As filed with the Securities and Exchange Commission on September 9, 1999
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. 48
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 49
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)
Johanne Castro, 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)
_____ on ____________ pursuant to Rule 485(b)
__X__ 60 days after filing pursuant to Rule 485(a)(1)
_____ 75 days after filing pursuant to Rule 485(a)(2)
_____ on ____________ pursuant to Rule 485(a)(1)
----------
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 THE POST-EFFECTIVE AMENDMENT
This Post-Effective Amendment to the registration statement of the Registrant
contains the following documents:
Facing Sheet
Contents of the Post-Effective Amendment
Part A - Prospectus for the Montgomery Institutional Series: Emerging
Markets Portfolio
Part B - Statement of Additional Information for the Montgomery
Institutional Series: Emerging Markets Portfolio
Part C - Other Information
Signature Page
Exhibits
<PAGE>
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PART A
PROSPECTUS
FOR
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
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<PAGE>
Prospectus
November 8, 1999
The Montgomery Funds IISM
MONTGOMERY INSTITUTIONAL SERIES:
Emerging Markets Portfolio
The Montgomery Funds II has registered the mutual fund offered in this
prospectus with the U.S. Securities and Exchange Commission (SEC). That
registration does not imply, however, that the SEC endorses the Fund.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<PAGE>
[Sidebar]
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How to Contact Us
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Montgomery Institutional
Advisory Services
800.627.7933
Montgomery Web Site
www.montgomeryasset.com
Address General
Correspondence to:
The Montgomery Funds II
101 California Street
San Francisco, CA 94111-9361
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<PAGE>
[Table of Contents]
MONTGOMERY INSTITUTIONAL SERIES
TABLE OF CONTENTS
Objective......................................................................5
Strategy.......................................................................5
Risks..........................................................................5
Portfolio Management...........................................................8
Management Fees...........................................................8
Additional Investment Strategies and Related Risks.............................8
The Euro: Single European Currency........................................8
Defensive Investments.....................................................9
Portfolio Turnover........................................................9
The Year 2000.............................................................9
Additional Benchmark Information.........................................10
Financial Highlights..........................................................11
What You Need To Know About Your Montgomery Account...........................12
How Fund Shares are Priced...............................................13
Foreign Investors........................................................13
Investing in the Fund Through Financial Intermediaries........................13
Buying and Selling Shares Through Securities Brokers and
Benefit Plan Administrators..............................................14
Investing in the Fund Directly with Montgomery................................14
Opening a New Account..................................................14
Buying Additional Shares...............................................15
Exchanging Shares......................................................15
Selling Shares.........................................................16
Other Policies................................................................17
Minimum Account Balances.................................................17
Uncashed Redemption Checks...............................................17
In-Kind Redemptions......................................................17
Telephone Transactions...................................................17
Tax Withholding Information..............................................18
After You Invest.........................................................18
Our Partners..................................................................19
How To Avoid "Buying A Dividend"..............................................20
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<PAGE>
This prospectus contains important information about the investment objective,
strategy and risks of the Montgomery Institutional Series: Emerging Markets
Portfolio (the "Fund") that you should know before you invest in the Fund.
Please read it carefully and keep it on hand for future reference.
Please be aware that the Fund:
[] Is not a bank deposit
[] Is not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Fund.
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<PAGE>
Emerging Markets Portfolio
Objective
[] Seeks long-term capital appreciation by investing in companies based or
operating primarily in developing economies throughout the world
Strategy [clipart]
The Fund invests at least 85% of its total assets in the stocks of companies
based in the world's developing economies. The Fund typically maintains
investments in at least six of these countries at all times, with no more than
25% of its assets in any single one of them. These may include:
Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica, Mexico,
Peru, Trinidad and Tobago, Uruguay and Venezuela
Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan, the
Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal, Romania,
Russia, Slovakia, Slovenia, Turkey and Ukraine
The Middle East: Israel and Jordan
Africa: Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa,
Tunisia and Zimbabwe
The Fund's strategy combines computer-based screening techniques with in-depth
financial review and on-site analysis of companies, countries and regions to
identify potential investments. The Fund's portfolio managers and analysts
frequently travel to the emerging markets to gain firsthand insight into the
economic, political and social trends that affect investments in those
countries. The Fund allocates its assets among emerging countries with stable or
improving macroeconomic environments and invests in companies within those
countries that the portfolio managers believe have high capital appreciation
potential without excessive risks. The portfolio managers strive to keep the
Fund well diversified across individual stocks, industries and countries to
reduce its overall risk.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a decline in a holding's share price or an
overall decline in the stock market. In addition, the risks of investing in
emerging markets are considerable. Emerging stock markets tend to be much more
volatile than the U.S. market due to relative immaturity and occasional
instability. Some emerging markets restrict the flow of money into or out of
their stock markets and impose restrictions on foreign investors. These markets
tend to be less liquid and offer less regulatory protection for investors. The
economies of emerging countries may be based on only a few industries or on
revenue from particular commodities and international aid. Most of the
securities in which the Fund invests are denominated in foreign currencies,
whose value may decline against the U.S. dollar.
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<PAGE>
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Past Fund Performance The bar chart on the left below shows the risks of
investing in the Fund and how the Fund's total return has varied from
year-to-year. The table on the right compares the Fund's performance with a
commonly used index for its market segment. Of course, past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
<TABLE>
[bar chart]
<CAPTION>
1994 1995 1996 1997 1998
- ------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
x.xx% x.xx% 13.00% -2.00% -35.00%
</TABLE>
<TABLE>
During the five-year period described above in the bar chart, the Fund's best
quarter was Q_ 199_ (x.xx%) and the worst quarter was Q_ 199_ (x.xx%).
<CAPTION>
<S> <C> <C> <C>
Emerging Markets Portfolio -35.00% -9.50% -9.50%
IFC Global Index+ -21.10% -8.70% -8.70%
- ---------------------------------------------------------------------------------------------------------
1 Year 5 Years Inception
(12/17/93)
<FN>
+See page __ for a description of this index.
</FN>
</TABLE>
1999 Return Through 9/30/99: x.xx% Average Annual Returns Through 12/31/98
<TABLE>
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads on this Fund.
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.75%+
Investment Expense Reimbursement Fee 0.75%+
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)++
Management Fee# 1.05%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.37%
--------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.42%
Fee Reduction and/or Expense Reimbursement 1.17%
--------------------------------------------------------------------------------------------------
Net Expenses 1.25%
<FN>
+ Investment expense reimbursement fees and redemption fees are paid to the Fund to offset certain
costs, such as brokers' commissions, incurred by the Fund in either investing in cash received
from shareholders or selling securities to obtain cash to pay redemptions. These fees are paid
directly to the Fund. The investment expense reimbursement fee will not be charged on investments
made in the form of securities acceptable to the Manager and the redemption fee will not be
charged on redemptions when the proceeds are paid in securities (although reregistration fees may
be incurred). Shares purchased after November 1, 1995 will not be subject to both the investment
expense reimbursement fees and the redemption fees. For those shares, shareholders may elect in
their discretion which fee to pay. Shares purchased by the Manager on behalf of advisory clients
for which it has investment discretion will not be subject to these fees. $10 will be deducted
from redemption proceeds sent by wire or overnight courier.
++ Montgomery Asset Management has contractually agreed to reduce its fees and/or absorb expenses to
limit the Fund's total annual operating expenses (excluding interest and tax expense) to 1.25%.
This contract has a rolling 10-year term.
# The management fee of 1.25% will be reduced to 1.00% for those assets over $50 million and to
0.90% for those assets over $100 million.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------
$127 $396 $685 $1,506
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<PAGE>
[clipart][sidebar]
Portfolio Management
Josephine Jimenez
Bryan Sudweeks
Frank Chiang
For more details see page ___.
For financial highlights
see page ___
-7-
<PAGE>
PORTFOLIO MANAGEMENT
The investment manager of the Fund is Montgomery Asset Management, LLC, 101
California Street, San Francisco, California 94111. Founded in 1990, Montgomery
Asset Management is a subsidiary of Commerzbank AG, one of the largest publicly
held commercial banks in Germany. As of September 30, 1999, Montgomery Asset
Management managed approximately $x.xx billion on behalf of some xxx,xxx
investors in The Montgomery Funds. Montgomery may rely on the expertise,
research and resources of Commerzbank AG and its worldwide affiliates in
managing the Fund.
[photo] JOSEPHINE JIMENEZ, CFA, senior portfolio manager of the Montgomery
Emerging Markets Portfolio (since 1992). Before joining Montgomery in 1991 as a
senior portfolio manager and managing director, Ms. Jimenez worked at Emerging
Markets Investors Corp./Emerging Markets Management in Washington, D.C., as a
senior analyst and portfolio manager. The research and analysis methods she
helped develop, including a proprietary stock valuation model for
hyperinflationary economies, are the foundation of her investment strategy.
[photo] BRYAN SUDWEEKS, PH.D., CFA, director of quantitative research for the
Montgomery Emerging Markets Portfolio (since 1992). Before joining Montgomery in
1991, Mr. Sudweeks was a senior analyst and portfolio manager at Emerging
Markets Investors Corp./Emerging Markets Management in Washington, D.C. Prior to
that he was a professor of international finance and investments at George
Washington University.
[photo] FRANK CHIANG, portfolio manager for the Montgomery Emerging Markets
Portfolio (since 1996). Mr. Chiang joined Montgomery in 1996. From 1993 to 1996,
he was a portfolio manager and managing director at TCW Asia Ltd. in Hong Kong.
Prior to that he was associate director and portfolio manager at Wardley
Investment Services, Hong Kong.
Management Fees
The management fee rate paid to Montgomery Asset Management over the past fiscal
year was 1.05%.
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS
The Euro: Single European Currency
On January 1, 1999, the European Union (EU) introduced a single European
currency called the euro. Eleven of the fifteen EU members that have begun to
convert their currencies to the euro are Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain
(leaving out Britain, Sweden, Denmark and Greece). For the first three years,
the euro will be a phantom currency (only an accounting entry). Euro notes and
coins will begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
[] Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
[] The applicable conversion rate for contracts stated in the national
currency of an EU member
[] The ability of clearing and settlement systems to process transactions
reliably
[] The effects of the euro on European financial and commercial markets
[] The effect of new legislation and regulations to address euro-related
issues
-8-
<PAGE>
These and other factors could cause market disruptions and affect the value of
your shares if the Fund invests in companies conducting business in Europe.
Montgomery and its key service providers have taken steps to address
euro-related issues, but there can be no assurance that these efforts will be
sufficient.
Defensive Investments
At the discretion of its portfolio manager(s), the Fund may invest up to 100% of
its assets in cash and cash equivalents for temporary defensive purposes. Such a
stance may help the Fund minimize or avoid losses during adverse market,
economic or political conditions. During such a period, the Fund may not achieve
its investment objective. For example, should the market advance during this
period, the Fund may not participate as much as it would have if it had been
more fully invested.
Portfolio Turnover
The Fund's portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long the Fund has owned that security.
Buying and selling securities generally involves some expense to the Fund, such
as commission paid to brokers and other transaction costs. By selling a
security, the Fund may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the Fund's annual
portfolio turnover, the greater its brokerage costs and the greater the
likelihood that it will realize taxable capital gains. Increased brokerage costs
may adversely affect the Fund's performance. Also, unless you are a tax-exempt
investor or you purchase shares through a tax-deferred account, the distribution
of capital gains may affect your after-tax return. Annual portfolio turnover of
100% or more is considered high. See "Financial Highlights" on page __ for the
Fund's historical portfolio turnover.
The Year 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect the Fund's operations,
including pricing, securities trading and the servicing of shareholder accounts.
Montgomery is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during and after 2000. We are now completing
tests on our internal systems. Montgomery is diligently working with external
partners, suppliers, vendors and other service providers to ensure that the
systems with which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, Montgomery is further developing contingency plans
intended to ensure that unexpected systems failures will not adversely affect
the Fund's operations. Montgomery intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternative solutions if
necessary.
