As filed with the Securities and Exchange Commission on August 28, 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. 36
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 37
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 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Rule 485(b)
__X__ on August 31, 1998 pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)(1)
_____ 75 days after filing pursuant to Rule 485(a)(2)
_____ on ________________ pursuant to Rule 485(a)
----------
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 Class A, Class B and Class C shares of
Montgomery Small Cap Systematic Value Fund and Montgomery
Macro Cap Systematic Value Fund
Part A - Prospectus for Class A, Class B and Class C shares of
Montgomery Small Cap Systematic Value Fund and Montgomery
Macro Cap Systematic Value Fund
Part B - Statement of Additional Information for Class A, Class B
and Class C shares of Montgomery Small Cap Systematic Value
Fund and Macro Cap of Systematic Value Fund
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 Small Cap Systematic Value Fund and
Montgomery Macro Cap Systematic Value Fund)
<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 Funds' Investment Objectives and
Policies," "Portfolio Securities," "Other Investment
Practices," "Risk Considerations" and "General
Information"
5. Management of the Fund "The Funds' Investment Objectives and Policies,"
"Management of the Funds" and "How to Invest in the
Funds"
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 Funds," "How Net Asset Value is
Offered Determined," "General Information" and "Backup
Withholding Instructions"
8. Redemption or Repurchase "How to Redeem an Investment in the Funds" and "General
Information"
9. Pending Legal Proceedings Not Applicable
</TABLE>
<PAGE>
<TABLE>
PART B: Information Required in
Statement of Additional Information
-----------------------------------
(Statement of Additional Information for
Montgomery Small Cap Systematic Value Fund and
Montgomery Macro Cap Systematic Value Fund)
<CAPTION>
N-1A Item No. Item Location in the Registration Statement by Heading
<S> <C> <C>
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 Funds," "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 "The Trust" and "General Information"
Securities
19. Purchase, Redemption and Pricing "Additional Purchase and Redemption Information" and
of Securities Being Offered "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>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR
PROSPECTUS FOR CLASS A, CLASS B AND CLASS C SHARES
MONTGOMERY SMALL CAP SYSTEMATIC VALUE FUND
MONTGOMERY MACRO CAP SYSTEMATIC VALUE FUND
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY PARTNERS SERIES(SM)
101 California Street
San Francisco, California 94111
(800) OWL-8758 [695-8758]
Invest wisely.(R)
Prospectus
August 31, 1998
Montgomery Small Cap Systematic Value Fund
Montgomery Macro Cap Systematic Value Fund
Class A, Class B and Class C shares of these Funds are offered in this
prospectus.
This prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. Please read it and retain it
for future reference. A Statement of Additional Information dated August 31,
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 your financial consultant or (800) OWL-8758
[695-8758]. 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 (800) OWL-8758 [695-8758].
Each Fund is a separate series of The Montgomery Funds II, an open-end
management investment company. The Securities and Exchange Commission maintains
a Web site link www.sec.gov that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
The Montgomery Funds II.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank. Shares are not insured by the Federal Deposit Insurance Corporation (the
"FDIC"), Federal Reserve Board or any other agency and are subject to investment
risks, including possible loss of principal amount invested.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SEC PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Table of Contents
Summary of Key Information............................2
Fees and Expenses of the Funds........................4
The Funds' Investment Objectives and Policies.........6
Selecting the Correct Class of Shares.................6
Sales Charge Reductions and Waivers...................8
How to Invest in the Funds............................9
How to Redeem an Investment in the Funds.............12
Exchange Privileges and Restrictions.................14
Portfolio Securities.................................14
Other Investment Practices...........................15
Risk Considerations..................................18
Performance Information of Similar Accounts..........19
Management of the Funds..............................19
How Net Asset Value Is Determined....................22
Dividends and Distributions..........................23
Taxation.............................................23
General Information..................................24
Backup Withholding Instructions......................25
Glossary.............................................26
1
<PAGE>
Summary of Key Information
What is offered in this prospectus?
Class A, Class B and Class C shares of the following Funds (the "Funds") are
offered in this prospectus:
Montgomery Small Cap Systematic Value Fund (the "Small Cap Fund")
Montgomery Macro Cap Systematic Value Fund (the "Macro Cap Fund")
What is each Fund's investment objective?
The Small Cap Fund and the Macro Cap Fund each seeks long-term capital
appreciation.
What is each Fund's strategy?
The Small Cap Fund normally seeks to achieve its objective by investing at least
65% of its total assets in equity securities of companies with market
capitalizations within the range of companies represented in the Russell 2000(R)
Value Index. On May 31, 1998, the largest company in the index had an
approximate market capitalization of $1.1 billion.
The Macro Cap Fund normally seeks to achieve its objective by investing at least
65% of its total assets in equity securities of domestic companies with market
capitalizations within the range of companies represented in the Russell Top
200(R) Value Index. On May 31, 1998, the smallest company in the index had an
approximate market capitalization of $8.1 billion.
See "The Funds' Investment Objectives and Policies."
What is special about the Funds?
The Small Cap Fund uses proprietary quantitative techniques to rank each of the
stocks in the Russell 2000 Value Index. Based upon these rankings, a portfolio
of typically up to 200 stocks will be constructed. Because the Small Cap Fund
invests in stocks, it is subject to certain market risks including, for example,
the possibility that stock prices in general may decline over short or even
extended periods of time.
The Macro Cap Fund uses proprietary quantitative techniques to rank each of the
stocks in the Russell Top 200 Value Index. Based upon these rankings, a
portfolio of typically up to 60 stocks will be constructed. Because the Macro
Cap Fund invests in stocks, it is subject to certain market risks including, for
example, the possibility that stock prices in general may decline over short or
even extended periods of time.
You should read this prospectus carefully and discuss your investment with your
financial consultant before investing. Like all mutual funds, there can be no
assurance that a Fund's investment objective will be attained. See "Risk
Considerations."
Who manages the Funds?
Each Fund is managed by Montgomery Asset Management, LLC (the "Manager"), a
subsidiary of Commerzbank AG ("Commerzbank"). Martingale Asset Management, L.P.,
an affiliate of Commerzbank, serves as Subadvisor to the Manager. Commerzbank
and its affiliates have worldwide investment management operations and
expertise. To benefit from these resources, the Manager and the Subadvisor may
consult with or rely on its affiliated investment advisory organizations for
research and other investment advice deemed useful by the Manager. See
"Management of the Funds."
How do you invest in the Funds?
The Funds' shares are sold primarily through financial intermediaries and
financial professionals. Certain classes of shares may be subject to an initial
sales charge (a "front-end load"), a back-end contingent deferred sales charge
(a "CDSC") and/or Rule 12b-1 fees as described in this prospectus. In general,
the minimum initial investment in each Fund is $2,000--including Individual
Retirement Accounts (IRAs)--and subsequent investments must be at least $500.
The Manager or the Distributor, under any circumstances that either deems
appropriate, may waive these minimums. See "Sales Charge Reductions and Waivers"
and "How to Invest in the Funds."
Which class of shares is best for you?
Each class has different expenses and sales charges. You should carefully review
"Fees and Expenses of the Funds" with your financial consultant. The alternative
purchase arrangements permit you to choose the method of buying shares that is
most
2
<PAGE>
beneficial to you given the amount of the purchase, the length of time you
expect to hold the shares and other circumstances. You should consider whether,
during the anticipated term of your investment, the accumulated continuing
distribution and service fees and contingent deferred sales charges of one class
would be more than the initial sales charge and accumulated continuing
distribution and service fees of another class of shares purchased at the same
time. See "Selecting the Correct Class of Shares" and "Sales Charge Reductions
and Waivers."
3
<PAGE>
Fees and Expenses of the Funds
Shareholder Transaction Expenses for the Funds
<TABLE>
An investor would pay, either directly or indirectly, the following charges when
buying or redeeming shares of a Fund:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B(a) CLASS C
(FOR EACH FUND)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases 5.50%(b) None None
(as a percentage of offering price)
- ------------------------------------------------------------------------------------------------------------
Sales charge on reinvested dividends None None None
- ------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge None(c) 5.00%(d) 1.00%(e)
(as a percentage of redemption proceeds)
- ------------------------------------------------------------------------------------------------------------
Redemption fee(f) None(g) None None
- ------------------------------------------------------------------------------------------------------------
Exchange fee None None None
- ------------------------------------------------------------------------------------------------------------
<FN>
(a) Class B shares convert to Class A shares automatically at the beginning of the seventh year after
purchase.
(b) Reduced for purchases of $50,000 and more. Class A purchases of $1,000,000 or more will not be subject
to an initial sales charge.
(c) Class A shares are not subject to a contingent deferred sales charge (a "CDSC"); except certain
purchases of $1,000,000 or more that are not subject to an initial sales charge may instead be subject
to a CDSC of 1.00% of amounts redeemed within the first year of purchase. Such a CDSC may be waived in
connection with redemptions to Fund participants in certain fee-based programs.
(d) 5.00% during the first year, 4.00% during the second year, 3.00% during the third and fourth years,
2.00% during the fifth year and 1.00% during the sixth year. Class B shares automatically convert into
Class A shares at the beginning of the seventh year after purchase and thereafter will not be subject
to a CDSC.
(e) Class C shares are subject to a 1.00% CDSC if redeemed within the first year after purchase.
(f) Shareholders effecting redemptions via wire transfer may be required to pay fees, including a $10 wire
fee, 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. See "How to Redeem an Investment in the Funds."
(g) Class A shares that (i) were not purchased through certain fee-based programs or (ii) were not subject
to an initial sales charge or CDSC are subject to a redemption fee of 1.00% on amounts redeemed within
the first year of purchase.
</FN>
</TABLE>
<TABLE>
Annual Portfolio Operating Expenses (as a percentage of average net assets) (h)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
MONTGOMERY SMALL CAP SYSTEMATIC VALUE FUND CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management fee 1.25% 1.25% 1.25%
- ----------------------------------------------------------------------------------------------------------------
12b-1 distribution fee None 0.75% 0.75%
- ----------------------------------------------------------------------------------------------------------------
Shareholder servicing fee 0.25% 0.25% 0.25%
- ----------------------------------------------------------------------------------------------------------------
Other expenses (after reimbursement) 0.25% 0.25% 0.25%
- ----------------------------------------------------------------------------------------------------------------
Total Fund operating expenses (after reimbursement) 1.75% 2.50% 2.50%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
MONTGOMERY MACRO CAP SYSTEMATIC VALUE FUND CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------------------------------
Management fee 0.85% 0.85% 0.85%
- ----------------------------------------------------------------------------------------------------------------
12b-1 distribution fee None 0.75% 0.75%
- ----------------------------------------------------------------------------------------------------------------
Shareholder servicing fee 0.25% 0.25% 0.25%
- ----------------------------------------------------------------------------------------------------------------
Other expenses (after reimbursement) 0.25% 0.25% 0.25%
- ----------------------------------------------------------------------------------------------------------------
Total Fund operating expenses (after reimbursement) 1.35% 2.10% 2.10%
- ----------------------------------------------------------------------------------------------------------------
<FN>
(h) Expenses for the Funds are estimated. The Manager will reduce its fees and may absorb or reimburse each
Fund for certain expenses to the extent necessary to limit total annual Fund operating expenses to the
amount indicated in the table. The Funds are required to reimburse the Manager for any reductions in the
Manager's fee only during the three years following that reduction and only if such reimbursement can be
achieved within the foregoing expense limits. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by a Fund for fees and expenses for the current year. Absent the
reduction, actual total Fund operating expenses are estimated to be: Small Cap Fund, Class A, 2.50% (1.00%
other expenses), Classes B and C, 3.25% (1.00% other expenses); and Macro Cap Fund: Class A, 2.10% (1.00%
other expenses), Classes B and C, 2.85% (1.00% other expenses). The Manager may terminate these voluntary
reductions at any time. See "Management of the Funds."
</FN>
</TABLE>
The foregoing table is intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Funds. Operating expenses
are paid out of each Fund's assets and are factored into each Fund's share
price. Each Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year. Because Rule
12b-1 distribution charges are accounted for on a class-level basis (and not on
an individual shareholder-level basis), individual long-term investors in the
Class B and Class C shares of each Fund may, over time, pay more than the
economic equivalent of the
4
<PAGE>
maximum front-end load permitted by the National Association of Securities
Dealers Regulation, Inc. ("NASDR"), even though all shareholders of those
classes in the aggregate may not.
Example of Expenses for the Funds
<TABLE>
Assuming, hypothetically, that a Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MONTGOMERY SMALL CAP SYSTEMATIC MONTGOMERY MACRO CAP SYSTEMATIC
VALUE FUND VALUE FUND
- -------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 1 YEAR 3 YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $72 $107 $68 $95
- -------------------------------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------------------------------
Assuming redemption at end of period $75 $108 $71 $96
- -------------------------------------------------------------------------------------------------------------------
Assuming no redemption $25 $78 $21 $66
- -------------------------------------------------------------------------------------------------------------------
Class C
- -------------------------------------------------------------------------------------------------------------------
Assuming redemption at end of period $35 $78 $31 $66
- -------------------------------------------------------------------------------------------------------------------
Assuming no redemption $25 $78 $21 $66
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
5
<PAGE>
The Funds' Investment Objectives and Policies
The investment objectives and general investment policies of the Funds are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities." Specific investment practices
that may be employed by the Funds are described in "Other Investment Practices."
Certain risks associated with investing in the Funds are described in those
sections as well as in "Risk Considerations." Certain terms used here are
defined in the Glossary at the end of this prospectus.
Montgomery Small Cap Systematic Value Fund
The investment objective of the Small Cap Fund is long-term capital appreciation
which, under normal conditions, it seeks by investing at least 65% of its total
assets in equity securities of small capitalization domestic companies, which it
considers to be companies having total market capitalizations within the range
of companies represented in the Russell 2000 Value Index. On May 31, 1998, the
largest company in the index had an approximate market capitalization of $1.1
billion. This Fund generally invests the remaining 35% of its total assets in a
similar manner, but may invest those assets in companies having larger total
market capitalizations, in investment-grade debt securities and real estate
investment trusts ("REITs") and in cash.
The Russell 2000 Value Index is a generally recognized and accepted small
company value index created by the Frank Russell Company. It measures the
performance of companies with lower price-to-book ratios and lower forecasted
growth values in the Russell 2000(R) Index--an index comprised of the smallest
2,000 of the 3,000 largest publicly traded U.S. companies, based on total market
capitalization. The Small Cap Fund uses proprietary quantitative techniques to
rank each of the stocks in the Russell 2000 Value Index. Based upon these
rankings a portfolio of typically up to 200 stocks will be constructed.
Industry, sector and market capitalization exposures in this Fund will typically
match that of the Russell 2000 Value Index. Among the key factors used to rank
stocks are price-to-earnings ratio, growth potential, earnings estimate
revisions and the direction, amount and timing (or momentum) of price movements.
The Small Cap Fund may use options and options on futures on financial indices
for hedging risk. This Fund invests primarily in common stocks (including
depositary receipts) but also may invest in other types of equity and
equity-derivative securities. See "Portfolio Securities," "Risk Considerations"
and the Appendix in the Statement of Additional Information.
Montgomery Macro Cap Systematic Value Fund
The investment objective of the Macro Cap Fund is long-term capital appreciation
which, under normal conditions, it seeks by investing at least 65% of its total
assets in equity securities of very large capitalization domestic companies,
which it considers to be companies having total market capitalizations within
the range of companies represented in the Russell Top 200 Value Index. On May
31, 1998, the smallest company in the index had an approximate market
capitalization of $8.1 billion. This Fund generally invests the remaining 35% of
its total assets in a similar manner, but may invest those assets in companies
having smaller total market capitalizations, in investment-grade debt securities
in other investment vehicles and in cash.
The Russell Top 200 Value Index is a generally recognized and accepted large
company value index created by the Frank Russell Company. It measures the
performance of companies with lower price-to-book ratios and lower forecasted
growth values in the Russell Top 200 Index--an index comprised of the 200
largest U.S. companies, based on total market capitalization. The Macro Cap Fund
uses proprietary quantitative techniques to rank each of the stocks in the
Russell Top 200 Value Index. Based upon these rankings, a portfolio of typically
up to 60 stocks will be constructed. Industry, sector and market capitalization
exposures in this Fund will typically match that of the Russell Top 200 Value
Index. Among the key factors used to rank stocks are P/E ratio, price-to-book
ratio, growth potential and earnings estimate revisions.
