Rule 497(e)
File Nos. 33-69686 and 811-8064
Prospectus
September 7, 1999
The Montgomery Funds II(SM)
MONTGOMERY INSTITUTIONAL SERIES:
International Growth Portfolio
Emerging Markets Focus Portfolio
The Montgomery Funds II has registered each 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 Funds.
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
Montgomery Institutional Series
International Growth Portfolio.................................................5
Emerging Markets Focus Portfolio...............................................7
Portfolio Management..........................................................10
International Growth Portfolio...........................................10
Emerging Markets Focus Portfolio.........................................10
Management Fees..........................................................10
Additional Investment Strategies and Related Risks
Emerging Markets Portfolio...............................................10
The Euro: Single European Currency.......................................11
Defensive Investments....................................................12
Portfolio Turnover.......................................................12
The Year 2000............................................................12
Financial Highlights..........................................................13
What You Need to Know About Your Montgomery Account...........................15
How Fund Shares Are Priced...............................................15
Investing in the Funds Through Financial Intermediaries..................16
Investing in the Funds Directly with Montgomery..........................16
Opening a New Account....................................................16
Buying Additional Shares.................................................17
Exchanging Shares........................................................18
Selling Shares...........................................................18
Other Policies...........................................................19
Tax Withholding Information..............................................20
After You Invest.........................................................21
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<PAGE>
This prospectus contains important information about the investment objectives,
strategies and risks of the Montgomery Institutional Series: International
Growth and Emerging Markets Focus Portfolios (each a "Fund" and, collectively,
the "Funds") that you should know before you invest in them. Please read it
carefully and keep it on hand for future reference.
Please be aware that the Funds:
[ ] Are not bank deposits
[ ] Are 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 Funds.
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<PAGE>
International Growth Portfolio |
Objective
[ ] Seeks long-term capital appreciation by investing in medium- and large-cap
companies in developed stock markets outside the United States
Strategy [clipart]
The Fund invests at least 85% of its total net assets in the stocks of companies
outside the United States whose shares have a stock market value (market
capitalization) of more than $1 billion. The Fund currently concentrates its
investments in the stock markets of western Europe, particularly the United
Kingdom, France, Germany, Italy and the Netherlands, as well as developed
markets in Asia, such as Japan and Hong Kong. The Fund typically invests in at
least three different countries outside the United States, with no more than 40%
of its assets in any one country.
The portfolio managers seek well-managed companies that they believe will be
able to increase their sales and corporate earnings on a sustained basis. In
addition, the portfolio managers purchase shares of companies that they consider
to be under- or reasonably valued relative to their long-term prospects. The
managers favor companies that they believe have a competitive advantage, offer
innovative products or services and may profit from such trends as deregulation
and privatization. On a strategic basis, the Fund's assets may be allocated
among countries in an attempt to take advantage of market trends. The Fund's
portfolio managers and analysts frequently travel to the countries in which the
Fund invests or may invest to gain firsthand insight into the economic,
political and social trends that affect investments in those countries.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. This Fund's investments in
medium-cap stocks may cause its shares to fluctuate more in value than funds
investing exclusively in larger-cap stocks, because medium-cap stocks may
fluctuate more than large-cap stock and trade less frequently and in more
limited volume. As with any stock fund, the value of your investment also will
fluctuate on a day-to-day basis with movements in the stock market, as well as
in response to the activities of individual companies.
By investing primarily in foreign stocks, the Fund may expose shareholders to
additional risks. Foreign stock markets tend to be more volatile than the U.S.
market due to economic and political instability and regulatory conditions in
some countries. In addition, most of the securities in which the Fund invests
are denominated in foreign currencies, whose values may decline against the U.S.
dollar. Although the introduction by the European Union of a single European
currency (the "euro") has occurred, uncertainties continue to exist that could
negatively affect the Fund's investments in European companies.
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<PAGE>
Past Fund Performance The Fund was launched on June 30, 1998. Performance
results have not been provided, because the Fund has not been in existence for a
full calendar year.
Fees & Expenses [clipart]
<TABLE>
The following table shows the fees and expenses you may pay if you buy and hold
shares of this 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 1.50%+
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)++
Management Fee# 0.75%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.34%
--------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.09%
Fee Reduction and/or Expense Reimbursement 0.19%
--------------------------------------------------------------------------------------------------
Net Expenses 0.90%
<FN>
+ The 1.50% redemption fee applies only to those shares redeemed within one
year from the date of purchase and is paid to the Fund. Shareholders who
have invested at least $2,000,000 in the Fund (less any prior redemptions)
are not subject to the redemption fee. $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 0.90%. This contract has a rolling
10-year term.
# The management fee of 0.75% will be reduced to 0.65% for those assets over
$500 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
- -----------------------------------------------------
$91 $286 $498 $1,105
PORTFOLIO MANAGEMENT [clipart] [sidebar]
John Boich and Oscar Castro For financial highlights
For more details see page 14. see page 19.
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<PAGE>
Emerging Markets Focus 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 normally invests at least 65% of its total assets in equity securities
of no less than three and no more than 10 developing countries. The Fund may
invest up to 50% of its total assets in a single emerging market. The Manager
currently regards the following to be developing countries/economies:
[ ] Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
[ ] Asia: Bangladesh, China/Hong Kong, India, Indonesia, South Korea,
Malaysia, Pakistan, the Philippines, Singapore, 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 may add other emerging markets to its investment universe in the
future.
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 manager 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. These techniques help determine in which stocks and countries the
Fund will invest. The Fund allocates its assets among emerging countries with
stable or improving macroeconomic environments and invests in companies within
those countries that the portfolio manager believes to have high capital
appreciation potential without excessive risks. The Manager may sell stocks
"short" (sell a security it does not own) in an effort to partially hedge the
Fund's other investments or to garner returns from insights made from its
research.
Risks [clipart]
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden 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 the relative immaturity, and
occasional instability, of their political and economic systems. In the past
many emerging markets restricted the flow of money into or out of their stock
markets, and some continue to 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 predominantly based on
only a few industries or on revenue from particular commodities, international
aid or other assistance. In addition, most of the securities in which the Fund
invests are denominated in foreign currencies, whose values may decline against
the U.S. dollar. Because the Fund will invest a larger percentage of its assets
in fewer countries (three to 10), the value of an investment in the Fund may be
more volatile and subject to higher risks than investments in other general
emerging markets mutual funds or foreign stock mutual funds. Also, short sales
are speculative investments and will cause the Fund to lose money if the value
of a security does not go down as the Manager expects.
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<PAGE>
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.
[bar chart]
1998
- -------------------
-20.76%
Average Annual Returns through 12/31/98
Emerging Markets Focus Portfolio -20.76% -20.76%
MSCI Emerging Markets Free Index+ -25.34% -25.34%
- ------------------------------------------------------------------------------
1 Year Inception
(12/31/97)
During the one-year period described above in the bar chart, the Fund's best
quarter was Q1 1998 (+14.40%) and its worst quarter was Q2 1998 (-18.29%). The
Fund's 1999 return through 6/30/99 was 69.46%.
+ This is an unmanaged, capitalization-weighted index that includes 26 emerging
markets countries, representing securities available to U.S. investors.
Fees & Expenses [clipart]
<TABLE>
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 sales loads on this
Fund.
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 1.00%+
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)++
Management Fee# 1.10%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 7.72%
-----------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 8.82%
Fee Reduction and/or Expense Reimbursement 7.22%
-----------------------------------------------------------------------------------------
Net Expenses 1.60%
<FN>
+ The 1.00% redemption fee applies only to those shares redeemed within one
year from the date of purchase and is paid to the Fund. Shareholders who have
invested at least $500,000 in the Fund (less any prior redemptions) are not
subject to the redemption fee. $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 1.60%. This contract has a rolling
10-year term.
# The management fee of 1.10% will be reduced to 1.00% for those assets over
$250 million and to 0.90% for those assets over $500 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
- -----------------------------------------------------
$162 $504 $869 $1,893
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<PAGE>
PORTFOLIO MANAGEMENT [clipart] [sidebar]
Josephine Jimenez For financial highlights
For more details see page 14. see page 20.
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<PAGE>
PORTFOLIO MANAGEMENT
Montgomery Asset Management
The investment manager of the Funds 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 June 30, 1999, Montgomery Asset
Management managed approximately $4.5 billion on behalf of some 250,000
investors in The Montgomery Funds. Montgomery may rely on the expertise,
research and resources of Commerzbank AG and its worldwide affiliates in
managing the Funds.
International Growth Portfolio
[photo] JOHN BOICH, CFA, senior portfolio manager of the Montgomery
International Growth Portfolio (since inception, 1998). He joined Montgomery in
1993 as a senior portfolio manager and managing director. From 1990 to 1993, Mr.
Boich was a vice president and portfolio manager at The Boston Company
Institutional Investors, Inc. From 1989 to 1990, he was co-founder and
co-manager of the Common Goal World Fund, a global equity partnership.
[photo] OSCAR CASTRO, CFA, senior portfolio manager of the Montgomery
International Growth Portfolio (since inception, 1998). He joined Montgomery in
1993 as a senior portfolio manager and managing director. From 1991 to 1993, Mr.
Castro was a vice president and portfolio manager at G.T. Capital Management,
Inc. From 1989 to 1990, he was co-founder and co-manager of the Common Goal
World Fund, a global equity partnership.
Emerging Markets Focus Portfolio
[photo] JOSEPHINE JIMENEZ, CFA, senior portfolio manager of the Montgomery
Emerging Markets Focus Portfolio (since inception, 1997). 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.
Management Fees
The table shows the management fee rate paid to Montgomery Asset Management over
the past fiscal year.
Montgomery Institutional Series: (annual rate)
- ------------------------------------------------------------------
International Growth Portfolio 0.75%
Emerging Markets Focus Portfolio 1.12%*
* On May 26, 1999, the contractual rate for the Emerging Markets Focus Portfolio
was reduced to 1.10%.
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS
Emerging Markets Focus Portfolio
The Manager may sell stocks "short" that it believes will go down. A short
position is when the Fund sells a security that it has borrowed. The Fund will
realize a profit or incur a loss from a short position depending on whether the
value of the underlying stock increases or decreases between the time it is sold
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<PAGE>
and when the Fund replaces the borrowed security. As a result, an investment in
this Fund may be more volatile than investments in other mutual funds. This Fund
is not appropriate for conservative investors.