Despite Montgomery's efforts and contingency plans, however, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations or financial condition. Additionally, the Fund's performance could be
hurt if a computer system failure at a company or governmental unit affects the
prices of securities the Fund owns. Issuers in countries outside of the United
States, particularly in emerging markets, may not be required to make the same
level of disclosure about year 2000 readiness as required in the United States.
Montgomery, of course, cannot audit any company and its major suppliers to
verify their year 2000 readiness. Montgomery understands that many foreign
countries and companies are well behind their U.S. counterparts in preparing for
2000.
-9-
<PAGE>
Additional Benchmark Information
The International Finance Corporation (IFC) Global Composite Index comprises
more than 1.200 individual stocks from 33 developing countries in Asia, Latin
America, the Middle East, Africa and Europe.
-10-
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
performance for the periods shown. The following financial information for the
periods ended June 30, 1999 and June 30, 1998 was audited by _______________.
Their August 18, 1999 and August 14, 1998 reports appear in the 1999 and 1998
Annual Reports of the Fund. The information for the periods ended June 30, 1995
through June 30, 1997 was audited by other independent accountants, whose report
is not included here. The total return figures in the table represent the rate
that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions).
<TABLE>
[table]
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Montgomery Institutional Series:
Emerging Markets Portfolio (a)
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD ENDED JUNE 30: 1999 1998 1997 1996 1995++
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $35.61 $58.52 $49.09 $44.61 $43.71
Net investment income/(loss) 0.38 0.32 0.43 0.50 0.13
Net realized and unrealized gain/(loss)
on investments 3.06 (22.44) 9.46 3.93 0.67
Net increase/(decrease) in net assets
resulting from investment operations 3.44 (22.12) 9.89 4.43 0.80
Effect of redemption expense reimbursement fee -- -- 0.02 0.09 0.11
Distributions:
Dividends from net investment income 0.00ss. (0.64) (0.48) (0.04) (0.01)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- (0.15) -- -- --
Distributions in excess of net realized capital gains -- -- -- -- --
Total distributions -- (0.79) (0.48) (0.04) (0.01)
Net asset value--end of year $39.05 $35.61 $58.52 $49.09 $44.61
====================================================================================================================-------------
Total return** 9.75% (38.05)% 20.45% 10.14% 2.09%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $103,661 $197,578 $334,181 $270,878 $186,666
Ratio of net investment income/(loss) to average
net assets 0.79% 0.96% 0.86% 1.16% 0.29%
Net investment income/(loss) before deferral
of fees by Manager $(0.11) $0.03 $0.26 $0.33 $(0.05)
Portfolio turnover rate 115% 104% 85% 88% 101%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.42% 1.66% 1.61% 1.70% 1.79%
Expense ratio including interest and tax expenses 1.45% 1.25% 1.26% 1.29% 1.40%
Expense ratio excluding interest and tax expenses 1.25% 1.25% 1.26% 1.29% 1.40%
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Montgomery Institutional Series: Emerging Markets Portfolio commenced operations on December 17, 1993.
** Total return represents aggregate total return for the periods indicated.
++ Per-share numbers have been calculated using the average share method, which more appropriately represents the per-share data
for the period, since the use of the undistributed income method did not accord with results of operations.
ss. Amount represents less than $0.001 per share.
</FN>
</TABLE>
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<PAGE>
WHAT YOU NEED TO KNOW ABOUT YOUR MONTGOMERY ACCOUNT
You pay no sales charge to invest in the Fund. Trade requests received after the
close of trading on the New York Stock Exchange (NYSE), normally 1:00 P.M.
Pacific time (4:00 P.M. eastern time) will be executed at the following business
day's closing price. The minimum initial investment in the Fund is $2,000,0000.
Subsequent investments in the Fund must be at least $100,000.
Under certain conditions we may waive these minimums. If you buy shares through
a broker or investment advisor, different requirements may apply. All
investments must be made in U.S. dollars. Purchases may also be made in certain
circumstances by payment of securities. See "In-Kind Purchases" below and the
Statement of Additional Information for further details.
We must receive payment from you within three business days of your purchase. In
addition, the Fund and the Distributor each reserve the right to reject any
purchase.
How Fund Shares Are Priced
How and when we calculate the Fund's price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate the Fund's NAV by
dividing the total value of its assets by the number of outstanding shares. We
base the value of the Fund's investments on their market value, usually the last
price reported for each security before the close of market that day. A market
price may not be available for securities that trade infrequently. Occasionally,
an event that affects a security's value may occur after the market closes. This
is more likely to happen for foreign securities traded in foreign markets that
have different time zones than in the United States. Major developments
affecting the prices of those securities may occur after the foreign markets in
which such securities trade have closed, but before the Fund calculates its NAV.
In this case, Montgomery, under the supervision of the Fund's Board of Trustees
or Pricing Committee, will make a good-faith estimate of the security's "fair
value," which may be higher or lower than the security's closing price in its
relevant market.
We calculate the NAV of the Fund after the close of trading on the NYSE every
day that the NYSE is open. We do not calculate the NAVs on the days that the
NYSE is closed for trading. An exception applies as described below. If we
receive your order by the close of trading on the NYSE, you can purchase shares
at the price calculated for that day. The NYSE usually closes at 4:00 P.M.
eastern time on weekdays, except for holidays. If your order and payment are
received after the NYSE has closed, your shares will be priced at the next NAV
we determine after the receipt of your order. More details about how we
calculate the Fund's NAVs are in the Statement of Additional Information.
> The Fund invests in securities denominated in foreign currencies and traded
on foreign exchanges. To determine their value, we convert their
foreign-currency price into U.S. dollars by using the exchange rate last
quoted by a major bank. Exchange rates fluctuate frequently and may affect
the U.S. dollar value of foreign-denominated securities, even if their
market price does not change. In addition, some foreign exchanges are open
for trading when the U.S. market is closed. As a result, the Fund's foreign
securities--and its price--may fluctuate during periods when you can't buy,
sell or exchange shares in the Fund.
Foreign Investors
Foreign citizens and resident aliens of the United States living abroad may not
invest in the Fund.
INVESTING IN THE FUND THROUGH FINANCIAL INTERMEDIARIES
The Fund is available to institutional investors and investment advisors through
select programs.
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<PAGE>
[sidebar]
Buying and Selling Shares Through Securities Brokers and Benefit Plan
Administrators
You may purchase and sell shares through securities brokers and benefit plan
administrators or their subagents. You should contact them directly for
information regarding how to invest or redeem through them. They may also charge
you service or transaction fees. If you purchase or redeem shares through them,
you will receive the NAV calculated after receipt of the order by them
(generally, 4:00 P.M. eastern time) on any day the NYSE is open. If your order
is received by them after that time, it will be purchased or redeemed at the
next calculated NAV. Brokers and benefit plan administrators who perform
shareholder servicing for the Fund may receive fees from the Fund or Montgomery
for providing these services.
INVESTING IN THE FUND DIRECTLY WITH MONTGOMERY
Opening a New Account
By Mail Send your completed application, with a check payable to The Montgomery
Institutional Series: Emerging Markets Portfolio, to the appropriate address at
right. Your check must be in U.S. dollars and drawn only on a bank located in
the United States. We do not accept third-party checks, "starter" checks,
credit-card checks, instant-loan checks or cash investments. We may impose a
charge on checks that do not clear.
By Wire Call us at (800) 627-7933, option (2) to let us know that you intend to
make your initial investment by wire. Tell us your name and the amount you want
to invest. We will give you further instructions and a fax number to which you
should send your completed New Account application. To ensure that we handle
your investment accurately, include complete account information in all wire
instructions. Then request your bank to wire money from your account to the
attention of:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
and include the following:
Account #7526601
Attention: The Montgomery Funds II
For credit to: [shareholder(s) name]
Shareholder Account Number:
[shareholder(s) account number]
Name of Fund: Montgomery Institutional Series: Emerging Markets Portfolio
Please note that your bank may charge a wire transfer fee.
By Phone To make an initial investment by phone, you must have been a current
Montgomery shareholder for at least 30 days. Your purchase of the Fund must meet
its investment minimum and is limited to the total value of your existing
accounts or $10,000, whichever is greater. To complete the transaction, we must
receive payment within three business days. We reserve the right to collect any
losses from your account if we do not receive payment within that time.
In-Kind Purchases An investor may purchase shares of the Fund by tendering
payment in-kind in the form of securities, provided that any such tendered
securities are readily marketable, their acquisition is consistent with the
Fund's investment objectives and policies, and the tendered securities are
otherwise acceptable to the Fund's portfolio managers. For purposes of in-kind
purchases, a security will be
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<PAGE>
considered "readily marketable" if it is in the process of undergoing customary
settlement and/or registration in its primary market. For purposes of sales of
shares of the Fund of such securities, the tendered securities shall be valued
at the identical time and in the identical manner that the portfolio securities
of the Fund are valued for the purpose of calculating the net asset value of the
Fund's shares.
Buying Additional Shares
By Mail Complete the form at the bottom of any Montgomery statement and mail it
with your check payable to Montgomery Institutional Series: Emerging Markets
Portfolio. Or mail the check with a signed letter noting the name of the Fund,
your account number and telephone number. We will mail you a confirmation of
your investment. Note that we may impose a charge on checks that do not clear.
[sidebar]
Regular Mail
The Montgomery Funds II
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
Express Mail or Overnight Courier
The Montgomery Funds II
c/o DST Systems, Inc.
210 West 10th Street
7th Floor
Kansas City, MO 64105-1614
By Phone Current shareholders are automatically eligible to buy shares by phone.
To buy shares in a Fund you currently own or to invest in a new Fund, call (800)
627-7933, option (2). There are restrictions on the dollar amount of shares
you may buy by phone.
We must receive payment for your purchase within three business days of your
request. To ensure that we do, you can:
> Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account)
> Send us a check by overnight or second-day courier service
> Instruct your bank to wire money to our affiliated bank using the
information provided on this page
By Wire There is no need to contact us when buying additional shares by wire.
Instruct your bank to wire funds to our affiliated bank using the information on
the previous page.
Exchanging Shares
You may exchange shares in the Fund for shares in another, in accounts with the
same registration, Taxpayer Identification Number and address. Applicable
minimums apply to exchanges as well as purchases. Note that an exchange may
result in a realized gain or loss for tax purposes. You may exchange shares by
phone at (800) 627-7933, option (2).
Other Exchange Policies
[] We will process your exchange order at the "next-calculated" NAV. This means
that if your exchange order is received after 4:00 P.M. eastern time on a
particular day, it will be processed at the NAV calculated on the next trading
day.
[] You may exchange shares only if the Fund is qualified for sale in your state.
You may not exchange shares in one Fund for shares of another that is currently
closed to new shareholders unless you are
-14-
<PAGE>
already a shareholder in the closed fund.
[] Because excessive exchanges can harm a Fund's performance, we reserve the
right to terminate your exchange privileges if you make more than four exchanges
out of any one Fund during a 12-month period. We may also refuse an exchange
into a Fund from which you have sold shares within the previous 90 days
(accounts under common control and accounts having the same Taxpayer
Identification Number will be counted together).
Selling Shares
You may sell some or all of your Fund shares on days that the NYSE is open for
trading. Note that a redemption may result in a realized gain or loss for tax
purposes.
Your shares will be sold at the next NAV we calculate for the Fund after
receiving your order. We will promptly pay the proceeds to you, less any
redemption charges, normally within three business days of receiving your order
and all necessary documents (including a written redemption order with the
appropriate signature guarantee). We will mail or wire you the proceeds,
depending on your instructions. Although shares purchased by check will be
redeemed at the next-calculated NAV, redemption proceeds will not be made
available until 15 days after the purchase date. Within this 15-day period, you
may choose to exchange your investment into a Montgomery money market fund if
you have a prospectus for one of those funds.
Shares can be sold in several ways:
[] By Mail Send us a letter including your name, Montgomery account number, the
name of the Fund and the dollar amount or number of shares you want to sell. You
must sign the letter in the same way your account is registered. If you have a
joint account, all account holders must sign the letter.
