As filed with the Securities and Exchange Commission on January 20, 2000
File No: 333-91625
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
THE MONTGOMERY FUNDS II
(Exact Name of Registrant as Specified in Charter)
(800) 572-3863
(Registrant's Telephone Number, Including Area Code)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Offices)
Johanne Castro
Assistant Secretary
The Montgomery Funds
101 California Street
San Francisco, CA 94111
(Name and Address of Agent for Service)
Copy to:
Julie Allecta, Esq.
David Hearth, Esq.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective. The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until the registration statement shall become effective on such date
as the Commission, acting pursuant to said Section 8(a), may determine.
No filing fee is required under the Securities Act of 1933, as amended, because
an indefinite number of shares of beneficial interest, with par value $0.01 per
share, has previously been registered pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended.
<PAGE>
CROSS REFERENCE SHEET
Form N-14 Part A, Item Location in Prospectus/Proxy Statement
- ---------------------- --------------------------------------
1 Front Cover; Cross Reference
2 Table of Contents
3 Introduction; Description of the
Proposed Reorganization; Comparison
of the Funds; Risk Factors
4 Introduction, The Transaction, The
Proposal, Description of the
Proposed Reorganization
5,6 The Transaction, Comparison of the
Funds; Risk Factors; Further
Information About the Equity Income
Fund and the Balanced Fund
7 Shares and Voting; Vote Required
8 Not Applicable
9 Not Applicable
Location in Statement of Additional
Form N-14 Part B, Item Information
- ---------------------- ------------------------------------
10 Cover Page
11 Table of Contents
12 Incorporation of Documents by
Reference in Statement of Additional
Information
13 Not Applicable
14 Incorporation of Documents by
Reference in Statement of Additional
Information
Form N-14 Part C
- ----------------
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of Form N-14.
<PAGE>
THE FOLLOWING ITEMS ARE HEREBY INCORPORATED BY REFERENCE:
From Post-Effective Amendment No. 69 of The Montgomery Funds, filed October 29,
1999 (SEC File No. 811-6011):
Combined Prospectus for Montgomery Equity Income Fund, with other funds
of The Montgomery Funds and certain funds of The Montgomery Funds II,
dated October 31, 1999.
Combined Statement of Additional Information for Montgomery Equity
Income Fund, with other funds of The Montgomery Funds and certain funds
of The Montgomery Funds II, dated October 31, 1999.
From Post-Effective Amendment No. 49 of The Montgomery Funds II, filed October
29, 1999 (SEC File No. 811-8064):
Combined Prospectus for Montgomery Balanced Fund (formerly Montgomery
U.S. Asset Allocation Fund), with other funds of The Montgomery Funds
and another fund of The Montgomery Funds II, dated October 31, 1999.
Combined Statement of Additional Information for Montgomery Balanced
Fund (formerly Montgomery U.S. Asset Allocation Fund), with other funds
of The Montgomery Funds and another fund of The Montgomery Funds II,
dated October 31, 1999.
As previously sent to shareholders of the Montgomery Equity Income Fund and the
Montgomery Balanced Fund (formerly Montgomery U.S. Asset Allocation Fund) for
the fiscal year ended June 30, 1999, as contained in the Annual Report for The
Montgomery Funds dated as of and for the periods ended June 30, 1999.
<PAGE>
-----------------------------------------
PART A
COMBINED PROXY STATEMENT AND PROSPECTUS
FOR THE REORGANIZATION OF
MONTGOMERY EQUITY INCOME FUND
INTO
MONTGOMERY BALANCED FUND
-----------------------------------------
<PAGE>
[Letterhead of Montgomery Asset Management, LLC]
January 29, 2000
Dear Equity Income Fund Shareholder:
We are seeking your approval to reorganize the Equity Income
Fund, a series of The Montgomery Funds, into the Balanced Fund (formerly the
U.S. Asset Allocation Fund), a series of The Montgomery Funds II. As the manager
of both Funds, we recommend that you approve the reorganization because we
believe that by consolidating these Funds, you will enjoy greater
diversification in a larger mutual fund with better long-term viability through
an allocation of assets among stocks, bonds and money market securities, while
at the same time maintaining an investment objective of current income and
long-term capital appreciation.
The reorganization would not cause you to recognize any gains
or losses on your shares of the Equity Income Fund. We have agreed to pay all
expenses of the reorganization so that shareholders will not bear those costs.
The Board of Trustees of each of The Montgomery Funds and The
Montgomery Funds II has approved the transaction and urges your approval.
Please read the enclosed proxy materials and consider the
information provided. We encourage you to complete and mail your proxy card
promptly.
Sincerely,
MONTGOMERY ASSET MANAGEMENT, LLC
Mark B. Geist, President
<PAGE>
THE MONTGOMERY FUNDS
THE MONTGOMERY FUNDS II
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF
MONTGOMERY EQUITY INCOME FUND
TO BE HELD FEBRUARY 29, 2000
To the Shareholders of the Montgomery Equity Income Fund:
Your Fund will host a special meeting of shareholders at the
offices of The Montgomery Funds, 101 California Street, 35th Floor, San
Francisco, California 94111 on February 29, 2000, at 10:00 a.m., local time. At
the meeting, we will ask you to vote on:
1. A proposal to reorganize the Equity Income Fund into the Balanced
Fund (formerly the U.S. Asset Allocation Fund), a series of The
Montgomery Funds II; and
2. Any other business that properly comes before the meeting.
Only shareholders of record at the close of business on
December 31, 1999 (the Record Date), will be entitled to receive this notice and
to vote at the meeting.
By Order of the Board of Trustees
Johanne Castro
Assistant Secretary
Your vote is important regardless of how many
shares you owned on the record date.
-------------------
Please vote on the enclosed proxy form, date and sign it, and return it in the
pre-addressed envelope provided. No postage is necessary if mailed in the United
States. You also may vote by Internet at www.proxyvote.com (just follow the
simple instructions once you have logged in) and by telephone by calling (800)
690-6903. In order to avoid the additional expense and disruption of further
solicitation, we request your cooperation in voting promptly.
<PAGE>
THE MONTGOMERY FUNDS
THE MONTOMGERY FUNDS II
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
Montgomery Equity Income Fund
and
Montgomery Balanced Fund
COMBINED PROXY STATEMENT AND PROSPECTUS
---------------------------------------
Dated: January 20, 2000
What is this document and why did we send it to you?
The Boards of Trustees of The Montgomery Funds ("TMF") and The
Montgomery Funds II ("TMF II") (collectively, the "Trusts") approved a plan to
reorganize the Montgomery Equity Income Fund (the "Equity Income Fund"), a
series of TMF, into the Montgomery Balanced Fund (formerly the Montgomery U.S.
Asset Allocation Fund) (the "Balanced Fund"), a series of TMF II and a
"fund-of-funds" that currently invests in the following three series of TMF:
Montgomery Growth Fund (the "Growth Fund"), Montgomery Total Return Bond Fund
(the "Total Return Bond Fund") and Montgomery Government Money Market Fund (the
"Money Market Fund") (that transaction is referred to as the "Reorganization").
Shareholder approval is needed to proceed with the Reorganization. The
shareholder meeting will be held on February 29, 2000 (the "Shareholder
Meeting"). We are sending this document to you for your use in deciding whether
to approve the Reorganization at the Shareholder Meeting.
This document includes a Notice of Special Meeting of Shareholders, a
Combined Proxy Statement and Prospectus and a form of Proxy.
As a technical matter, the Reorganization will have two steps:
o the automatic exchange of the Equity Income Fund shares held by the
shareholders of record as of the effective date of the
Reorganization (the "Effective Date") for shares of the Balanced
Fund (the "Balanced Fund Shares") of equivalent total net asset
value, and
2
<PAGE>
o the immediate treatment of the Equity Income Fund as an underlying
fund of the Balanced Fund.
As a result of the Reorganization, each shareholder of the Equity
Income Fund would instead hold Balanced Fund Shares having the same total value
as the shares of the Equity Income Fund held immediately before the
Reorganization. Lawyers for the Equity Income Fund and the Balanced Fund will
issue an opinion to the effect that, for federal income tax purposes, the
Reorganization will be treated as a tax-free reorganization that will not cause
the Equity Income Fund's shareholders to recognize a gain or loss for federal
income tax purposes. See Section II.A.3 below.
