As filed with the Securities and Exchange Commission on May 11, 1998
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. 29
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 30
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)
Greg M. Siemons, Assistant Secretary
101 California Street
San Francisco, California 94104
(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 June 30, 1998 pursuant to Rule 485(b)
__X__ 60 days after filing pursuant to Rule 485(a)(1)
_____ 75 days after filing pursuant to Rule 485(a)(2)
_____ on ______________ pursuant to Rule 485(a)
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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
<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 the prospectus for Montgomery Institutional
Series: International Growth Portfolio
Part A-Prospectus for Montgomery Institutional Series: International
Growth Portfolio
Part B-Statement of Additional Information for Montgomery Institutional
Series: International Growth Portfolio.
Part C-Other Information
Signature Page
<PAGE>
<TABLE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Prospectus for Montgomery Institutional Series: International Growth Portfolio)
<CAPTION>
N-1A Item No. Item Location in the Registration Statement by Heading
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Cover Page, "Fees and Expenses of the Fund"
3. Condensed Financial Information Not Applicable
4. General Description Cover Page, "The Fund's Investment Objective and
Policies," "Portfolio Securities," "Other
Investment Practices," "Risk Considerations" and
"General Information"
5. Management of the Fund "The Fund's Investment Objectives and Policies,"
"Management of the Fund" and "How to Invest in
the Fund"
5A. Management's Discussion of Fund Not Applicable
Performance
6. Capital Stock and Distributions "Dividends and Distributions," "Taxation" and
"General Information"
7. Purchase of Securities Being "How to Invest in the Fund," "How Net Asset Value
Offered is Determined," "General Information" and "Backup
Withholding Instructions"
8. Redemption or Repurchase "How to Redeem an Investment in the Fund" and
"General Information"
9. Pending Legal Proceedings Not Applicable
<PAGE>
PART B: Information Required in
Statement of Additional Information
(Statement of Additional Information for
Montgomery Institutional Series: International Growth Portfolio)
N-1A Item No. Item Location in the Registration Statement by Heading
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History "The Trust" and "General Information"
13. Investment Objectives "Investment Objectives and Policies of the Fund,"
"Risk Factors" and "Investment Restrictions"
14. Management of the Registrant "Trustees and Officers"
15. Control Persons and Principal "Trustees and Officers" and "General Information"
Holders of Securities
16. Investment Advisory and Other "Investment Management and Other Services"
Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and Other Securities "The Trust" and "General Information"
19. Purchase, Redemption and Pricing "Additional Purchase and Redemption Information"
of Securities Being Offered and "Determination of Net Asset Value"
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of Performance Data "Performance Information"
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
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PART A
PROSPECTUS FOR MONTGOMERY INSTITUTIONAL SERIES:
MONTGOMERY INTERNATIONAL GROWTH PORTFOLIO
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
101 California Street
San Francisco, California 94111
(415) 248-6330
Invest wisely.(SM)
Montgomery Institutional Series: International Growth Portfolio
Prospectus
June 30, 1998
Montgomery Institutional Series: International Growth Portfolio (the "Fund")
seeks capital appreciation for institutional investors by investing primarily in
equity securities of companies outside the United States having total market
capitalizations of more than $1 billion. As with all mutual funds, attainment of
the Fund's investment objective cannot be ensured.
The Fund's shares are sold at net asset value ("NAV") with no sales load, no
commissions, no Rule 12b-1 fees and no dividend reinvestment or exchange fees.
In general, the minimum initial investment in the Fund is $2,000,000, and
subsequent investments must be at least $100,000. The Manager or the Distributor
may waive these minimums. See "How to Invest in the Fund."
The Fund is a separate series of The Montgomery Funds II, an open-end management
investment company (the "Trust") managed by Montgomery Asset Management, LLC
(the "Manager"), an affiliate of Commerzbank AG, and is intended primarily for
institutional investors. Funds Distributor, Inc., which is not affiliated with
the Manager, is the distributor of the Fund (the "Distributor").
This prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated June 30, 1998,
as may be revised, has been filed with the Securities and Exchange Commission
(the "SEC"), is incorporated by this reference and is available without charge
by calling (415) 248-6659. If you are viewing the electronic version of this
prospectus through an online computer service, you may request a printed version
free of charge by calling (415) 248-6659.
Like all mutual funds, 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
Fees and Expenses of the Fund.................................................3
The Fund's Investment Objective and Policies..................................4
Management of the Fund........................................................4
How to Invest in the Fund.....................................................6
How to Redeem an Investment in the Fund.......................................7
How Net Asset Value Is Determined.............................................8
Dividends and Distributions...................................................8
Taxation......................................................................9
Portfolio Securities..........................................................9
Other Investment Practices...................................................11
Risk Considerations..........................................................14
General Information..........................................................16
Backup Withholding Instructions..............................................17
2
<PAGE>
Fees and Expenses of the Fund
Shareholder Transaction Expenses
<TABLE>
An investor would pay the following charges when buying or redeeming shares of
the Fund in cash:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
MAXIMUM SALES LOAD
MAXIMUM SALES LOAD IMPOSED ON MAXIMUM
IMPOSED ON PURCHASES REINVESTED DIVIDENDS DEFERRED SALES LOAD REDEMPTION FEES+ EXCHANGE FEES
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None 1.50%++ None
- ----------------------------------------------------------------------------------------------------------
<FN>
+ Shareholders effecting redemptions via wire transfer may be required to
pay fees, including a $10 wire fee and other fees, that will be directly
deducted from redemption proceeds. Shareholders who request redemption
checks to be sent by Federal Express may be required to pay a $10 fee that
will be directly deducted from redemption proceeds.
++ The 1.50% redemption fee applies only to those shares redeemed within
one year from the date of purchase and is paid to the Fund. Shareholders
who have invested at least $2,000,000 in the Fund (less any prior
redemptions) are not subject to the redemption fee. See "How to Redeem an
Investment in the Fund - Redemption Fee."