If you want the proceeds to go to a party other than the account owner(s) or
your predesignated bank account, or if the dollar amount of your redemption
exceeds $50,000, you must obtain a signature guarantee (not a notarization),
available from many commercial banks, savings associations, stock brokers and
other NASD member firms.
If you want to wire your redemption proceeds but do not have a predesignated
bank account, include a voided check or deposit slip with your letter. The
minimum wire amount is $500. Wire charges, if any, will be deducted from the
redemption proceeds. We may permit lesser wire amounts or fees at our
discretion.
[] By Phone You may accept or decline telephone redemption privileges on your
New Account application. If you accept, you will be able to sell up to $50,000
in shares by phone. If you included bank wire information on your New Account
application or made arrangements later for wire redemptions, proceeds can be
wired to your bank account. Please allow at least two business days for the
proceeds to be credited to your bank account. If you want proceeds to arrive at
your bank on the same business day (subject to bank cutoff times), there is a
$10 fee. For more information about our telephone transaction policies, see
"Other Policies" below.
[] Investment Expense Reimbursement Fees and Redemption Fees The investment
expense reimbursement fees are intended to defray costs associated with
investing the proceeds received by the Fund and to offset the dilutive effect
those costs would otherwise have on the net asset value of shares held by
existing shareholders. Likewise, the redemption fees are intended to compensate
the Fund for the increased expenses to longer-term shareholders and the
disruptive effect on the portfolios caused by short-term investments. The
redemption fee will be assessed on the net asset value of the shares redeemed or
exchanged and will be deducted from the redemption proceeds otherwise payable to
the shareholder. The Fund will retain the fee charged.
-15-
<PAGE>
The Fund imposes redemption fees on shares redeemed within one year of purchase.
Redemption fees will be deducted from the redemption proceeds and will be paid
to the Fund.
Shareholders who have invested at least the applicable minimum in the Fund (less
any prior redemptions) are exempt from redemption fees. This requirement also
applies individually to shareholders who own shares indirectly through a
financial intermediary (such as a no-transaction-fee network or a financial
advisor). When calculating the total amount invested for purposes of this
exception, any increase or decrease in the value of a shareholder's account due
to market appreciation and/or depreciation is not taken into account.
Additionally, the following fees may also be charged when you sell your shares:
[] For shares sold by wire, a $10 wire transfer fee will be deducted directly
from the proceeds.
[] For redemption checks requested by Federal Express, a $10 fee will be
deducted directly from the redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission (SEC), we
reserve the right to suspend redemptions under extraordinary circumstances.
OTHER POLICIES
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum account
balance of $10,000. If your account balance falls below that amount for any
reason, we will ask you to add to your account. If your account balance is not
brought up to the minimum or you do not send us other instructions, we will
redeem your shares and send you the proceeds. We believe that this policy is in
the best interests of all our shareholders.
Uncashed Redemption Checks
If you receive your Fund redemption proceeds or distributions by check (instead
of by wire) and it does not arrive within a reasonable period of time, call us
at (800) 627-7933, option (2). Please note that we are responsible only for
mailing redemption or distribution checks and are not responsible for tracking
uncashed checks or determining why checks are uncashed. If your check is
returned to us by the U.S. Postal Service or other delivery service, we will
hold it on your behalf for a reasonable period of time. We will not invest the
proceeds in any interest-bearing account. No interest will accrue on uncashed
distribution or redemption proceeds.
In-Kind Redemptions
When in the judgment of the Manager it is consistent with the best interests of
the Fund, an investor may redeem shares of the Fund and receive securities from
the Fund's portfolio selected by the Manager at its sole discretion, provided
that such redemption is not expected to affect the Fund's ability to attain its
investment objective or otherwise materially affect its operations. For the
purposes of redemptions in kind, the redeemed securities shall be valued at the
identical time and in the identical manner that the other portfolio securities
are valued for purposes of calculating the net asset value of the Fund's shares.
Telephone Transactions
By buying, selling or exchanging shares over the phone, you agree to reimburse
the Fund for any expenses or losses incurred in connection with transfers of
money from your account. This includes any losses or expenses caused by your
bank's failure to honor your debit or act in accordance with your instructions.
If your bank makes erroneous payments or fails to make payment after you buy
shares, we may cancel the purchase and immediately terminate your telephone
transaction privilege. In addition, we may discontinue these privileges at any
time upon prior written notice. You may discontinue phone privileges at any
time.
-16-
<PAGE>
The shares you purchase by phone will be priced at the first net asset value we
determine after receiving your purchase. You will not actually own the shares,
however, until we receive your payment in full. If we do not receive your
payment within three business days of your request, we will cancel your
purchase. You may be responsible for any losses incurred by the Fund as a
result.
Please note that we cannot be held liable for following telephone instructions
that we reasonably believe to be genuine. We use several safeguards to ensure
that the instructions we receive are accurate and authentic, such as:
> recording certain calls,
> requiring a special authorization number or other personal information not
likely to be known by others, and
> sending a transaction confirmation to the investor.
Montgomery and its Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not followed
these reasonable procedures.
We reserve the right to revoke the telephone transaction privilege of any
shareholder at any time if he or she has used abusive language or misused the
phone privilege by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, we will temporarily suspend your
telephone redemption privileges until 30 days after your notification to protect
you and your account. We require all redemption requests made during this period
to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of volatile economic or market conditions. In these cases you may
want to transmit your redemption request:
> by overnight courier
> by telegram
Tax Withholding Information
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If you don't have a Social Security Number or TIN, apply
for one immediately by contacting a local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide us
with a TIN or a Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain distributions, and
redemption and exchange proceeds (unless you qualify as an exempt payee under
certain rules).
Other rules about TINs apply for certain investors. If the IRS has notified you
that you are subject to backup withholding because you failed to report all
interest and dividend income on your tax return, you must check the appropriate
item on the New Account application. Foreign shareholders should note that any
dividends the Fund pays to them may be subject to up to 30% withholding instead
of backup withholding.
After You Invest
Taxes
IRS rules require that the Fund distributes all of its net investment income and
capital gains, if any, to shareholders. Capital gains may be taxable at
different rates, depending on the length of time the Fund holds its assets. We
will inform you about the source of any dividends and capital gains upon
payment.
-17-
<PAGE>
After the close of each calendar year, we will advise you of their tax status.
The Fund's distributions, whether received in cash or reinvested, may be
taxable. Any redemption of the Fund's shares or any exchange of the Fund's
shares for those of another Fund will be treated as a sale, and any gain on the
transaction may be taxable.
Additional information about tax issues relating to the Fund can be found in our
Statement of Additional Information, available free by calling (800) 627-7933,
option (2). Consult your tax advisor about the potential tax consequences of
investing in the Fund.
Dividends and Distributions
As a shareholder in the Fund, you may receive income dividends and capital gain
distributions for which you will owe taxes (unless you invest solely through a
tax-advantaged account such as a 401(k) plan). Dividends and distributions are
paid to all shareholders who maintain accounts with the Fund as of its "record
date."
If you would like to receive distributions in cash, indicate that choice on your
New Account application. Otherwise, the distributions will be reinvested in
additional Fund shares.
Referral Arrangements
The Distributor for the Fund compensates selected solicitors for bringing new
accounts or investments to the Fund. The Fund will not pay this compensation out
of its assets unless it has adopted a Rule 12b-1 plan. You may request the
Statement of Additional Information through the telephone number given on the
last page for specific information about these arrangements.
[sidebar]
Our Partners
As a Montgomery shareholder, you may see the names of our partners on a regular
basis. We all work together to ensure that your investments are handled
accurately and efficiently.
Funds Distributor, Inc., located in New York City and Boston, distributes The
Montgomery Funds.
DST Systems, located in Kansas City, Missouri, provides transfer agent services
and performs certain recordkeeping and accounting functions for the Fund.
-18-
<PAGE>
<TABLE>
[table]
<CAPTION>
- ------------------------------------------------------------------------------------------------------
INCOME Dividends CAPITAL GAINS
<S> <C> <C>
Emerging Markets Portfolio Declared and paid in the last Declared and paid in the last
quarter of each calendar year* quarter of each calendar year*
- ------------------------------------------------------------------------------------------------------
<FN>
* Following its fiscal year end June 30, the Fund may make additional
distributions to avoid the imposition of a tax.
</FN>
</TABLE>
During the year, we will also send you the following communications:
[] Confirmation statements
[] Account statements Mailed after the close of each calendar quarter
[] Annual and semiannual reports Mailed approximately 60 days after June 30
and December 31
[] 1099 tax form Sent by January 31
[] Annual updated prospectus Mailed to existing shareholders in the fall
To save you money, we send only one copy of each shareholder report or other
mailing to your household if you hold accounts under common ownership or at the
same address (regardless of the number of shareholders or accounts at that
household or address), unless you request additional copies.
[sidebar]
HOW TO AVOID "BUYING A DIVIDEND"
If you plan to purchase shares in the Fund, check if it is planning to make a
distribution in the near future. Here's why: If you buy shares of the Fund just
before a distribution, you'll pay full price for the shares but receive a
portion of your purchase price back as a taxable distribution. This is called
"buying a dividend." Unless you hold the Fund in a tax-deferred account, you
will have to include the distribution in your gross income for tax purposes,
even though you may not have participated in the increase of the Fund's
appreciation.
-19-
<PAGE>
[Outside back cover: The Montgomery Funds II; Address; Contact Info; Logo]
You can find more information about the Montgomery Institutional Series'
investment policies in the Statement of Additional Information (SAI),
incorporated by reference in this prospectus, which is available free of charge.
To request a free copy of the SAI, call us at 800.627.7933. You can review and
copy further information about The Montgomery Funds II, including the SAI, at
the Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. Call 800.SEC.0330 to obtain information about the operation of
the Public Reference Room. Reports and other information about The Montgomery
Funds II are available through the SEC's Web site at www.sec.gov. You can also
obtain copies of this information, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C., 20549-6009.
You can also find further information about the Montgomery Institutional Series
in our annual and semiannual shareholder reports, which discuss the market
conditions and investment strategies that significantly affected each Fund's
performance during the previous fiscal period. To request a copy of the most
recent annual or semiannual report, call us at 800.627.7933.
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
800.627.7933
www.montgomeryasset.com
SEC File Nos.: The Montgomery Funds II 811-8064
Funds Distributor, Inc. 11/99
-20-
<PAGE>
- --------------------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
THE MONTGOMERY FUNDS II
- --------------------------------------------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS PORTFOLIO
101 California Street
San Francisco, California 94111
(415) 248-6330
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
November 8, 1999
The Montgomery Funds II (the "Trust") is an open-end management
investment company organized as a Delaware business trust with different series
of shares of beneficial interest. Montgomery Institutional Series: Emerging
Markets Portfolio (the "Fund") is a series of the Trust. The Fund is managed by
Montgomery Asset Management, LLC (the "Manager") and its shares are distributed
by Funds Distributor, Inc. (the "Distributor"). This Statement of Additional
Information contains information in addition to that set forth in the Prospectus
for the Fund (the "Prospectus"), dated November 8, 1999, as may be revised from
time to time. The Prospectus provides the basic information a prospective
investor should know before purchasing shares of the Fund and may be obtained
without charge at the address or telephone number provided above. This Statement
of Additional Information is not a prospectus and should be read in conjunction
with the Prospectus.
B-1
<PAGE>
TABLE OF CONTENTS
THE TRUST......................................................................3
Investment Objective and Policies of he Fund...................................3
Risk Factors..................................................................14
INVESTMENT RESTRICTIONS.......................................................17
Distributions and Tax Information.............................................19
TRUSTEES AND OFFICERS.........................................................23
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................26
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................27
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................30
DETERMINATION OF NET ASSET VALUE..............................................32
PRINCIPAL UNDERWRITER.........................................................34
PERFORMANCE INFORMATION.......................................................34
GENERAL INFORMATION...........................................................37
FINANCIAL STATEMENTS..........................................................38
APPENDIX......................................................................39
B-2
<PAGE>
THE TRUST
The Trust is an open-end management investment company organized as a
Delaware business trust on September 10, 1993, and registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Trust currently offers shares of beneficial interest, $0.01 par value per share,
in various series. Each series offers three classes of shares (Class R, Class P
and Class L). This Statement of Additional Information pertains to Montgomery
Institutional Series: Emerging Markets Portfolio.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Fund is managed by Montgomery Asset Management, LLC (the "Manager")
and its shares are distributed by Funds Distributor, Inc. (the "Distributor").