The Balanced Fund is a fund-of-funds whose investment objective is to
seek to provide shareholders with high total return (consisting of both capital
appreciation and income) while also seeking to reduce risk by actively
allocating its assets among stocks, bonds and money market securities. The
Balanced Fund currently invests in three underlying Montgomery Funds: the Growth
Fund, the Total Return Bond Fund and the Government Money Market Fund (but also
will invest in the Equity Income Fund as a result of the Reorganization). The
investment objective of the Equity Income Fund is to seek current income with a
yield that is greater than the average yield of Standard and Poor's 500
Composite Price Index stocks and to seek long-term capital appreciation while
striving to minimize portfolio volatility by investing in large, dividend-paying
U.S. companies.
This Combined Proxy Statement and Prospectus sets forth the basic
information that you should know before voting on the proposal. You should read
it and keep it for future reference.
What other important documents should I know about?
The Equity Income Fund is a series of TMF and the Balanced Fund is a
series of TMF II (together, the "Funds"). TMF and TMF II are open-end management
investment companies. The following documents are on file with the Securities
and Exchange Commission (the "SEC") and are deemed to be legally part of this
document:
o Combined Prospectus for the Equity Income Fund and the Balanced
Fund (formerly the U.S. Asset Allocation Fund), as well as other
series of TMF and TMF II, dated October 31, 1999
o Combined Statement of Additional Information relating to the Equity
Income Fund and the Balanced (formerly the U.S. Asset Allocation
Fund), as well as other series of TMF and TMF II, dated October 31,
1999
3
<PAGE>
o Statement of Additional Information relating to this Combined Proxy
Statement and Prospectus
Those documents are available without charge by writing to The
Montgomery Funds at 101 California Street, 35th Floor, San Francisco, California
94111, or by calling (800) 572-FUND [3863].
The Annual Report to Shareholders of the Equity Income Fund and the
Balanced Fund (formerly the U.S. Asset Allocation Fund) for the fiscal year
ended June 30, 1999, containing audited financial statements of the Equity
Income Fund and the Balanced Fund has been previously mailed to shareholders. If
you do not have a copy, additional copies of that Annual Report are available
without charge by writing or calling The Montgomery Funds at its address and
telephone number listed above. It is expected that this Combined Proxy Statement
and Prospectus will be mailed to shareholders on or about January 29, 2000.
Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities, nor has it passed on the accuracy or adequacy
of this combined proxy statement and prospectus. It is a criminal offense to
represent otherwise.
4
<PAGE>
TABLE OF CONTENTS
I. INTRODUCTION............................................................6
A. GENERAL..............................................................6
B. SUMMARY OF THE PROPOSAL..............................................6
C. RISK FACTORS.........................................................7
D. COMPARISON OF EXPENSES...............................................7
E. SHARES AND VOTING....................................................9
II. THE PROPOSAL...........................................................13
A. DESCRIPTION OF THE PROPOSED REORGANIZATION..........................13
1. The Reorganization...............................................13
2. Effect of the Reorganization.....................................14
3. Federal Income Tax Consequences..................................14
4. Description of the Balanced Fund Shares..........................15
5. Capitalization...................................................15
B. COMPARISON OF THE FUNDS.............................................16
1. Investment Objectives and Policies...............................16
2. Investment Restrictions..........................................17
3. Comparative Performance Information..............................19
4. Advisory Fees and Other Expenses.................................21
5. Portfolio Managers...............................................22
6. Distribution and Shareholder Services............................23
7. Purchase Procedures..............................................23
8. Redemption and Exchange Procedures...............................24
9. Income Dividends, Capital Gains Distributions and Taxes..........24
10. Portfolio Transactions and Brokerage Commissions.................25
11. Shareholders' Rights.............................................25
C. RISK FACTORS........................................................26
D. RECOMMENDATION OF THE BOARD OF TRUSTEES.............................27
E. DISSENTERS'RIGHTS OF APPRAISAL......................................27
F. FURTHER INFORMATION ABOUT THE ACQUIRED FUND
AND THE ACQUIRING FUND..............................................28
G. VOTE REQUIRED.......................................................28
H. FINANCIAL HIGHLIGHTS................................................28
III. MISCELLANEOUS ISSUES................................................34
A. OTHER BUSINESS......................................................34
B. NEXT MEETING OF SHAREHOLDERS........................................34
C. LEGAL MATTERS.......................................................34
D. EXPERTS.............................................................34
5
<PAGE>
I. INTRODUCTION
A. GENERAL
The Board of Trustees of The Montgomery Funds called this shareholder
meeting to allow shareholders to consider and vote on the proposed
Reorganization of the Equity Income Fund. The Board of Trustees (including a
majority of the independent trustees, meaning those trustees who are not
"interested" persons under the Investment Company Act) voted on November 16,
1999, to approve the Reorganization subject to the approval of the Equity Income
Fund's shareholders.
Montgomery Asset Management, LLC, serves as the manager of each Fund
(the "Manager"). The Manager recommends that you approve the reorganization
because it believes that by consolidating these Funds, shareholders of the
Equity Income Fund will enjoy greater diversification through an allocation of
assets among stocks, bonds and money market securities, while at the same time
maintaining an investment objective of current income and long-term capital
appreciation.
If the proposed Reorganization of the Equity Income Fund into the
Balanced Fund is approved and completed, the Equity Income Fund will become part
of a fund with similar investment objectives and policies but with larger assets
which may provide it with more flexibility to respond to shareholder activity or
changes in market conditions. The Manager also believes that the Equity Income
Fund is not independently viable at its current size and expense ratio (the
Equity Income Fund can be more efficiently run as an underlying fund).
The Equity Income Fund sells its Class R shares directly to the public
at net asset value, without any sales load or Rule 12b-1 fee, and also offers
Class P shares that are subject to a 0.25% Rule 12b-1 distribution fee.
Likewise, the Balanced Fund currently offers Class R shares directly to the
public at net asset value, without any sales load or Rule 12b-1 fee, and also
offers Class P shares that are subject to a 0.25% Rule 12b-1 distribution fee.
If the Reorganization is completed, all remaining holders of Class R and Class P
shares of the Equity Income Fund would receive respective Class R and Class P
shares of the Balanced Fund.
B. SUMMARY OF THE PROPOSAL
At the Shareholder Meeting, the shareholders of the Equity Income Fund
will be asked to approve the proposed Reorganization of the Equity Income Fund
into the Balanced Fund. The Reorganization will include the automatic exchange
of shares by the shareholders of record of the Equity Income Fund for shares of
the the Balanced Fund. The Equity Income Fund will then become an underlying
fund of the Balanced Fund.
The Balanced Fund is a fund-of-funds whose investment objective is to
seek to provide shareholders with high total return (consisting of both capital
appreciation and income) while also seeking to reduce risk by allocating its
assets among stocks and money market securities. The Balanced Fund currently
invests in three underlying
6
<PAGE>
Montgomery Funds: the Growth Fund, the Total Return Bond Fund and the Government
Money Market Fund. The investment objective of the Equity Income Fund is to seek
current income with a yield that is greater than the average yield of Standard
and Poor's 500 Composite Price Index stocks and to seek long-term capital
appreciation while striving to minimize portfolio volatility by investing in the
common and preferred stocks of large, dividend-paying U.S. companies.
The Manager and the Board of Trustees of each of The Montgomery Funds
and The Montgomery Funds II believe that the proposed Reorganization is in the
best interests of the Equity Income Fund, the Balanced Fund and their
shareholders, and that the interests of existing shareholders of the Equity
Income and Balanced Funds will not be diluted as a result of the proposed
Reorganization. See Section II.D. below.
The Manager will pay the costs of the Reorganization, the Shareholder
Meeting and solicitation of proxies, including the cost of copying, printing and
mailing proxy materials. In addition to solicitations by mail, the Manager and
the Board of Trustees of each of The Montgomery Funds and The Montgomery Funds
II also may solicit proxies, without special compensation, by telephone,
facsimile or otherwise.
