenses). The Manager may terminate these voluntary
reductions at any time. See "Management of the Fund."
</FN>
</TABLE>
Example of Expenses for the Fund
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares:
- --------------------------------------------------------------------------------
Montgomery Concentrated Emerging Markets Fund
- --------------------------------------------------------------------------------
3
<PAGE>
1 YEAR 3 YEARS
- --------------------------------------------------------------------------
Class A $73 $116
- --------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------
Assuming redemption at end of time period $70 $111
- --------------------------------------------------------------------------
Assuming no redemption $29 $90
- --------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------
Assuming redemption at end of time period $40 $90
- --------------------------------------------------------------------------
Assuming no redemption $29 $90
- --------------------------------------------------------------------------
Class D $76 $123
- --------------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
The Fund's Investment Objective and Policies
The investment objective and general investment policies of the Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities." Specific investment practices that may
be employed by the Fund are described in "Other Investment Practices." Certain
risks associated with investments in the Fund are described in those sections as
well as in "Risk Considerations." Certain terms used in the prospectus are
defined in the glossary found at the end of the prospectus.
The Fund seeks capital appreciation which, under normal conditions, it seeks by
investing at least 65% of its total assets in equity securities of no less than
three and no more than ten emerging markets countries. The Fund may invest up to
50% of its total assets in a single emerging markets country. The Manager
currently regards the following to be emerging markets countries: Latin America
(Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad
and Tobago, Uruguay and Venezuela); Asia (Bangladesh, China/Hong Kong, India,
Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka,
Taiwan, Thailand and Vietnam); southern and eastern Europe (the Czech Republic,
Greece, Hungary, Kazakstan, Poland, Portugal, Romania, Russia, Slovakia,
Slovenia, Turkey and Ukraine); the Middle East (Israel and Jordan); and Africa
(Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia and
Zimbabwe). In the future, the Fund may invest in other emerging markets
countries. As is the case for all mutual funds, attainment of the Fund's
investment objective cannot be assured.
At times, the Fund may concentrate its investments in one or more market
sectors, such as, for example, the telecommunications sector. When a fund
concentrates its investments in a market sector, financial, economic, business
and other developments affecting issuers in that sector will have a greater
effect on the Fund than if it had not concentrated its assets in that sector.
This Fund invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including debt securities rated below investment
grade. See "Portfolio Securities," "Risk Considerations" and the Appendix in the
Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in emerging market companies under debt conversion programs
sponsored by such governments. The Fund deems securities that are convertible to
equity investments to be equity derivative securities.
4
<PAGE>
Portfolio Securities
Equity Securities
The Fund may, within the limits described above, invest in common stocks and may
also invest in other types of equity securities (such as preferred stocks or
convertible securities) as well as equity derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Fund may invest in ADRs, EDRs and GDRs and convertible securities that the
Manager regards as a form of equity security. The Fund may also invest up to 5%
of its net assets in warrants, whether or not listed on a securities exchange.
Privatizations
The Fund believes that foreign governmental programs of selling interests in
government-owned or controlled enterprises ("privatizations") may represent
opportunities for significant capital appreciation, and the Fund may invest in
privatizations. The ability of U.S. entities, such as the Fund, to participate
in privatizations may be limited by local law, or the terms for participation
may be less advantageous than for local investors. Many privatization programs
have failed and there can be no assurance that the Fund will invest in
successful programs.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and similar
vehicles (collectively, "special situations") could enhance its capital
appreciation potential. The Fund also may invest in certain types of vehicles or
derivative securities that represent indirect investments in foreign markets or
securities in which it is impracticable for the Fund to invest directly.
Investments in special situations may be illiquid, as determined by the Manager
based on criteria reviewed by the Board. The Fund does not invest more than 15%
of its net assets in illiquid investments, including special situations.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. Such investments may involve the
payment of substantial premiums above the net asset value of those investment
companies' portfolio securities and are subject to limitations under the
Investment Company Act. The Fund also may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company" regardless of whether such "passive foreign investment company" makes
distributions to the Fund. See the Statement of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees. The
Manager has agreed to waive its own management fee with respect to the portion
of the Fund's assets invested in other open-end (but not closed-end) investment
companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
In selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. The Fund, however, may also invest up to 35% of its total assets in
debt securities rated lower than investment grade (commonly called "junk
bonds"). This can include securities in default. See "Risk Considerations."
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit quality standards of the Fund and will be limited to 5%
of the Fund's total assets.
5
<PAGE>
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, governmental entities and companies of
emerging market countries. The percentage distribution between equity and debt
will vary from country to country based on anticipated trends in inflation and
interest rates; expected rates of economic and corporate profits growth; changes
in government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
U.S. Government Securities
The Fund may invest in fixed rate and floating or variable rate U.S. government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage related securities of the GNMA, are issued or guaranteed by
the U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, while
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. government does not guarantee
the net asset value of the Fund's shares.
Structured Notes and Indexed Securities
The Fund may invest in structured notes and indexed securities. Structured notes
are debt securities; the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities include structured notes as well as
securities other than debt securities; the interest rate or principal of which
is determined by an unrelated indicator. Index securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the Fund's portfolio in an effort to monitor the
Fund's interest rate risk.
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more detailed information about certain of these practices, including
limitations designed to reduce risks.
Short Sales
The Fund may effect short sales of securities. Short sales are transactions in
which the Fund sells a security or other asset which it does not own, in
anticipation of a decline in the market value of the security or other asset.
The Fund will realize a profit or incur a loss depending upon whether the price
of the security sold short decreases or increases in value between the date of
the short sale and the date on which the Fund must replace the borrowed
security. Short sales are speculative investments and involve special risks. See
"Risk Considerations" below.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. government security or other high-grade
liquid debt instrument from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price. Under the
Investment Company Act, repurchase agreements are considered to be loans by the
Fund and must be fully collateralized by cash, letters of credit, U.S.
government securities or other high-grade liquid debt or equity securities
("collateral assets"). If the seller defaults on its obligation to repurchase
the underlying security, the Fund may experience delay or difficulty in
exercising its rights to realize upon the security, may incur a loss if the
value of the security declines and may incur disposition costs in liquidating
the security.
Borrowing
The Fund may borrow money from banks and engage in reverse repurchase
transactions for temporary or emergency purposes. In a reverse repurchase
agreement, the Fund sells to a financial institution a security that it holds
and agrees to
6
<PAGE>
repurchase the same security at an agreed-upon price and date. The Fund also may
borrow from broker-dealers and other institutions in order to leverage its
profits. See "Leverage" below. Total borrowings may not exceed one-third of the
value of the Fund's assets and the Fund may pledge its assets in connection with
its borrowings. The Fund may not purchase securities if such borrowings exceed
10% of its total assets.
Leverage
The Fund may leverage its portfolio through margin borrowing and other
techniques in an effort to increase total return. Although leverage creates an
opportunity for increased income and gain, it also creates special risk
considerations. For example, leveraging may magnify changes in the net asset
values of the Fund's shares and in the yield on its portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value while the borrowing is outstanding. Leveraging creates interest expenses
that can exceed the income from the assets retained.
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of the Fund's total assets. Each
securities loan is collateralized with collateral assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially.
Hedging and Risk Management Practices
The Fund may use derivative securities and techniques (known as "derivatives")
to hedge against changes in net asset value or to attempt to realize a greater
current return. The Fund may use the following derivatives: forward currency
exchange contracts, currency options, futures contracts and options on futures
contracts on foreign government securities and currencies. Markets in some
countries currently do not have instruments available for hedging transactions
relating to currencies or to securities denominated in such currencies or to
securities of issuers domiciled or principally engaged in business in such
countries. To the extent that such markets do not exist, the Manager may not be
able to hedge its investment effectively in such countries. Furthermore, the
Fund engages in hedging activities only when the Manager deems it to be
appropriate and does not necessarily engage in hedging transactions with respect
to each investment. As noted elsewhere in this prospectus, the fund's use of
derivatives is not limited to hedging purposes.
Forward Currency Contracts
The Fund may invest a substantial portion of its assets in forward currency
contracts without a limit as to the percentage of its assets. A forward currency
contract is individually negotiated and privately traded by currency traders and
their customers and creates an obligation to purchase or sell a specific
currency for an agreed-upon price at a future date. The Fund normally conducts
its foreign currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate in the foreign currency exchange market at the time of the
transaction, or through entering into forward contracts to purchase or sell
foreign currencies at a future date. The Fund generally does not enter into
forward contracts with terms greater than one year.
Options on Securities, Securities Indices and Currencies
The Fund may purchase put and call options on securities and currencies traded
on U.S. exchanges and, to the extent permitted by law, foreign exchanges, as
well as in the over-the-counter market. The Fund may purchase call options on
securities which it intends to purchase (or on currencies in which those
securities are denominated) in order to limit the risk of a substantial increase
in the market price of such security (or an adverse movement in the applicable
currency. The Fund may purchase put options on particular securities (or on
currencies in which those securities are denominated) in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option (or an adverse movement in
the applicable currency relative to the U.S. dollar). Put options allow the Fund
to protect unrealized gain in an appreciated security that it owns without
selling that security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transactions
costs.
The Fund may also purchase put and call options in an attempt to realize a
greater return.
7
<PAGE>
The Fund also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industry-wide stock price fluctuations.
The Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of forward foreign exchange contracts and futures
contracts on currencies.
Futures and Options on Futures
The Fund may enter into futures contracts on securities indices and U.S.
government securities that are traded on exchanges licensed and regulated by the
CFTC or on foreign exchanges. Thee Fund will purchase and sell futures contracts
and options thereon for "bona fide hedging" purposes (as defined by the CFTC)
and non "bona fide hedging" purposes in accordance with CFTC regulations. The
Fund's policies regarding futures contracts and options thereon may be changed
from time to time to conform to regulatory changes.
The Fund may enter into futures contracts on securities indices such as the
Standard & Poor's Composite Index of 500 Stocks (the "S&P 500"), the Russell
2000 Index (the "Russell 2000") or foreign/international indices. A securities
index futures contract does not require the physical delivery of the securities
underlying the index. Changes in the market value of a particular securities
index futures contract reflect changes in the specified index of the securities
on which the futures contract is based.
The Fund may also purchase put and call options on futures contracts for "bona
fide hedging" purposes (as defined by the CFTC) and non "bona fide hedging"
purposes. The purchase of an option on a futures contract requires the Fund to
pay a premium. If the option cannot be profitably exercised before it expires,
the Fund's loss will be limited to the amount of the premium and any transaction
costs. The Fund may enter into closing purchase or sale transactions in order to
terminate its position in a futures contract. There is no guarantee, however,
that such closing transaction can be effected. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
market, which may not be available at all times.
Although futures and options transactions, when used for hedging rather than
non-hedging purposes to pursue the Fund's investment objective, are intended to
enable the Fund to manage interest rate, stock market or currency exchange
risks, unanticipated changes in interest rates, market prices or currency
exchange rates could result in poorer performance than if the Fund had not
entered into these transactions.
Futures contracts and options thereon are derivative instruments. Losses that
may arise from certain futures transactions, particularly those involved in
non-hedging contexts to pursue the Fund's investment objective, are potentially
unlimited. Subject to the regulations of the Commodity Futures Trading
Commission, the Fund may invest in futures contracts and options on futures
contracts without limitation as to a percentage of its assets.
Hedging Considerations
Hedging transactions involve certain risks. While the Fund may benefit from the
use of hedging transactions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats any securities subject to restrictions on repatriation for more
than seven days and securities issued in connection with foreign debt conversion
programs that are restricted as to remittance of invested capital or profit as
illiquid. The Fund also treats repurchase agreements with maturities in excess
of seven days as illiquid. Illiquid securities do not include securities that
meet the requirements of Rule 144A under the Securities Act of 1933 and that,
subject to the review by the Board and guidelines adopted by the Board, the
Manager has determined to be liquid.
Equity Swaps
The Fund may invest a substantial portion of its total assets in equity swaps.
Equity swaps allow the parties to exchange the dividend income or other
components of return on an equity investment (e.g., a group of equity securities
or an index) for a component of return on another non-equity
8
<PAGE>
or equity investment. Equity swaps are derivatives and their value can be very
volatile. To the extent that the Manager does not accurately analyze and predict
the potential relative fluctuation of the components swapped with another party,
a Fund may suffer a loss. The value of some components of an equity swap (like
the dividends on a common stock) may also be sensitive to changes in interest
rates. Furthermore, during the period a swap is outstanding, the Fund may suffer
a loss if the counterparty defaults.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objective or when it appears that a position of the desired
size cannot be accumulated. Portfolio turnover generally involves some expense
to the Fund, including brokerage commissions, dealer mark-ups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders. Generally, portfolio turnover in excess of 100%
is considered high and increases such costs. The annual portfolio turnover for
the Fund is expected to be approximately 150%. Even if the portfolio turnover
for the Fund is considered high, the Fund would not consider portfolio turnover
as a limiting factor.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval, but unless otherwise stated, the Fund's other
investment policies may be changed by the Board. If there is a change in the
investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30 days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this Prospectus.
Risk Considerations
Short Sales
When the Manager believes that a security is overvalued, it may sell the
security short and borrow the same security from a broker or other institution
to complete the sale. The Fund may make a profit or incur a loss depending upon
whether the market price of the security decreases or increases between the date
of the short sale and the date on which the Fund must replace the borrowed
security. An increase in the value of a security sold short by an Fund over the
price at which it was sold short will result in a loss to the Fund, and there
can be no assurance that the Fund will be able to close out the position at any
particular time or at an acceptable price. Although the Fund's gain is limited
to the amount at which it sold the security short, its potential loss is limited
only by the maximum attainable price of the security less the price at which the
security was sold. There also is a risk that the borrowed securities would need
to be returned to the brokerage firm on short notice. If that request for the
return of securities occurs at a time when other short sellers of the subject
security are receiving similar requests, a "short squeeze" can occur. This means
that the Fund might be compelled, at the most disadvantageous time, to replace
borrowed securities previously sold short with purchases on the open market,
possibly at prices significantly in excess of the proceeds received earlier. The
successful use of short selling may be adversely affected by an imperfect
correlation between movements in the
9
<PAGE>
price of the security sold short and the securities being hedged. Short selling
also may produce higher than normal portfolio turnover and may result in
increased transaction costs to the Fund.
The Fund also may make short sales against-the-box, in which it sells short
securities it owns or has the right to obtain without payment of additional
consideration. If the Fund makes a short sale against-the-box, it will be
required to set aside securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into those securities) and
will be required to hold those securities while the short sale is outstanding.
The Fund will incur transaction costs, including interest expenses, in
connection with opening, maintaining and closing short sales against-the-box.
Until the Fund replaces a borrowed security, it will maintain daily a segregated
account with its Custodian containing cash, U.S. Government securities, or other
liquid debt or equity securities such that the amount deposited in the account
plus any amount deposited with a broker or other custodian as collateral will
equal the current value of the security sold short and will not be less than the
value of the security at the time it was sold short. Depending on arrangements
made with the broker or custodian, the Fund may not receive any payments
(including interest) on collateral deposited with the broker or custodian. The
Fund will not make a short sale if, after giving effect to the short sale, the
market value of all securities sold exceeds 100% of the value of the Fund's
total assets.
Small Companies
The Fund may make investments in smaller companies that may benefit from the
development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Such smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Lower-Quality Debt
The Fund may invest in medium-quality and in high-risk debt securities below
investment-grade quality (sometimes called "junk bonds"). Medium-quality debt
securities have speculative characteristics, and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than with higher-grade debt securities. Junk
bonds offer greater speculative characteristics and are regarded as having a
great vulnerability to default although currently having the capacity to meet
interest payments and principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The ability to maintain other terms of the contract over
any long period of time may be small. Junk bonds are more subject to default
during periods of economic downturns or increases in interest rates and their
yields will fluctuate over time. It may be more difficult to dispose of or to
value junk bonds. Achievement of the Fund's investment objective may also be
more dependent on the Manager's own credit analysis to the extent the Fund's
portfolio includes junk bonds.
The Fund may also invest in unrated debt securities. Unrated debt securities are
not necessarily of lower quality than rated securities but may not be attractive
to as many buyers. Regardless of rating levels, all debt securities considered
for purchase (whether rated or unrated) are analyzed by the Manager to
determine, to the extent reasonably possible, that the planned investment is
sound. From time to time, these Funds may purchase defaulted debt securities if,
in the opinion of the Manager, the issuer may resume interest payments in the
near future.
Foreign Securities
The Fund invests primarily in foreign securities of emerging markets, including
debt or equity securities denominated in foreign currencies. There are certain
risks associated with investments in foreign securities that are greater in
emerging markets. Foreign investments involve the possibility of expropriation,
nationalization or confiscatory taxation, taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country and repatriation of investments), default in
foreign government securities, and political or social instability or diplomatic
developments that could adversely affect investments. In addition, there is
often less publicly available information about foreign issuers than those in
the U.S. Foreign companies are often not subject to uniform accounting, auditing
and financial reporting standards. Further, the Fund may encounter difficulties
in pursuing legal remedies or in
10
<PAGE>
obtaining judgments in foreign courts. Additional risk factors, including use of
domestic and foreign custodian banks and depositories, are described elsewhere
in the Prospectus and in the Statement of Additional Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments by the Fund in other countries are generally greater than in the
U.S. Foreign markets, have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of the Fund to make intended security
purchases due to settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund if it had
entered into a contract to sell the security. In certain countries, there is
less government supervision and regulation of business and industry practices,
stock exchanges, brokers, and listed companies than in the U.S. The securities
markets of many of the countries in which the Fund may invest may also be
smaller, less liquid, and subject to greater price volatility than those in the
U.S.
Because the securities owned by the Fund may be denominated in foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. The
Fund may be affected either favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations, and the Fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not freely convertible at market rates into the U.S. dollar.
Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments.
Certain countries also limit the amount of foreign capital that can be invested
in their markets and local companies, creating a "foreign premium" on capital
investments available to foreign investors such as the Fund. The Fund may pay a
"foreign premium" to establish an investment position which it cannot later
recoup because of changes in that country's foreign investment laws.
Interest Rates
The market value of debt securities that are interest-rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.
Lack of Country Diversification
Diversifying a Fund's portfolio across a large number of emerging markets
countries can reduce the country-related risks involved with investing in
emerging markets by limiting the portion of your investment in any one country,
although it would also limit the potential reward. The Fund's investment
objective is not to diversify but instead to concentrate its investments in a
small number of emerging markets countries (although it may invest in a large
number of companies in each selected country). Such a heavy country
concentration may make the Fund's net asset value extremely volatile and, if
economic downturns or other events occur that adversely affect one or more of
the countries the Fund invests in, such events' impact on the Fund will be more
magnified than if the Fund did not have such a narrow concentration.
11
<PAGE>
Management of the Fund
The Montgomery Funds II has a Board of Trustees that establishes the Fund's
policies and supervises and reviews its management. Day-to-day operations of the
Fund are administered by the officers of the Trust and by the Manager pursuant
to the terms of an investment management agreement with the Fund.
Montgomery Asset Management, LLC is the Fund's Manager. The Manager is a
Delaware limited liability company and is registered as an investment adviser
with the SEC under the Investment Advisers Act of 1940, as amended. The Manager
and its predecessor have advised private accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG ("Commerzbank").
Commerzbank is one of the largest publicly held commercial banks in Germany and
has total assets of approximately $268 billion. Commerzbank and its affiliates
had over $479 billion in assets under management as of June 30, 1997.
Commerzbank's asset management operations involve more than 1,000 employees in
13 countries worldwide.
Portfolio Manager
Josephine S. Jimenez, CFA, a founding partner of the emerging markets
discipline, is a senior portfolio manager and principal responsible for
strategic research and qualitative analysis of countries and industries. From
1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C., as senior analyst
and portfolio manager in charge of investments in Latin America, the Philippines
and Portugal. From 1984 through 1987, she was an Investment Officer at Shawmut
Corporation where she designed a stock valuation model for hyper-inflationary
economies, which has served as the foundation for most of her work since that
time. Ms. Jimenez will be supported by the rest of the Montgomery Emerging
Markets Team.
Management Fees and Other Expenses
<TABLE>
The Manager provides the Fund with advice on buying and selling securities,
manages the Fund's investments, including the placement of orders for portfolio
transactions, furnishes the Fund with office space and certain administrative
services, and provides personnel needed by the Fund with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Fund. The Manager also compensates the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and shareholder reports for dissemination to prospective investors. As
compensation, the Fund pays the Manager a monthly management fee (accrued daily
but paid when requested by the Manager) based upon the value of its average
daily net assets, according to the following table.
<CAPTION>
- ----------------------------------------------------------------- --------------------------------- -----------------
AVERAGE DAILY NET ASSETS ANNUAL RATE
- ----------------------------------------------------------------- --------------------------------- -----------------
<S> <C> <C>
Montgomery Concentrated Emerging Markets Fund First $250 million 1.50%
Next $250 million 1.25%
Over $500 million 1.00%
- ----------------------------------------------------------------- --------------------------------- -----------------
</TABLE>
The Manager also serves as the Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of the Fund's
administrative operations. As compensation, the Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million).
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to the Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
12
<PAGE>
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees has approved, and the Fund has entered into, a Share Marketing
Plan (the "Plan") with the Distributor, as the distribution coordinator, for the
Class B, Class C and Class D shares. Under the Plan, the Fund will pay
distribution fees to the Distributor, at an annual rate of 0.25% of the Fund's
aggregate average daily net assets attributable to its Class D shares (and at an
annual rate of 0.75% of the Fund's aggregate average daily net assets
attributable to its Class B and Class C shares) to reimburse the Distributor for
its distribution costs with respect to each such Class.
The Plan provides that the Distributor may use the distribution fees received
from the Class to pay for the distribution expenses of that Class, including,
but not limited to (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to, the Distributor or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Fund to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Fund and that Class; and (iv) costs involved obtaining whatever information,
analysis and reports with respect to marketing and promotional activities that
the Fund may, from time to time, deem advisable with respect to the distribution
of that Class. Distribution fees are accrued daily and paid monthly, and are
charged as expenses of, respectively, the Class B, Class C and Class D shares as
accrued.
In adopting the Plan, the Board determined that there was a reasonable
likelihood that the Plan would benefit the Fund and the shareholders of Class B,
Class C and Class D shares. Information with respect to distribution revenues
and expenses is presented to the Board of Trustees quarterly for its
consideration in connection with its deliberations as to the continuance of the
Plan. In its review of the Plan, the Board of Trustees is asked to take into
consideration expenses incurred in connection with the separate distribution of
the Class B, Class C and Class D shares.
The Class B, Class C and Class D shares are not obligated under the Plan to pay
any distribution expenses in excess of the distribution fee. Thus, if the Plan
were terminated or otherwise not continued, no amounts (other than current
amounts accrued but not yet paid) would be owed by the Class to the Distributor.
The distribution fees attributable to the Class B and Class C shares are
designed to permit an investor to purchase Class B and Class C shares through
broker-dealers without the assessment of a front-end sales charge and at the
same time to permit the Distributor to compensate broker-dealers on an ongoing
basis in connection with the sale of the Class B and Class C shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trust, including a majority of
the Trustees who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the Independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class
B, Class C and Class D shares.
All distribution fees paid by the Fund under the Plan will be paid in accordance
with Rule 2830 of the NASD Rules of Conduct.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses (excluding the Rule 12b-1 fee and the servicing fee)
at or below one and nine-tenths of one percent (1.90%) of the Fund's average net
assets. The Manager also may voluntarily reduce additional amounts to increase
the return to the Fund's investors. The Manager may terminate these voluntary
reductions at any time. Any reductions made by the Manager in its fees are
subject to reimbursement by the Fund within the following three years, provided
that the Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Manager generally seeks reimbursement for
the oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the
13
<PAGE>
Investment Management Agreement, the Manager is entitled to seek reimbursement
from the Fund for the Manager's costs incurred in rendering such service or
assuming such expense. The Manager, out of its own funds, also may compensate
the Distributor and broker-dealers who distribute the Fund's shares as well as
other service providers of shareholder and administrative services. In addition,
the Manager, out of its own funds, may sponsor seminars and educational programs
on the Fund for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider sale of the Fund's shares as a factor in selecting broker-dealers for
the Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding the
Fund's policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
Distribution of Shares
Choosing a Portfolio
This prospectus offers Class A, B, C and D shares. Each Class has its own cost
structure, allowing you to choose the one that best meets your requirements.
Your financial representative can help you decide. For estimated expenses of A,
B, C and D Classes, see the Fee Table earlier in this prospectus.
Class A shares will incur an initial sales charge when they are purchased and
will bear no ongoing distribution or account maintenance fees. Class A shares
are offered to a limited group of investors and also will be issued upon
reinvestment of dividends on outstanding Class A shares. Investors who own Class
A shares of the Fund in a shareholder account will be entitled to purchase
additional Class A shares of the Fund in that account. Other eligible investors
will include certain retirement plans and participants in certain investment
programs. In addition, Class A shares of the Fund will be offered at net asset
value to the directors and employees of the Manager and to members of the Board
of Trustees of the Fund. The maximum initial sales charge will be 5.25%, which
will be reduced for purchases of $25,000 and over and waived for purchases by
certain retirement plans in connection with certain investment programs.
Purchases of $1,000,000 or more may not be subject to an initial sales charge
but instead may be subject to a CDSC if the shares are redeemed within one year
after purchase. Sales charges also are reduced under a right of accumulation
which takes into account the investor's holdings of all Classes of all mutual
funds advised by the Manager. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares".
Class B shares will not incur a sales charge when they are purchased, but they
are subject an ongoing distribution fee of 0.75% and an ongoing shareholder
servicing fee of 0.25% of the Fund's average net assets attributable to Class B
shares, and a CDSC if they are redeemed within five years of purchase.
Approximately six years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to the same
account maintenance fee of 0.25% but a reduced distribution fee of 0.25%. If
Class B shares of the Fund are exchanged for Class B shares of another mutual
fund advised by the Manager, the conversion period applicable to the Class B
shares acquired in the exchange will apply, as will the Class D account
maintenance fee of the acquired fund upon the conversion and the holding period
for the shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares will occur
at least once a month on the basis of the relative net asset values of the
shares of the two Classes on the Conversion Date (as defined below), without the
imposition of any sales load, fee or other charge. Conversion of Class B shares
to Class D shares will not be deemed a purchase or sale of the shares for
Federal income tax purposes. Shares purchased through reinvestment of dividends
and other distribution on Class B shares also will convert automatically to
Class D shares.
14
<PAGE>
Class C shares do not incur a sales charge when they are purchased, but they are
subject to an ongoing distribution fee of 0.75% and an ongoing shareholder
servicing fee of 0.25% of the Fund's average net assets attributable to Class C
shares. Class C shares also are subject to a 1.0% CDSC if they are redeemed
within one year of purchase. Although Class C shares are subject to a CDSC for
only one year (as compared to five years for Class B), Class C shares have no
conversion feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C shares for
an indefinite period subject to annual approval by the Fund's Board of Trustees
and regulatory limitations.
Class D: Class D shares will incur an initial sales charge when they are
purchased and will be subject to an distribution fee of 0.25% and an ongoing
shareholder servicing fee of 0.25% of the Fund's average net assets attributable
to Class D shares. Class D shares will not be subject to any CDSC when they are
redeemed. Purchases of $1,000,000 or more may not be subject to an initial sales
charge but if the initial sales charge is waived such purchase may be subject to
a CDSC of 1.0% if the shares are redeemed within one year after purchase. The
schedule of initial sales charges and reductions for the Class D shares is the
same as the schedule for Class A shares, except that there is no waiver for
purchases by retirement plans in connection with certain investment programs.
Class D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares".
How Sales Charges are Calculated
<TABLE>
Class A and Class D shares. Sales charges are as follows:
<CAPTION>
------------------------------------------ --------------------- -------------------------- -------------------------
YOUR INVESTMENT AS A % OF AS A % OF YOUR INVESTMENT DEALER COMMISSION AS A
OFFERING PRICE % OF OFFERING PRICE
------------------------------------------ --------------------- -------------------------- -------------------------
<S> <C> <C> <C>
Less than $25,000 5.25% 5.54% 5.00%
------------------------------------------ --------------------- -------------------------- -------------------------
$25,000 or more, but less than $50,000 4.75% 4.99% 4.50%
------------------------------------------ --------------------- -------------------------- -------------------------
$50,000 or more, but less than $100,000 4.00% 4.17% 3.75%
------------------------------------------ --------------------- -------------------------- -------------------------
$100,000 or more, but less than $250,000 3.00% 3.09% 2.75%
------------------------------------------ --------------------- -------------------------- -------------------------
$250,000 or more, but less than $1,000,000 2.00% 2.04% 1.80%
------------------------------------------ --------------------- -------------------------- -------------------------
$1,000,000 and over 0.00%* 0.00%* 0.00%*
------------------------------------------ --------------------- -------------------------- -------------------------
</TABLE>
Class B shares.
o Class B shares are offered at their net asset value per share, without
any initial sales charge. The Distributor pays a commission of [4%]to
financial institutions that initiate purchases.
Class C shares.
o Class C shares are offered at their net asset value per share without any
initial sales charge. The Distributor pays a [1%] commission to financial
institutions that initiate purchases.
Contingent Deferred Sales Charge
Shareholders of Class B and Class C shares may be subject to a Contingent
Deferred Sales Charge ("CDSC") upon redemption of their shares under the
following conditions:
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Class B Shares.
------------------------------------- ------------------------------------
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
------------------------------------- ------------------------------------
1st year 5.00%
------------------------------------- ------------------------------------
2nd year 4.00%
------------------------------------- ------------------------------------
3rd year 3.00%
------------------------------------- ------------------------------------
4th year 2.00%
------------------------------------- ------------------------------------
5th year 1.00%
------------------------------------- ------------------------------------
After 5 years 0.00%
------------------------------------- ------------------------------------
Class B shares will be automatically converted to Class D shares after the
end of the sixth year after purchase.
Class C shares.
o Shareholders who redeem Class C shares within one full year of purchase
date may be charged a CDSC of 1% of shares redeemed.
There is no CDSC imposed on shares acquired through reinvestment of dividends or
capital gains.
The CDSC will be imposed on the lesser of the original purchase price or the net
asset value of the redeemed shares at the time of redemption. CDSC calculations
are based on the specific shares involved, not the value of your account. To
keep your CDSC as low as possible, each time you place a request to sell shares,
we will first sell any shares in your account that represent reinvested
dividends/capital gains and then shares that satisfy the holding period. If
there are not enough of these of meet your request, we will sell your shares on
a first-in, first-out basis. Your financial institution may elect to waive some
or all of the payment thereby reducing or eliminating the otherwise applicable
CDSC.