The investment objective and policies of the Fund are described in detail in the
Prospectus. The following discussion supplements the discussion in the
Prospectus.
The Fund is a diversified series of the Trust, an open-end management
investment company offering redeemable shares of beneficial interest. The
achievement of the Fund's investment objective will depend on market conditions
generally and on the Manager's analytical and portfolio management skills.
Portfolio Securities
Depository Receipts, Convertible Securities and Securities Warrants.
The Fund may hold securities of foreign issuers in the form of sponsored and
unsponsored American Depositary Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depositary Receipts ("GDRs") 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. Unsponsored ADR and EDR
programs are organized without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not be
as current as for sponsored ADRs and EDRs, and the prices of unsponsored ADRs
and EDRs may be more volatile. For purposes of the Fund's investment policies,
its investments in ADRs, EDRs and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted.
Other Investment Companies. The Fund may invest in securities issued by
other investment companies. Those investment companies must invest in securities
in which the Fund can invest in a manner consistent with the Fund's investment
objective and policies. Applicable provisions of the Investment Company Act
require that the Fund limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 10% of the value of the
Fund's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either the Fund and affiliated persons
of the Fund not own together more than 3% of the total outstanding shares of any
one investment company at the time of purchase (and that all shares of the
investment company held by the Fund in excess of 1% of the company's total
outstanding shares be deemed illiquid); or the Fund not invest more than 5% of
its total assets in any one investment company and the investment not represent
more than 3% of the total outstanding voting stock of the investment company at
the time of purchase.
B-3
<PAGE>
Because of restrictions on direct investment by U.S. entities in
certain countries, other investment companies may provide the most practical or
only way for the Fund to invest in certain markets. Such investments may involve
the payment of substantial premiums above the net asset value of those
investment companies' portfolio securities and are subject to limitations under
the Investment Company Act. The Fund may incur tax liability to the extent that
it invests in the stock of a foreign issuer that is a "passive foreign
investment company" regardless of whether such "passive foreign investment
company" makes distributions to the Fund.
The Fund does not intend to invest in other investment companies
unless, in the Manager's judgment, the potential benefits exceed associated
costs. As a shareholder in an investment company, the Fund bears its ratable
share of that investment company's expenses, including advisory and
administration fees.
Debt Securities. The Fund may purchase debt securities that complement
its objective of capital appreciation through anticipated favorable changes in
relative foreign exchange rates, in relative interest rate levels or in the
creditworthiness of issuers. Debt securities may constitute up to 35% of the
Fund's total assets. In selecting debt securities, the Manager seeks out good
credits and analyzes interest rate trends and specific developments that may
affect individual issuers. As an operating policy, which may be changed by the
Board, the Fund may invest up to 5% of their total assets in debt securities
rated lower than investment grade. Subject to this limitation, the Fund may
invest in any debt security, including securities in default. After its purchase
by the Fund, a debt security may cease to be rated or its rating may be reduced
below that required for purchase by the Fund. A security downgraded below the
minimum level may be retained if determined by the Manager and the Board to be
in the best interests of the Fund.
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 the Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, government entities and companies of
emerging markets countries. The percentage distribution between equity and debt
will vary from country to country, based on anticipated trends in inflation and
interest rates; expected rates of economic and corporate profits growth; changes
in government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
U.S. Government Securities. The Fund may invest a substantial portion,
if not all, of its net assets in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, including repurchase agreements
backed by such securities ("U.S. Government securities"). The Fund generally
will have a lower yield than if it purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Fund's shares, however. With
B-4
<PAGE>
respect to U.S. government securities supported only by the credit of the
issuing agency or instrumentality or by an additional line of credit with the
U.S. Treasury, there is no guarantee that the U.S. government will provide
support to such agencies or instrumentalities. Accordingly, such U.S. government
securities may involve risk of loss of principal and interest.
Privatizations. The Fund may invest in privatizations. Foreign
governmental programs of selling interests in government-owned or -controlled
enterprises ("privatizations") may represent opportunities for significant
capital appreciation and the Fund may invest in privatizations. The ability of
U.S. entities, such as the Fund, to participate in privatizations may be limited
by local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
Special Situations. The Fund may invest in special situations. The Fund
believes that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities and similar vehicles
(collectively, "special situations") could enhance its capital appreciation
potential. The Fund also may invest in certain types of vehicles or derivative
securities that represent indirect investments in foreign markets or securities
in which it is impracticable for the Fund to invest directly. Investments in
special situations may be illiquid, as determined by the Manager based on
criteria reviewed by the Board. The Fund does not invest more than 15% of its
net assets in illiquid investments, including special situations.
Risk Factors/Special Considerations Relating to Debt Securities
The Fund may invest in debt securities which are rated below Baa by
Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Corporation ("S&P") or Fitch Investor Services ("Fitch"), or, if unrated, are
deemed to be of equivalent investment quality by the Manager. As an operating
policy, which may be changed by the Board of Trustees (the "Board") without
shareholder approval, the Fund will invest no more than 5% of its assets in debt
securities rated below Baa by Moody's or BBB by S&P or Fitch, or, if unrated, of
equivalent investment quality as determined by the Manager.
The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities. The net asset value of the Fund will reflect these
changes in market value.
Prepayments of principal of mortgage-related securities by mortgagors
or mortgage foreclosures affect the average life of the mortgage-related
securities remaining in the Fund's portfolio. Mortgage prepayments are affected
by the level of interest rates and other factors, including general economic
conditions of the underlying location and age of the mortgage. In periods of
rising interest rates, the prepayment rate tends to decrease, lengthening the
average life of a pool of mortgage-related securities. In periods of falling
interest rates, the prepayment tends to increase, shortening the average life of
such a pool. Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, affecting the Fund's yield.
Bonds 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."
B-5
<PAGE>
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 loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher rated securities. The existence of limited markets for particular
securities may diminish the ability of the Fund 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 per-share net asset value of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low-rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the Fund to
achieve its investment objective may, to the extent it invests in low-rated debt
securities, be more dependent upon such credit analysis than would be the case
if the Fund invested in higher rated debt securities.
Low-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low-rated debt securities have been found to be less
sensitive to interest rate changes than higher rated debt securities, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a sharper decline in the prices of low-rated debt
securities because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If the issuer of low-rated debt securities defaults, the Fund may
incur additional expenses to seek financial recovery. The low-rated bond market
is relatively new, and many of the outstanding low-rated bonds have not endured
a major business downturn.
Hedging and Risk Management Practices
The Fund typically will not hedge against the foreign currency exchange
risks associated with its investments in foreign securities. Consequently, the
Fund will be very sensitive to any changes in exchange rates for the currencies
in which its foreign investments are denominated or linked. The Fund may enter
into forward foreign currency exchange contracts ("forward contracts") and
foreign currency futures contracts, as well as purchase put or call options on
foreign currencies, as described below, in connection with making an investment
or, on rare occasions, to hedge against expected adverse currency exchange rate
changes. Despite their very limited use, the Funds may enter into hedging
transactions when, in fact, it is inopportune to do so and, conversely, when it
is more opportune to enter into hedging transactions the Fund might not enter
into such transactions. Such inopportune timing or utilization of hedging
practices could result in substantial losses to the Fund.
Forward Contracts. A forward contract, which is individually negotiated
and privately traded by currency traders and their customers, involves an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date.
The Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When the Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities
B-6
<PAGE>
denominated in such currency, or when the Fund believes that the U.S. dollar may
suffer a substantial decline against a foreign currency, it may enter into a
forward contract to buy that currency for a fixed dollar amount.
In connection with the Fund's forward contract transactions, an amount
of the Fund's assets equal to the amount of the Fund's commitments will be held
aside or segregated to be used to pay for the commitments. Accordingly, the Fund
always will have cash, cash equivalents or liquid equity or debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them and the ability of
the Fund to utilize forward contracts may be restricted. Forward contracts may
limit potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by the Fund than if it had not entered into
such contracts. The Fund generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. The Fund typically
will not hedge against movements in interest rates, securities prices or
currency exchange rates. The Fund may still occasionally purchase and sell
various kinds of futures contracts and options on futures contracts. The Fund
also may enter into closing purchase and sale transactions with respect to any
such contracts and options. Futures contracts may be based on various securities
(such as U.S. government securities), securities indices, foreign currencies and
other financial instruments and indices.
The Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant to Section 4.5 of the regulations under the Commodity
Exchange Act, the notice of eligibility included the representation that the
Fund will use futures contracts and related options for bona fide hedging
purposes within the meaning of CFTC regulations, provided that the Fund may hold
positions in futures contracts and related options that do not fall within the
definition of bona fide hedging transactions if the aggregate initial margin and
premiums required to establish such positions will not exceed 5% of the Fund's
net assets (after taking into account unrealized profits and unrealized losses
on any such positions) and that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded from such 5%.
The Fund will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
which it expects to purchase. The Fund's futures transactions generally will be
entered into only for traditional hedging purposes--i.e., futures contracts will
be sold to protect against a decline in the price of securities or currencies
and will be purchased to protect the Fund against an increase in the price of
securities it intends to purchase (or the currencies in which they are
denominated). All futures contracts entered into by the Fund are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the CFTC or on
foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions which may result in a profit or a loss. While the Fund's
futures contracts on securities or currencies will usually be liquidated in this
manner, the Fund may 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.
B-7
<PAGE>
By using futures contracts to hedge its positions, the Fund seeks to
establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Fund proposes to acquire. For example, when
interest rates are rising or securities prices are falling, the Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, the
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, the Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. The Fund
can purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that the Fund has acquired or
expects to acquire.
As part of its hedging strategy, the Fund also may enter into other
types of financial futures contracts if, in the opinion of the Fund's Manager,
there is a sufficient degree of correlation between price trends for the Fund's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in the Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having the Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Fund's securities portfolio. When
hedging of this character is successful, any depreciation in the value of the
portfolio securities can be substantially offset by appreciation in the value of
the futures position. However, any unanticipated appreciation in the value of
the Fund's portfolio securities could be offset substantially by a decline in
the value of the futures position.
The acquisition of put and call options on futures contracts gives the
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives the Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
The Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. The Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by the Fund is potentially
unlimited.
The Fund will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
its qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. The Fund may
purchase put and call options on securities in which it has invested, on foreign
currencies represented in its portfolio and on any securities index based in
whole or in part on securities in which the Fund may invest. The Fund also may
enter into closing sales transactions in order to realize gains or minimize
losses on options it has purchased.
The Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the foreign currency in which such securities are
denominated. The purchase of a call option would entitle the Fund, in return for
the premium paid, to purchase specified securities or a specified amount of a
foreign currency at a specified price during the option period.
B-8
<PAGE>
The Fund may purchase and sell options that are traded on U.S. and
foreign exchanges and options traded over the counter ("OTC options") with
broker-dealers who make markets in these options. The ability to terminate OTC
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Trading in OTC options is also subject to the risk that the
other party will be unable or unwilling to close out options purchased by the
Fund.
Although the Fund will generally purchase only those options for which
there appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Fund does not currently intend to do so, the Fund may, in
the future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which the Fund may invest. A covered call
option involves the Fund's giving another party, in return for a premium, the
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against a price decline of the underlying security. However, by
writing a covered call option, the Fund gives up the opportunity, while the
option is in effect, to realize gain from any price increase (above the option
exercise price) in the underlying security. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction.