There can be no assurance that the Fund will be able to close out the short
position at any particular time or at an acceptable price. Although the Fund's
gain is limited to the amount at which it sold a security short, its potential
loss is not limited. A lender may request that the borrowed securities be
returned on short notice, and if that occurs at a time when other short sellers
of the subject security are receiving similar requests, a "short squeeze" can
occur. This means that the Fund might be compelled, at the most disadvantageous
time, to replace borrowed securities previously sold short, with purchases on
the open market at prices significantly greater than those the securities were
sold short at. Short selling also may produce higher than normal portfolio
turnover and result in increased transaction costs to the Fund.
The Fund also may make short sales "against-the-box," in which it sells short
securities it owns. The Fund will incur transaction costs, including interest
expenses, in connection with opening, maintaining and closing short sales
against-the-box, which result in a "constructive sale" requiring the Fund to
recognize any taxable gain from the transaction.
Until the Fund replaces a borrowed security it will designate sufficient U.S.
government securities, and other liquid debt and equity securities to cover any
difference between the value of the security sold short and any collateral
deposited with a broker or other custodian. In addition, the value of the
designated securities must be at least equal to the original value of the
securities sold short. Depending on arrangements made with the broker or
custodian, the Fund may not receive any payments (including interest) on
collateral deposited with the broker or custodian. The Fund will not make a
short sale if, immediately before the transaction, the market value of all
securities sold exceeds 100% of the value of the Fund's net assets.
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
These and other factors could cause market disruptions and affect the value of
your shares in a Fund that 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.
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<PAGE>
Defensive Investments
At the discretion of its portfolio manager(s), each Fund may invest up to 100%
of its assets in cash and cash equivalents for temporary defensive purposes.
Such a stance may help a Fund minimize or avoid losses during adverse market,
economic or political conditions. During such a period, a Fund may not achieve
its investment objective. For example, should the market advance during this
period, a Fund may not participate as much as it would have if it had been more
fully invested.
Portfolio Turnover
The Funds' portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long a Fund has owned that security.
Buying and selling securities generally involves some expense to a Fund, such as
commission paid to brokers and other transaction costs. By selling a security, a
Fund may realize taxable capital gains that it will subsequently distribute to
shareholders. Generally speaking, the higher a 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 a
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," beginning on page __, for each
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. Many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. This failure could adversely affect a Fund's operations, including
pricing, securities trading and the servicing of shareholder accounts.
Although the rollover into 2000 has occurred, noncompliant computer systems
could have a material adverse effect on a Fund's business, operations or
financial condition. Additionally, a 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.
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<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
The financial highlights table is intended to help you understand the Fund's
performance for the periods shown. The following financial information for the
period ended June 30, 1999 was audited by PricewaterhouseCoopers LLP. Their
August 18, 1999 report appears in the 1999 Annual Report of the Fund. The
information for the period ended March 31, 1998 was also audited by
PricewaterhouseCoopers LLP, whose report is also included here. The total return
in the table represents the rate that an investor would have earned (or lost) on
an investment in the Fund (assuming reinvestment of all dividends and
distributions).
[table]
<CAPTION>
- --------------------------------------------------------------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA: For the Fiscal Year Ended
June 30, 1999(a)
<S> <C>
Net Asset Value--Beginning of Period $ 10.00
Net investment income/(loss) 0.08
Net realized and unrealized gain/(loss) on
investments 0.10
Net increase/(decrease) in net assets
resulting from investment operations 0.18
Distributions to shareholders:
Dividends from net investment income --
Distributions in excess of net investment income --
Distributions from net realized capital gains --
Distributions in excess of net realized capital gains --
Distributions from capital
Total Distributions:
Net Asset Value--End of Period $ 10.18
Total Return* 1.80%
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $148,831
Ratio of net investment income/(loss) to
average net assets 1.50%
Net investment income/(loss) before reduction of
fees by Manager $0.07
Portfolio turnover rate 155%
Expense ratio before reduction of fees by Manager,
including interest and tax expenses 1.09%
Expense ratio including interest and tax expenses 0.90%
Expense ratio excluding interest and tax expenses 0.90%
- --------------------------------------------------------------------------------------------------
<FN>
(a) The Montgomery Institutional Series: International Growth Portfolio commenced operations
on June 30, 1998.
* Total return represents aggregate total return for the period indicated.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
EMERGING MARKETS FOCUS PORTFOLIO(a)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Fiscal Year Ended
SELECTED PER-SHARE DATA FOR
THE PERIOD ENDED: June 30, 1999(b) March 31, 1999++ March 31, 1998++
<S> <C> <C> <C>
Net Asset Value--Beginning of Period $ 9.63 $11.43 $10.00
Net investment income/(loss) 0.04 0.12 0.27
Net realized and unrealized gain/(loss) on
investments 3.48 (1.76) 1.16
Net increase/(decrease) in net assets
resulting from investment operations 3.52 (1.64) 1.43
Distributions to shareholders:
Dividends from net investment income -- (0.16) --
Distributions in excess of net investment income -- -- --
Distributions from net realized capital gains -- -- --
Distributions in excess of net realized -- -- --
capital gains -- (0.16) --
Distributions from capital
Total Distributions:
Net Asset Value--End of Period $13.15 $ 9.63 $11.43
Total Return* 36.55% (14.04)% 14.40%
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $2,551 $1,655 $1,789
Ratio of net investment income/(loss) to
average net assets 0.05%+ 1.24% 10.46%+
Net investment income/(loss), before reduction of
fees by Manager $(0.10) $(0.52) $(0.07)
Portfolio turnover rate 200% 437% 71%
Expense ratio before reduction of fees by Manager,
including interest and tax expenses 8.82%+ 8.68% 15.34%+
Expense ratio including interest and tax expenses 1.73%+ 2.10% 2.10%+
Expense ratio excluding interest and tax expenses 1.73%+ 2.10% 2.10%+
- --------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Montgomery Institutional Series: Emerging Markets Focus Portfolio commenced operations on December 31,
1997.
(b) For the period April 1, 1999 to June 30, 1999.
* Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ 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.
</FN>
</TABLE>
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<PAGE>
WHAT YOU NEED TO KNOW ABOUT YOUR MONTGOMERY ACCOUNT
<TABLE>
You pay no sales charge to invest in the Funds. 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 investments for the Funds are as
follows:
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Minimum Subsequent
Montgomery Institutional Series: Minimum Initial Investment Investments
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
International Growth Portfolio $2,000,000 $10,000
- --------------------------------------------------------------------------------------------------------------------
Emerging Markets Focus Portfolio $ 500,000 $10,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Funds and the Distributor each reserve the right to reject any
purchase.
How Fund Shares Are Priced
How and when we calculate the Funds' price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate a Fund's NAV by
dividing the total value of its assets by the number of outstanding shares. We
base the value of the Funds' 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 security's closing price in its
relevant market.
We calculate the NAV of each 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 Funds' NAVs are in the Statement of Additional Information.
[ ]Foreign Funds. Several of our Funds invest 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, a Fund's foreign securities--and its price--may fluctuate during
periods when you can't buy, sell or exchange shares in the Fund.
-15-
<PAGE>
Foreign Investors
Foreign citizens and resident aliens of the United States living abroad may not
invest in the Funds.
INVESTING IN THE FUNDS THROUGH FINANCIAL INTERMEDIARIES
The Funds are available to institutional investors and investment advisors
through select programs.
[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 Funds may receive fees from the Funds or
Montgomery for providing these services.
INVESTING IN THE FUNDS DIRECTLY WITH MONTGOMERY
Opening a New Account
By Mail Send your completed application, with a check payable to The Montgomery
Institutional Series: [Fund Name], 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, the amount you want
to invest and the Fund(s) in which 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: Fund name]
Please note that your bank may charge a wire transfer fee.
-16-
<PAGE>
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 a new 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 Funds 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
Funds' investment objectives and policies, and the tendered securities are
otherwise acceptable to the Funds' portfolio managers. For purposes of in-kind
purchases, a security will be considered "readily marketable" if it is in the
process of undergoing customary settlement and/or registration in its primary
market. For purposes of sales of shares of the Funds of such securities, the
tendered securities shall be valued at the identical time and in the identical
manner that the portfolio securities of the Funds are valued for the purpose of
calculating the net asset value of the Funds' shares.
Buying Additional Shares
By Mail Complete the form at the bottom of any Montgomery statement and mail it
with your check payable to The Montgomery Institutional Series: [Fund Name]. Or
mail the check with a signed letter noting the name of the Fund in which you
want to invest, as well as 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 earlier in this section
[ ] 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 provided earlier in this section.
-17-
<PAGE>
Exchanging Shares
You may exchange shares in one 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 in Funds that are qualified for sale in your
state and that are offered in this prospectus. You may not exchange shares in
one Fund for shares of another that is currently closed to new shareholders
unless you are 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
Fund from which you would like to sell shares 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,
-18-
<PAGE>
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.
[ ] Redemption Fees The redemption fees charged by the International Growth
Portfolio and Emerging Markets Focus Portfolio are intended to compensate those
Funds 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. Each Fund will retain the fee charged.
Those Funds impose 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.
-19-
<PAGE>
In-Kind Redemptions
When in the judgment of the Manager it is consistent with the best interests of
the Funds, an investor may redeem shares of a 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 Funds 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.
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 an authorization number or other personal information not likely
to be known by others
[ ] 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 your local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide
-20-
<PAGE>
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 Funds pay to them may be subject to up to 30% withholding instead
of backup withholding.
After You Invest
Taxes
IRS rules require that the Funds distribute all of their net investment income
and capital gains, if any, to shareholders. Capital gains may be taxable at
different rates, depending on the length of time a Fund holds its assets. We
will inform you about the source of any dividends and capital gains upon
payment. After the close of each calendar year, we will advise you of their tax
status. The Funds' distributions, whether received in cash or reinvested, may be
taxable. Any redemption of a Fund's shares or any exchange of a 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 Funds 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 Funds.
Dividends and Distributions
As a shareholder in the Funds, 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 each 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 Funds compensates selected solicitors for bringing new
accounts or investments to the Funds. No Fund will 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 Funds.