The Macro Cap Fund may use options and options on futures on financial indices
for hedging risk. This Fund invests primarily in common stocks (including
depositary receipts) but also may invest in other types of equity and
equity-derivative securities. See "Portfolio Securities," "Risk Considerations"
and the Appendix in the Statement of Additional Information.
Selecting the Correct Class of Shares
This prospectus offers Class A, Class B and Class C shares of each Fund. Each
class has its own cost structure, allowing you to choose the one that best meets
your requirements. Your financial consultant can help you decide. For estimated
expenses of each class, see the table under "Fees and Expenses of the Funds"
earlier in this prospectus.
6
<PAGE>
Class A Shares--Initial Sales Charge
Class A shares will incur an initial sales charge when they are purchased (a
"front-end load") based on the dollar amount of the purchase. The maximum
initial sales charge is 5.50%, which will be reduced for purchases of $50,000
and over. Sales charges also are reduced under a right of accumulation which
takes into account the investor's holdings of all classes of The Montgomery
Partners Series Funds. Class A shares are subject to an ongoing shareholder
servicing fee of 0.25% of a Fund's average net assets attributable to Class A
shares. Class A shares will not be subject to any CDSC when they are redeemed.
Although purchases of $1,000,000 or more may not be subject to an initial sales
charge, if the initial sales charge is waived, such purchase may be subject to a
CDSC of 1.00% if the shares are redeemed within one year after purchase. Class A
shares that (i) were not purchased through certain fee-based programs or (ii)
were not subject to an initial sales charge or CDSC are subject to a redemption
fee of 1.00% on amounts redeemed within the first year of purchase. Class A
shares also will be issued upon conversion of Class B shares as described under
"Class B Shares."
Class B Shares--Deferred Sales Charge
Class B shares will not incur a sales charge when they are purchased, but they
are subject to an ongoing Rule 12b-1 distribution fee of 0.75% and an ongoing
shareholder servicing fee of 0.25% of a Fund's average net assets attributable
to Class B shares. Class B shares are subject to a CDSC if they are redeemed
within six years of purchase. At the beginning of the seventh year after
purchase, Class B shares of a Fund will automatically convert into Class A
shares of that Fund, which are subject to the same shareholder servicing fee of
0.25%. If Class B shares of a Fund are exchanged for Class B shares of another
Fund of The Montgomery Partners Series, the conversion period applicable to the
Class B shares acquired in the exchange will apply, as will the Class A
shareholder servicing fee of the acquired Fund upon the conversion. The holding
period of the exchanged shares will be tacked onto the holding period of the
acquired shares. Automatic conversion of Class B shares to Class A shares will
occur at least once a month on the basis of the relative net asset values of the
shares of the two classes on the conversion date, without the imposition of any
sales load, fee or other charge. Conversion of Class B shares to Class A shares
will not be deemed a purchase or sale of the shares for federal income tax
purposes. Shares purchased through reinvestment of dividends and other
distributions on Class B shares also will convert automatically to Class A
shares based on the portion of purchased shares that convert.
Class C Shares--Pay As You Go
Class C shares do not incur a sales charge when they are purchased, but they are
subject to an ongoing Rule 12b-1 distribution fee of 0.75% and an ongoing
shareholder servicing fee of 0.25% of a Fund's average net assets attributable
to Class C shares. Class C shares also are subject to a 1.00% CDSC if they are
redeemed within one year of purchase. Although Class C shares are subject to a
CDSC for only one year (as compared with six years for Class B), Class C shares
have no conversion feature and, accordingly, an investor who purchases Class C
shares will be subject to the 0.75% Rule 12b-1 distribution fee for an
indefinite period subject to annual approval by the Funds' Board of Trustees and
subject to regulatory limitations.
Sales Charges
Class A Shares
<TABLE>
Part of the initial sales charge is paid directly to the selling broker-dealer
(the "dealer reallowance"). The remainder is retained by the Distributor and may
be used either to promote the sale of the Funds or to compensate the Distributor
for its efforts to sell the Funds.
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
YOUR INVESTMENT AS A PERCENTAGE OF AS A PERCENTAGE OF YOUR DEALER REALLOWANCE AS A PERCENTAGE
OFFERING PRICE NET INVESTMENT OF OFFERING PRICE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
- --------------------------------------------------------------------------------------------------------------------------------
$50,000 or more, but less than $100,000 4.50% 4.71% 4.00%
- --------------------------------------------------------------------------------------------------------------------------------
$100,000 or more, but less than $250,000 3.50% 3.63% 3.00%
- --------------------------------------------------------------------------------------------------------------------------------
$250,000 or more, but less than $500,000 2.50% 2.56% 2.00%
- --------------------------------------------------------------------------------------------------------------------------------
$500,000 or more, but less than $1,000,000 2.00% 2.04% 1.75%
- --------------------------------------------------------------------------------------------------------------------------------
$1,000,000 or more 0.00%* 0.00%* 0.00%*
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* The Manager may pay a dealer reallowance on purchases of $1 million or more during a 13-month period. The dealer
reallowance, as a percentage of offering price, is as follows: 1.00% on purchases between $1 million and $2 million; plus
0.80% on the amount between $2 million and $3 million; plus 0.50% on the amount between $3 million and $50 million; plus
0.25% on the amount between $50 million and $100 million; plus 0.15% of the amount exceeding $100 million. Class A shares
that (i) were not purchased through certain fee-based programs or (ii) were not subject to an initial sales charge or CDSC
will be subject to a redemption fee of 1.00% on amounts redeemed within the first year of purchase.
</FN>
</TABLE>
7
<PAGE>
Class B Shares
Class B shares are offered at their net asset value per share, without any
initial sales charge, but are subject to a CDSC if redeemed within six years of
purchase (a "back-end load"). The Distributor pays the selling broker-dealer a
4.00% commission at the time of sale.
Class C Shares
Class C shares are offered at their net asset value per share without any
initial sales charge. Class C shares are subject to a CDSC if they are redeemed
within one year of purchase. The Distributor may pay the selling broker-dealer
up to a 1.00% commission at the time of sale.
Contingent Deferred Sales Charge (CDSC)
Shareholders of Class B and Class C shares may be subject to a CDSC upon
redemption of their shares under the following conditions:
Class B Shares
- ----------------------------------------------------------------------------
YEARS AFTER PURCHASE CDSC ON SHARES BEING REDEEMED
- ----------------------------------------------------------------------------
1st year 5.00%
- ----------------------------------------------------------------------------
2nd year 4.00%
- ----------------------------------------------------------------------------
3rd year 3.00%
- ----------------------------------------------------------------------------
4th year 3.00%
- ----------------------------------------------------------------------------
5th year 2.00%
- ----------------------------------------------------------------------------
6th year 1.00%
- ----------------------------------------------------------------------------
After 6 years None
- ----------------------------------------------------------------------------
Class B shares will automatically be converted to Class A shares at the
beginning of the seventh year after purchase.
Class C Shares
Shareholders who redeem Class C shares within one year of purchase will be
charged a CDSC of 1.00% of shares redeemed. There is no CDSC imposed on Class C
shares acquired through reinvestment of dividends or capital gains.
Class B and C Shares
The CDSC will be imposed on the lesser of the original purchase price or the net
asset value of the redeemed shares at the time of the redemption. CDSC
calculations are based on the specific shares involved, not the value of the
account. To keep your CDSC as low as possible, each time you place a request to
sell shares, we will first sell any shares in your account that are not subject
to a CDSC. If there are not enough of these shares to meet your request, we will
sell your shares on a first-in, first-out basis. Your financial consultant or
institution may elect to waive some or all of the payment, thereby reducing or
eliminating the otherwise applicable CDSC.
Sales Charge Reductions and Waivers
Reducing Sales Charges on Your Class A Shares. There are several ways you can
combine multiple purchases of Class A shares to take advantage of the
breakpoints in the sales charge schedule. These can be combined in any manner:
o Accumulation privilege--lets you add the value of shares of any Class A
shares you and your immediate family already own to the amount of your next
investment for purposes of calculating sales charges
o Letter of intent--lets you purchase Class A shares over a 13-month period
and receive the same sales charge as if all shares had been purchased at
once. See the New Account application and the Statement of Additional
Information for terms and conditions
o Combination privilege--lets you combine purchases of Class A shares of
multiple Funds of The Montgomery Partners Series for the purpose of
reducing the sales charge
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To use these privileges: Complete the appropriate section on the New Account
application, or contact your financial consultant or The Montgomery Partners
Series to add these options to an existing account.
CDSC Waivers. In general, the CDSC may be waived on shares you sell for the
following reasons:
o Payments through certain systematic retirement plans and other employee
benefit plans
o Qualifying distributions from qualified retirement plans and other employee
benefit plans
o Distributions from custodial accounts under section 403(b)(7) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as from
Individual Retirement Accounts ("IRAs") due to death, disability or
attainment of age 59-1/2
o Participation in certain fee-based programs
To use any of these waivers: Contact your financial consultant or The Montgomery
Partners Series.
Reinstatement Privilege. If you sell shares of a Fund, you may invest some or
all of the proceeds in the same Fund within 90 days without a sales charge. If
you paid a CDSC when you sold your shares, you will be credited with the amount
of the CDSC. All accounts involved must have the same registration.
To use: Contact your financial consultant or The Montgomery Partners Series.
Net Asset Value Purchases. Class A shares may be sold at net asset value to:
o Current or retired directors, trustees, partners, officers and employees of
the Trust, the Distributor, the Transfer Agent, the Manager and its
members, certain family members of the above persons, and trusts or plans
primarily for such persons or their family members
o Current or retired registered representatives or full-time employees and
their spouses and minor children and plans of broker-dealers or other
institutions that have selling agreements with the Distributor
o Investors who exchange their shares from an unaffiliated investment company
that has a comparable sales charge, so long as shares are purchased within
60 days of the redemption
o Trustees or other fiduciaries purchasing shares for certain retirement
plans of organizations with 50 or more eligible employees
o Investment advisors, financial planners and certain financial institutions
that place trades for their own accounts or the accounts of their clients
either individually or through a master account and who charge a
management, consulting or other fee for their services
o Employer-sponsored benefit plans in connection with purchases of Class A
shares made as a result of participant-directed exchanges between options
in such a plan
o "Wrap accounts" for the benefit of clients of broker-dealers, financial
institutions or financial planners having sales or service agreements with
the Distributor or another broker-dealer or financial institution with
respect to sales of Class A shares
o Such other persons as are determined by the Manager to have acquired shares
under circumstances not involving any sales expense
How to Invest in the Funds
Shares are sold at a public offering price based on the net asset value for the
class of shares selected, next determined after receipt of the order. Investors
may purchase shares of a Fund from selected financial professionals, securities
brokers, dealers or through financial intermediaries such as benefit plan
administrators. Investors should contact these agents directly for appropriate
instructions, as well as for information pertaining to accounts and any
servicing or transaction fees that may be charged. Some of these agents may
appoint subagents. The Funds' shares are also offered for sale directly by Funds
Distributor, Inc., the Funds' Distributor, 101 California Street, San Francisco,
California 94111, (800) OWL-8758 [695-8758].
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor or securities brokers, dealers and other financial
intermediaries that have an agreement with the Distributor 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 public
offering price calculated that day for the applicable class of shares. Orders
for Fund shares received after close of trading will be purchased at the next
day's public offering price.
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The minimum initial investment in the Funds is $2,000 (including IRAs) and $500
for subsequent investments. The Manager or the Distributor, at its discretion,
may waive these minimums. The Funds do not accept third-party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the United States. Purchases may also be made in
certain circumstances by payment of securities. See the Statement of Additional
Information for further details.
o The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
o See "Sales Charge Reductions and Waivers" for ways to make your initial
investment go farther.
Initial Investment by Check
o Complete the New Account application. Tell your financial consultant which
Fund(s) you wish to invest in and make your check payable to The Montgomery
Partners Series.
o A charge may be imposed on checks that do not clear.
Initial Investment by Wire
o Call your financial consultant or the Transfer Agent to say that you intend
to make your initial investment by wire. Provide your name, the dollar
amount to be invested and the Fund(s) and class(es) in which you want to
invest. You will receive 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.
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 No. 7519060
Attention: The Montgomery Partners Series
For credit to: [shareholder(s) name]
Shareholder account number: [shareholder(s) account number]
Name of Fund: [Fund name]
o Your bank may charge a fee for any wire transfers.
Subsequent Investments
Minimum subsequent investment (including IRAs)
for Class A, Class B and Class C shares: ..............................$500
Subsequent Investments by Check
o Make your check payable to The Montgomery Partners Series. Enclose an
investment stub with your check. If you do not have an investment stub,
mail your check with written instructions indicating the Fund name and
account number to which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact your financial consultant or the Transfer Agent
before making subsequent investments by wire. Instruct your bank to wire
funds to the Transfer Agent's affiliated bank by using the bank wire
information preceding under "Initial Investment by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) OWL-8758 [695-8758]
before the Funds' cutoff time.
o Shares for IRAs may not be purchased by telephone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
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o You should do one of the following to ensure that payment is received in
time:
o Transfer funds directly from your bank account by sending a letter and
a voided check or deposit slip (for a savings account) to the Transfer
Agent.
o Send a check by overnight or second-day courier service to The
Montgomery Partners Series, 210 West 10th Street, 7th Floor, Kansas
City, MO 64105.
o Instruct your bank to wire funds to the Transfer Agent's affiliated
bank by using the preceding bank wire information under "Initial
Investment by Wire."
Automatic Account Builder ("AAB")
With AAB you can periodically, either monthly or quarterly, make additional
purchases of Fund shares through automatic transfers from your checking or
savings account.
o AAB will be established on existing accounts only. You may not use an AAB
investment to make an initial deposit into a new account. The minimum
automatic investment amount is the relevant Fund's subsequent investment
minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your New Account
application or your letter of instruction. Investments will automatically
be transferred into your account from your checking or savings account.
o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your New Account application or your letter of instruction,
the 20th day of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to your financial
consultant or the Transfer Agent. Your request will be processed upon
receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for the Funds is $500 per payroll period.
o You may automatically deposit a designated amount of your paycheck directly
into an account for a Fund in The Montgomery Partners Series.
o Please call your financial consultant or the Transfer Agent for
instructions on establishing this service.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with telephone transfers to or from your accounts, including any
caused by your bank's failure to act in accordance with your request or its
failure to honor your debit. If your bank makes erroneous payments or fails to
make payment after shares are purchased on your behalf, any such purchase may be
canceled and telephone privileges terminated immediately. This privilege may be
discontinued at any time by the Funds upon prior written notice or at any time
by you by written notice to the Funds. Your request will be processed upon
receipt.
Although Fund shares are priced based on the net asset value next determined
after receipt of a purchase request, share purchases are not considered final
until payment is received. Should payment not be received when required, the
Transfer Agent will cancel the telephone purchase request and you may be
responsible for any losses incurred by a Fund. Although the Funds employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine, the Funds and the Transfer Agent will not be liable for following
instructions communicated by telephone reasonably believed to be genuine. These
procedures include recording certain telephone calls, sending a confirmation and
requiring the caller to give an authorization number or other personal
information not likely to be known by others. The Funds and the Transfer Agent
may be liable for any losses due to unauthorized or fraudulent telephone
transactions only if such reasonable procedures are not followed.
Telephone privileges may be revoked at any time by the Funds as to any
shareholder if the Funds believe that the shareholder has abused the telephone
privilege by using abusive language or by purchases and redemptions that appear
to be part of a systematic market-timing strategy.
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Retirement Plans
Shares of the Funds are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. The Funds may be available for
purchase through administrators for retirement plans. Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing from their plan administrators. Plan administrators may receive
compensation from the Funds for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
noncertificated form, registered on the books of the Funds by the Transfer Agent
for the account of the shareholder or relevant financial intermediary. Your
financial consultant should always have a correct share balance for you.
General
The Distributor, at its expense, will from time to time also provide additional
compensation to dealers who sell shares of The Montgomery Partners Series Funds.