C. RISK FACTORS
Investments in the Equity Income Fund are subject to the general risks
of the stock market. In comparison, investments in the Balanced Fund are subject
only in part to stock market risks (to the extent the Balanced Fund invests in
the Growth Fund), but also subject to interest rate risks from the Balanced
Fund's investment in the Total Return Bond Fund. The growth stocks the Growth
Fund invests in tend to be more volatile than the large dividend-paying stocks
the Equity Income Fund invests in. However, that volatility may, in part, be
offset by the fixed-income assets represented by the Balanced Fund's investments
in the Total Return Bond Fund and Government Money Market Fund. See Section
II.C. below. The purchase and redemption arrangements of the Funds are
identical. The Equity Income Fund and the Balanced Fund have the same
distribution and exchange arrangements, which are discussed in Section II.B.
below.
D. COMPARISON OF EXPENSES
The following table shows the comparative fees and expenses you may pay
if you buy and hold shares of these Funds. The Funds do not impose any front-end
or deferred sales loads and they do not charge shareholders for exchanging
shares or reinvesting dividends.
7
<PAGE>
<TABLE>
Fees and Expenses of the Funds
<CAPTION>
Montgomery Montgomery Montgomery
Equity Income Balanced Balanced
Fund Fund Fund
---- ---- ----
(Class R Shares) (Class R Shares) (Pro Forma)
<S> <C> <C> <C>
Shareholder Fees (fees paid directly from your
investment)
Redemption Fee 0.00% 0.00% 0.00%
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)+
Management Fee 0.60% 0.00% 0.00%
Distribution/Service (12b-1) Fee 0.00% 0.00% 0.00%
Other Expenses 0.85%
Top Fund Expenses 0.46% 0.46%
Underlying Fund Expenses 1.25% 1.25%
Total Annual Fund Operating Expenses 1.45% 1.71% 1.71%
Fee Reduction and/or Expense Reimbursement
(0.60%) (0.41%) (0.41%)
------- ------- -------
Net Expenses 0.85% 1.30% 1.30%
===== ===== =====
Montgomery Montgomery Montgomery
Equity Income Balanced Balanced
Fund Fund Fund
---- ---- ----
(Class P Shares) (Class R Shares) (Pro Forma)
Shareholder Fees (fees paid directly from your
investment)
Redemption Fee 0.00% 0.00% 0.00%
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)++
Management Fee 0.60% 0.00% 0.00%
Distribution/Service (12b-1) Fee 0.25% 0.25% 0.25%
Other Expenses 0.85%
Top Fund Expenses 0.46% 0.46%
Underlying Fund Expenses 1.25% 1.25%
Total Annual Fund Operating Expenses 1.70% 1.96% 1.96%
Fee Reduction and/or Expense Reimbursement
(0.60%) (0.41%) (0.41%)
------- ------- -------
Net Expenses 1.10% 1.55% 1.55%
===== ===== =====
<FN>
+ Montgomery Asset Management has contractually agreed to reduce its fees and/or
absorb expenses to limit total annual operating expenses to 0.85% (excluding
Rule 12b-1 fees, interest and tax expenses) for the Equity Income Fund.
++ In addition to the 0.46% total operating expenses of the Balanced Fund, a
shareholder also indirectly bears the Fund's pro rata share of the fees and
expenses incurred by each underlying fund. The total expense ratio before
reimbursement, including indirect expenses for the fiscal year ended June 30,
1999 was 1.71%, calculated based on the Fund's total operating expense ratio
(0.46%) plus a weighted average of the expense ratios of its underlying funds
(1.25%). Montgomery has contractually agreed to reduce its fees and/or absorb
expenses to limit the Fund's total annual operating expenses (excluding Rule
12b-1 fees, interest and tax expenses) to 1.30% (including expenses of the
underlying funds).
</FN>
</TABLE>
8
<PAGE>
The 1.30% contractual limit (excluding Rule 12b-1 fees, interest and tax
expenses) will apply after the Reorganization. This contract has a rolling
ten-year term. See Section II.B.4. for a discussion of fees reduced and expenses
reimbursed that may be recouped by the Manager.
<TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Funds 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 the changes specified above. This
example is for comparison purposes only. It does not necessarily represent the
Funds' actual expenses or returns.
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Equity Income Fund (Class R shares) $86 $271 $470 $1,046
- ------------------------------------------------- -------------- -------------- -------------- --------------
Balanced Fund (current Class R shares) $132 $411 $711 $1,563
- ------------------------------------------------- -------------- -------------- -------------- --------------
Balanced Fund (pro forma Class R shares) $132 $411 $711 $1,563
=============================================================================================================
Equity Income Fund (Class P shares) $112 $349 $605 $1,336
- ------------------------------------------------- -------------- -------------- -------------- --------------
Balanced Fund (current Class P shares) $157 $488 $843 $1,839
- ------------------------------------------------- -------------- -------------- -------------- --------------
Balanced Fund (pro forma Class P shares) $157 $488 $843 $1,839
</TABLE>
E. SHARES AND VOTING
The Montgomery Funds is a Massachusetts business trust and is
registered with the SEC as an open-end management investment company and
currently has nineteen operating series, or funds, including the Equity Income
Fund. Each Fund has its own investment objective and policies and operates
independently for purposes of investments, dividends, other distributions and
redemptions. The Equity Income Fund has three authorized classes of shares, each
with its own fee and expense structure: Class R shares, Class P shares and Class
L shares. At present, the Equity Income Fund has issued only Class R and Class P
shares. The Balanced Fund, a series of The Montgomery Funds II, also has three
authorized classes of shares, each with its own fee and expense structure: Class
R shares, Class P shares and Class L shares. At present, the Balanced Fund has
issued only Class R and Class P shares.
The Equity Income Fund's Class R and Class P shareholders will receive
respective Class R and Class P shares of the Balanced Fund in exchange for their
shares if the Reorganization is approved and completed. Information about Class
L shares of the Balanced Fund is contained in the Funds' Combined Statement of
Additional Information.
Each whole or fractional share of the Equity Income Fund is entitled to
one vote or corresponding fraction at the Shareholder Meeting. At the close of
business on December 31, 1999, the record date for the determination of
shareholders entitled to vote at the Shareholder Meeting (the "Record Date"),
there were 1,159,739 shares outstanding held by 917 record holders (including
omnibus accounts representing multiple underlying beneficial owners such as
those in the names of brokers).
9
<PAGE>
All shares represented by each properly signed proxy received before
the meeting will be voted at the Shareholder Meeting. If a shareholder specifies
how the proxy is to be voted on any business properly to come before the
Shareholder Meeting, it will be voted in accordance with instruction given. If
no choice is indicated on the proxy, it will be voted FOR approval of the
Reorganization, as more fully described in this Combined Proxy Statement and
Prospectus. A proxy may be revoked by a shareholder at any time before its use
by written notice to The Montgomery Funds, by submission of a later-dated proxy
or by voting in person at the Shareholder Meeting. If any other matters come
before the Shareholder Meeting, proxies will be voted by the persons named as
proxies in accordance with their best judgment.
The presence in person or by proxy of shareholders entitled to cast 40%
of the votes entitled to be cast at the Shareholder Meeting will constitute a
quorum. When a quorum is present, a majority of the shares voted shall decide
the proposal. The Shareholder Meeting may be adjourned from time to time by a
majority of the votes properly voting on the question of adjourning a meeting to
another date and time, whether or not a quorum is present, and the meeting may
be held as adjourned within a reasonable time after the date set for the
original meeting without further notice. The persons named in the proxy will
vote those shares that they are entitled to vote in favor of adjournment if
adjournment is necessary to obtain a quorum or to obtain a favorable vote on any
proposal. If the adjournment requires setting a new record date or the
adjournment is for more than 60 days from the date set for the original meeting
(in which case the Board of Trustees will set a new record date), The Montgomery
Funds will give notice of the adjourned meeting to the shareholders. Business
may be conducted once a quorum is present and may continue until adjournment of
the meeting.
Proxies may be voted by mail or electronically by internet or
telephone. If voted electronically, the Equity Income Fund or its agent will use
reasonable procedures (such as requiring an identification number) to verify the
authenticity of the vote cast. Each shareholder who casts an electronic vote
also will be able to validate that his or her vote was received correctly.
All proxies voted, including abstentions and broker non-votes (where
the underlying holder has not voted and the broker does not have discretionary
authority to vote the shares), will be counted toward establishing a quorum.
Approval of the Reorganization will occur only if a sufficient number of votes
at the Meeting are cast FOR that proposal. Abstentions do not constitute a vote
"for" and effectively result in a vote "against." Broker non-votes do not
represent a vote "for" or "against" and are disregarded in determining whether
the proposal has received enough votes.