Sales Charge Reductions and Waivers
Reducing Sales Charge on your Class A or Class D Shares. There are several ways
you can combine multiple purchases of shares of Class A or Class D shares to
take advantage of the breakpoints in the sales charge schedule. These can be
combined in any manner:
o Accumulation Privilege - lets you add the value of shares of any Class A or
Class D shares you and your immediate family already own to the amount of
your next investment for purposes of calculating sales charge.
o Letter of Intent - lets you purchase shares of any Class A or Class D
shares over a 13-month period and receive the same sales charge as if all
shares had been purchased at once.
o Combination Privilege - lets you combine Class A or Class D shares
purchases of multiple Montgomery Funds for the purpose of reducing the
sales charge.
To use: complete the appropriate section on your application, or contact your
financial representative or The Montgomery Funds to add these options to an
existing account.
CDSC Waivers. In general, the CDSC may be waived on shares you sell for the
following reasons:
o payments through certain systematic retirement plans and other employee
benefit plans
o qualifying distributions from qualified retirement plans and other employee
benefit plans
o distributions from custodial accounts under section 403(b)(7) of the
Internal Revenue Code as well as IRAs due to death, disability or
attainment of age 59 1/2
o participation in certain fee-based programs
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To use: contact your financial representative or The Montgomery Funds.
Reinstatement Privilege. If you sell shares of a Fund, you may invest some or
all of the proceeds in the same Fund within 90 days without a sales charge. If
you paid a CDSC, when you sold your shares, you will be credited with the amount
of the CDSC. All accounts involved must have the same registration.
To use: contact your financial representative or The Montgomery Funds.
Net Asset Value Purchases. Class A or Class D shares may be sold at net asset
value to:
o current or retired directors, trustees, partners, officers and employees of
the Trust, the Distributor, the Manager and its members, certain family
members of the above persons, and trusts or plans primarily for such
persons;
o current or retired registered representatives or full-time employees and
their spouses and minor children and plans of such persons;
o investors who exchange their shares from an unaffiliated investment company
which has a sales charge, so long as shares are purchased within 60 days of
the redemption;
o trustees or other fiduciaries purchasing shares for certain retirement
plans of organizations with 50 or more eligible employees;
o investment advisers, financial planners and certain financial institutions
that place trades for their own accounts or the accounts of their clients
either individually or through a master account and who charge a
management, consulting or other fee for their services;
o employer-sponsored benefit plans in connection with purchases of shares of
Class A or Class D shares made as a result of participant-directed
exchanges between options in such a plan;
o 'wrap accounts' for the benefit of clients of broker-dealers, financial
institutions or financial planners having sales or service agreements with
the Distributor or another broker-dealer or financial institution with
respect to sales of Class A or Class D shares; and
o such other persons as are determined by the Board of Trustees (or by the
Distributor pursuant to guidelines established by the Board of Trustees) to
have acquired shares under circumstances not involving any sales expense to
the Trust or the Distributor.
How to Invest in the Fund
The Fund's shares are offered primarily through financial intermediaries and
financial professionals at their next-determined net asset value (plus any
applicable front-end sales charge) after receipt of an order with payment. The
Fund's shares are offered for sale by Funds Distributor, Inc., the Fund's
Distributor, 101 California Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or certain intermediates that have an agreement with the
Fund by the close of trading, generally 4:00 P.M., eastern time, on any day that
the New York Stock Exchange ("NYSE") is open, Fund shares will be purchased at
the Fund's next-determined net asset value. Orders for Fund shares received
after the Fund's cutoff time will be purchased at the next-determined net asset
value after receipt of the order.
The minimum initial investment in the Fund is $5,000 (including IRAs) and $500
for subsequent investments. The Manager or the Distributor, in its discretion,
may waive these minimums. The Fund does not accept third party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the U.S. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
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Initial Investments
Minimum Initial Investment (including IRAs) for Class A, Class B, Class C and
Class D shares:.......................................................... $5,000
Initial Investments by Check
o Complete the New Account application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
Initial Investments by Wire
o Call the Transfer Agent to say that you intend to make your initial
investment by wire. Provide the Transfer Agent with your name, dollar
amount to be invested and Fund(s) in which you want to invest. They will
provide you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
Name of fund: Montgomery Concentrated Emerging Markets Fund
o Your bank may charge a fee for any wire transfers.
o The Fund and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Subsequent Investments
Minimum Subsequent Investment (including IRAs) for Class A, Class B, Class C and
Class D shares: $500
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and account number to
which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-3863 before the Fund
cutoff time. Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
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o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure payment is received in time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated
bank by using the bank wire information under the section titled
"Initial Investments by Wire."
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is the Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your Montgomery
account application or your letter of instruction. Investments will
automatically be transferred into your Montgomery account from your
checking or savings account.
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your account application or your letter of instruction, the
20th of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for the Fund is $100 per payroll deduction
period.
o You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Fund account.
o Please call the Transfer Agent to receive instructions to establish this
service.
Telephone Transactions
You agree to reimburse the Fund for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30-days' written notice or at any time by you by written notice
to the Fund. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by the Fund. The Fund and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special authorization number or other
19
<PAGE>
personal information not likely to be known by others. The Fund and Transfer
Agent may be liable for any losses due to unauthorized or fraudulent telephone
transactions only if such reasonable procedures are not followed.
Telephone privileges may be revoked at any time by the Fund as to any
shareholder if the Fund believes that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market timing strategy.
Retirement Plans
Shares of the Fund are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. The Fund may be available for
purchase through administrators for retirement plans. Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing from their plan administrators. Plan administrators may receive
compensation from the Fund for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
How to Redeem an Investment in the Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or other agents of the Fund. Payment of redemption proceeds is
made promptly regardless of when redemption occurs and normally within three
days after receipt of all documents in proper form, including a written
redemption order with appropriate signature guarantee. Redemption proceeds will
be mailed or wired in accordance with the shareholder's instructions. The Fund
may suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC. In the case of shares purchased by check
and redeemed shortly after the purchase, the Transfer Agent will not mail
redemption proceeds until it has been notified that the monies used for the
purchase have been collected, which may take up to 15 days from the purchase
date. Shares tendered for redemptions through brokers or dealers (other than the
Distributor) may be subject to a service charge by such brokers or dealers.
Procedures for requesting redemption are set forth below.
Redeeming by Written Instruction
o Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all account holders must sign.
o Signature guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s), your predesignated bank account
or if the dollar amount of the redemption exceeds $50,000. Signature
guarantees may be provided by an eligible guarantor institution such as a
commercial bank, a NASD member firm such as a stockbroker, a savings
association or national securities exchange. Contact the Transfer Agent for
more information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees in the Manager's discretion.
Redeeming By Telephone
o Unless you have declined telephone redemption privileges on your account
application, you may redeem shares up to $50,000 by calling the Transfer
Agent before the Fund cutoff time. This service is not available for IRA
accounts.
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o If you included bank wire information on your account application or made
subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be cancelled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Fund may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Fund will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See discussion of Fund telephone
procedures and liability under "Telephone Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in the Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from the Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Uncashed Distribution or Redemption Check
If you choose to receive your distribution or redemption by a check from the
Fund (instead of bank wire), you should follow-up to ensure that you have
received the distribution or redemption in a timely manner. The Fund is
responsible only for mailing the distribution or redemption checks and is not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Fund, the Fund will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, the Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
the Fund decides to make an involuntary redemption, the shareholder will first
be notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional investment to bring the
value of that account at least to the minimum investment required to open an
account before the Fund takes any action.
Exchange Privileges and Restrictions
You may exchange shares from the Montgomery Global Partners Fund with the same
registration, taxpayer identification number and address.
21
<PAGE>
An exchange may result in a recognized gain or loss for income tax purposes. See
the discussion of Fund telephone procedures and limitations of liability under
"Telephone Transactions" above.
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with any applicable sales charge but no
exchange fee) after your request is received. Your request is subject to
the Funds' cutoff times.
o Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
o You may exchange for shares of a Fund only in states where that Montgomery
Fund's shares are qualified for sale and only after you have reviewed a
prospectus of that Fund.
o You may not exchange for shares of a Montgomery Fund that is not open to
new shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trust
reserves the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts
with the same taxpayer identification number will be counted together). A
shareholder's exchanges may be restricted or refused if the Fund receives,
or the Manager anticipates, simultaneous orders affecting significant
portions of the Fund's assets and, in particular, a pattern of exchanges
coinciding with a "market timing" strategy. The Trust reserves the right to
refuse exchanges by any person or group if, in the Manager's judgment, a
Fund would be unable to effectively invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. Although the Trust attempts to provide prior notice to
affected shareholders when it is reasonable to do so, they may impose these
restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trust reserves the right to terminate or modify the
exchange privileges of Fund shareholders in the future.
Brokers and Other Intermediaries
Investing through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of the Fund from other selected securities
brokers, dealers or through financial intermediaries such as benefit plan
administrators. Investors should contact these agents directly for appropriate
instructions, as well as information pertaining to accounts and any service or
transaction fees that may be charged by these agents. Some of these agents may
appoint sub-agents. Purchase orders through securities brokers, dealers and
other financial intermediaries are effected at the next-determined net asset
value after receipt of the order by such agent before the Fund's daily cutoff
time. To the extent that these agents perform shareholder-servicing activities
for the Fund, they may receive fees from the Fund or the Manager for such
services.
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<PAGE>
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Fund by wire or telephone through
selected securities brokers or dealers. Shareholders should contact their
securities broker or dealer for appropriate instructions and for information
concerning any transaction or service fee that may be imposed by the broker or
dealer. Shareholders are entitled to the net asset value next determined after
receipt of a redemption order by such broker-dealer, provided the broker-dealer
transmits such order on a timely basis to the Transfer Agent so that it is
received before the Fund's cutoff time on a day that the Fund redeems shares.
Orders received after that time are entitled to the net asset value next
determined after receipt.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of the Fund's cutoff
time on each day that the NYSE is open for trading. Generally this is 4:00 P.M.
eastern time, or earlier when trading closes earlier. Per-share net asset value
is calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset values, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset values may not be reflected in the Fund's
calculation of net asset values unless the Manager, under supervision of the
Board, determines that a particular event would materially affect the Fund's net
asset values.
Dividends and Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends are declared daily and paid
annually. Capital gains are declared and paid in the last quarter of each year.
Additional distributions, if necessary, may be made following the Fund's fiscal
year end (June 30) in order to avoid the imposition of tax on the Fund. The
amount and frequency of Fund distributions are not guaranteed and are at the
discretion of the Board.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the New Account application, all dividends
and other distributions will be reinvested automatically in additional shares of
the Fund and credited to the shareholder's account at the closing net asset
value on the reinvestment date.
Taxation
The Fund intends to qualify and elect as soon as possible to be treated as a
regulated investment company under Subchapter M of the Code, by distributing
substantially all of its net investment income and net capital gains to its
shareholders and meeting other requirements of the Code relating to the sources
of its income and diversification of assets. Accordingly, the Fund generally
will not be liable for federal income tax or excise tax based on net income
except to the extent that its earnings are not distributed or are distributed in
a manner that does not satisfy the requirements of the Code pertaining to the
timing of distributions. If the Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation. The
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Fund may also incur tax liability to the extent that it invests in "passive
foreign investment companies." See the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gains over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. Part of the distributions paid by the Fund may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gains over net short-term
capital loss from transactions of the Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Fund. Additional information on tax matters
relating to the Fund and its shareholders is included in the Statement of
Additional Information.
Tax-Exempt Investors
The Fund may use margin leverage in connection with the purchase of securities.
Therefore, the Fund may generate "unrelated business taxable income," which
income would be taxable to tax-exempt investors. Therefore, an investment in the
Fund may not be suitable for tax-exempt investors, who are urged to consult
their own tax advisors prior to investing in the Fund.
General Information
The Trust
The Fund is a series of The Montgomery Funds II, a Delaware business trust
organized on September 10, 1993 (the "Trust"). The Trust's Agreement and
Declaration of Trust permits the Board to issue an unlimited number of full and
fractional shares of beneficial interest, $.01 par value, in any number of
series. The assets and liabilities of each series within the Trust are separate
and distinct from those of each other series.
This prospectus relates only to the Class A, Class B, Class C and Class D shares
of the Fund. The Fund has not designated other classes of shares but may in the
future designate other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting all series of the Trust jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees. Except as set forth herein, all
classes of shares issued by the Fund shall have identical voting, dividend,
liquidation and other rights, preferences, and terms and conditions. The only
differences among the various classes of shares relate solely to the following:
(a) each class may be subject to different class expenses; (b) each class may
bear a different identifying designation; (c) each class may have exclusive
voting rights with respect to matters solely affecting such class; (d) each
class may have different exchange privileges; and (e) each class may provide for
the automatic conversion of that Class Anto another class. While the Trust is
not required and does not intend to hold annual meetings of shareholders, such
meetings may be called by the Board at its discretion, or upon demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing or removing Trustees. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees pursuant to the provisions of Section 16(c) of the Investment
Company Act.
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Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. Performance data may be quoted
separately for each class of shares. Total return information generally will
include the Fund's average annual compounded rate of return over the most recent
four calendar quarters and over the period from the Fund's inception of
operations. The Fund may also advertise aggregate and average total return
information over different periods of time. The Fund's average annual compounded
rate of return is determined by reference to a hypothetical $1,000 investment
that includes capital appreciation and depreciation for the stated period
according to a specific formula. Aggregate total return is calculated in a
similar manner, except that the results are not annualized. Total return figures
will reflect all recurring charges against the Fund's income.
Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return or current yield may be in any
future period.
Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. A confirmation statement
will be mailed to your record address each time you request a transaction except
for pre-authorized automatic investment and redemption services (quarterly). All
transactions are recorded on quarterly account statements which you will receive
at the end of each calendar quarter. Your fourth-quarter account statement will
be a year-end statement, listing all transaction activity for the entire year.
Retain this statement for your tax records.
In general, shareholders who redeemed shares from a qualifying Montgomery
account should expect to receive an Average Cost Statement in February of the
following year. Your statement will calculate your average cost using the
average cost single-category method.
Any questions should be directed to The Montgomery Funds at 800-572-FUND (3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the
Account Application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item in the Account
Application. Dividends paid to a foreign shareholder's account by the Fund may
be subject to up to 30% withholding instead of backup withholding.
A shareholder who is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, government agencies,
financial
25
<PAGE>
institutions, registered securities and commodities dealers and others. For
further information, see Section 3406 of the Code and consult with a tax
adviser.
---------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesman, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional
Information, or in the Fund's official sales literature.
26
<PAGE>
Glossary
below investment grade debt securities. Debt securities rated below "investment
grade."
cash equivalents. These are short-term, interest bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
The price of a convertible security is influenced by the market value of the
underlying common stock.
covered call option. A call option is "covered" if the fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option, or owns an offsetting call option.
covered put option. A put option is "covered" if the fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
depositary receipts. These include American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
other similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence ownership
of underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, currency
options, futures contracts, swaps and options on futures contracts on U.S.
government and foreign government securities and currencies.
FNMA. The Federal National Mortgage Association.
equity derivative securities. These include, among other things, options on
equity securities, warrants and future contracts on equity securities.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date. The fund generally does not enter into forward contracts with terms
greater than one year. The fund generally enters into forward contracts only
under two circumstances. First, if the fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security by entering into a forward
contract to buy the amount of a foreign currency needed to settle the
transaction. Second, if the Manager believes that the currency of a particular
foreign country will substantially rise or fall against the U.S. dollar, it may
enter into a forward contract to buy or sell the currency approximating the
value of some or all of the fund's portfolio securities denominated in such
currency. The fund will not enter into a forward contract if, as a result, it
would have more than one-third of total assets committed to such contracts
(unless it owns the currency that it is obligated to deliver or has collateral
assets sufficient to cover its obligations). Although forward contracts are used
primarily to protect the fund from adverse currency movements, they involve the
risk that currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, the fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated increase
in interest rates and a corresponding decline in debt securities it owns. The
fund will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
27
<PAGE>
GNMA. The Government National Mortgage Association.
illiquid securities. The Fund treats any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit as illiquid. The Fund also treats repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on formal
markets for some period of time but for which an active informal market exists,
or securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board and guidelines adopted by
the Board, the Manager has determined to be liquid.
investment grade. Investment grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa) or in unrated debt securities deemed to be of comparable quality by
the Manager using guidelines approved by the Board of Trustees.
leverage. Some funds may use leverage in an effort to increase return. Although
leverage creates an opportunity for increased income and gain, it also creates
special risk considerations. Leveraging also creates interest expenses that can
exceed the income from the assets retained.
repurchase agreement. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the Money
Market Funds, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same security
at a specified time and price.
reverse repurchase agreement. In a reverse repurchase agreement, a fund sells to
a financial institution a security that it holds and agrees to repurchase the
same security at an agreed-upon price and date.
securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with collateral
assets in an amount at least equal to the current market value of the loaned
securities, plus accrued interest. There is a risk of delay in receiving
collateral or in recovering the securities loaned or even a loss of rights in
collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
warrants. Typically is a long-term option that permits the holder to buy a
specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Fund may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed delivery" basis. The price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but a fund will enter into
when-issued and forward commitments only with the intention of actually
receiving or delivering the securities. No income accrues on securities that
have been purchased pursuant to a forward commitment or on a when-issued basis
prior to delivery to a Fund. At the time a fund enters into a transaction on a
when-issued or forward commitment basis, it supports its obligation with
collateral assets equal to the value of the when-issued or forward commitment
securities and causes the collateral assets to be marked to market daily. There
is a risk that the securities may not be delivered and that the fund may incur a
loss.
28
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1 (800) 447-4210
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
29
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS A, B, C AND D SHARES
MONTGOMERY GLOBAL PARTNERS FUND
---------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may any
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities law of any State.
Subject to Completion Dated October __, 1997
The Montgomery Focus Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
www.montgomeryfunds.com
Montgomery Global Partners Fund Prospectus
December 31, 1997
Class A, Class B, Class C and Class D shares of the Montgomery Global Partners
Fund (the "Fund") are offered in this prospectus.
This Fund uses aggressive investment approaches that present substantially
higher risks than most mutual funds. It may invest a larger percentage of its
assets in transactions using margin, leverage, short sales and other forms of
volatile financial derivatives like options and futures. As a result, the value
of an investment in this Fund may be more volatile than investments in other
mutual funds. The Fund is not an appropriate investment for conservative
investors. You should read this prospectus carefully and consult your financial
adviser before investing.
The Fund's shares are sold primarily through financial intermediaries and
financial professionals. Certain classes of shares may be subject to a front-end
sales charge, a back-end contingent deferred sales charge and/or Rule 12b-1
distribution fees as described in this prospectus. In general, the minimum
initial investment in the Fund is $5,000 and subsequent investments must be at
least $500. The Manager or the Distributor, under any circumstances that either
deems appropriate, may waive these minimums. See "Sales Charge Reductions and
Waivers" and "How to Invest in the Fund."
The Fund, which is a separate series of The Montgomery Funds II, an open-end
management investment company, is managed by Montgomery Asset Management, LLC
(the "Manager"), and is distributed by Funds Distributor, Inc. (the
"Distributor").
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated December 31, 1997, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (800)
572-FUND (3863). If you are viewing the electronic version of this prospectus
through an on-line computer service, you may request a printed version free of
charge by calling (800) 572-FUND (3863).
The Internet World Wide Web site for The Montgomery Funds is
www.montgomeryfunds.com. The Securities and Exchange Commission maintains a Web
site (www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding The
Montgomery Funds II.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
1
<PAGE>
TABLE OF CONTENTS
The Montgomery Funds..........................................................1
Fees and Expenses of the Fund.................................................3
The Fund's Investment Objective and Policies..................................4
Portfolio Securities..........................................................4
Other Investment Practices....................................................6
Risk Considerations...........................................................9
Management of the Fund.......................................................11
Distribution of Shares.......................................................15
Sales Charge Reductions and Waivers..........................................17
How to Invest in the Fund....................................................18
How to Redeem an Investment in the Fund......................................21
Exchange Privileges and Restrictions.........................................22
Brokers and Other Intermediaries.............................................23
How Net Asset Value Is Determined............................................23
Dividends and Distributions..................................................24
Taxation.....................................................................24
General Information..........................................................25
Backup Withholding Instructions..............................................26
Glossary.....................................................................27
2
<PAGE>
Fees and Expenses of the Fund
Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay, either directly or indirectly, the following charges when
buying or redeeming shares of the Fund:
<CAPTION>
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS A(a) CLASS B(b) CLASS C CLASS D
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Maximum sales charge on purchases 5.25%(c) None None 5.25%(c)
(as a percentage of offering price)
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Sales charge on reinvested dividends None None None None
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Maximum deferred sales charge (as a percentage of None(d) 5.00%(e) 1.00% None(d)
redemption proceeds)
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Redemption fee(f) None None None None
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Exchange fee None None None None
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Management fees(g) 1.50% 1.50% 1.50% 1.50%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
12b-1 Distribution fees None 0.75% 0.75% 0.25%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Shareholder Servicing fees 0.25% 0.25% 0.25% 0.25%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Other expenses (after reimbursement)(g) 0.40% 0.40% 0.40% 0.40%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
Total fund operating expenses(g) 2.15% 2.90% 2.90% 2.40%
- ----------------------------------------------------------- --------------- --------------- ---------------- ---------------
<FN>
The previous table is intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year. Because Rule
12b-1 distribution charges are accounted for on a class-level basis (and not on
an individual shareholder-level basis), individual long-term investors in the
Class B, Class C and Class D shares of the Fund may over time pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc. ("NASD"), even though all
shareholders of those Classes in the aggregate will not. This is recognized and
permitted by the NASD.
(a) Class A shares are sold to a limited group of investors, including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs.
(b) Class B shares convert to Class D shares automatically approximately six
years after initial purchase.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with fee-based programs. Class A or Class D purchases of $1,000,000 or more
will not be subject to an initial sales charge.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.00% of amounts redeemed within the first year after purchase. Such
CDSC may be waived in connection with redemptions to fund participation in
certain fee-based programs.
(e) 5.00% during the first year, decreasing 1.00% annually thereafter to 0.00%
after the fifth year.
(f) Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. See "How to Redeem an Investment in the Fund."
(g) Expenses for the Fund are estimated. The Manager will reduce its fees and
may absorb or reimburse the Fund for certain expenses to the extent
necessary to limit total annual fund operating expenses to the amount
indicated in the table for the Fund. The Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the three years
following that reduction and only if such reimbursement can be achieved
within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the
Fund for fees and expenses for the current year. Absent the reduction,
actual total Fund operating expenses for the Fund (excluding 12b-1
distribution fees and shareholder servicing fees) are estimated to be 3.10%
(1.60% other expenses). The Manager may terminate these voluntary
reductions at any time. See "Management of the Fund."
</FN>
</TABLE>
Example of Expenses for the Fund
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares:
3
<PAGE>
- -----------------------------------------------------------------------------
Montgomery Global Partners Fund
- -----------------------------------------------------------------------------
1 YEAR 3 YEARS
- -----------------------------------------------------------------------------
Class A $73 $116
- -----------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------
Assuming redemption at end of time period $70 $111
- -----------------------------------------------------------------------------
Assuming no redemption $29 $90
- -----------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------
Assuming redemption at end of time period $40 $90
- -----------------------------------------------------------------------------
Assuming no redemption $29 $90
- -----------------------------------------------------------------------------
Class D $76 $123
- -----------------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
The Fund's Investment Objective and Policies
The investment objective and general investment policies of the Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities". Specific investment practices that may
be employed by the Fund are described in "Other Investment Practices". Certain
risks associated with investments in the Fund are described in those sections as
well as in "Risk Considerations. Certain terms used in the prospectus are
defined in the glossary found at the end of this prospectus.
The Fund's investment objective is to seek capital appreciation. Under normal
conditions, the Fund seeks to achieve its objective by investing at least 65% of
its total assets in long and short positions in equity securities of publicly
traded companies of any size worldwide. Any income derived from dividends and
interest will be incidental to the Fund's investment objective. As is the case
for all mutual funds, attainment of the Fund's investment objective cannot be
assured.
The Fund may employ margin leverage in connection with short-sale of securities
it does not own. The Fund also may use options and financial indexes for hedging
purposes and/or to establish or increase its long or short positions. This Fund
invests primarily in common stock (including depositary receipts) but also may
invest in other types of equity and equity derivative securities. Also, for
liquidity purposes the Fund will normally invest a portion of its assets in
investment grade debt securities and money market instruments, including
repurchase agreements. It may invest up to 35% of its total assets in debt
securities, including up to 5% in debt securities rated below investment grade.
See "Portfolio Securities," "Risk Considerations" and the Appendix in the
Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in emerging market companies under debt conversion programs
sponsored by such governments. The Fund deems securities that are convertible to
equity investments to be equity derivative securities.
Portfolio Securities
Equity Securities
The Fund may, within the limits described above, invest in common stocks and may
also invest in other types of equity securities (such as preferred stocks or
convertible securities) as well as equity derivative securities.
4
<PAGE>
Depositary Receipts, Convertible Securities and Securities Warrants
The Fund may invest in ADRs, EDRs and GDRs and convertible securities that the
Manager regards as a form of equity security. The Fund also may invest up to 5%
of its net assets in warrants, whether or not listed on a securities exchange.
Privatizations
The Fund believes that foreign governmental programs of selling interests in
government-owned or controlled enterprises ("privatizations") may represent
opportunities for significant capital appreciation, and the Fund may invest in
privatizations. The ability of U.S. entities, such as the Fund, to participate
in privatizations may be limited by local law, or the terms for participation
may be less advantageous than for local investors. Many privatization programs
have failed and there can be no assurance that the Fund will invest in
successful programs.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and similar
vehicles (collectively, "special situations") could enhance its capital
appreciation potential. The Fund also may invest in certain types of vehicles or
derivative securities that represent indirect investments in foreign markets or
securities in which it is impracticable for the Fund to invest directly.
Investments in special situations may be illiquid, as determined by the Manager
based on criteria reviewed by the Board. The Fund does not invest more than 15%
of its net assets in illiquid investments, including special situations.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. Such investments may involve the
payment of substantial premiums above the net asset value of those investment
companies' portfolio securities and are subject to limitations under the
Investment Company Act. The Fund also may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company" regardless of whether such "passive foreign investment company" makes
distributions to the Fund. See the Statement of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees. The
Manager has agreed to waive its own management fee with respect to the portion
of the Fund's assets invested in other open-end (but not closed-end) investment
companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
In selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. The Fund, however, may also invest up to 5% of its total assets in debt
securities rated lower than investment grade (commonly called "junk bonds").
This can include securities in default. See "Risk Considerations."
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit quality standards of the Fund and will be limited to 5%
of the Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., foreign lenders) debt
obligations issued by the governments, governmental entities and companies of
emerging market countries.
5
<PAGE>
The percentage distribution between equity and debt will vary from country to
country based on anticipated trends in inflation and interest rates; expected
rates of economic and corporate profits growth; changes in government policy;
stability, solvency and expected trends of government finances; and conditions
of the balance of payments and terms of trade.
U.S. Government Securities
The Fund may invest in fixed rate and floating or variable rate U.S. government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, while
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. government does not guarantee
the net asset value of the Fund's shares.
Structured Notes and Indexed Securities
The Fund may invest in structured notes and indexed securities. Structured notes
are debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by an unrelated indicator. Index securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Manager analyzes these securities
in its overall assessment of the Fund's portfolio in an effort to monitor the
Fund's interest rate risk.
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more detailed information about certain of these practices, including
limitations designed to reduce risks.
Short Sales
The Fund may effect short sales of securities. Short sales are transactions in
which the Fund sells a security or other asset which it does not own, in
anticipation of a decline in the market value of the security or other asset.
The Fund will realize a profit or incur a loss depending upon whether the price
of the security sold short decreases or increases in value between the date of
the short sale and the date on which the Fund must replace the borrowed
security. Short sales are speculative investments and involve special risks. See
"Risk Considerations" below.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. government security or other high-grade
liquid debt instrument from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price. Under the
Investment Company Act, repurchase agreements are considered to be loans by the
Fund and must be fully collateralized by cash, letters of credit, U.S.
government securities or other high-grade liquid debt or equity securities
("collateral assets"). If the seller defaults on its obligation to repurchase
the underlying security, the Fund may experience delay or difficulty in
exercising its rights to realize upon the security, may incur a loss if the
value of the security declines and may incur disposition costs in liquidating
the security.
Borrowing
The Fund may borrow money from banks and engage in reverse repurchase
transactions for temporary or emergency purposes. In a reverse repurchase
agreement, the Fund sells to a financial institution a security that it holds
and agrees to repurchase the same security at an agreed-upon price and date. The
Fund may borrow from broker-dealers and other institutions in order to leverage
its portfolio. See "Leverage" below. Total borrowings may not exceed one-third
of the value of the Fund's assets and the Fund may pledge its assets in
connection with the borrowings The Fund may not purchase securities if such
borrowings exceed 10% of its total assets.
6
<PAGE>
Leverage
The Fund may leverage its portfolio through margin borrowing and other
techniques in an effort to increase total return. Although leverage creates an
opportunity for increased income and gain, it also creates special risk
considerations. For example, leveraging may magnify changes in the net asset
values of the Fund's shares and in the yield on its portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value while the borrowing is outstanding. Leveraging creates interest expenses
that can exceed the income from the assets retained.
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of the Fund's total assets. Each
securities loan is collateralized with collateral assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Fund, the Fund may employ certain
risk management practices using the following derivative securities and
techniques (known as "derivatives"): forward currency exchange contracts,
currency options, futures contracts and options on futures contracts on foreign
government securities and currencies. The Board has adopted derivative
guidelines that require the Board to review each new type of derivative that may
be used by the Fund. Markets in some countries currently do not have instruments
available for hedging transactions relating to currencies or to securities
denominated in such currencies or to securities of issuers domiciled or
principally engaged in business in such countries. To the extent that such
markets do not exist, the Manager may not be able to hedge its investment
effectively in such countries. Furthermore, the Fund engages in hedging
activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment.
Forward Currency Contracts
The Fund may invest a substantial portion of its assets in forward currency
contracts. A forward currency contract is individually negotiated and privately
traded by currency traders and their customers and creates an obligation to
purchase or sell a specific currency for an agreed-upon price at a future date.
The Fund normally conducts its foreign currency exchange transactions either on
a spot (i.e., cash) basis at the spot rate in the foreign currency exchange
market at the time of the transaction, or through entering into forward
contracts to purchase or sell foreign currencies at a future date. The Fund
generally does not enter into forward contracts with terms greater than one
year.
Options on Securities, Securities Indices and Currencies
The Fund may purchase put and call options on securities and currencies traded
on U.S. exchanges and, to the extent permitted by law, foreign exchanges, as
well as in the over-the-counter market. The Fund may purchase call options on
securities which it intends to purchase (or on currencies in which those
securities are denominated) in order to limit the risk of a substantial increase
in the market price of such security (or an adverse movement in the applicable
currency. The Fund may purchase put options on particular securities (or on
currencies in which those securities are denominated) in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option (or an adverse
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movement in the applicable currency relative to the U.S. dollar). Put options
allow the Fund to protect unrealized gain in an appreciated security that it
owns without selling that security. Prior to expiration, most options are
expected to be sold in a closing sale transaction. Profit or loss from the sale
depends upon whether the amount received is more or less than the premium paid
plus transactions costs.