Compensation may include financial assistance to dealers in connection with
conferences, sales training or promotional programs for their employees,
seminars for the public, advertising campaigns regarding one or more of the
Funds and/or other dealer-sponsored special events. In some instances, this
compensation will be made available only to dealers whose representatives have
sold or are expected to sell significant amounts of such shares. Dealers may not
use sales of any of the Funds' shares to qualify for this compensation to the
extent prohibited by the laws or regulations of any state or any self-regulatory
agency, such as the NASDR. Compensation may include payment for travel expenses,
including resort lodging incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
How to Redeem an Investment in the Funds
You should contact your financial consultant for assistance with redemptions if
you own shares of a Fund in an account through a broker-dealer or other
financial intermediary. Your financial consultant will advise you concerning any
transaction or servicing fee that may be imposed by the financial consultant.
Each Fund also will redeem any portion or all of an investor's shares upon
request for accounts held directly with the Transfer Agent. Redemptions can be
made on any day that the NYSE is open for trading.
Shareholders are entitled to the net asset value (less any applicable CDSC or
redemption fee) next determined after receipt of a redemption order from a
shareholder. Orders received after the cutoff time are entitled to the net asset
value next determined after receipt.
Payment of redemption proceeds is made promptly regardless of when redemption
occurs and normally within three business days after receipt of all documents in
proper form, including a written redemption order with appropriate signature
guarantee. Redemption proceeds will be mailed or wired in accordance with the
shareholder's instructions. The Funds 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,
redemption proceeds may not be mailed until the monies used for the purchase
have been collected, which may take up to 15 days from the day your check is
received. Shares tendered for redemption through brokers or dealers (other than
the Distributor) may be subject to a service charge (in addition to any CDSC) by
such brokers or dealers. Procedures for requesting redemptions are set forth
below.
Redeeming by Written Instruction
o Write a letter to your financial consultant or the Fund giving your name,
account number, the name of the Fund and class of shares that you wish to
redeem and the dollar amount (before deduction of any CDSC or redemption
fee) or number of shares you wish to redeem.
o The letter must be signed in the same way your account is registered. If
you have a joint account, all accountholders must sign.
o Signature-guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s) or your predesignated bank
account, or if the dollar amount of the redemption exceeds $50,000.
Signature guarantees may be provided by an eligible guarantor institution
such as a commercial bank, an NASD member firm such as a stockbroker, a
savings association or a national securities exchange. Contact your
financial consultant or the Transfer Agent for more information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from
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redemption proceeds). Your broker-dealer and the Funds reserve the right to
permit lesser wire amounts or fees in their discretion.
Redeeming by Telephone
o Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling your
financial consultant or the Transfer Agent before the Funds' cutoff time.
This service is not available for IRA accounts.
o If you included bank wire information on your New Account application or
made subsequent arrangements to accommodate bank wire redemptions, you may
request that your redemption proceeds be wired to your bank account. Allow
at least two business days for redemption proceeds to be credited to your
bank account. If you want to wire your redemption proceeds to arrive at
your bank on the same business day (subject to bank cutoff times), there is
a $10 fee.
o Telephone redemption privileges will be suspended for 30 days after an
address change. All redemption requests during this period must be in
writing with a signature guarantee.
o Telephone redemption privileges may be canceled by written request after an
account is opened. Your request will be processed upon receipt.
For shareholders holding shares directly with the Transfer Agent: By
establishing telephone redemption privileges, a shareholder authorizes the Funds
and the Transfer Agent to act upon the instruction of the shareholder or his or
her designee by telephone to redeem from the account for which such service has
been authorized and transfer the proceeds to a bank or other account designated
in the authorization. When a shareholder appoints a designee on the New Account
application or by other written authorization, the shareholder agrees to be
bound by the telephone redemption instructions given by the shareholder's
designee. The Funds may change, modify or terminate these privileges at any time
upon prior written notice to shareholders. The Funds will not be responsible for
any loss, damage, cost or expense arising out of any transaction that appears on
the shareholder's confirmation after 30 days following mailing of such
confirmation. See the preceding discussion of the Funds' telephone procedures
and liability under "Telephone Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
For shareholders holding shares directly with the Transfer Agent: Under a
Systematic Withdrawal Plan, a shareholder with an account value of $2,000 or
more in a Fund may receive (or have sent to a third party) periodic payments (by
check or wire). The minimum payment amount is $100 from a Fund account. Payments
may be made either monthly or quarterly on the first day of each month.
Depending on the form of payment requested, shares will be redeemed up to five
business days before the redemption proceeds are scheduled to be received by the
shareholder. The redemption may result in the recognition of a gain or loss for
income tax purposes.
Uncashed Distribution or Redemption Checks
If you choose to receive your distribution or redemption by a check from a Fund
(instead of a bank wire), you should followup to ensure that you have received
the distribution or redemption in a timely manner. The Funds are responsible
only for mailing the distribution or redemption checks and are not responsible
for tracking uncashed checks or determining why checks are uncashed. If the
postal or other delivery service is unable to deliver a check and the check is
returned to a Fund, that Fund will hold the check in a separate account on your
behalf for a reasonable period of time but will not invest the money in any
interest-bearing account. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Small Accounts
For shareholders holding shares directly with the Transfer Agent: Due to the
relatively high cost of maintaining smaller accounts, a Fund will redeem shares
from any account if at any time, because of redemptions by the shareholder, the
total value of a shareholder's account is less than $2,000. If a Fund decides to
make an involuntary redemption, the shareholder will first be notified that the
value of the shareholder's account is less than the minimum level and will be
allowed 30 days to make an additional investment to bring the value of that
account to at least the minimum investment required to open an account before
that Fund takes any action.
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Exchange Privileges and Restrictions
You may exchange shares from an account in one Fund within The Montgomery
Partners Series into an account in another Fund offered by your broker-dealer or
financial intermediary within The Montgomery Partners Series with the same share
class, registration, Taxpayer Identification number and address. An exchange may
result in a recognized gain or loss for income tax purposes.
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value after your request is received. Your
request is subject to the Funds' cutoff time.
o Shares will be exchanged in the same order they are redeemed--shares
purchased through dividend and distribution reinvestments will be exchanged
first, followed by additional shares, if needed, on a first-in, first-out
basis.
o The holding period of the exchanged shares will be tacked onto the holding
period of the acquired shares.
o Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
o You may exchange for shares of a Fund only in states where that Fund's
shares are permitted to be sold and only after you have reviewed a
prospectus of that Fund.
o You may not exchange for shares of a Fund of The Montgomery Partners Series
that is not open to new shareholders unless you have an existing account
with that Fund.
o Your broker-dealer or financial intermediary may impose limits on your
exchanges. In addition, because excessive exchanges can harm a Fund's
performance, the Trust reserves the right to terminate your exchange
privileges if you hold your shares directly with the Transfer Agent and
make more than four exchanges out of any one Fund during a 12-month period.
A Fund may also refuse an exchange into a Fund from which you have redeemed
shares within the previous 90 days (accounts under common control and
accounts with the same Taxpayer Identification number will be counted
together). A shareholder's exchanges may be restricted or refused if a Fund
receives, or the Manager or Distributor anticipates, simultaneous orders
affecting significant portions of the Fund's assets and, in particular, a
pattern of exchanges coinciding with a market-timing strategy. The Trust
reserves the right to refuse exchanges by any person or group if, in the
Manager's judgment, a Fund would be unable to effectively invest the money
in accordance with its investment objective and policies, or would
otherwise be potentially adversely affected. Although the Trust attempts to
provide prior notice to affected shareholders when it is reasonable to do
so, it may impose these restrictions at any time. The exchange limit may be
modified for accounts in certain institutional retirement plans to conform
to plan exchange limits and U.S. Department of Labor regulations (for those
limits, see plan materials). The Trust reserves the right to terminate or
modify the exchange privileges of the Funds' shareholders in the future.
Portfolio Securities
Equity Securities
Each Fund may, within the limits just described, invest in common stocks and may
also invest in other types of equity securities (such as preferred stocks or
convertible securities) as well as equity-derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
Each Fund may invest in ADRs, EDRs and GDRs and convertible securities that the
Manager regards as a form of equity security. Each Fund also may invest up to 5%
of its net assets in warrants, whether or not listed on a securities exchange.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Each 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, each 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 each Fund's assets invested in other open-end (but not closed-end) investment
companies.
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Real Estate Investment Trusts
The Small Cap Fund may invest up to 15% of its total assets in real estate
investment trusts ("REITs"). REITs are pooled investment vehicles that invest
primarily in income-producing real estate or real estate related loans or
interests. REITs are generally classified as Equity REITs or Mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. The value of Equity
REITs will depend on the value of the underlying properties and the value of
Mortgage REITs will be sensitive to the value of the underlying loans or
interests. Like other mortgage-related securities, these securities are subject
to the risk of prepayment and changes in value from changes in interest rates.
The Small Cap Fund will not invest in real estate directly, but only in
securities issued by real estate companies. Investments in REITs, however, may
be subject to risks similar to those associated with the direct ownership of
real estate (in addition to securities markets risks). These include declines in
the value of real estate, risks related to general and local economic
conditions, dependency on management skill, increase in interest rates, possible
lack of availability of mortgage funds, overbuilding, extended vacancies of
properties, increased competition, increases in property taxes and operating
expenses, changes in zoning laws, losses due to costs resulting from the cleanup
of environmental problems, casualty or condemnation losses, limitations on
rents, changes in neighborhood values and the appeal of properties to tenants.
Certain REITs have relatively small capitalization, which may tend to increase
the volatility of the market price of securities issued by such REITs. See "Risk
Considerations."
Debt Securities
Each Fund may invest up to 35% of its total assets in debt securities that
complement that Fund's objective 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.
Debt securities may also consist of participation certificates in large loans
made by financial institutions to various borrowers, typically in the form of
large unsecured corporate loans. These certificates must otherwise comply with
the maturity and credit-quality standards of each Fund and will be limited to 5%
of that Fund's total assets.
U.S. Government Securities
Each 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 (the "GNMA"), are issued or guaranteed by the U.S. government. Other
securities issued by U.S. government agencies or instrumentalities are supported
only by the credit of the agency or instrumentality, such as those issued by the
Federal Home Loan Bank (the "FHLB"), whereas others, such as those issued by the
Federal National Mortgage Association (the "FNMA"), Farm Credit System and
Student Loan Marketing Association, have an additional line of credit with the
U.S. Treasury. Short-term U.S. government securities generally are considered to
be among the safest short-term investments. The U.S. government does not
guarantee the net asset value of the Funds' shares, however.
Structured Notes and Indexed Securities
Each Fund may invest in structured notes and indexed securities. Structured
notes are debt securities, the interest rate or principal of which is determined
by an unrelated indicator. Indexed securities include structured notes as well
as securities other than debt securities, the interest rate or principal of
which is determined by an unrelated indicator. Indexed securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent a
Fund invests in these securities, the Manager analyzes them in its overall
assessment of that Fund's portfolio in an effort to monitor that Fund's interest
rate risk.
Asset-Backed Securities
Each Fund may invest up to 5% of its total assets in asset-backed securities.
Like mortgage-related securities, these securities are subject to the risk of
prepayment.
Other Investment Practices
Each Fund also may engage in the investment practices described below, each of
which may involve certain risks. The Statement of Additional Information, under
the heading "Investment Objectives and Policies of the Funds," contains more
detailed information about these practices, including limitations designed to
reduce risks.
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Repurchase Agreements
Each 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. Under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), repurchase
agreements are considered to be loans by a 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, a Fund may experience
delay or difficulty in exercising its rights to realize upon the security, may
incur a loss if the value of the security declines and may incur disposition
costs in liquidating the security.
Borrowing
Each Fund may borrow money from banks and engage in reverse repurchase
transactions for temporary or emergency purposes. In a reverse repurchase
agreement, a Fund sells to a financial institution a security that it holds and
agrees to repurchase the same security at an agreed-upon price and date. Total
borrowings may not exceed one-third of the value of a Fund's assets, and a Fund
may pledge its assets in connection with such borrowing. A Fund may not purchase
securities if such borrowing exceeds 10% of its total assets.
Securities Lending
Each Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of a Fund's total assets. Each
securities loan is collateralized with collateral assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially.
Hedging and Risk Management Practices Using Derivatives
In seeking to protect against the effect of adverse changes in financial markets
or interest rate changes that are adverse to the present or prospective
positions of the Funds, each Fund may employ risk management practices using
certain derivative securities and techniques (known as "derivatives"). The Board
of Trustees (the "Board") has adopted derivative guidelines that require the
Board to review each new type of derivative that may be used by the Funds. A
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.
Other Uses of Derivatives
The Small Cap Fund and the Macro Cap Fund may also use derivatives, such as
stock index futures, to increase these Funds' exposure to the equity markets
when the Funds are not otherwise fully invested (such as after the receipt of
substantial new cash into the Funds) to maintain a fully invested portfolio
position.
Options on Securities, Securities Indices and Currencies
Each Fund may invest up to 25% of its net assets in 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. A 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). A 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 a
Fund to protect unrealized gains in an appreciated security that it owns without
selling that security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from the sale depends on whether
the amount received is more or less than the premium paid plus transaction
costs.
Each Fund also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industry-wide stock price fluctuations. A
Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of futures contracts.
Futures and Options on Futures
Each Fund may enter into futures contracts on securities indices and U.S.
government securities that are traded on exchanges licensed and regulated by the
U.S. Commodities Futures Trading Commission (the "CFTC") or on foreign
exchanges. The Funds will purchase and sell futures contracts and options
thereon for "bona fide hedging" purposes (as defined by the CFTC) and non-"bona
fide hedging" purposes in accordance with CFTC regulations. The Funds' policies
(including percentage limitations) regarding futures contracts and options
thereon may be changed from time to time to conform to regulatory changes.
16
<PAGE>
Each Fund may enter into futures contracts on securities indices such as the
Standard & Poor's(R) 500 Composite Index (the "S&P 500(R)"), the Russell Top 200
Value Index, the Russell 2000 Value Index, the Russell 3000(R) Index and
foreign/international indices. A securities index futures contract does not
require the physical delivery of the securities underlying the index. Changes in
the market value of a particular securities index futures contract reflects
changes in the specified index of the securities on which the futures contract
is based. The Small Cap Fund and the Macro Cap Fund may purchase futures
contracts on securities indices to maintain a fully invested position.
Each Fund may purchase put and call options on futures contracts for bona fide
hedging purposes (as defined by the CFTC) and non-bona fide hedging purposes.
The purchase of an option on a futures contract requires a Fund to pay a
premium. If the option cannot be profitably exercised before it expires, a
Fund's loss will be limited to the amount of the premium and any transaction
costs. A Fund may enter into closing purchase or sale transactions in order to
terminate its position in a futures contract. There is no guarantee, however,
that such closing transaction can be effected. A Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
market, which may not be available at all times.
Although futures and options transactions, when used for hedging rather than
non-hedging purposes to pursue a Fund's investment objective, are intended to
enable a Fund to manage interest rate, stock market or currency exchange risks,
unanticipated changes in interest rates, market prices or currency exchange
rates could result in poorer performance than if that Fund had not entered into
these transactions.
Futures contracts and options thereon are derivative instruments. Losses that
may arise from certain futures transactions, particularly those involved in
non-hedging contexts to pursue a Fund's investment objective, are potentially
unlimited. Subject to the regulations of the CFTC, each Fund may invest in
futures contracts and options on futures contracts for bona fide hedging
purposes without limitation as to a percentage of its assets but subject to a
limit for non-bona fide hedging purposes of 5% of net assets for initial margins
and premiums on those futures.
Hedging Considerations
Hedging transactions involve certain risks. Although a Fund may benefit from the
use of hedging transactions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for a 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 a Fund may be exposed to greater risk of
financial loss. In addition, a Fund pays commissions and other costs in
connection with such investments.
Illiquid Securities
No Fund may invest more than 15% of its net assets in illiquid securities. Each
Fund treats as illiquid any securities subject to restrictions on repatriation
for more than seven days and securities issued in connection with foreign debt
conversion programs that are restricted as to remittance of invested capital or
profit. Each Fund also treats as illiquid repurchase agreements with maturities
in excess of seven days. Illiquid securities do not include securities that meet
the requirements of Rule 144A under the Securities Act of 1933, as amended, and
that, subject to the review by the Board and guidelines adopted by the Board,
the Manager has determined to be liquid. Limitations on resale may adversely
affect the marketability of illiquid securities and a Fund may not be able to
dispose of these securities at the desired price and time.