-21-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
INCOME Dividends CAPITAL GAINS
<S> <C> <C>
International Growth Portfolio Declared and paid in the last Declared and paid in the last
quarter of each calendar year* quarter of each calendar year*
Emerging Markets Focus Declared and paid in the last Declared and paid in the last
Portfolio quarter of each calendar year* quarter of each calendar year*
- --------------------------------------------------------------------------------------------------------
<FN>
* Following their fiscal year end June 30, the Funds 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 a Fund, check if it is planning to make a
distribution in the near future. Here's why: If you buy shares of a 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.
-22-
<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. 9/99
-23-
<PAGE>
Rule 497(e)
File Nos. 33-69686 and 811-8064
- --------------------------------------------------------------------------------
THE MONTGOMERY FUNDS II
- --------------------------------------------------------------------------------
MONTGOMERY INSTITUTIONAL SERIES:
INTERNATIONAL GROWTH PORTFOLIO
EMERGING MARKETS FOCUS PORTFOLIO
AND
MONTGOMERY GLOBAL LONG-SHORT FUND
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
September 7, 1999
The Montgomery Funds II (the "Trust") is an open-end management
investment company organized as a Delaware business trust, having five series of
shares of beneficial interest. Each of the above-named funds is a separate
series of the Trust (each a "Fund" and collectively, the "Funds"). This
Statement of Additional Information contains information in addition to that set
forth in the combined Prospectuses for Montgomery Institutional Series:
International Growth Portfolio and Montgomery Institutional Series: Emerging
Markets Focus Portfolio, each dated September 7, 1999, and in the Prospectus for
Montgomery Global Long-Short Fund dated July 31, 1999, as those prospectuses may
be revised from time to time (in reference to the appropriate Fund or Funds, the
"Prospectuses"). The Prospectuses 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 appropriate
Prospectuses.
<PAGE>
TABLE OF CONTENTS
THE TRUST......................................................................3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS................................3
RISK FACTORS..................................................................18
INVESTMENT RESTRICTIONS.......................................................21
DISTRIBUTIONS AND TAX INFORMATION.............................................23
TRUSTEES AND OFFICERS.........................................................28
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................31
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................34
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................37
DETERMINATION OF NET ASSET VALUE..............................................38
PRINCIPAL UNDERWRITER.........................................................40
PERFORMANCE INFORMATION.......................................................41
GENERAL INFORMATION...........................................................44
FINANCIAL STATEMENTS..........................................................46
APPENDIX......................................................................47
B-2
<PAGE>
THE TRUST
The Montgomery Funds II (the "Trust") is an open-end management
investment company organized as a Delaware business trust on September 10, 1993.
The Trust is 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 five series. This Statement of
Additional Information pertains to Montgomery Institutional Series:
International Growth Portfolio (the "International Growth Portfolio"),
Montgomery Institutional Series: Emerging Markets Focus Portfolio (the "Emerging
Markets Focus Portfolio") and the Montgomery Global Long-Short Fund (the "Global
Long-Short Fund").
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The Funds are managed by Montgomery Asset Management, LLC (the
"Manager") and their shares are distributed by Funds Distributor, Inc. (the
"Distributor"). The investment objectives and policies of the Funds are
described in detail in the respective Prospectuses. The following discussion
supplements the discussion in the Prospectuses.
Each Fund is a diversified series of the Trust. The achievement of each
Fund's investment objective will depend on market conditions generally and on
the Manager's analytical and portfolio management skills.
Special Investment Strategies and Risks
Certain of the Funds have investment policies, strategies and risks in addition
to those discussed in the Prospectuses, as described below.
International Growth Portfolio. 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 may also invest in certain types of vehicles or
derivative securities that represent indirect investments in foreign markets or
securities in which it is impractical for the Fund to invest directly.
Investments in special situations may be illiquid, as determined by the Manager
based on criteria approved by the Board of Trustees (the "Board"). The Fund does
not invest more than 15% of its net assets in illiquid investments, including
special situations.
Emerging Markets Focus Portfolio. The Fund does not intend to diversify its
portfolio across a large number of emerging markets countries. Instead, the
Fund's investment objective is to concentrate its investments in a small number
of emerging markets countries (although it may invest in a large number of
companies in each selected country). Such a heavy country concentration may make
the Fund's net asset value extremely volatile and, if economic downturns or
other events occur that adversely affect one or more of the countries the Fund
invests in, such events' impact on the Fund will be more magnified than if the
Fund did not have such a narrow concentration.
The Fund may invest in special situations as described above. The Fund
does not invest more than 15% of its net assets in illiquid investments,
including special situations.
B-3
<PAGE>
Montgomery Global Long-Short Fund. The Fund uses sophisticated investment
approaches that may present substantially higher risks than most mutual funds.
It may invest a larger percentage of its assets in transactions using margin,
leverage, short sales and other forms of volatile financial derivatives such as
options and futures. As a result, the value of an investment in this Fund may be
more volatile than investments in other mutual funds. This Fund may not be an
appropriate investment for conservative investors.
The Fund's investment objective is to seek capital appreciation. Under
normal conditions, this Fund seeks to achieve its objective by investing at
least 65% of its total assets in long and short positions in equity securities
of publicly traded companies of any size worldwide. This Fund measures short
sale exposure by the current market value of the collateral used to secure the
short sale positions. Any income derived from dividends and interest will be
incidental to this Fund's investment objective. Investors should note that this
Fund uses an approach different from the traditional long-term investment
approach of most other mutual funds. The use of borrowing and short sales may
cause the Fund to have higher expenses (especially interest expenses and
dividend expenses) than those of other equity mutual funds. Like all mutual
funds, there can be no assurance that the Fund's investment objective will be
attained.
This Fund may employ margin leverage and engage in short sales of
securities it does not own. This Fund may also use options and financial indices
for hedging purposes and/or to establish or increase its long or short
positions. This Fund invests primarily in common stocks (including depositary
receipts) but also may invest in other types of equity and equity-derivative
securities. It may invest up to 35% of its total assets in debt securities,
including up to 5% in debt securities rated below investment grade.
This Fund may 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. This Fund deems securities that are
convertible to equity investments to be equity-derivative securities.
Portfolio Securities
Depositary Receipts. Each Fund may hold securities of foreign issuers
in the form of sponsored and unsponsored American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depository 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 a 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.
B-4
<PAGE>
Convertible Securities. Each Fund may invest in convertible securities.
A convertible security is a fixed-income security (a bond or preferred stock)
that may be converted at a stated price within a specified period of time into a
certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
Through their conversion feature, they provide an opportunity to participate in
capital appreciation resulting from a market price advance in the underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the common stock's
value rises and decrease as the common stock's value declines. For purposes of
allocating a Fund's investments, the Manager regards convertible securities as a
form of equity security.
Securities Warrants. Each Fund may invest up to 5% of its net assets in
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
Other Investment Companies. Each Fund may invest up to 10% of its total
assets 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 a Fund limit its
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 10% of the value of a Fund's total assets will be
invested in the aggregate in securities of investment companies as a group; and
(b) either (i) a Fund and affiliated persons of that Fund not own together more
than 3% of the total outstanding shares of any one investment company at the
time of purchase (and that all shares of the investment company held by that
Fund in excess of 1% of the company's total outstanding shares be deemed
illiquid), or (ii) a 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.
Because of restrictions on direct investment by U.S. entities in
certain countries, other investment companies may provide the most practical or
the only way for a 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. A Fund may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company" regardless of whether such "passive foreign investment company" makes
distribution to that Fund.
Each 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, a Fund bears its ratable share
of that investment company's expenses, including its advisory and administrative
fees.
Debt Securities. Each Fund may invest in traditional corporate,
government debt securities rated within the four highest grades by Standard and
Poor's Corporation ("S&P") (at least BBB), Moody's Investors Service, Inc.
("Moody's") (at least Baa) or Fitch Investors Service ("Fitch") (at least Baa),
or unrated debt securities deemed to be of comparable quality by the Manager
using guidelines approved by the Board. In selecting debt securities, the
Manager seeks out good credits and analyzes interest rate trends and specific
developments that may affect individual issuers.
B-5
<PAGE>
Debt securities may also consist of participation 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
a Fund's total assets.
As an operating policy, which may be changed by the Board, a Fund may
invest in debt securities rated lower than investment grade. Subject to this
limitation, a Fund may invest in any debt security, including securities in
default. After its purchase, 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.
In addition to traditional corporate, government and supranational debt
securities, a 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. A 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"). As a result, that 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 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 Funds' shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest. The securities issued by these agencies are
discussed in more detail later.
Structured Notes and Indexed Securities. A Fund may invest in
structured notes and indexed securities. Structured notes are debt securities,
the interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk.
Asset-Backed Securities. A Fund may invest up to 5% of its total assets
in asset-backed securities, which represent a direct or indirect participation
in, or are secured by and payable from, pools of assets, such as motor
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vehicle installment sales contracts, installment from loan contracts, leases of
various types of real or personal property, and receivables from revolving
credit (e.g., credit card) agreements. Payments or distributions of principal
and interest on asset-backed securities may be supported by credit enhancements,
such as various forms of cash collateral accounts or letters of credit. Like
mortgage-related securities, these securities are subject to the risk of
prepayment.
Mortgage-Related Securities: Government National Mortgage Association.
GNMA is a wholly-owned corporate instrumentality of the U.S. government within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of, and interest on, securities that are based on and
backed by a pool of specified mortgage loans. For these types of securities to
qualify for a GNMA guarantee, the underlying collateral must be mortgages
insured by the FHA under the Housing Act or Title V of the Housing Act of 1949,
as amended ("VA Loans"), or be pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the U.S. government is
pledged to the payment of all amounts that may be required to be paid under any
guarantee. In order to meet its obligations under a guarantee, GNMA is
authorized to borrow from the U.S. Treasury with no limitations as to amount.
GNMA pass-through securities may represent a proportionate interest in
one or more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans; (3)
fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured
by manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
Mortgage-Related Securities: Federal National Mortgage Association.