The Fund may purchase put and call options in an attempt to realize a greater
return. The Fund also may purchase put and call options on stock indices in
order to hedge against risks of stock market or industry-wide stock price
fluctuations. The Fund may purchase options on currencies in order to hedge its
positions in a manner similar to its use of forward foreign exchange contracts
and futures contracts on currencies.
Futures and Options on Futures
The Fund may enter into futures contracts on securities indices and U.S.
government securities that are traded on exchanges licensed and regulated by the
CFTC or on foreign exchanges. Thee Fund will purchase and sell futures contracts
and options thereon for "bona fide hedging" purposes (as defined by the CFTC)
and non "bona fide hedging" purposes in accordance with CFTC regulations. The
Fund's policies regarding futures contracts and options thereon may be changed
from time to time to conform to regulatory changes.
The Fund may enter into futures contracts on securities indices such as the
Standard & Poor's Composite Index of 500 Stocks (the "S&P 500"), the Russell
2000 Index (the "Russell 2000") or foreign/international indices. A securities
index futures contract does not require the physical delivery of the securities
underlying the index. Changes in the market value of a particular securities
index futures contract reflect changes in the specified index of the securities
on which the futures contract is based.
The Fund may also purchase put and call options on futures contracts for "bona
fide hedging" purposes (as defined by the CFTC) and non "bona fide hedging"
purposes. The purchase of an option on a futures contract requires the Fund to
pay a premium. If the option cannot be profitably exercised before it expires,
the Fund's loss will be limited to the amount of the premium and any transaction
costs. The Fund may enter into closing purchase or sale transactions in order to
terminate its position in a futures contract. There is no guarantee, however,
that such closing transaction can be effected. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
market, which may not be available at all times.
Although futures and options transactions, when used for hedging rather than
non-hedging purposes to pursue the Fund's investment objective, are intended to
enable the Fund to manage interest rate, stock market or currency exchange
risks, unanticipated changes in interest rates, market prices or currency
exchange rates could result in poorer performance than if the Fund had not
entered into these transactions.
Futures contracts and options thereon are derivative instruments. Losses that
may arise from certain futures transactions, particularly those involved in
non-hedging contexts to pursue the Fund's investment objective, are potentially
unlimited. Subject to the regulations of the Commodity Futures Trading
Commission, the Fund may invest in futures contracts and options on futures
contracts without limitation as to a percentage of its assets.
Hedging Considerations
Hedging transactions involve certain risks. While the Fund may benefit from the
use of hedging transactions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats any securities subject to restrictions on repatriation for more
than seven days and securities issued in connection with foreign debt conversion
programs that are restricted as to remittance of invested capital or profit as
illiquid. The Fund also treats repurchase agreements with maturities in excess
of seven days as illiquid. Illiquid securities do not include securities that
meet the requirements of Rule 144A under the Securities Act of 1933 and that,
subject to the review by the Board and guidelines adopted by the Board, the
Manager has determined to be liquid.
Equity Swaps
The Fund may invest a substantial portion of its total assets in equity swaps.
Equity swaps allow the parties to exchange the dividend income or other
components of return on an equity investment (e.g., a group of equity securities
or an index) for a component of return on another non-equity or equity
investment. Equity swaps are derivatives and their value can be very volatile.
To the extent that the Manager does not accurately analyze and predict the
potential relative fluctuation of the components swapped with another party, a
Fund may suffer a loss. The value of some components of an equity swap (like the
dividends on a common stock) may also be sensitive to changes in interest rates.
Furthermore, during the period a swap is outstanding, the Fund may suffer a loss
if the counterparty defaults.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote
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economic reconstruction or development, high-quality commercial paper, time
deposits, savings accounts, certificates of deposit, bankers' acceptances and
repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes the Fund's investments whenever it believes doing so will further the
Fund's investment objective or when it appears that a position of the desired
size cannot be accumulated. The Fund's investment program emphasizes active
portfolio management with a sensitivity to short-term market trends and price
changes in individual securities. Accordingly, the Fund expects to take frequent
trading positions, resulting in portfolio turnover and brokerage expenses that
may exceed those of most investment companies of comparable size. Portfolio
turnover generally involves some expense to the Fund, including brokerage
commissions, dealer mark-ups and other transaction costs, and may result in the
recognition of capital gains that may be distributed to shareholders. Generally,
portfolio turnover in excess of 100% is considered high and increases such
costs. The annual portfolio turnover for the Fund is expected to be
approximately 300%. Even though the portfolio turnover for the Fund is
considered high, the Fund would not consider portfolio turnover as a limiting
factor.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, the Fund's other
investment policies may be changed by the Board. If there is a change in the
investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30 days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this Prospectus.
Risk Considerations
Short Sales
When the Manager believes that a security is overvalued, it may sell the
security short and borrow the same security from a broker or other institution
to complete the sale. The Fund may make a profit or incur a loss depending upon
whether the market price of the security decreases or increases between the date
of the short sale and the date on which the Fund must replace the borrowed
security. An increase in the value of a security sold short by an Fund over the
price at which it was sold short will result in a loss to the Fund, and there
can be no assurance that the Fund will be able to close out the position at any
particular time or at an acceptable price. Although the Fund's gain is limited
to the amount at which it sold the security short, its potential loss is limited
only by the maximum attainable price of the security less the price at which the
security was sold. There also is a risk that the borrowed securities would need
to be returned to the brokerage firm on short notice. If that request for the
return of securities occurs at a time when other short sellers of the subject
security are receiving similar requests, a "short squeeze" can occur. This means
that the Fund might be compelled, at the most disadvantageous time, to replace
borrowed securities previously sold short with purchases on the open market,
possibly at prices significantly in excess of the proceeds received earlier. The
successful use of short selling may be adversely affected by an imperfect
correlation between movements in the price of the security sold short and the
securities being hedged. Short selling also may produce higher than normal
portfolio turnover and may result in increased transaction costs to the Fund.
The Fund also may make short sales against-the-box, in which it sells short
securities it owns or has the right to obtain without payment of additional
consideration. If the Fund makes a short sale against-the-box, it will be
required to set aside securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into those securities) and
will be required to hold those securities while the short sale is outstanding.
The Fund will incur transaction costs, including interest expenses, in
connection with opening, maintaining and closing short sales against-the-box.
Until the Fund replaces a borrowed security, it will maintain daily a segregated
account with its Custodian containing cash, U.S. Government securities, or other
liquid debt or equity securities such that the amount deposited in the account
plus any amount deposited with a broker or other custodian as collateral will
equal the current value of the security sold short and will
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<PAGE>
not be less than the value of the security at the time it was sold short.
Depending on arrangements made with the broker or custodian, the Fund may not
receive any payments (including interest) on collateral deposited with the
broker or custodian. The Fund will not make a short sale if, after giving effect
to the short sale, the market value of all securities sold exceeds 100% of the
value of the Fund's total assets.
Small Companies
The Fund may make investments in smaller companies that may benefit from the
development of new products and services. Such smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Such smaller companies may have limited product
lines, markets or financial resources, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Lower-Quality Debt
The Fund may invest in medium-quality and in high-risk debt securities below
investment-grade quality (sometimes called "junk bonds"). Medium-quality debt
securities have speculative characteristics, and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than with higher-grade debt securities. Junk
bonds offer greater speculative characteristics and are regarded as having a
great vulnerability to default although currently having the capacity to meet
interest payments and principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The ability to maintain other terms of the contract over
any long period of time may be small. Junk bonds are more subject to default
during periods of economic downturns or increases in interest rates and their
yields will fluctuate over time. It may be more difficult to dispose of or to
value junk bonds. Achievement of the Fund's investment objective may also be
more dependent on the Manager's own credit analysis to the extent the Fund's
portfolio includes junk bonds.
The Fund may also invest in unrated debt securities. Unrated debt securities are
not necessarily of lower quality than rated securities but may not be attractive
to as many buyers. Regardless of rating levels, all debt securities considered
for purchase (whether rated or unrated) are analyzed by the Manager to
determine, to the extent reasonably possible, that the planned investment is
sound. From time to time, these Funds may purchase defaulted debt securities if,
in the opinion of the Manager, the issuer may resume interest payments in the
near future.
Foreign Securities
The Fund may invest in foreign securities, including debt or equity securities
denominated in foreign currencies. The Fund may also invest in emerging market
securities. There are certain risks associated with investments in foreign
securities that are greater in emerging markets. Foreign investments involve the
possibility of expropriation, nationalization or confiscatory taxation, taxation
of income earned in foreign nations (including, for example, withholding taxes
on interest and dividends) or other taxes imposed with respect to investments in
foreign nations, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country and repatriation of
investments), default in foreign government securities, and political or social
instability or diplomatic developments that could adversely affect investments.
In addition, there is often less publicly available information about foreign
issuers than those in the U.S. Foreign companies are often not subject to
uniform accounting, auditing and financial reporting standards. Further, the
Fund may encounter difficulties in pursuing legal remedies or in obtaining
judgments in foreign courts. Additional risk factors, including use of domestic
and foreign custodian banks and depositories, are described elsewhere in the
Prospectus and in the Statement of Additional Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments by the Fund in other countries are generally greater than in the
U.S. Foreign markets, have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of the Fund to make intended security
purchases due to settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund if it had
entered into a contract to sell the security. In certain countries, there is
less government supervision and regulation of business and industry
10
<PAGE>
practices, stock exchanges, brokers, and listed companies than in the U.S. The
securities markets of many of the countries in which the Fund may invest may
also be smaller, less liquid, and subject to greater price volatility than those
in the U.S.
Because the securities owned by the Fund may be denominated in foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. The
Fund may be affected either favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations, and the Fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not freely convertible at market rates into the U.S. dollar.
Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments.
Certain countries also limit the amount of foreign capital that can be invested
in their markets and local companies, creating a "foreign premium" on capital
investments available to foreign investors such as the Fund. The Fund may pay a
"foreign premium" to establish an investment position which it cannot later
recoup because of changes in that country's foreign investment laws.
Interest Rates
The market value of debt securities that are interest-rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.
Management of the Fund
The Montgomery Funds II has a Board of Trustees (the "Board") that establishes
the Fund's policies and supervises and reviews its management. Day-to-day
operations of the Fund are administered by the officers of the Trust and by the
Manager pursuant to the terms of an investment management agreement with the
Fund.
Montgomery Asset Management, LLC is the Fund's Manager. The Manager is a
Delaware limited liability company and is registered as an investment adviser
with the SEC under the Investment Advisers Act of 1940, as amended. The Manager
and its predecessor have advised private accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG ("Commerz bank").
Commerzbank is one of the largest publicly held commercial banks in Germany and
has total assets of approximately $268 billion. Commerzbank and its affiliates
had over $479 billion in assets under management as of June 30, 1997.
Commerzbank's asset management operations involve more than 1,000 employees in
13 countries worldwide.
11
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Portfolio Managment
The Fund is managed by the Manager's Emerging Markets Team, International Team
and Growth Team.
12
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Management Fees and Other Expenses
The Manager provides the Fund with advice on buying and selling securities,
manages the Fund's investments, including the placement of orders for portfolio
transactions, furnishes the Fund with office space and certain administrative
services, and provides personnel needed by the Fund with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Fund. The Manager also compensates the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and shareholder reports for dissemination to prospective investors. As
compensation, the Fund pays the Manager a monthly management fee (accrued daily
but paid when requested by the Manager) based upon the value of its average
daily net assets, according to the following table.
- -------------------------------------------------------------------------------
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------------------------------------------
Montgomery Global Partners Fund First $250 million 1.50%
Next $250 million 1.25%
Over $500 million 1.00%
- -------------------------------------------------------------------------------
The Manager also serves as the Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of the Fund's
administrative operations. As compensation, the Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million).
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to the Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees has approved, and the Fund has entered into, a Share Marketing
Plan (the "Plan") with the Distributor, as the distribution coordinator, for the
Class B, Class C and Class D shares. Under the Plan, the Fund will pay
distribution fees to the Distributor, at an annual rate of 0.25% of the Fund's
aggregate average daily net assets attributable to its Class D shares (and at an
annual rate of 0.75% of the Fund's aggregate average daily net assets
attributable to its Class B and Class C shares) to reimburse the Distributor for
its distribution costs with respect to each such Class.
The Plan provides that the Distributor may use the distribution fees received
from the Class to pay for the distribution expenses of that Class, including,
but not limited to (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to, the Distributor or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Fund to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Fund and that Class; and (iv) costs involved obtaining whatever information,
analysis and reports with respect to marketing and promotional activities that
the Fund may, from time to time, deem advisable with respect to the distribution
of that Class. Distribution fees
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<PAGE>
are accrued daily and paid monthly, and are charged as expenses of,
respectively, the Class B, Class C and Class D shares as accrued.
In adopting the Plan, the Board determined that there was a reasonable
likelihood that the Plan would benefit the Fund and the shareholders of Class B,
Class C and Class D shares. Information with respect to distribution revenues
and expenses is presented to the Board of Trustees quarterly for its
consideration in connection with its deliberations as to the continuance of the
Plan. In its review of the Plan, the Board of Trustees is asked to take into
consideration expenses incurred in connection with the separate distribution of
the Class B, Class C and Class D shares.
The Class B, Class C and Class D shares are not obligated under the Plan to pay
any distribution expenses in excess of the distribution fee. Thus, if the Plan
were terminated or otherwise not continued, no amounts (other than current
amounts accrued but not yet paid) would be owed by the Class to the Distributor.
The distribution fees attributable to the Class B and Class C shares are
designed to permit an investor to purchase Class B and Class C shares through
broker-dealers without the assessment of a front-end sales charge and at the
same time to permit the Distributor to compensate broker-dealers on an ongoing
basis in connection with the sale of the Class B and Class C shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trust, including a majority of
the Trustees who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the Independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class
B, Class C and Class D shares.
All distribution fees paid by the Fund under the Plan will be paid in accordance
with Rule 2830 of the NASD Rules of Conduct.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses (excluding the Rule 12b-1 fee and the servicing fee)
at or below one and nine-tenths of one percent (1.90%) of the Fund's average net
assets. The Manager also may voluntarily reduce additional amounts to increase
the return to the Fund's investors. The Manager may terminate these voluntary
reductions at any time. Any reductions made by the Manager in its fees are
subject to reimbursement by the Fund within the following three years, provided
that the Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations. The Manager generally seeks reimbursement for
the oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate the Distributor
broker-dealers who distribute the Fund's shares as well as other service
providers of shareholder and administrative services. In addition, the Manager,
out of its own funds, may sponsor seminars and educational programs on the Fund
for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider sale of the Fund's shares as a factor in selecting broker-dealers for
the Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding the
Fund's policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073,
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<PAGE>
the Fund's transfer agent (the "Transfer Agent"). Morgan Stanley Trust Company
located at One Pierrepont Plaza, Brooklyn, New York 11201, serves as the Fund's
principal custodian (the "Custodian").
Distribution of Shares
Choosing a Portfolio
This prospectus offers Class A, B, C and D shares. Each Class has its own cost
structure, allowing you to choose the one that best meets your requirements.
Your financial representative can help you decide. For estimated expenses of A,
B, C and D Classes, see the Fee Table earlier in this prospectus.
Class A shares will incur an initial sales charge when they are purchased and
will bear no ongoing distribution or account maintenance fees. Class A shares
are offered to a limited group of investors and also will be issued upon
reinvestment of dividends on outstanding Class A shares. Investors who own Class
A shares of the Fund in a shareholder account will be entitled to purchase
additional Class A shares of the Fund in that account. Other eligible investors
will include certain retirement plans and participants in certain investment
programs. In addition, Class A shares of the Fund will be offered at net asset
value to the directors and employees of the Manager and to members of the Board
of Trustees of the Fund. The maximum initial sales charge will be 5.25%, which
will be reduced for purchases of $25,000 and over and waived for purchases by
certain retirement plans in connection with certain investment programs.
Purchases of $1,000,000 or more may not be subject to an initial sales charge
but instead may be subject to a CDSC if the shares are redeemed within one year
after purchase. Sales charges also are reduced under a right of accumulation
which takes into account the investor's holdings of all Classes of all mutual
funds advised by the Manager. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares".
Class B shares will not incur a sales charge when they are purchased, but they
are subject an ongoing distribution fee of 0.75% and an ongoing shareholder
servicing fee of 0.25% of the Fund's average net assets attributable to Class B
shares, and a CDSC if they are redeemed within five years of purchase.
Approximately six years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to the same
account maintenance fee of 0.25% but a reduced distribution fee of 0.25%. If
Class B shares of the Fund are exchanged for Class B shares of another mutual
fund advised by the Manager, the conversion period applicable to the Class B
shares acquired in the exchange will apply, as will the Class D account
maintenance fee of the acquired fund upon the conversion and the holding period
for the shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares will occur
at least once a month on the basis of the relative net asset values of the
shares of the two Classes on the Conversion Date (as defined below), without the
imposition of any sales load, fee or other charge. Conversion of Class B shares
to Class D shares will not be deemed a purchase or sale of the shares for
Federal income tax purposes. Shares purchased through reinvestment of dividends
and other distributions on Class B shares also will convert automatically to
Class D shares.
Class C shares do not incur a sales charge when they are purchased, but they are
subject to an ongoing distribution fee of 0.75% and an ongoing shareholder
servicing fee of 0.25% of the Fund's average net assets attributable to Class C
shares. Class C shares also are subject to a 1.0% CDSC if they are redeemed
within one year of purchase. Although Class C shares are subject to a CDSC for
only one year (as compared to five years for Class B), Class C shares have no
conversion feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C shares for
an indefinite period subject to annual approval by the Fund's Board of Trustees
and regulatory limitations.
Class D: Class D shares will incur an initial sales charge when they are
purchased and will be subject to an distribution fee of 0.25% and an ongoing
shareholder servicing fee of 0.25% of the Fund's average net assets attributable
to Class D shares. Class D shares will not be subject to any CDSC when they are
redeemed. Purchases of $1,000,000 or more may not be subject to an initial sales
charge but if the initial sales charge is waived such purchase may be subject to
a CDSC of 1.0% if the shares are redeemed within one year after purchase. The
schedule of initial sales charges and reductions for the Class D shares is the
same as the schedule for Class A shares, except that there is no waiver for
purchases by retirement plans in connection with certain investment programs.
Class D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares".
15
<PAGE>
How Sales Charges are Calculated
<TABLE>
Class A and Class D shares. Sales charges are as follows:
<CAPTION>
------------------------------------- -------------------------- -------------------------- -------------------------
YOUR INVESTMENT AS A % OF AS A % OF YOUR INVESTMENT DEALER COMMISSION AS A
OFFERING PRICE % OF OFFERING PRICE
------------------------------------- -------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
Less than $25,000 5.25% 5.54% 5.00%
----------------------------------------- -------------------------- -------------------------- -------------------------
$25,000 or more, but less than $50,000 4.75% 4.99% 4.50%
----------------------------------------- -------------------------- -------------------------- -------------------------
$50,000 or more, but less than $100,000 4.00% 4.17% 3.75%
----------------------------------------- -------------------------- -------------------------- -------------------------
$100,000 or more, but less than $250,000 3.00% 3.09% 2.75%
----------------------------------------- -------------------------- -------------------------- -------------------------
$250,000 or more but less than $1,000,000 2.00% 2.04% 1.80%
----------------------------------------- -------------------------- -------------------------- -------------------------
$1,000,000 and over 0.00%* 0.00%* 0.00%*
----------------------------------------- -------------------------- -------------------------- -------------------------
</TABLE>
Class B shares.
o Class B shares are offered at their net asset value per share, without
any initial sales charge. The Distributor pays a commission of [4%]to
financial institutions that initiate purchases.
Class C shares.
o Class C shares are offered at their net asset value per share without
any initial sales charge. The Distributor pays a [1%] commission to
financial institutions that initiate purchases.
Contingent Deferred Sales Charge
Shareholders of Class B and Class C shares may be subject to a Contingent
Deferred Sales Charge ("CDSC") upon redemption of their shares under the
following conditions:
Class B Shares.
------------------------------------- ------------------------------------
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
------------------------------------- ------------------------------------
1st year 5.00%
------------------------------------- ------------------------------------
2nd year 4.00%
------------------------------------- ------------------------------------
3rd year 3.00%
------------------------------------- ------------------------------------
4th year 2.00%
------------------------------------- ------------------------------------
5th year 1.00%
------------------------------------- ------------------------------------
After 5 years 0.00%
------------------------------------- ------------------------------------
Class B shares will be automatically converted to Class D shares after the
end of the sixth year after purchase.
Class C shares.
o Shareholders who redeem Class C shares within one full year of purchase
date may be charged a CDSC of 1% of shares redeemed.
16
<PAGE>
There is no CDSC imposed on shares acquired through reinvestment of dividends or
capital gains.
The CDSC will be imposed on the lesser of the original purchase price or the net
asset value of the redeemed shares at the time of redemption. CDSC calculations
are based on the specific shares involved, not the value of your account. To
keep your CDSC as low as possible, each time you place a request to sell shares,
we will first sell any shares in your account that represent reinvested
dividends/capital gains and then shares that satisfy the holding period. If
there are not enough of these of meet your request, we will sell your shares on
a first-in, first-out basis. Your financial institution may elect to waive some
or all of the payment thereby reducing or eliminating the otherwise applicable
CDSC.
Sales Charge Reductions and Waivers
Reducing Sales Charge on your Class A or Class D Shares. There are several ways
you can combine multiple purchases of shares of Class A or Class D shares to
take advantage of the breakpoints in the sales charge schedule. These can be
combined in any manner:
o Accumulation Privilege - lets you add the value of shares of any Class A or
Class D shares you and your immediate family already own to the amount of
your next investment for purposes of calculating sales charge.
o Letter of Intent - lets you purchase shares of any Class A or Class D
shares over a 13-month period and receive the same sales charge as if all
shares had been purchased at once.
o Combination Privilege - lets you combine Class A or Class D shares
purchases of multiple Montgomery Funds for the purpose of reducing the
sales charge.
To use: complete the appropriate section on your application, or contact your
financial representative or The Montgomery Funds to add these options to an
existing account.
CDSC Waivers. In general, the CDSC may be waived on shares you sell for the
following reasons:
o payments through certain systematic retirement plans and other employee
benefit plans
o qualifying distributions from qualified retirement plans and other employee
benefit plans
o distributions from custodial accounts under section 403(b)(7) of the
Internal Revenue Code as well as IRAs due to death, disability or
attainment of age 59-1/2
o participation in certain fee-based programs
To use: contact your financial representative or The Montgomery Funds.
Reinstatement Privilege. If you sell shares of a Fund, you may invest some or
all of the proceeds in the same Fund within 90 days without a sales charge. If
you paid a CDSC, when you sold your shares, you will be credited with the amount
of the CDSC. All accounts involved must have the same registration.
To use: contact your financial representative or The Montgomery Funds.
Net Asset Value Purchases. Class A or Class D shares may be sold at net asset
value to:
o current or retired directors, trustees, partners, officers and employees of
the Trust, the Distributor, the Manager and its shareholders, certain
family members of the above persons, and trusts or plans primarily for such
persons;
o current or retired registered representatives or full-time employees and
their spouses and minor children and plans of such persons;
o investors who exchange their shares from an unaffiliated investment company
which has a sales charge, so long as shares are purchased within 60 days of
the redemption;
17
<PAGE>
o trustees or other fiduciaries purchasing shares for certain retirement
plans of organizations with 50 or more eligible employees;
o investment advisers, financial planners and certain financial institutions
that place trades for their own accounts or the accounts of their clients
either individually or through a master account and who charge a
management, consulting or other fee for their services;
o employer-sponsored benefit plans in connection with purchases of shares of
Class A or Class D shares made as a result of participant-directed
exchanges between options in such a plan;
o 'wrap accounts' for the benefit of clients of broker-dealers, financial
institutions or financial planners having sales or service agreements with
the Distributor or another broker-dealer or financial institution with
respect to sales of Class A or Class D shares; and
o such other persons as are determined by the Board of Trustees (or by the
Distributor pursuant to guidelines established by the Board of Trustees) to
have acquired shares under circumstances not involving any sales expense to
the Trust or the Distributor.
How to Invest in the Fund
The Fund's shares are offered primarily through financial intermediaries and
financial professionals at their next-determined net asset value (plus any
applicable front-end sales charge) after receipt of an order with payment. The
Fund's shares are offered for sale by Funds Distributor, Inc., the Fund's
Distributor, 101 California Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or certain intermediates that have an agreement with the
Fund by the close of trading, generally 4:00 P.M., eastern time, on any day that
the New York Stock Exchange ("NYSE") is open, Fund shares will be purchased at
the Fund's next-determined net asset value. Orders for Fund shares received
after the Fund's cutoff time will be purchased at the next-determined net asset
value after receipt of the order.
The minimum initial investment in the Fund is $5,000 (including IRAs) and $500
for subsequent investments. The Manager or the Distributor, in its discretion,
may waive these minimums. The Fund does not accept third party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the U.S. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
Initial Investments
Minimum Initial Investment (including IRAs) for Class A, Class B, Class C and
Class D shares:.......................................................... $5,000
Initial Investments by Check
o Complete the New Account application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
Initial Investments by Wire
o Call the Transfer Agent to say that you intend to make your initial
investment by wire. Provide the Transfer Agent with your name, dollar
amount to be invested and Fund(s) in which you want to invest. They will
provide you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
18
<PAGE>
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
Name of fund: Montgomery Global Partners Fund
o Your bank may charge a fee for any wire transfers.
o The Fund and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Subsequent Investments
Minimum Subsequent Investment (including IRAs) for Class A, Class B, Class C and
Class D shares: ........................................................... $500
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and account number to
which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-3863 before the Fund
cutoff time. Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure payment is received in time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated
bank by using the bank wire information under the section titled
"Initial Investments by Wire."
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is the Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
19
<PAGE>
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your Montgomery
account application or your letter of instruction. Investments will
automatically be transferred into your Montgomery account from your
checking or savings account.
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your account application or your letter of instruction, the
20th of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for the Fund is $100 per payroll deduction
period.
o You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Fund account.
o Please call the Transfer Agent to receive instructions to establish this
service.
Telephone Transactions
You agree to reimburse the Fund for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30-days' written notice or at any time by you by written notice
to the Fund. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by the Fund. The Fund and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Telephone privileges may be revoked at any time by the Fund as to any
shareholder if the Fund believes that a shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market timing strategy.
Retirement Plans
Shares of the Fund are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. The Fund may be available for
purchase through administrators for retirement plans. Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing from their plan administrators. Plan administrators may receive
compensation from the Fund for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
20
<PAGE>
How to Redeem an Investment in the Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or other agents of the Fund. Payment of redemption proceeds is
made promptly regardless of when redemption occurs and normally within three
days after receipt of all documents in proper form, including a written
redemption order with appropriate signature guarantee. Redemption proceeds will
be mailed or wired in accordance with the shareholder's instructions. The Fund
may suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC. In the case of shares purchased by check
and redeemed shortly after the purchase, the Transfer Agent will not mail
redemption proceeds until it has been notified that the monies used for the
purchase have been collected, which may take up to 15 days from the purchase
date. Shares tendered for redemptions through brokers or dealers (other than the
Distributor) may be subject to a service charge by such brokers or dealers.
Procedures for requesting redemption are set forth below.
Redeeming by Written Instruction
o Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all account holders must sign.
o Signature guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s), your predesignated bank account
or if the dollar amount of the redemption exceeds $50,000. Signature
guarantees may be provided by an eligible guarantor institution such as a
commercial bank, a NASD member firm such as a stockbroker, a savings
association or national securities exchange. Contact the Transfer Agent for
more information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees in the Manager's discretion.
Redeeming By Telephone
o Unless you have declined telephone redemption privileges on your account
application, you may redeem shares up to $50,000 by calling the Transfer
Agent before the Fund cutoff time. This service is not available for IRA
accounts.
o If you included bank wire information on your account application or made
subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at least two business days for redemption proceeds to be
credited to your bank account. If you want to wire your redemption proceeds
to arrive at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be cancelled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Fund may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Fund will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See discussion of Fund telephone
procedures and liability under "Telephone Transactions."
21
<PAGE>
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in the Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from the Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Uncashed Distribution or Redemption Check
If you choose to receive your distribution or redemption by a check from the
Fund (instead of bank wire), you should follow-up to ensure that you have
received the distribution or redemption in a timely manner. The Fund is
responsible only for mailing the distribution or redemption checks and is not
responsible for tracking uncashed checks or determining why checks are uncashed.
If the postal or other delivery service is unable to deliver a check and the
check is returned to the Fund, the Fund will hold the check in a separate
account on your behalf for a reasonable period of time but will not invest the
money in any interest-bearing account. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, the Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
the Fund decides to make an involuntary redemption, the shareholder will first
be notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional investment to bring the
value of that account at least to the minimum investment required to open an
account before the Fund takes any action.
Exchange Privileges and Restrictions
You may exchange shares from the Montgomery Concentrated Emerging Mandate Fund
with the same registration, taxpayer identification number and address. An
exchange may result in a recognized gain or loss for income tax purposes. See
the discussion of Fund telephone procedures and limitations of liability under
"Telephone Transactions" above.
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with any applicable sales charge but no
exchange fee) after your request is received. Your request is subject to
the Funds' cutoff times.
o Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
o You may exchange for shares of a Fund only in states where that Montgomery
Fund's shares are qualified for sale and only after you have reviewed a
prospectus of that Fund.
o You may not exchange for shares of a Montgomery Fund that is not open to
new shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trust
reserves the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The
22
<PAGE>
Fund may also refuse an exchange into a fund from which you have redeemed
shares within the previous 90 days (accounts under common control and
accounts with the same taxpayer identification number will be counted
together). A shareholder's exchanges may be restricted or refused if the
Fund receives, or the Manager anticipates, simultaneous orders affecting
significant portions of the Fund's assets and, in particular, a pattern of
exchanges coinciding with a "market timing" strategy. The Trust reserves
the right to refuse exchanges by any person or group if, in the Manager's
judgment, a Fund would be unable to effectively invest the money in
accordance with its investment objective and policies, or would otherwise
be potentially adversely affected. Although the Trust attempts to provide
prior notice to affected shareholders when it is reasonable to do so, they
may impose these restrictions at any time. The exchange limit may be
modified for accounts in certain institutional retirement plans to conform
to plan exchange limits and U.S. Department of Labor regulations (for those
limits, see plan materials). The Trust reserves the right to terminate or
modify the exchange privileges of Fund shareholders in the future.