Equity Swaps
Each Fund may invest a portion of its total assets in equity swaps. Equity swaps
allow the parties to exchange the dividend income or other components of return
on an equity investment (e.g., a group of equity securities or an index) for a
component of return on another non-equity or equity investment. Equity swaps are
derivatives, and their values 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, the Fund may suffer a
loss. The value of some components of an equity swap (such as the dividends on a
common stock) may also be sensitive to changes in interest rates. Furthermore,
during the period a swap is outstanding, a Fund may suffer a loss if the
counterparty defaults. The Funds typically regard equity swaps as liquid
securities because they may be sold within seven days for approximately the
amount at which the Funds have valued them. Certain equity swaps, however, may
be illiquid. See "Illiquid Securities."
Leaps and Bounds
Subject to a limit of 25% of total assets in options, each Fund may invest in
long-term exchange-traded equity options called Long-term Equity Anticipation
Securities ("LEAPS") and Buy-Write Options Unitary Derivatives ("BOUNDs"). LEAPS
provide a holder the opportunity to participate in the underlying securities'
appreciation in excess of a fixed dollar amount and BOUNDs provide a holder the
opportunity to retain dividends on the underlying securities while potentially
participating in the underlying securities' capital appreciation up to a fixed
dollar amount.
17
<PAGE>
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a 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 a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes a 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 Funds, including brokerage commissions, dealer markups and other
transaction costs, and may result in the recognition of capital gains that may
be distributed to shareholders. Generally, portfolio turnover in excess of 100%
is considered high and increases such costs. The annual portfolio turnover is
expected to be approximately 100 to 150% for the Small Cap Fund and
approximately 30 to 50% for the Macro Cap Fund. The Manager will not necessarily
limit portfolio turnover to these levels. See "Taxation."
Investment Restrictions
The investment objective of each 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 a Fund, shareholders should consider whether
the Fund remains an appropriate investment in light of their then-current
financial positions and goals. Each Fund is subject to additional investment
policies and restrictions described in the Statement of Additional Information,
some of which are fundamental.
Each Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30-days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this prospectus.
Risk Considerations
The Year 2000
The Manager and the Funds' other service providers depend on the smooth
functioning of their computer systems. Unfortunately, because of the way dates
are encoded and calculated, many computer systems in use today cannot recognize
the year 2000, but revert to 1900 or another incorrect date. A computer failure
due to the year 2000 problem could negatively impact the handling of securities
trades, pricing and account services.
The Funds' software vendors and service providers have assured us that they are
prepared to handle these potential problems. There can be no guarantee, however,
that all of these computer systems will be adapted in time. Furthermore, brokers
and other intermediaries that hold shareholder accounts may still experience
incompatibility problems. It is also important to keep in mind that year 2000
problems may negatively impact the companies in which the Funds invest and, by
extension, the value of the shares held in the Funds.
Small Companies
Both Funds, especially the Small Cap Fund, may make investments in smaller
companies that may benefit from the development of new products and services.
Such smaller companies may present greater opportunities for capital
appreciation but may involve greater risk than larger, more mature issuers. Such
smaller companies may have limited product lines, markets or financial
resources, and their securities may trade less frequently and in more limited
volume than those of larger, more mature companies. As a result, the prices of
their securities may fluctuate more than those of larger issuers.
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 debt security's market value, and an interest
rate increase produces a decrease in value. The
18
<PAGE>
longer the remaining maturity of a debt 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.
Performance Information of Similar Accounts
<TABLE>
The Subadvisor also serves as the manager of other accounts that have investment
objectives, policies and strategies that are substantially similar to those of
the Small Cap Fund and the Macro Cap Fund, known as the Small Cap Accounts and
the Macro Cap Accounts, respectively. The following performance information is
based on all of the Subadvisor's Small Cap and Macro Cap Accounts. This
information should not be considered a prediction of the future performance of
the Small Cap or the Macro Cap Fund. Those Funds' performance may be higher or
lower than the performance of the corresponding Accounts. The Small Cap and
Macro Cap Accounts were not registered under the 1940 Act and, therefore, were
not subject to certain investment restrictions imposed by the 1940 Act or
Subchapter M of the Internal Revenue Code. If the Small Cap and Macro Cap
Accounts had been registered under the 1940 Act or were subject to the
requirements of Subchapter M of the Internal Revenue Code, their performance
might have been adversely affected. The following tables show the average total
return for various periods up to June 30, 1998, for the Small Cap and Macro Cap
Accounts and their respective benchmarks.
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1 YEAR PERIOD 1/1/98 1997 7/1/96 7/1/96 (INCEPTION)
ENDED TO TO TO
6/30/98 6/30/98 12/31/96 6/30/98
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Small Cap Accounts 26.6% 5.78% 38.07% 15.24% 29.72%
- --------------------------------------------------------------------------------------------------------------------------------
Russell 2000 Value Index 19.9% 4.44% 31.71% 11.64% 23.91%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
1 YEAR PERIOD 1/1/98 1997 7/1/96 7/1/96 (INCEPTION)
ENDED TO TO TO
6/30/98 6/30/98 12/31/96 6/30/98
- --------------------------------------------------------------------------------------------------------------------------------
Macro Cap Accounts 31.9% 13.37% 39.27% 16.42% 35.57%
- --------------------------------------------------------------------------------------------------------------------------------
Russell Top 200 Value Index 30.4% 14.67% 35.51% 13.89% 33.02%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please read the following important notes concerning the performance information
shown:
1. The date of inception of the both the Small Cap and Macro Cap Accounts was
7/1/96.
2. The total return results for the Small Cap and Macro Cap Accounts are net
of the highest fees charged by the Subadvisor to each type of account.
3. The results presented are not intended to predict or suggest the return to
be experienced by the Funds or the return an investor might achieve by
investing in the Funds. Investors should not rely on the performance data
as an indication of future performance of the Subadvisor or of the Funds.
4. Past performance is not an indicator of future results. Further, as with
any active equity strategy, there is always the potential to lose money.
5. Performance calculations are time-weighted rates of return based on
trade-date valuations and accrual-based accounting for dividends.
Portfolios are revalued for all cash flows. Dividends and other earnings
are reinvested. The portfolios are dollar weighted.
6. For the Small Cap Accounts, the standard deviation of annual returns is
13.85% versus a standard deviation of the annual benchmark returns of
11.53%. For the Macro Cap Accounts, the standard deviation of annual
returns is 13.61% versus a standard deviation of the annual benchmark
returns of 13.05%.
7. To the extent permitted by law the Manager and the Distributor may
advertise the above performance information in connection with the Funds'
marketing.
8. Investors should note that the Funds will compute and disclose their
average annual compounded rate of return using the standard formula set
forth in Securities and Exchange Commission rules, which differ in certain
respects from returns for the Accounts noted above. The SEC total return
calculation method calls for computation and disclosure of the average
annual compounded rate of return for one-, five- and ten-year periods or
shorter periods from inception. The SEC formula provides a rate of return
that equates a hypothetical initial investment of $1,000 to an ending
redeemable value.
19
<PAGE>
Management of the Funds
The Montgomery Funds II (the "Trust") has a Board of Trustees (the "Board") that
establishes the Funds' policies and supervises and reviews their management.
Day-to-day operations of the Funds are administered by the officers of the Trust
and by the Manager pursuant to the terms of an Investment Management Agreement
with the Funds.
Montgomery Asset Management, LLC, is the Funds' Manager. The Manager is a
Delaware limited liability company and is registered as an investment adviser
with the SEC under the Investment Advisers Act of 1940, as amended. The Manager
and its predecessor have advised private accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG ("Commerzbank"). The Manager has
retained Martingale Asset Management, L.P. of Boston, Massachusetts (the
"Subadvisor") to provide the Manager and each Fund with portfolio management
services. The Subadvisor has two general partners: Martingale Asset Management
Corporation, which is owned by employees of the Subadvisor and CAM (USA), a
wholly owned subsidiary of Commerzbank International Capital Management, a
wholly owned subsidiary of Commerzbank. The Subadvisor and its predecessor have
been managing portfolio assets since 1987. Except in this "Management of the
Funds" section, references to the Manager also refer to the Subadvisor.
The Subadvisor may assist the Manager with evaluating and executing various
investment strategies and may directly manage all or portions of each Fund's
assets the Manager has designated. The Manager's Investment Oversight Committee
oversees all investment services provided by the Subadvisor.
Commerzbank, one of the largest publicly held commercial banks in Germany, had
total assets of approximately $288 billion on December 31, 1997. Commerzbank and
its affiliates had more than $98 billion in assets under management as of
December 31, 1997. Commerzbank's asset management operations involve more than
1,000 employees in 13 countries worldwide.
To benefit from these resources, the Manager may rely on or consult its
affiliated investment advisory organizations for research or other investment
advice deemed useful by the Manager.
Portfolio Management
Montgomery Asset Management (the "Manager")
The Manager is responsible for overseeing the activities of the Subadvisor. In
addition to monitoring the performance of each Fund, the Manager will verify
compliance with each Fund's particular investment restrictions.
Kevin T. Hamilton, CFA, chair of Montgomery Asset Management's Investment
Oversight Committee. Mr. Hamilton coordinates and oversees the investment
decisions of the Manager's portfolio management teams. Prior to joining
Montgomery Asset Management in 1991, he was a senior vice president and
portfolio manager at Analytic Investment Management, where he managed both
equity and fixed-income portfolios.
Martingale Asset Management (the "Subadvisor")
Each Fund is managed by the following individuals:
William E. Jacques, CFA, is a partner, executive vice president and chief
investment officer responsible for overseeing investment research, portfolio
management and trading. Mr. Jacques joined the Subadvisor in 1987. Mr. Jacques
was a trustee and vice president of Batterymarch Financial Management from 1984
to 1987, where he was involved in quantitative research and portfolio management
as an investment strategist. Before joining Batterymarch he was a vice president
of J. P. Morgan Investment Management, where he began his career in 1976 as a
research analyst.
Douglas E. Stark, CFA, is director of U.S. Equity Management and Research and a
portfolio manager. Mr. Stark is responsible for the management of U.S.
long-short and equity portfolios, and research and development of equity
processes. Prior to joining the Subadvisor in 1996, Mr. Stark was a senior vice
president and portfolio manager at InterCoast Capital Company where he developed
a stock selection strategy and created a risk management process for an active
U.S. equity portfolio, active international portfolio and emerging markets
portfolio. Mr. Stark started his career as a vice president at State Street
Global Advisors in 1990, where he managed international stock portfolios and
active currency overlays.
Management Fees and Other Expenses
<TABLE>
The Manager provides the Funds with advice on buying and selling securities;
manages the Funds' investments, including the placement of orders for portfolio
transactions; furnishes the Funds with office space and certain administrative
services; and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Funds. The Manager also compensates the members of the Board who are
interested persons of the Manager. As compensation, the Funds pay the Manager a
management fee (accrued daily but paid when requested by the
20
<PAGE>
Manager) based on the value of its average daily net assets, according to the
following table. These fees are higher than for most mutual funds.
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
AVERAGE DAILY NET ASSETS ANNUAL RATE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Small Cap Systematic Value Fund First $250 million 1.25%
Over $250 million 1.10%
- ----------------------------------------------------------------------------------------------------------
Montgomery Macro Cap Systematic Value Fund First $500 million 0.85%
Over $500 million 0.75%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Manager compensates the Subadvisor out of the Manager's management fee. The
Manager and Subadvisor are parties to a Sub-Advisory Agreement concerning the
Subadvisor's management of each Fund's assets allocated to it. The Subadvisor's
fees under that agreement are equal to 45% of the management fee received each
month by the Manager, net of fees and expenses paid by the Manager to certain
broker-dealers and other intermediaries.
The Manager also serves as each Fund's administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, each Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
that Fund's average daily net assets (six one-hundredths of one percent (0.06%)
of that Fund's average daily net assets over $250 million).
Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third-party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, Statements of Additional Information and
reports to shareholders; and other expenses relating to the Funds' operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 (the "Rule") adopted by the Securities and Exchange Commission under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to the Rule, the Board
has approved, and each Fund has entered into, a Share Marketing Plan (the "12b-1
Plan") with the Distributor, as the distribution coordinator, for the Class B
and Class C shares. Under the 12b-1 Plan, each Fund will pay distribution fees
to the Distributor at an annual rate of seventy-five one-hundredths of one
percent (0.75%) of its aggregate average daily net assets attributable to its
Class B and Class C shares to reimburse the Distributor for its distribution
costs with respect to each such class.
The 12b-1 Plan provides that the Distributor may use the distribution fees
received from the class to pay for the distribution expenses of that class,
including, but not limited to (i) incentive compensation paid to the directors,
officers and employees of, agents for and consultants to the Distributor or any
other broker-dealer or financial institution that engages in the distribution of
that class; and (ii) compensation to broker-dealers, financial institutions or
other persons for providing distribution assistance with respect to that class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that class; (ii) costs
of printing and distributing prospectuses, Statements of Additional Information
and reports of a Fund to prospective investors in that class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
a Fund and that class; and (iv) costs involved in obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that a Fund may, from time to time, deem advisable with respect to
the distribution of that class. Distribution fees are accrued daily, paid
monthly, and charged as expenses of, respectively, Class B and Class C shares as
accrued.
The Board also has adopted a Shareholder Servicing Plan (the "Servicing Plan")
for the Class A, Class B and Class C shares of the Funds. Under the Servicing
Plan, a Fund will pay servicing fees to the Distributor or Manager, as service
coordinators, at an annual rate of up to twenty-five one-hundredths of one
percent (0.25%) of the Fund's average daily net assets attributable to each
class of shares. The service fee is intended to reimburse the Distributor and
Manager for providing or arranging for services to shareholders of those
classes. The Distributor or Manager may pay certain banks, trust companies,
broker-dealers and other financial intermediaries to the extent they provide
shareholder services.
In adopting the 12b-1 Plan and the Servicing Plan (together, the "Plans"), the
Board determined that there was a reasonable likelihood that the Plans would
benefit the Funds and the shareholders of Class A, Class B and Class C shares.
Information with respect to distribution and servicing revenues and expenses is
presented to the Board quarterly for its consideration in connection
21
<PAGE>
with its deliberations as to the continuance of the Plans. In its review of the
Plans, the Board is asked to take into consideration expenses incurred in
connection with the separate distribution and servicing of the Class A, Class B
and Class C shares of each Fund.
The Class A, Class B and Class C shares are not obligated under the Plans to pay
any distribution or servicing expenses in excess of the distribution and
servicing fees. Thus, if the Plans were terminated or otherwise not continued,
no amounts (other than current amounts accrued but not yet paid) would be owed
by the class to the Distributor.
The distribution fees attributable to the Class B and Class C shares are
designed to permit an investor to purchase Class B and Class C shares through
broker-dealers without the assessment of an initial sales charge and at the same
time to permit the Distributor to compensate broker-dealers on an ongoing basis
in connection with assets in the Class B and Class C shares attributable to
those broker-dealers.
The Plans provide that they shall continue in effect from year to year provided
that a majority of the Board, including a majority of the Trustees who are not
"interested persons" of the Trust (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plans
or any agreements related to the Plans (the "Independent Trustees"), vote
annually to continue the Plans. The Plans may be terminated at any time by vote
of a majority of the Independent Trustees or of a majority of the outstanding
shares (as defined in the Investment Company Act) of the Class A, Class B and
Class C shares.
All distribution fees paid by the Funds under the 12b-1 Plan will be paid in
accordance with Rule 2830 of the NASDR Rules of Conduct.
The Manager and Subadvisor have agreed to reduce their management fees if
necessary to keep total annual operating expenses for each class (excluding (I)
the Rule 12b-1 fees, (ii) interest expenses related to borrowing transactions
and (iii) extraordinary items) at or below the following with respect to the
average net assets for that class: one and seventy-five one-hundredths of one
percent (1.75%) of the Small Cap Fund and one and thirty-five one-hundredths of
one percent (1.35%) of the Macro Cap Fund. The Manager also may voluntarily
reduce additional amounts to increase the return to a Fund's investors. The
Manager may terminate these voluntary reductions at any time. Any reductions
made by the Manager in its fees are subject to reimbursement by a Fund within
the following three years, provided that the Fund is able to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Manager generally seeks reimbursement for the oldest reductions and waivers
before payment by a Fund of fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that a 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
a Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate the Distributor as well as
other service providers of shareholder and administrative services.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Funds' 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
that the Funds receive prompt execution at competitive prices, the Manager also
may consider sale of the Funds' shares as a factor in selecting broker-dealers
for the Funds' portfolio transactions. See "Execution of Portfolio Transactions"
in the Statement of Additional Information for further information regarding the
Funds' 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 Funds (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419898, Kansas City, Missouri 64141-6898, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How Net Asset Value Is Determined
The net asset value of each class of shares of the Funds is determined once
daily as of the Funds' 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
each Fund's total net assets of a class by the total number of the Fund's shares
of that class then outstanding. Each class will have a different per-share net
asset value reflecting the specific expense structure of that class.