FNMA is a federally chartered and privately owned corporation established under
the Federal National Mortgage Association Charter Act. FNMA was originally
organized in 1938 as a U.S. government agency to add greater liquidity to the
mortgage market. FNMA was transformed into a private sector corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
Each FNMA pass-through security represents a proportionate interest in
one or more pools of FHA Loans, VA Loans or conventional mortgage loans (that
is, mortgage loans that are not insured or guaranteed by any U.S. government
agency). The loans contained in those pools consist of one or more of the
following: (1) fixed-rate level payment mortgage loans; (2) fixed-rate growing
equity mortgage loans; (3) fixed-rate graduated payment mortgage loans; (4)
variable-rate mortgage loans; (5) other adjustable-rate mortgage loans; and (6)
fixed-rate mortgage loans secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage Corporation.
FHLMC is a corporate instrumentality of the United States established by the
Emergency Home Finance Act of 1970, as amended. FHLMC was organized primarily
for the purpose of increasing the availability of mortgage credit to finance
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needed housing. The operations of FHLMC currently consist primarily of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in mortgage loans and the resale of the mortgage loans
in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of
fixed-rate or adjustable-rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one-to-four-family residential properties or multifamily projects. Each
mortgage loan must include whole loans, participation interests in whole loans,
and undivided interests in whole loans and participation in another FHLMC
security.
Risk Factors/Special Considerations Relating to Debt Securities
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 a 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 a 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 a 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 are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income 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 a Fund to sell the securities at fair
value either to meet redemption requests or to respond to changes in the economy
or financial markets and could adversely affect, and cause fluctuations in, the
per-share net asset value of that 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 a Fund to
achieve its investment objectives may, to the extent it invests in low-rated
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debt securities, be more dependent upon such credit analysis than would be the
case if that 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, a 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 Funds typically will not hedge against the foreign currency
exchange risks associated with their investments in foreign securities.
Consequently, these Funds will be very sensitive to any changes in exchange
rates for the currencies in which their foreign investments are denominated or
linked. These Funds 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 Funds might not enter into such transactions. Such inopportune
timing or utilization of hedging practices could result in substantial losses to
the Funds.
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.
A 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 a 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 that Fund's portfolio
securities denominated in such currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.
In connection with a Fund's forward contract transactions, an amount of
that Fund's assets equal to the amount of its commitments will be held aside or
segregated to be used to pay for the commitments. Accordingly, a 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 (the
"CFTC"), the CFTC may in the future regulate them, and the ability of a Fund to
utilize forward contracts may be restricted. Forward
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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 a Fund than if it
had not entered into such contracts. A 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 Funds typically
will not hedge against movements in interest rates, securities prices or
currency exchange rates. The Funds may still occasionally purchase and sell
various kinds of futures contracts and options on futures contracts. The Funds
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 Funds have 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
Funds will use futures contracts and related options for bona fide hedging
purposes within the meaning of CFTC regulations, provided that a 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 that 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 Funds 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 Funds or
which they expect to purchase. When used, the Funds' futures transactions
(except for the Global Long-Short Fund's transactions) generally will be entered
into only for traditional hedging purposes, i.e., futures contracts will be sold
to protect against a decline in the price of securities or currencies and will
be purchased to protect a Fund against an increase in the price of securities it
intends to purchase (or the currencies in which they are denominated). All
futures contracts entered into by the Funds are traded on U.S. exchanges or
boards of trade licensed and regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While the Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, the Funds seek 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 Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with
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respect to anticipated purchases. Similarly, a 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. A
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, a Fund may also enter into other types
of financial futures contracts if, in the opinion of the Manager, there is a
sufficient degree of correlation between price trends for that Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in a Fund's portfolio may be more or less volatile than prices of
such futures contracts, the Manager will attempt to estimate the extent of this
difference in volatility based on historical patterns and to compensate for it
by having that Fund enter into a greater or lesser number of futures contracts
or by attempting to achieve only a partial hedge against price changes affecting
that Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities can be substantially
offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of a Fund's portfolio securities could
be offset substantially by a decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives a
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives a Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
A Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. A Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by a Fund is potentially
unlimited.
A Fund will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), for maintaining its qualification as a regulated investment
company for federal income tax purposes.
Options on Securities, Securities Indices and Currencies. Each Fund may
purchase put and call options on securities in which it has invested, on foreign
currencies represented in its portfolios and on any securities index based in
whole or in part on securities in which that Fund may invest. A Fund may also
enter into closing sales transactions in order to realize gains or minimize
losses on options they have purchased.
A Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign
exchanges. Although a Fund will generally purchase only those options for which
there appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular
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time. For some options, no secondary market on an exchange may exist. In such
event, it might not be possible to effect closing transactions in particular
options, with the result that a Fund would have to exercise its options in order
to realize any profit and would incur transaction costs upon the purchase or
sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of the 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 Funds do not (with the exception of the Global Long-Short
Fund) currently intend to do so, they may, in the future, write (i.e., sell)
covered put and call options on securities, securities indices, and currencies
in which they may invest. A covered call option involves a Fund's giving another
party, in return for a premium, the right to buy specified securities owned by
that Fund at a specified future date and price set at the time of the contract.
A covered call option serves as a partial hedge against a price decline of the
underlying security. However, by writing a covered call option, a Fund gives up
the opportunity, while the option is in effect, to realize a gain from any price
increase (above the option exercise price) in the underlying security. In
addition, a Fund's ability to sell the underlying security is limited while the
option is in effect unless that Fund effects a closing purchase transaction.
Each Fund may also write covered put options that give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. A Fund will receive a premium for writing a put option but will
be obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, a Fund
will cause its custodian to segregate cash, cash equivalents, U.S. government
securities or other liquid equity or debt securities whose value is at least the
value of the exercise price of the put options. A Fund will not write put
options if the aggregate value of the obligations underlying the put options
exceeds 25% of that Fund's total assets.
The Global Long-Short Fund may write options that are not covered by
portfolio securities. This is regarded as a speculative investment technique
that could expose the Fund to substantial losses. The Global Long-Short Fund
will designate liquid securities in the amount of its potential obligation under
uncovered options, and increase or decrease the amount of designated assets
daily based on the amount of the then-current obligation under the option. This
designation of liquid assets will not eliminate the risk of loss from writing
the option but it will ensure that the Global Long-Short Fund can satisfy its
obligations under the option.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and result in the
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institution by an exchange of special procedures that may interfere with the
timely execution of the Funds' orders.
Equity-Linked Derivatives--SPDRs, WEBS, DIAMONDS and OPALS. Each Fund
may invest in S&P's 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 designated 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 holders 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, an economic downturn in a single country could significantly and
adversely affect the price of the WEBS for that country.
Leaps and Bounds. Subject to the limitation that no more than 25% of
its total assets be invested in options, each Fund may invest in long-term,
exchange-traded equity options called Long-term Equity Anticipation Securities
("LEAPS") and Buy-Write Options Unitary Derivatives ("BOUNDs"). LEAPS provide a
holder the opportunity to participate in the underlying securities' appreciation
in excess of a fixed dollar amount, and BOUNDs provide a holder the opportunity
to retain dividends on the underlying securities while potentially participating
in the underlying securities' capital appreciation up to a fixed dollar amount.
Privatizations. A Fund may believe that foreign governmental programs
of selling interests in government-owned or -controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation. Accordingly, 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.
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Other Investment Practices
Repurchase Agreements. Each Fund may enter into repurchase agreements.
A 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 that Fund.
Alternatively, the purchase and repurchase prices may be the same, with interest
at a stated rate due to a Fund together with the repurchase price on the date of
repurchase. In either case, the income to a 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 Funds enter into repurchase
agreements to evaluate potential risk. All repurchase agreements will be made
pursuant to procedures adopted and regularly reviewed by the Board.
The Funds generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Funds regard repurchase agreements with
maturities in excess of seven days as illiquid. A 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 a Fund to the seller of the security
subject to the repurchase agreement. It is not clear whether a court would
consider the security acquired by a Fund subject to a repurchase agreement as
being owned by that Fund or as being collateral for a loan by that Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and a Fund has not perfected a security interest in the
security, that Fund may be required to return the security to the seller's
estate and be treated as an unsecured creditor. As such, a Fund would be at risk
of losing some or all of the principal and income involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a Fund
also runs the risk that the seller may fail to repurchase the security. However,
each 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 each Fund makes payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), a 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 equals or exceeds the repurchase price (including interest)
at all times.
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The Funds may participate in one or more joint accounts with each other
and other series of the Trust that 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 have a duration
of more than seven days.
Reverse Repurchase Agreements. A Fund may enter into reverse repurchase
agreements. A Fund typically will invest the proceeds of a reverse repurchase
agreement in money market instruments or repurchase agreements maturing not
later than the expiration of the reverse repurchase agreement. This use of
proceeds involves leverage and a Fund will enter into a reverse repurchase
agreement for leverage purposes only when the Manager believes that the interest
income to be earned from the investment of the proceeds would be greater than
the interest expense of the transaction. A Fund also may use the proceeds of
reverse repurchase agreements to provide liquidity to meet redemption requests
when sale of the Fund's securities is disadvantageous.
A Fund causes its custodian to segregate liquid assets, such as cash,
U.S. government securities or other liquid equity or debt securities equal in
value to its obligations (including accrued interest) with respect to reverse
repurchase agreements. Such assets are marked to market daily to ensure that
full collateralization is maintained.
Lending Portfolio Securities. Each 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 may not exceed 30% of the value of the
Fund's total assets. These loans would be required to be secured continuously by
collateral, including cash, cash equivalents, irrevocable letters of credit,
U.S. government securities or other high-grade liquid debt securities,
maintained on a current basis (i.e., marked to market daily) at an amount at
least equal to 100% of the market value of the securities loaned plus accrued
interest. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the income earned on
the cash to the borrower or placing broker. Loans are subject to termination at
the option of a Fund or the borrower at any time. Upon such termination, that
Fund is entitled to obtain the return of these securities loaned within five
business days.
For the duration of the loan, a Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral, and will
continue to retain any voting rights with respect to 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 failed
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.
B-15
<PAGE>
Leverage. Each Fund may leverage its portfolio in an effort to increase
the total return. Although leverage creates an opportunity for increased income
and gain, it also creates special risk considerations. For example, leveraging
may magnify changes in the net asset value of a Fund's shares and in the yield
on its portfolio. Although the principal of such borrowings will be fixed, the
Fund's assets may change in value while the borrowing is outstanding. Leveraging
creates interest expenses that can exceed the income from the assets retained.