<TABLE>
As of the Record Date, the Equity Income Fund's and the Balanced Fund's
shareholders of record and (to The Montgomery Funds' and The Montgomery Funds
II's respective knowledge) beneficial owners who owned more than five percent of
those Funds are as follows:
10
<PAGE>
<CAPTION>
Percentage of the Fund's Percentage of the Fund's
Outstanding Class R Shares Outstanding Class P Shares
- ------------------------------------------------- ----------------------------- -----------------------------
<S> <C>
Equity Income Fund
- ------------------
Charles Schwab & Co., Inc. 359,400
101 Montgomery Street (37.93%)
San Francisco, CA 94104-4322
National Financial Services Corp. 55,970
For the Exclusive Benefit of Our (5.91%)
Customers - Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
State Street Bank & Trust Co. Tr 211,992
U/A Dec 01 1993 (99.94%)
Ameridata Tech Employee Svgs Plan
Attn Steven Shipman Master Tr W6C
One Enterprise Dr.
North Quincy, MA 02171-2126
Balanced Fund
- -------------
Charles Schwab & Co., Inc. 1,277,629
101 Montgomery Street (30.06%)
San Francisco, CA 94104-4322
National Financial Services Corp. 400,966
For the Exclusive Benefit of Our (9.43%)
Customers - Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Inv. Fiduciary Trust Co. 2,689
IRA Carl N. Grant (76.47%)
2008 Cutwater Ct.
Reston, VA 20191-3604
National Financial Services Corp. 594
For the Exclusive Benefit of Our (16.90%)
Customers
55 Water St., 32nd Floor
New York, NY 10041-3299
11
<PAGE>
Carl N. Grant 190
U/A 06/22/1999 (5.40%)
2008 Cutwater Ct.
Reston, VA 20191-3604
</TABLE>
The officers and Trustees of The Montgomery Funds, as a group, owned of
record and beneficially less than one percent of the outstanding voting
securities of each Fund as of the Record Date.
12
<PAGE>
II. THE PROPOSAL
A. DESCRIPTION OF THE PROPOSED REORGANIZATION
1. The Reorganization
If the Reorganization is approved, on the Effective Date the
shareholders of record of the Equity Income Fund will automatically exchange
shares of the Equity Income Fund for shares of the Balanced Fund. As part of
that exchange, the Balanced Fund will issue to the shareholders of record of the
Equity Income Fund the number of Balanced Fund Class R and Class P shares
determined by dividing the respective total net asset value of the Class R and
Class P shares of the Equity Income Fund so exchanged by the net asset value of
one Balanced Fund Class R share and one Balanced Fund Class P share,
respectively. The net asset value of the Balanced Fund and the net asset value
of the Equity Income Fund will be calculated at the close of business on the
date immediately preceding the Effective Date (the "Valuation Date") in
accordance with the Funds' valuation procedures described in The Montgomery
Funds Combined Prospectus dated October 31, 1999.
For example, on June 30, 1999, the aggregate net asset value of the
Equity Income Fund Class R and Class P shares was approximately $26,750,000 and
$3,212,000, respectively. The Equity Income Fund Class R shares were valued at
$19.04 per share and the Equity Income Fund Class P shares were valued at $19.01
per share. The Balanced Fund Class R shares were valued at $16.77 per share and
the Balanced Fund Class P shares were valued at $16.74 per share. Therefore, if
the Effective Date had been June 30, 1999, the shareholders of record of the
Equity Income Fund would then have exchanged each of their then outstanding
Class R shares for 1.135 Balanced Fund Class R shares and each of their then
outstanding Class P shares for 1.136 Balanced Fund Class P shares.
This exchange for the Balanced Fund Class R and Class P shares by the
Equity Income Fund's shareholders will be accomplished by the establishment of
accounts on the Balanced Fund's share records in the names of those
shareholders, representing the respective pro rata number of Balanced Fund Class
R and Class P shares deliverable to them. Fractional shares will be carried to
the third decimal place. Certificates evidencing the Balanced Fund Class R and
Class P shares will not be issued to the Equity Income Fund's shareholders.
Immediately following the exchange of shares of the Equity Income Fund
for the Balanced Fund Class R and Class P shares by the Equity Income Fund
shareholders, the Equity Income Fund will become an underlying Fund of the
Balanced Fund.
13
<PAGE>
Completion of the Reorganization is subject to approval by the
shareholders of the Equity Income Fund. The Reorganization may be abandoned at
any time before the Effective Date by a majority of the Board of Trustees of The
Montgomery Funds or The Montgomery Funds II.
The Manager will pay all costs and expenses of the Reorganization,
including those associated with the Shareholder Meeting, the copying, printing
and distribution of this Combined Proxy Statement and Prospectus, and the
solicitation of proxies for the Shareholder Meeting.
The above is a summary of the Reorganization. The summary is not a
complete description of the terms of the Reorganization, which are fully set
forth in the Agreement and Plan of Reorganization attached as Exhibit A to this
document.
2. Effect of the Reorganization
If the Reorganization is approved by the Equity Income Fund's
shareholders and completed, shareholders of the Equity Income Fund as of the
Effective Date will become shareholders of the Balanced Fund. The total net
asset value of the Balanced Fund Shares held by each shareholder of the Equity
Income Fund immediately after completion of the Reorganization will be
equivalent to the total net asset value of the Equity Income Fund shares held by
that same shareholder immediately before completion of the Reorganization.
On or before the Effective Date, the Equity Income Fund intends to
distribute all of its then-remaining net investment income and realized capital
gains.
After the Reorganization, the investment adviser for the Balanced Fund
will continue to be Montgomery Asset Management, LLC. Funds Distributor, Inc.
will continue to be the Balanced Fund's Distributor. The Balanced Fund will
continue to be managed in accordance with its existing investment objective and
policies.
3. Federal Income Tax Consequences
As a condition to closing the Reorganization, the Equity Income Fund
and the Balanced Fund must receive a favorable opinion from Paul, Hastings,
Janofsky & Walker LLP, counsel to the Equity Income Fund and Balanced Fund,
substantially to the effect that, for federal income tax purposes: (a) the
exchange of shares of the Equity Income Fund by the shareholders of the Equity
Income Fund solely in exchange for the Balanced Fund Shares, as described above,
is a reorganization within the meaning of Section 368(a)(1) of the Internal
Revenue Code of 1986, as amended (the "Code"); (b) no gain or loss will be
recognized by the Balanced Fund on receipt of the Equity Income Fund shares for
the Balanced Fund Shares; (c) no gain or loss is recognized by the shareholders
of the Equity Income Fund upon the receipt of the Balanced Fund Shares
14
<PAGE>
solely in exchange for the Equity Income Fund shares; (d) the basis of the
Balanced Fund Shares received by the Equity Income Fund shareholders is, in each
instance, the same as the basis of the Equity Income Fund shares surrendered in
exchange therefor; and (e) the holding period of the Balanced Fund Shares
received by the Equity Income Fund shareholders includes the holding period
during which shares of the Equity Income Fund were held, provided that those
shares were held as a capital asset in the hands of the Equity Income Fund
shareholders on the date of the exchange. The Montgomery Funds does not intend
to seek a private letter ruling from the Internal Revenue Service with respect
to the tax effects of the Reorganization, and one is not required.
4. Description of the Balanced Fund Shares
Each Balanced Fund Share issued to Equity Income Fund shareholders
pursuant to the Reorganization will be duly authorized, validly issued, fully
paid and nonassessable when issued, will be transferable without restriction and
will have no preemptive or conversion rights. Each Balanced Fund Share will
represent an equal interest in the assets of the Balanced Fund. The Balanced
Fund Shares will be sold and redeemed based upon the net asset value of the
Balanced Fund next determined after receipt of the purchase or redemption
request, as described in the Balanced Fund's Prospectus.
5. Capitalization
<TABLE>
The capitalization of the Funds as of June 30, 1999 and their pro forma
combined capitalization as of that date after giving effect to the proposed
Reorganization are as follows:
<CAPTION>
Balanced Equity Income Pro Forma
Fund Fund Combined
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Aggregate net assets $81,189,495 $29,961,977 $111,151,472
Shares outstanding*
Class R Shares 4,838,742 1,405,261 6,434,220
Class P Shares 3,362 168,990 195,168
Net asset value per share:
Class R Shares $16.77 $19.04 $16.77
Class P Shares $16.74 $19.01 $16.74
<FN>
* Each Fund is authorized to issue an indefinite number of shares.