</FN>
</TABLE>
Annual Operating Expenses (as a percentage of average net assets)
- --------------------------------------------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Management Fee* 0.75%
Rule 12b-1 fees None
Other Expenses (after reimbursement)* 0.15%
Total Fund Operating Expenses* 0.90%
- --------------------------------------------------------------------------------
*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, subject to possible reimbursement by
the Fund within the following three years if such reimbursement can be
achieved within the foregoing expense limit. The Manager generally seeks
reimbursement for the oldest fee reductions and expense reimbursements
before payment by the Fund for fees and expenses for the current year.
Absent the reduction, actual total Fund operating expenses is estimated to
be 1.90% (1.20% other expenses). The Manager may terminate these voluntary
reductions at any time. See "Management of the Fund."
The previous tables are 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.
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 (assuming application of the redemption expense reimbursement fee):
-------------------------------------------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
INTERNATIONAL GROWTH PORTFOLIO
-------------------------------------------------------------------------------
1 Year $ 9
3 Years $ 29
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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.
3
<PAGE>
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 investing in the Fund are described in those sections as
well as in "Risk Considerations."
The investment objective of the Fund is capital appreciation which, under normal
conditions, it seeks by investing at least 65% of its total assets in equity
securities of companies outside the United States having total market
capitalizations of more than $1 billion. The Fund generally invests the
remaining 35% of its total assets in a similar manner, but may invest those
assets in equity securities of U.S. companies, in lower-capitalization companies
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. The Fund does not expect to invest more than 10%
of its assets in securities of emerging markets companies. The Fund invests in
foreign securities and smaller companies, which may involve special risks not
present in other mutual funds. See "Portfolio Securities" and "Risk
Considerations."
The Fund targets companies with potential for above-average, long-term growth in
sales and earnings on a sustained basis with securities reasonably priced at the
time of purchase, in the Manager's opinion, compared with the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research;
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
The Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the United States, but no country may represent more
than 40% of its total assets. The Manager uses its financial expertise and
research capabilities in markets throughout the world in attempting to identify
those countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Management of the Fund
The Montgomery Funds II (the "Trust") has a Board of Trustees (a "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, a Delaware
limited liability company, is a subsidiary of Commerzbank AG ("Commerzbank").
The Manager was formed in February 1997 as an investment adviser registered as
such with the SEC under the Investment Advisers Act of 1940, as amended. It
advises private accounts as well as the Fund. Commerzbank, one of the largest
publicly held commercial banks in Germany, had total assets of approximately
$288 billion as of December 31, 1997. Commerzbank and its affiliates had more
than $92 billion in assets under management as of October 31, 1997.
Commerzbank's asset management operations involve more than 1,000 employees in
13 countries worldwide.
Portfolio Managers
The Fund is co-managed by John D. Boich and Oscar A. Castro.
John D. Boich, CFA, is a senior portfolio manager and principal. From 1990 to
1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, Mr. Boich worked as a financial advisor with Prudential-Bache
Securities and E.F. Hutton & Company.
Oscar A. Castro, CFA, is a senior portfolio manager and principal. Before
joining the Manager, he was vice president/portfolio manager at G.T. Capital
Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity partnership. From 1987
to 1989, he was deputy portfolio manager/analyst at Templeton International.
4
<PAGE>
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 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 MANAGEMENT FEE (ANNUAL RATE)
- -------------------------------------------- --------------------------------- ---------------------------
<S> <C> <C>
Montgomery Institutional Series: First $500 million 0.75%
International Growth Portfolio More than $500 million 0.65%
- -------------------------------------------- --------------------------------- ---------------------------
</TABLE>
The management fee is higher than for most mutual funds but is believed by the
Manager to be comparable for other mutual funds with similar strategies and
policies.
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 an annual rate of five one-hundredths of one percent (0.05%) of
average daily equity assets.
The Fund is responsible for its own operating expenses including but not limited
to: the Manager's fee; the Administrator's fee; taxes, if any; brokerage and
commission expenses, if any; interest charges on any borrowings; transfer agent,
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.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses at or below nine-tenths of one percent (0.90%) of the
Fund's average net assets. The Manager also may voluntarily reduce additional
amounts and/or to reimburse the Fund for its expenses to increase the return to
the Fund's investors. The Manager may terminate these voluntary reductions
and/or reimbursements at any time. Any reductions made by the Manager in its
fees and any reimbursements by the Manager of Fund expenses 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 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 broker-dealers and other
intermediaries who distribute the Fund's shares as well as other 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. 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 Fund
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
5
<PAGE>
Agent delegates certain transfer agent functions to DST Systems, Inc., P.O. Box
419073, Kansas City, Missouri 64141-6073, the Funds' 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").
How to Invest in the Fund
The Fund's shares are offered directly to the institutional investors, with no
sales load, at their next-determined net asset value 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-FUND (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 intermediaries that have an agreement with the
Fund by the close of trading (generally, 4:00 P.M. eastern time, except when the
market closes earlier due to a holiday or for any other reason) on any day that
the New York Stock Exchange (the "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.
Initial Investment
The minimum initial investment in the Fund is $2,000,000. Subsequent investments
must be at least $100,000. The Manager or the Distributor, at its discretion,
may waive these minimums. Shareholders who invest in the Fund through a
financial intermediary (such as a no transaction fee network or a financial
adviser) may qualify for a lower minimum initial and subsequent investment.
Purchases may also be made in certain circumstances by payment of securities.
See "In Kind Purchases" below and the Statement of Additional Information for
further details.
Initial Investment by Check
o Complete the New Account application. Tell us that you wish to invest
in the Montgomery Institutional Series: International Growth Portfolio.
Make your check payable to The Montgomery Funds.
o Mail or deliver the completed New Account application and your check(s)
to the Transfer Agent: Montgomery Institutional Series: International
Growth Portfolio, P.O. Box 419073, Kansas City, MO 64141-6073.
Initial Investment by Wire
o Call the Transfer Agent to tell it that you intend to make your initial
investment by wire. Provide the Transfer Agent with your name and the
dollar amount to be invested, and tell the Transfer Agent that you wish
to invest in the Montgomery Institutional Series: International Growth
Portfolio. The Transfer Agent will provide you with an account number
and 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 Complete the New Account application. Be sure to include the date and
the account number. Mail or deliver the completed New Account
application to the appropriate address shown at the end of the New
Account application.