When-Issued and Forward Commitment Securities. A Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their 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 a Fund are held in cash
pending the settlement of a purchase of securities, that Fund will earn no
income on these assets.
The Funds 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 a Fund engages in this type of
transaction, it will segregate assets as discussed above.
Illiquid Securities. Each Fund may invest up to 15% of its 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, securities subject to restrictions on repatriation for more
than seven days, securities issued in connection with foreign debt conversion
programs that are restricted as to remittance of invested or profit, certain
restricted securities and securities that are otherwise not freely transferable.
Illiquid securities also include shares of an investment company held by a Fund
in excess of 1% of
B-16
<PAGE>
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 a Fund may
include those that are subject to restrictions on transferability contained in
the securities laws of other countries.
Securities that are freely marketable in the country where they are
principally traded, but that would not be freely 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, a Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time that Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, that 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 has delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board. The Manager takes into account a number of factors in reaching
liquidity decisions, including, but not limited to: (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers and (v) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Board.
B-17
<PAGE>
Defensive Investments and Portfolio Turnover. Notwithstanding its
investment objective, each Fund may adopt up to 100% cash or cash equivalent
position for temporary defensive purposes to protect against the erosion of its
capital base. Depending on the Manager's analysis of the various markets and
other considerations, all or part of the assets of the Fund may be held in cash
and cash equivalents (denominated in U.S. dollars or foreign currencies), such
as U.S. government securities or obligations issued or guaranteed by the
government of a foreign country or by an international organization designed or
supported by multiple foreign governmental entities to promote economic
reconstruction or development, high-quality commercial paper, time deposits,
savings accounts, certificates of deposit, bankers' acceptances, and repurchase
agreements with respect to all of the foregoing. Such investments also may be
made for temporary purposes pending investment in other securities and following
substantial new investment of the Fund.
Portfolio securities are sold whenever the Manager believes it
appropriate, regardless of how long the securities have been held. The Manager
therefore changes the Fund's investments whenever it believes doing so will
further the Fund's investment objectives or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expenses to the Fund, including brokerage commissions, dealer markups, and
other transaction costs and may result in the recognition of gains that may be
distributed to shareholders. Portfolio turnover in excess of 100% is considered
high and increases such costs. Even when portfolio turnover exceeds 100%,
however, the Fund does not regard portfolio turnover as a limiting factor.
RISK FACTORS
The following describes certain risks involved with investing in the
Funds in addition to those described in the Prospectuses or elsewhere in this
Statement of Additional Information.
Foreign Securities
The International Growth Portfolio, the Emerging Markets Focus
Portfolio and the Global Long-Short 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, these Funds 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 these Funds 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
B-18
<PAGE>
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 these Funds 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, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
Some countries in which these Funds 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 Funds. The Funds 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 International Growth Portfolio, the Emerging Markets Focus
Portfolio and the Global Long-Short Fund may invest in securities of companies
domiciled in, and in markets of, so-called "emerging market countries." These
Funds 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. These Funds deem securities that are convertible
to equity investments to be equity-derivative securities.
These Funds consider 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
B-19
<PAGE>
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
Funds that buy and sell foreign currencies endeavor to do so on
favorable terms. Some price spreads on currency exchange (to cover service
charges) may be incurred, particularly when these Funds change investments from
one country to another or when proceeds from the sale of shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent these Funds from repatriating
invested capital and dividends, withhold portions of interest and dividends at
the source or impose other taxes, with respect to these Funds' 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.
These Funds 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 the likelihood of the imposition by any foreign
government of exchange control restrictions that would affect the liquidity of
the Funds' assets maintained with custodians in foreign countries, as well as
the degree of risk from political acts of foreign governments to which such
assets may be exposed. The Manager also considers the degree of risk attendant
to holding portfolio securities in domestic and foreign securities depositories
(see "Investment Management and Other Services").
Equity Swaps
A Fund may invest in equity swaps. Equity swaps are derivatives that
allow the parties to exchange the dividend income or other components of return
on an equity investment (e.g., a group of equity securities or an index) for a
component of return on another non-equity or equity investment. The value of
equity swaps can be very volatile. To the extent the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, the Fund may suffer a loss. The value of some components of
an equity swap (like the dividends on a common stock) may also be sensitive to
changes in
B-20
<PAGE>
interest rates. Furthermore, during the period a swap is outstanding, the Fund
may suffer a loss if the counterparty defaults.
Short Sales
The Emerging Markets Focus Portfolio and the Global Long-Short Fund may
effect short sales of securities. Short sales are transactions in which a Fund
sells a security or other asset which it does not own, in anticipation of a
decline in the market value of the security or other asset. A Fund will realize
a profit or incur a loss depending upon whether the price of the security sold
short decreases or increases in value between the date of the short sale and the
date on which that Fund must replace the borrowed security. Short sales are
speculative investments and involve special risks, including greater reliance on
the Manager's accurately anticipating the future value of a security. Short
sales also may result in a Fund's recognition of gain for certain portfolio
securities.
Until the Fund replaces a borrowed security, it will instruct its
custodian to identify as unavailable for investment cash, U.S. government
securities, or other liquid debt or equity securities such that the amount so
identified plus any amount deposited with a broker or other custodian as
collateral will equal the current value of the security sold short and will not
be less than the value of the security at the time it was sold short. Depending
on arrangements made with the broker or custodian, the Fund may not receive any
payments (including interest) on collateral deposited with the broker or
custodian. The Emerging Markets Focus Portfolio will not make a short sale if,
after giving effect to the short sale, the market value of all securities sold
exceeds 25% of the value of the Fund's total assets.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of a Fund's outstanding voting
securities as defined in the Investment Company Act. Each Fund may not:
1. With respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. government
and its agencies and instrumentalities) if immediately after
and as a result of such investment more than 5% of the total
assets of that Fund would be invested in such issuer. There
are no limitations with respect to the remaining 25% of that
Fund's total assets, except to the extent other investment
restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and
policies, (b) through the lending of up to 30% of its
portfolio securities as described above or (c) to the extent
the entry into a repurchase agreement or a reverse dollar roll
transaction is deemed to be a loan.
3. (a) Borrow money, except for temporary or emergency
purposes from a bank and then not in excess of
one-third (10% for the International Growth
Portfolio) of its total assets (at the lower of cost
or fair market value). Any such borrowing will be
made only if immediately thereafter there is an asset
coverage of at least 300% of all borrowings, and no
additional investments may be made while any such
borrowings are in excess of 10% of total assets.
B-21
<PAGE>
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 purpose 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 a 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 or commodities or commodity contracts;
however, each 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. As an operating policy which may be changed
without shareholder approval, each Fund may invest in real
estate investment trusts only up to 10% of its total assets.
6. Invest in securities of other investment companies, except to
the extent permitted by the Investment Company Act and
discussed this Statement of Additional Information or as such
securities may be acquired as part of a merger, consolidation
or acquisition of assets.
7. Invest, in the aggregate, more than 15% of its net assets in
illiquid securities, including (under current SEC
interpretations) restricted securities (excluding liquid Rule
144A-eligible restricted securities), securities which are not
otherwise readily marketable, repurchase agreements that
mature in more than seven days, and over-the-counter options
(and securities underlying such options) purchased by that
Fund. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment
Company Act and changes in relevant SEC interpretations.)
8. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy which
may be changed without shareholder approval, consistent with
the Investment Company Act.)
9. Invest more than 25% of the market value of its total assets
in the securities of companies engaged in any one industry.
(This does not apply to investment in the securities of the
U.S. government, its agencies or instrumentalities.) For
purposes of this restriction, each Fund generally relies on
the U.S. Office of Management and Budget's Standard Industrial
Classifications.
10. Issue senior securities, as defined in the Investment Company
Act, except that this restriction shall not be deemed to
prohibit each Fund from (a) making any permitted borrowings,
mortgages or pledges, or (b) entering into permissible
repurchase and dollar roll transactions.
B-22
<PAGE>
11. Except as described in this Statement of Additional
Information, acquire, dispose of or write put, call, straddle
or spread options unless the aggregate premiums paid on, and
assets subject to, all such options which are held at any time
do not exceed 25% of the Fund's total assets (5% for the
International Growth Portfolio).
12. Except as 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.)
13. Invest in warrants, valued at the lower of cost or market, in
excess of 5% of the value of that Fund's net assets. Warrants
acquired by that Fund in units or attached to securities may
be deemed to be without value. (This is an operating policy
which may be changed without shareholder approval.)
14. Purchase more than 10% of the outstanding voting securities of
any one issuer. (This is an operating policy that may be
changed without shareholder approval.)
15. Invest in commodities, except for futures contracts or options
on futures contracts the investments are either (a) for bona
fide hedging purposes within the meaning of CFTC regulations
or (b) for other than bona fide hedging purposes if, as a
result thereof, no more than 5% of that Fund's total assets
(taken at market value at the time of entering into the
contract) would be committed to initial deposits and premiums
on open futures contracts and options on such contracts.
To the extent these restrictions reflect matters of operating policy
which may be changed without shareholder vote, these restrictions may be amended
upon approval by the Board and notice to shareholders. If there is a change in
the investment objective or policies of the Fund, a shareholder should consider
whether the Fund remains an appropriate investment in light of its then-current
financial positions and needs.
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 each 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 know 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 Funds. You would receive prior notice
before we took any such action. As of the date of this prospectus, we have not
proposed instituting alternative structures for any of the Funds.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds receive income in the form of dividends and
interest earned on their investments in securities. This income, less the
expenses incurred in their operations, is the Funds' net investment income,
substantially all of which will be declared as dividends to the Funds'
shareholders.
B-23
<PAGE>
The amount of income dividend payments by the Funds is dependent upon
the amount of net investment income received by the Funds from their portfolio
holdings, is not guaranteed and is subject to the discretion of the Funds'
Board. These Funds do not pay "interest" or guarantee any fixed rate of return
on an investment in their shares.
The Funds also may derive capital gains or losses in connection with
sales or other dispositions of their portfolio securities. Any net gain a Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year a Fund realizes a
net gain on transactions involving investments held for 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 that Fund's shares
may have been held by the shareholders.
The maximum long-term 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 a Fund reduces that
Fund's net asset value per share on the date paid by the amount of the dividend
or distribution per share. Accordingly, a dividend or distribution paid shortly
after a purchase of shares by a shareholder would represent, in substance, a
partial return of capital (to the extent it is paid on the shares so purchased),
even though it would be subject to income taxes.