</FN>
</TABLE>
15
<PAGE>
B. COMPARISON OF THE FUNDS
A brief comparison of the Funds is set forth below. See Section II.F.
for more information.
1. Investment Objectives and Policies
The investment objective of the Balanced Fund is to seek to provide
shareholders with high total return (consisting of both capital appreciation and
income) while also seeking to reduce risk by allocating its assets among stocks,
bonds and money market securities. As a "fund-of-funds," the Fund currently
invests its assets in three underlying Montgomery Funds:
o Growth Fund, for U.S. equity exposure. This Fund invests in U.S.
companies of any size, but usually invests in those undervalued,
growth-oriented companies whose shares have a market capitalization
of at least $1 billion;
o Total Return Bond Fund, for U.S. bond exposure. This Fund invests
in a broad range of investment-grade bonds, including U.S.
government securities, corporate bonds, mortgage-related
securities, asset-backed securities and money market securities;
and
o Government Money Market Fund, for cash exposure. This Fund invests
exclusively in short-term U.S. government securities.
Additionally, if the Reorganization is approved by the shareholders of
the Equity Income Fund, the Equity Income Fund will become an underlying fund of
the Balanced Fund.
The Balanced Fund's strategy is to analyze various market factors,
including relative risk and return, to help the Manager determine what it
believes is an optimal asset allocation among stocks, bonds and cash.
The Balanced Fund's total equity and bond exposure may each range from
20% to 80% of its assets. It may invest anywhere from 0% to 50% of its assets in
a Montgomery money market fund. At times, the Balanced Fund may invest in other
Montgomery Funds that have similar investment exposures to the Funds listed
above. The Manager may adjust the proportion of assets allotted to the
underlying portfolios in response to changing market conditions when believed to
be appropriate.
The investment objective of the Equity Income Fund is to seek current
income with a yield greater than the average yield of Standard & Poor's 500
Composite Price Index stocks and to seek long-term capital appreciation while
striving to minimize portfolio volatility by investing in large, dividend-paying
U.S. companies.
16
<PAGE>
The equity securities in which the Equity Income Fund invests generally
consist of common stocks, preferred stocks and securities convertible into or
exchangeable for common or preferred stocks. Under normal market conditions, at
least 65% of the value of the Equity Income Fund's total assets are invested in
dividend-paying stocks of large U.S. companies.
In selecting investments for the Equity Income Fund, the Manager
generally seeks to identify mature companies that have a history of paying
regular dividends to shareholders and offer a dividend yield well above their
historical average and/or the market's average. The Equity Income Fund typically
invests in companies for two to four years. The Manager will usually begin to
reduce the Equity Income Fund's position in a company as its share price moves
up and its dividend yield drops to the lower end of its historical range. The
Manager may also pare back or sell the Equity Income Fund's position in a
company that reduces or eliminates its dividend or if the Manager believes that
the company is about to do so.
2. Investment Restrictions
Both the Balanced Fund and the Equity Income Fund have substantially
similar fundamental investment restrictions, which cannot be changed without
affirmative vote of a majority of each Fund's outstanding voting securities as
defined in the Investment Company Act (unless otherwise noted). Neither the
Balanced Fund nor the Equity Income Fund may (unless otherwise noted):
(1) With respect to 75% of its total assets, invest in the securities
of any one issuer (other than the U.S. government and its agencies and
instrumentalities) if immediately after and as a result of such investment more
than 5% of the total assets of the Fund would be invested in such issuer. There
are no limitations with respect to the remaining 25% of its total assets, except
to the extent other investment restrictions may be applicable. This investment
restriction does not apply to the Balanced Fund.
(2) Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b)
through the lending of up to 30% of its portfolio securities as described in the
Combined Statement of Additional Information, or (c) to the extent the entry
into a repurchase agreement or a reverse dollar transaction is deemed to be a
loan.
(3) (a) Borrow money, except for temporary or emergency purposes from a
bank, or pursuant to reverse repurchase agreements or dollar roll transactions,
in an amount not in excess of one-third of the value of its total assets
(including the proceeds of such borrowings, at the lower of cost or fair market
value). Any such borrowing will be made only if immediately thereafter there is
an asset coverage of at least 300% of all borrowings, and no additional
investments may be made while any such borrowings are in excess of 10% of total
assets. Transactions that are fully collateralized in a manner that does not
involve the prohibited issuance of a "senior security" within the meaning of
17
<PAGE>
Section 18(f) of the Investment Company Act shall not be regarded as borrowings
for the purposes of this restriction.
(b) Mortgage, pledge or hypothecate any of its assets except
in connection with permissible borrowings and permissible forward contracts,
futures contracts, option contracts or other hedging transactions.
(4) Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude each Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities or from
engaging in 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.)
(5) Buy or sell real estate or commodities or commodity contracts;
however each Fund, to the extent not otherwise prohibited in the Combined
Prospectus or Combined Statement of Additional Information, may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein, including real estate
investment trusts, and may purchase or sell currencies (including forward
currency exchange contracts), futures contracts and related options generally as
described in the Combined Statement of Additional Information.
(6) Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act and discussed in the Combined
Prospectus or Combined 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 that Funds from (a)
making any
18
<PAGE>
permitted borrowings, mortgages or pledges, or (b) entering into permissible
repurchase and dollar roll transactions.
(11) Except as described in the Combined Prospectus and the Combined
Statement of Additional Information, acquire or dispose of put, call, straddle
or spread options unless:
(a) such options are written by other persons, or are put
options written with respect to securities
representing 25% or less of the Fund's total assets,
and
(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of that Fund's
total assets.
(This is an operating policy which may be changed without
shareholder approval.)
(12) Except as described in the Combined Prospectus and the Combined
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) Purchase more than 10% of the outstanding voting securities of any
one issuer. (This is an operating policy which may be changed without
shareholder approval.)
(14) Invest in commodities, except for futures contracts or options on
futures contracts if 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 each Board of The Montgomery Funds and The Montgomery Funds II
and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
3. Comparative Performance Information
The chart below shows the risks of investing in each Fund and how each
Fund's total return has varied from year-to-year. The table compares each Fund's
performance to the most commonly used index for its market segment. Of course,
past performance is no guarantee of future results.
19
<PAGE>
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
1999 Return Through 12/31/99: -0.52% 1999 Return Through 12/31/99: 12.85%
*During the five-year period described above in the bar chart, the Equity Income
Fund's best quarter was Q4 1998 (+12.78%) and its worst quarter was Q3 1999
(-10.61).
**During the five-year period described above in the bar chart, the Balanced
Fund's best quarter was Q2 1997 (+11.94%) and its worst quarter was Q3 1999
(-10.63).
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
1999 Return Through 12/31/99: -0.72% 1999 Return Through 12/31/99: 12.18%
*During the three-year period described above in the bar chart, the Equity
Income Fund's best quarter was Q4 1998 (+12.60%) and its worst quarter was Q3
1998 (-5.60%).
**During the three-year period described above in the bar chart, the Balanced
Fund's best quarter was Q2 1997 (+11.37%) and its worst quarter was Q3 1998
(-6.38%).