The Fund also may write covered put options which give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a put option but
will be obligated for as long as the option is outstanding to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise. In order to "cover" put options it has
written, the Fund will cause its custodian to segregate cash, cash equivalents,
U.S. Government securities or other liquid equity or debt securities with at
least the value of the exercise price of the put options. The Fund will not
write put options if the aggregate value of the obligations underlying the put
options shall exceed 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of the Fund's orders.
B-9
<PAGE>
Indexed-Equity Derivatives--SPDRs, WEBS and DIAMONDS and OPALS. The
Fund may invest in Standard & Poor's ("S&P") Depository Receipts ("SPDRs") and
S&P's MidCap 400 Depository Receipts ("MidCap SPDRs"), World Equity Benchmark
Series ("WEBS"), Dow Jones Industrial Average instruments ("DIAMONDS") and
baskets of Country Securities ("OPALS"). Each of these instruments are
derivative securities whose value follows a well-known securities index or
baskets of securities.
SPDRs and MidCap SPDRs are designed to follow the performance of S&P
500 Index and the S&P MidCap 400 Index, respectively. WEBS are currently
available in 17 varieties, each designed to follow the performance of a
different Morgan Stanley Capital International country index. DIAMONDS are
designed to follow the performance of the Dow Jones Industrial Average which
tracks the composite stock performance of 30 major U.S. companies in a diverse
range of industries.
OPALS track the performance of adjustable baskets of stocks owned by
Morgan Stanley Capital (Luxembourg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALS will receive semi-annual distributions
corresponding to dividends received on shares contained in the underlying basket
of stocks and certain amounts, net of expenses. On the maturity date of the
OPALS, the holder will receive the physical securities comprising the underlying
baskets. OPALS, like many of these types of instruments, represent an unsecured
obligation and therefore carry with them the risk that the Counterparty will
default.
Because the prices of SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALS are
correlated to diversified portfolios, they are subject to the risk that the
general level of stock prices may decline or that the underlying indices
decline. In addition, because SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALS will
continue to be traded even when trading is halted in component stocks of the
underlying indices, price quotations for these securities may, at times, be
based upon non-current price information with respect to some of even all of the
stocks in the underlying indices. In addition to the risks disclosed in "Foreign
Securities" below, because WEBS mirror the performance of a single country
index, a economic downturn in a single country could significantly adversely
affect the price of the WEBS for that country.
Other Investment Practices
Repurchase Agreements. The Fund may enter into repurchase agreements.
The Fund's repurchase agreements will generally 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 at a mutually
agreed-upon time and price. The repurchase price is generally higher than the
purchase price, the difference being interest income to the Fund. Alternatively,
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on the date of
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Manager, acting under the supervision of the Board,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Fund enters into repurchase
agreements to evaluate potential risk. All repurchase agreements will be made
pursuant to procedures adopted and regularly reviewed by the Board.
B-10
<PAGE>
The Fund generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Fund regards repurchase agreements with
maturities in excess of seven days as illiquid. The Fund may not invest more
than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is
deemed to be a collateralized loan from the Fund to the seller of the security
subject to the repurchase agreement. It is not clear whether a court would
consider the security acquired by the Fund subject to a repurchase agreement as
being owned by the Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase under a repurchase agreement,
the Fund may encounter delays and incur costs before being able to sell the
security. Delays may involve loss of interest or a decline in price of the
security. If a court characterizes such a transaction as a loan and the Fund has
not perfected a security interest in the security, the Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for the Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, the Fund
also runs the risk that the seller may fail to repurchase the security. However,
the Fund always requires collateral for any repurchase agreement to which it is
a party in the form of securities acceptable to it, the market value of which is
equal to at least 100% of the amount invested by the Fund plus accrued interest,
and the Fund makes payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement at all times equals or exceeds the repurchase price
(including interest) at all times.
The Fund may participate in one or more joint accounts with other funds
of the Trust that may invest in repurchase agreements collateralized, subject to
their investment policies, either by (i) obligations issued or guaranteed as to
principal and interest by the U.S. Government or by one of its agencies or
instrumentalities, or (ii) privately issued mortgage-related securities that are
in turn collateralized by securities issued by GNMA, FNMA or FHLMC, and are
rated in the highest rating category by a nationally recognized statistical
rating organization, or, if unrated, are deemed by the Manager to be of
comparable quality using objective criteria. Any such repurchase agreement will
have, with rare exceptions, an overnight, over-the-weekend or over-the-holiday
duration, and in no event will have a duration of more than seven days.
Lending of Portfolio Securities. The Fund may lend securities to
brokers, dealers and other financial organizations. Such loans may be made to
broker-dealers or other financial institutions whose creditworthiness is
acceptable to the Manager. These loans would be required to be secured
continuously by collateral, including cash, cash equivalents, irrevocable
letters of credit, U.S. Government securities, or other high grade liquid debt
securities, maintained on a current basis (i.e., marked to market daily) at an
amount at least equal to 100% of the market value of the securities loaned plus
accrued interest. The Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the income earned
on the cash to the borrower or placing broker. Loans are subject to termination
at the option of the Fund or the borrower at any time. Upon such termination,
the Fund is entitled to obtain the return of the securities loaned within five
business days.
B-11
<PAGE>
For the duration of the loan, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to those 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.
Such loans of securities are 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 failed financially.
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer.
While the Fund reserves the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Fund does not believe that its net asset value
will be adversely affected by its purchase of securities on a when-issued or
delayed delivery basis. The Fund causes its custodian to segregate cash, U.S.
Government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund will earn no
income on these assets.
The Fund may seek to hedge investments or to realize additional gains
through forward commitments to sell high-grade liquid debt securities it does
not own at the time it enters into the commitments. Such forward commitments
effectively constitute a form of short sale. To complete such a transaction, the
Fund must obtain the security which it has made a commitment to deliver. If the
Fund does not have cash available to purchase the security it is obligated to
deliver, it may be required to liquidate securities in its portfolio at either a
gain or a loss, or borrow cash under a reverse repurchase or other short-term
arrangement, thus incurring an additional expense. In addition, the Fund may
incur a loss as a result of this type of forward commitment if the price of the
security increases between the date the Fund enters into the forward commitment
and the date on which it must purchase the security it is committed to deliver.
The Fund will realize a gain from this type of forward commitment if the
security declines in price between those dates. The amount of any gain will be
reduced, and the amount of any loss increased, by the amount of the interest or
other transaction expenses the Fund may be required to pay in connection with
this type of forward commitment. Whenever this Fund engages in this type of
transaction, it will segregate assets as discussed above.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Fund has valued the
securities and includes, among 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
B-12
<PAGE>
company held by the Fund in excess of 1% of the total outstanding shares of that
investment company. Restricted securities may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). Illiquid securities acquired by the Fund may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries.
Securities that are freely marketable in the country where they are
principally traded, but that would not be freely marketable in the United
States, will not be considered illiquid. Also, 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 requirement of Rule 144A under the 1933 Act (see below) and that,
subject to review by the Board and guidelines adopted by the Board, the Manager
has determined to be liquid.
Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A-eligible restricted securities,
however, could adversely affect the marketability of such portfolio securities
and result in a Fund's inability to dispose of such securities promptly or at
favorable prices.
The Board have 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.
B-13
<PAGE>
RISK FACTORS
The following describes certain risks involved with investing in the
Fund.
Small Companies
Since the Fund may invest in smaller companies, investors should
consider carefully the special risks involved. Smaller companies may present
greater opportunities for capital appreciation but may involve greater risk than
larger, more mature issuers. Also, 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.
Foreign Securities
The Fund may purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation; taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations; foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments); default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the United States. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards. Further, the Fund may encounter difficulties in pursuing
legal remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs
relating to investments by the Fund in other countries are generally greater
than in the United States. Foreign markets have different clearance and
settlement procedures from those in the United States, and certain markets have
experienced times when settlements did not keep pace with the volume of
securities transactions which resulted in settlement difficulty. The inability
of a Fund to make intended security purchases due to settlement difficulties
could cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to the Fund
if the value of the portfolio security declined, or result in claims against the
Fund if it had entered into a contract to sell the security. In certain
countries there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
United States. The securities markets of many of the countries in which the Fund
may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States.
Because certain securities may be denominated in foreign currencies,
the value of such securities will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. A Fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange among the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however,
B-14
<PAGE>
involve certain transaction costs and investment risks, including dependence
upon the Manager's ability to predict movements in exchange rates.
Some countries in which the Fund may invest may also have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Emerging Market Countries
The Fund may invest in securities of companies domiciled in, and in
markets of, so-called "emerging market countries." The Fund may also invest in
certain debt securities issued by the governments of emerging markets countries
that are, or may be eligible for, conversion into investments in emerging
markets companies under debt conversion programs sponsored by such governments.
The Fund deems securities that are convertible to equity investments to be
equity-derivative securities.
The Fund considers a company to be an emerging markets company if its
securities are principally traded in the capital market of an emerging markets
country; it derives 50% of its total revenue from either goods produced or
services rendered in emerging markets countries or from sales made in such
emerging markets countries, regardless of where the securities of such companies
are principally traded; or it is organized under the laws of, and with a
principal office in, an emerging markets country. An emerging markets country is
one having an economy that is or would be considered by the World Bank or the
United Nations to be emerging or developing.
Investments in companies and markets of emerging market countries may
be subject to potentially higher risks than investments in developed countries.
These risks include (i) volatile social, political and economic conditions; (ii)
the small current size of the markets for such securities and the currently low
or nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) the existence of national policies which may
restrict these Funds' investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests; (iv)
foreign taxation; (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain emerging market countries,
of a capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in certain emerging
market countries may be slowed or reversed by unanticipated political or social
events in such countries.
Exchange Rates and Policies
The Fund endeavors to buy and sell foreign currencies on favorable
terms. Some price spreads on currency exchange (to cover service charges) may be
incurred, particularly when the Fund changes investments from one country to
another or when proceeds from the sale of shares in U.S. dollars are used for
the purchase
B-15
<PAGE>
of securities in foreign countries. Also, some countries may adopt policies
which would prevent the Fund from repatriating invested capital and dividends,
withhold portions of interest and dividends at the source, or impose other
taxes, with respect to the Fund's investments in securities of issuers of that
country. There also is the possibility of expropriation, nationalization,
confiscatory or other taxation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Manager considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions that would
affect the liquidity of the Fund's assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Manager also considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
Investors in the Fund should consider carefully the substantial risks
involved in securities of companies located or doing business in, and
governments of, foreign nations, which are in addition to the usual risks
inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published regarding companies in the U.S. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. Many foreign markets have substantially less volume than either
the established domestic securities exchanges or the OTC markets. Securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Commission rates in foreign countries, which may be
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In many foreign countries there is less government supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S. and capital requirements for brokerage firms are generally lower.
Settlement of transactions in foreign securities may, in some instances, be
subject to delays and related administrative uncertainties.
Hedging Transactions
While transactions in forward contracts, options, futures contracts and
options on futures (i.e., "hedging positions") may reduce certain risks, such
transactions themselves entail certain other risks. Thus, while the Fund may
benefit from the use of hedging positions, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in a poorer
overall performance for the Fund than if it had not entered into any hedging
positions. If the correlation between a hedging position and portfolio position
which is intended to be protected is imperfect, the desired protection may not
be obtained, and the Fund may be exposed to risk of financial loss. Furthermore,
the Fund may enter into hedging transactions when, in fact, it is inopportune to
do so and, conversely, when it is more opportune to enter into hedging
transactions the Fund might not enter into such transactions. Such inopportune
timing of utilization of hedging practices could result in substantial losses to
the Fund.
Perfect correlation between the Fund's hedging positions and portfolio
positions may be difficult to achieve because hedging instruments in many
foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign
B-16
<PAGE>
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the Investment Company Act. The Fund may not:
1. With respect to 75% of its total assets, invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such
investment more than 5% of the total assets of the Fund would be
invested in such issuer. There are no limitations with respect to the
remaining 25% of its total assets, except to the extent other
investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and policies,
(b) through the lending of up to 10% of its portfolio securities as
described above, or (c) to the extent the entry into a repurchase
agreement is deemed to be a loan.