Dividends and other distributions will be reinvested in additional
shares of the applicable Fund unless the shareholder has otherwise indicated.
Investors have the right to change their elections with respect to the
reinvestment of dividends and distributions by notifying the transfer agent in
writing, but any such change will be effective only as to dividends and other
distributions for which the record date is seven or more business days after the
transfer agent has received the written request.
Tax Information. Each 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 for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. Each Fund that has filed a tax
return has so qualified and elected in prior tax years. Each Fund's policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Internal Revenue Code, so that the
Fund will not be subject to any federal income tax or excise taxes based on net
income. However, the Board may elect to pay such excise taxes if it determines
that payment is, under the circumstances, in the best interests of a Fund.
In order to qualify as a regulated investment company, 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
B-24
<PAGE>
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 Internal Revenue 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 Internal Revenue Code. If a Fund is unable to meet certain
requirements of the Internal Revenue Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains
by a Fund will be taxable to shareholders whether made in cash or reinvested 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 a 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 Funds or any securities dealer effecting a redemption of the Funds'
shares by a shareholder will be required to file information reports with the
Internal Revenue Service (the "IRS") with respect to distributions and payments
made to the shareholder. In addition, the Funds 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 made
certain required certifications on the Account Application Form or with respect
to which a Fund or the securities dealer has been notified by the IRS that the
number furnished is incorrect or that the account is otherwise subject to
withholding.
The Funds intend 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, each Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
A Fund may receive dividend distributions from U.S. corporations. To
the extent that a Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Internal Revenue 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 a Fund at the end of
its fiscal year is invested in stock or other securities of foreign
corporations, that Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by that Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of any foreign income taxes paid by that Fund, and (ii) entitled
either to deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such
B-25
<PAGE>
taxes against their U.S. income tax, subject to certain limitations under the
Internal Revenue Code, including certain holding period requirements. In this
case, shareholders will be informed in writing by that Fund at the end of each
calendar year regarding the availability of any credits on and the amount of
foreign source income (including or excluding foreign income taxes paid by that
Fund) to be included in their income tax returns. If 50% or less in value of
that Fund's total assets at the end of its fiscal year are invested in stock or
other securities of foreign corporations, that Fund will not be entitled under
the Internal Revenue Code to pass through to its shareholders their pro rata
share of the foreign income taxes paid by that Fund. In this case, these taxes
will be taken as a deduction by that Fund.
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. A 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 Internal Revenue Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that these Funds
derive from PFIC stock may be subject to a non-deductible federal income tax at
the Fund level. In some cases, a 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. A Fund will endeavor to limit its
exposure to the PFIC tax by investing in PFICs only where the election to be
taxed currently will be made. Because it is not always possible to identify a
foreign issuer as a PFIC in advance of making the investment, a Fund may incur
the PFIC tax in some instances.
The Trust and the Funds intend to comply with the requirements of
Section 817(h) of the Internal Revenue Code and related regulations, including
certain diversification requirements that are in 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 a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts, and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Internal Revenue Code.
For accounting purposes, when a Fund purchases an option, the premium
paid by that Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by a Fund upon the
expiration or sale of such options held by that Fund generally will be capital
gain or loss.
Any security, option or other position entered into or held by a Fund
that substantially diminishes that Fund's risk of loss from any other position
held by that Fund may constitute a "straddle" for federal income tax purposes.
In general, straddles are subject to certain rules that may affect the amount,
character, and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term
B-26
<PAGE>
capital losses, be treated as long-term capital losses. Different elections are
available to a Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Internal Revenue Code ("Section 1256 Contracts")
and that are held by a Fund at the end of its taxable year generally will be
required to be "marked to market" for federal income tax purposes, that is,
deemed to have been sold at market value. Sixty percent of any net gain or loss
recognized on these deemed sales and 60% of any net gain or loss realized from
any actual sales of Section 1256 Contracts will be treated as long-term capital
gain or loss, and the balance will be treated as short-term capital gain or
loss.
Section 988 of the Internal Revenue 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 a 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 Internal
Revenue Code and for which no election is made) is treated as ordinary income or
loss. Some part of a 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
Internal Revenue Code, rather than as capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. All or a portion of a loss realized upon the redemption of
shares of a Fund may be disallowed to the extent shares of that Fund are
purchased (including shares acquired by means of reinvested dividends) within 30
days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectuses are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Funds. 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 Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to the ownership of an
investment in the Funds.
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the overall management of
the Funds, including general supervision and review of their investment
activities. The officers (the Trust as well as two affiliated Trusts, The
Montgomery Funds and The Montgomery Funds III, have the same officers), who
administer the Funds' daily operations, are appointed by the Board. 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:
B-27
<PAGE>
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. (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).
Margaret W. Chambers, Secretary (born 1959)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of Funds Distributor Inc. (since April 1998).
From August 1996 to March 1998, Ms. Chambers was Vice President and Assistant
General Counsel for Loomis, Sayles & Company, L.P. From January 1986 to July
1996, she was an associate with the law firm of Ropes & Gray.
Christopher J. Kelley, Vice President and Assistant Secretary (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.
Gary S. MacDonald, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
B-28
<PAGE>
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.
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 P. Covino, Vice President (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 its 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.
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.
B-29
<PAGE>
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 Board
of Schools of the Sacred Heart, and is a member of the Archdiocese of San
Francisco Finance Council, where she chairs the Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (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 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.
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from the
Trust for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or Funds Distributor, Inc.
(the "Distributor") may receive remuneration indirectly because the Manager will
receive a management fee from the Funds and the Distributor, will receive
commissions for executing portfolio transactions for the Funds. The Trustees who
are not affiliated with the Manager or the Distributor receive an annual
retainer and fees and expenses for each regular Board meeting attended. The
aggregate compensation paid by each Trust to each of the Trustees during the
fiscal year ended June 30, 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:
- --------------------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-30
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30, 1999
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation Pension or Retirement Total Compensation From the Trust
from Benefits Accrued as Part of and Fund Complex
Name of Trustee The Montgomery Funds II Fund Expenses* (2 Additional Trusts)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- --------------------------------------------------------------------------------------------------------------------------------
John A. Farnsworth $15,000 -- $55,000
- --------------------------------------------------------------------------------------------------------------------------------
Andrew Cox $15,000 -- $55,000
- --------------------------------------------------------------------------------------------------------------------------------
Cecilia H. Herbert $15,000 -- $55,000
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* The Trust does not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectuses,
investment management services are provided to the Funds by Montgomery Asset
Management, LLC (the "Manager"), pursuant to an Investment Management Agreement
between the Manager and The Montgomery Funds II dated July 31, 1997, as amended
(the "Agreement").
The Agreement with respect to each Fund is in effect for two years
after the Fund's inclusion in the Trust's Agreement (on or around its beginning
of public operations) and then continues for each Fund 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 that 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 a 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, each Fund pays the Manager
a management fee (accrued daily but paid when requested by the Manager) based
upon the average daily net assets of the Fund at the following annual rates:
- --------------------------------------------------------------------------------
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
- --------------------------------------------------------------------------------
International Growth Portfolio First $500 million 0.75%
Over $500 million 0.65%
- --------------------------------------------------------------------------------
Emerging Markets Focus Portfolio First $250 million 1.10%
Next $250 million 1.00%
Over $500 million 0.90%
- --------------------------------------------------------------------------------
Global Long-Short Fund First $250 million 1.50%
Over $250 million 1.25%
- --------------------------------------------------------------------------------
As noted in the Prospectus, the Manager has agreed to reduce some or
all of its management fee if necessary to keep total operating expenses
(excluding interest, taxes, dividend expenses and Rule 12b-1 plan fees),
expressed on an annualized basis, at or below ninety one-hundredths of one
percent (0.90%) of the
B-31
<PAGE>
International Growth Portfolio's average net assets, one and six-tenths of one
percent (1.60%) of the Emerging Markets Focus Portfolio's average net assets,
and two and thirty-five one-hundredths of one percent (2.35%) of the Global
Long-Short Fund's average net assets. The Manager also may voluntarily reduce
additional amounts to increase the return to the Funds' shareholders. Any
reductions made by the Manager in its fees are subject to reimbursement by the
Funds within the following three years provided the Funds are able to effect
such reimbursement and remain in compliance with the foregoing expense
limitations. The Manager will generally seek reimbursement for the oldest
reductions and waivers before payment by the Funds 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,
expenses incurred in connection with any merger or reorganization or
extraordinary expenses such as litigation.
The Agreement was approved with respect to the Funds by the Board at
duly called meetings. In considering the Agreement, the Trustees specifically
considered and approved the provision which permits the Manager to seek
reimbursement of any reductions made to its management fee within the three-year
period. The Manager's ability to request reimbursement is subject to various
conditions. First, any reimbursement is subject to a Fund's ability to effect
such reimbursement and remain in compliance with applicable expense limitations
in place at that time. Second, the Manager must specifically request the
reimbursement from the Board. Third, the Board must approve such reimbursement
as appropriate and not inconsistent with the best interests of the Fund and the
shareholders at the time such reimbursement is requested. Because of these
substantial contingencies, the potential reimbursements will be accounted for as
contingent liabilities that are not recordable on the balance sheet of a Fund
until collection is probable; but the full amount of the potential liability
will appear footnote to each Fund's financial statements. At such time as it
appears probable that a Fund is able to effect such reimbursement, that the
Manager intends to seek such reimbursement and that the Board has or is likely
to approve the payment of such reimbursement, the amount of the reimbursement
will be accrued as an expense of that Fund for that current period.
<TABLE>
As compensation for its investment management services, each of the
following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
FOR THE PERIOD ENDED
June 30, March 31, March 31,
FUND 1999 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Growth Portfolio* $ 591,014 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
Emerging Markets Focus Portfolio* $ 6,229+ $ 46,263 $ 4,244
- ------------------------------------------------------------------------------------------------------------
Global Long-Short Fund* $ 885,497+ $ 863,717 $ 31,398
- ------------------------------------------------------------------------------------------------------------
<FN>
* The International Growth Portfolio commenced operations on June 30, 1998;
the Emerging Markets Focus Portfolio and the Global Long-Short Fund
commenced operations on December 31, 1997.