22
<PAGE>
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sale price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and ask
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the Manager and the Pricing
Committee of the Board, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
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 a Fund's shares
even if there has not been any change in the foreign currency-denominated values
of such securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time a Fund calculates its net
asset values may not be reflected in that Fund's calculation of net asset values
unless the Manager, under the supervision of the Board, determines that a
particular event would materially affect that Fund's net asset values.
Dividends and Distributions
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Dividends are declared and paid
annually. Capital gains are declared and paid in the last quarter of each year.
Additional distributions, if necessary, may be made following a Fund's fiscal
year end (March 31) 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
relevant Fund and credited to the shareholder's account at the closing net asset
value on the reinvestment date.
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in a Fund's daily net asset value. The share
price of a Fund drops by the amount of the distribution, net of any subsequent
market fluctuations. For example, assume that on December 31 a 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.
If you buy shares of a 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. 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 of
whether you reinvested the dividends.
Taxation
Each Fund intends to qualify and elect as soon as possible 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 assets. Accordingly, each Fund generally will not be liable
for federal income tax or excise tax based on net income except to the extent
that its earnings are not distributed or are distributed in a manner that does
not satisfy the requirements of the Code pertaining to the timing of
distributions. If a Fund is unable to meet certain requirements of the Code, it
may be subject to taxation as a corporation. A 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 gains over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund
23
<PAGE>
shares) receive from a Fund are considered ordinary income. Part of the
distributions paid by a Fund may be eligible for the dividends-received
deduction allowed to corporate shareholders under the Code. Distributions of the
excess of net long-term capital gains over net short-term capital losses from
transactions of a Fund are treated by shareholders as long-term capital gains
regardless of the length of time that Fund's shares have been owned. The maximum
capital gains rate for individuals is 20% with respect to assets held for more
than a year. The maximum capital gains rate for corporate shareholders is the
same as the maximum tax rate for ordinary income. Distributions of income and
capital gains are taxed in the manner described above, whether they are taken in
cash or reinvested in additional shares of the Funds.
Each 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 them
of an investment in shares of a Fund. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
General Information
The Trust
Each Fund is a series of The Montgomery Funds II, a Delaware business trust
organized on September 10, 1993 (the "Trust"). The Trust's Agreement and
Declaration of Trust permits the Board to issue an unlimited number of full and
fractional shares of beneficial interest, $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 A, Class B and Class C shares of the
Funds. The Funds have not designated other classes of shares but may in the
future designate other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Funds 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 a Fund and to the net assets of the Fund upon
liquidation or dissolution. Each Fund, as a separate series of the Trust, votes
separately on matters affecting only that 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; the holders
of more than 50% of the shares voting in any election of Trustees can, if they
so choose, elect all of the Trustees. Except as set forth herein, all classes of
shares issued by each Fund shall have identical voting, dividend, liquidation
and other rights, preferences, and terms and conditions. The only differences
among the various classes of shares relate solely to the following: (a) each
class may be subject to different class expenses; (b) each class may bear a
different identifying designation; (c) each class may have exclusive voting
rights with respect to matters solely affecting such class; (d) each class may
have different exchange privileges; and (e) each class may provide for the
automatic conversion of that class into another class. 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.
Performance Information
From time to time, a Fund may publish its total return, such as in
advertisements and communications to investors. Performance data may be quoted
separately for each class of shares. Total return information generally will
include a 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. A Fund may also advertise aggregate and average total return
information over different periods of time. A Fund's average annual compounded
rate of return is determined by reference to a hypothetical $1,000 investment
that includes capital appreciation and depreciation for the stated period
according to a specific formula. Aggregate total return is calculated in a
similar manner, except that the results are not annualized. Total return figures
will reflect all recurring charges against a Fund's income.
Investment results of a Fund will fluctuate over time, and any presentation of a
Fund's total return for any prior period should not be considered a
representation of what an investor's total return or current yield may be in any
future period.
24
<PAGE>
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
Each shareholder whose account is maintained at the Transfer Agent will receive
the following information during the year:
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 March
31 and September 30.
o 1099 tax form(s) are mailed by January 31.
o An annual updated prospectus is mailed to existing shareholders in June or
July.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household for accounts
having the same address regardless of the number of shareholders or accounts at
that household or address. Any questions should be directed to The Montgomery
Partners Series at (800) OWL-8758 [695-8758].
Backup Withholding Instructions
Shareholders are required by law to provide the Funds 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 on the New
Account application and to sign the shareholder's name could result in backup
withholding by a Fund of an amount of federal income tax equal to 31% of taxable
dividends, capital-gain 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. Other 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 a 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 Funds' official sales literature.
25
<PAGE>
Glossary
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.
cash equivalents. These are short-term, interest-bearing instruments or deposits
and may include, for example, commercial paper, certificates of deposit,
repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank money
market deposit accounts, master demand notes and money market mutual funds.
These consist of high-quality debt obligations, certificates of deposit and
bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
convertible security. This is a fixed-income security (a bond or some preferred
stocks) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
covered call option. A call option is "covered" if a Fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option, or owns an offsetting call option.
covered put option. A put option is "covered" if a Fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
CFTC. The U.S. Commodities Futures Trading Commission.
depositary receipts. These include American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs")
and other similar instruments. Depositary receipts are typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
derivatives. These include forward currency exchange contracts, currency
options, futures contracts, options, warrants, swaps and options on futures
contracts on U.S. government and foreign government securities, currencies
and indices.
FNMA. The Federal National Mortgage Association.
forward currency contracts. This is a contract individually negotiated and
privately traded by currency traders and their customers which creates an
obligation to purchase or sell a specific currency for an agreed-upon price
at a future date. A Fund generally may enter into forward contracts with
terms greater than one year.
futures and options on futures. A futures contract is an agreement to buy or
sell a security, instrument or commodity at an agreed-upon price sometime in
the future. Futures contracts also may relate to securities indices or the
underlying securities. These often are standardized agreements traded on
futures exchanges. Options on futures are the right, but not the obligation,
to buy or sell an underlying futures contract at a specific price during a
specified time period.
GNMA. The Government National Mortgage Association.
illiquid securities. A Fund treats as illiquid any securities subject to
restrictions on repatriation for more than seven days and securities issued
in connection with foreign debt conversion programs that are restricted as to
remittance of invested capital or profit. A 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 the review by
the Board and guidelines adopted by the Board, the Manager has determined to
be liquid.
investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch
(at least Baa) or in unrated debt securities deemed to be of comparable
quality by the Manager using guidelines approved by the Board.
leverage. Some Funds may use leverage in an effort to increase return. Leverage
refers to borrowing money or engaging in a transaction that has the same
economic effect. Although leverage creates an opportunity for increased
income and gain, it can also magnify losses and create certain risk
considerations. Leveraging also creates interest expenses that can exceed any
income from the assets retained.
repurchase agreement. With a repurchase agreement, a Fund acquires a U.S.
government security or other high-grade liquid debt instrument from a
financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
reverse repurchase agreement. In a reverse repurchase agreement, a Fund sells to
a financial institution a security
26
<PAGE>
that it holds and agrees to repurchase the same security at an agreed-upon
price and date.
securities lending. A Fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value of
the loaned securities, plus accrued interest. There is a risk of delay in
receiving collateral or in recovering the securities loaned or even a loss of
rights in collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
warrant. Typically, this warrant is a long-term option that permits the holder
to buy a specified number of shares of the issuer's underlying common stock
at a specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
when-issued and forward commitment securities. A Fund may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" or "delayed-delivery" basis. The
price is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued securities and
forward commitments may be sold prior to the settlement date, but a Fund will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to a Fund. At the time a Fund enters into
a transaction on a when-issued or forward commitment basis, it supports its
obligation with collateral assets equal to the value of the when-issued or
forward commitment securities and causes the collateral assets to be
marked-to-market daily. There is a risk that the securities may not be
delivered and that a Fund may incur a loss.
27
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
(800) OWL-8758 [695-8758]
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
(800) OWL-8758 [695-8758]
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419898
Kansas City, Missouri 64141
(800) OWL-8758 [695-8758]
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
THE MONTGOMERY PARTNERS SERIES(SM)
101 California Street
San Francisco, California 94111
(800) OWL-8758 (695-8758)
Invest wisely.(R)
<PAGE>
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PART B
STATEMENT OF ADDITIONAL INFORMATION FOR
MONTGOMERY SMALL CAP SYSTEMATIC VALUE FUND
MONTGOMERY MACRO CAP SYSTEMATIC VALUE FUND
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<PAGE>
THE MONTGOMERY FUNDS II
MONTGOMERY PARTNERS SERIES FUNDS:
MONTGOMERY SMALL CAP SYSTEMATIC VALUE FUND
MONTGOMERY MACRO CAP SYSTEMATIC VALUE FUND
101 California Street
San Francisco, California 94111
(800) OWL-8758 (695-8758)
STATEMENT OF ADDITIONAL INFORMATION
August 31, 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. The Trust does business under the name The Montgomery
Partners Series and it consists of nine series, two of which are discussed here:
Montgomery Small Cap Systematic Value Fund, Montgomery Macro Cap Systematic
Value Fund (each a "Fund" and collectively the "Funds"). The Funds are managed
by Montgomery Asset Management, LLC (the "Manager") and distributed by Funds
Distributor, Inc. (the "Distributor"). The Manager has retained Martingale Asset
Management, L.P. of Boston, Massachusetts (the "Sub-Adviser") to provide the
Manager and the Fund with portfolio management services for Montgomery Small Cap
Systematic Value Fund and Montgomery Macro Cap Systematic Value Fund.
This Statement of Additional Information contains information in addition to
that set forth in the prospectus for Montgomery Small Cap Systematic Value Fund
and Montgomery Macro Cap Systematic Value Fund dated August 31, 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 Funds 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.
B-1
<PAGE>
TABLE OF CONTENTS
The Trust.....................................................................2
Investment Objectives and Policies of the Funds...............................2
Risk Factors.................................................................11
Investment Restrictions......................................................12
Purchase of Shares...........................................................15
Distributions and Tax Information............................................17
Trustees and Officers........................................................21
Investment Management and Other Services.....................................24
Execution of Portfolio Transactions..........................................28
Additional Purchase and Redemption Information...............................30
Determination of Net Asset Value.............................................32
Principal Underwriter........................................................34
Performance Information......................................................34
General Information..........................................................36
Financial Statements.........................................................37
Appendix.....................................................................38
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, $0.01 par value per share, in
various series. Each series offers several classes of shares. This Statement of
Additional Information pertains to Class A, Class B and Class C shares of
Montgomery Small Cap Systematic Value Fund (the "Small Cap Fund") and Montgomery
Macro Cap Systematic Value Fund (the "Macro Cap Fund").
Investment Objectives and Policies of the Funds
The investment objectives and policies of the Funds are described in detail in
the prospectuses. The following discussion supplements the discussion in the
prospectuses.
Each Fund is a diversified series of the Trust, an open-end management
investment company offering redeemable shares of beneficial interest. The
achievement of each Fund's investment objective will depend on market conditions
generally and on the Manager's analytical and portfolio management skills.
Portfolio Securities
Depositary Receipts. Each Fund, to the extent allowed by its prospectus, may
hold securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and other similar global
instruments available in emerging markets, or other securities convertible into
securities of eligible issuers. These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. Generally, ADRs in registered form are designed for use in U.S.
securities markets, and EDRs and other similar global instruments in bearer form
are designed for use in European securities markets. For purposes of each Fund's
investment policies, each Funds'
B-2
<PAGE>
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. Each Fund, to the extent allowed by its prospectus,
may invest in securities issued by other investment companies investing in
securities in which each Fund can invest provided that such investment companies
invest in portfolio securities in a manner consistent with each Fund's
investment objective and policies. Applicable provisions of the Investment
Company Act require that each Fund limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 10% of the
value of a Fund's total assets will be invested in the aggregate in securities
of investment companies as a group; and (b) either a Fund and affiliated persons
of that 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 that Fund in excess of 1% of the company's total
outstanding shares be deemed illiquid); or that 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, a 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 a Fund bears directly in
connection with their own operations.
U.S. Government Securities. Generally, the value of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government securities") held by the Funds will fluctuate inversely with interest
rates. U.S. Government securities in which the Funds 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, each 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 a
Fund.
Risk Factors/Special Considerations Relating to Debt Securities. Each Fund, to
the extent allowed by its prospectus, 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.
The Funds consider below-investment-grade debt securities to be those 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 each Fund's net asset values.
B-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 a 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 values of that
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 each 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 that 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 an issuer of low
rated debt securities owned by a Fund defaults, that Fund may incur additional
expenses seeking 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, to the extent
allowed by the prospectuses, each 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. Each such 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.
Each Fund, to the extent allowed by its prospectus, also may purchase other
types of options and futures and may, in the future, write options, as described
below and in its prospectus.
Forward Contracts. Each Fund, to the extent allowed by its prospectus, may enter
into forward contracts to attempt to minimize the risk from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract, which is individually negotiated and privately traded by currency
traders and their customers, involves an obligation to purchase or sell a
specific currency for an agreed upon price at a future date.
B-4
<PAGE>
Each Fund, to the extent allowed by its prospectus, may enter into forward
contracts, for example, when its enters into a contract for the purchase or sale
of a security denominated in a foreign currency or it is expecting a dividend or
interest payment, in order to "lock in" the U.S. dollar price of a security,
dividend or interest payment. When such a Fund believes that a foreign currency
may suffer a substantial decline against the U.S. dollar, it may enter into
forward contracts to sell an amount of that foreign currency approximating the
value of some or all of that Fund's portfolio securities denominated in such
currency, or when a Fund believes that the U.S. dollar may suffer a substantial
decline against a foreign currency, they may enter into a forward contract to
buy that currency for a fixed dollar amount.
In connection with each Fund's forward contract transactions, an amount of each
Fund's assets equal to the amount of its commitments will be held aside or
segregated to be used to pay for the commitments. Accordingly, each 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. Designated assets used to cover forward
contracts will be marked to market on a daily basis. While these contracts are
not presently regulated by the Commodity Futures Trading Commission ("CFTC"),
the CFTC may in the future regulate them, and the ability of the Funds to
utilize forward contracts may be restricted. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by the Fund than if it had not entered into
such contracts. Each 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, Each Fund, to
the extent allowed by its prospectus, may purchase and sell various kinds of
futures contracts and options on futures contracts and 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 Trust 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 each series of the Trust
will use futures contracts and related options for "bona fide hedging purposes"
within the meaning of CFTC regulations, provided that each Fund may hold
positions in futures contracts and related options that do not fall within the
definition of bona fide hedging transactions if the aggregate initial margin and
premiums required to establish such positions will not exceed 5% of each 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%.
A 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 that Fund or which they
expect to purchase. Each 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 a Fund against an increase in the price of securities it
intends to purchase (or the currencies in which they are denominated). All
futures contracts
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entered into by a Fund are traded on U.S. exchanges or boards of trade licensed
and regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting or "closing" purchase or sale
transactions, which may result in a profit or a loss. While each Fund's futures
contracts on securities or currencies will usually be liquidated in this manner,
each Fund may make or take delivery of the underlying securities or currencies
whenever it appears economically advantageous. A clearing corporation associated
with the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
By using futures contracts to hedge its positions, a 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 Fund proposes to acquire. For example, when interest rates are
rising or securities prices are falling, a Fund can seek, through the sale of
futures contracts, to the extent allowed by the prospectuses, to offset a
decline in the value of its current portfolio securities. When rates are falling
or prices are rising, a 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, each 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. Each Fund, to the extent allowed by its prospectus, can purchase
futures contracts on a foreign currency to fix the price in U.S. dollars of a
security denominated in such currency that Fund has acquired or expects to
acquire.