3.
(a) Borrow money, except for temporary or emergency purposes from
a bank, and then not in excess of 10% 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 no additional
investments may be made while any such borrowings are in
excess of 5% 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 other
hedging transactions.
4. Except as required in connection with permissible hedging activities,
purchase securities on margin or underwrite securities. (This does not
preclude the Fund from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities.)
5. Buy or sell real estate (including interests in real estate limited
partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts;
however, the Fund, to the extent not otherwise prohibited in 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 this Statement of Additional Information.
6. Buy or sell interests in oil, gas or mineral exploration or development
leases and programs. (This does not preclude permissible investments in
marketable securities of issuers engaged in such activities.)
B-17
<PAGE>
7. Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in this
Statement of Additional Information, or as such securities may be
acquired as part of a merger, consolidation or acquisition of assets.
8. Invest, in the aggregate, more than 15% of its net assets in illiquid
securities, including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A-eligible restricted securities),
securities which are not otherwise readily marketable, repurchase
agreements that mature in more than seven days and OTC options (and
securities underlying such options) purchased by a Fund. (This is an
operating policy which may be changed without shareholder approval,
consistent with the Investment Company Act, changes in relevant SEC
interpretations).
9. Invest in any issuer for purposes of exercising control or management
of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company
Act.)
10. Invest more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry. (This does not
apply to investment in the securities of the U.S. Government, its
agencies or instrumentalities.) For purposes of this restriction, the
Fund generally relies on the U.S. Office of Management and Budget's
Standard Industrial Classifications.
11. Issue senior securities, as defined in the Investment Company Act,
except that this restriction shall not be deemed to prohibit the Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
12. Acquire or dispose of put, call, straddle or spread options except as
described herein and in the Prospectus and subject to the following
conditions:
(a) such options are written by other persons (except as described
herein), and
(b) the aggregate premiums paid on all such options which are held
at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without
shareholder approval.)
13. Except as and unless described in this Statement of Additional
Information, engage in short sales of securities. (This is an operating
policy which may be changed without shareholder approval, consistent
with applicable regulations.)
14. Invest in warrants, valued at the lower of cost or market, in excess of
5% of the value of the Fund's net assets. Warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
(This is an operating policy which may be changed without shareholder
approval.)
15. Purchase more than 10% of the outstanding voting securities of any one
issuer. (This is an operating policy which may be changed without
shareholder approval.)
16. Invest in commodities, except for futures contracts or options on
futures contracts, if, as a result thereof, more than 5% of the Fund's
total assets (taken at market value at the time of entering into the
contract) would be committed to initial deposits and premiums on open
futures contracts and options on such contracts.
B-18
<PAGE>
To the extent these restrictions reflect matters of operating policy
which may be changed without shareholder vote, these restrictions may be amended
upon approval by the Board of Trustees and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
In the future, the Fund has reserved the right, if approved by its
Board of Trustees, to convert to a "master/feeder" structure. In this structure,
the assets of mutual funds with common investment objectives and similar
parameters are combined into a pool, rather than being managed separately. The
individual funds are known as "feeder" funds and the pool as the "master" fund.
Although combining assets in this manner allows for economies of scale and other
advantages, this change will not affect the investment objectives, philosophies
or disciplines currently employed by the Fund. You would receive prior notice
before we took any action. AS of the date of this Statement of Additional
Information, we have not proposed instituting alternative structures for the
Fund.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Fund receives income in the form of dividends and
interest earned on its investments in securities. This income, less the expenses
incurred in its operations, is the Fund's net investment income, substantially
all of which will be declared as dividends to the Fund's shareholders.
The amount of ordinary income dividend payments by the Fund is
dependent upon the amount of net investment income received by the Fund from its
portfolio holdings, is not guaranteed and is subject to the discretion of the
Fund's Board. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
The Fund also may derive capital gains or losses in connection with
sales or other dispositions of its portfolio securities. Any net gain the Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders.
The maximum long-term federal capital gains rate for individuals is 20%
with respect to capital assets held for more than 12 months. The maximum capital
gains rate for corporate shareholders is the same as the maximum tax rate for
ordinary income.
Any dividend or distribution per share paid by the Fund reduces the
Fund's net asset value per share on the date paid by the amount of the dividend
or distribution per share. Accordingly, a dividend or distribution
B-19
<PAGE>
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 reinvested in additional
shares of the Fund. Investors have the right to change their elections with
respect to the reinvestment of dividends and distributions by notifying the
Transfer Agent in writing, but any such change will be effective only as to
dividends and other distributions for which the record date is seven or more
business days after the Transfer Agent has received the written request.
Tax Information. The Fund has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), for each taxable
year by complying with all applicable requirements regarding the source of its
income, the diversification of its assets, and the timing of its distributions.
The Fund's policy is to distribute to its shareholders all of its investment
company taxable income and any net realized capital gains for each fiscal year
in a manner that complies with the distribution requirements of the Code, so
that the Fund will not be subject to any federal income or excise taxes based on
net income. However, the Board of Trustees may elect to pay such excise taxes if
it determines that payment is, under the circumstances, in the best interests of
the Fund.
In order to qualify as a regulated investment company, each Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stocks or other securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency, and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the market value of its assets is represented by
cash, cash items, U.S. Government securities, securities of other regulated
investment companies and other securities limited, for purposes of this
calculation, in the case of other securities of any one issuer to an amount not
greater than 5% of that 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, a Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If 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 the Fund will be taxable to shareholders whether made in cash or reinvested
in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from the eight prior taxable years will
be applied against capital gains. Shareholders receiving distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so received equal to the net asset value of a share of the Fund on
the reinvestment date. Fund distributions also will be included in individual
and corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Fund or any securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder. In addition, the Fund will be required to withhold federal
income tax at the rate of 31% on taxable dividends, redemptions and other
payments made to accounts of individual or other non-exempt shareholders who
have not furnished their correct taxpayer identification numbers and certain
required certifications on the Account Application Form or with respect to which
the Fund or the securities dealer has
B-20
<PAGE>
been notified by the IRS that the number furnished is incorrect or that the
account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, the Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To
the extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of the Fund at the end of
its fiscal year is invested in stock or securities of foreign corporations, the
Fund may elect to pass through to its shareholders the pro rata share of all
foreign income taxes paid by the Fund. If this election is made, shareholders
will be (i) required to include in their gross income their pro rata share of
any foreign income taxes paid by the Fund, and (ii) entitled either to deduct
their share of such foreign taxes in computing their taxable income or to claim
a credit for such taxes against their U.S. income tax, subject to certain
limitations under the Code, including certain holding period requirements. In
this case, shareholders will be informed in writing by the Fund at the end of
each calendar year regarding the availability of any credits on and the amount
of foreign source income (including or excluding foreign income taxes paid by
the Fund) to be included in their income tax returns. If 50% or less in value of
the Fund's total assets at the end of its fiscal year are invested in stock or
other securities of foreign corporations, the Fund will not be entitled under
the Code to pass through to its shareholders their pro rata share of the foreign
income taxes paid by the Fund. In this case, these taxes will be taken as a
deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. The Fund may
invest up to 10% of its total assets in the stock of foreign investment
companies. Such companies are likely to be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that the Fund derives from
PFIC stock may be subject to a non-deductible federal income tax at the Fund
level. In some cases, the Fund may be able to avoid this tax by electing to be
taxed currently on its share of the PFIC's income, whether or not such income is
actually distributed by the PFIC. The Fund will endeavor to limit its exposure
to the PFIC tax by investing in PFICs only where the election to be taxed
currently will be made. Because it is not always possible to identify a foreign
issuer as a PFIC in advance of making the investment, the Fund may incur the
PFIC tax in some instances.
The Trust and the Fund intend to comply with the requirements of
Section 817(h) of the Internal Revenue Code and related regulations, including
certain diversification requirements that are addition to the diversification
requirements of Subchapter M and the Investment Company Act.
Hedging. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by the Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures
B-21
<PAGE>
contracts and forward contracts derived by the Fund with respect to its business
of investing in securities or foreign currencies will qualify as permissible
income under Subchapter M of the Code.
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code, rather than
as a capital gain or loss.
A shareholder who purchases shares of the Fund by tendering payment for
the shares in the form of other securities may be required to recognize gain or
loss for income tax purposes on the difference, if any, between the adjusted
basis of the securities tendered to the Fund and the purchase price of the
Fund's shares acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mark to market" rules do not apply,
however, to a security held for investment which is clearly identified in the
dealer's records as being held for investment before the end of the day in which
the security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund
B-22
<PAGE>
held by a dealer in securities will be subject to the "mark to market" rules
unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. Any loss realized upon the redemption or exchange of shares
may be disallowed to the extent shares are purchased (including shares acquired
by means of reinvested dividends) within 30 days before or after such
redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Fund. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the overall management of
the Fund, including establishing the Fund's policies, general supervision and
review of its investment activities. The officers (the Trust, as well as the two
affiliated Trusts, The Montgomery Funds and The Montgomery Funds III, have the
same officers), who administer the Fund's daily operations, are appointed by the
Boards of Trustees. The current Trustees and officers of the Trust performing a
policy-making function and their affiliations and principal occupations for the
past five years are set forth below:
George A. Rio, President and Treasurer (born 1955)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. ("FDI")
(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.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (born 1966)
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)
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<PAGE>
Margaret W. Chambers, Secretary (born 1959)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of FDI (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 (born 1964)
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 (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
John P. Covino, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Covino is a Vice
President and Treasury Group Manager of Treasury Servicing and Administration of
FDI. From February 1995 to November 1998, Mr. Covino was employed by Fidelity
Investments where he held multiple positions in their Institutional Brokerage
Group. Prior to joining Fidelity, Mr. Covino was employed by SunGard Brokerage
Systems where he was responsible for the technology and development of the
accounting product group.
Marie E. Connolly, Vice President and Assistant Treasurer (born 1957)
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 (born 1969)
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.
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<PAGE>
Joseph F. Tower, III, Vice President and Assistant Treasurer (born 1962)
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 (born 1941)
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.,
an 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 (born 1944)
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 (born 1949)
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 Boards
of Groton School and Catholic Charities of San Francisco. Ms. Herbert is also 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 (born 1939).+
101 California Street, San Francisco, California 94111. R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General Partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E. F.
Hutton & Co. as a Vice President with responsibility for both
- ----------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-25
<PAGE>
retail and institutional accounts. Mr. Doyle was also with Connecticut General
Insurance, where he served as a Consultant to New York Stock Exchange Member
Firms in the area of financial planning.
<TABLE>
The officers of the Trusts, and the Trustees who are considered
"interested persons" of the Trusts, receive no compensation directly from the
Trusts for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Fund and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Fund. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by each Trust to each of the Trustees during the fiscal year
ended June 30, 1999, and the aggregate compensation paid to each of the Trustees
during the fiscal year ended June 30, 1999, by all of the registered investment
companies to which the Manager provides investment advisory services, are set
forth below.
<CAPTION>
----------------------------------------------------------------------------
Fiscal Year
Ended June 30, 1999
- -----------------------------------------------------------------------------------------------------------
Total Compensation From
Aggregate Compensation Pension or Retirement the Trust and Fund
from The Montgomery Benefits Accrued as Part Complex
Name of Trustee Funds II of Fund Expenses* (2 additional Trusts
- ------------------------------ ----------------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- ------------------------------ ----------------------------------------------------------------------------
John A. Farnsworth $15,000 -- $45,000
- ------------------------------ ----------------------------------------------------------------------------
Andrew Cox $15,000 -- $45,000
- ------------------------------ ----------------------------------------------------------------------------
Cecilia H. Herbert $15,000 -- $45,000
- ------------------------------ ----------------------------------------------------------------------------
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus, investment
management services are provided to the Fund by Montgomery Asset Management,
LLC, the Manager, pursuant to an Investment Management Agreement between the
Manager and The Montgomery Funds II dated July 31, 1997 (the "Agreement").