Brokers and Other Intermediaries
Investing through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of the Fund from other selected securities
brokers, dealers or through financial intermediaries such as benefit plan
administrators. Investors should contact these agents directly for appropriate
instructions, as well as information pertaining to accounts and any service or
transaction fees that may be charged by these agents. Some of these agents may
appoint sub-agents. Purchase orders through securities brokers, dealers and
other financial intermediaries are effected at the next-determined net asset
value after receipt of the order by such agent before the Fund's daily cutoff
time. To the extent that these agents perform shareholder-servicing activities
for the Fund, they may receive fees from the Fund or the Manager for such
services.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Fund by wire or telephone through
selected securities brokers or dealers. Shareholders should contact their
securities broker or dealer for appropriate instructions and for information
concerning any transaction or service fee that may be imposed by the broker or
dealer. Shareholders are entitled to the net asset value next determined after
receipt of a redemption order by such broker-dealer, provided the broker-dealer
transmits such order on a timely basis to the Transfer Agent so that it is
received before the Fund's cutoff time on a day that the Fund redeems shares.
Orders received after that time are entitled to the net asset value next
determined after receipt.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of the Fund's cutoff
time on each day that the NYSE is open for trading. Generally this is 4:00 P.M.
eastern time, or earlier when trading closes earlier. Per-share net asset value
is calculated by dividing the value of the Fund's total net assets by the total
number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board respectively, in accordance with methods that are
23
<PAGE>
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset values, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset values may not be reflected in the Fund's
calculation of net asset values unless the Manager, under supervision of the
Board, determines that a particular event would materially affect the Fund's net
asset values.
Dividends and Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends are declared daily and paid
annually, Capital gains are declared and paid in the last quarter of each year.
Additional distributions, if necessary, may be made following the Fund's fiscal
year end (June 30) in order to avoid the imposition of tax on the Fund. The
amount and frequency of Fund distributions are not guaranteed and are at the
discretion of the Board.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the New Account application, all dividends
and other distributions will be reinvested automatically in additional shares of
the Fund and credited to the shareholder's account at the closing net asset
value on the reinvestment date.
Taxation
The Fund intends to qualify and elect as soon as possible to be treated as a
regulated investment company under Subchapter M of the Code, by distributing
substantially all of its net investment income and net capital gains to its
shareholders and meeting other requirements of the Code relating to the sources
of its income and diversification of assets. Accordingly, the Fund generally
will not be liable for federal income tax or excise tax based on net income
except to the extent that its earnings are not distributed or are distributed in
a manner that does not satisfy the requirements of the Code pertaining to the
timing of distributions. If the Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation. The Fund may also
incur tax liability to the extent that it invests in "passive foreign investment
companies." See the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gains over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. Part of the distributions paid by the Fund may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gains over net short-term
capital loss from transactions of the Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Fund. Additional information on tax matters
relating to the Fund and its shareholders is included in the Statement of
Additional Information.
Tax-Exempt Investors
24
<PAGE>
The Fund may use margin leverage in connection with the purchase of securities.
Therefore, the Fund may generate "unrelated business taxable income," which
income would be taxable to tax-exempt investors. Therefore, an investment in the
Fund may not be suitable for tax-exempt investors, who are urged to consult
their own tax advisors prior to investing in the Fund.
General Information
The Trust
The Fund is a series of The Montgomery Funds II, a Delaware business trust
organized on September 10, 1993 (the "Trust"). The Trust's Agreement and
Declaration of Trust permits the Board to issue an unlimited number of full and
fractional shares of beneficial interest, $.01 par value, in any number of
series. The assets and liabilities of each series within the Trust are separate
and distinct from those of each other series.
This prospectus relates only to the Class D, Class B, Class C and Class A shares
of the Fund. The Fund has not designated other classes of shares but may in the
future designate other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting all series of the Trust jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees. Except as set forth herein, all
classes of shares issued by the Fund shall have identical voting, dividend,
liquidation and other rights, preferences, and terms and conditions. The only
differences among the various classes of shares relate solely to the following:
(a) each class may be subject to different class expenses; (b) each class may
bear a different identifying designation; (c) each class may have exclusive
voting rights with respect to matters solely affecting such class; (d) each
class may have different exchange privileges; and (e) each class may provide for
the automatic conversion of that Class Anto another class. While the Trust is
not required and does not intend to hold annual meetings of shareholders, such
meetings may be called by the Board at its discretion, or upon demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing or removing Trustees. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees pursuant to the provisions of Section 16(c) of the Investment
Company Act.
Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. Performance data may be quoted
separately for each class of shares. Total return information generally will
include the Fund's average annual compounded rate of return over the most recent
four calendar quarters and over the period from the Fund's inception of
operations. The Fund may also advertise aggregate and average total return
information over different periods of time. The Fund's average annual compounded
rate of return is determined by reference to a hypothetical $1,000 investment
that includes capital appreciation and depreciation for the stated period
according to a specific formula. Aggregate total return is calculated in a
similar manner, except that the results are not annualized. Total return figures
will reflect all recurring charges against the Fund's income.
Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return or current yield may be in any
future period.
Legal Opinion
The validity of shares offered by this prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
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Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. A confirmation statement
will be mailed to your record address each time you request a transaction except
for pre-authorized automatic investment and redemption services (quarterly). All
transactions are recorded on quarterly account statements which you will receive
at the end of each calendar quarter. Your fourth-quarter account statement will
be a year-end statement, listing all transaction activity for the entire year.
Retain this statement for your tax records.
In general, shareholders who redeemed shares from a qualifying Montgomery
account should expect to receive an Average Cost Statement in February of the
following year. Your statement will calculate your average cost using the
average cost single-category method.
Any questions should be directed to The Montgomery Funds at 800-572-FUND (3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the
Account Application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item in the Account
Application. Dividends paid to a foreign shareholder's account by the Fund may
be subject to up to 30% withholding instead of backup withholding.
A shareholder who is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, government agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesman, dealer or other
person is authorized to give any information or make any representation other
than those contained in this prospectus, the Statement of Additional
Information, or in the Fund's official sales literature.
26
<PAGE>
Glossary
below investment grade debt securities. Debt securities rated below "investment
grade."
cash equivalents. These are short-term, interest bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
The price of a convertible security is influenced by the market value of the
underlying common stock.
covered call option. A call option is "covered" if the fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option, or owns an offsetting call option.
covered put option. A put option is "covered" if the fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
depositary receipts. These include American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
other similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence ownership
of underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, currency
options, futures contracts, swaps and options on futures contracts on U.S.
government and foreign government securities and currencies.
FNMA. The Federal National Mortgage Association.
equity derivative securities. These include, among other things, options on
equity securities, warrants and future contracts on equity securities.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date. The fund generally does not enter into forward contracts with terms
greater than one year. The fund generally enters into forward contracts only
under two circumstances. First, if the fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security by entering into a forward
contract to buy the amount of a foreign currency needed to settle the
transaction. Second, if the Manager believes that the currency of a particular
foreign country will substantially rise or fall against the U.S. dollar, it may
enter into a forward contract to buy or sell the currency approximating the
value of some or all of the fund's portfolio securities denominated in such
currency. The fund will not enter into a forward contract if, as a result, it
would have more than one-third of total assets committed to such contracts
(unless it owns the currency that it is obligated to deliver or has collateral
assets sufficient to cover its obligations). Although forward contracts are used
primarily to protect the fund from adverse currency movements, they involve the
risk that currency movements will not be accurately predicted.
futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, the fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated increase
in interest rates and a corresponding decline in debt securities it owns. The
fund will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
27
<PAGE>
GNMA. The Government National Mortgage Association.
illiquid securities. The Fund treats any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit as illiquid. The Fund also treats repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on formal
markets for some period of time but for which an active informal market exists,
or securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board and guidelines adopted by
the Board, the Manager has determined to be liquid.
investment grade. Investment grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa) or in unrated debt securities deemed to be of comparable quality by
the Manager using guidelines approved by the Board of Trustees.
leverage. Some funds may use leverage in an effort to increase return. Although
leverage creates an opportunity for increased income and gain, it also creates
special risk considerations. Leveraging also creates interest expenses that can
exceed the income from the assets retained.
repurchase agreement. With a repurchase agreement, a fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the Money
Market Funds, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same security
at a specified time and price.
reverse repurchase agreement. In a reverse repurchase agreement, a fund sells to
a financial institution a security that it holds and agrees to repurchase the
same security at an agreed-upon price and date.
securities lending. A fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with collateral
assets in an amount at least equal to the current market value of the loaned
securities, plus accrued interest. There is a risk of delay in receiving
collateral or in recovering the securities loaned or even a loss of rights in
collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
warrants. Typically is a long-term option that permits the holder to buy a
specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. The Fund may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed delivery" basis. The price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but a fund will enter into
when-issued and forward commitments only with the intention of actually
receiving or delivering the securities. No income accrues on securities that
have been purchased pursuant to a forward commitment or on a when-issued basis
prior to delivery to a Fund. At the time a fund enters into a transaction on a
when-issued or forward commitment basis, it supports its obligation with
collateral assets equal to the value of the when-issued or forward commitment
securities and causes the collateral assets to be marked to market daily. There
is a risk that the securities may not be delivered and that the fund may incur a
loss.
28
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Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1 (800) 447-4210
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
29
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---------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
MONTGOMERY CONCENTRATED EMERGING MARKETS FUND
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
MONTGOMERY CONCENTRATED EMERGING MARKETS FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1997
The Montgomery Funds II (the "Trust") is an open-end management investment
company organized as a Delaware business trust with different series of shares
of beneficial interest. Montgomery Concentrated Emerging Markets Fund (the
"Fund") is a series of the Trust. The Fund is managed by Montgomery Asset
Management, LLC (the "Manager") and distributed by Funds Distributor, Inc. (the
"Distributor"). This Statement of Additional Information contains information in
addition to that set forth in the prospectus for the Fund (the "Prospectus")
dated December 31, 1997, as may be revised from time to time. The Prospectus
provides the basic information a prospective investor should know before
purchasing shares of the Fund and may be obtained without charge at the address
or telephone number provided above. This Statement of Additional Information is
not a prospectus and should be read in conjunction with the Prospectus.
TABLE OF CONTENTS
The Trust.....................................................................1
Investment Objective and Policies of the Fund.................................2
Risk Factors..................................................................8
Investment Restrictions.......................................................9
Distributions and Tax Information............................................11
Trustees and Officers........................................................16
Investment Management and Other Services.....................................19
Execution of Portfolio Transactions..........................................21
Additional Purchase and Redemption Information...............................23
Determination of Net Asset Value.............................................24
Principal Underwriter........................................................25
Performance Information......................................................26
General Information..........................................................27
Financial Statements.........................................................28
Appendix.....................................................................29
The Trust
The Trust is an open-end management investment company organized as a Delaware
business trust on September 10, 1993, and registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Trust
currently offers shares of beneficial interest, $.01 par value per share, in
various series. Each series offers several classes of shares. This Statement of
Additional Information pertains to Class A, Class B, Class C and Class D shares
of Montgomery Concentrated Emerging Markets Fund.
B-1
<PAGE>
Investment Objective and Policies of the Fund
The investment objective and policies of the Fund are described in detail in the
Prospectus. The following discussion supplements the discussion in the
Prospectus.
The Fund is a diversified series of the Trust, an open-end management investment
company offering redeemable shares of beneficial interest. The achievement of
the Fund's investment objective will depend on market conditions generally and
on the Manager's analytical and portfolio management skills.
Portfolio Securities
Depositary Receipts. The Fund may hold securities of foreign issuers in the form
of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs")
and other similar global instruments available in emerging markets, or other
securities convertible into securities of eligible issuers. These securities may
not necessarily be denominated in the same currency as the securities for which
they may be exchanged. Generally, ADRs in registered form are designed for use
in U.S. securities markets, and EDRs and other similar global instruments in
bearer form are designed for use in European securities markets. For purposes of
the Fund's investment policies, the Fund's investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. The Fund may invest up to 10% of its total assets in
securities issued by other investment companies investing in securities in which
the Fund can invest provided that such investment companies invest in portfolio
securities in a manner consistent with the Fund's investment objective and
policies. Applicable provisions of the Investment Company Act require that the
Fund limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 10% of the value of the Fund's total assets
will be invested in the aggregate in securities of investment companies as a
group; and (b) either the Fund and affiliated persons of the Fund not own
together more than 3% of the total outstanding shares of any one investment
company at the time of purchase (and that all shares of the investment company
held by the Fund in excess of 1% of the company's total outstanding shares be
deemed illiquid); or the Fund not invest more than 5% of its total assets in any
one investment company and the investment not represent more than 3% of the
total outstanding voting stock of the investment company at the time of
purchase. As a shareholder of another investment company, the Fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the advisory and other expenses that the Fund bears directly in connection
with its own operations.
U.S. Government Securities. Generally, the value of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government securities") held by the Fund will fluctuate inversely with interest
rates. U.S. Government securities in which the Fund may invest include debt
obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency or instrumentality of the U.S. Government, including the
Federal Housing Administration ("FHA"), Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Bank, Farm
Credit System Financial Assistance Corporation, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Financing Corporation, Federal Financing Bank, Federal
National Mortgage Association ("FNMA"), Maritime Administration, Tennessee
Valley Authority, Resolution Funding Corporation, Student Loan Marketing
Association and Washington Metropolitan Area Transit Authority. Direct
obligations of the U.S. Treasury include a variety of securities that differ
primarily in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it sponsors, the Fund will not invest in obligations issued by an
instrumentality of the U.S. Government unless the Manager determines that the
instrumentality's credit risk makes its securities suitable for investment by
the Fund.
Risk Factors/Special Considerations Relating to Debt Securities. The Fund may
invest in debt securities which are rated below Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation ("S&P") or
Fitch Investor Services ("Fitch"), or, if unrated, are deemed to be of
equivalent investment quality by the Manager. As an operating policy, which may
be changed by the Board of Trustees (the "Board") without shareholder approval,
the Fund will invest no more than 5% of its assets in debt securities rated
below Baa by Moody's or BBB by S&P or Fitch, or, if unrated, of equivalent
investment quality as determined by the Manager. The market value of debt
securities generally varies in response to changes
B-2
<PAGE>
in interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the Fund's net asset value.
Bonds which are rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P or Fitch are
obligations on which no interest is being paid. Bonds rated below BBB or Baa are
often referred to as "junk bonds."
Although such bonds may offer higher yields than higher rated securities, low
rated debt securities generally involve greater price volatility and risk of
principal and income, including the possibility of default by, or bankruptcy of,
the issuers of the securities. In addition, the markets in which low rated debt
securities are traded are more limited than those for higher rated securities.
The existence of limited markets for particular securities may diminish the
Fund's ability to sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in the financial markets and
could adversely affect, and cause fluctuations in, the daily net asset value of
the Fund's shares.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve its investment
objective may, to the extent it invests in low rated debt securities, be more
dependent upon such credit analysis than would be the case if the Fund were
investing in higher rated debt securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated debt securities, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a sharper decline in the prices of low rated debt securities because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Fund may incur additional expenses to
seek financial recovery. The low rated bond market is relatively new, and many
of the outstanding low rated bonds have not endured a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate risks, the Fund may
enter into forward foreign currency exchange contracts ("forward contracts") and
foreign currency futures contracts, as well as purchase put or call options on
foreign currencies, as described below. The Fund also may conduct its foreign
currency exchange transactions on a spot ( i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market.
The Fund also may purchase other types of options and futures and may, in the
future, write covered options, as described below and in the Prospectus.
Forward Contracts. The Fund may enter into forward contracts to attempt to
minimize the risk from adverse changes in the relationship between the U.S.
dollar and foreign currencies. A forward contract, which is individually
negotiated and privately traded by currency traders and their customers,
involves an obligation to purchase or sell a specific currency for an agreed
upon price at a future date.
The Fund may enter into a forward contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When the Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such currency, or when the Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.
In connection with the Fund's forward contract transactions, an amount of the
Fund's assets equal to the amount of its commitments will be held aside or
segregated to be used to pay for the commitments. Accordingly, the Fund always
will have cash, cash equivalents or liquid equity or debt securities denominated
in the appropriate currency available in an amount
B-3
<PAGE>
sufficient to cover any commitments under these contracts. Segregated assets
used to cover forward contracts will be marked to market on a daily basis. While
these contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of the Fund to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by the Fund than if it had not entered into
such contracts. The Fund generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge against movements
in interest rates, securities prices or currency exchange rates, the Fund may
purchase and sell various kinds of futures contracts and options on futures
contracts. The Fund also may enter into closing purchase and sale transactions
with respect to any such contracts and options. Futures contracts may be based
on various securities (such as U.S. Government securities), securities indices,
foreign currencies and other financial instruments and indices.
The Fund has filed a notice of eligibility for exclusion from the definition of
the term "commodity pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures markets, before engaging in
any purchases or sales of futures contracts or options on futures contracts.
Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act, the
notice of eligibility included the representation that the Fund will use futures
contracts and related options for bona fide hedging purposes within the meaning
of CFTC regulations, provided that the Fund may hold positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions if the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of the Fund's net assets (after
taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded from such 5%.
The Fund will attempt to determine whether the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Fund or which it expects
to purchase. The Fund's futures transactions generally will be entered into only
for traditional hedging purposes -- i.e., futures contracts will be sold to
protect against a decline in the price of securities or currencies and will be
purchased to protect the Fund against an increase in the price of securities it
intends to purchase (or the currencies in which they are denominated). All
futures contracts entered into by the Fund are traded on U.S. exchanges or
boards of trade licensed and regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting or "closing" purchase or sale
transactions, which may result in a profit or a loss. While the Fund's futures
contracts on securities or currencies will usually be liquidated in this manner,
the Fund may make or take delivery of the underlying securities or currencies
whenever it appears economically advantageous. A clearing corporation associated
with the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
By using futures contracts to hedge its positions, the Fund seeks to establish
more certainty than would otherwise be possible with respect to the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that the Fund proposes to acquire. For example, when interest rates
are rising or securities prices are falling, the Fund can seek, through the sale
of futures contracts, to offset a decline in the value of its current portfolio
securities. When rates are falling or prices are rising, the Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market with respect to anticipated purchases.
Similarly, the Fund can sell futures contracts on a specified currency to
protect against a decline in the value of such currency and its portfolio
securities which are denominated in such currency. The Fund can purchase futures
contracts on a foreign currency to fix the price in U.S. dollars of a security
denominated in such currency that such Fund has acquired or expects to acquire.
As part of its hedging strategy, the Fund also may enter into other types of
financial futures contracts if, in the opinion of the Manager, there is a
sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in the Fund's portfolio may be more or less volatile than prices
of such futures contracts, the Manager will attempt to estimate the extent of
this difference in volatility based on historical patterns and to compensate for
it by having that Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes
affecting that Fund's securities portfolio. When hedging of this character is
successful, any depreciation in the value of portfolio securities can be
substantially offset by appreciation in
B-4
<PAGE>
the value of the futures position. However, any unanticipated appreciation in
the value of the Fund's portfolio securities could be offset substantially by a
decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives the Fund the
right (but not the obligation), for a specified price, to sell or purchase the
underlying futures contract at any time during the option period. Purchasing an
option on a futures contract gives the Fund the benefit of the futures position
if prices move in a favorable direction, and limits its risk of loss, in the
event of an unfavorable price movement, to the loss of the premium and
transaction costs.
The Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. The Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by the Fund is potentially
unlimited.
The Fund will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended, for maintaining their qualification
as a regulated investment company for federal income tax purposes.
Options on Securities, Securities Indices and Currencies. The Fund may purchase
put and call options on securities in which they have invested, on foreign
currencies represented in their portfolios and on any securities index based in
whole or in part on securities in which the Fund may invest. The Fund also may
enter into closing sales transactions in order to realize gains or minimize
losses on options they have purchased.
The Fund normally will purchase call options in anticipation of an increase in
the market value of securities of the type in which it may invest or a positive
change in the currency in which such securities are denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified securities or a specified amount of a foreign currency at a
specified price during the option period.
The Fund may purchase and sell options that are traded on U.S. and foreign
exchanges and options traded over the counter ("OTC options") with
broker-dealers who make markets in these options. The ability to terminate OTC
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Trading in OTC options is also subject to the risk that the
other party will be unable or unwilling to close out options purchased by the
Fund.
Although the Fund will generally purchase only those options for which there
appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for a
variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Fund does not currently intend to do so, it may, in the future,
write (i.e., sell) covered put and call options on securities, securities
indices and currencies in which it may invest. A covered call option involves a
Fund's giving another party, in return for a premium, the right to buy specified
securities owned by the Fund at a specified future date and price set at the
time of the contract. A covered call option serves as a partial hedge against
the price decline of the underlying security. However, by writing a covered call
option, the Fund gives up the opportunity, while the option is in effect, to
realize gain from any price increase (above the option exercise price) in the
underlying security. In addition, the Fund's ability to sell the underlying
security is limited while the option is in effect unless the Fund effects a
closing purchase transaction.
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The Fund also may write covered put options that give the holder of the option
the right to sell the underlying security to the Fund at the stated exercise
price. The Fund will receive a premium for writing a put option but will be
obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, the Fund
will cause its custodian to segregate cash, cash equivalents, U.S. Government
securities or other liquid equity or debt securities with at least the value of
the exercise price of the put options. In segregating such assets, the custodian
either deposits such assets in a segregated account or separately identifies
such assets and renders them unavailable for investment. The Fund will not write
put options if the aggregate value of the obligations underlying the put options
exceeds 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of
the Fund's orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Fund may enter into
repurchase agreements. The Fund's repurchase agreements generally will involve a
short-term investment in a U.S. Government security or other high grade liquid
debt security, with the seller of the underlying security agreeing to repurchase
it from the Fund at a mutually agreed-upon time and price. The repurchase price
generally is higher than the purchase price, the difference being interest
income to the Fund. Alternatively, the purchase and repurchase prices may be the
same, with interest at a stated rate due to the Fund together with the
repurchase price on the date of repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the value of
the securities subject to the repurchase agreement at not less than their
repurchase price. The Manager, acting under the supervision of the Board,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Fund enters into repurchase
agreements to evaluate potential risk. All repurchase agreements will be made
pursuant to procedures adopted and regularly reviewed by the Board.
The Fund generally will enter into repurchase agreements of short maturities,
from overnight to one week, although the underlying securities will generally
have longer maturities. The Fund regards repurchase agreements with maturities
in excess of seven days as illiquid. The Fund may not invest more than 15% of
the value of its net assets in illiquid securities, including repurchase
agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is deemed to
be a collateralized loan from the Fund to the seller of the security subject to
the repurchase agreement. It is not clear whether a court would consider the
security acquired by the Fund subject to a repurchase agreement as being owned
by the Fund or as being collateral for a loan by the Fund to the seller. If
bankruptcy or insolvency proceedings are commenced with respect to the seller of
the security before its repurchase under a repurchase agreement, the Fund may
encounter delays and incur costs before being able to sell the security. Delays
may involve loss of interest or a decline in price of the security. If a court
characterizes such a transaction as a loan and the Fund has not perfected a
security interest in the security, the Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Fund, the Manager seeks to minimize
the risk of loss through repurchase agreements by analyzing the creditworthiness
of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, the Fund also runs
the risk that the seller may fail to repurchase the security. However, the Fund
always requires collateral for any repurchase agreement to which it is a party
in the form of securities acceptable to it, the market value of which is equal
to at least 100% of the amount invested by the Fund plus accrued interest, and
the Fund makes payment against such securities only upon physical delivery or
evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement at all times equals or exceeds the repurchase price
(including interest) at all times.
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The Fund may participate in one or more joint accounts with other funds of the
Trust that may invest in repurchase agreements collateralized either by (i)
obligations issued or guaranteed as to principal and interest by the U.S.
Government or by one of its agencies or instrumentalities, or (ii) privately
issued mortgage-related securities that are in turn collateralized by securities
issued by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event will have a
duration of more than seven days.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements, as set forth in the Prospectus. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of proceeds involves leverage, and the Fund will
enter into a reverse repurchase agreement for leverage purposes only when the
Manager believes that the interest income to be earned from the investment of
the proceeds would be greater than the interest expense of the transaction. The
Fund also may use the proceeds of reverse repurchase agreements to provide
liquidity to meet redemption requests when sale of the Fund's securities is
disadvantageous.
The Fund causes its custodian to segregate liquid assets, such as cash, U.S.
Government securities or other liquid equity or debt securities equal in value
to its obligations (including accrued interest) with respect to reverse
repurchase agreements. In segregating such assets, the custodian either places
such securities in a segregated account or separately identifies such assets and
renders them unavailable for investment. Such assets are marked to market daily
to ensure that full collateralization is maintained.
Lending of Portfolio Securities. Although the Fund does not currently intend to
do so, the Fund may lend its portfolio securities having a value of up to 30% of
its total assets in order to generate additional income. Such loans may be made
to broker-dealers or other financial institutions whose creditworthiness is
acceptable to the Manager. These loans would be required to be secured
continuously by collateral, including cash, cash equivalents, irrevocable
letters of credit, U.S. Government securities, or other high grade liquid debt
securities, maintained on a current basis (i.e., marked to market daily) at an
amount at least equal to 100% of the market value of the securities loaned plus
accrued interest. The Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the income earned
on the cash to the borrower or placing broker. Loans are subject to termination
at the option of the Fund or the borrower at any time. Upon such termination,
the Fund is entitled to obtain the return of the securities loaned within five
business days.
For the duration of the loan, the Fund will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned, will
receive proceeds from the investment of the collateral and will continue to
retain any voting rights with respect to the securities. As with other
extensions of credit, there are risks of delay in recovery or even losses of
rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. The Fund may purchase securities
on a "when-issued" basis and may purchase or sell securities on a "forward
commitment" or "delayed delivery" basis. The price of such securities is fixed
at the time the commitment to purchase or sell is made, but delivery and payment
for the securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by the Fund to the issuer. While the Fund
reserves the right to sell when-issued or delayed delivery securities prior to
the settlement date, the Fund intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes a commitment to purchase a
security on a when-issued or delayed delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of the when-issued securities may be more or less than
the settlement price. The Fund does not believe that its net asset value will be
adversely affected by its purchase of securities on a when-issued or delayed
delivery basis. The Fund causes its custodian to segregate cash, U.S. Government
securities or other liquid equity or debt securities with a value equal in value
to commitments for when-issued or delayed delivery securities. The segregated
securities either will mature or, if necessary, be sold on or before the
settlement date. To the extent that assets of the Fund are held in cash pending
the settlement of a purchase of securities, the Fund will earn no income on
these assets.
Illiquid Securities. The Fund may invest up to 15% of its net assets in illiquid
securities. The term "illiquid securities" for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the
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amount at which a Fund has valued the securities and includes, among others,
repurchase agreements maturing in more than seven days, certain restricted
securities and securities that are otherwise not freely transferable. Illiquid
securities also include shares of an investment company held by the Fund in
excess of 1% of the total outstanding shares of that investment company.
Restricted securities may be sold only in privately negotiated transactions or
in public offerings with respect to which a registration statement is in effect
under the Securities Act of 1933, as amended ("1933 Act"). Illiquid securities
acquired by the Fund may include those that are subject to restrictions on
transferability contained in the securities laws of other countries. Securities
that are freely marketable in the country where they are principally traded, but
that would not be freely marketable in the United States, will not be considered
illiquid. Where registration is required, the Fund may be obligated to pay all
or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities sold
pursuant to Rule 144A in many cases provide both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities held by the
Fund, however, could affect adversely the marketability of such portfolio
securities, and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
The Board has delegated the function of making day-to-day determinations of
liquidity to the Manager pursuant to guidelines approved by the Board. The
Manager takes into account a number of factors in reaching liquidity decisions,
including but not limited to (i) the frequency of trades for the security, (ii)
the number of dealers that quote prices for the security, (iii) the number of
dealers that have undertaken to make a market in the security, (iv) the number
of other potential purchasers, and (v) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how bids are
solicited and the mechanics of transfer). The Manager monitors the liquidity of
restricted securities in the Fund's portfolio and reports periodically on such
decisions to the Board.
Risk Factors
Foreign Securities. Investors in the Fund should consider carefully the
substantial risks involved in securities of companies located or doing business
in, and governments of, foreign nations, which are in addition to the usual
risks inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published regarding companies in the U.S. Foreign companies are often not
subject to uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements often may not be comparable to those
applicable to U.S. companies. Many foreign markets have substantially less
volume than either the established domestic securities exchanges or the OTC
markets. Securities of some foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Commission rates in foreign
countries, which may be fixed rather than subject to negotiation as in the U.S.,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the U.S., and capital requirements for brokerage firms are generally
lower. Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.
Emerging markets Countries. The Fund invests in securities of companies
domiciled in, and in markets of, so-called "emerging markets countries." These
investments may be subject to potentially higher risks than investments in
developed countries. These risks include (i) volatile social, political and
economic conditions; (ii) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which result
in a lack of liquidity and in greater price
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<PAGE>
volatility; (iii) the existence of national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain emerging markets countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in certain emerging markets countries may be
slowed or reversed by unanticipated political or social events in such
countries.
Exchange Rates and Policies. The Fund endeavors to buy and sell foreign
currencies on favorable terms. Some price spreads on currency exchange (to cover
service charges) may be incurred, particularly when the Fund change investments
from one country to another or when proceeds from the sale of shares in U.S.
dollars are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from repatriating
invested capital and dividends, withhold portions of interest and dividends at
the source, or impose other taxes, with respect to the Fund's investments in
securities of issuers of that country. There also is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
The Fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, exchange
control regulations and indigenous economic and political developments.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions that would affect the
liquidity of the Fund's assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
attendant to holding portfolio securities in domestic and foreign securities
depositories (see "Investment Management and Other Services").
Hedging Transactions. While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while the
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for the Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and the Fund may be exposed to risk of financial loss.
Perfect correlation between the Fund's hedging positions and portfolio positions
may be difficult to achieve because hedging instruments in many foreign
countries are not yet available. In addition, it is not possible to hedge fully
against currency fluctuations affecting the value of securities denominated in
foreign currencies because the value of such securities is likely to fluctuate
as a result of independent factors not related to currency fluctuations.
Investment Restrictions
The following policies and investment restrictions have been adopted by the Fund
and (unless otherwise noted) are fundamental and cannot be changed without the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act. The Fund may not:
1. With respect to 75% of its total assets, invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such
investment more than 5% of the total assets of the Fund would be
invested in such issuer. There are no limitations with respect to the
remaining 25% of its total assets, except to the extent other
investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies,
(b) through the lending of up to 30% of its portfolio securities as
described above and in its Prospectus, or (c) to the extent the entry
into a repurchase agreement is deemed to be a loan.
3. (a) Borrow money, except for temporary or emergency purposes from
a bank, or pursuant to reverse repurchase agreements, and then
not in excess of one-third of the value of its total assets
(at the lower of cost or fair market value). Any such
borrowing will be made only if immediately thereafter there is
an asset coverage of
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at least 300% of all borrowings, and no additional investments
may be made while any such borrowings are in excess of 10% of
total assets.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other
hedging transactions.