As part of its hedging strategy, Each Fund, to the extent allowed by its
prospectus, also may enter into other types of financial futures contracts if,
in the opinion of the Manager, there is a sufficient degree of correlation
between price trends for that Fund's portfolio securities and such futures
contracts. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Manager will attempt to estimate the extent of this difference in volatility
based on historical patterns and to compensate for it by having that Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting that Fund's securities
portfolio. When hedging of this character is successful, any depreciation in the
value of portfolio securities can be substantially offset by appreciation in the
value of the futures position. However, any unanticipated appreciation in the
value of a Fund's portfolio securities could be offset substantially by a
decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives a Fund the
right (but not the obligation), for a specified price, to sell or purchase the
underlying futures contract at any time during the option period. Purchasing an
option on a futures contract gives a 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.
A 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. A Fund's ability to establish and close out positions on such
options is dependent upon a liquid market.
Loss from investing in futures transactions by a Fund is potentially unlimited.
A Fund will engage in transactions in futures contracts and related options only
to the extent allowed by the prospectuses and to the extent such transactions
are consistent with the requirements of the Internal
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Revenue Code of 1986, as amended, for maintaining their qualification as a
regulated investment company for federal income tax purposes.
Options on Securities, Securities Indices and Currencies. Each Fund, to the
extent allowed by its prospectus, may purchase put and call options on
securities in which it has invested, on foreign currencies represented in its
portfolios and on any securities index based in whole or in part on securities
in which that Fund may invest. Each such Fund also may enter into closing sales
transactions in order to realize gains or minimize losses on options it has
purchased.
A Fund normally will purchase call options in anticipation of an increase in the
market value of securities of the type in which it may invest or a positive
change in the currency in which such securities are denominated. The purchase of
a call option entitles a 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.
Each Fund, to the extent allowed by its prospectus, 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 a Fund.
Although a Fund will generally purchase only those options for which there
appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that a 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.
Each Fund, to the extent allowed by its prospectus, may write (i.e., sell)
covered put and call options on securities, securities indices and currencies in
which it may invest. A covered call option involves a Fund's giving another
party, in return for a premium, the right to buy specified securities owned by
that Fund at a specified future date and price set at the time of the contract.
A covered call option serves as a partial hedge against the price decline of the
underlying security. However, by writing a covered call option, a Fund gives up
the opportunity, while the option is in effect, to realize gain from any price
increase (above the option exercise price) in the underlying security. In
addition, a Fund's ability to sell
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the underlying security is limited while the option is in effect unless that
Fund effects a closing purchase transaction.
Each Fund, to the extent allowed by its prospectus, also may write covered put
options that give the holder of the option the right to sell the underlying
security to that Fund at the stated exercise price. A Fund will receive a
premium for writing a put option but will be obligated for as long as the option
is outstanding to purchase the underlying security at a price that may be higher
than the market value of that security at the time of exercise. In order to
"cover" put options it has written, the Funds will cause their custodian to
designate cash, cash equivalents, U.S. Government securities or other liquid
equity or debt securities with at least the value of the exercise price of the
put options. In designating such assets, the custodian either deposits such
assets in a segregated account or separately identifies such assets and renders
them unavailable for investment. A Fund will not write put options if the
aggregate value of the obligations underlying the put options exceeds 25% of
that Fund's total assets.
Each Fund, to the extent allowed by its prospectus, may write options that are
not covered by portfolio securities. This is regarded as a speculative
investment technique that could expose a Fund to substantial losses. Each such
Fund will designate liquid securities in the amount of its potential obligation
under uncovered options, and increase or decrease the amount of designated
assets daily based on the amount of the then-current obligation under the
option. This designation of liquid assets will not eliminate the risk of loss
from writing the option but it will ensure that the Fund can satisfy its
obligations under the option.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of a
Fund's orders.
Other Investment Practices
Repurchase Agreements. Each Fund, to the extent allowed by its prospectus, may
enter into repurchase agreements. A 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 that 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 a Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to that Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the value of
the securities subject to the repurchase agreement at not less than their
repurchase price. The Manager, acting under the supervision of the Board of
Trustees (the "Board"), reviews on a periodic basis the suitability and
creditworthiness, and the value of the collateral, of those sellers with whom
each Fund enters into repurchase agreements to evaluate potential risk. All
repurchase agreements will be made pursuant to procedures adopted and regularly
reviewed by the Board.
A Fund generally will enter into repurchase agreements of short maturities, from
overnight to one week, although the underlying securities will generally have
longer maturities. Each such Fund regards repurchase agreements with maturities
in excess of seven days as illiquid. To the extent permitted in the
prospectuses, each Fund may invest in illiquid securities, including repurchase
agreements with maturities greater than seven days.
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<PAGE>
For purposes of the Investment Company Act, a repurchase agreement is deemed to
be a collateralized loan from a 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 a Fund subject to a repurchase agreement as being owned by
that Fund or as being collateral for a loan by that 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, a 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 a Fund has not perfected a
security interest in the security, that 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, a 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 a 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, a Fund also runs
the risk that the seller may fail to repurchase the security. However, a 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 that Funds plus accrued interest, and
that Fund makes payment against such securities only upon physical delivery or
evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), a Funds, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement at all times equals or exceeds the repurchase price
(including interest) at all times.
Each Fund may participate in one or more joint accounts with other funds of the
Trust that may invest in repurchase agreements collateralized either by (i)
obligations issued or guaranteed as to principal and interest by the U.S.
Government or by one of its agencies or instrumentalities, or (ii) privately
issued mortgage-related securities that are in turn collateralized by securities
issued by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event will have a
duration of more than seven days.
Reverse Repurchase Agreements. Each Fund, to the extent allowed by its
prospectus, may enter into reverse repurchase agreements, as set forth in the
prospectuses. A Fund typically will invest the proceeds of a reverse repurchase
agreement in money market instruments or repurchase agreements maturing not
later than the expiration of the reverse repurchase agreement. This use of
proceeds involves leverage, and a Fund will enter into a reverse repurchase
agreement for leverage purposes only when the Manager believes that the interest
income to be earned from the investment of the proceeds would be greater than
the interest expense of the transaction. A Fund also may use the proceeds of
reverse repurchase agreements to provide liquidity to meet redemption requests
when sale of that Funds' securities is disadvantageous.
A Fund causes its custodian to designate liquid assets, such as cash, U.S.
Government securities or other liquid equity or debt securities equal in value
to its obligations (including accrued interest) with respect to reverse
repurchase agreements. In segregating such assets, the custodian either places
such securities in a segregated account or separately identifies such assets and
renders them unavailable for investment. Such assets are marked to market daily
to ensure that full collateralization is maintained.
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<PAGE>
Lending of Portfolio Securities. Each Fund, to the extent allowed by its
prospectus, may lend its portfolio securities 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. A 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 a Fund or the borrower
at any time. Upon such termination, a Fund is entitled to obtain the return of
the securities loaned within five business days.
For the duration of the loan, a 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. Each 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 a Fund to the issuer. While each Fund reserves
the right to sell when-issued or delayed delivery securities prior to the
settlement date, each Fund intends to purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons. At the time a 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 their net asset values. The
market value of the when-issued securities may be more or less than the
settlement price. The Funds do not believe that their net asset values will be
adversely affected by their purchase of securities on a when-issued or delayed
delivery basis. Each Fund causes its custodian to designate 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 a Fund are held in cash
pending the settlement of a purchase of securities, that Funds will earn no
income on these assets.
Illiquid Securities. Each Fund, to the extent allowed by its prospectus, may
invest 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 others, repurchase agreements maturing in more
than seven days, certain restricted securities and securities that are otherwise
not freely transferable. Illiquid securities also include shares of an
investment company held by a Fund in excess of 1% of the total outstanding
shares of that investment company. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
(the "1933 Act"). Illiquid securities acquired by a 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
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marketable in the United States, will not be considered illiquid. Where
registration is required, a 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 that Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities sold
pursuant to Rule 144A in many cases provide both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities held by a
Fund, however, could affect adversely the marketability of such portfolio
securities, and that Fund might be unable to dispose of such securities promptly
or at favorable prices.
The Board has delegated the function of making day-to-day determinations of
liquidity to the Manager pursuant to guidelines approved by the Board. The
Manager takes into account a number of factors in reaching liquidity decisions,
including but not limited to (i) the frequency of trades for the security, (ii)
the number of dealers that quote prices for the security, (iii) the number of
dealers that have undertaken to make a market in the security, (iv) the number
of other potential purchasers, and (v) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how bids are
solicited and the mechanics of transfer). The Manager monitors the liquidity of
restricted securities in the Fund's portfolio and reports periodically on such
decisions to the Board.
Risk Factors
Foreign Securities. Investors in each Fund that is allowed to invest in foreign
securities 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 United States. Foreign companies are often not subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements often may not be comparable to those applicable to U.S.
companies. Many foreign markets have substantially less volume than either the
established domestic securities exchanges or the OTC markets. Securities of some
foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Commission rates in foreign countries, which may be
fixed rather than subject to negotiation
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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.
Exchange Rates and Policies. Each Fund, to the extent allowed by its prospectus,
endeavors to buy and sell foreign currencies on favorable terms. Some price
spreads on currency exchanges (to cover service charges) may be incurred,
particularly when a 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 a Fund from repatriating invested capital and dividends, withhold
portions of interest and dividends at the source, or impose other taxes, with
respect to that 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.
A Fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, exchange
control regulations and indigenous economic and political developments.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions that would affect the
liquidity of the Funds' assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
attendant to holding portfolio securities in domestic and foreign securities
depositories (see "Investment Management and Other Services").
Hedging Transactions. While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while a
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 that 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 a Fund may be exposed to risk of financial loss.
Perfect correlation between a Fund's hedging positions and portfolio positions
may be difficult to achieve because hedging instruments in many foreign
countries are not yet available. In addition, it is not possible to hedge fully
against currency fluctuations affecting the value of securities denominated in
foreign currencies because the value of such securities is likely to fluctuate
as a result of independent factors not related to currency fluctuations.
Investment Restrictions
The following policies and investment restrictions have been adopted by each
Fund and (unless otherwise noted) are fundamental and cannot be changed without
the affirmative vote of a majority of a Fund's outstanding voting securities as
defined in the Investment Company Act. Each Fund may not:
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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 that 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 in excess of one-third of the value of its total
assets (including the proceeds of such borrowings, 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, in the case
of each Fund, no additional investments may be made while any
such borrowings are in excess of 10% of total assets.
Transactions that are fully collateralized in a manner that
does not involve the prohibited issuance of a "senior
security" within the meaning of Section 18(f) of the
Investment Company Act shall not be regarded as borrowings for
the purposes of this restriction.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or hedging
transactions.
4. Except as disclosed in the prospectuses or required in connection with
permissible hedging activities, purchase securities on margin or
underwrite securities. (This does not preclude that 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, that Fund, to the extent not otherwise prohibited in its
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 its prospectus and Statement
of Additional Information. As an operating policy which may be changed
without shareholder approval, a Fund may invest in real estate
investment trusts only up to 10% of its total assets.
6. Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in its
prospectus or this Statement of Additional Information, or as such
securities may be acquired as part of a merger, consolidation or
acquisition of assets.
7. Invest, in the aggregate, more than 15% of its net assets in illiquid
securities, including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A-eligible restricted securities),
securities which are not otherwise readily marketable, repurchase
agreements that mature in more than seven days and over-the-counter
options (and securities underlying such
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options) purchased by that Fund. (This is an operating policy which may
be changed without shareholder approval consistent with the Investment
Company Act and changes in relevant SEC interpretations.)
8. Invest in any issuer for purposes of exercising control or management
of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company
Act.)
9. Invest more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry. (This does not
apply to investment in the securities of the U.S. Government, its
agencies or instrumentalities.) For purposes of this restriction, each
Fund generally relies on the U.S. Office of Management and Budget's
Standard Industrial Classifications.
10. Issue senior securities, as defined in the Investment Company Act,
except that this restriction shall not be deemed to prohibit each Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
11. Except as described in its prospectus and this Statement of Additional
Information, acquire, dispose of or write put, call, straddle or spread
options unless the aggregate premiums paid on, and assets subject to,
all such options which are held at any time do not exceed 25% of that
Fund's total assets.
12. Except as described in its prospectus and this Statement of Additional
Information, engage in short sales of securities. (This is an operating
policy which may be changed without shareholder approval, consistent
with applicable regulations.)
13. Invest in warrants, valued at the lower of cost or market, in excess of
5% of the value of that Fund's net assets. Warrants acquired by a Fund
in units or attached to securities may be deemed to be without value.
(This is an operating policy which may be changed without shareholder
approval.)
14. Purchase more than 10% of the outstanding voting securities of any one
issuer. (This is an operating policy which may be changed without
shareholder approval.)
15. Invest in commodities; except that the Fund may invest in futures
contracts or options on futures contracts (a) for bona fide hedging
purposes within the meaning of CFTC regulations, or (b) for other than
bona fide hedging purposes if, as a result thereof, no more than 5% of
that 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. (this is an
operating policy that may be changed without shareholder approval,
consistent with applicable regulations.)
To the extent these restrictions reflect matters of operating policy which may
be changed without shareholder vote, these restrictions may be amended upon
approval by the Board and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
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Purchase of Shares
Each Fund issues three classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and shares of Class B and Class C
are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B and Class C share, based on its respective net asset value,
represents an identical interest in the investment portfolio of its respective
Fund, and has the same rights, except that Class B and Class C shares bear the
expenses of the ongoing distribution fees. Class B and Class C shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which distribution fees are paid.
Each Fund has entered into separate distribution agreements with the Distributor
in connection with the subscription and continuous offering of each class of
shares of each Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of each Fund. After the prospectuses, Statements of
Additional Information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs.
Initial sales charge alternatives--Class A shares
The term "purchase," as used in the prospectuses and this Statement of
Additional Information in connection with an investment in Class A shares of
each Fund, refers to a single purchase by an individual, or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or single
fiduciary account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company", as that term is defined in
the Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of a Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
Reduced initial sales charges
Right of Accumulation. Reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase shares of
a Fund subject to an initial sales charge at the offering price applicable to
the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of a
Fund and of other Montgomery Partners Series funds. A purchaser may include
shares held by that purchaser's immediate family, i.e., minor children, spouse
and, if in the same household, adult children, siblings and grandparents. For
any such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension,
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profit-sharing, or other employee benefit plans may not be combined with other
shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating more than $25,000 of Class A shares of a Fund and of funds in The
Montgomery Partners Series made within a 13-month period starting with the first
purchase pursuant to a Letter of Intention. The Letter of Intention is available
only to investors whose accounts are maintained at DST Systems, Inc., the Funds'
transfer agent (the "Transfer Agent"). The Letter of Intention is not a binding
obligation to purchase any amount of Class A shares; however, its execution will
result in the purchaser paying a lower sales charge at the appropriate quantity
purchase level. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent Letter of Intention executed within 90 days
of such purchase if the Distributor is informed in writing of this intent within
such 90-day period. The value of Class A shares of The Montgomery Partners
Series Funds presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intention, may be
included as a credit toward the completion of such Letter, but the reduced sales
charge applicable to the amount covered by such Letter will be applied only to
new purchases. If the total amount of shares does not equal the amount stated in
the Letter of Intention (minimum of $25,000), the investor will be notified and
must pay, within 20 days of the expiration of such Letter, the difference
between the sales charge on the Class A shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A shares equal to five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter otherwise would be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the Class A shares then being purchased under such Letter, but there will be
no retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser prior
to termination or completion of the Letter of Intention will be deducted from
the total purchases made under such Letter.
Purchase Privilege of Certain Persons. The following individuals and groups may
purchase Class A shares of each Fund at net asset value: current or retired
directors, trustees, partners, members, officers and employees of the Trust, the
Distributor, the Manager and its shareholders, certain family members of the
above persons, and trusts or plans primarily for such persons; current or
retired registered representatives or full-time employees and their spouses and
minor children and plans of such persons; investors who exchange their shares
from an unaffiliated investment company which has a sales charge, so long as
shares are purchased within 60 days of the redemption; trustees or other
fiduciaries purchasing shares for certain retirement plans of organizations with
50 or more eligible employees; investment advisers, financial planners and
certain financial institutions that place trades for their own accounts or the
accounts of their clients either individually or through a master account and
who charge a management, consulting or other fee for their services;
employer-sponsored benefit plans in connection with purchases of shares of Class
A shares made as a result of participant-directed exchanges between options in
such a plan; `wrap accounts' for the benefit of clients of broker-dealers,
financial institutions or financial planners having sales or service agreements
with the Distributor or another broker-dealer or financial institution with
respect to sales of Class A shares; and such other persons as are determined by
the Board (or by the Distributor pursuant to guidelines established by the
Board) to have acquired shares under circumstances not involving any sales
expense to the Trust or the Distributor.