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: Montgomery Institutional Series: International Growth
Portfolio
For credit to: (shareholder(s) name)
Shareholder account number: (shareholder(s) account number)
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 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 Montgomery Institutional
Series: International
6
<PAGE>
Growth Portfolio and the account number to which your investment should
be credited. Write your shareholder account number on the check.
o Mail the check(s) and investment stub to the Transfer Agent: Montgomery
Institutional Series: International Growth Portfolio, P.O. Box 419073,
Kansas City, MO 64141-6073.
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 Investment by Wire" above.
It is essential that complete information regarding your account be included in
all wire instructions in order to facilitate prompt and accurate handling of
investments. Investors may obtain further information about remitting funds in
this manner and any fees that may be imposed from their own banks.
All investments must be made in U.S. dollars, and, to avoid fees and delays,
checks must be drawn only on banks located in the United States. A charge may be
imposed if any check used for investment does not clear. The Fund and the
Distributor each reserve the right to reject any purchase order in whole or in
part.
If an order, together with payment in proper form, is received by the Transfer
Agent by the close of trading (generally, 4:00 P.M. eastern time, except when
the market closes earlier due to a holiday or for any other reason) on any day
that the New York Stock Exchange (the "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 times will be purchased at the next-determined
net asset value after receipt of the order.
In-Kind Purchases
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 purposes of in-kind purchases, a security will be considered
"readily marketable" if it is in the process of undergoing customary settlement
and/or registration in its primary market. 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.
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, in the case of purchase orders, securities dealers. The
procedures for requesting a redemption are set forth below.
Direct Redemption by Check or Wire
Redemptions can be requested by writing to the Fund's Transfer Agent. If you
want to have redemption proceeds wired directly to your bank account, include a
voided check with your letter. Send your letter to Montgomery Institutional
Series: International Growth Portfolio, P.O. Box 419073, Kansas City, MO
64141-6073. The minimum amount that may be wired is $100,000 (wire charges, if
any, will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager's discretion. The Transfer
Agent requires that the signature(s) on any written request be guaranteed by an
eligible guarantor institution, such as a commercial bank, a member firm of a
domestic stock exchange or the National Association of Securities Dealers, Inc.,
an authorized credit union, a national securities exchange, a registered
securities association, a clearing agency or a savings association. Please
contact the Transfer Agent for more information.
7
<PAGE>
In-Kind Redemptions
When in the judgment of the Manager it is consistent with 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 at 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.
General
Payment of redemption proceeds is made promptly regardless of when redemption
occurs, and normally within three days after the 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 on the New Account application to a predesignated
account. The minimum amount that may be wired is $100,000 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees at the Manager's discretion. 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.
Due to the relatively high cost of maintaining smaller accounts, the Fund may
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 $100,000.
If the Fund decides to make such 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 back up to $100,000 before the Fund takes any
action.
Redemption Fee
The Fund imposes a 1.50% redemption fee on shares redeemed within one year of
purchase. The redemption fee will be deducted from the redemption proceeds and
will be paid to the Fund.
Shareholders who have invested at least $2,000,000 in the Fund (less any prior
redemptions) are exempt from the redemption fee. This $2,000,000 requirement
also applies individually to shareholders who own shares indirectly through a
financial intermediary (such as a no transaction fee network or a financial
adviser). When calculating the total amount invested for purposes of this
exception, any increase or decrease in the value of a shareholder's account due
to market appreciation and/or depreciation is not taken into account.
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 asked
price. Securities for which market quotations are not readily available or that
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.
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
without 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 value, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset
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value may not be reflected in the Fund's calculation of its net asset value
unless the Manager, under the supervision of the Board, determines that a
particular event would materially affect the Fund's net asset value.
Dividends and Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends and 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 you 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 your account at the closing net asset value on the
reinvestment date, without the imposition of an investment expense reimbursement
fee. Furthermore, if you have elected to receive cash distributions in cash and
the postal or other delivery service is unable to deliver checks to your address
of record, your distribution option will automatically be converted to having
all dividend and other distributions reinvested in additional shares. Also, as
is the case for redemption checks, no interest will accrue on amounts
represented by uncashed distribution checks. See "Uncashed Distribution or
Redemption Checks" above.
Distributions Affect the Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of the
Fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in the Fund's daily net asset value.
The share price of the Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Fund declared a dividend in the amount of $0.50 per share. If the Fund's share
price was $10.00 on December 30, the Fund's share price on December 31 would be
$9.50 barring market fluctuations.
"Buying a Dividend"
If you buy shares of the Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
The Fund intends to elect and to qualify to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (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 its assets.
Accordingly, the Fund generally will not be liable for federal income tax or
excise tax based on the 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 "Portfolio
Securities" and 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 gain 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 gain 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 advisors regarding the particular tax consequences to
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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.
Portfolio Securities
The following describes portfolio securities in which the Fund may invest.
Equity Securities
In seeking its investment objective, the Fund emphasizes investments in common
stock. The Fund also may invest in other types of equity securities and
equity-derivative securities such as preferred stocks, convertible securities,
warrants, units, rights, and options on securities and on securities indices.
Depositary Receipts
The Fund may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other depositary receipts. 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. Unsponsored depositary receipts programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not be
as current as for sponsored depositary receipts, and the prices of unsponsored
depositary receipts may be more volatile than if such depositary receipts were
sponsored by the issuer.
Convertible Securities
The Fund may invest in convertible securities as a form of equity securities. A
convertible security 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 stocks in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
Convertible securities provide, through their conversion feature, an opportunity
to participate in capital appreciation resulting from a market price advance in
a convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock. For
purposes of allocating the Fund's investments, the Manager regards convertible
securities as a form of equity securities.
Securities Warrants
The Fund may invest up to 5% of its net assets in warrants. Typically a warrant
is a long-term option issued by a corporation that gives the holder the
privilege of buying a specified number of shares of the underlying common stock
of the issuer at a specified exercise price at any time on or before an
expiration date. A warrant not exercised or disposed of by its expiration date
expires worthless.