B-32
<PAGE>
+ The Emerging Markets Focus Portfolio and the Global Long-Short Fund changed
their fiscal year end from March 31 to June 30.
</FN>
</TABLE>
Share Marketing Plan. The Trust has adopted a Share Marketing Plan (or
Rule 12b-1 Plan) (the "12b-1 Plan") with respect to Class B and Class C shares
of the Global Long-Short Fund (for this section, the "Fund"), pursuant to Rule
12b-1 under the Investment Company Act. The Distributor serves as the
distribution coordinator under the 12b-1 Plan and, as such, receives any fees
paid by the Fund pursuant to the 12b-1 Plan.
The Board, including a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan
(the "Independent Trustees"), at their regular quarterly meeting, adopted the
12b-1 Plan for the Class B and Class C shares of the Fund. Class R and
undesignated class shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, the Fund pays distribution fees to the
Distributor at an annual rate of 0.75% of the Fund's aggregate average daily net
assets attributable to its Class B and Class C shares to reimburse the
Distributor for its expenses in connection with the promotion and distribution
of those Classes. The 12b-1 Plan provides that the Distributor may use the
distribution fees received from the class of the Fund covered by the 12b-1 Plan
only to pay for the distribution expenses of that class. Distribution fees are
accrued daily and paid monthly, and are charged as expenses of the Class B and
Class C shares as accrued. Class B and Class C shares are not obligated under
the 12b-1 Plan to pay any distribution expense in excess of the distribution
fee. Thus, if the 12b-1 Plan were terminated or otherwise not continued, no
amounts (other than current amounts accrued but not yet paid) would be owed by
the class to the Distributor. The Distributor may retain (rather than pay to
third parties) fees paid under the 12b-1 Plan on the Class C shares during the
first year of purchase.
The 12b-1 Plan provides that it shall continue in effect from year to
year provided that a majority of the Board, including a majority of the
Independent Trustees, vote annually to continue the 12b-1 Plan. The 12b-1 Plan
(and any distribution agreement between the Fund and the Distributor and a
selling agent with respect to the Class B and Class C shares) may be terminated
without penalty upon at least 60-days' notice by the Distributor, or by the Fund
by vote of a majority of the Independent Trustees, or by vote of a majority of
the outstanding shares (as defined in the Investment Company Act) of the class
to which the 12b-1 Plan applies.
All distribution fees paid by the Fund under the 12b-1 Plan will be
paid in accordance with Rule 2830 of the NASD Regulation, Inc. (the "NASDR")
Rules of Conduct, as such Rule may change from time to time. Pursuant to the
12b-1 Plan, the Board will review at least quarterly a written report of the
distribution expenses incurred by the Distributor on behalf of the Class B and
Class C shares of the Fund. In addition, as long as the 12b-1 Plan remains in
effect, the selection and nomination of Trustees who are not interested persons
(as defined in the Investment Company Act) of the Trust shall be made by the
Trustees then in office who are not interested persons of the Trust.
Shareholder Services Plan. The Trust has adopted a Shareholder Services
Plan (the "Services Plan") with respect to the Global Long-Short Fund (for this
section, the "Fund"). The Distributor serves as the service provider under the
Services Plan and, as such, receives any fees paid by the Fund pursuant to the
Services Plan.
The Board, including a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Services Plan or in any agreement related to
B-33
<PAGE>
the Services Plan (the "Independent Trustees"), at their regular quarterly
meeting, adopted the Services Plan for the Class R, Class B and Class C shares
of the Fund.
Under the Services Plan, Class R, Class B and Class C shares of the
Fund will pay a continuing service fee to the Distributor or other service
providers, in an amount, computed and prorated on a daily basis, equal to 0.25%
per annum of the average daily net assets of that class of shares of the Fund.
Such amounts are compensation for providing certain services to clients owning
those classes of shares of the Fund, including personal services such as
processing purchase and redemption transactions, assisting in change of address
requests and similar administrative details, and providing other information and
assistance with respect to the Fund, including responding to shareholder
inquiries.
The Distributor. The Distributor may provide certain administrative
services to the Funds on behalf of the Manager. The Distributor will also
perform investment banking, investment advisory and brokerage services for
persons other than the Funds, including issuers of securities in which the Funds
may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Funds, and may restrict the
ability of the Distributor to provide services to the Funds.
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 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 Funds' 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 Funds 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 Funds, 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 Funds and which broker-dealers are eligible to execute
the Funds' portfolio transactions, subject to the instructions of, and review
by, that Fund and its Board. Purchases and sales of securities within the U.S.
other than on a securities exchange will generally be executed directly with a
"market-
B-34
<PAGE>
maker" unless, in the opinion of the Manager or a Fund, a better price and
execution can otherwise be obtained by using a broker for the transaction.
A Fund may contemplate purchasing most equity securities directly in
the securities markets located in emerging or developing countries or in the
over-the-counter markets. A Fund purchasing ADRs and EDRs may purchase those
listed on stock exchanges or traded in the over-the-counter markets in the U.S.
or Europe, as the case may be. ADRs, like other securities traded in the U.S.,
will be subject to negotiated commission rates. The foreign and domestic debt
securities and money market instruments in which a Fund may invest may be traded
in the over-the-counter markets.
Purchases of portfolio securities for the Funds also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Funds will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the firm's ability to execute trades in a specific
market required by a Funds, 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 Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by NASD Regulation, Inc.
While the Funds' 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
Funds or to the Manager, even if the specific services were not imputed just to
the Funds 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 Manager, acting on behalf of a Fund, may therefore pay a higher
commission or spread than would be the case if no weight were given to the
furnishing of these supplemental services, provided that the amount of such
commission or spread has been determined in good faith by that Fund and the
Manager to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer, which services either produce
a direct benefit to that Fund or assist the Manager in carrying out its
responsibilities to that Fund. These brokerage, research and statistical
services may include research/analysis reports, on-line quotation and news
services, industry publications, portfolio management software, access to market
information (e.g., last
B-35
<PAGE>
sales, bid-asked, and order) on various equity and options exchanges, and
investment workshops. The standard of reasonableness is to be measured in light
of the Manager's overall responsibilities to the Funds. 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 Funds.
Investment decisions for a 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 one or more Funds 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 Funds and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and a Fund seek to
acquire the same security at the same general time (especially if that 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, a Fund may not be
able to obtain as high a price for, or as large an execution of, an order to
sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold, and other factors deemed relevant
by the Manager. In many cases, a Fund's transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that Fund is concerned. In other cases, however, it is believed that
the ability of a Fund to participate in volume transactions may produce better
executions for that Fund.
Other than for the Global Long-Short Fund, the Manager's sell
discipline for investments 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.
For each Fund, 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.
B-36
<PAGE>
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.
<TABLE>
For the fiscal year ended June 30, 1999, the Funds' total securities
transactions generated commissions of $4,334,532 (including those of two Funds
that are currently not offering any shares), of which $8,445 was paid to Bank of
America Securities (formerly Nationsbanc Montgomery Securities). Throughout 1996
and through July 31, 1997, Bank of America Securities, also formerly Montgomery
Securities, was affiliated with the Funds through its ownership of Montgomery
Asset Management, L.P., the former manager of the Funds. Brokerage commissions
paid by each Fund are noted below:
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED
- ---------------------------------------------------------------------------------------------------------------------
June 30, March 31, March 31,
Fund 1999 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Growth Portfolio* $ 1,020,365 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------------------
Emerging Markets Focus Portfolio* $ 17,190+ $ 98,117 $ 8,616
- ---------------------------------------------------------------------------------------------------------------------
Global Long-Short Fund* $ 1,682,405+ $ 1,502,432 $ 187,522
- ---------------------------------------------------------------------------------------------------------------------
<FN>
* The International Growth Portfolio commenced operations on June 30,
1998; the Emerging Markets Focus Portfolio and the Global Long-Short
Fund commenced operations on December 31, 1997.
+ For the three-month period ended June 30, 1999. The Emerging Markets
Focus Portfolio and the Global Long-Short Fund changed their fiscal
year end from March 31 to June 30.
</FN>
</TABLE>
The Funds do not effect securities transactions through brokers in
accordance with any formula, nor do they effect securities transactions through
such brokers solely for selling shares of the Funds. However, brokers who
execute brokerage transactions as described above may from time to time effect
purchases of shares of the Funds for their customers.
Depending on the Manager's view of market conditions, a Fund may or may
not purchase securities with the expectation of holding them to maturity,
although its general policy is to hold securities to maturity. A Funds may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i) suspend the
continued offering of its Funds' shares, and (ii) reject purchase orders in
whole or in part when in the judgment of the Manager or the Distributor such
suspension or rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best interests of a
Fund, an investor may purchase shares of that Fund by tendering payment in kind
in the form of securities, provided that any such tendered securities are
readily marketable (e.g., the Fund will not acquire restricted securities),
their acquisition is consistent with that Fund's investment objective and
policies, and the tendered securities are otherwise
B-37
<PAGE>
acceptable to that Fund's Manager. Such securities are acquired by that Fund
only for the purpose of investment and not for resale. For the purposes of sales
of shares of that Fund for such securities, the tendered securities shall be
valued at the identical time and in the identical manner that the portfolio
securities of that Fund are valued for the purpose of calculating the net asset
value of that Fund's shares. A shareholder who purchases shares of a Fund by
tendering payment for the shares in the form of other securities may be required
to recognize gain or loss for income tax purposes on the difference, if any,
between the adjusted basis of the securities tendered to the Fund and the
purchase price of the Fund's shares acquired by the shareholder.
Payments to shareholders for shares of a Fund redeemed directly from
that Fund will be made as promptly as possible but no later than three days
after receipt by the Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectuses, except that a Fund
may suspend the right of redemption or postpone the date of payment during any
period when (i) 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; (ii) an emergency exists as determined by the SEC (upon application by
a Fund pursuant to Section 22(e) of the Investment Company Act) making disposal
of portfolio securities or valuation of net assets of a Fund not reasonably
practicable; or (iii) for such other period as the SEC may permit for the
protection of the Fund's shareholders.