4. Except as required in connection with permissible hedging activities,
purchase securities on margin or underwrite securities. (This does not
preclude the Fund from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities.)
5. Buy or sell real estate (including interests in real estate limited
partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts;
however, the Fund, to the extent not otherwise prohibited in the
Prospectus or this Statement of Additional Information, may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein, including
real estate investment trusts, and may purchase or sell currencies
(including forward currency exchange contracts), futures contracts and
related options generally as described in the Prospectus and Statement
of Additional Information. As an operating policy which may be changed
without shareholder approval, the Fund may invest in real estate
investment trusts only up to 10% of its total assets.
6. Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in the
Prospectus or this Statement of Additional Information, or as such
securities may be acquired as part of a merger, consolidation or
acquisition of assets.
7. Invest, in the aggregate, more than 15% of its net assets in illiquid
securities, including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A-eligible restricted securities),
securities which are not otherwise readily marketable, repurchase
agreements that mature in more than seven days and over-the-counter
options (and securities underlying such options) purchased by a Fund.
(This is an operating policy which may be changed without shareholder
approval consistent with the Investment Company Act and changes in
relevant SEC interpretations.)
8. Invest in any issuer for purposes of exercising control or management
of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company
Act.)
9. Invest more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry. (This does not
apply to investment in the securities of the U.S. Government, its
agencies or instrumentalities.) For purposes of this restriction, the
Fund generally relies on the U.S. Office of Management and Budget's
Standard Industrial Classifications.
10. Issue senior securities, as defined in the Investment Company Act,
except that this restriction shall not be deemed to prohibit the Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
11. Except as described in the Prospectus and this Statement of Additional
Information, acquire or dispose of put, call, straddle or spread
options and subject to the following conditions:
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which are held
at any time do not exceed 5% of the Fund's total assets.
12. Except as and unless described in the Prospectus and this Statement of
Additional Information, engage in short sales of securities. (This is
an operating policy which may be changed without shareholder approval,
consistent with applicable regulations.)
13. Invest in warrants, valued at the lower of cost or market, in excess of
5% of the value of the Fund's net assets. Warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
(This is an operating policy which may be changed without shareholder
approval.)
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14. Purchase more than 10% of the outstanding voting securities of any one
issuer. (This is an operating policy which may be changed without
shareholder approval.)
15. Invest in commodities, except for futures contracts or options on
futures contracts if, as a result thereof, more than 5% of the Fund's
total assets (taken at market value at the time of entering into the
contract) would be committed to initial deposits and premiums on open
futures contracts and options on such contracts.
To the extent these restrictions reflect matters of operating policy which may
be changed without shareholder vote, these restrictions may be amended upon
approval by the Board and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
Purchase Of Shares
The Fund issues four classes of shares: shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share represents an
identical interest in the investment portfolio of the Fund, and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing distribution fees. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which distribution fees are paid.
The Fund has entered into separate distribution agreements with the Distributor
in connection with the subscription and continuous offering of each class of
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs.
Initial sales charge alternatives--Class A and Class D shares
The term "purchase", as used in the Prospectus and this Statement of Additional
Information in connection with an investment in Class A and Class D shares of
the Fund, refers to a single purchase by an individual, or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or single
fiduciary account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company", as that term is defined in
the Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
Reduced initial sales charges
Right of Accumulation. Reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase shares of
the Fund subject to an initial sales charge at the offering price applicable to
the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of other eligible mutual funds in The Montgomery Focus Funds Group. For
any such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended
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or terminated at any time. Shares held in the name of a nominee or custodian
under pension, profit-sharing, or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating more than $25,000 of Class A or Class D shares of the Fund and of
other eligible mutual funds in The Montgomery Focus Funds made within a 13-month
period starting with the first purchase pursuant to a Letter of Intention in the
form provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at DST Systems, Inc., the Fund's
transfer agent (the "Transfer Agent"). The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of eligible Montgomery Focus Funds mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intention (minimum of $25,001), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter otherwise would be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge which would be applicable to a single purchase equal to
the total dollar value of the Class A or Class D shares then being purchased
under such Letter, but there will be no retroactive reduction of the sales
charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser prior
to termination or completion of the Letter of Intention will be deducted from
the total purchases made under such Letter.
Purchase Privilege of Certain Persons. The following individuals and groups may
purchase Class A shares of the Fund at net asset value: current or retired
directors, trustees, partners, members, officers and employees of the Trust, the
Distributor, the Manager and its shareholders, certain family members of the
above persons, and trusts or plans primarily for such persons; current or
retired registered representatives or full-time employees and their spouses and
minor children and plans of such persons; investors who exchange their shares
from an unaffiliated investment company which has a sales charge, so long as
shares are purchased within 60 days of the redemption; trustees or other
fiduciaries purchasing shares for certain retirement plans of organizations with
50 or more eligible employees; investment advisers, financial planners and
certain financial institutions that place trades for their own accounts or the
accounts of their clients either individually or through a master account and
who charge a management, consulting or other fee for their services;
employer-sponsored benefit plans in connection with purchases of shares of Class
A or Class D shares made as a result of participant-directed exchanges between
options in such a plan; 'wrap accounts' for the benefit of clients of
broker-dealers, financial institutions or financial planners having sales or
service agreements with the Distributor or another broker-dealer or financial
institution with respect to sales of Class A or Class D shares; and such other
persons as are determined by the Board (or by the Distributor pursuant to
guidelines established by the Board) to have acquired shares under circumstances
not involving any sales expense to the Trust or the Distributor.
Acquisition of Certain Investment Companies. The public offering price of Class
D shares may be reduced to the net asset value per Class D share in connection
with the acquisition of the assets of or merger or consolidation with a public
or private investment company. The value of the assets or company acquired in a
tax-free transaction may be adjusted in appropriate cases to reduce possible
adverse tax consequences to the Fund which might result from an acquisition of
assets having net unrealized appreciation which is disproportionately higher at
the time of acquisition than the realized or unrealized appreciation of the
Fund. The issuance of Class D shares for consideration other than cash is
limited to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities at all
times shall remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to transfer
either by law or liquidity of market (except that the Fund may
B-12
<PAGE>
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies of the Fund"
herein).
Reductions in or exemptions from the imposition of a sales load are due to the
nature of the investors and/or the reduced sales efforts that will be needed in
obtaining such investments.
Employer-sponsored retirement or savings plans and certain other arrangements
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments.
Certain other plans may purchase Class B shares with a waiver of the CDSC upon
redemption, based on similar criteria. Such Class B shares will convert into
Class D shares approximately six years after the plan purchases the first share
of any Montgomery Funds mutual fund. Minimum purchase requirements may be waived
or varied for such plans. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other arrangements
are available from The Montgomery Funds at (800) 572-3863.
Deferred sales charges--Class B and Class C shares
As discussed in the Prospectus, while Class B shares redeemed within five years
of purchase are subject to a CDSC under most circumstances, the charge is waived
on redemptions of Class B shares in connection with certain post-retirement
withdrawals from an Individual Retirement Account ("IRA") or other retirement
plan or following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a tax-free distribution following retirement under a
tax-deferred retirement plan or attaining age 59-1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided that the
redemption is requested within one year of the death or initial determination of
disability.
Distributions and Tax Information
Distributions. The Fund will receive income in the form of dividends and
interest earned on its investments in securities. This income, less the expenses
incurred in its operations, is the Fund's net investment income, substantially
all of which will be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the amount
of net investment income received by the Fund from its portfolio holdings, is
not guaranteed and is subject to the discretion of the Board. The Fund does not
pay "interest" or guarantee any fixed rate of return on an investment in its
shares.
The Fund also may derive capital gains or losses in connection with sales or
other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders.
Any dividend or distribution paid by the Fund reduces the Fund's net asset value
per share on the date paid by the amount of the dividend or distribution per
share. Accordingly, a dividend or distribution paid shortly after a purchase of
shares by a shareholder would represent, in substance, a partial return of
capital (to the extent it is paid on the shares so purchased), even though it
would be subject to income taxes.
B-13
<PAGE>
Dividends and other distributions will be made in the form of additional shares
of the Fund unless the shareholder has otherwise indicated. Investors have the
right to change their elections with respect to the reinvestment of dividends
and distributions by notifying the Transfer Agent in writing, but any such
change will be effective only as to dividends and other distributions for which
the record date is seven or more business days after the Transfer Agent has
received the written request.
Tax Information. The Fund intends to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. The Fund's policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes based on net income. However, the
Board may elect to pay such excise taxes if it determines that payment is, under
the circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains by the
Fund will be taxable to shareholders whether made in cash or reinvested by the
Fund in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from the eight prior taxable years will
be applied against capital gains. Shareholders receiving distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so received equal to the net asset value of a share of the Fund on
the reinvestment date. Fund distributions also will be included in individual
and corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Fund or the securities dealer effecting a redemption of the Fund's shares by
a shareholder will be required to file information reports with the Internal
Revenue Service ("IRS") with respect to distributions and payments made to the
shareholder. In addition, the Fund will be required to withhold federal income
tax at the rate of 31% on taxable dividends, redemptions and other payments made
to accounts of individual or other non-exempt shareholders who have not
furnished their correct taxpayer identification numbers and certain required
certifications on the Account Application Form or with respect to which the Fund
or the securities dealer has been notified by the IRS that the number furnished
is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions, as stated
in the Prospectus. In order to avoid the payment of any federal excise tax based
on net income, the Fund must declare on or before December 31 of each year, and
pay on or before January 31 of the following year, distributions at least equal
to 98% of its ordinary income for that calendar year and at least 98% of the
excess of any capital gains over any capital losses realized in the one-year
period ending October 31 of that year, together with any undistributed amounts
of ordinary income and capital gains (in excess of capital losses) from the
previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To the
extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of the Fund at the end of its
fiscal year is invested in stock or securities of foreign corporations, the Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by the
B-14
<PAGE>
Fund. If this election is made, shareholders will be (i) required to include in
their gross income their pro rata share of the Fund's foreign source income
(including any foreign income taxes paid by the Fund), and (ii) entitled either
to deduct their share of such foreign taxes in computing their taxable income or
to claim a credit for such taxes against their U.S. income tax, subject to
certain limitations under the Code, including certain holding period
requirements. In this case, shareholders will be informed in writing by the Fund
at the end of each calendar year regarding the availability of any credits on
and the amount of foreign source income (including or excluding foreign income
taxes paid by the Fund) to be included in their income tax returns. If not more
than 50% in value of the Fund's total assets at the end of its fiscal year is
invested in stock or securities of foreign corporations, the Fund will not be
entitled under the Code to pass through to its shareholders their pro rata share
of the foreign taxes paid by the Fund. In this case, these taxes will be taken
as a deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. The Fund may invest
up to 10% of its total assets in the stock of foreign investment companies that
may be treated as "passive foreign investment companies" ("PFICs") under the
Code. Certain other foreign corporations, not operated as investment companies,
may nevertheless satisfy the PFIC definition. A portion of the income and gains
that the Fund derives from PFIC stock may be subject to a non-deductible federal
income tax at the Fund level. In some cases, the Fund may be able to avoid this
tax by electing to be taxed currently on its share of the PFIC's income, whether
or not such income is actually distributed by the PFIC. The Fund will endeavor
to limit its exposure to the PFIC tax by investing in PFICs only where the
election to be taxed currently will be made. Because it is not always possible
to identify a foreign issuer as a PFIC in advance of making the investment, the
Fund may incur the PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into futures contracts
and forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by the Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when the Fund purchases an option, the premium paid by
the Fund is recorded as an asset and is subsequently adjusted to the current
market value of the option. Any gain or loss realized by the Fund upon the
expiration or sale of such options held by the Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held by the Fund that
substantially diminishes the Fund's risk of loss from any other position held by
the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are subject to
Section 1256 of the Code ("Section 1256 Contracts") and that are held by the
Fund at the end of its taxable year generally will be required to be "marked to
market" for federal income tax purposes, that is, deemed to have been sold at
market value. Sixty percent of any net gain or loss recognized on these deemed
sales and 60% of any net gain or loss realized from any actual sales of Section
1256 Contracts will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain foreign
currency transactions that may affect the amount, timing and character of
income, gain or loss recognized by the Fund. Under these rules, foreign exchange
gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of the Fund's
gain or loss on the sale or other disposition of shares of a foreign corporation
may, because of changes in foreign currency exchange rates, be treated as
ordinary income or loss under Section 988 of the Code rather than as capital
gain or loss.
B-15
<PAGE>
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the fund and the purchase price of the Fund's shares
acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must generally
"mark to market" at the end of its taxable year all securities which it owns.
The resulting gain or loss is treated as ordinary (and not capital) gain or
loss, except to the extent allocable to periods during which the dealer held the
security for investment. The "mark to market" rules do not apply, however, to a
security held for investment which is clearly identified in the dealer's records
as being held for investment before the end of the day in which the security was
acquired. The IRS has issued guidance under Section 475 that provides that, for
example, a bank that regularly originates and sells loans is a dealer in
securities, and subject to the "mark to market" rules. Shares of the Fund held
by a dealer in securities will be subject to the "mark to market" rules unless
they are held by the dealer for investment and the dealer property identifies
the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in gains or losses
for tax purposes to the extent of the difference between the proceeds and the
shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income taxes,
and the treatment thereof may differ from the federal income tax treatment.
Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Fund. The law firm of Paul, Hastings, Janofsky & Walker
LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign
persons are subject to different tax rules, and may be subject to withholding of
up to 30% on certain payments received from the Fund. Shareholders are advised
to consult with their own tax advisers concerning the application of foreign,
federal, state and local taxes to an investment in the Fund.
Trustees and Officers
The Trustees of the Trust are responsible for the overall management of the
Fund, including general supervision and review of its investment activities. The
officers (the Trust, as well as two an affiliated Trusts, The Montgomery Funds
and The Montgomery Funds III, have the same officers), who administer the Funds'
daily operations, are appointed by the Boards of Trustees. The current Trustees
and officers of the Trusts performing a policy-making function and their
affiliations and principal occupations for the past five years are set forth
below:
Richard W. Ingram, President and Treasurer (Age 42)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Ingram is the
Executive Vice President and Director of Client Services and Treasury
Administration of FDI; Senior Vice President of Premier Mutual Fund Services,
Inc., an affiliate of FDI ("Premier Mutual") and an officer of certain
investment companies advised or administered by JP Morgan ("Morgan"), Dreyfus
Corporation ("Dreyfus"), Waterhouse Asset Management, Inc. ("Waterhouse"), RCM
Capital Management LLC ("RCM") and Harris Trust and Savings Bank ("Harris") or
their respective affiliates. Prior to April 1997, Mr. Ingram was Senior Vice
President and Director of Client Services and Treasury Administration of FDI.
From March 1994 to November 1995, Mr. Ingram was Vice President and Division
Manager of First Data Investor Services Group, Inc. From 1989 to 1994, Mr.
Ingram was Vice President, Assistant Treasurer and Tax Director - Mutual Funds
of The Boston Company, Inc.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 30)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
("TBCA").
Elizabeth A. Keeley, Vice President and Assistant Secretary (Age 28)
B-16
<PAGE>
200 Park Avenue, New York, New York 10166. Ms. Keeley is the Vice President and
Senior Counsel of FDI and Premier Mutual, and an officer of certain investment
companies advised or administered by Morgan, Dreyfus, RCM, Waterhouse and Harris
or their respective affiliates. Prior to August 1996, Ms. Keeley was Assistant
Vice President and Counsel of FDI and premier Mutual. Prior to September 1995,
Ms. Keeley was enrolled at Fordham University School of Law and received her
J.D. in May 1995. Prior to September 1995, Ms. Keeley was an Assistant at the
National Association for Public Interest Law.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 32)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
John E. Pelletier, Vice President and Secretary (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 0209. Mr. Pelletier is the
Senior Vice President, General Counsel, Secretary and Clerk of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From February 1992 to April 1994, Mr. Pelletier served as Counsel for TBCA. From
August 1990 to February 1992, Mr. Pelletier was employed as an Associate at
Ropes & Gray (a Boston law firm).
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 28)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (Age 35)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior
B-17
<PAGE>
Vice President, Treasurer and Chief Financial Officer, Chief Administrative
Officer and Director of FDI. From July 1988 to November 1993, Mr. Tower was
Financial Manager of The Boston Company, Inc.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner off Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
and executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (Age 53)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 48)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Board
of Schools of the Sacred Heart, and is a member of the Archdiocese of San
Francisco Finance Council, where she chairs the Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (Age 56).*
101 California Street, San Francisco, California 94111. Mr. Doyle has been the
Chairman and a Director of Montgomery Asset Management, Inc., the general
partner of the Manager, and Chairman of the Manager since April 1990. Mr. Doyle
is a managing director of the investment banking firm of Montgomery Securities,
the Fund's former Distributor, and has been employed by Montgomery Securities
since October 1983.
The officers of the Trusts, and the Trustees who are considered "interested
persons" of the Trusts, receive no compensation directly from the Trusts for
performing the duties of their offices. However, those officers and Trustees who
are officers or partners of the Manager or the Distributor may receive
remuneration indirectly because the Manager will receive a management fee from
the Funds and Funds Distributor, Inc. will receive commissions for executing
portfolio transactions for the Funds. The Trustees who are not affiliated with
the Manager or the Distributor receive an annual retainer and fees and expenses
for each regular Board meeting attended. The aggregate compensation paid by each
Trust to each of the Trustees during the fiscal year ended June 30, 1997, and
the aggregate compensation paid to each of the Trustees during the fiscal year
ended June 30, 1997 by all of the registered investment companies to which the
Manager provides investment advisory services, are set forth below.
The officers of the Trust, and the Trustees who are considered "interested
persons" of the Trust, receive no compensation directly from the Trust for
performing the duties of their offices. However, those officers and Trustees who
are officers or partners of the may receive remuneration indirectly because the
Manager will receive a management fee from the Funds and Funds Distributor,
Inc., will receive commissions for executing portfolio transactions for the
Funds. The Trustees who are not affiliated with the Manager or the Distributor
receive an annual retainer and fees and expenses for each regular Board meeting
attended. The aggregate compensation paid by the Trust to each of the Trustees
during the fiscal year ended June 30, 1997, and the aggregate compensation paid
to each of the Trustees during the fiscal year ended June 30, 1997 by all of the
registered investment companies to which the Manager provides investment
advisory services, are set forth below.
- -------------------------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Name of Trustee Aggregate Compensation from Pension or Retirement Total Compensation From the
the Trust Benefits Accrued as Part of Trust and Fund Complex
Fund Expenses* (2 additional Trusts)
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
John A. Farnsworth $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Andrew Cox $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Cecilia H. Herbert $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
Each of the above persons serves in the same capacity for The Montgomery Funds
and The Montgomery Funds III, investment companies registered under the
Investment Company Act, with separate series of funds managed by the Manager.
Investment Management and Other Services
Investment Management Services. As stated in the Prospectus, investment
management services are provided to the Fund by Montgomery Asset Management,
LLC, the Manager, pursuant to an Investment Management Agreement
[_______________] (the "Agreement"). The Agreement is in effect with respect to
the Fund for two years after the Fund's inclusion in the Trust's Agreement (on
or around the beginning of public operations) and shall continue in effect
thereafter for periods not exceeding one year so long as such continuation is
approved at least annually by (i) the Board or the vote of a majority of the
outstanding shares of the Fund, and (ii) a majority of the Trustees who are not
interested persons of any party to the Agreement, in each case by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Agreement may be terminated at any time, without penalty, by the Fund or the
Manager upon 60 days' written notice, and is automatically terminated in the
event of its assignment as defined in the Investment Company Act.
For services performed under the Agreement, the Fund pays the Manager a monthly
management fee (accrued daily but paid when requested by the Manager) based upon
the average daily net assets of the Fund, at the annual rate of
one-hundred-twenty-five one-hundredths of one percent (1.25%) of the first $250
million in average daily net assets and one percent (1.00%) of average daily
assets over $250 million.
As noted in the Prospectus, the Manager has agreed to reduce some or all of its
management fee if necessary to keep total operating expenses (excluding any Rule
12b-1 distribution fees and servicing fees), expressed on an annualized basis,
at or below one and nine-tenths of one percent (1.90%) of the Fund's average net
assets. The Manager also may voluntarily reduce additional amounts to increase
the return to the Fund's investors. Any reductions made by the Manager in its
fees are subject to reimbursement by the Fund within the following three years
provided the Fund is able to effect such reimbursement and remain in compliance
with the foregoing expense limitation. The Manager generally seeks reimbursement
for the oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year.
Operating expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions, if
any, expenses incurred in connection with any merger or reorganization, any
extraordinary expenses such as litigation, and such other expenses as may be
deemed excludable with the prior written approval of any state securities
commission imposing an expense limitation. The Manager may also at its
discretion from time to time pay for other Fund expenses from its own funds or
reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the Board at a duly
called meeting. In considering the Agreement, the Trustees specifically
considered and approved the provision which permits the Manager to seek
reimbursement of any reduction made to its management fee within the three-year
period following such reduction subject to the Fund's ability to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Trustees also considered that any such management fee reimbursement will be
accounted for on the financial statements of the Fund as a contingent liability
of the Fund and will appear as a footnote to the Fund's financial statements
until such time as it appears that the Fund will be able to effect such
reimbursement. At such time as it appears probable that the Fund is able to
effect such reimbursement, the amount of reimbursement that the Fund is able to
effect will be accrued as an expense of the Fund for that current period.
The Manager also may act as an investment adviser or administrator to other
persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trust and who are also affiliated persons of the
Manager.
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The use of the name "Montgomery" by the Trust and by the Fund is pursuant to the
consent of the Manager, which may be withdrawn if the Manager ceases to be the
Manager of the Fund.
Share Marketing Plan. The Trust has adopted a Share Marketing Plan (or Rule
12b-1 Plan) (the "12b-1 Plan") with respect to the Fund pursuant to Rule 12b-1
under the Investment Company Act. The Manager serves as the distribution
coordinator under the 12b-1 Plan and, as such, receives any fees paid by the
Fund pursuant to the 12b-1 Plan.
The Board, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (the
"Independent Trustees"), at their regular quarterly meeting, adopted the 12b-1
Plan for the Class B, Class C and Class D shares of the Fund. The initial
shareholders of the Class B, Class C and Class D shares of the Fund approved the
12b-1 Plan covering each Class prior to offering those Classes to the public.
Class A shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, the Fund pays distribution fees to the Manager at an
annual rate of 0.75% of the Fund's aggregate average daily net assets
attributable to its Class B and Class C shares and at an annual rate of 0.25% of
the Fund's aggregate average daily net assets attributable to its Class D shares
to reimburse the Manager for its expenses in connection with the promotion and
distribution of those Classes. The 12b-1 Plan provides that the Manager may use
the distribution fees received from the Class of the Fund covered by the 12b-1
Plan only to pay for the distribution expenses of that Class. Distribution fees
are accrued daily and paid monthly, and are charged as expenses of the Class B,
Class C and Class D shares as accrued. Class B, Class C and Class D shares are
not obligated under the 12b-1 Plan to pay any distribution expense in excess of
the distribution fee. Thus, if the 12b-1 Plan were terminated or otherwise not
continued, no amounts (other than current amounts accrued but not yet paid)
would be owed by the Class to the Manager.
The 12b-1 Plan provides that it shall continue in effect from year to year
provided that a majority of the Board, including a majority of the Independent
Trustees, vote annually to continue the 12b-1 Plan. The 12b-1 Plan (and any
distribution agreement between the Fund, the Distributor or the Manager and a
selling agent with respect to the Class B, Class C or Class D shares) may be
terminated without penalty upon at least 60-days' notice by the Distributor or
the Manager, or by the Fund by vote of a majority of the Independent Trustees,
or by vote of a majority of the outstanding shares (as defined in the Investment
Company Act) of the Class to which the 12b-1 Plan applies.
All distribution fees paid by the Fund under the 12b-1 Plan will be paid in
accordance with Rule 2830 of the NASD Rules of Conduct, as such Rule may change
from time to time. Pursuant to the 12b-1 Plan, the Board will review at least
quarterly a written report of the distribution expenses incurred by the Manager
on behalf of the Class B and Class C shares of the Fund. In addition, as long as
the 12b-1 Plan remains in effect, the selection and nomination of Trustees who
are not interested persons (as defined in the Investment Company Act) of the
Trust shall be made by the Trustees then in office who are not interested
persons of the Trust.
Shareholder Services Plan. The Trust has adopted a Shareholder Services Plan
(the "Services Plan") with respect to the Fund. The Manager (or its affiliate)
serves as the service provider under the Services Plan and, as such, receives
any fees paid by the Fund pursuant to the Services Plan. The Trust has not yet
implemented the Services Plan for the Fund and has not set a date for
implementation. Affected shareholders will be notified at least 60 days before
implementation of the Services Plan.
The Board, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Services Plan or in any agreement related to the Services Plan
(the "Independent Trustees"), at their regular quarterly meeting, adopted the
Services Plan for the Class B, Class C and Class D shares of the Fund. The
initial shareholder of the Class B, Class C and Class D shares of the Fund
approved the Services Plan covering each Class prior to offering those Classes
to the public. Class A shares are not covered by the Services Plan.
Under the Services Plan, when implemented, Class B, Class C and Class D shares
of the Fund will pay a continuing service fee to the Manager, the Distributor or
other service providers, in an amount, computed and prorated on a daily basis,
equal to 0.25% per annum of the average daily net assets of Class B, Class C and
Class D shares of the Fund. Such amounts are compensation for providing certain
services to clients owning shares of Class B, Class C or Class D of the Fund,
including personal services such as processing purchase and redemption
transactions, assisting in change of address requests and similar administrative
details, and providing other information and assistance with respect to the
Fund, including responding to shareholder inquiries.
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The Distributor. The Distributor may provide certain administrative services to
the Fund on behalf of the Manager. The Distributor will also perform investment
banking, investment advisory and brokerage services for persons other than the
Fund, including issuers of securities in which the Fund may invest. These
activities from time to time may result in a conflict of interests of the
Distributor with those of the Fund, and may restrict the ability of the
Distributor to provide services to the Fund.
The Custodian. Morgan Stanley Trust Company serves as principal Custodian of the
Fund's assets, which are maintained at the Custodian's principal office and at
the offices of its branches and agencies throughout the world. The Custodian has
entered into agreements with foreign sub-custodians approved by the Trustees
pursuant to Rule 17f-5 under the Investment Company Act. The Custodian, its
branches and sub-custodians generally hold certificates for the securities in
their custody, but may, in certain cases, have book records with domestic and
foreign securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities. Compensation for the services
of the Custodian is based on a schedule of charges agreed on from time to time.
Execution of Portfolio Transactions
In all purchases and sales of securities for the Fund, the primary consideration
is to obtain the most favorable price and execution available. Pursuant to the
Agreement, the Manager determines which securities are to be purchased and sold
by the Fund and which broker-dealers are eligible to execute the Fund's
portfolio transactions, subject to the instructions of, and review by, the Fund
and the Board. Purchases and sales of securities within the U.S. other than on a
securities exchange will generally be executed directly with a "market-maker"
unless, in the opinion of the Manager or the Fund, a better price and execution
can otherwise be obtained by using a broker for the transaction.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the
over-the-counter markets. A Fund purchasing ADRs and EDRs may purchase those
listed on stock exchanges, or traded in the over-the-counter markets in the U.S.
or Europe, as the case may be. ADRs, like other securities traded in the U.S.,
will be subject to negotiated commission rates. The foreign and domestic debt
securities and money market instruments in which the Fund may invest may be
traded in the over-the-counter markets.
Purchases of portfolio securities for the Fund also may be made directly from
issuers or from underwriters. Where possible, purchase and sale transactions
will be effected through dealers (including banks) which specialize in the types
of securities which the Fund will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principals for
their own account. Purchases from underwriters will include a concession paid by
the issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
In placing portfolio transactions, the Manager will use its best efforts to
choose a broker-dealer capable of providing the services necessary generally to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the firm's ability to execute trades in a specific market required by
the Fund, such as in an emerging market, the size of the order, the difficulty
of execution, the operational facilities of the firm involved, the firm's risk
in positioning a block of securities, and other factors.
Provided the Trust's officers are satisfied that the Fund is receiving the most
favorable price and execution available, the Manager may also consider the sale
of the Fund's shares as a factor in the selection of broker-dealers to execute
its portfolio transactions. The placement of portfolio transactions with
broker-dealers who sell shares of the Fund is subject to rules adopted by the
National Association of Securities Dealers, Inc. ("NASD").
While the Fund's general policy is to seek first to obtain the most favorable
price and execution available, in selecting a broker-dealer to execute portfolio
transactions, weight may also be given to the ability of a broker-dealer to
furnish brokerage, research and statistical services to the Fund or to the
Manager, even if the specific services were not imputed just to the Fund and may
be lawfully and appropriately used by the Manager in advising other clients. The
Manager considers such information, which is in addition to, and not in lieu of,
the services required to be performed by it under the Agreement, to be useful in
varying degrees, but of indeterminable value. In negotiating any commissions
with a broker or evaluating the spread to be paid to a dealer, the Fund may
therefore pay a higher commission or spread than would be the case if no weight
were
B-21
<PAGE>
given to the furnishing of these supplemental services, provided that the amount
of such commission or spread has been determined in good faith by the Fund and
the Manager to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer, which services either produce
a direct benefit to the Fund or assist the Manager in carrying out its
responsibilities to the Fund. The standard of reasonableness is to be measured
in light of the Manager's overall responsibilities to the Fund.
Investment decisions for the Funds are made independently from those of other
client accounts of the Manager or its affiliates, and suitability is always a
paramount consideration. Nevertheless, it is possible that at times the same
securities will be acceptable for the Fund and for one or more of such client
accounts. The Manager and its personnel may have interests in one or more of
those client accounts, either through direct investment or because of management
fees based on gains in the account. The Manager has adopted allocation
procedures to ensure the fair allocation of securities and prices between the
Fund and the Manager's various other accounts. These procedures emphasize the
desirability of bunching trades and price averaging (see below) to achieve
objective fairness among clients advised by the same portfolio manager or
portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and the Fund seek to acquire
the same security at the same general time (especially if the security is thinly
traded or is a small cap stock), the Fund may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price or
obtain a lower yield for such security. Similarly, the Fund may not be able to
obtain as high a price for, or as large an execution of, an order to sell any
particular security at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security that the Fund is purchasing
or selling, each day's transactions in such security generally will be allocated
between the Fund and all such client accounts in a manner deemed equitable by
the Manager, taking into account the respective sizes of the accounts, the
amount being purchased or sold and other factors deemed relevant by the Manager.