Privatizations
The Fund believes that foreign government 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 in certain foreign countries may be limited by local law and the
terms may be less advantageous than for local investors. There can be no
assurance that foreign governments will continue to sell their interests in
companies currently owned or controlled by them or that privatization programs
will be successful.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and other
similar vehicles (collectively, "special situations") could enhance its capital
appreciation potential. This 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 established by the Board of Trustees. The Fund will not invest
more than 15% of its net assets in illiquid investments, including special
situations.
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Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies. 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
that it invests in 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 the 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 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. As an operating policy which may be changed by the Board, the Fund will
not invest more than 5% of its total assets in debt securities rated lower than
BBB by Standard & Poor's Corporation ("S&P"), Baa by Moody's Investor Service,
Inc. ("Moody's") or BBB by Fitch Investor Services ("Fitch"), or in unrated debt
securities deemed to be of comparable quality by the Manager using guidelines
approved by the Board of Trustees. Subject to this limitation, the Fund may
invest in any debt security, including securities in default. See "Risk
Considerations."
In addition to traditional corporate, governmental and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, government entities and companies of
emerging markets countries.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
the Fund's assets to be invested in equity securities versus debt securities:
levels and anticipated trends in inflation and interest rates; expected rates of
economic growth and corporate profits growth; changes in government policies,
including regulations governing industry, trade, financial markets, and foreign
and domestic investment; stability, solvency and expected trends of governmental
finances; and the conditions of the balance of payments and changes in the terms
of trade.
U.S. Government Securities
The Fund may invest in fixed-rate and floating or variable-rate U.S. government
securities. Certain obligations, including U.S. Treasury bills, notes and bonds,
and mortgage-related securities of the Government National Mortgage Association
("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, for example those issued by the
Federal Home Loan Bank; whereas others, such as those issued by the Federal
National Mortgage Association ("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. The U.S. government does not guarantee the net
asset value of the Fund's shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Asset-Backed Securities
The Fund may invest up to 5% of its total assets in asset-backed securities.
These are secured by and payable from pools of assets, such as motor vehicle
installment loan contracts, leases of various types of real and personal
property, and receivables from revolving credit (e.g., credit card) agreements.
These securities are subject to the risk of prepayment.
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Other Investment Practices
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, a 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. The repurchase price
reflects an agreed-upon rate of return not determined by the coupon rate on the
underlying security. 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. See the Statement of Additional Information for
further information.
Borrowing
The Fund may borrow money from banks in an aggregate amount not to exceed
one-third of the Fund's total assets to meet temporary or emergency needs, and
the Fund may pledge its assets in connection with such borrowings. The Fund will
not purchase securities while such borrowings exceed 10% of the Fund's total
assets.
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 waived or even a loss of rights in the collateral should the borrower
of the securities fail financially.
When-Issued and Forward Commitment Securities
The Fund may purchase U.S. government or other securities on a "when-issued,"
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
the Fund will enter into when-issued and forward commitments only with the
intention of actually receiving or delivering the securities, as the case may
be. No income accrues on securities that have been purchased pursuant to a
forward commitment or on a when-issued basis prior to delivery to the Fund.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its Custodian to collateralize the Fund's obligation
with collateral assets equal to the value of the when-issued or forward
commitment securities, marked-to-market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in the 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, stock
options, currency options, and stock and stock index options; futures contracts;
and swaps and options on futures contracts on U.S. government and foreign
government securities and currencies. The Board has adopted derivatives
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
instruments 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.
Although utilization of options, futures contracts and related options and
similar instruments may be advantageous to the Fund, if the Manager is not
successful in employing such instruments in managing the Fund's investments or
in predicting changes in the market, the Fund's performance will be worse than
if the Fund did not make such investments. In addition, the Fund pays
commissions and other costs in connection with such investments, which may
increase the Fund's expenses and reduce its return. See the Statement of
Additional Information for a further discussion of the possible risks involved
in transactions in options and futures contracts and related options.
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Hedging transactions involve certain risks. Although the Fund may benefit from
the use of hedging positions, 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. The Statement of Additional Information contains further
information on the Fund's hedging and risk management practices, including
related risks and other special considerations.
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 prevailing 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.
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 in relation to another currency by entering into a forward
contract to buy or sell the amount of foreign currency needed to settle the
transaction. Second, if the Manager believes that the currency of a particular
foreign country may rise or fall or substantially against the U.S. dollar, it
may enter into a forward contract to buy or sell the currency of such country
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. The Fund will not enter into forward
contracts if, as a result, it would have more than one-third of its total assets
committed to such contracts (unless it owns the currency that it is obligated to
deliver or has caused its Custodian to segregate segregable assets having a
value sufficient to cover its obligations). Although forward contracts will be
used primarily to protect the Fund from adverse currency movements, they involve
the risk that currency movements will not be accurately predicted.
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 that 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). Put options allow the Fund to protect the unrealized
gains in an appreciated security that it owns without actually selling the
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 transaction costs.
The Fund also may purchase put and call options on stock indices in order to
hedge against the risk of stock market or industrywide 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.
The Fund may purchase and write options in the over-the-counter market ("OTC
options") to the same extent that it may engage in transactions in
exchange-traded options. OTC options differ from exchange-traded options in that
they are negotiated individually and terms of the contract are not standardized
as is the case with exchange-traded options. Moreover, because there is no
clearing corporation involved in an OTC option, there is a risk of
non-performance by the counterparty to the option. However, OTC options
generally are much more available for securities in a wider range of expiration
dates and exercise prices than exchange-traded options. It is the current
position of the staff of the SEC that OTC options (and securities underlying the
OTC options) are illiquid securities except to the extent that OTC options are
entered into with U.S. government securities dealers designated by the Federal
Reserve Bank of New York under guidelines specified by the SEC staff.
Accordingly, the Fund will treat OTC options as subject to the Fund's
limitations on illiquid securities until such time as there is a change in the
SEC's position.
Futures and Options on Futures
The Fund may purchase and sell equity index futures contracts like S&P 500 Index
futures contracts. The S&P 500 Index futures contract (or other similar equity
futures contract) is an agreement to purchase or sell the cash value of the S&P
500 Index (or other applicable basket of securities) at a specified date and
price. The Fund may sell an equity index futures contract (i.e., enter into a
futures contract to sell a basket of the securities underlying the index) in an
attempt to hedge against an anticipated market decline. Conversely, the Fund may
purchase an equity index futures contract (i.e., enter into a futures contract
to purchase a basket of securities underlying the index) in an attempt to hedge
against any increase in the value of
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securities it anticipates purchasing. In addition, the Fund may also purchase
and sell put and call options on futures contracts. 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.