20
<PAGE>
<TABLE>
Average Annual Returns through 12/31/99
<CAPTION>
Inception Inception
1 Year (9/30/94) (3/11/96)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Income Fund - Class R -0.52% 16.20% N/A
----------------------------------------------------------------------------------------------------------
Equity Income Fund - Class P -0.72% N/A [18.42%]
----------------------------------------------------------------------------------------------------------
S&P 500 Index [28.58%] [28.47%] [28.17%]
----------------------------------------------------------------------------------------------------------
<FN>
+ Calculated from 2/28/96
</FN>
</TABLE>
<TABLE>
<CAPTION>
Inception Inception
1 Year (3/31/94) (1/2/96)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund - Class R 12.85% 17.71% N/A
----------------------------------------------------------------------------------------------------------
Balanced Fund - Class P 12.18% N/A [12.38%]
----------------------------------------------------------------------------------------------------------
S&P 500 Index [28.58%] [26.50%] [28.23%]
----------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index [8.69%] [8.33%] [7.29%]
----------------------------------------------------------------------------------------------------------
<FN>
+ Calculated from 12/31/95
</FN>
</TABLE>
4. Advisory Fees and Other Expenses
The Manager serves as investment adviser to both Funds pursuant to
Investment Management Agreements between the Manager and The Montgomery Funds
and The Montgomery Funds II, both dated July 31, 1997. The Equity Income Fund
pays the Manager a management fee (accrued daily but paid when requested by the
Manager) calculated at an annualized rate of 0.60% of the first $500 million of
the average daily net assets of the Equity Income Fund plus 0.50% of average
daily net assets over $500 million. The Balanced Fund does not pay the Manager
any management fees since the management fees apply to the underlying funds
only. The management fees are accrued daily but paid when requested by the
Manager and are calculated at an annualized rate as follows:
Growth Fund 1.00% of the first
$500 million of net
assets; plus 0.90% of the
next $500 million of net
assets; plus 0.80% of net
assets over $1 billion
Total Return Bond Fund 0.50% of
the first $500 million of
net assets; plus 0.40% of
net assets over $500
million
Government Money Market Fund 0.40%
of the first $250 million
of net assets; plus 0.30%
of the next $250 million
of net assets; plus 0.20%
of net assets over $500
million
21
<PAGE>
The total annual expense limitation of the Balanced Fund currently is
higher than that of the Equity Income Fund (1.30% versus 0.85%). The Manager
agreed to those expense limitations (excluding interest and taxes) under a
contract with a rolling ten-year term. A Fund is required to reimburse the
Manager for any reductions in the Manager's fee or its payment of expenses only
during the three years following that reduction and only if such reimbursement
can be achieved within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment for fees and
expenses for the current year.
For the fiscal year ended June 30, 1999, the Manager absorbed expenses
of the Balanced Fund equal to approximately $207,593. For the fiscal year ended
June 30, 1999, the Manager received management fees of approximately $303,646
from the Equity Income Fund. Of these fees, the Manager reduced its fee or
absorbed expenses of the Equity Income Fund equal to approximately $217,211. The
Manager may continue to seek reimbursement for the deferred management fee and
absorbed expenses from the Equity Income Fund after the Reorganization occurs,
provided that reimbursement is effected within three years after the original
reduction and the reimbursement can be achieved within the applicable expense
limit. The Manager acknowledges that there may be a greater potential for it to
be reimbursed for the deferred management fee and absorbed expenses after the
Reorganization occurs. The Trustees considered this matter prior to approving
the Reorganization and concluded that the benefits to the existing shareholders
of the Equity Income Fund and the Balanced Fund as a result of the
Reorganization outweigh the potential financial benefit to the Manager. See
Section II.D. below.
5. Portfolio Managers
The investment manager of the both Funds is Montgomery Asset
Management, LLC. Founded in 1990, the Manager is a subsidiary of Commerzbank AG,
one of the largest publicly held commercial banks in Germany. As of December 31,
1999, the Manager managed approximately $4 billion on behalf of some 200,000
investors in The Montgomery Funds.
Equity Income Fund
WILLIAM KING, CFA, senior portfolio manager for the Equity Income Fund (since
1994). Before joining Montgomery in 1994 as a portfolio manager, Mr. King gained
analytical and portfolio management experience at Merus Capital Management.
Previously, he was a financial analyst/manager for SEI and a division controller
and financial analyst for Kaiser Aluminum and Kaiser Industries.
Balanced Fund
The portfolio managers listed below allocate assets among the underlying funds
for the Balanced Fund, which currently include the Growth Fund, the Total Return
Bond Fund and the Government Money Market Fund:
ROGER HONOUR, senior portfolio manager of the Growth Fund (since 1995). Prior to
joining Montgomery in 1993 as a senior portfolio manager and managing director,
Mr.
22
<PAGE>
Honour was a vice president and portfolio manager at Twentieth Century Investors
in Kansas City, Missouri. From 1990 to 1992, he served as vice president and
portfolio manager at Alliance Capital Management.
KATHRYN PETERS, portfolio manager of the Growth Fund (since 1995). Ms. Peters
joined Montgomery in 1995 as a portfolio manager. From 1992 to 1995, she was an
associate in the investment banking division of Donaldson, Lufkin & Jenrette in
New York. Prior to that she analyzed mezzanine investments for Barclays de Zoete
Wedd.
MARIE CHANDOHA, portfolio manager for the Total Return Bond Fund (since 1999).
Prior to joining Montgomery as a portfolio manager, Ms. Chandoha worked at
Goldman Sachs & Co., where she advised institutional clients on optimal asset
allocation strategies in the U.S. bond market. From 1994 to 1996, she held
positions as a managing director of global fixed-income and economics research
at Credit Suisse First Boston. Prior to that she was a research analyst in
mortgage securities at Morgan Stanley, and an economist at the Federal Reserve
Bank of New York.
WILLIAM STEVENS, senior portfolio manager for the Government Money Market Fund
(since 1992). Prior to joining Montgomery in 1992 as a senior portfolio manager
and managing director, Mr. Stevens worked at Barclays de Zoete Wedd Securities,
where he started its collateralized mortgage obligation and asset-backed
securities trading. From 1990 to 1991, he traded stripped mortgage securities
and mortgage-related interest rate swaps for The First Boston Company.
6. Distribution and Shareholder Services
Funds Distributor, Inc. (the "Distributor"), 101 California Street, San
Francisco, California 94104, serves as the Funds' Distributor and principal
underwriter in a continuous public offering of the Funds' shares. The
Distributor does not impose any sales charge on purchases of Class R shares.
Class P shares have adopted a Share Marketing Plan (the "Plan") under Rule
12b-1.
Neither Fund currently offers Class L shares.
The Class R shares of the Balanced Fund to be issued in the
Reorganization will not be subject to any sales charge. No sales charge is
imposed by either Fund on reinvestment of dividends or capital gains
distributions.
7. Purchase Procedures
The Funds generally require a minimum initial investment of $1,000, and
subsequent investments of $100 or more. Both Funds have automatic investment
plans under which selected amounts are electronically withdrawn from
shareholders' accounts with banks and are applied to purchase shares of the
Funds.
23
<PAGE>
8. Redemption and Exchange Procedures
Shareholders of both Funds may redeem their shares at the net asset
value next determined after receipt of a written redemption request or a
telephone redemption order without the imposition of any fee or other charge.
Each Fund may involuntarily redeem a shareholder's shares if the
combined aggregate net asset value of the shares in a shareholder's account is
less than $1,000 due to redemptions or if purchases through a systematic
investment plan fails to meet that Fund's investment minimum within a
twelve-month period. If the shareholder's account balance is not brought up to
the minimum or the shareholder does not send the Fund other instructions, the
Fund will redeem the shares and send the shareholder the proceeds.
Montgomery shareholders may exchange Class R and Class P shares in one
Fund for respective Class R and Class P shares in another Fund with the same
shareholder account registration, taxpayer identification number and address
without the imposition of any sales charges or exchange fees. There is a $100
minimum to exchange into a Fund the shareholder currently owns and a $1,000
minimum for investing in a new Fund. An exchange may result in a realized gain
or loss for tax purposes. However, because excessive exchanges can harm a Fund's
performance, The Montgomery Funds reserves the right to terminate, either
temporarily or permanently, exchange privileges of any shareholder who makes
more than four exchanges out of any one Fund during a twelve-month period and to
refuse an exchange into a Fund from which a shareholder has redeemed shares
within the previous 90 days (accounts under common ownership or control and
accounts with the same taxpayer identification number will be counted together).
Shares can be exchanged by telephone at (800) 572-FUND[3863] or through the
online shareholder service center at www.montgomeryfunds.com.
Other restrictions may apply. Refer to the Combined Prospectus and the
Combined Statement of Additional Information for other exchange policies.
9. Income Dividends, Capital Gains Distributions and Taxes
Each Fund distributes substantially all of its net investment income
and net capital gains to shareholders each year, if any. Each Fund currently
intends to make quarterly or, if necessary to avoid the imposition of tax on the
Fund, additional distributions during each calendar year. A distribution may be
made between November 1 and December 31 of each year with respect to any
undistributed capital gains earned during the one-year period ended October 31
of each calendar year. Another distribution of any undistributed capital gains
may also be made following the Funds' fiscal year end (June 30 for both Funds).