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Reductions in or exemptions from the imposition of a sales load are due to the
nature of the investors and/or the reduced sales efforts that will be needed in
obtaining such investments.
Employer-sponsored retirement or savings plans and certain other arrangements
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A shares at net asset value, based on the number
of employees or number of employees eligible to participate in the plan, the
aggregate amount invested by the plan in specified investments. Certain other
plans may purchase Class B shares with a waiver of the CDSC upon redemption,
based on similar criteria. Such Class B shares will convert into Class A shares
approximately at the beginning of the seventh year after the plan purchases the
first share of any Montgomery Partners Series fund. Minimum purchase
requirements may be waived or varied for such plans. Additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements are available from The Montgomery Partners Series at
(800) OWL-8758 (695-8758).
Deferred sales charges--Class B and Class C shares
As discussed in the prospectuses, while Class B shares redeemed within six years
of purchase are subject to a CDSC under most circumstances, the charge is waived
on redemptions of Class B shares in connection with certain post-retirement
withdrawals from an Individual Retirement Account ("IRA") or other retirement
plan or following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a tax-free distribution following retirement under a
tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided that the
redemption is requested within one year of the death or initial determination of
disability.
Distributions and Tax Information
Distributions. Each Fund will receive income in the form of dividends and
interest earned on their investments in securities. This income, less the
expenses incurred in its operations, is a Fund's net investment income,
substantially all of which will be declared as dividends to that Fund's
shareholders.
The amount of income dividend payments by a Fund is dependent upon the amount of
net investment income received by that Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. The Funds do not pay
"interest" or guarantee any fixed rate of return on an investment in their
shares.
Each Fund also may derive capital gains or losses in connection with sales or
other dispositions of its portfolio securities. Any net gain a Fund may realize
from transactions involving investments held less than the period required for
long-term capital gain or loss recognition or otherwise producing short-term
capital gains and losses (taking into account any carryover of capital losses
from the eight previous taxable years), although a distribution from capital
gains, will be distributed to shareholders with and as a part of dividends
giving rise to ordinary income. If during any year a Fund realizes a net gain on
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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, that 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 that
Fund's shares may have been held by the shareholders. The maximum capital gains
rate for individuals is 28% with respect to assets held for more than 12 months,
but not more than 18 months, and 20% with respect to assets held more than 18
months. The maximum capital gains rate for corporate shareholders is the same as
the maximum tax rate for ordinary income.
Any dividend or distribution paid by a Fund reduces that Fund's net asset value
per share on the date paid by the amount of the dividend or distribution per
share. Accordingly, a dividend or distribution paid shortly after a purchase of
shares by a shareholder would represent, in substance, a partial return of
capital (to the extent it is paid on the shares so purchased), even though it
would be subject to income taxes.
Dividends and other distributions will be made in the form of additional shares
of a Fund unless the shareholder has otherwise indicated. Investors have the
right to change their elections with respect to the reinvestment of dividends
and distributions by notifying the Transfer Agent in writing, but any such
change will be effective only as to dividends and other distributions for which
the record date is seven or more business days after the Transfer Agent has
received the written request.
Tax Information. The Funds intend 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. Each 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 each Fund will not be
subject to any federal income or excise taxes based on net income. However, the
Board may elect to pay such excise taxes if it determines that payment is, under
the circumstances, in the best interests of a Fund.
In order to qualify as a regulated investment company, the Funds must, among
other things, (a) derive at least 90% of their 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 their 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 a 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 Funds 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 a Fund is unable to meet
certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains by a Fund
will be taxable to shareholders whether made in cash or reinvested by that Fund
in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from the eight prior taxable years will
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be applied against capital gains. Shareholders receiving a distribution from a
Fund 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 that 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.
Each Fund or the securities dealer effecting a redemption of a 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, each 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 New Account application or with respect to which that 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.
Each Fund intends to declare and pay dividends and other distributions, as
stated in the prospectuses. In order to avoid the payment of any federal excise
tax based on net income, each 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.
Each Fund may receive dividend distributions from U.S. corporations. To the
extent that a Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of that 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 a Fund at the end of its fiscal
year is invested in stock or securities of foreign corporations, that Fund may
elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by that Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of that
Fund's foreign source income (including any foreign income taxes paid by that
Fund), and (ii) entitled either to deduct their share of such foreign taxes in
computing their taxable income or to claim a credit for such taxes against their
U.S. income tax, subject to certain limitations under the Code, including
certain holding period requirements. In this case, shareholders will be informed
in writing by that 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 that Fund) to be included
in their income tax returns. If not more than 50% in value of a Fund's total
assets at the end of its fiscal year is invested in stock or securities of
foreign corporations, that Fund will not be entitled under the Code to pass
through to its shareholders their pro rata share of the foreign taxes paid by
that Fund. In this case, these taxes will be taken as a deduction by the Fund.
Each Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. Each 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 each Fund derives from PFIC stock may be subject to a non-deductible
federal income tax at the Fund level. In some cases, a Fund
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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. Each 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, a 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 each 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
each 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 a Fund purchases an option, the premium paid by
that Fund is recorded as an asset and is subsequently adjusted to the current
market value of the option. Any gain or loss realized by that Fund upon the
expiration or sale of such options held by that Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held by a Fund that
substantially diminishes that Fund's risk of loss from any other position held
by that 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 a 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 a 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 a
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 a 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 each Fund. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of each
Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code rather than as
capital gain or loss.
A shareholder who purchases shares of a 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,
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between the adjusted basis of the securities tendered to the fund and the
purchase price of that 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 a 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 a 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 prospectuses are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in a 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 a 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 a Fund.
Trustees and Officers
The Trustees of the Trust are responsible for the overall management of each
Fund, including general supervision and review of its investment activities. The
officers (the Trust, as well as two an affiliated Trusts, The Montgomery Funds
and The Montgomery Funds III, have the same officers), who administer each
Fund's daily operations, are appointed by the Boards of Trustees. The current
Trustees and officers of the Trusts performing a policy-making function and
their affiliations and principal occupations for the past five years are set
forth below:
George A. Rio, President and Treasurer (Age 43)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. (since
April 1998). From June 1995 to March 1998, he was Senior Vice President, Senior
Key Account Manager for Putnam Mutual Funds. From May 1994 to june 1995, he was
Director of business development for First Data Corporation. From September 1993
to May 1994, he was Senior Vice President and Manager of Client Services; and
Director of Internal Audit at the Boston Company.
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Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 31)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
("TBCA").
Margaret W. Chambers, Secretary (Age 38)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of Funds Distributor Inc. (since April 1998).
From August 1996 to March 1998, Ms. Chambers was Vice President and Assistant
General Counsel for Loomis, Sayles & Company, L.P. from January 1986 to July
1996, she was an associate with the law firm of Ropes & Gray.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 33)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age 34)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 29)
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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 36)
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 of Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
and executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (Age 54)
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 49)
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.
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All persons listed, with the exception of Trustees John A. Farnsworth, Andrew
Cox and Cecilia H. Herbert, are considered "interested persons" of the Trusts.
Such "interested persons" of the Trusts, receive no compensation directly from
the Trusts for performing the duties of their offices. However, those officers
and Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Funds and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Funds. The Trustees who are not
affiliated with the Manager or the Distributor, receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by each Trust to each of the Trustees during the fiscal year
ended June 30, 1998, and the aggregate compensation paid to each of the Trustees
during the fiscal year ended June 30, 1998, by all of the registered investment
companies to which the Manager provides investment advisory services, are set
forth below.
<TABLE>
The officers of the Trust, and the Trustees who are considered "interested
persons" of the Trust, receive no compensation directly from the Trust for
performing the duties of their offices. However, those officers and Trustees who
are officers or partners of the may receive remuneration indirectly because the
Manager will receive a management fee from the Funds and Funds Distributor,
Inc., will receive commissions for executing portfolio transactions for the
Funds. The Trustees who are not affiliated with the Manager or the Distributor
receive an annual retainer and fees and expenses for each regular Board meeting
attended. The aggregate compensation paid by the Trust to each of the Trustees
during the fiscal year ended June 30, 1998, and the aggregate compensation paid
to each of the Trustees during the fiscal year ended June 30, 1998, by all of
the registered investment companies to which the Manager provides investment
advisory services, are set forth below.
<CAPTION>
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Aggregate Pension or Retirement Total Compensation From the
Compensation from Benefits Accrued as Part of Trust and Fund Complex
Name of Trustee the Trust Fund Expenses* (2 additional Trusts)
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
John A. Farnsworth $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Andrew Cox $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
Cecilia H. Herbert $5,000 -- $35,000
- --------------------------------- ----------------------------- ------------------------------ -----------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
Each of the above persons serves in the same capacity for The Montgomery Funds
and The Montgomery Funds III, investment companies registered under the
Investment Company Act, with separate series of Funds managed by the Manager.
Investment Management and Other Services
Investment Management Services. As stated in the prospectuses, investment
management services are provided to the Funds by Montgomery Asset Management,
LLC, the Manager, pursuant to an Investment Management Agreement between the
Manager and The Montgomery Funds II dated August 31, 1998, as amended (the
"Management Agreement"). The Sub-Adviser provides investment management services
for the Funds to the Manager pursuant to an agreement dated August 31, 1998 (the
"Sub-Advisory Agreement").
The Management Agreement, with respect to each Fund (and the Sub-Advisory
Agreement with respect to each Fund the Sub-Adviser provides investment
management services to), is in effect for two years
B-24
<PAGE>
after that Fund's inclusion in the Trust's Agreement (on or around the beginning
of public operations) and shall continue in effect thereafter for periods not
exceeding one year so long as such continuation is approved at least annually by
(i) the Board or the vote of a majority of the outstanding shares of that Fund,
and (ii) a majority of the Trustees who are not interested persons of any party
to either the Management Agreement or the Sub-Advisory Agreement (the
"Agreements"), in each case by a vote cast in person at a meeting called for the
purpose of voting on such approval. The Management Agreement (Sub-Advisory
Agreement) may be terminated at any time, without penalty, by the respective
Fund or the Manager (Sub-Adviser) upon 60 days' written notice, and is
automatically terminated in the event of its assignment as defined in the
Investment Company Act.
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Funds. The Manager also compensates the members of the Board who are
interested persons of the Manager. As compensation, the Funds pay 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.
These fees are higher than for most mutual funds.
<TABLE>
The management fees are accrued daily, but paid when requested by the Manager at
the Annual Rate shown in the following table.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE DAILY NET ASSETS MANAGEMENT FEE: ANNUAL RATE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Small Cap Systematic Value Fund First $250 million 1.25%
Over $250 million 1.10%
- ------------------------------------------------------------------------------------------------------------------------------
Montgomery Macro Cap Systematic Value Fund First $500 million 0.85%
Over $500 million 0.75%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As noted in the prospectuses, the Manager has agreed to reduce some or all of
its management fee if necessary to keep total operating expenses for each Fund
(excluding any Rule 12b-1 distribution fees), expressed on an annualized basis,
at or below the Total Expense Cap amounts shown in the following table.
- --------------------------------------------------------------------------------
TOTAL EXPENSE CAP EXCLUDING
12B-1 FEES
- --------------------------------------------------------------------------------
Montgomery Small Cap Systematic Value Fund 1.75%
- --------------------------------------------------------------------------------
Montgomery Macro Cap Systematic Value Fund 1.35%
- --------------------------------------------------------------------------------
The Manager engages a Sub-Adviser to provide investment management services for
certain of the Funds. The Manager compensates the Sub-Adviser out of the
Manager's management fee. The Manager, Sub-Adviser and certain Fund are parties
to a Sub-Advisory Agreement concerning the Sub-Adviser's management of each
Fund's assets allocated to it. The Sub-Adviser's fees under that agreement are
equal to 45% of the management fee received each month by the Manager, net of
fees and expenses paid by the Manager to certain broker-dealers and other
intermediaries.
The Manager also may voluntarily reduce additional amounts to increase the
return to a Fund's investors. Any reductions made by the Manager in its fees are
subject to reimbursement by a Fund within the
B-25
<PAGE>
following three years provided that Fund is able to effect such reimbursement
and remain in compliance with the foregoing expense limitation. The Manager
generally seeks reimbursement for the oldest reductions and waivers before
payment by a Fund for fees and expenses for the current year.
Operating expenses for purposes of the Management 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 a Fund in excess of that required.
The Agreements were approved with respect to each Fund by the Board at a duly
called meeting. In considering the Management 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 a 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 a Fund as a contingent liability of
that Fund and will appear as a footnote to that Fund's financial statements
until such time as it appears that Fund will be able to effect such
reimbursement. At such time as it appears probable that Fund is able to effect
such reimbursement, the amount of reimbursement that Fund is able to effect will
be accrued as an expense of that Fund for the then-current period.
The Manager also serves as each Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, each Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
that Fund's average daily net assets (six one-hundredths of one percent (0.06%)
of that Fund's average daily net assets over $250 million).
The Manager and the Sub-Adviser 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 each Fund is pursuant to
the consent of the Manager, which may be withdrawn if the Manager ceases to be
the Manager of a Fund.
Share Marketing Plan. The Trust has adopted a Share Marketing Plan (or Rule
12b-1 Plan) (the "12b-1 Plan") with respect to each Fund pursuant to Rule 12b-1
under the Investment Company Act. The Distributor serves as the distribution
coordinator under the 12b-1 Plan and, as such, receives any fees paid by each
Fund pursuant to the 12b-1 Plan.
The Board, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (the
"Independent Trustees"), at their regular quarterly meeting, adopted the 12b-1
Plan for the Class B and Class C shares of each Fund. Class A shares are not
covered by the 12b-1 Plan.
Under the 12b-1 Plan, each Fund pays distribution fees to the Distributor at an
annual rate of 0.75% of each Fund's aggregate average daily net assets
attributable to its Class B and Class C shares 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 a Fund
B-26
<PAGE>
covered by the 12b-1 Plan only to pay for the distribution expenses of that
class. Distribution fees are accrued daily and paid monthly, and are charged as
expenses of the Class B and Class C shares as accrued. Class B and Class C
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 Distributor may
retain (rather than pay to third parties) fees paid under the 12b-1 Plan on the
Class C shares during the first year of purchase.
The 12b-1 Plan provides that it shall continue in effect from year to year
provided that a majority of the Board, including a majority of the Independent
Trustees, vote annually to continue the 12b-1 Plan. The 12b-1 Plan (and any
distribution agreement between a Fund and the Distributor and a selling agent
with respect to the Class B and Class C shares) may be terminated without
penalty upon at least 60-days' notice by the Distributor, or by that 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 each Fund under the 12b-1 Plan will be paid in
accordance with Rule 2830 of the NASD Regulation, Inc. (the "NASDR") Rules of
Conduct, as such Rule may change from time to time. Pursuant to the 12b-1 Plan,
the Board will review at least quarterly a written report of the distribution
expenses incurred by the Distributor on behalf of the Class B and Class C shares
of each 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 each Fund. The Distributor serves as the
service provider under the Services Plan and, as such, receives any fees paid by
each Fund pursuant to 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 A, Class B and Class C shares of each Fund. The
initial shareholder of the Class A, Class B and Class C shares of each Fund
approved the Services Plan covering each Class prior to offering those Classes
to the public.
Under the Services Plan, Class A, Class B and Class C shares of each Fund will
pay a continuing service fee to 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 A, Class B and Class C shares of each
Fund. Such amounts are compensation for providing certain services to clients
owning Class A, Class B or Class C shares of each 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 each Fund, including responding
to shareholder inquiries.
The Distributor. The Distributor may provide certain administrative services to
each Fund on behalf of the Manager. The Distributor will also perform investment
banking, investment advisory and brokerage services for persons other than the
Funds, including issuers of securities in which the Funds may invest. These
activities from time to time may result in a conflict of interests of the
Distributor with those of the Funds, and may restrict the ability of the
Distributor to provide services to the Funds.