An equity index futures contract does not require the physical delivery of the
securities underlying the index. The Fund will settle its gains and losses on
futures transactions in cash.
The Fund will not enter into any futures contracts or related options if the sum
of the initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options purchased by the Fund would exceed 5% of the value of
the Fund's total assets. The Fund will not purchase futures contracts or related
options if, as a result, more than one-third of the value of the Fund's total
assets would be so invested.
Hedging Considerations
Hedging transactions involve certain risks. Although a Fund may benefit from the
use of hedging positions, 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. The Fund also could be exposed to risks if it could not close out
its futures or options positions because of an illiquid secondary market. The
Statement of Additional Information contains further information on the Fund's
hedging and risk management practices, including related risks and other special
considerations.
Futures, options and options on futures have effective durations which, in
general, are closely related to the effective duration of their underlying
securities. Holding purchased futures or call option positions (supported by
collateral assets) may lengthen the effective duration of the Fund's portfolio.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats as illiquid any securities that are 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. The Fund also treats as illiquid repurchase
agreements with maturities in excess of seven days. 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, as
amended, and that, subject to review by the Board and guidelines adopted by the
Board, the Manager has determined to be liquid.
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
the 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 is appropriate,
regardless of how long the securities have been held by the Fund. 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 or dealer markups and
other transaction costs and may result in the recognition of capital gains that
may be distributed to shareholders. Portfolio turnover in excess of 100% is
considered high and increases such costs. The annual portfolio turnover for the
Fund is anticipated to be approximately 100%. The Manager does not regard
portfolio turnover as a limiting factor, however.
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
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their then-current financial positions and goals. The Fund is subject to
additional investment policies and restrictions described in the Statement of
Additional Information, some of which are fundamental.
Risk Considerations
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund.
Foreign Securities
The Fund invests primarily in foreign securities, including debt or equity
securities denominated in foreign currencies. Accordingly, shareholders should
carefully consider the substantial risks involved in investing in securities
issued by companies and governments of foreign nations, which are in addition to
the usual risks inherent in domestic investments. Investments in securities of
companies domiciled in, and markets of, emerging markets countries may be
subject to higher risks than investments in more-developed countries.
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 investment in securities of issuers in foreign nations. In addition,
there is often less publicly available information about foreign issuers than
those in the United States. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards, and auditing
practices and requirements may not be comparable to those applicable to U.S.
companies. Further, the Fund may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. Further 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 generally are greater than in the
United States. Such markets have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions which resulted in
settlement difficulty. The inability of the Fund to make intended security
purchases due to settlement difficulty problems could cause the Fund to miss
attractive investment opportunities. Inability to sell a portfolio security due
to settlement problems could result either in loss to the Fund if the value of
the portfolio security subsequently declined or, if the Fund entered into a
contract to sell the security, could result in possible claims against the Fund.
In certain countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. 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 United States
Because the securities of the Fund may be denominated in foreign currencies, the
value of such securities to the Fund will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions among currencies. A change in the value of a
foreign currency against the U.S. dollar will result in a corresponding change
in the U.S. dollar value of the Fund's securities denominated in that currency.
Such changes also will affect the Fund's income and distributions to
shareholders. The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange among the currencies of different
nations, and the Fund therefore may engage in certain foreign currency hedging
strategies. Such strategies involve certain investment risks and transaction
costs to which the Fund might not otherwise be subject. These risks include
dependence on the Manager's ability to predict movements in exchange rates, as
well as the difficulty of predicting, and the imperfect movements among,
exchange rates and currency hedges.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not free-floating against the U.S. dollar. Further, certain
currencies may not be internationally traded. Certain of these currencies have
experienced a steady devaluation relative to the U.S. dollar. Any devaluations
in the currencies in which the Fund's portfolio securities are denominated 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 fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain countries. 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,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
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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.
Small Companies
While the Fund may invest in mature suppliers of products, services and
technologies, the Fund also may invest in smaller companies that can benefit
from the development of new products and services. These smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks 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 the securities of such smaller
companies may fluctuate to a greater degree than those of the securities of
other issuers.
Lower-Quality Debt
The Fund is authorized to invest in medium-quality (rated or equivalent to BBB
by S&P or Fitch's or Baa by Moody's) or (in limited amounts) high-risk,
lower-quality debt securities (i.e., securities rated below BBB or Baa) or, if
unrated, deemed to be of equivalent investment quality as determined by the
Manager. 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 is the case
with higher-grade debt securities.
As an operating policy, which may be changed by the Board of Trustees without
shareholder approval, the Fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by S&P or Baa by Moody's or, if unrated,
deemed to be of comparable quality as determined by the Manager using guidelines
approved by the Board of Trustees. The Board may consider a change in this
operating policy if, in its judgment, economic conditions change such that a
higher level of investment in high-risk, lower-quality debt securities would be
consistent with the interests of the Fund and its shareholders. Unrated debt
securities are not necessarily of lower quality than rated securities, but they
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 in the Manager's opinion. The Fund, from time to time, may
purchase defaulted debt securities if, in the opinion of the Manager, the issuer
may resume interest payments in the near future.
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.
Equity Swaps
The Fund may invest in equity swaps. 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.
General Information
The Trust
The Fund is a series of The Montgomery Funds II, a Delaware business trust
organized on September 8, 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, $0.01 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 R shares of the Fund. The Fund may in
the future designate other classes of shares for specific purposes.
16
<PAGE>
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 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. Although 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.
The Fund has reserved the right, if approved by the Board of Trustees, 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.
Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. 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, but is subject to the expense
reimbursement fees discussed elsewhere in this prospectus. 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. See "Performance Information" in the Statement of Additional
Information.
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. The Fund's annual report contains additional performance
information and is available upon request and without charge by calling (415)
248-6659.
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
During the year, the Fund will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for preauthorized automatic investment,
exchange and redemption services (quarterly).