In many cases, the Fund's transactions are bunched with the transactions for
other client accounts. It is recognized that in some cases this system could
have a detrimental effect on the price or value of the security insofar as the
Fund is concerned. In other cases, however, it is believed that the ability of
the Fund to participate in volume transactions may produce better executions for
the Fund.
The Manager's sell discipline for the Fund's investment in issuers is based on
the premise of a long-term investment horizon; however, sudden changes in
valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon. The
Fund will limit investments in illiquid securities to 15% of net assets.
Sell decisions at the country level are dependent on the results of the
Manager's asset allocation model. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Manager's
assumed time horizon in those countries. In addition, the rapid pace of
privatization and initial public offerings creates a flood of new opportunities
which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of factors
including current stock valuation relative to the estimated fair value range, or
a high P/E relative to expected growth. Negative changes in the relevant
industry sector, or a reduction in international competitiveness and a declining
financial flexibility may also signal a sell.
The Fund does not effect securities transactions through brokers in accordance
with any formula, nor does it effect securities transactions through such
brokers solely for selling shares of the Fund. However, as stated above,
Montgomery Securities may act as one of the Fund's brokers in the purchase and
sale of portfolio securities, and other brokers who execute brokerage
transactions as described above may from time to time effect purchases of shares
of the Fund for their customers.
Depending on the Manager's view of market conditions, the Fund may or may not
purchase securities with the expectation of holding them to maturity, although
its general policy is to hold securities to maturity. The Fund may, however,
sell securities prior to maturity to meet redemptions or as a result of a
revised management evaluation of the issuer.
B-22
<PAGE>
Additional Purchase and Redemption Information
The Trust reserves the right in its sole discretion to (i) suspend the continued
offering of the Fund's shares, and (ii) reject purchase orders in whole or in
part when in the judgment of the Manager or the Distributor such suspension or
rejection is in the best interest of the Fund.
When in the judgment of the Manager it is in the best interests of the Fund, an
investor may purchase shares of the Fund by tendering payment in kind in the
form of securities, provided that any such tendered securities are readily
marketable, their acquisition is consistent with the Fund's investment objective
and policies, and the tendered securities are otherwise acceptable to the Fund's
Manager. For the purposes of sales of shares of the Fund for such securities,
the tendered securities shall be valued at the identical time and in the
identical manner that the portfolio securities of the Fund are valued for the
purpose of calculating the net asset value of the Fund's shares. A shareholder
who purchases shares of the Fund by tendering payment for the shares in the form
of other securities may be required to recognize gain or loss for income tax
purposes on the difference, if any, between the adjusted basis of the securities
tendered to the Fund and the purchase price of the Fund's shares acquired by the
shareholder.
Payments to shareholders for shares of the Fund redeemed directly from the Fund
will be made as promptly as possible but no later than three days after receipt
by the Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectus, except that the Fund may
suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange ("NYSE") is restricted as
determined by the SEC or the NYSE is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC (upon application by
the Fund pursuant to Section 22(e) of the Investment Company Act) making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but, as
described below or under abnormal conditions that make payment in cash unwise,
the Fund may make payment partly in its portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Fund does not anticipate that it will normally make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Fund pay in cash all requests for redemption
by any shareholder of record limited in amount, however, during any 90-day
period to the lesser of $250,000 or 1% of the value of the Trust's net assets at
the beginning of such period.
When in the judgment of the Manager it is in the best interests of the Fund, an
investor may redeem shares of the Fund and receive securities from the Fund's
portfolio selected by the Manager in its sole discretion, provided that such
redemption is not expected to affect the Fund's ability to attain its investment
objective or otherwise materially affect its operations. For the purposes of
redemptions in kind, the redeemed securities shall be valued at the identical
time and in the identical manner that the other portfolio securities are valued
for purposes of calculating the net asset value of the Fund's shares.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the Fund's portfolio
securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Fund are available for purchase by any
retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and
individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Fund through an IRA, there is
available through the Fund a prototype individual retirement account and custody
agreement. The custody agreement provides that DST Systems, Inc. will act as
custodian under the plan, and will furnish custodial services for an annual
maintenance fee per participating account of $10. (These fees are in addition to
the normal custodian charges paid by the Fund and will be deducted automatically
from each Participant's account.) For further details, including the right to
appoint a successor custodian, see the plan and custody agreements and the IRA
Disclosure Statement as provided by the Fund. An IRA that invests in shares of
the Fund may also be used by employers who have adopted a Simplified Employee
Pension Plan. Individuals or employers who wish to invest in shares of the Fund
under a custodianship with another bank or trust company must make individual
arrangements with such institution.
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<PAGE>
The IRA Disclosure Statement available from the Fund contains more information
on the amount investors may contribute and the deductibility of IRA
contributions. In summary, for tax years prior to January 1, 1998, an individual
may make deductible contributions to the IRA of up to 100% of earned
compensation, not to exceed $2,000 annually (or $4,000 to two IRAs if there is a
non-working spouse). An IRA may be established whether or not the amount of the
contribution is deductible. Generally, a full deduction for federal income tax
purposes will only be allowed to taxpayers who meet one of the following two
additional tests:
(A) the individual and the individual's spouse are each not an active
participant in an employer's qualified retirement plan, or
(B) the individual's adjusted gross income (with some modifications) before
the IRA deduction is (i) $40,000 or less for married couples filing
jointly, or (ii) $25,000 or less for single individuals. The maximum
deduction is reduced for a married couple filing jointly with a
combined adjusted gross income (before the IRA deduction) between
$40,000 and $50,000, and for a single individual with an adjusted gross
income (before the IRA deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any retirement plan
to consult with an attorney or to obtain advice from a competent retirement plan
consultant with respect to the requirements of such plans and the tax aspects
thereof.
Determination of Net Asset Value
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As noted in the Prospectus, the net asset value of shares of the Fund generally
will be determined at least once daily as of 4:00 p.m., New York City time, on
each day the NYSE is open for trading. It is expected that the Exchange will be
closed on Saturdays and Sundays and on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The Fund may, but does not expect to, determine the net asset value
of its shares on any day when the NYSE is not open for trading if there is
sufficient trading in its portfolio securities on such days to materially affect
the per share net asset value.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In addition,
trading in and valuation of foreign securities may not take place on every day
in which the NYSE is open for trading. Furthermore, trading takes place in
various foreign markets on days in which the NYSE is not open for trading and on
which the Fund's net asset values are not calculated. Occasionally, events
affecting the values of such securities in U.S. dollars on a day on which the
Fund calculates its net asset value may occur between the times when such
securities are valued and the close of the NYSE which will not be reflected in
the computation of the Fund's net asset value unless the Trustees or their
delegates deem that such events would materially affect the net asset value, in
which case an adjustment would be made.
Generally, the Fund's investments are valued at market value or, in the absence
of a market value, at fair value as determined in good faith by the Manager and
the Trust's Pricing Committee pursuant to procedures approved by or under the
direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded on
securities exchanges are valued at the last sale price on the exchange on which
such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange, are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60 days are
valued at current market prices, as discussed above. Short-term securities with
60 days or less remaining to maturity are, unless conditions indicate otherwise,
amortized to
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<PAGE>
maturity based on their cost to the Fund if acquired within 60 days of maturity
or, if already held by the Fund on the 60th day, based on the value determined
on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments or by an independent pricing service, approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
An option that is written by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last offer price. An option that
is purchased by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contract equals the unrealized gain or loss on the contract that is determined
by marking the contract to the current settlement price for a like contract on
the valuation date of the futures contract if the securities underlying the
futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the Board.
If any securities held by the Fund are restricted as to resale or do not have
readily available market quotations, the Manager and the Trust's Pricing
Committee determine their fair value, following procedures approved by the
Board. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the official exchange rate or, alternatively, at
the mean of the current bid and asked prices of such currencies against the U.S.
dollar last quoted by a major bank that is a regular participant in the foreign
exchange market or on the basis of a pricing service that takes into account the
quotes provided by a number of such major banks. If neither of these
alternatives is available or both are deemed not to provide a suitable
methodology for converting a foreign currency into U.S. dollars, the Board in
good faith will establish a conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
Principal Underwriter
The Distributor acts as the Fund's principal underwriter in a continuous public
offering of the Fund's shares. The Distributor is currently registered as a
broker-dealer with the SEC and in all 50 states, and is a member of most of the
principal securities exchanges in the U.S. and is a member of the NASD. The
Underwriting Agreement between the Fund and the Distributor is in effect for two
years from when the Fund commences public offerings, and shall continue in
effect thereafter for periods not exceeding one year if approved at least
annually by (i) the Board or the vote of a majority of the outstanding
securities of the Fund (as defined in the Investment Company Act), and (ii) a
majority of the Trustees who are not interested persons of any such party, in
each case by a vote cast in person at a meeting called for the purpose of voting
on such approval. The Underwriting Agreement may be terminated without penalty
by the parties thereto upon 60 days' written notice, and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act. There are no underwriting commissions paid with respect to sales of the
Fund's shares.
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Performance Information
As noted in the Prospectus, the Fund may, from time to time, quote various
performance figures in advertisements and investor communications to illustrate
its past performance. Performance figures will be calculated separately for
Class A, Class B, Class C and Class D.
Average Annual Total Return. Total return may be stated for any relevant period
as specified in the advertisement or communication. Any statements of total
return for the Fund will be accompanied by information on the Fund's average
annual compounded rate of return over the most recent four calendar quarters and
the period from the Fund's inception of operations. The Fund may also advertise
aggregate and average total return information over different periods of time.
The Fund's "average annual total return" figures are computed according to a
formula prescribed by the SEC, expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
1-, 5- or 10-year period at the end of each
respective period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
Aggregate Total Return. The Fund's "aggregate total return" figures represent
the cumulative change in the value of an investment in the Fund for the
specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of
a l-, 5- or 10-year period at the end of a
l-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
The Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses. The
total return information also assumes cash investments and redemptions and,
therefore, includes the applicable expense reimbursement fees discussed in the
Prospectus. Consequently, any given performance quotation should not be
considered representative of the Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
Comparisons. To help investors better evaluate how an investment in the Fund
might satisfy their investment objectives, advertisements and other materials
regarding the Fund may discuss various financial publications. Materials may
also compare performance (as calculated above) to performance as reported by
other investments, indices, and averages. The following publications, indices
and averages may be used:
a) Standard & Poor's 500 Composite Stock Index, one or more of the Morgan
Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor--A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings
account rates and average loan rates.
c) Lipper Mutual Fund Performance Analysis and Lipper Fixed Income Fund
Performance Analysis--A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual
mutual fund
B-26
<PAGE>
performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Salomon Brothers Bond Market Roundup--A weekly publication which
reviews yield spread changes in the major sectors of the money,
government agency, futures, options, mortgage, corporate, Yankee,
Eurodollar, municipal, and preferred stock markets. This publication
also summarizes changes in banking statistics and reserve aggregates.
In addition, one or more portfolio managers or other employees of the Manager
may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolios, that the averages are generally
unmanaged, and that the items included in the calculations of such averages may
not be identical to the formulae used by the Fund to calculate its figures.
The Fund may also publish its relative rankings as determined by independent
mutual fund ranking services like Lipper Analytical Services, Inc. and
Morningstar, Inc.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's total return for any period should
not be considered as a representation of what an investment may earn or what an
investor's total return may be in any future period.
Reasons to Invest in the Fund. From time to time the Fund may publish or
distribute information and reasons supporting the Manager's belief that a
particular Fund may be appropriate for investors at a particular time. The
information will generally be based on internally generated estimates resulting
from the Manager's research activities and projections from independent sources.
These sources may include, but are not limited to, Barings, The WEFA Group,
Consensus Estimate, Datastream, Micropal, I/B/E/S Consensus Forecast, Worldscope
and Reuters as well as both local and international brokerage firms. For
example, the Fund may suggest that certain countries or areas may be
particularly appealing to investors because of interest rate movements,
increasing exports and/or economic growth.
Research. Largely inspired by its prior affiliate, Montgomery Securities--which
has established a tradition for specialized research in emerging growth
companies--the Manager has developed its own tradition of intensive research.
The Manager has made intensive research one of the important characteristics of
the Montgomery Funds style.
The portfolio managers for Montgomery's global and international Funds work
extensively on developing an in-depth understanding of particular foreign
markets and particular companies. And they very often discover that they are the
first analysts from the United States to meet with representatives of foreign
companies, especially those in emerging markets nations.
Extensive research into companies that are not well known--discovering new
opportunities for investment--is a theme that may be used for the Fund.
In-depth research, however, goes beyond gaining an understanding of unknown
opportunities. The portfolio analysts have also developed new ways of gaining
information about well-known parts of the domestic market.
General Information
Investors in the Fund will be informed of the Fund's progress through periodic
reports. Financial statements will be submitted to shareholders semi-annually,
at least one of which will be certified by independent public accountants.
Expenses incurred in connection with the establishment and registration of
shares of any other funds constituting a separate series of the Trust will be
assumed by each respective series. The expenses incurred in connection with the
establishment and registration of shares of the Fund as a separate series of the
Trust have been assumed by the Fund and are being amortized over a period of
five years commencing with the date of the Fund's inception. The Manager has
agreed, to the extent necessary, to advance the organizational expenses incurred
by the Fund and will be reimbursed for such expenses after commencement of the
Fund's
B-27
<PAGE>
operations. Investors purchasing shares of the Fund bear such expenses only as
they are amortized daily against the Fund's investment income.
As noted above, Morgan Stanley and Trust Company (the "Custodian") acts as
custodian of the securities and other assets of the Fund. The Custodian does not
participate in decisions relating to the purchase and sale of securities by the
Fund.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is the Fund's Master Transfer Agent. The Master Transfer Agent has
delegated certain transfer agent functions to DST Systems, Inc., P.O. Box
419073, Kansas City, Missouri 64141-6073, the Fund's Transfer and Dividend
Disbursing Agent.
[________________], 50 Fremont Street, San Francisco, California 94105, are the
independent auditors for the Fund.
The validity of shares offered hereby will be passed on Paul, Hastings, Janofsky
& Walker LLP, 345 California Street, San Francisco, California 94104.
Among the Trustees' powers enumerated in the Declaration of Trust is the
authority to terminate the Trust or any series of the Trust, or to merge or
consolidate the Trust or one or more of its series with another trust or company
without the need to seek shareholder approval of any such action.
The Trust is registered with the Securities and Exchange Commission as a
non-diversified management investment company, although the Fund is a
diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of the Fund. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of the Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.
Financial Statements
The Fund has recently commenced operations and, therefore, has not yet prepared
financial statements for public distribution.
B-28
<PAGE>
Appendix
Description ratings for Standard & Poor's Ratings Group ("S&P"); Moody's
Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade)
category.
Commercial Paper Rating
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Issues assigned an A rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus designation.
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<PAGE>
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with
doubtful capacity for payment.
D Issues carrying this designation are in default, and payment
of interest and/or repayment of principal is in arrears.
Moody's Investors Service, Inc.
Bond Rating
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
generally are known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
B-30
<PAGE>
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will
be evidenced by leading market positions in well established
industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate
liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Rating
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B-31
<PAGE>
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Rating
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-l+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F1+.
F-2 Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Rating
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
B-32
<PAGE>
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by
ample asset protection. Risk factors are minor. Paper rated Duff-2 is
regarded as having good certainty of timely payment, good access to
capital markets and sound liquidity factors and company fundamentals.
Risk factors are small. Paper rated Duff 3 is regarded as having
satisfactory liquidity and other protection factors. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected. Paper rated Duff 4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to insure
against disruption in debt service. operating factors and market access
may be subject to a high degree of variation. Paper rated Duff 5 is in
default. The issuer has failed to meet scheduled principal and/or
interest payments.
B-33
<PAGE>
---------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
MONTGOMERY GLOBAL PARTNERS FUND
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
MONTGOMERY GLOBAL PARTNERS FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND (3863)
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1997
The Montgomery Funds II (the "Trust") is an open-end management investment
company organized as a Delaware business trust with different series of shares
of beneficial interest. Montgomery Global partners Fund (the "Fund") is a series
of the Trust. The Fund is managed by Montgomery Asset Management, LLC (the
"Manager") and distributed by Funds Distributor, Inc. (the "Distributor"). This
Statement of Additional Information contains information in addition to that set
forth in the prospectus for the Fund (the "Prospectus") dated December 31, 1997,
as may be revised from time to time. The Prospectus provides the basic
information a prospective investor should know before purchasing shares of the
Fund and may be obtained without charge at the address or telephone number
provided above. This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus.
TABLE OF CONTENTS
The Trust....................................................................1
Investment Objective and Policies of the Fund................................2
Risk Factors.................................................................8
Investment Restrictions......................................................9
Distributions and Tax Information...........................................11
Trustees and Officers.......................................................16
Investment Management and Other Services....................................19
Execution of Portfolio Transactions.........................................21
Additional Purchase and Redemption Information..............................23
Determination of Net Asset Value............................................24
Principal Underwriter.......................................................25
Performance Information.....................................................26
General Information.........................................................27
Financial Statements........................................................28
Appendix....................................................................29
The Trust
The Trust is an open-end management investment company organized as a Delaware
business trust on September 10, 1993, and registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Trust
currently offers shares of beneficial interest, $.01 par value per share, in
various series. Each series offers several classes of shares. This Statement of
Additional Information pertains to Class A, Class B, Class C and Class D shares
of Montgomery Global partners Fund.
B-1
<PAGE>
Investment Objective and Policies of the Fund
The investment objective and policies of the Fund are described in detail in the
Prospectus. The following discussion supplements the discussion in the
Prospectus.
The Fund is a diversified series of the Trust, an open-end management investment
company offering redeemable shares of beneficial interest. The achievement of
the Fund's investment objective will depend on market conditions generally and
on the Manager's analytical and portfolio management skills.
Portfolio Securities
Depositary Receipts. The Fund may hold securities of foreign issuers in the form
of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs")
and other similar global instruments available in emerging markets, or other
securities convertible into securities of eligible issuers. These securities may
not necessarily be denominated in the same currency as the securities for which
they may be exchanged. Generally, ADRs in registered form are designed for use
in U.S. securities markets, and EDRs and other similar global instruments in
bearer form are designed for use in European securities markets. For purposes of
the Fund's investment policies, the Fund's investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. The Fund may invest up to 10% of its total assets in
securities issued by other investment companies investing in securities in which
the Fund can invest provided that such investment companies invest in portfolio
securities in a manner consistent with the Fund's investment objective and
policies. Applicable provisions of the Investment Company Act require that the
Fund limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 10% of the value of the Fund's total assets
will be invested in the aggregate in securities of investment companies as a
group; and (b) either the Fund and affiliated persons of the Fund not own
together more than 3% of the total outstanding shares of any one investment
company at the time of purchase (and that all shares of the investment company
held by the Fund in excess of 1% of the company's total outstanding shares be
deemed illiquid); or the Fund not invest more than 5% of its total assets in any
one investment company and the investment not represent more than 3% of the
total outstanding voting stock of the investment company at the time of
purchase. As a shareholder of another investment company, the Fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the advisory and other expenses that the Fund bears directly in connection
with its own operations.
U.S. Government Securities. Generally, the value of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government securities") held by the Fund will fluctuate inversely with interest
rates. U.S. Government securities in which the Fund may invest include debt
obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency or instrumentality of the U.S. Government, including the
Federal Housing Administration ("FHA"), Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Bank, Farm
Credit System Financial Assistance Corporation, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Financing Corporation, Federal Financing Bank, Federal
National Mortgage Association ("FNMA"), Maritime Administration, Tennessee
Valley Authority, Resolution Funding Corporation, Student Loan Marketing
Association and Washington Metropolitan Area Transit Authority. Direct
obligations of the U.S. Treasury include a variety of securities that differ
primarily in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it sponsors, the Fund will not invest in obligations issued by an
instrumentality of the U.S. Government unless the Manager determines that the
instrumentality's credit risk makes its securities suitable for investment by
the Fund.
Risk Factors/Special Considerations Relating to Debt Securities. The Fund may
invest in debt securities which are rated below Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation ("S&P") or
Fitch Investor Services ("Fitch"), or, if unrated, are deemed to be of
equivalent investment quality by the Manager. As an operating policy, which may
be changed by the Board of Trustees (the "Board") without shareholder approval,
the Fund will invest no more than 5% of its assets in debt securities rated
below Baa by Moody's or BBB by S&P or Fitch, or, if unrated, of equivalent
investment quality as determined by the Manager. The market value of debt
securities generally varies in response to changes
B-2
<PAGE>
in interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the Fund's net asset value.
Bonds which are rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P or Fitch are
obligations on which no interest is being paid. Bonds rated below BBB or Baa are
often referred to as "junk bonds."
Although such bonds may offer higher yields than higher rated securities, low
rated debt securities generally involve greater price volatility and risk of
principal and income, including the possibility of default by, or bankruptcy of,
the issuers of the securities. In addition, the markets in which low rated debt
securities are traded are more limited than those for higher rated securities.
The existence of limited markets for particular securities may diminish the
Fund's ability to sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in the financial markets and
could adversely affect, and cause fluctuations in, the daily net asset value of
the Fund's shares.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve its investment
objective may, to the extent it invests in low rated debt securities, be more
dependent upon such credit analysis than would be the case if the Fund were
investing in higher rated debt securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated debt securities, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a sharper decline in the prices of low rated debt securities because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Fund may incur additional expenses to
seek financial recovery. The low rated bond market is relatively new, and many
of the outstanding low rated bonds have not endured a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate risks, the Fund may
enter into forward foreign currency exchange contracts ("forward contracts") and
foreign currency futures contracts, as well as purchase put or call options on
foreign currencies, as described below. The Fund also may conduct its foreign
currency exchange transactions on a spot ( i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market.
The Fund also may purchase other types of options and futures and may, in the
future, write covered options, as described below and in the Prospectus.
Forward Contracts. The Fund may enter into forward contracts to attempt to
minimize the risk from adverse changes in the relationship between the U.S.
dollar and foreign currencies. A forward contract, which is individually
negotiated and privately traded by currency traders and their customers,
involves an obligation to purchase or sell a specific currency for an agreed
upon price at a future date.
The Fund may enter into a forward contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When the Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such currency, or when the Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.
In connection with the Fund's forward contract transactions, an amount of the
Fund's assets equal to the amount of its commitments will be held aside or
segregated to be used to pay for the commitments. Accordingly, the Fund always
will have cash, cash equivalents or liquid equity or debt securities denominated
in the appropriate currency available in an amount
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sufficient to cover any commitments under these contracts. Segregated assets
used to cover forward contracts will be marked to market on a daily basis. While
these contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of the Fund to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by the Fund than if it had not entered into
such contracts. The Fund generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge against movements
in interest rates, securities prices or currency exchange rates, the Fund may
purchase and sell various kinds of futures contracts and options on futures
contracts. The Fund also may enter into closing purchase and sale transactions
with respect to any such contracts and options. Futures contracts may be based
on various securities (such as U.S. Government securities), securities indices,
foreign currencies and other financial instruments and indices.
The Fund has filed a notice of eligibility for exclusion from the definition of
the term "commodity pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures markets, before engaging in
any purchases or sales of futures contracts or options on futures contracts.
Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act, the
notice of eligibility included the representation that the Fund will use futures
contracts and related options for bona fide hedging purposes within the meaning
of CFTC regulations, provided that the Fund may hold positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions if the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of the Fund's net assets (after
taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded from such 5%.
The Fund will attempt to determine whether the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Fund or which it expects
to purchase. The Fund's futures transactions generally will be entered into only
for traditional hedging purposes -- i.e., futures contracts will be sold to
protect against a decline in the price of securities or currencies and will be
purchased to protect the Fund against an increase in the price of securities it
intends to purchase (or the currencies in which they are denominated). All
futures contracts entered into by the Fund are traded on U.S. exchanges or
boards of trade licensed and regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting or "closing" purchase or sale
transactions, which may result in a profit or a loss. While the Fund's futures
contracts on securities or currencies will usually be liquidated in this manner,
the Fund may make or take delivery of the underlying securities or currencies
whenever it appears economically advantageous. A clearing corporation associated
with the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
By using futures contracts to hedge its positions, the Fund seeks to establish
more certainty than would otherwise be possible with respect to the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that the Fund proposes to acquire. For example, when interest rates
are rising or securities prices are falling, the Fund can seek, through the sale
of futures contracts, to offset a decline in the value of its current portfolio
securities. When rates are falling or prices are rising, the Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market with respect to anticipated purchases.
Similarly, the Fund can sell futures contracts on a specified currency to
protect against a decline in the value of such currency and its portfolio
securities which are denominated in such currency. The Fund can purchase futures
contracts on a foreign currency to fix the price in U.S. dollars of a security
denominated in such currency that such Fund has acquired or expects to acquire.
As part of its hedging strategy, the Fund also may enter into other types of
financial futures contracts if, in the opinion of the Manager, there is a
sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in the Fund's portfolio may be more or less volatile than prices
of such futures contracts, the Manager will attempt to estimate the extent of
this difference in volatility based on historical patterns and to compensate for
it by having that Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes
affecting that Fund's securities portfolio. When hedging of this character is
successful, any depreciation in the value of portfolio securities can be
substantially offset by appreciation in
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the value of the futures position. However, any unanticipated appreciation in
the value of the Fund's portfolio securities could be offset substantially by a
decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives the Fund the
right (but not the obligation), for a specified price, to sell or purchase the
underlying futures contract at any time during the option period. Purchasing an
option on a futures contract gives the Fund the benefit of the futures position
if prices move in a favorable direction, and limits its risk of loss, in the
event of an unfavorable price movement, to the loss of the premium and
transaction costs.
The Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. The Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by the Fund is potentially
unlimited.
The Fund will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended, for maintaining their qualification
as a regulated investment company for federal income tax purposes.
Options on Securities, Securities Indices and Currencies. The Fund may purchase
put and call options on securities in which they have invested, on foreign
currencies represented in their portfolios and on any securities index based in
whole or in part on securities in which the Fund may invest. The Fund also may
enter into closing sales transactions in order to realize gains or minimize
losses on options they have purchased.
The Fund normally will purchase call options in anticipation of an increase in
the market value of securities of the type in which it may invest or a positive
change in the currency in which such securities are denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified securities or a specified amount of a foreign currency at a
specified price during the option period.
The Fund may purchase and sell options that are traded on U.S. and foreign
exchanges and options traded over the counter ("OTC options") with
broker-dealers who make markets in these options. The ability to terminate OTC
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Trading in OTC options is also subject to the risk that the
other party will be unable or unwilling to close out options purchased by the
Fund.
Although the Fund will generally purchase only those options for which there
appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for a
variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Fund does not currently intend to do so, it may, in the future,
write (i.e., sell) covered put and call options on securities, securities
indices and currencies in which it may invest. A covered call option involves a
Fund's giving another party, in return for a premium, the right to buy specified
securities owned by the Fund at a specified future date and price set at the
time of the contract. A covered call option serves as a partial hedge against
the price decline of the underlying security. However, by writing a covered call
option, the Fund gives up the opportunity, while the option is in effect, to
realize gain from any price increase (above the option exercise price) in the
underlying security. In addition, the Fund's ability to sell the underlying
security is limited while the option is in effect unless the Fund effects a
closing purchase transaction.
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The Fund also may write covered put options that give the holder of the option
the right to sell the underlying security to the Fund at the stated exercise
price. The Fund will receive a premium for writing a put option but will be
obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, the Fund
will cause its custodian to segregate cash, cash equivalents, U.S. Government
securities or other liquid equity or debt securities with at least the value of
the exercise price of the put options. In segregating such assets, the custodian
either deposits such assets in a segregated account or separately identifies
such assets and renders them unavailable for investment. The Fund will not write
put options if the aggregate value of the obligations underlying the put options
exceeds 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of
the Fund's orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Fund may enter into
repurchase agreements. The Fund's repurchase agreements generally will involve a
short-term investment in a U.S. Government security or other high grade liquid
debt security, with the seller of the underlying security agreeing to repurchase
it from the Fund at a mutually agreed-upon time and price. The repurchase price
generally is higher than the purchase price, the difference being interest
income to the Fund. Alternatively, the purchase and repurchase prices may be the
same, with interest at a stated rate due to the Fund together with the
repurchase price on the date of repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the value of
the securities subject to the repurchase agreement at not less than their
repurchase price. The Manager, acting under the supervision of the Board,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Fund enters into repurchase
agreements to evaluate potential risk. All repurchase agreements will be made
pursuant to procedures adopted and regularly reviewed by the Board.
The Fund generally will enter into repurchase agreements of short maturities,
from overnight to one week, although the underlying securities will generally
have longer maturities. The Fund regards repurchase agreements with maturities
in excess of seven days as illiquid. The Fund may not invest more than 15% of
the value of its net assets in illiquid securities, including repurchase
agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is deemed to
be a collateralized loan from the Fund to the seller of the security subject to
the repurchase agreement. It is not clear whether a court would consider the
security acquired by the Fund subject to a repurchase agreement as being owned
by the Fund or as being collateral for a loan by the Fund to the seller. If
bankruptcy or insolvency proceedings are commenced with respect to the seller of
the security before its repurchase under a repurchase agreement, the Fund may
encounter delays and incur costs before being able to sell the security. Delays
may involve loss of interest or a decline in price of the security. If a court
characterizes such a transaction as a loan and the Fund has not perfected a
security interest in the security, the Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Fund, the Manager seeks to minimize
the risk of loss through repurchase agreements by analyzing the creditworthiness
of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, the Fund also runs
the risk that the seller may fail to repurchase the security. However, the Fund
always requires collateral for any repurchase agreement to which it is a party
in the form of securities acceptable to it, the market value of which is equal
to at least 100% of the amount invested by the Fund plus accrued interest, and
the Fund makes payment against such securities only upon physical delivery or
evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement at all times equals or exceeds the repurchase price
(including interest) at all times.
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The Fund may participate in one or more joint accounts with other funds of the
Trust that may invest in repurchase agreements collateralized either by (i)
obligations issued or guaranteed as to principal and interest by the U.S.
Government or by one of its agencies or instrumentalities, or (ii) privately
issued mortgage-related securities that are in turn collateralized by securities
issued by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event will have a
duration of more than seven days.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements, as set forth in the Prospectus. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of proceeds involves leverage, and the Fund will
enter into a reverse repurchase agreement for leverage purposes only when the
Manager believes that the interest income to be earned from the investment of
the proceeds would be greater than the interest expense of the transaction. The
Fund also may use the proceeds of reverse repurchase agreements to provide
liquidity to meet redemption requests when sale of the Fund's securities is
disadvantageous.
The Fund causes its custodian to segregate liquid assets, such as cash, U.S.
Government securities or other liquid equity or debt securities equal in value
to its obligations (including accrued interest) with respect to reverse
repurchase agreements. In segregating such assets, the custodian either places
such securities in a segregated account or separately identifies such assets and
renders them unavailable for investment. Such assets are marked to market daily
to ensure that full collateralization is maintained.