B-27
<PAGE>
The Custodian. Morgan Stanley Trust Company serves as principal Custodian of the
Funds' 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 in compliance with 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 each Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Agreements, the Manager or Sub-Adviser determines which
securities are to be purchased and sold by each Fund and which broker-dealers
are eligible to execute each Fund's portfolio transactions, subject to the
instructions of, and review by, each Fund and the Board. Purchases and sales of
securities within the U.S. other than on a securities exchange will generally be
executed directly with a "market-maker" unless, in the opinion of the Manager,
Sub-Adviser or a Fund, a better price and execution can otherwise be obtained by
using a broker for the transaction.
Each Fund, to the extent allowed by its prospectus, contemplates purchasing most
equity securities directly in the securities markets located in emerging or
developing countries or in the over-the-counter markets. A Fund purchasing ADRs
and EDRs may purchase those listed on stock exchanges, or traded in the
over-the-counter markets in the U.S. or Europe, as the case may be. ADRs, like
other securities traded in the U.S., will be subject to negotiated commission
rates. The foreign and domestic debt securities and money market instruments in
which a Fund may invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for each 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 Funds 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 a
Fund, such as in an emerging market, the size of the order, the difficulty of
execution, the operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and other factors.
Provided the Trust's officers are satisfied that a Fund is receiving the most
favorable price and execution available, the Manager may also consider the sale
of that 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 Funds is subject to rules adopted by the
NASDR.
B-28
<PAGE>
While each 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 a Fund or to the
Manager, even if the specific services were not imputed just to that 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, a
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 that 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 that Fund or assist the Manager in
carrying out its responsibilities to that Fund. The standard of reasonableness
is to be measured in light of the Manager's overall responsibilities to a Fund.
Investment decisions for the Funds are made independently from those of other
client accounts of the Manager or its affiliates, and suitability is always a
paramount consideration. Nevertheless, it is possible that at times the same
securities will be acceptable for a Fund and for one or more of such client
accounts. The Manager and its personnel may have interests in one or more of
those client accounts, either through direct investment or because of management
fees based on gains in the account. The Manager has adopted allocation
procedures to ensure the fair allocation of securities and prices between a 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 a 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, that Fund may not be able to
obtain as high a price for, or as large an execution of, an order to sell any
particular security at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security that a Fund is purchasing or
selling, each day's transactions in such security generally will be allocated
between that 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, a 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 that Fund is
concerned. In other cases, however, it is believed that the ability of a Fund to
participate in volume transactions may produce better executions for that Fund.
In determining the appropriate investment horizon, the Manager considers
liquidity, volatility and overall risk of position. Sudden changes in valuation
levels arising from, for example, new macroeconomic policies, political
developments, and industry conditions could change the assumed time horizon.
B-29
<PAGE>
Sell decisions at the country level are dependent on the results of the
Manager's asset allocation model. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Manager's
assumed time horizon in those countries. In addition, the rapid pace of
privatization and initial public offerings creates a flood of new opportunities
which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of factors
including current stock valuation relative to the estimated fair value range, or
a high P/E relative to expected growth. Negative changes in the relevant
industry sector, or a reduction in international competitiveness and a declining
financial flexibility may also signal a sell.
The Funds do not effect securities transactions through brokers in accordance
with any formula, nor do they effect securities transactions through such
brokers solely for selling shares of the Funds. However, as stated above,
Montgomery Securities may act as one of the Funds' brokers in the purchase and
sale of portfolio securities, and other brokers who execute brokerage
transactions as described above may from time to time effect purchases of shares
of a Fund for their customers.
Depending on the Manager's view of market conditions, a 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. A 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 each 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 a Fund.
When in the judgment of the Manager it is in the best interests of a Fund, an
investor may purchase shares of that 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 that Fund's investment
objective and policies, and the tendered securities are otherwise acceptable to
that Fund's Manager. For the purposes of sales of shares of a Fund for such
securities, the tendered securities shall be valued at the identical time and in
the identical manner that the portfolio securities of that Fund are valued for
the purpose of calculating the net asset value of that Fund's shares. A
shareholder who purchases shares of a 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 that Fund and the purchase price of that Fund's shares
acquired by the shareholder.
Payments to shareholders for shares of a Fund redeemed directly from that 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 prospectuses, except that 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
that Fund pursuant to Section 22(e) of the Investment Company Act) making
disposal of portfolio securities or valuation of net assets of that Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of that Fund's shareholders.
B-30
<PAGE>
Each 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,
each 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 each 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 each Fund pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
When in the judgment of the Manager it is in the best interests of a Fund, an
investor may redeem shares of that Fund and receive securities from that Fund's
portfolio selected by the Manager in its sole discretion, provided that such
redemption is not expected to affect that 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 a 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 a Fund's portfolio
securities at the time of redemption or repurchase.
Retirement Plans. Shares of each Fund are available for purchase by any
retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and
individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of a Fund through an IRA, there is
available through each Fund a prototype individual retirement account and
custody agreement. The custody agreement provides that DST Systems, Inc. will
act as custodian under the plan, and will furnish custodial services for an
annual maintenance fee per participating account of $10. (These fees are in
addition to the normal custodian charges paid by each Fund and will be deducted
automatically from each Participant's account.) For further details, including
the right to appoint a successor custodian, see the plan and custody agreements
and the IRA Disclosure Statement as provided by the Funds. An IRA that invests
in shares of a Fund may also be used by employers who have adopted a Simplified
Employee Pension Plan. Individuals or employers who wish to invest in shares of
a Fund under a custodianship with another bank or trust company must make
individual arrangements with such institution.
The IRA Disclosure Statement available from the Funds contains more information
on the amount investors may contribute and the deductibility of IRA
contributions. In summary, for tax years prior to January 1, 1998, an individual
may make deductible contributions to the IRA of up to 100% of earned
compensation, not to exceed $2,000 annually (or $4,000 to two IRAs if there is a
non-working spouse). An IRA may be established whether or not the amount of the
contribution is deductible. Generally, a full deduction for federal income tax
purposes will only be allowed to taxpayers who meet one of the following two
additional tests:
(A) the individual and the individual's spouse are each not an active
participant in an employer's qualified retirement plan, or
(B) the individual's adjusted gross income (with some modifications) before
the IRA deduction is (i) $40,000 or less for married couples filing
jointly, or (ii) $25,000 or less for single individuals. The maximum
deduction is reduced for a married couple filing jointly with a
combined adjusted gross
B-31
<PAGE>
income (before the IRA deduction) between $40,000 and $50,000, and for
a single individual with an adjusted gross income (before the IRA
deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any retirement plan
to consult with an attorney or to obtain advice from a competent retirement plan
consultant with respect to the requirements of such plans and the tax aspects
thereof.
Determination of Net Asset Value
The net asset value per share of each 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 that 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 prospectuses, the net asset value of shares of the Funds
generally will be determined at least once daily as of 4:00 P.M. (12:00 noon for
the Money Market Funds), eastern time, (or earlier when trading closes earlier)
on each day the NYSE is open for trading. It is expected that the NYSE 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 Funds may, but do not expect to, determine
the net asset values of their shares on any day when the NYSE is not open for
trading if there is sufficient trading in their portfolio securities on such
days to affect materially per-share net asset value.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In addition,
trading in and valuation of foreign securities may not take place on every day
in which the NYSE is open for trading. Furthermore, trading takes place in
various foreign markets on days in which the NYSE is not open for trading and on
which a 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 a 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 that 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, a Fund's investments are valued at market value or, in the absence of
a market value, at fair value as determined in good faith by the Manager and the
Trust's Pricing Committee pursuant to procedures approved by or under the
direction of the Board.
A Fund's securities, including ADRs, EDRs and GDRs, which are traded on
securities exchanges are valued at the last sale price on the exchange on which
such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange, are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60 days are
valued at current market prices, as discussed above. Short-term securities with
60 days or less remaining to maturity are, unless
B-32
<PAGE>
conditions indicate otherwise, amortized to maturity based on their cost to a
Fund if acquired within 60 days of maturity or, if already held by that 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 a Fund are valued on the basis of valuations provided by
dealers in those instruments or by an independent pricing service, approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
An option that is written by a 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 a Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contract equals the unrealized gain or loss on the contract that is determined
by marking the contract to the current settlement price for a like contract on
the valuation date of the futures contract if the securities underlying the
futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the Board.
If any securities held by a Fund are restricted as to resale or do not have
readily available market quotations, the Manager and the Trust's Pricing
Committee determine their fair value, following procedures approved by the
Board. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the official exchange rate or, alternatively, at
the mean of the current bid and asked prices of such currencies against the U.S.
dollar last quoted by a major bank that is a regular participant in the foreign
exchange market or on the basis of a pricing service that takes into account the
quotes provided by a number of such major banks. If neither of these
alternatives is available or both are deemed not to provide a suitable
methodology for converting a foreign currency into U.S. dollars, the Board in
good faith will establish a conversion rate for such currency.
All other assets of each Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
B-33
<PAGE>
Principal Underwriter
The Distributor acts as each Fund's principal underwriter in a continuous public
offering of each 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 each Fund and the Distributor is in effect for
two years from when a Fund commences public offerings, and shall continue in
effect thereafter for periods not exceeding one year if approved at least
annually by (i) the Board or the vote of a majority of the outstanding
securities of that 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 a
Fund's shares.
Performance Information
As noted in the prospectuses, each Fund may, from time to time, quote various
performance figures in advertisements and investor communications to illustrate
its past performance. Performance figures will be calculated separately for
Class A, Class B and Class C 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 a Fund will be accompanied by information on that Fund's average
annual compounded rate of return over the most recent four calendar quarters and
the period from that Fund's inception of operations. Each Fund may also
advertise aggregate and average total return information over different periods
of time. Each Fund's "average annual total return" figures are computed
according to a formula prescribed by the SEC, expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of
$1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a 1-, 5- or
10-year period at the end of each
respective period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Aggregate Total Return. Each Fund's "aggregate total return" figures represent
the cumulative change in the value of an investment in each Fund for the
specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of
$10,000.
B-34
<PAGE>
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.
Each 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
prospectuses. Consequently, any given performance quotation should not be
considered representative of a 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 a Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
Comparisons. To help investors better evaluate how an investment in a Fund might
satisfy their investment objectives, advertisements and other materials
regarding that 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 a 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 a 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 a Fund to calculate its figures.
Each Fund may also publish its relative rankings as determined by independent
mutual fund ranking services like Lipper Analytical Services, Inc. and
Morningstar, Inc.
B-35
<PAGE>
Investors should note that the investment results of each Fund will fluctuate
over time, and any presentation of a 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 Funds. From time to time each Fund may publish or
distribute information and reasons supporting the Manager's belief that a
particular Fund may be appropriate for investors at a particular time. The
information will generally be based on internally generated estimates resulting
from the Manager's research activities and projections from independent sources.
These sources may include, but are not limited to, Barings, The WEFA Group,
Consensus Estimate, Datastream, Micropal, I/B/E/S Consensus Forecast, Worldscope
and Reuters as well as both local and international brokerage firms. For
example, a Fund may suggest that certain countries or areas may be particularly
appealing to investors because of interest rate movements, increasing exports
and/or economic growth.
Research. The Manager has made intensive research one of the important
characteristics of The Montgomery Partners Series style. Extensive research into
companies that are not well known--discovering new opportunities for
investment--is a theme that may be used for each 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 each Fund will be informed of each Fund's progress through periodic
reports. Financial statements will be submitted to shareholders semi-annually,
at least one of which will be certified by independent public accountants.
Expenses incurred in connection with the establishment and registration of
shares of any other funds constituting a separate series of the Trust will be
assumed by each respective series. The expenses incurred in connection with the
establishment and registration of shares of a Fund as a separate series of the
Trust have been assumed by that Fund and are being amortized over a period of
five years commencing with the date of that Fund's inception. The Manager has
agreed, to the extent necessary, to advance the organizational expenses incurred
by a Fund and will be reimbursed for such expenses after commencement of that
Fund's operations. Investors purchasing shares of a Fund bear such expenses only
as they are amortized daily against that 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.
The validity of shares offered hereby will be passed on Paul, Hastings, Janofsky
& Walker LLP, 345 California Street, San Francisco, California 94104.
B-36
<PAGE>
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 each Fund is a
diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of each Fund. The prospectuses 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
Each Fund has not yet commenced operations and, therefore, has not yet prepared
financial statements for public distribution.
B-37
<PAGE>
Appendix
Description ratings for Standard & Poor's Ratings Group ("S&P"); Moody's
Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC-rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
B-38
<PAGE>
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 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.
B-39
<PAGE>
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.
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
B-40
<PAGE>
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+.
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.
B-41
<PAGE>
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.
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.
B-42
<PAGE>
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 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.
B-43
<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.
(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.
(3) For Montgomery Partners Series Funds: Montgomery
Global Long-Short Fund and Montgomery Emerging
Markets Focus Fund:
C-1
<PAGE>
(a) Portfolio Investments as of March 31, 1998;
Statement of Assets and Liabilities as of
March 31, 1998; Statement of Operations for
the period ended March 31, 1998; Statement
of Changes in Net Assets for the period
ended March 31, 1998; Financial Highlights
for a Fund share outstanding throughout the
period ended March 31, 1998; Notes to
Financial Statements; Independent Auditor's
Report on the foregoing, all incorporated by
reference to the Annual Report to
Shareholders of Montgomery Partners Series
Funds: Montgomery Global Long-Short Fund and
Montgomery Emerging Markets Focus Fund for
the period ended March 31, 1998.
(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
(16)(A) Performance Computation for Montgomery Institutional
Series: Emerging Markets Portfolio.C
(16)(B) Performance Computation for Montgomery U.S. Asset
Allocation Fund.C
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(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.
<TABLE>
<CAPTION>
Item 26. Number of Holders of Securities
<S> <C> <C>
Number of Record Holders
Title of Class as of May 29, 1998
-------------- ------------------
Montgomery Institutional Series: Emerging Markets Portfolio 37
Montgomery U.S. Asset Allocation Fund 9,519
Montgomery Global Long-Short Fund 63
Montgomery Emerging Markets Focus Fund 134
</TABLE>
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers
the Trustees of the Trust, to the full extent permitted by law, to
purchase with Trust assets insurance for indemnification from liability
and to pay for all expenses reasonably incurred or paid or expected to
be paid by a Trustee or officer in connection with any claim, action,
suit or proceeding in which he or she becomes involved by virtue of his
or her capacity or former capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust
shall indemnify any person who was or is a party or is threatened to be
made a party to any proceeding by reason of the fact that such person
is and other amounts or was an agent of the Trust, against expenses,
judgments, fines, settlement and other amounts actually and reasonable
incurred in connection with such proceeding if that person acted in
good faith and reasonably believed his or her conduct to be in the best
interests of the Trust. Indemnification will not be provided in certain
circumstances, however, including instances of willful misfeasance, bad
faith, gross negligence, and reckless disregard of the duties involved
in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, 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
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<PAGE>
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.
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
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<PAGE>
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.
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
President and Treasurer George A. Rio
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
Secretary Margaret W. Chambers
(c) Not Applicable.
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will
be kept by the Registrant's Transfer Agent, DST Systems, Inc., P.O. Box
1004 Baltimore, Kansas City, Missouri 64105, except those records
relating to portfolio transactions and the basic organizational and
Trust documents of the Registrant (see Subsections (2)(iii), (4), (5),
(6), (7), (9), (10) and (11) of Rule 31a-1(b)), which will be kept by
the Registrant at 600 Montgomery Street, San Francisco, California
94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last
annual report to Shareholders, upon request and without
charge.
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<PAGE>
(c) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act of 1940, as amended, which requires the
prompt convening of a meeting of shareholders to elect
trustees to fill existing vacancies in the Registrant's Board
of Trustees in the event that less than a majority of the
trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of
shareholders for the purpose of voting upon the question of
removal of any Trustee or Trustees when requested in writing
to do so by the record holders of not less than 10 percent of
the Registrant's outstanding shares and to assist its
shareholders in communicating with other shareholders in
accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940, as amended.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all the requirements
for effectiveness of this Amendment pursuant to Rule 485(b) under the Securities
Act of 1933, as amended, and that the Registrant has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Francisco and State of California
on this 27th day of August, 1998.
THE MONTGOMERY FUNDS II
By: Margaret W. Chambers*
---------------------
Margaret W. Chambers
Secretary
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 August 27, 1998
- ------------------
R. Stephen Doyle
Andrew Cox * Trustee August 27, 1998
Andrew Cox
Cecilia H. Herbert * Trustee August 27, 1998
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee August 27, 1998
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
C-7