Each Fund has elected and qualified as a separate "regulated investment
company" under Subchapter M of the Code for federal income tax purposes and
meets all other requirements that are necessary for it (but not its
shareholders) to pay no federal taxes on income and capital gains paid to
shareholders in the form of dividends. In order
24
<PAGE>
to accomplish this goal, each Fund must, among other things, distribute
substantially all of its ordinary income and net capital gains on a current
basis and maintain a portfolio of investments which satisfies certain
diversification criteria.
10. Portfolio Transactions and Brokerage Commissions
The Manager is responsible for decisions to buy and sell securities for
each Fund, broker-dealer selection, and negotiation of commission rates. In
placing orders for each Fund's portfolio transactions, the Manager's primary
consideration is to obtain the most favorable price and execution available
although the Manager also may consider a securities broker-dealer's sale of Fund
shares, or research and brokerage services provided by the securities
broker-dealer, as factors in considering through whom portfolio transactions
will be effected. Each Fund may pay to those securities broker-dealers who
provide brokerage and research service to the Manager a higher commission than
that charged by other securities broker-dealers if the Manager determines in
good faith that the amount of the commission is reasonable in relation to the
value of those services in terms either of the particular transaction, or in
terms of the overall responsibility of the Manager and to any other accounts
over which the Manager exercises investment discretion.
11. Shareholders' Rights
The Montgomery Funds is a Massachusetts business trust and The
Montgomery Funds II is a Delaware business Trust. Because the Equity Income Fund
is a series of The Montgomery Funds and the Balanced Fund is a series of The
Montgomery Funds II, their operations are governed by each Trust's Declaration
of Trust and By-laws and applicable Massachusetts and Delaware law.
The Funds normally will not hold meetings of shareholders except as
required under the Investment Company Act and Massachusetts and Delaware law.
However, shareholders holding 10% or more of the outstanding shares of each Fund
may call meetings for the purpose of voting on the removal of one or more of the
Trustees.
Shareholders of each Fund have no preemptive, conversion or
subscription rights. The shares of each Fund have non-cumulative voting rights,
with each shareholder of each Fund entitled to one vote for each full share of
that Fund (and a fractional vote for each fractional share) held in the
shareholder's name on the books of that Fund as of the record date for the
action in question. On any matter submitted to a vote of shareholders, shares of
each Fund will be voted by that Fund's shareholders individually when the matter
affects the specific interest of that Fund only, such as approval of that Fund's
investment management arrangements. The shares of all the Funds will be voted in
the aggregate on other matters, such as the election of trustees and
ratification of the Board of Trustees' selection of the Funds' independent
accountants.
25
<PAGE>
C. RISK FACTORS
The Equity Income Fund's portfolio is subject to the general risks and
considerations associated with equity investing. As with any stock fund, the
value of the Equity Income Fund will fluctuate on a day-to-day basis with
movements in the stock market, as well as response to the activities of
individual companies. Although the Fund seeks to provide a consistent level of
income to shareholders, its yield may fluctuate significantly in the short term.
Like the Equity Income Fund, the Balanced Fund's portfolio is subject
to the general risks and considerations associated with equity investing (to the
extent the Balanced Fund invests in the Growth Fund). The growth stocks the
Growth Fund invests in tend to be more volatile than the large dividend-paying
stocks the Equity Income Fund invests in. However, that volatility may, in part,
be offset by the fixed-income assets represented by the Balanced Fund's
investments in the Total Return Bond Fund and Government Money Market Fund. The
value of the Total Return Bond Fund will fluctuate along with interest rates.
When interest rates rise, a bond's market price generally declines. In addition,
if the Manager does not accurately predict changing market conditions and other
economic factors, the Fund's assets might be allocated in a manner that is
disadvantageous. See the Combined Prospectus and Statement of Additional
Information for more information on the risks of the Balanced Fund.
26
<PAGE>
D. RECOMMENDATION OF THE BOARD OF TRUSTEES
The Board of Trustees of each of The Montgomery Funds and The
Montgomery Funds II (including a majority of the noninterested Trustees), after
due consideration, has unanimously determined that the Reorganization is in the
best interests of the shareholders of the Equity Income Fund and the Balanced
Fund and that the interests of the existing shareholders of the Equity Income
and Balanced Funds would not be diluted thereby.
Specifically, the Boards of Trustees found that at the Equity Income
Fund's current total net assets of approximately $30 million, the Manager would
experience more difficulty in pursuing the Fund's investment objective and would
incur higher transaction costs pursuing that investment objective than if there
were a larger asset base. The Boards of Trustees concur with the Manager's
assessment that the Equity Income Fund is not independently viable at its
current size and expense ratio (the Equity Income Fund can be more efficiently
run as an underlying fund). Consequently, the Boards of Trustees concluded that
the Reorganization would be in the best interests of the shareholders of the
Equity Income Fund because those shareholders would be shareholders of a
Montgomery Fund that has a similar investment objective as that of the Equity
Income Fund but has a larger asset base. Additionally, the Boards of Trustee
recognized that a larger asset base would provide the Manager with more
flexibility to respond to shareholder activity as well as changes in market
conditions, and that there would be no adverse effects on the Balanced Fund by
adding the Equity Income Fund as an additional underlying fund. However, the
Boards of Trustees also recognized that the Manager might potentially benefit
financially as a result of the Reorganization because the Equity Income Fund
currently has an operating expense limit of 0.85% (excluding Rule 12b-1 fees and
interest and tax expenses) compared to 1.30% (excluding Rule 12b-1 fees and
interest and tax expenses, but including the expenses of the underlying funds)
for the Balanced Fund. Nevertheless, the Boards of Trustees concluded that the
benefits to the shareholders of the Equity Income Fund as a result of the
Reorganization outweigh the potential financial benefit to the Manager.
The Board of Trustees unanimously recommends that shareholders vote for
the adoption of the Proposal.
E. DISSENTERS' RIGHTS OF APPRAISAL
Shareholders of the Equity Income Fund who object to the proposed
Reorganization will not be entitled to any "dissenters' rights" under
Massachusetts law. However, those shareholders have the right at any time up to
when the Reorganization occurs to redeem shares of the Equity Income Fund at net
asset value or to exchange their shares for shares of the other funds offered by
The Montgomery Funds and The Montgomery Funds II (including the Balanced Fund)
without charge. After the Reorganization, shareholders of the Equity Income Fund
will hold shares of the Balanced Fund, which may also be redeemed at net asset
value in accordance with the procedures
27
<PAGE>
described in the Balanced Fund's Prospectus dated October 31, 1999, subject to
applicable redemption procedures.
F. FURTHER INFORMATION ABOUT THE ACQUIRED FUND AND THE ACQUIRING FUND
Further information about the Equity Income Fund and the Balanced Fund
is contained in the following documents:
o Combined Prospectus dated October 31, 1999.
o Combined Statement of Additional Information also dated October 31,
1999.
o Documents that relate to the Funds are available, without charge,
by writing to The Montgomery Funds at 101 California Street, San
Francisco, California 94111 or by calling (800) 572-FUND [3863]. A
copy of the Combined Prospectus also accompanies this Combined
Proxy Statement and Prospectus.
The Montgomery Funds and The Montgomery Funds II are subject to the
informational requirements of the Securities Exchange Act of 1934 and the
Investment Company Act, and they file reports, proxy materials and other
information with the SEC. These reports, proxy materials and other information
can be inspected and copied at the Public Reference Room maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of these
materials can be obtained at prescribed rates from the Public Reference Branch,
Office of Consumer Affairs and Information Services, of the SEC, Washington,
D.C. 20549, or by e-mailing the SEC at [email protected].
G. VOTE REQUIRED
Approval of the proposed Reorganization requires the affirmative vote
of the holders of a majority of the shares of the Equity Income Fund present or
voting by proxy at the Shareholder Meeting. If the shareholders of the Equity
Income Fund do not approve the proposed Reorganization, or if the Reorganization
is not consummated for any other reason, then the Board of Trustees will take
any further action as it deems to be in the best interest of the Equity Income
Fund and its shareholders, including liquidation, subject to approval by the
shareholders of the Equity Income Fund if required by applicable law.
H. FINANCIAL HIGHLIGHTS
The following selected per-share data and ratios for the period ended
June 30, 1999 and 1998, were audited by PricewaterhouseCoopers LLP. Their August
18, 1999 and August 14, 1998, reports appear in the 1999 and 1998 Annual Reports
of the Funds. Information for the periods ended
28
<PAGE>
June 30, 1995, through June 30, 1997, was audited by other independent
accountants. Their report is not included here.