Lending of Portfolio Securities. Although the Fund does not currently intend to
do so, the Fund may lend its portfolio securities having a value of up to 30% of
its total assets in order to generate additional income. Such loans may be made
to broker-dealers or other financial institutions whose creditworthiness is
acceptable to the Manager. These loans would be required to be secured
continuously by collateral, including cash, cash equivalents, irrevocable
letters of credit, U.S. Government securities, or other high grade liquid debt
securities, maintained on a current basis (i.e., marked to market daily) at an
amount at least equal to 100% of the market value of the securities loaned plus
accrued interest. The Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the income earned
on the cash to the borrower or placing broker. Loans are subject to termination
at the option of the Fund or the borrower at any time. Upon such termination,
the Fund is entitled to obtain the return of the securities loaned within five
business days.
For the duration of the loan, the Fund will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned, will
receive proceeds from the investment of the collateral and will continue to
retain any voting rights with respect to the securities. As with other
extensions of credit, there are risks of delay in recovery or even losses of
rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. The Fund may purchase securities
on a "when-issued" basis and may purchase or sell securities on a "forward
commitment" or "delayed delivery" basis. The price of such securities is fixed
at the time the commitment to purchase or sell is made, but delivery and payment
for the securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by the Fund to the issuer. While the Fund
reserves the right to sell when-issued or delayed delivery securities prior to
the settlement date, the Fund intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes a commitment to purchase a
security on a when-issued or delayed delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of the when-issued securities may be more or less than
the settlement price. The Fund does not believe that its net asset value will be
adversely affected by its purchase of securities on a when-issued or delayed
delivery basis. The Fund causes its custodian to segregate cash, U.S. Government
securities or other liquid equity or debt securities with a value equal in value
to commitments for when-issued or delayed delivery securities. The segregated
securities either will mature or, if necessary, be sold on or before the
settlement date. To the extent that assets of the Fund are held in cash pending
the settlement of a purchase of securities, the Fund will earn no income on
these assets.
Illiquid Securities. The Fund may invest up to 15% of its net assets in illiquid
securities. The term "illiquid securities" for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the
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amount at which a Fund has valued the securities and includes, among others,
repurchase agreements maturing in more than seven days, certain restricted
securities and securities that are otherwise not freely transferable. Illiquid
securities also include shares of an investment company held by the Fund in
excess of 1% of the total outstanding shares of that investment company.
Restricted securities may be sold only in privately negotiated transactions or
in public offerings with respect to which a registration statement is in effect
under the Securities Act of 1933, as amended ("1933 Act"). Illiquid securities
acquired by the Fund may include those that are subject to restrictions on
transferability contained in the securities laws of other countries. Securities
that are freely marketable in the country where they are principally traded, but
that would not be freely marketable in the United States, will not be considered
illiquid. Where registration is required, the Fund may be obligated to pay all
or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities sold
pursuant to Rule 144A in many cases provide both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities held by the
Fund, however, could affect adversely the marketability of such portfolio
securities, and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
The Board has delegated the function of making day-to-day determinations of
liquidity to the Manager pursuant to guidelines approved by the Board. The
Manager takes into account a number of factors in reaching liquidity decisions,
including but not limited to (i) the frequency of trades for the security, (ii)
the number of dealers that quote prices for the security, (iii) the number of
dealers that have undertaken to make a market in the security, (iv) the number
of other potential purchasers, and (v) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how bids are
solicited and the mechanics of transfer). The Manager monitors the liquidity of
restricted securities in the Fund's portfolio and reports periodically on such
decisions to the Board.
Risk Factors
Foreign Securities. Investors in the Fund should consider carefully the
substantial risks involved in securities of companies located or doing business
in, and governments of, foreign nations, which are in addition to the usual
risks inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published regarding companies in the U.S. Foreign companies are often not
subject to uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements often may not be comparable to those
applicable to U.S. companies. Many foreign markets have substantially less
volume than either the established domestic securities exchanges or the OTC
markets. Securities of some foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Commission rates in foreign
countries, which may be fixed rather than subject to negotiation as in the U.S.,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the U.S., and capital requirements for brokerage firms are generally
lower. Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.
Emerging markets Countries. The Fund invests in securities of companies
domiciled in, and in markets of, so-called "emerging markets countries." These
investments may be subject to potentially higher risks than investments in
developed countries. These risks include (i) volatile social, political and
economic conditions; (ii) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which result
in a lack of liquidity and in greater price
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volatility; (iii) the existence of national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain emerging markets countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in certain emerging markets countries may be
slowed or reversed by unanticipated political or social events in such
countries.
Exchange Rates and Policies. The Fund endeavors to buy and sell foreign
currencies on favorable terms. Some price spreads on currency exchange (to cover
service charges) may be incurred, particularly when the Fund change investments
from one country to another or when proceeds from the sale of shares in U.S.
dollars are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from repatriating
invested capital and dividends, withhold portions of interest and dividends at
the source, or impose other taxes, with respect to the Fund's investments in
securities of issuers of that country. There also is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
The Fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, exchange
control regulations and indigenous economic and political developments.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions that would affect the
liquidity of the Fund's assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
attendant to holding portfolio securities in domestic and foreign securities
depositories (see "Investment Management and Other Services").
Hedging Transactions. While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while the
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for the Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and the Fund may be exposed to risk of financial loss.
Perfect correlation between the Fund's hedging positions and portfolio positions
may be difficult to achieve because hedging instruments in many foreign
countries are not yet available. In addition, it is not possible to hedge fully
against currency fluctuations affecting the value of securities denominated in
foreign currencies because the value of such securities is likely to fluctuate
as a result of independent factors not related to currency fluctuations.
Investment Restrictions
The following policies and investment restrictions have been adopted by the Fund
and (unless otherwise noted) are fundamental and cannot be changed without the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act. The Fund may not:
1. With respect to 75% of its total assets, invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such
investment more than 5% of the total assets of the Fund would be
invested in such issuer. There are no limitations with respect to the
remaining 25% of its total assets, except to the extent other
investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies,
(b) through the lending of up to 30% of its portfolio securities as
described above and in its Prospectus, or (c) to the extent the entry
into a repurchase agreement is deemed to be a loan.
3. (a) Borrow money, except for temporary or emergency purposes from
a bank, or pursuant to reverse repurchase agreements, and then
not in excess of one-third of the value of its total assets
(at the lower of cost or fair market value). Any such
borrowing will be made only if immediately thereafter there is
an asset coverage of
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at least 300% of all borrowings, and no additional investments
may be made while any such borrowings are in excess of 10% of
total assets.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other
hedging transactions.
4. Except as required in connection with permissible hedging activities,
purchase securities on margin or underwrite securities. (This does not
preclude the Fund from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities.)
5. Buy or sell real estate (including interests in real estate limited
partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts;
however, the Fund, to the extent not otherwise prohibited in the
Prospectus or this Statement of Additional Information, may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein, including
real estate investment trusts, and may purchase or sell currencies
(including forward currency exchange contracts), futures contracts and
related options generally as described in the Prospectus and Statement
of Additional Information. As an operating policy which may be changed
without shareholder approval, the Fund may invest in real estate
investment trusts only up to 10% of its total assets.
6. Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in the
Prospectus or this Statement of Additional Information, or as such
securities may be acquired as part of a merger, consolidation or
acquisition of assets.
7. Invest, in the aggregate, more than 15% of its net assets in illiquid
securities, including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A-eligible restricted securities),
securities which are not otherwise readily marketable, repurchase
agreements that mature in more than seven days and over-the-counter
options (and securities underlying such options) purchased by a Fund.
(This is an operating policy which may be changed without shareholder
approval consistent with the Investment Company Act and changes in
relevant SEC interpretations.)
8. Invest in any issuer for purposes of exercising control or management
of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company
Act.)
9. Invest more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry. (This does not
apply to investment in the securities of the U.S. Government, its
agencies or instrumentalities.) For purposes of this restriction, the
Fund generally relies on the U.S. Office of Management and Budget's
Standard Industrial Classifications.
10. Issue senior securities, as defined in the Investment Company Act,
except that this restriction shall not be deemed to prohibit the Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
11. Except as described in the Prospectus and this Statement of Additional
Information, acquire or dispose of put, call, straddle or spread
options and subject to the following conditions:
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which are held
at any time do not exceed 5% of the Fund's total assets.
12. Except as and unless described in the Prospectus and this Statement of
Additional Information, engage in short sales of securities. (This is
an operating policy which may be changed without shareholder approval,
consistent with applicable regulations.)
13. Invest in warrants, valued at the lower of cost or market, in excess of
5% of the value of the Fund's net assets. Warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
(This is an operating policy which may be changed without shareholder
approval.)
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14. Purchase more than 10% of the outstanding voting securities of any one
issuer. (This is an operating policy which may be changed without
shareholder approval.)
15. Invest in commodities, except for futures contracts or options on
futures contracts if, as a result thereof, more than 5% of the Fund's
total assets (taken at market value at the time of entering into the
contract) would be committed to initial deposits and premiums on open
futures contracts and options on such contracts.
To the extent these restrictions reflect matters of operating policy which may
be changed without shareholder vote, these restrictions may be amended upon
approval by the Board and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
Purchase Of Shares
The Fund issues four classes of shares: shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share represents an
identical interest in the investment portfolio of the Fund, and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing distribution fees. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which distribution fees are paid.
The Fund has entered into separate distribution agreements with the Distributor
in connection with the subscription and continuous offering of each class of
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs.
Initial sales charge alternatives--Class A and Class D shares
The term "purchase", as used in the Prospectus and this Statement of Additional
Information in connection with an investment in Class A and Class D shares of
the Fund, refers to a single purchase by an individual, or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or single
fiduciary account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company", as that term is defined in
the Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
Reduced initial sales charges
Right of Accumulation. Reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase shares of
the Fund subject to an initial sales charge at the offering price applicable to
the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of other eligible mutual funds in The Montgomery Focus Funds group. For
any such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended B-11
<PAGE>
or terminated at any time. Shares held in the name of a nominee or custodian
under pension, profit-sharing, or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating more than $25,000 of Class A or Class D shares of the Fund and of
other eligible mutual funds in The Montgomery Focus Funds made within a 13-month
period starting with the first purchase pursuant to a Letter of Intention in the
form provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at DST Systems, Inc., the Fund's
transfer agent (the "Transfer Agent"). The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of eligible Montgomery Focus Funds mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intention (minimum of $25,001), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter otherwise would be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge which would be applicable to a single purchase equal to
the total dollar value of the Class A or Class D shares then being purchased
under such Letter, but there will be no retroactive reduction of the sales
charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser prior
to termination or completion of the Letter of Intention will be deducted from
the total purchases made under such Letter.
Purchase Privilege of Certain Persons. The following individuals and groups may
purchase Class A shares of the Fund at net asset value: current or retired
directors, trustees, partners, officers and employees of the Trust, the
Distributor, the Manager and its shareholders, certain family members of the
above persons, and trusts or plans primarily for such persons; current or
retired registered representatives or full-time employees and their spouses and
minor children and plans of such persons; investors who exchange their shares
from an unaffiliated investment company which has a sales charge, so long as
shares are purchased within 60 days of the redemption; trustees or other
fiduciaries purchasing shares for certain retirement plans of organizations with
50 or more eligible employees; investment advisers, financial planners and
certain financial institutions that place trades for their own accounts or the
accounts of their clients either individually or through a master account and
who charge a management, consulting or other fee for their services;
employer-sponsored benefit plans in connection with purchases of shares of Class
A or Class D shares made as a result of participant-directed exchanges between
options in such a plan; `wrap accounts' for the benefit of clients of
broker-dealers, financial institutions or financial planners having sales or
service agreements with the Distributor or another broker-dealer or financial
institution with respect to sales of Class A or Class D shares; and such other
persons as are determined by the Board (or by the Distributor pursuant to
guidelines established by the Board) to have acquired shares under circumstances
not involving any sales expense to the Trust or the Distributor.
Acquisition of Certain Investment Companies. The public offering price of Class
D shares may be reduced to the net asset value per Class D share in connection
with the acquisition of the assets of or merger or consolidation with a public
or private investment company. The value of the assets or company acquired in a
tax-free transaction may be adjusted in appropriate cases to reduce possible
adverse tax consequences to the Fund which might result from an acquisition of
assets having net unrealized appreciation which is disproportionately higher at
the time of acquisition than the realized or unrealized appreciation of the
Fund. The issuance of Class D shares for consideration other than cash is
limited to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities at all
times shall remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to transfer
either by law or liquidity of market (except that the Fund may
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<PAGE>
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies of the Fund"
herein).
Reductions in or exemptions from the imposition of a sales load are due to the
nature of the investors and/or the reduced sales efforts that will be needed in
obtaining such investments.
Employer-sponsored retirement or savings plans and certain other arrangements
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments.
Certain other plans may purchase Class B shares with a waiver of the CDSC upon
redemption, based on similar criteria. Such Class B shares will convert into
Class D shares approximately six years after the plan purchases the first share
of any Montgomery Funds mutual fund. Minimum purchase requirements may be waived
or varied for such plans. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other arrangements
are available from The Montgomery Funds at (800) 572-3863.
Deferred sales charges--Class B and Class C shares
As discussed in the Prospectus, while Class B shares redeemed within five years
of purchase are subject to a CDSC under most circumstances, the charge is waived
on redemptions of Class B shares in connection with certain post-retirement
withdrawals from an Individual Retirement Account ("IRA") or other retirement
plan or following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a tax-free distribution following retirement under a
tax-deferred retirement plan or attaining age 59-1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided that the
redemption is requested within one year of the death or initial determination of
disability.
Distributions and Tax Information
Distributions. The Fund will receive income in the form of dividends and
interest earned on its investments in securities. This income, less the expenses
incurred in its operations, is the Fund's net investment income, substantially
all of which will be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the amount
of net investment income received by the Fund from its portfolio holdings, is
not guaranteed and is subject to the discretion of the Board. The Fund does not
pay "interest" or guarantee any fixed rate of return on an investment in its
shares.
The Fund also may derive capital gains or losses in connection with sales or
other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders.
Any dividend or distribution paid by the Fund reduces the Fund's net asset value
per share on the date paid by the amount of the dividend or distribution per
share. Accordingly, a dividend or distribution paid shortly after a purchase of
shares by a shareholder would represent, in substance, a partial return of
capital (to the extent it is paid on the shares so purchased), even though it
would be subject to income taxes.
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<PAGE>
Dividends and other distributions will be made in the form of additional shares
of the Fund unless the shareholder has otherwise indicated. Investors have the
right to change their elections with respect to the reinvestment of dividends
and distributions by notifying the Transfer Agent in writing, but any such
change will be effective only as to dividends and other distributions for which
the record date is seven or more business days after the Transfer Agent has
received the written request.
Tax Information. The Fund intends to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. The Fund's policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes based on net income. However, the
Board may elect to pay such excise taxes if it determines that payment is, under
the circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains by the
Fund will be taxable to shareholders whether made in cash or reinvested by the
Fund in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from the eight prior taxable years will
be applied against capital gains. Shareholders receiving distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so received equal to the net asset value of a share of the Fund on
the reinvestment date. Fund distributions also will be included in individual
and corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Fund or the securities dealer effecting a redemption of the Fund's shares by
a shareholder will be required to file information reports with the Internal
Revenue Service ("IRS") with respect to distributions and payments made to the
shareholder. In addition, the Fund will be required to withhold federal income
tax at the rate of 31% on taxable dividends, redemptions and other payments made
to accounts of individual or other non-exempt shareholders who have not
furnished their correct taxpayer identification numbers and certain required
certifications on the Account Application Form or with respect to which the Fund
or the securities dealer has been notified by the IRS that the number furnished
is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions, as stated
in the Prospectus. In order to avoid the payment of any federal excise tax based
on net income, the Fund must declare on or before December 31 of each year, and
pay on or before January 31 of the following year, distributions at least equal
to 98% of its ordinary income for that calendar year and at least 98% of the
excess of any capital gains over any capital losses realized in the one-year
period ending October 31 of that year, together with any undistributed amounts
of ordinary income and capital gains (in excess of capital losses) from the
previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To the
extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of the Fund at the end of its
fiscal year is invested in stock or securities of foreign corporations, the Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by the
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Fund. If this election is made, shareholders will be (i) required to include in
their gross income their pro rata share of the Fund's foreign source income
(including any foreign income taxes paid by the Fund), and (ii) entitled either
to deduct their share of such foreign taxes in computing their taxable income or
to claim a credit for such taxes against their U.S. income tax, subject to
certain limitations under the Code, including certain holding period
requirements. In this case, shareholders will be informed in writing by the Fund
at the end of each calendar year regarding the availability of any credits on
and the amount of foreign source income (including or excluding foreign income
taxes paid by the Fund) to be included in their income tax returns. If not more
than 50% in value of the Fund's total assets at the end of its fiscal year is
invested in stock or securities of foreign corporations, the Fund will not be
entitled under the Code to pass through to its shareholders their pro rata share
of the foreign taxes paid by the Fund. In this case, these taxes will be taken
as a deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. The Fund may invest
up to 10% of its total assets in the stock of foreign investment companies that
may be treated as "passive foreign investment companies" ("PFICs") under the
Code. Certain other foreign corporations, not operated as investment companies,
may nevertheless satisfy the PFIC definition. A portion of the income and gains
that the Fund derives from PFIC stock may be subject to a non-deductible federal
income tax at the Fund level. In some cases, the Fund may be able to avoid this
tax by electing to be taxed currently on its share of the PFIC's income, whether
or not such income is actually distributed by the PFIC. The Fund will endeavor
to limit its exposure to the PFIC tax by investing in PFICs only where the
election to be taxed currently will be made. Because it is not always possible
to identify a foreign issuer as a PFIC in advance of making the investment, the
Fund may incur the PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into futures contracts
and forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by the Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when the Fund purchases an option, the premium paid by
the Fund is recorded as an asset and is subsequently adjusted to the current
market value of the option. Any gain or loss realized by the Fund upon the
expiration or sale of such options held by the Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held by the Fund that
substantially diminishes the Fund's risk of loss from any other position held by
the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are subject to
Section 1256 of the Code ("Section 1256 Contracts") and that are held by the
Fund at the end of its taxable year generally will be required to be "marked to
market" for federal income tax purposes, that is, deemed to have been sold at
market value. Sixty percent of any net gain or loss recognized on these deemed
sales and 60% of any net gain or loss realized from any actual sales of Section
1256 Contracts will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain foreign
currency transactions that may affect the amount, timing and character of
income, gain or loss recognized by the Fund. Under these rules, foreign exchange
gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of the Fund's
gain or loss on the sale or other disposition of shares of a foreign corporation
may, because of changes in foreign currency exchange rates, be treated as
ordinary income or loss under Section 988 of the Code rather than as capital
gain or loss.
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A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the fund and the purchase price of the Fund's shares
acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must generally
"mark to market" at the end of its taxable year all securities which it owns.
The resulting gain or loss is treated as ordinary (and not capital) gain or
loss, except to the extent allocable to periods during which the dealer held the
security for investment. The "mark to market" rules do not apply, however, to a
security held for investment which is clearly identified in the dealer's records
as being held for investment before the end of the day in which the security was
acquired. The IRS has issued guidance under Section 475 that provides that, for
example, a bank that regularly originates and sells loans is a dealer in
securities, and subject to the "mark to market" rules. Shares of the Fund held
by a dealer in securities will be subject to the "mark to market" rules unless
they are held by the dealer for investment and the dealer property identifies
the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in gains or losses
for tax purposes to the extent of the difference between the proceeds and the
shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income taxes,
and the treatment thereof may differ from the federal income tax treatment.
Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Fund. The law firm of Paul, Hastings, Janofsky & Walker
LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign
persons are subject to different tax rules, and may be subject to withholding of
up to 30% on certain payments received from the Fund. Shareholders are advised
to consult with their own tax advisers concerning the application of foreign,
federal, state and local taxes to an investment in the Fund.
Trustees and Officers
The Trustees of the Trust are responsible for the overall management of the
Fund, including general supervision and review of its investment activities. The
officers (the Trust, as well as two an affiliated Trusts, The Montgomery Funds
and The Montgomery Funds III, have the same officers), who administer the Funds'
daily operations, are appointed by the Boards of Trustees. The current Trustees
and officers of the Trusts performing a policy-making function and their
affiliations and principal occupations for the past five years are set forth
below:
Richard W. Ingram, President and Treasurer (Age 42)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Ingram is the
Executive Vice President and Director of Client Services and Treasury
Administration of FDI; Senior Vice President of Premier Mutual Fund Services,
Inc., an affiliate of FDI ("Premier Mutual") and an officer of certain
investment companies advised or administered by JP Morgan ("Morgan"), Dreyfus
Corporation ("Dreyfus"), Waterhouse Asset Management, Inc. ("Waterhouse"), RCM
Capital Management LLC ("RCM") and Harris Trust and Savings Bank ("Harris") or
their respective affiliates. Prior to April 1997, Mr. Ingram was Senior Vice
President and Director of Client Services and Treasury Administration of FDI.
From March 1994 to November 1995, Mr. Ingram was Vice President and Division
Manager of First Data Investor Services Group, Inc. From 1989 to 1994, Mr.
Ingram was Vice President, Assistant Treasurer and Tax Director - Mutual Funds
of The Boston Company, Inc.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 30)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
("TBCA").
Elizabeth A. Keeley, Vice President and Assistant Secretary (Age 28)
B-16
<PAGE>
200 Park Avenue, New York, New York 10166. Ms. Keeley is the Vice President and
Senior Counsel of FDI and Premier Mutual, and an officer of certain investment
companies advised or administered by Morgan, Dreyfus, RCM, Waterhouse and Harris
or their respective affiliates. Prior to August 1996, Ms. Keeley was Assistant
Vice President and Counsel of FDI and premier Mutual. Prior to September 1995,
Ms. Keeley was enrolled at Fordham University School of Law and received her
J.D. in May 1995. Prior to September 1995, Ms. Keeley was an Assistant at the
National Association for Public Interest Law.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 32)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
John E. Pelletier, Vice President and Secretary (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 0209. Mr. Pelletier is the
Senior Vice President, General Counsel, Secretary and Clerk of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From February 1992 to April 1994, Mr. Pelletier served as Counsel for TBCA. From
August 1990 to February 1992, Mr. Pelletier was employed as an Associate at
Ropes & Gray (a Boston law firm).
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 28)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (Age 35)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior
B-17
<PAGE>
Vice President, Treasurer and Chief Financial Officer, Chief Administrative
Officer and Director of FDI. From July 1988 to November 1993, Mr. Tower was
Financial Manager of The Boston Company, Inc.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner off Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
and executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (Age 53)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 48)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Board
of Schools of the Sacred Heart, and is a member of the Archdiocese of San
Francisco Finance Council, where she chairs the Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (Age 56).*
101 California Street, San Francisco, California 94111. Mr. Doyle has been the
Chairman and a Director of Montgomery Asset Management, Inc., the general
partner of the Manager, and Chairman of the Manager since April 1990. Mr. Doyle
is a managing director of the investment banking firm of Montgomery Securities,
the Fund's former Distributor, and has been employed by Montgomery Securities
since October 1983.
The officers of the Trusts, and the Trustees who are considered "interested
persons" of the Trusts, receive no compensation directly from the Trusts for
performing the duties of their offices. However, those officers and Trustees who
are officers or partners of the Manager or the Distributor may receive
remuneration indirectly because the Manager will receive a management fee from
the Funds and Funds Distributor, Inc. will receive commissions for executing
portfolio transactions for the Funds. The Trustees who are not affiliated with
the Manager or the Distributor receive an annual retainer and fees and expenses
for each regular Board meeting attended. The aggregate compensation paid by each
Trust to each of the Trustees during the fiscal year ended June 30, 1997, and
the aggregate compensation paid to each of the Trustees during the fiscal year
ended June 30, 1997 by all of the registered investment companies to which the
Manager provides investment advisory services, are set forth below.
The officers of the Trust, and the Trustees who are considered "interested
persons" of the Trust, receive no compensation directly from the Trust for
performing the duties of their offices. However, those officers and Trustees who
are officers or partners of the may receive remuneration indirectly because the
Manager will receive a management fee from the Funds and Funds Distributor,
Inc., will receive commissions for executing portfolio transactions for the
Funds. The Trustees who are not affiliated with the Manager or the Distributor
receive an annual retainer and fees and expenses for each regular Board meeting
attended. The aggregate compensation paid by the Trust to each of the Trustees
during the fiscal year ended June 30, 1997, and the aggregate compensation paid
to each of the Trustees during the fiscal year ended June 30, 1997 by all of the
registered investment companies to which the Manager provides investment
advisory services, are set forth below.
- ----------------------------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Name of Trustee Aggregate Compensation from Pension or Retirement Total Compensation From the
the Trust Benefits Accrued as Part of Trust and Fund Complex
Fund Expenses* (2 additional Trusts)
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
John A. Farnsworth $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Andrew Cox $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Cecilia H. Herbert $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
Each of the above persons serves in the same capacity for The Montgomery Funds
and The Montgomery Funds III, investment companies registered under the
Investment Company Act, with separate series of funds managed by the Manager.
Investment Management and Other Services
Investment Management Services. As stated in the Prospectus, investment
management services are provided to the Fund by Montgomery Asset Management,
LLC, the Manager, pursuant to an Investment Management Agreement
[_______________] (the "Agreement"). The Agreement is in effect with respect to
the Fund for two years after the Fund's inclusion in the Trust's Agreement (on
or around the beginning of public operations) and shall continue in effect
thereafter for periods not exceeding one year so long as such continuation is
approved at least annually by (i) the Board or the vote of a majority of the
outstanding shares of the Fund, and (ii) a majority of the Trustees who are not
interested persons of any party to the Agreement, in each case by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Agreement may be terminated at any time, without penalty, by the Fund or the
Manager upon 60 days' written notice, and is automatically terminated in the
event of its assignment as defined in the Investment Company Act.
For services performed under the Agreement, the Fund pays the Manager a monthly
management fee (accrued daily but paid when requested by the Manager) based upon
the average daily net assets of the Fund, at the annual rate of
one-hundred-twenty-five one-hundredths of one percent (1.25%) of the first $250
million in average daily net assets and one percent (1.00%) of average daily
assets over $250 million.
As noted in the Prospectus, the Manager has agreed to reduce some or all of its
management fee if necessary to keep total operating expenses (excluding any Rule
12b-1 distribution fees and servicing fees), expressed on an annualized basis,
at or below one and nine-tenths of one percent (1.90%) of the Fund's average net
assets. The Manager also may voluntarily reduce additional amounts to increase
the return to the Fund's investors. Any reductions made by the Manager in its
fees are subject to reimbursement by the Fund within the following three years
provided the Fund is able to effect such reimbursement and remain in compliance
with the foregoing expense limitation. The Manager generally seeks reimbursement
for the oldest reductions and waivers before payment by the Fund for fees and
expenses for the current year.
Operating expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions, if
any, expenses incurred in connection with any merger or reorganization, any
extraordinary expenses such as litigation, and such other expenses as may be
deemed excludable with the prior written approval of any state securities
commission imposing an expense limitation. The Manager may also at its
discretion from time to time pay for other Fund expenses from its own funds or
reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the Board at a duly
called meeting. In considering the Agreement, the Trustees specifically
considered and approved the provision which permits the Manager to seek
reimbursement of any reduction made to its management fee within the three-year
period following such reduction subject to the Fund's ability to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Trustees also considered that any such management fee reimbursement will be
accounted for on the financial statements of the Fund as a contingent liability
of the Fund and will appear as a footnote to the Fund's financial statements
until such time as it appears that the Fund will be able to effect such
reimbursement. At such time as it appears probable that the Fund is able to
effect such reimbursement, the amount of reimbursement that the Fund is able to
effect will be accrued as an expense of the Fund for that current period.
The Manager also may act as an investment adviser or administrator to other
persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trust and who are also affiliated persons of the
Manager.
B-19
<PAGE>
The use of the name "Montgomery" by the Trust and by the Fund is pursuant to the
consent of the Manager, which may be withdrawn if the Manager ceases to be the
Manager of the Fund.
Share Marketing Plan. The Trust has adopted a Share Marketing Plan (or Rule
12b-1 Plan) (the "12b-1 Plan") with respect to the Fund pursuant to Rule 12b-1
under the Investment Company Act. The Manager serves as the distribution
coordinator under the 12b-1 Plan and, as such, receives any fees paid by the
Fund pursuant to the 12b-1 Plan.
The Board, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (the
"Independent Trustees"), at their regular quarterly meeting, adopted the 12b-1
Plan for the Class B, Class C and Class D shares of the Fund. The initial
shareholders of the Class B, Class C and Class D shares of the Fund approved the
12b-1 Plan covering each Class prior to offering those Classes to the public.
Class A shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, the Fund pays distribution fees to the Manager at an
annual rate of 0.75% of the Fund's aggregate average daily net assets
attributable to its Class B and Class C shares and at an annual rate of 0.25% of
the Fund's aggregate average daily net assets attributable to its Class D shares
to reimburse the Manager for its expenses in connection with the promotion and
distribution of those Classes. The 12b-1 Plan provides that the Manager may use
the distribution fees received from the Class of the Fund covered by the 12b-1
Plan only to pay for the distribution expenses of that Class. Distribution fees
are accrued daily and paid monthly, and are charged as expenses of the Class B,
Class C and Class D shares as accrued. Class B, Class C and Class D shares are
not obligated under the 12b-1 Plan to pay any distribution expense in excess of
the distribution fee. Thus, if the 12b-1 Plan were terminated or otherwise not
continued, no amounts (other than current amounts accrued but not yet paid)
would be owed by the Class to the Manager.
The 12b-1 Plan provides that it shall continue in effect from year to year
provided that a majority of the Board, including a majority of the Independent
Trustees, vote annually to continue the 12b-1 Plan. The 12b-1 Plan (and any
distribution agreement between the Fund, the Distributor or the Manager and a
selling agent with respect to the Class B, Class C or Class D shares) may be
terminated without penalty upon at least 60-days' notice by the Distributor or
the Manager, or by the Fund by vote of a majority of the Independent Trustees,
or by vote of a majority of the outstanding shares (as defined in the Investment
Company Act) of the Class to which the 12b-1 Plan applies.
All distribution fees paid by the Fund under the 12b-1 Plan will be paid in
accordance with Rule 2830 of the NASD Rules of Conduct, as such Rule may change
from time to time. Pursuant to the 12b-1 Plan, the Board will review at least
quarterly a written report of the distribution expenses incurred by the Manager
on behalf of the Class B and Class C shares of the Fund. In addition, as long as
the 12b-1 Plan remains in effect, the selection and nomination of Trustees who
are not interested persons (as defined in the Investment Company Act) of the
Trust shall be made by the Trustees then in office who are not interested
persons of the Trust.