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after
June 30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o An annual updated prospectus is mailed to existing shareholders in
October or November.
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. Any questions should be
directed to The Montgomery Funds at (415) 248-6330.
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<PAGE>
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 New
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
taxable dividends, capital-gains 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
Internal Revenue Service (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 on the New 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.
If a shareholder has been notified by the IRS that the shareholder is subject to
backup withholding because the shareholder failed to report all interest and
dividend income on his, her or its tax return and the shareholder has not been
notified by the IRS that such withholding should cease, the shareholder should
cross out the backup withholding certification in the signature portion of the
New Account application.
If a shareholder is a nonresident alien or foreign entity, a completed Form W-8
should be provided to the Fund in order to avoid backup withholding on
redemptions and other payments. Dividends paid to a shareholder 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 a tax advisor.
---------------------------------
This prospectus is not an offering of the securities herein described in any
state in which such offering is unauthorized. No salesperson, 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.
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<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
(415) 248-6330
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
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
(800) 572-3863
Independent Auditors
---------------------
555 California Street
San Francisco, California 94104
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
THE MONTGOMERY FUNDS
101 California Street
San Francisco, California 94111
(415) 248-6330
Invest wisely.(SM)
19
<PAGE>
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PART B
STATEMENT OF ADDITIONAL INFORMATION FOR
MONTGOMERY INSTITUTIONAL SERIES:
MONTGOMERY INTERNATIONAL GROWTH PORTFOLIO
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
MONTGOMERY INSTITUTIONAL SERIES: INTERNATIONAL GROWTH
PORTFOLIO
101 California Street
San Francisco, California 94111
(415) 248-6330
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1998
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 Institutional Series: International
Growth Portfolio (the "Fund") is a series of the Trust. The Fund is managed by
Montgomery Asset Management LLC (the "Manager") and its shares are 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 June 30, 1998, 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
Page
The Trust.....................................................................2
Investment Objective and Policies of he Fund..................................2
Risk Factors.................................................................12
Investment Restrictions......................................................14
Distributions and Tax Information............................................16
Trustees and Officers........................................................21
Investment Management and Other Services.....................................24
Execution of Portfolio Transactions..........................................27
Additional Purchase and Redemption Information...............................30
Determination of Net Asset Value.............................................31
Principal Underwriter........................................................33
Performance Information......................................................33
General Information..........................................................36
Financial Statements.........................................................37
Appendix.....................................................................38
1
<PAGE>
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 three classes of shares (Class
R, Class P and Class L). This Statement of Additional Information pertains to
Class R shares of Montgomery Institutional Series: International Growth
Portfolio.
Investment Objective and Policies of he 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"), Global Depositary Receipts ("GDRs") and other
similar 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
2
<PAGE>
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. In accordance with applicable regulatory provisions of
the State of California, the Manager has agreed to waive its management fee with
respect to assets of the Fund that are invested in other investment companies.
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 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.
3
<PAGE>
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
at the time of the transaction.
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.
4
<PAGE>
Forward Contracts. The Fund may enter into forward contracts
to attempt to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed-upon
price at a future date which is individually negotiated and privately traded by
currency traders and their customers.
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 the security or dividend or interest payment.
In addition, 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 foreign
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 foreign 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 the Fund's 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 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 forward
contracts. In such event, the Fund's ability to utilize forward contracts in the
manner set forth above 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 engaged in 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
5
<PAGE>
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 that are 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 instead make or take delivery of the underlying securities
or currencies whenever it appears economically advantageous for it to do so. 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 the 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 Fund's
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 the Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Fund's securities portfolio. When
hedging of this character is successful,
6
<PAGE>
any depreciation in the value of the portfolio securities can be substantially
offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of the Fund's portfolio securities could
substantially be offset 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, respectively, 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 will be subject to the development and maintenance
of 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
its 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 it has invested,
on foreign currencies represented in its portfolio 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 it has 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 foreign 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
7
<PAGE>
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, the Fund
may, in the future, write (i.e., sell) covered put and call options on
securities, securities indices and currencies in which the Fund may invest. A
covered call option is an option where the Fund, in return for a premium, gives
another party 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 of the underlying security
declining. 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 in the underlying security above the option exercise price. In
addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction.
The Fund also may write covered put options which 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 to purchase the underlying security at a price that
may be higher than the market value of that security at the time of exercise for
as long as the option is outstanding. In order to "cover" the put options that
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 a value equal to or greater than the exercise price of the put
options. The Fund will not write put options if the aggregate value of the
obligations underlying the put options shall exceed 10% 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 thereby result in
the institution by an exchange of special procedures which may interfere with
the timely execution of the Fund's orders.
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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 itself.
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 of Trustees, 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 Trust's Board of Trustees.
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
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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.
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.
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 10% 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
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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 amount at which a Fund has valued the
securities and includes, among other things, purchased OTC options, 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 that
company's total outstanding shares. 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
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<PAGE>
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 of Trustees 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 of Trustees.
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 not generally
subject to uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements 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 may invest 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
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<PAGE>
result in a lack of liquidity and in greater price 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 Polices
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 changes 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 Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
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 Trustees also consider 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
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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, 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 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.
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<PAGE>
6. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude permissible investments
in marketable securities of issuers engaged in such activities.)
7. 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.
8. 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 OTC 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, changes in relevant SEC interpretations).
9. 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.)
10. 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.
11. 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.
12. Acquire or dispose of put, call, straddle or spread
options except as described herein and in the Prospectus and subject to the
following conditions:
(A) such options are written by other persons (except as
described herein or in the Prospectus), 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.
(This is an operating policy which may be changed without shareholder approval.)
13. 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.)
14. 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
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attached to securities may be deemed to be without value. (This is an operating
policy which may be changed without shareholder approval.)
15. 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.)
16. 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 of Trustees 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.
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
Fund's 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 previous 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
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<PAGE>
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.
As stated in the Prospectus, dividends and other distributions
will generally be made in the form of additional shares of the Fund. 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 of Trustees 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 will be taxable to shareholders whether made in cash or reinvested
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.
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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 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. 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. In either 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.
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
18
<PAGE>
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
19
<PAGE>
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.
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.