The Agreement is in effect with respect to the Fund for two years after
the Fund's inclusion in its Trust's Agreement (on or around its beginning of
public operations) and then continues for periods not exceeding one year so long
as such continuation is approved at least annually by (1) the Board or the vote
of a majority of the outstanding shares of the Fund, and (2) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case by a vote cast in person at a meeting called for the purpose of voting on
such approval. The Agreement may be terminated at any time, without penalty, by
the Fund or the Manager upon 60 days' written notice, and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act.
For services performed under the Agreement, the Fund pays the Manager a
monthly management fee (accrued daily but paid when requested by the Manager)
based upon the average daily net assets of the Fund, at the annual rate of 1.25%
of the first $50 million in average daily net assets, 1.00% of the next $50
million in average daily net assets and 0.90% of amounts over $100 million in
average daily net assets.
As noted in the Prospectus, the Manager has agreed to reduce some or
all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below 1.25% of the Fund's
B-26
<PAGE>
average net assets. The Manager also may voluntarily reduce additional amounts
to increase the return to the Fund's investors. Any reductions made by the
Manager in its fees are subject to reimbursement by the Fund within the
following three years provided the Fund is able to effect such reimbursement and
remain in compliance with the foregoing expense limitations. The Manager
generally seeks reimbursement for the oldest reductions and waivers before
payment by the Fund for fees and expenses for the current year.
Operating expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions, if
any, expenses incurred in connection with any merger or reorganization, any
extraordinary expenses such as litigation, and such other expenses as may be
deemed excludable with the prior written approval of any state securities
commission imposing an expense limitation. The Manager may also at its
discretion from time to time pay for other Fund expenses from its own funds or
reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the Board of
Trustees of the Trust at a duly called meeting. In considering the Agreement,
the Trustees specifically considered and approved the provision which permits
the Manager to seek reimbursement of any reduction made to its management fee
within the three-year period following such reduction subject to the Fund's
ability to effect such reimbursement and remain in compliance with applicable
expense limitations. The Trustees also considered that any such management fee
reimbursement will be accounted for on the financial statements of the Fund as a
contingent liability of the Fund and will appear as a footnote to the Fund's
financial statements until such time as it appears that the Fund will be able to
effect such reimbursement. At such time as it appears probable that the Fund is
able to effect such reimbursement, the amount of reimbursement that the Fund is
able to effect will be accrued as an expense of the Fund for that current
period.
<TABLE>
As compensation for its investment management services the Fund paid
the Manager investment advisory fees in the amounts specified below. Additional
investment advisory fees payable under the Agreement may have instead been
waived by the Manager, but may be subject to reimbursement by the Fund as
discussed previously.
<CAPTION>
YEAR OR PERIOD ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
Emerging Markets Portfolio $1,574,726 $3,536,299 $3,614,992
</TABLE>
The Manager also may act as an investment adviser or administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trust and who are also affiliated persons of the
Manager.
The use of the name "Montgomery" by the Trust and by the Fund is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Fund.
The Distributor. The Distributor may provide certain administrative
services to the Fund on behalf of the Manager. The Distributor will also perform
investment banking, investment advisory and brokerage services for persons other
than the Fund, including issuers of securities in which the Fund may invest.
These activities from time to time may result in a conflict of interests of the
Distributor with those of the Fund, and may restrict the ability of the
Distributor to provide services to the Fund.
The Distributor from time to time compensates other parties for the
solicitation of additional investments by existing shareholders or new
shareholder accounts. The Distributor pays compensation only to those who
B-27
<PAGE>
have a written agreement with the Distributor or the Manager. The only agreement
currently in place is with Bear, Stearns Securities Corp. ("Bear Stearns") and
relates to a very limited number of its registered representatives. The
Distributor currently pays Bear, Stearns at the annual rate of 0.25% of average
daily assets introduced and maintained in customer accounts of these
representatives. The Distributor also may reimburse certain solicitation
expenses.
The Custodian. The Chase Manhattan Bank (the "Custodian"), as the
successor to the custody business of Morgan Stanley Trust Company, serves as
principal custodian of the Fund's assets, which are maintained at the
Custodian's principal office, 270 Park Avenue, New York, New York 10017-2070,
and at the offices of its branches and agencies throughout the world. The Board
has delegated various foreign custody responsibilities to the Custodian, as the
"Foreign Custody Manager" for the Fund to the extent permitted by Rule 17f-5
under the Investment Company Act. The Custodian has entered into agreements with
foreign sub-custodians in accordance with delegation instructions approved by
the Board pursuant to Rule 17f-5. The Custodian, its branches and sub-custodians
generally hold certificates for the securities in their custody, but may, in
certain cases, have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents of the
issuers of the securities. Compensation for the services of the Custodian is
based on a schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Agreement, the Manager determines which securities are to be
purchased and sold by the Fund and which broker-dealers are eligible to execute
the Fund's portfolio transactions, subject to the instructions of, and review
by, the Fund and the Trust's Board of Trustees. Purchases and sales of
securities within the U.S. other than on a securities exchange will generally be
executed directly with a "market-maker" unless, in the opinion of the Manager or
the Fund, a better price and execution can otherwise be obtained by using a
broker for the transaction.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the
over-the-counter markets. The Fund may purchase ADRs and EDRs listed on stock
exchanges, or traded in the over-the-counter markets in the U.S. or Europe, as
the case may be. ADRs, like other securities traded in the U.S., will be subject
to negotiated commission rates. The foreign and domestic debt securities and
money market instruments in which the Fund may invest may be traded in the
over-the-counter markets.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the firm's
B-28
<PAGE>
ability to execute trades in a specific market required by the Fund, such as in
an emerging market, the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm's risk in positioning a
block of securities, and other factors.
Provided the Trust's officers are satisfied that the Fund is receiving
the most favorable price and execution available, the Manager may also consider
the sale of the Fund's shares as a factor in the selection of broker-dealers to
execute its portfolio transactions. The placement of portfolio transactions with
broker-dealers who sell shares of the Fund is subject to rules adopted by the
National Association of Securities Dealers, Inc.
("NASD").
While the Fund's general policy is to seek first to obtain the most
favorable price and execution available, in selecting a broker-dealer to execute
portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Fund or to the Manager, even if the specific services were not imputed just to
the Fund and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, the Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to the Fund or
assist the Manager in carrying out its responsibilities to the Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Fund. The Board reviews all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Fund.
Investment decisions for the Fund are made independently from those of
other client accounts of the Manager or its affiliates, and suitability is
always a paramount consideration. Nevertheless, it is possible that at times the
same securities will be acceptable for the Fund and for one or more of such
client accounts. The Manager and its personnel may have interests in one or more
of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Fund and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and the Fund seek to
acquire the same security at the same general time (especially if the security
is thinly traded or is a small cap stock), that Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, the Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security the Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between the Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased
B-29
<PAGE>
or sold and other factors deemed relevant by the Manager. In many cases, the
Fund's transactions are bunched with the transactions for other client accounts.
It is recognized that in some cases this system could have a detrimental effect
on the price or value of the security insofar as the Fund is concerned. In other
cases, however, it is believed that the ability of the Fund to participate in
volume transactions may produce better executions for the Fund.
The Manager's sell discipline for the Fund's investment in issuers is
based on the premise of a long-term investment horizon; however, sudden changes
in valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon. The
Fund will limit investments in illiquid securities to 15% of net assets.
Sell decisions at the country level are dependent on the results of the
Manager's asset allocation model. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Manager's
assumed time horizon in those countries. In addition, the rapid pace of
privatization and initial public offerings creates a flood of new opportunities
which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of
factors including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and a
declining financial flexibility may also signal a sell.
For the year ended June 30, 1998, the Fund's total securities
transactions generated commissions of $1,828,504, none of which was paid to Bank
of America Securities (formerly Nationsbanc Montgomery Securities). For the year
ended June 30, 1997, the Fund's total securities transactions generated
commissions of $2,250,280, none of which was paid to Montgomery Securities. For
the year ended June 30, 1996, the Fund's total securities transactions generated
commissions of $2,251,340, none of which was paid to Montgomery Securities.
Throughout 1996 and through July 31, 1997, Bank of America Securities, also
formerly Montgomery Securities, was affiliated with the Fund through its
ownership of Montgomery Asset Management L.P., the former Manager of the Fund.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
such brokers solely for selling shares of the Fund. Brokers who execute
brokerage transactions as described above may from time to time effect purchases
of shares of the Fund for their customers.
Depending on the Manager's view of market conditions, the Fund may or
may not purchase securities with the expectation of holding them to maturity,
although its general policy is to hold securities to maturity. The Fund may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Board and the Manager have determined that payment of an investment
expense reimbursement fee by certain investors is appropriate to defray the
significant costs, listed below, associated with investing the proceeds received
by the Fund and to offset the dilutive effect such costs would otherwise have on
the net asset value of shares held by existing shareholders. Likewise, the
redemption expense reimbursement fee is used to
B-30
<PAGE>
defray the significant costs, listed below, associated with the sale of
portfolio securities needed to pay cash redemption requests. Therefore, the
shares of the Fund are sold at a public offering price that is equal to the net
asset value of such shares plus the investment expense reimbursement fee. In
addition, redemption requests are paid at net asset value less the redemption
expense reimbursement fee.
The amounts of the reimbursement fees represent the Manager's estimate
of the costs reasonably anticipated to be associated with the purchase of
securities with cash received from investors and the sale of securities to
obtain cash. The fees are paid to the Fund and used by it to defray those costs.
Those costs include brokerage commissions on listed securities, imputed
commissions on over-the-counter securities, and, in the case of foreign
countries, commissions, duties and taxes (other than taxes based on net income)
imposed on the purchase or sale of securities. These costs do not include
distribution-related expenses. It is possible that the amount of the
reimbursement fees will be more or less than the actual costs they are intended
to defray. The Fund will incur any extra costs or receive any excess fees, as
applicable.
The Fund charges an investment expense reimbursement fee of 0.75% of
the amount invested and a redemption expense reimbursement fee of 0.75% of the
amount redeemed. Shares purchased after November 1, 1995, will not be subject to
both fees. For those shares, shareholders may elect in their discretion which
fee to pay. Shares purchased by the Manager on behalf of advisory clients for
which it has investment discretion will not be subject to these fees.
Reinvestments of dividends, capital-gains distributions paid by the Fund and
investments in kind are not subject to the expense reimbursement fees. Purchases
and redemptions in kind are not subject to the expense reimbursement fees. See
"How to Invest in the Fund's In-Kind Purchases."
The Trust reserves the right in its sole discretion to (i) suspend the
continued offering of the Fund's shares, and (ii) reject purchase orders in
whole or in part when in the judgment of the Manager or the Distributor such
suspension or rejection is in the best interest of the Fund.
When in the judgment of the Manager it is in the best interests of the
Fund, an investor may purchase shares of the Fund by tendering payment in kind
in the form of securities, provided that any such tendered securities are
readily marketable (e.g., the Fund will not acquire restricted securities),
their acquisition is consistent with the Fund's investment objective and
policies, and the tendered securities are otherwise acceptable to the Fund's
Manager. Such securities are acquired by the Fund only for the purpose of
investment and not for resale. For the purposes of sales of shares of the Fund
for such securities, the tendered securities shall be valued at the identical
time and in the identical manner that the portfolio securities of the Fund are
valued for the purpose of calculating the net asset value of the Fund's shares.
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the Fund and the purchase price of the Fund's shares
acquired by the shareholder.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as promptly as possible but no later than three days after
receipt by the Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectus, except that the Fund may
suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange ("NYSE") is restricted as
determined by the SEC or the NYSE is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC (upon application by
the Fund pursuant to Section 22(e) of the Investment Company Act) making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable; or (c) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
B-31
<PAGE>
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, as described below or under abnormal conditions that make payment in cash
unwise, the Fund may make payment partly in its portfolio securities with a
current amortized cost or market value, as appropriate, equal to the redemption
price. Although the Fund does not anticipate that it will make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Fund pay in cash all requests for redemption
by any shareholder of record limited in amount, however, during any 90-day
period to the lesser of $250,000 or 1% of the value of the Trust's net assets at
the beginning of such period.