Shareholder Services Plan. The Trust has adopted a Shareholder Services Plan
(the "Services Plan") with respect to the Fund. The Manager (or its affiliate)
serves as the service provider under the Services Plan and, as such, receives
any fees paid by the Fund pursuant to the Services Plan. The Trust has not yet
implemented the Services Plan for the Fund and has not set a date for
implementation. Affected shareholders will be notified at least 60 days before
implementation of the Services Plan.
The Board, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Services Plan or in any agreement related to the Services Plan
(the "Independent Trustees"), at their regular quarterly meeting, adopted the
Services Plan for the Class B, Class C and Class D shares of the Fund. The
initial shareholder of the Class B, Class C and Class D shares of the Fund
approved the Services Plan covering each Class prior to offering those Classes
to the public. Class A shares are not covered by the Services Plan.
Under the Services Plan, when implemented, Class B, Class C and Class D shares
of the Fund will pay a continuing service fee to the Manager, the Distributor or
other service providers, in an amount, computed and prorated on a daily basis,
equal to 0.25% per annum of the average daily net assets of Class B, Class C and
Class D shares of the Fund. Such amounts are compensation for providing certain
services to clients owning shares of Class B, Class C or Class D of the Fund,
including personal services such as processing purchase and redemption
transactions, assisting in change of address requests and similar administrative
details, and providing other information and assistance with respect to the
Fund, including responding to shareholder inquiries.
B-20
<PAGE>
The Distributor. The Distributor may provide certain administrative services to
the Fund on behalf of the Manager. The Distributor will also perform investment
banking, investment advisory and brokerage services for persons other than the
Fund, including issuers of securities in which the Fund may invest. These
activities from time to time may result in a conflict of interests of the
Distributor with those of the Fund, and may restrict the ability of the
Distributor to provide services to the Fund.
The Custodian. Morgan Stanley Trust Company serves as principal Custodian of the
Fund's assets, which are maintained at the Custodian's principal office and at
the offices of its branches and agencies throughout the world. The Custodian has
entered into agreements with foreign sub-custodians approved by the Trustees
pursuant to Rule 17f-5 under the Investment Company Act. The Custodian, its
branches and sub-custodians generally hold certificates for the securities in
their custody, but may, in certain cases, have book records with domestic and
foreign securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities. Compensation for the services
of the Custodian is based on a schedule of charges agreed on from time to time.
Execution of Portfolio Transactions
In all purchases and sales of securities for the Fund, the primary consideration
is to obtain the most favorable price and execution available. Pursuant to the
Agreement, the Manager determines which securities are to be purchased and sold
by the Fund and which broker-dealers are eligible to execute the Fund's
portfolio transactions, subject to the instructions of, and review by, the Fund
and the Board. Purchases and sales of securities within the U.S. other than on a
securities exchange will generally be executed directly with a "market-maker"
unless, in the opinion of the Manager or the Fund, a better price and execution
can otherwise be obtained by using a broker for the transaction.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the
over-the-counter markets. A Fund purchasing ADRs and EDRs may purchase those
listed on stock exchanges, or traded in the over-the-counter markets in the U.S.
or Europe, as the case may be. ADRs, like other securities traded in the U.S.,
will be subject to negotiated commission rates. The foreign and domestic debt
securities and money market instruments in which the Fund may invest may be
traded in the over-the-counter markets.
Purchases of portfolio securities for the Fund also may be made directly from
issuers or from underwriters. Where possible, purchase and sale transactions
will be effected through dealers (including banks) which specialize in the types
of securities which the Fund will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principals for
their own account. Purchases from underwriters will include a concession paid by
the issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
In placing portfolio transactions, the Manager will use its best efforts to
choose a broker-dealer capable of providing the services necessary generally to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the firm's ability to execute trades in a specific market required by
the Fund, such as in an emerging market, the size of the order, the difficulty
of execution, the operational facilities of the firm involved, the firm's risk
in positioning a block of securities, and other factors.
Provided the Trust's officers are satisfied that the Fund is receiving the most
favorable price and execution available, the Manager may also consider the sale
of the Fund's shares as a factor in the selection of broker-dealers to execute
its portfolio transactions. The placement of portfolio transactions with
broker-dealers who sell shares of the Fund is subject to rules adopted by the
National Association of Securities Dealers, Inc. ("NASD").
While the Fund's general policy is to seek first to obtain the most favorable
price and execution available, in selecting a broker-dealer to execute portfolio
transactions, weight may also be given to the ability of a broker-dealer to
furnish brokerage, research and statistical services to the Fund or to the
Manager, even if the specific services were not imputed just to the Fund and may
be lawfully and appropriately used by the Manager in advising other clients. The
Manager considers such information, which is in addition to, and not in lieu of,
the services required to be performed by it under the Agreement, to be useful in
varying degrees, but of indeterminable value. In negotiating any commissions
with a broker or evaluating the spread to be paid to a dealer, the Fund may
therefore pay a higher commission or spread than would be the case if no weight
were
B-21
<PAGE>
given to the furnishing of these supplemental services, provided that the amount
of such commission or spread has been determined in good faith by the Fund and
the Manager to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer, which services either produce
a direct benefit to the Fund or assist the Manager in carrying out its
responsibilities to the Fund. The standard of reasonableness is to be measured
in light of the Manager's overall responsibilities to the Fund.
Investment decisions for the Funds are made independently from those of other
client accounts of the Manager or its affiliates, and suitability is always a
paramount consideration. Nevertheless, it is possible that at times the same
securities will be acceptable for the Fund and for one or more of such client
accounts. The Manager and its personnel may have interests in one or more of
those client accounts, either through direct investment or because of management
fees based on gains in the account. The Manager has adopted allocation
procedures to ensure the fair allocation of securities and prices between the
Fund and the Manager's various other accounts. These procedures emphasize the
desirability of bunching trades and price averaging (see below) to achieve
objective fairness among clients advised by the same portfolio manager or
portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and the Fund seek to acquire
the same security at the same general time (especially if the security is thinly
traded or is a small cap stock), the Fund may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price or
obtain a lower yield for such security. Similarly, the Fund may not be able to
obtain as high a price for, or as large an execution of, an order to sell any
particular security at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security that the Fund is purchasing
or selling, each day's transactions in such security generally will be allocated
between the Fund and all such client accounts in a manner deemed equitable by
the Manager, taking into account the respective sizes of the accounts, the
amount being purchased or sold and other factors deemed relevant by the Manager.
In many cases, the Fund's transactions are bunched with the transactions for
other client accounts. It is recognized that in some cases this system could
have a detrimental effect on the price or value of the security insofar as the
Fund is concerned. In other cases, however, it is believed that the ability of
the Fund to participate in volume transactions may produce better executions for
the Fund.
The Manager's sell discipline for the Fund's investment in issuers is based on
the premise of a long-term investment horizon; however, sudden changes in
valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon. The
Fund will limit investments in illiquid securities to 15% of net assets.
Sell decisions at the country level are dependent on the results of the
Manager's asset allocation model. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Manager's
assumed time horizon in those countries. In addition, the rapid pace of
privatization and initial public offerings creates a flood of new opportunities
which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of factors
including current stock valuation relative to the estimated fair value range, or
a high P/E relative to expected growth. Negative changes in the relevant
industry sector, or a reduction in international competitiveness and a declining
financial flexibility may also signal a sell.
The Fund does not effect securities transactions through brokers in accordance
with any formula, nor does it effect securities transactions through such
brokers solely for selling shares of the Fund. However, as stated above,
Montgomery Securities may act as one of the Fund's brokers in the purchase and
sale of portfolio securities, and other brokers who execute brokerage
transactions as described above may from time to time effect purchases of shares
of the Fund for their customers.
Depending on the Manager's view of market conditions, the Fund may or may not
purchase securities with the expectation of holding them to maturity, although
its general policy is to hold securities to maturity. The Fund may, however,
sell securities prior to maturity to meet redemptions or as a result of a
revised management evaluation of the issuer.
B-22
<PAGE>
Additional Purchase and Redemption Information
The Trust reserves the right in its sole discretion to (i) suspend the continued
offering of the Fund's shares, and (ii) reject purchase orders in whole or in
part when in the judgment of the Manager or the Distributor such suspension or
rejection is in the best interest of the Fund.
When in the judgment of the Manager it is in the best interests of the Fund, an
investor may purchase shares of the Fund by tendering payment in kind in the
form of securities, provided that any such tendered securities are readily
marketable, their acquisition is consistent with the Fund's investment objective
and policies, and the tendered securities are otherwise acceptable to the Fund's
Manager. For the purposes of sales of shares of the Fund for such securities,
the tendered securities shall be valued at the identical time and in the
identical manner that the portfolio securities of the Fund are valued for the
purpose of calculating the net asset value of the Fund's shares. A shareholder
who purchases shares of the Fund by tendering payment for the shares in the form
of other securities may be required to recognize gain or loss for income tax
purposes on the difference, if any, between the adjusted basis of the securities
tendered to the Fund and the purchase price of the Fund's shares acquired by the
shareholder.
Payments to shareholders for shares of the Fund redeemed directly from the Fund
will be made as promptly as possible but no later than three days after receipt
by the Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectus, except that the Fund may
suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange ("NYSE") is restricted as
determined by the SEC or the NYSE is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC (upon application by
the Fund pursuant to Section 22(e) of the Investment Company Act) making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but, as
described below or under abnormal conditions that make payment in cash unwise,
the Fund may make payment partly in its portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Fund does not anticipate that it will normally make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Fund pay in cash all requests for redemption
by any shareholder of record limited in amount, however, during any 90-day
period to the lesser of $250,000 or 1% of the value of the Trust's net assets at
the beginning of such period.
When in the judgment of the Manager it is in the best interests of the Fund, an
investor may redeem shares of the Fund and receive securities from the Fund's
portfolio selected by the Manager in its sole discretion, provided that such
redemption is not expected to affect the Fund's ability to attain its investment
objective or otherwise materially affect its operations. For the purposes of
redemptions in kind, the redeemed securities shall be valued at the identical
time and in the identical manner that the other portfolio securities are valued
for purposes of calculating the net asset value of the Fund's shares.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the Fund's portfolio
securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Fund are available for purchase by any
retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and
individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Fund through an IRA, there is
available through the Fund a prototype individual retirement account and custody
agreement. The custody agreement provides that DST Systems, Inc. will act as
custodian under the plan, and will furnish custodial services for an annual
maintenance fee per participating account of $10. (These fees are in addition to
the normal custodian charges paid by the Fund and will be deducted automatically
from each Participant's account.) For further details, including the right to
appoint a successor custodian, see the plan and custody agreements and the IRA
Disclosure Statement as provided by the Fund. An IRA that invests in shares of
the Fund may also be used by employers who have adopted a Simplified Employee
Pension Plan. Individuals or employers who wish to invest in shares of the Fund
under a custodianship with another bank or trust company must make individual
arrangements with such institution.
B-23
<PAGE>
The IRA Disclosure Statement available from the Fund contains more information
on the amount investors may contribute and the deductibility of IRA
contributions. In summary, for tax years prior to January 1, 1998, an individual
may make deductible contributions to the IRA of up to 100% of earned
compensation, not to exceed $2,000 annually (or $4,000 to two IRAs if there is a
non-working spouse). An IRA may be established whether or not the amount of the
contribution is deductible. Generally, a full deduction for federal income tax
purposes will only be allowed to taxpayers who meet one of the following two
additional tests:
(A) the individual and the individual's spouse are each not an active
participant in an employer's qualified retirement plan, or
(B) the individual's adjusted gross income (with some modifications) before
the IRA deduction is (i) $40,000 or less for married couples filing
jointly, or (ii) $25,000 or less for single individuals. The maximum
deduction is reduced for a married couple filing jointly with a
combined adjusted gross income (before the IRA deduction) between
$40,000 and $50,000, and for a single individual with an adjusted gross
income (before the IRA deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any retirement plan
to consult with an attorney or to obtain advice from a competent retirement plan
consultant with respect to the requirements of such plans and the tax aspects
thereof.
Determination of Net Asset Value
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As noted in the Prospectus, the net asset value of shares of the Fund generally
will be determined at least once daily as of 4:00 p.m., New York City time, on
each day the NYSE is open for trading. It is expected that the Exchange will be
closed on Saturdays and Sundays and on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The Fund may, but does not expect to, determine the net asset value
of its shares on any day when the NYSE is not open for trading if there is
sufficient trading in its portfolio securities on such days to materially affect
the per share net asset value.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In addition,
trading in and valuation of foreign securities may not take place on every day
in which the NYSE is open for trading. Furthermore, trading takes place in
various foreign markets on days in which the NYSE is not open for trading and on
which the Fund's net asset values are not calculated. Occasionally, events
affecting the values of such securities in U.S. dollars on a day on which the
Fund calculates its net asset value may occur between the times when such
securities are valued and the close of the NYSE which will not be reflected in
the computation of the Fund's net asset value unless the Trustees or their
delegates deem that such events would materially affect the net asset value, in
which case an adjustment would be made.
Generally, the Fund's investments are valued at market value or, in the absence
of a market value, at fair value as determined in good faith by the Manager and
the Trust's Pricing Committee pursuant to procedures approved by or under the
direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded on
securities exchanges are valued at the last sale price on the exchange on which
such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange, are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60 days are
valued at current market prices, as discussed above. Short-term securities with
60 days or less remaining to maturity are, unless conditions indicate otherwise,
amortized to
B-24
<PAGE>
maturity based on their cost to the Fund if acquired within 60 days of maturity
or, if already held by the Fund on the 60th day, based on the value determined
on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments or by an independent pricing service, approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
An option that is written by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last offer price. An option that
is purchased by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contract equals the unrealized gain or loss on the contract that is determined
by marking the contract to the current settlement price for a like contract on
the valuation date of the futures contract if the securities underlying the
futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the Board.
If any securities held by the Fund are restricted as to resale or do not have
readily available market quotations, the Manager and the Trust's Pricing
Committee determine their fair value, following procedures approved by the
Board. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the official exchange rate or, alternatively, at
the mean of the current bid and asked prices of such currencies against the U.S.
dollar last quoted by a major bank that is a regular participant in the foreign
exchange market or on the basis of a pricing service that takes into account the
quotes provided by a number of such major banks. If neither of these
alternatives is available or both are deemed not to provide a suitable
methodology for converting a foreign currency into U.S. dollars, the Board in
good faith will establish a conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
Principal Underwriter
The Distributor acts as the Fund's principal underwriter in a continuous public
offering of the Fund's shares. The Distributor is currently registered as a
broker-dealer with the SEC and in all 50 states, and is a member of most of the
principal securities exchanges in the U.S. and is a member of the NASD. The
Underwriting Agreement between the Fund and the Distributor is in effect for two
years from when the Fund commences public offerings, and shall continue in
effect thereafter for periods not exceeding one year if approved at least
annually by (i) the Board or the vote of a majority of the outstanding
securities of the Fund (as defined in the Investment Company Act), and (ii) a
majority of the Trustees who are not interested persons of any such party, in
each case by a vote cast in person at a meeting called for the purpose of voting
on such approval. The Underwriting Agreement may be terminated without penalty
by the parties thereto upon 60 days' written notice, and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act. There are no underwriting commissions paid with respect to sales of the
Fund's shares.
B-25
<PAGE>
Performance Information
As noted in the Prospectus, the Fund may, from time to time, quote various
performance figures in advertisements and investor communications to illustrate
its past performance. Performance figures will be calculated separately for
Class A, Class B, Class C and Class D.
Average Annual Total Return. Total return may be stated for any relevant period
as specified in the advertisement or communication. Any statements of total
return for the Fund will be accompanied by information on the Fund's average
annual compounded rate of return over the most recent four calendar quarters and
the period from the Fund's inception of operations. The Fund may also advertise
aggregate and average total return information over different periods of time.
The Fund's "average annual total return" figures are computed according to a
formula prescribed by the SEC, expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
1-, 5- or 10-year period at the end of each
respective period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
Aggregate Total Return. The Fund's "aggregate total return" figures represent
the cumulative change in the value of an investment in the Fund for the
specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of
a l-, 5- or 10-year period at the end of a
l-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
The Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses. The
total return information also assumes cash investments and redemptions and,
therefore, includes the applicable expense reimbursement fees discussed in the
Prospectus. Consequently, any given performance quotation should not be
considered representative of the Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
Comparisons. To help investors better evaluate how an investment in the Fund
might satisfy their investment objectives, advertisements and other materials
regarding the Fund may discuss various financial publications. Materials may
also compare performance (as calculated above) to performance as reported by
other investments, indices, and averages. The following publications, indices
and averages may be used:
a) Standard & Poor's 500 Composite Stock Index, one or more of the Morgan
Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor--A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings
account rates and average loan rates.
c) Lipper Mutual Fund Performance Analysis and Lipper Fixed Income Fund
Performance Analysis--A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual
mutual fund
B-26
<PAGE>
performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Salomon Brothers Bond Market Roundup--A weekly publication which
reviews yield spread changes in the major sectors of the money,
government agency, futures, options, mortgage, corporate, Yankee,
Eurodollar, municipal, and preferred stock markets. This publication
also summarizes changes in banking statistics and reserve aggregates.
In addition, one or more portfolio managers or other employees of the Manager
may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolios, that the averages are generally
unmanaged, and that the items included in the calculations of such averages may
not be identical to the formulae used by the Fund to calculate its figures.
The Fund may also publish its relative rankings as determined by independent
mutual fund ranking services like Lipper Analytical Services, Inc. and
Morningstar, Inc.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's total return for any period should
not be considered as a representation of what an investment may earn or what an
investor's total return may be in any future period.
Reasons to Invest in the Fund. From time to time the Fund may publish or
distribute information and reasons supporting the Manager's belief that a
particular Fund may be appropriate for investors at a particular time. The
information will generally be based on internally generated estimates resulting
from the Manager's research activities and projections from independent sources.
These sources may include, but are not limited to, Barings, The WEFA Group,
Consensus Estimate, Datastream, Micropal, I/B/E/S Consensus Forecast, Worldscope
and Reuters as well as both local and international brokerage firms. For
example, the Fund may suggest that certain countries or areas may be
particularly appealing to investors because of interest rate movements,
increasing exports and/or economic growth.
Research. Largely inspired by its prior affiliate, Montgomery Securities--which
has established a tradition for specialized research in emerging growth
companies--the Manager has developed its own tradition of intensive research.
The Manager has made intensive research one of the important characteristics of
the Montgomery Funds style.
The portfolio managers for Montgomery's global and international Funds work
extensively on developing an in-depth understanding of particular foreign
markets and particular companies. And they very often discover that they are the
first analysts from the United States to meet with representatives of foreign
companies, especially those in emerging markets nations.
Extensive research into companies that are not well known--discovering new
opportunities for investment--is a theme that may be used for the Fund.
In-depth research, however, goes beyond gaining an understanding of unknown
opportunities. The portfolio analysts have also developed new ways of gaining
information about well-known parts of the domestic market.
General Information
Investors in the Fund will be informed of the Fund's progress through periodic
reports. Financial statements will be submitted to shareholders semi-annually,
at least one of which will be certified by independent public accountants.
Expenses incurred in connection with the establishment and registration of
shares of any other funds constituting a separate series of the Trust will be
assumed by each respective series. The expenses incurred in connection with the
establishment and registration of shares of the Fund as a separate series of the
Trust have been assumed by the Fund and are being amortized over a period of
five years commencing with the date of the Fund's inception. The Manager has
agreed, to the extent necessary, to advance the organizational expenses incurred
by the Fund and will be reimbursed for such expenses after commencement of the
Fund's
B-27
<PAGE>
operations. Investors purchasing shares of the Fund bear such expenses only as
they are amortized daily against the Fund's investment income.
As noted above, Morgan Stanley and Trust Company (the "Custodian") acts as
custodian of the securities and other assets of the Fund. The Custodian does not
participate in decisions relating to the purchase and sale of securities by the
Fund.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is the Fund's Master Transfer Agent. The Master Transfer Agent has
delegated certain transfer agent functions to DST Systems, Inc., P.O. Box
419073, Kansas City, Missouri 64141-6073, the Fund's Transfer and Dividend
Disbursing Agent.
[________________], 50 Fremont Street, San Francisco, California 94105, are the
independent auditors for the Fund.
The validity of shares offered hereby will be passed on Paul, Hastings, Janofsky
& Walker LLP, 345 California Street, San Francisco, California 94104.
Among the Trustees' powers enumerated in the Declaration of Trust is the
authority to terminate the Trust or any series of the Trust, or to merge or
consolidate the Trust or one or more of its series with another trust or company
without the need to seek shareholder approval of any such action.
The Trust is registered with the Securities and Exchange Commission as a
non-diversified management investment company, although the Fund is a
diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of the Fund. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of the Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.
Financial Statements
The Fund has recently commenced operations and, therefore, has not yet prepared
financial statements for public distribution.
B-28
<PAGE>
Appendix
Description ratings for Standard & Poor's Ratings Group ("S&P"); Moody's
Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade)
category.
Commercial Paper Rating
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Issues assigned an A rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus designation.
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<PAGE>
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with
doubtful capacity for payment.
D Issues carrying this designation are in default, and payment
of interest and/or repayment of principal is in arrears.
Moody's Investors Service, Inc.
Bond Rating
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
generally are known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
B-30
<PAGE>
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will
be evidenced by leading market positions in well established
industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate
liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Rating
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B-31
<PAGE>
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Rating
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-l+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F1+.
F-2 Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Rating
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
B-32
<PAGE>
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
Commercial Paper Rating
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by
ample asset protection. Risk factors are minor. Paper rated Duff-2 is
regarded as having good certainty of timely payment, good access to
capital markets and sound liquidity factors and company fundamentals.
Risk factors are small. Paper rated Duff 3 is regarded as having
satisfactory liquidity and other protection factors. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected. Paper rated Duff 4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to insure
against disruption in debt service. operating factors and market access
may be subject to a high degree of variation. Paper rated Duff 5 is in
default. The issuer has failed to meet scheduled principal and/or
interest payments.
B-33
<PAGE>
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PART C
OTHER INFORMATION
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<PAGE>
THE MONTGOMERY FUNDS II
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FORM N-1A
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PART C
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Item 24. Financial Statements and Exhibits
(a) For Montgomery Institutional Series: Emerging Markets
Portfolio:
(1) Portfolio Investments as of June 30, 1997; Statement of
Assets and Liabilities as of June 30, 1997; Statement of
Operations for the Year Ended June 30, 1997; Statement of
Changes in Net Assets for the year ended June 30, 1997;
Financial Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1997; Notes to
Financial Statements; Independent Auditor's Report on the
foregoing, all incorporated by reference to the Annual Report
to Shareholders of Montgomery Institutional Series: Emerging
Markets Portfolio for the year ended June 30, 1997.
(b) For Montgomery U.S. Asset Allocation Fund:
(1) Portfolio Investments as of June 30, 1997; Statement of
Assets and Liabilities as of June 30, 1997; Statement of
Operations for the Year Ended June 30, 1997; Statement of
Changes in Net Assets for the year ended June 30, 1997;
Financial Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1997; Notes to
Financial Statements; Independent Auditors' Report on the
foregoing, all incorporated by reference to the Annual Report
to Shareholders of Montgomery Asset Allocation Fund for the
year ended June 30, 1997.
(c) Exhibits:
(1) Amended and Restated Agreement and Declaration of
Trust.D
(2) Amended and Restated By-Laws.D
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement.G
(6) Form of Underwriting Agreement.G
(7) Benefit Plan(s) - Not applicable.
(8) Custodian Agreement.E
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A Previously filed as part of Pre-Effective Amendment No. 2 to the Registration
Statement, filed on November 24, 1993.
B Previously filed as part of the Registration Statement, filed on October 1,
1993.
C Previously filed as part of Pre-Effective Amendment No. 1 to the Registration
Statement, filed on November 15, 1993. D Previously filed as part of
Post-Effective Amendment No. 9 to the Registration Statement, filed on
November 1, 1994.
E Previously filed as part of Post-Effective Amendment No. 11 to the
Registration Statement, filed on March 31, 1995.
F Previously filed as part of Post-Effective Amendment No. 14 to the
Registration Statement, filed on September 13, 1995.
G Previously filed as part of Post-Effective Amendment No. 22 to the
Registration Statement, filed on July 31, 1997.
C-1
<PAGE>
(9)(A) Administrative Services Agreement.G
(9)(B) Form of Multiple Class Plan.F
(9)(C) Form of Shareholder Services Plan.F
(10) Consent and Opinion of Counsel as to legality of shares.C
(11) Consent of Independent Auditors - Not applicable.
(12) Financial Statements omitted from Item 23 - Not applicable.
(13) Form of Subscription Agreement for initial shares.C
(14) Model Retirement Plan Documents - Not applicable.
(15) Form of Share Marketing Plan (Rule 12b-1 Plan)G
(16)(A) Performance Computation for Montgomery Institutional Series:
Emerging Markets Portfolio.E
(16)(B) Performance Computation for Montgomery Asset Allocation Fund.E
(27) Financial Data Schedule is incorporated by reference to Form
N-SAR filed for the period ended December 31, 1996.
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A Previously filed as part of Pre-Effective Amendment No. 2 to the Registration
Statement, filed on November 24, 1993.
B Previously filed as part of the Registration Statement, filed on October 1,
1993.
C Previously filed as part of Pre-Effective Amendment No. 1 to the Registration
Statement, filed on November 15, 1993.
D Previously filed as part of Post-Effective Amendment No. 9 to the
Registration Statement, filed on November 1, 1994.
E Previously filed as part of Post-Effective Amendment No. 11 to the
Registration Statement, filed on March 31, 1995.
F Previously filed as part of Post-Effective Amendment No. 14 to the
Registration Statement, filed on September 13, 1995.
G Previously filed as part of Post-Effective Amendment No. 22 to the
Registration Statement, filed on July 31, 1997.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, LLC, a Delaware limited company,
is the manager of each series of the Registrant, of The Montgomery Funds, a
Delaware business trust, and of The Montgomery Funds III, a Delaware business
trust. Montgomery Asset Management LLC is a subsidiary of Commerzbank AG based
in Frankfurt. The Registrant, The Montgomery Funds and The Montgomery Funds III
are deemed to be under the common control of each of those two entities.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of September 30, 1997
-------------- ------------------------
Montgomery Institutional Series:
Emerging Markets Portfolio 32
Montgomery U.S. Asset Allocation Fund 8,607
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers
the Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust
shall indemnify any person who was or is a party or is threatened to be made a
party to any proceeding by reason of the fact that such person is and other
amounts or was an agent of the Trust, against expenses, judgments, fines,
settlement and other amounts actually and reasonable incurred in connection with
such proceeding if that person acted in good faith and reasonably believed his
or her conduct to be in the best interests of the Trust. Indemnification will
not be provided in certain circumstances, however, including instances of
willful misfeasance, bad faith, gross negligence, and reckless disregard of the
duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to the Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
C-3
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
Effective July 31, 1997, MAM, L.P. completed the sale of
substantially all of its assets to the current investment manager -- Montgomery
Asset Management, LLC ("MAM, LLC"), a subsidiary of Commerzbank AG. Mr. R.
Stephen Doyle is the Chief Executive Officer, Mr. Mark B. Geist is the
President, Mr. Kevin T. Hamilton is the Managing Director, Mr. John T. Story is
an Executive Vice President and Mr. David E. Demarest is a Managing Director and
Chief Administrative Officer of MAM, LLC. In addition to their positions ads
officers, each of them is also a Director of MAM, LLC. Mr. Heinz Josef Hockmann,
Mr. Dietrich-Kurt Frowein and Mr. Andreas Kleffel (each of whom is an officer of
Commerzbank) also are Directors of MAM, LLC.
Prior to July 31, 1997, Montgomery Securities, which is a broker-dealer
and the prior principal underwriter of The Montgomery Funds, was the sole
limited partner of the prior investment manager, Montgomery Asset Management,
L.P. ("MAM, L.P."). The general partner of MAM, L.P. was a corporation,
Montgomery Asset Management, Inc. ("MAM, Inc."), certain of the officers and
directors of which serve in similar capacities for MAM, L.P. R. Stephen Doyle
was the Chairman and Chief Executive Officer of MAM, L.P.; Mark B. Geist was the
President, John T. Story was the Managing Director of Mutual Funds and Executive
Vice President; and David E. Demarest was Chief Administrative Officer;
Information about the individuals who functioned as officers of MAM, L.P. was
set forth in Part B of Post-Effective Amendment No. 51 to the Registration
Statement as filed with the Commission on July 16, 1997 and are herein
incorporated by reference.
Item 29. Principal Underwriter
(a) Funds Distributor, inc. currently acts as distributor for:
BJB Investment Funds
Burridge funds
The Brinson Funds
Fremont Mutual Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
The JPM Advisor Funds
The JPM Institutional Funds
The JPM Poerpoint Funds
The JPM Series Trust
The JPM Series Trust II
LKCM Fund
Monetta Trust
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc
Orbitex Group of Funds
The PanAgora Institutional Funds
RCM Capital Funds, Inc.
RCM Equity Funds, Inc.
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Cash Management Fund, Inc.
WEBS Index Fund, Inc.
Funds Distributor, Inc. is registered with the Securities and Exchange
Commission as a broker- dealer and is a member of the National Association of
Securities Dealers. Funds Distributor, Inc. is an indirect wholly-owned
subsidiary of Boston Institutional Group, Inc., a holding company all of whose
outstanding shares are owned by key employees.
(b) The following is a list of the executive officers,
directors and partners of Funds Distributor, Inc.:
C-4
<PAGE>
Director, President and Chief Marie E. Connolly
Executive Officer
Executive Vice President Richard W. Ingram
Executive Vice President Donald R. Robertson
Senior Vice President, General John E. Pelletier
Counsel, Secretary and Clerk
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President Joseph F. Tower, III
Treasurer and Chief Financial Officer
Senior Vice President Paula R. David
Senior Vice President Bernard A. Whalen
Director William J. Nutt
(c) Not Applicable.
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will be kept
by the Registrant's Transfer Agent, DST Systems, Inc., P.O. Box 1004 Baltimore,
Kansas City, Missouri 64105, except those records relating to portfolio
transactions and the basic organizational and Trust documents of the Registrant
(see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule
31a-1(b)), which will be kept by the Registrant at 600 Montgomery Street, San
Francisco, California 94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's last annual
report to Shareholders, upon request and without charge.
(c) Registrant has undertaken to comply with Section 16(a) of
the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Francisco, the
State of California, on the 14th day of October, 1997.
THE MONTGOMERY FUNDS II
By: Richard W. Ingram*
----------------------------------
Richard W. Ingram
President and Treasurer (Principal
Executive Officer and Principal
Accounting and Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
R. Stephen Doyle * Trustee October 14, 1997
- ------------------
R. Stephen Doyle
Andrew Cox * Trustee October 14, 1997
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee October 14, 1997
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee October 14, 1997
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
----------------------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.