The Funds intend to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Funds may
make payment partly in their portfolio securities with a current amortized cost
or market value, as appropriate, equal to the redemption price. Although the
Funds do not anticipate that they 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 Trusts have elected to be governed by
the provisions of Rule 18f-1 under the Investment Company Act, which require
that the Funds 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.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of a Fund's portfolio
securities at the time of redemption or repurchase.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of a Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of that Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As noted in the Prospectuses, the net asset value of shares of the
Funds generally will be determined at least once daily as of 4:00 P.M., 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
national bank holidays, in addition to New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas, include Columbus Day and Veterans Day. The Funds
may, but do not expect to, determine the net asset values of their shares on any
day when the NYSE is not open for trading if there is sufficient trading in
their portfolio securities on such days to affect materially per-share net asset
value.
B-38
<PAGE>
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 Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Board.
The Funds' securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to a Fund if
acquired within 60 days of maturity or, if already held by a 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 Funds are valued on the basis of valuations provided by
dealers in those instruments, 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 a Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Board.
B-39
<PAGE>
If any securities held by a Fund are restricted as to resale or do not
have readily available market quotations, the Manager and the Trust's Pricing
Committee determine their fair value, following procedures approved by the
Board. The Board periodically reviews such valuations and valuation procedures.
The fair value of such securities is generally determined as the amount which a
Fund could reasonably expect to realize from an orderly disposition of such
securities over a reasonable period of time. The valuation procedures applied in
any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any registration
expenses that might be borne by a Fund in connection with such disposition). In
addition, specific factors are also generally considered, such as the cost of
the investment, the market value of any unrestricted securities of the same
class (both at the time of purchase and at the time of valuation), the size of
the holding, the prices of any recent transactions or offers with respect to
such securities and any available analysts' reports regarding the issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of the Funds 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 02190, also acts as the Funds' principal underwriter in a
continuous public offering of the Funds' 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
Funds' shares. The Principal Underwriter has not been paid any underwriting
commissions for underwriting securities of the Funds during each of the Funds'
last three fiscal years.
B-40
<PAGE>
PERFORMANCE INFORMATION
As noted in the Prospectuses, the Funds may, from time to time and in
accordance with applicable law, quote various performance figures in
advertisements and other communications to illustrate their past performance.
Average Annual Total Return. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a 1-, 5- or
10-year period at the end of each
respective period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Aggregate Total Return. A Fund's "aggregate total return" figures
represent the cumulative change in the value of an investment in that Fund for
the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of
$1,000.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a l-, 5- or
10-year period at the end of a l-,
5- or 10-year period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Each Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of that 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 that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing
B-41
<PAGE>
that 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 each Fund for the periods
indicated was as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INCEPTION*
PERIOD ENDED THROUGH PERIOD ENDED
FUND JUNE 30, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
International Growth Portfolio 1.80% 1.10%
- ----------------------------------------------------------------------------------------------------------------------------------
Undesignated Class: 36.55% Undesignated Class: -20.76%
Emerging Markets Focus Portfolio Class B: -15.13%+ Class B: -18.66%
Class C: -14.98%+ Class C: -18.66%
- ----------------------------------------------------------------------------------------------------------------------------------
Global Long Short Fund Class B: 50.79% Class B: 51.69%
Class C: 50.68% Class C: 41.98%
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception (i.e., start of
operations) for the Funds were: International Growth Portfolio, June
30, 1998; Emerging Markets Focus Portfolio, December 31, 1997; and
Global Long-Short Fund, December 31, 1997.
+ The Emerging Markets Focus Portfolio's Class B and C shares ceased
operations on May 28, 1999. The average annual total return shown in
the table is as of March 31, 1999.
</FN>
</TABLE>
Comparisons. To help investors better evaluate how an investment in the
Funds might satisfy their investment objectives, advertisements and other
materials regarding the Funds may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. Publications, indices and
averages, including but not limited to the following may be used in a discussion
of a Fund's performance or the investment opportunities it may offer:
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) Lipper Mutual 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.
c) Other indices--including Consumer Price Index, Ibbotson, Micropal,
CNBC/Financial News Composite Index, MSCI EAFE Index (Morgan Stanley Capital
International, Europe, Australasia, Far East Index -- a capitalization-weighted
index that includes all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000, and IFC Emerging Markets
Database.
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 Funds.
B-42
<PAGE>
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 Funds' 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 Funds to calculate
their figures.
The Funds may also publish their 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 Funds will
fluctuate over time, and any presentation of a Funds' total return for any
period should not be considered as a representation of what an investment may
earn or what a investor's total return may be in any future period.
Reasons to Invest in the Funds. 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 developed its own tradition of intensive
research and has made intensive research one of the important characteristics of
the Montgomery Funds style.
The portfolio managers for the Funds work extensively on developing an
in-depth understanding of particular foreign markets and particular companies.
And they very often discover that they are the first analysts from the United
States to meet with representatives of foreign companies, especially those in
emerging markets nations.
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that may be used for the Funds.
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. The growth
equity team, for example, has developed its own strategy for analyzing the
growth potential of U.S. companies, often large, well-known companies.
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.
B-43
<PAGE>
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (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 Funds will be informed of the Funds' 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 organization of the
Trust have been assumed by a series of the Trust not part of this Statement of
Additional Information. Expenses incurred in connection with the establishment
and registration of shares of each of the other funds constituting Trusts as
separate series of the Trusts have been assumed by each respective Fund. The
expenses incurred in connection with the establishment and registration of
shares of the Funds as separate series of the Trusts have been assumed by the
respective Funds and are being amortized over a period of five years commencing
with their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after commencement of those Funds'
operations. Investors purchasing shares of a Fund bear such expenses only as
they are amortized daily against that Funds' investment income.
As noted above, The Chase Manhattan Bank (the "Custodian") acts as
custodian of the securities and other assets of the Funds. The Custodian does
not participate in decisions relating to the purchase and sale of securities by
the Funds.
DST Systems, Inc., P.O. Box 419073, Kansas City, Missouri 64141-6073,
serves as the Funds' Transfer and Dividend Disbursing Agent.
PricewaterhouseCoopers LLP is the independent accountant for the Funds.
The validity of shares offered hereby have been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Among the Board's powers enumerated in the Agreement and 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.
<TABLE>
As of July 30, 1999, to the knowledge of the Funds, the following
shareholders owned of record 5% or more of the outstanding shares of the
respective Funds indicated:
B-44
<PAGE>
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD NUMBER OF PERCENT
OWNER SHARES OWNED OF SHARES
- -------------------------------------------------------------------------------------------------------------
International Growth Portfolio
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 9,432,162 63.68%
101 Montgomery Street
San Francisco, CA 94104-4122
Springfield Massachusetts Contributory System 1,760,563 11.89%
36 Court Street
Springfield, MA 01103-1699
- -------------------------------------------------------------------------------------------------------------
Emerging Markets Focus Portfolio
- -------------------------------------------------------------------------------------------------------------
Merrill Lynch Pierce Fenner & Smith 64,521 38.62%
FBO Its Customers
4800 Deer Lake Drive, E. Floor 2
Jacksonville, FL 32246-6484
Frank M. Jordan 10,212 6.11%
2529 Fillmore Street
San Francisco, CA 94115-1318
Charles Schwab & Co., Inc. 45,741 27.38%
101 Montgomery Street
San Francisco, CA 94104-4122
Bryan L. & Anne Sudweeks 10,919 6.54%
817 Ashley Lane
Walnut Creek, CA 94596-3271
Kevin T. Hamilton 9,712 5.81%
2030 Hatch Road
Novato, California
- -------------------------------------------------------------------------------------------------------------
Global Long-Short Fund - Class R
- -------------------------------------------------------------------------------------------------------------
Merrill Lynch Pierce Fenner & Smith 872,585 7.46%
FBO Its Customers
4800 Deer Lake Drive, E. Floor 2
Jacksonville, FL 32246-6484
FTC & Co. 1,178,062 10.07%
Datalynk House Account
P.O. Box 173716
Denver, CO 80217-1716
Charles Schwab & Co., Inc. 4,285419 36.62%
101 Montgomery Street
San Francisco, CA 94104-4122
- -------------------------------------------------------------------------------------------------------------
Global Long-Short Fund - Class B
- -------------------------------------------------------------------------------------------------------------
Merrill Lynch Pierce Fenner & Smith 898,989 94.91%
FBO Its Customers
4800 Deer Lake Drive, E. Floor 2
Jacksonville, FL 32246-6484
B-45
<PAGE>
- -------------------------------------------------------------------------------------------------------------
Global Long-Short Fund - Class C
- -------------------------------------------------------------------------------------------------------------
Merrill Lynch Pierce Fenner & Smith 385,440 97.21%
FBO Its Customers
4800 Deer Lake Drive, E. Floor 2
Jacksonville, FL 32246-6484
</TABLE>
As of July 30, 1999, the Trustees and Officers of the Trust, as a
group, owned less than 1% of the outstanding shares of each Fund.
The Trust is registered with the SEC as a non-diversified management
investment company, although each Fund is a diversified series of the Trust.
Such a registration does not involve supervision of the management or policies
of the Funds. The Prospectuses and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the SEC. Copies of the Registration Statement may be obtained from the SEC upon
payment of the prescribed fee.
FINANCIAL STATEMENTS
The audited financial statements for the relevant periods ending June
30, 1999 for the International Growth Portfolio and the Emerging Markets Focus
Portfolio, as contained in the Annual Report to Shareholders of those Funds (the
"Report"), are incorporated herein by reference to the Report. The Emerging
Markets Focus Portfolio changed its fiscal year from March 31 to June 30.
Also incorporated by reference are the audited financial statements for
the fiscal years ended March 31, 1998 and March 31, 1999 for the Global
Long-Short Fund and the Emerging Markets Focus Fund, as contained in the Annual
Reports to Shareholders of those Funds for the fiscal years ended March 31, 1998
and March 31, 1999, respectively.
B-46
<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.
B-47
<PAGE>
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade)
category.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Issues assigned an A rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with
doubtful capacity for payment.
D Issues carrying this designation are in default, and payment
of interest and/or repayment of principal is in arrears.
Moody's Investors Service, Inc.
Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
generally are known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
B-48
<PAGE>
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
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
B-49
<PAGE>
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
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
B-50
<PAGE>
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 imminentdefault in payment of interest or
principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated 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.
B-51
<PAGE>
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Ratings
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company 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.
B-52
<PAGE>
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 payment.
B-53