20
<PAGE>
Trustees and Officers
The Trustees are responsible for the overall management of the
Fund, including general supervision and review of its investment activities. The
officers, who administer the Fund's daily operations, are appointed by the Board
of Trustees. The current Trustees and officers of the Trust performing a
policy-making function and their affiliations and principal occupations for the
past five years are set forth below:
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 JP Morgan ("Morgan"), Waterhouse Asset
Management, Inc. ("Waterhouse"), RCM Capital Management LLC ("RCM"), and Harris
Trust and Savings Bank ("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").
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 Fund Services,
Inc. an affiliate of FDI ("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 Corporation ("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.
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.
21
<PAGE>
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 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 56)
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.
22
<PAGE>
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 58).*
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 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 Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Fund and Fund Distributors, Inc. will receive commissions for
executing portfolio transactions for the Fund. 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.
23
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Aggregate Retirement From the
Compensation Compensation Benefits Trusts and
from The from The Accrued as Fund Complex
Montgomery Montgomery Part of Fund (1 additional
Name of Trustee Funds Funds II Expenses* Trust)
- --------------------- -------------------- ------------- ------------------- --------------------
<S> <C> <C> <C> <C>
R. Stephen Doyle None None -- None
John A. Farnsworth $25,000 $5,000 -- $35,000
Andrew Cox $25,000 $5,000 -- $35,000
Cecilia H. Herbert $25,000 $5,000 -- $35,000
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
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
between the Manager and The Montgomery Funds II dated ___________, 1998 (the
"Agreement").
The Agreement is in effect with respect to the Fund for two
years after the Fund's inclusion in its Trust's Agreement (on or around its
beginning of public operations) and then continues for periods not exceeding one
year so long as such continuation is approved at least annually by (1) the Board
or the vote of a majority of the outstanding shares of the Fund, and (2) 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 and ten one-hundredths of one percent (1.10%) of the first $500 million
in average daily net assets, one percent (1.00%) of the next $500 million in
average daily net assets and nine-tenths of one percent (.90%) of amounts over
$1 billion in average daily net assets.
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,
expressed on an annualized basis, at or below eighty-five one hundredths of one
percent (0.85%) 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
24
<PAGE>
the Fund is able to effect such reimbursement and remain in compliance with the
foregoing 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.
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 of Trustees of the Trust 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.
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 P and Class L shares of the Fund. The
initial shareholder of the Class P and Class L shares of the Fund approved the
12b-1 Plan covering each Class prior to offering those Classes to the public.
Class R shares are not covered by the 12b-1 Plan.
25
<PAGE>
Under the 12b-1 Plan, the Fund pays 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 P shares and at an annual rate of 0.75% of the
Fund's aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Distributor for its expenses in connection with
the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Distributor 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 P and
Class L shares as accrued.
Class P and Class L 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
Distributor.
The 12b-1 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 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 P or
Class L 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 of
Trustees will review at least quarterly a written report of the distribution
expenses incurred by the Manager on behalf of the Class P and Class L 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 P and Class L shares of the
Fund. The initial shareholder of the Class P and Class L shares of the Fund
approved the Services Plan covering each Class prior to offering those Classes
to the public. Class R shares are not covered by the Services Plan.
26
<PAGE>
Under the Services Plan, when implemented, Class P and Class L
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 P and Class L
shares of the Fund. Such amounts are compensation for providing certain services
to clients owning shares of Class P or Class L 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.
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 Trust's Board of Trustees. 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 foreign countries or in the
over-the-counter markets. The Fund may purchase ADRs and EDRs 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.
27
<PAGE>
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 a foreign 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 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 Fund 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,
28
<PAGE>
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), that 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 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.
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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. 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.
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.
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-
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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.
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 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. It is expected that the Exchange will be closed on
Saturdays and Sundays and on New Year's Day, Martin Luther King 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 net asset value per share.
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
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<PAGE>
the Trust's Pricing Committee pursuant to procedures approved by or under the
direction of the Board of Trustees.
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 of Trustees.
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 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 of Trustees. 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 Trust's Board of Trustees.
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 of Trustees. 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
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<PAGE>
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 of Trustees 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 of Trustees 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 the same periods as the Agreement, and shall continue in effect
thereafter for periods not exceeding one year if approved at least annually by
(i) the Board of Trustees of the Trust 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.
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 R, Class P and Class L shares.
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
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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.
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<PAGE>
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 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.
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 the 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, 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
35
<PAGE>
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 the Fund 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. All expenses incurred in connection with the Trust's organization
and the registration of shares of the Fund as one of the three initial series of
the Trust have been assumed pro rata by each series; 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
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.
_____________________, 555 California Street, San Francisco,
California 94104, are the independent auditors for the Fund.
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<PAGE>
The validity of shares offered hereby will be passed on by
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.
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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-rating.
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<PAGE>
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 Ratings
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.
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 Ratings
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
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<PAGE>
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 in the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a 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.
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.
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Commercial Paper Ratings
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 Ratings
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+.
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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 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 Ratings
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.
42
<PAGE>
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-1+ 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 Ratings
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.
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
43
<PAGE>
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 Ratings
Duff-1 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.
Duff-2 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.
Duff-3 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.
Duff-4 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.
Duff-5 Paper rated Duff-5 is in default. The issuer has failed to
meet scheduled principal and/or interest payments.
44
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) For Montgomery Institutional Series: Emerging Markets
Portfolio:
(a) 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) Portfolio Investments as of December 31,
1997; Statement of Assets and Liabilities as
of December 31, 1997; Statement of
Operations for the six months period ended
December 31, 1997; Statement of Changes in
Net Assets for the six months period ended
December 31, 1997; Financial Highlights for
a Fund share outstanding throughout each
year, including the six months period ended
December 31, 1997; Notes to Financial
Statements, all incorporated by reference to
the Semi-Annual Report to Shareholders of
Montgomery Institutional Series: Emerging
Markets Portfolio for the period ended
December 31, 1997.
(2) For Montgomery U.S. Asset Allocation Fund:
(a) 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.