When in the judgment of the Manager it is in the best interests of the
Fund, an investor may redeem shares of the Fund and receive securities from the
Fund's portfolio selected by the Manager in its sole discretion, provided that
such redemption is not expected to affect the Fund's ability to attain its
investment objective or otherwise materially affect its operations. For the
purposes of redemptions in kind, the redeemed securities shall be valued at the
identical time and in the identical manner that the other portfolio securities
are valued for purposes of calculating the net asset value of the Fund's shares.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As noted in the Prospectus, the net asset value of shares of the Fund
generally will be determined at least once daily as of 4:00 P.M., 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 for New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The
Fund may, but does not expect to, determine the net asset value of its shares on
any day when the NYSE is not open for trading if there is sufficient trading in
its portfolio securities on such days to materially affect the per-share net
asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Fund's net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which the Fund calculates its net asset value may occur between the
times when such securities are valued and the close of the NYSE that will not be
reflected in the computation of the Fund's net asset value unless the Board or
their delegates deem that such events would materially affect the net asset
value, in which case an adjustment would be made.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Boards.
B-32
<PAGE>
The Fund's securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange, are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments or by an independent pricing service, approved by
the Board or at fair value as determined in good faith by procedures approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Trust's Board of Trustees.
If any securities held by the Fund are restricted as to resale or do
not have readily available market quotations, the Manager and the Trust's
Pricing Committee determine their fair value, following procedures approved by
the Board. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
B-33
<PAGE>
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
PRINCIPAL UNDERWRITER
The Distributor, Funds Distributor, Inc., 60 State Street, Suite 1300,
Boston, Massachusetts 02109, also acts as the Fund's principal underwriter in a
continuous public offering of the Fund's shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
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 with respect to each Fund may be terminated without
penalty by the parties thereto upon 60 days' written notice and is automatically
terminated in the event of its assignment as defined in the Investment Company
Act. There are no underwriting commissions paid with respect to sales of the
Fund's shares. The Principal Underwriter has not been paid any underwriting
commissions for underwriting securities of the Fund during the Fund's last three
fiscal years.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Fund may, from time to time, quote
various performance figures in advertisements and investor communications to
illustrate its past performance. Performance figures will be calculated
separately for Class R, Class P and Class L shares.
Average Annual Total Return. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return for the Fund will be accompanied by information on
the Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from the Fund's inception of operations. The
Fund may also advertise aggregate and average total return information over
different periods of time. The Fund's "average 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.
B-34
<PAGE>
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5- or 10-year period at the end of
each respective period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
Aggregate Total Return. The Fund's "aggregate total return" figures
represent the cumulative change in the value of an investment in the Fund for
the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of
a l-, 5- or 10-year period at the end of a
l-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
The Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
The total return information also assumes cash investments and redemptions and,
therefore, includes the applicable expense reimbursement fees discussed in the
Prospectus. Consequently, any given performance quotation should not be
considered representative of the Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
<TABLE>
The average annual total return for the Fund for the periods indicated
was as follows:
<CAPTION>
YEAR 5-YEARS INCEPTION*
FUND ENDED ENDED THROUGH
JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999
<S> <C> <C> <C>
Emerging Markets Portfolio 9.80% -1.70% -4.10%
</TABLE>
Comparisons. To help investors better evaluate how an investment in the
Fund might satisfy their investment objectives, advertisements and other
materials regarding the Fund may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. The following
publications, indices and averages may be used:
(a) Standard & Poor's 500 Composite Stock Index, one or more of
the Morgan Stanley Capital International Indices, and one or
more of the International Finance Corporation Indices.
(b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
B-35
<PAGE>
(c) Lipper Mutual Fund Performance Analysis and Lipper Fixed
Income Fund Performance Analysis--A ranking service that
measures total return and average current yield for the mutual
fund industry and ranks individual mutual fund performance
over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
(d) Salomon Brothers Bond Market Roundup--A weekly publication
which reviews yield spread changes in the major sectors of the
money, government agency, futures, options, mortgage,
corporate, Yankee, Eurodollar, municipal, and preferred stock
markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Fund's portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by the Fund to calculate its
figures.
The Fund may also publish its relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.,
VARDS and Morningstar, Inc.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Fund. From time to time the Funds 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, Bloomberg, Morningstar,
Barings, WEFA, consensus estimates, Datastream, Micropal, I/B/E/S Consensus
Forecast, Worldscope, and Reuters as well as both local and international
brokerage firms. For example, the Funds may suggest that certain countries or
areas may be particularly appealing to investors because of interest rate
movements, increasing exports, and/or economic growth. The Funds may, by way of
further example, present a region as possessing the fastest growing economies
and may also present projected gross domestic product (GDP) for selected
economies.
Research. The Manager has made intensive research one of the important
characteristics of the Montgomery Funds style.
The portfolio managers for the Fund work extensively on developing an
in-depth understanding of particular foreign markets and particular companies.
And they very often discover that they are the first analysts from the United
States to meet with representatives of foreign companies, especially those in
emerging markets nations.
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that may be used for the Fund.
B-36
<PAGE>
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.
From time to time, advertising and sales materials for the Montgomery
Funds may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management in mutual funds (as of
June 30, 1999, over $4.5 billion for retail and institutional investors) and
total shareholders invested in the Funds (as of June 30, 1999, around 250,000).
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the Trust's organization
and the registration of shares of the Fund as one of the three initial series of
the Trust have been assumed pro rata by each series; expenses incurred in
connection with the establishment and registration of shares of any other funds
constituting a separate series of the Trust will be assumed by each respective
series. The expenses incurred in connection with the establishment and
registration of shares of the Fund as a separate series of the Trust have been
assumed by the Fund and are being amortized over a period of five years
commencing with the date of the Fund's inception. The Manager has agreed, to the
extent necessary, to advance the organizational expenses incurred by the Fund
and will be reimbursed for such expenses after commencement of the Fund's
operations. Investors purchasing shares of the Fund bear such expenses only as
they are amortized daily against the Fund's investment income.
As noted above, The Chase Manhattan Bank (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.
DST Systems, Inc., P.O. Box 419073, Kansas City, Missouri 64141-6073,
serves as the Fund's Transfer and Dividend Disbursing Agent.
__________________ is the independent auditor for the Fund.
The validity of shares offered hereby has been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Among the Trustees' powers enumerated in the Declaration of Trust is
the authority to terminate the Trust or any series of the Trust, or to merge or
consolidate the Trust or one or more of its series with another trust or company
without the need to seek shareholder approval of any such action.
B-37
<PAGE>
As of October __, 1999 to the knowledge of the Fund, the following
shareholders owned of record 5% or more of the outstanding shares of the Fund:
NAME OF FUND/NAME AND NUMBER OF PERCENT
ADDRESS OF RECORD OWNER SHARES OWNED OF SHARES
[] [] []
[] [] []
[] [] []
[] [] []
[] [] []
As of October __, 1999 the Trustees and Officers of the Fund, as a
group, owned less than 1% of the outstanding shares of the Fund.
The Trust is registered with the Securities and Exchange Commission as
a non-diversified management investment company, although the Fund is a
diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of the Fund. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of the Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant period ended June 30,
1999 for the Fund, as contained in the Annual Report to Shareholders of the Fund
for the fiscal period ended June 30, 1999 (the "Report"), are incorporated
herein by reference to the Report.
B-38
<PAGE>
APPENDIX
Description ratings for Standard & Poor's Ratings Group ("S&P"); Moody's
Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade)
category.
B-39
<PAGE>
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.
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
B-40
<PAGE>
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 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.
B-41
<PAGE>
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.
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.
B-42
<PAGE>
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 F-1+.
F-2 Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Ratings
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
B-43
<PAGE>
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-44
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
--------------
FORM N-1A
--------------
PART C
--------------
Item 23. Exhibits
(a) Amended and Restated Agreement and Declaration of Trust as
incorporated by reference to Post-Effective Amendment No. 37
to the Registration Statement as filed with the Commission on
October 29, 1998 ("Post-Effective Amendment No. 37").
(b) Amended and Restated By-Laws is incorporated by reference to
Post-Effective Amendment No. 37.
(c) Instruments Defining Rights of Security Holder - Not
applicable.
(d) Investment Advisory Contracts - Form of Investment Management
Agreement is incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement as filed with
the Commission on July 31, 1997 ("Post-Effective Amendment No.
22").
(e) Form of Underwriting Agreement is incorporated by reference to
Post-Effective Amendment No. 22.
(f) Bonus or Profit Sharing Contracts - Not applicable.
(g) Form of Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 37.
(h) Other Material Contracts:
(1) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective Amendment
No. 22.
(2) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 37.
(i) Opinion of Counsel as to legality of shares is incorporated by
reference to Post-Effective Amendment No. 42 to the
Registration Statement as filed with the Commission on May 27,
1999.
(j) Other Opinions: Independent Auditors' Consent - Not
applicable.
(k) Omitted Financial Statements - Not applicable.
(l) Initial Capital Agreements: Letter of Understanding re:
Initial Shares is incorporated by reference to Post-Effective
Amendment No. 37.
(m) Rule 12b-1 Plan: Form of Share Marketing Plan (Rule 12b-1Plan)
is incorporated by reference to Post-Effective Amendment No.
22.
(n) Financial Data Schedule. - Not applicable.
(o) 18f-3 Plan - Form of Amended and Restated Multiple Class Plan
is incorporated by reference to Post-Effective Amendment No.
37.
<PAGE>
Item 24. Persons Controlled by or Under Common Control with the Fund
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 AG based in Frankfurt, Germany. The Registrant, The Montgomery Funds
and The Montgomery Funds III are deemed to be under the common control of each
of those two entities.
Item 25. 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 "1933 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 1933 Act and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the 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
F. Scott Tuck Executive Vice President of MAM, LLC
David E. Demarest Secretary, Treasurer and Executive Vice
President 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
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<PAGE>
Item 27. 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
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Institutional Funds
J.P. Morgan Funds
JPM Series Trust
JPM Series Trust II
LaSalle Partners Funds, Inc.
Kobrick-Cendant Investment Trust
Merrimac Series
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
National Investors Cash Management Fund, Inc.
Orbitex Group of Funds
SG Cowen Funds, Inc.
SG Cowen Income + Growth Fund, Inc.
SG Cowen Standby Reserve Fund, Inc.
SG Cowen Standby Tax-Exempt Reserve Fund, Inc.
SG Cowen Series Funds, Inc.
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
The 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
located at 60 State Street, Suite 1300, Boston, Massachusetts
02109. Funds Distributor is an indirect wholly
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<PAGE>
owned subsidiary of Boston Institutional Group, Inc., a
holding company all of whose outstanding shares are owned by
key employees.
(b) The following is a list of the executive officers, directors
and partners of Funds Distributor, Inc.
Director, President and Chief Marie E. Connolly
Executive Officer
Executive Vice President George A. Rio
Executive Vice President Donald R. Roberson
Executive Vice President William S. Nichols
Senior Vice President, General Margaret W. Chambers
Counsel, Chief Compliance
Officer, Secretary and Clerk
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President, Joseph F. Tower, III
Treasurer and Chief
Financial Officer
Senior Vice President Paula R. David
Senior Vice President Allen B. Closser
Senior Vice President Bernard A. Whalen
Chairman and Director William J. Nutt
(c) Not Applicable.
Item 28. 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, as amended (the "Investment
Company Act") 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 101
California Street, San Francisco, California 94111.
Item 29. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 30. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last
annual report to shareholders, upon request and without
charge.
(c) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Francisco, the
State of California, on this 8th day of September 1999.
THE MONTGOMERY FUNDS II
By: George A. Rio*
-----------------------------
George A. Rio
President and Principal Executive Officer;
Treasurer and Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
George A. Rio* President and September 8, 1999
- --------------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the September 8, 1999
- -------------------- Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee September 8, 1999
- --------------------
Andrew Cox
Cecilia H. Herbert * Trustee September 8, 1999
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee September 8, 1999
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
--------------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
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