<PAGE>
(b) Portfolio Investments as of December 31,
1997; Statement of Assets and Liabilities as
of December 31, 1997; Statement of
Operations for the six months period ended
December 31, 1997; Statement of Changes in
Net Assets for the six months period ended
June 30, 1997; Financial Highlights for a
Fund share outstanding throughout each year,
including the period ended December 31,
1997; Notes to Financial Statements, all
incorporated by reference to the Semi-Annual
Report to Shareholders of Montgomery Asset
Allocation Fund for the period ended
December 31, 1997.
(b) Exhibits:
(1) Amended and Restated Agreement and Declaration of
Trust.(B)
(2) Amended and Restated By-Laws.(B)
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5)(A) Form of Investment Management Agreement.(E)
(5)(B) Form of Investment Management Sub-Advisory
Agreement--to be filed in a later post-effective
amendment.
(6) Form of Underwriting Agreement.(E)
(7) Benefit Plan(s) - Not applicable.
(8) Custodian Agreement.(C)
(9)(A) Administrative Services Agreement.(E)
(9)(B) Form of Multiple Class Plan.(D)
(9)(C) Form of Shareholder Services Plan.(D)
(10) Consent and Opinion of Counsel as to legality of
shares.(A)
(11) Consent of Independent Auditors - Not applicable.
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Form of Subscription Agreement for initial shares.(A)
(14) Model Retirement Plan Documents - Not applicable.
(15) Form of Share Marketing Plan (Rule 12b-1 Plan)(E)
<PAGE>
(16)(A) Performance Computation for Montgomery Institutional
Series: Emerging Markets Portfolio.(C)
(16)(B) Performance Computation for Montgomery U.S. Asset
Allocation Fund.(C)
(17) Financial Data Schedule is incorporated by reference
to Form N-SAR filed for the period ended June 30,
1997.
(A) Previously filed as part of Pre-Effective Amendment No. 1
to the Registration Statement, filed on November 15, 1993.
(B) Previously filed as part of Post-Effective Amendment No. 9
to the Registration Statement, filed on November 1, 1994.
(C) Previously filed as part of Post-Effective Amendment No.
11 to the Registration Statement, filed on March 31, 1995.
(D) Previously filed as part of Post-Effective Amendment No.
14 to the Registration Statement, filed on September 13,
1995.
(E) Previously filed as part of Post-Effective Amendment No.
22 to the Registration Statement, filed on July 31, 1997.
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, LLC, a Delaware limited liability
company, is the manager of each series of the Registrant, of The
Montgomery Funds, a Massachusetts business trust, and of The Montgomery
Funds III, a Delaware business trust. Montgomery Asset Management, LLC
is a subsidiary of Commerzbank A.G. based in Frankfurt, Germany. 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 March 31, 1998
-------------- --------------------
Montgomery Institutional Series: Emerging
Markets Portfolio 37
Montgomery U.S. Asset Allocation Fund 9,385
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,
<PAGE>
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, as amended (the "33 Act"), 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 33 Act 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 33 Act and will be
governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Effective July 31, 1997, Montgomery Asset Management, 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 A.G. Information about the officers and
directors of MAM, LLC is provided below. The address for the following
persons is 101 California Street, San Francisco, California 94111.
R. Stephen Doyle Chairman of the Board of Directors
and Chief Executive Officer of MAM
LLC
Mark B. Geist President and Director of MAM, LLC
John T. Story Executive Vice President of MAM, LLC
David E. Demarest Chief Administrative Officer and
Managing Director of MAM, LLC
The following directors of MAM, LLC also are officers of
Commerzbank AG. The address for the following persons is Neue Mainzer
Strasse 32-36, Frankfurt am Main, Germany.
Heinz Josef Hockmann Director of MAM, LLC
Dietrich-Kurt Frowein Director of MAM, LLC
Andreas Kleffel Director of MAM, LLC
Before July 31, 1997, Montgomery Securities, which is a
broker-dealer and the prior principal underwriter of The Montgomery
Funds II, 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 now serve in
similar capacities for MAM, LLC.
<PAGE>
Item 29. Principal Underwriter
(a) Funds Distributor, Inc. (the "Distributor") acts as principal
underwriter for the following investment companies:
American Century California Tax-Free and Municipal Funds
American Century Capital portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
The Harris Insight Funds Trust
HT Insight Funds, Inc.
J.P. Morgan Institutional Funds
J.P. Morgan Funds
J.P. Morgan Series Trust
J.P. Morgan Series Trust II
Kobrick-Cendant Investment trust
LaSalle Partners Funds, Inc.
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
the Munder Funds Trust
The Orbitex Group of Funds
PanAgora Institutional Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
St. Clair Money Market Fund, Inc.
The Skyline Funds
Waterhouse Investors Cash Management Fund, Inc.
WEBS Index Fund, Inc.
<PAGE>
Funds Distributor 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 is an indirect wholly-owned subsidiary of Boston Institutional
Group, Inc., a holding company of all whose outstanding shares are owned by key
employees.
(b) The following is a list of the executive officers of Funds Distributor,
Inc.
President and Chief Executive Officer - Mario E. Connolly
Executive Vice President - Richard W. Ingram
Executive Vice President - Donald R. Roberson
Senior Vice President - Allen B. Closser
Senior Vice President - Paula K. David
Senior Vice President - Michael S. Petrucelli
Senior Vice President, Treasurer
and Chief Financial Officer - Joseph F. Tower, III
Senior Vice President - Bernard A. Whalen
(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 file a post-effective
amendment including financial statements for Montgomery Global
Long-Short Fund, Montgomery Emerging Markets Focus Fund,
Montgomery Tax-Managed Growth Fund, Montgomery Small Cap Value
Fund, Montgomery Macro Cap Value Fund, Montgomery U.S.
Long-Short Fund, Montgomery U.S. Market Neutral Fund and
Montgomery Institutional Series: International Growth
Portfolio, which need not be certified, within four to six
months from the effective dates of the Registrant's 33 Act
registration statements as to those series.
(c) 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-1
<PAGE>
(d) 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-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, 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
8th day of May, 1998.
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 May 8, 1998
- ------------------
R. Stephen Doyle
Andrew Cox * Trustee May 8, 1998
- -----------
Andrew Cox
Cecilia H. Herbert * Trustee May 8, 1998
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee May 8, 1998
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-----------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney
previously filed.
C-3