29
<PAGE>
<TABLE>
<CAPTION>
Equity Income Fund
(Class R Shares)
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD
ENDED JUNE 30: 1999 1998 1997## 1996 1995(a)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value - beginning of year $18.27 $17.91 $16.09 $13.38 $12.00
Net investment income/(loss) 0.32 0.44 0.49 0.43 0.31
Net realized and unrealized gain/(loss)
on investments 2.30 2.27 3.35 2.82 1.38
Net increase/(decrease) in net assets
resulting from investment operations 2.62 2.71 3.84 3.25 1.69
Distributions:
Dividends from net investment income (0.31) (0.44) (0.46) (0.42) (0.31)
Distributions from net realized capital gains (1.54) (1.91) (1.56) (0.12) --
Distributions in excess of net realized
capital gains -- -- -- -- --
Total distributions (1.85) (2.35) (2.02) (0.54) (0.31)
Net asset value - end of year $19.04 $18.27 $17.91 $16.09 $13.38
==================================================================================================
Total return** 15.06% 15.83% 26.02% 24.56% 14.26%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $26,750 $40,260 $38,595 $19,312 $6,383
Ratio of net investment income/(loss) to
average net assets 1.71% 2.32% 2.93% 3.03% 4.06%+
Net investment income/(loss) before deferral
of fees by Manager $0.21 $0.34 $0.39 $0.34 $0.13
Portfolio turnover rate 57% 68% 62% 90% 29%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.45% 1.38% 1.46% 1.45% 3.16%+
Expense ratio including interest and tax
expenses 0.85% 0.86% -- -- --
Expense ratio excluding interest and tax
expenses 0.85% 0.85% 0.86% 0.85% 0.84%+
- ----------------------------------------------------------------------------------------------------
<FN>
(a) The Equity Income Fund's Class R Shares commenced operations on September
30, 1994.
** 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 the results of
operations.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Equity Income Fund
(Class P Shares)
SELECTED PER-SHARE DATA FOR THE YEAR OR PERIOD
ENDED JUNE 30: 1999 1998 1997## 1996(a)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value - beginning of year $18.25 $17.90 $16.09 $15.66
Net investment income/(loss) 0.26 0.38 0.44 0.08
Net realized and unrealized gain/(loss)
on investments 2.31 2.27 3.35 0.35
Net increase/(decrease) in net assets
resulting from investment operations 2.57 2.65 3.79 0.43
Distributions:
Dividends from net investment income (0.27) (0.39) (0.42) --
Distributions from net realized capital gains (1.54) (1.91) (1.56) --
Distributions in excess of net realized
capital gains -- -- -- --
Total distributions (1.81) (2.30) (1.98) --
Net asset value--end of year $19.01 $18.25 $17.90 $16.09
==================================================================================================
Total return** 14.74% 15.49% 25.64% 2.75%
Ratios to average net assets/supplemental data
Net assets, end of year (in 000s) $3,212 $2,719 $868 $2
Ratio of net investment income/(loss) to
average net assets 1.46% 2.07% 2.68% 2.78%+
Net investment income/(loss) before deferral
of fees by Manager $0.15 $0.28 $0.34 $0.06
Portfolio turnover rate 57% 68% 62% 90%
Expense ratio before deferral of fees by
Manager, including interest and tax expense 1.70% 1.63% 1.71% 1.70%+
Expense ratio including interest and tax
expenses 1.10% 1.11% -- --
Expense ratio excluding interest and tax
expenses 1.10% 1.10% 1.11% 1.10%+
- --------------------------------------------------------------------------------------------------
<FN>
(a) The Equity Income Fund's Class P shares commenced operations on March 12,
1996.
** Total return represents aggregate total 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>
31
<PAGE>
<TABLE>
<CAPTION>
Balanced Fund (a)
(Class R Shares)
SELECTED PER-SHARE DATA FOR THE YEAR OR
PERIOD ENDED JUNE 30: 1999## 1998(b) 1997## 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of year $19.08 $19.89 $19.33 $16.33 $12.24
Net investment income/(loss) 0.48 1.66 0.48 0.26 0.25
Net realized and unrealized gain/(loss) on
investments 1.23 0.99 2.13 3.54 4.11
Net increase/(decrease) in net assets
resulting from investment operations 1.71 2.65 2.61 3.80 4.36
Distributions:
Dividends from net investment income (0.93) (0.93) (0.39) (0.25) (0.17)
Dividends in excess of net
investment income -- (0.70) -- -- --
Distributions from net realized capital
gains (1.68) (1.83) (1.66) (0.55) (0.10)
Distributions in excess of net realized
capital gains (1.41) -- -- -- --
Total distributions (4.02) (3.46) (2.05) (0.80) (0.27)
Net asset value - end of year $16.77 $19.08 $19.89 $19.33 $16.33
===============================================================================================================
Total return** 11.93% 14.67% 14.65% 23.92% 35.99%
Ratios to average net assets/supplemental
data
Net assets, end of year (in 000s) $81,133 $128,075 $127,214 $132,511 $60,234
Ratio of net investment income/(loss) to
average net assets 2.63% 3.10% 2.55% 1.85% 3.43%
Net investment income/(loss) before
deferral of fees by Manager 0.45 $1.63 $0.47 $0.24 $0.19
Portfolio turnover rate 36% 84% 169% 226% 96%
Expense ratio before deferral of fees by
Manager, including interest and tax
expenses 0.46% 0.31% 1.49% 1.55% 2.07%
Expense ratio including interest and tax
expenses 0.25% 0.26% 1.43% 1.42% 1.31%
Expense ratio excluding interest and tax
expenses 0.25% 0.25% 1.31% 1.30% 1.30%
- ---------------------------------------------------------------------------------------------------------------
<FN>
(a) Formerly the Montgomery U.S. Asset Allocation Fund.
(b) The Fund converted to a fund of funds structure effective July 1, 1998.
Expense ratios prior to that date do not reflect expenses borne indirectly.
** Total return represents aggregate total return for the periods indicated.
## Per-share numbers have been calculated using the average share method, which
more appropriately represents the per-share data for the period, since the
use of the undistributed income method did not accord with the results of
operations.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Balanced Fund (a)
(Class P Shares)
SELECTED PER-SHARE DATA FOR THE YEAR OR
PERIOD ENDED JUNE 30: 1999## 1998++ 1997## 1996(b)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value - beginning of year $19.11 $19.89 $19.33 $17.86
Net investment income/(loss) 0.44 1.62 0.43 0.09
Net realized and unrealized
gain/(loss) on investments 1.17 1.01 2.13 1.38
Net increase/(decrease) in net assets
resulting from investment operations 1.61 2.63 2.56 1.47
Distributions:
Dividends from net investment income (0.89) (0.84) (0.34) --
Dividends in excess of net
investment income -- (0.74) -- --
Distributions from net realized
capital gains (1.68) (1.83) (1.66) --
Distributions in excess of net
realized capital gains (1.41) -- -- --
Total distributions (3.98) (3.41) (2.00) --
Net asset value - end of year $16.74 $19.11 $19.89 $19.33
===============================================================================================================
Total return** 11.15% 14.53% 14.35% 8.23%
Ratios to average net
assets/supplemental data
Net assets, end of year (in 000s) $56 $71 $74 $43
Ratio of net investment income/(loss)
to average net assets 2.68% 2.85% 2.30% 1.60%+
Net investment income/(loss) before
deferral of fees by Manager $0.41 $1.59 $0.42 $0.08
Portfolio turnover rate 36% 84% 169% 226%
Expense ratio before deferral of fees
by Manager, including interest and tax
expenses 0.71% 0.56% 1.74% 1.80%+
Expense ratio including interest and
tax expenses 0.50% 0.51% 1.68% 1.67%+
Expense ratio excluding interest and
tax expenses 0.50% 0.50% 1.56% 1.55%+
- --------------------------------------------------------------------------------------------------------------
<FN>
(a) Formerly the Montgomery U.S. Asset Allocation Fund.
(b) The Balanced Fund's Class P shares commenced operations on January 3, 1996.
++ The Fund converted to a fund of funds structure effective July 1, 1998.
Expense ratios prior to that date do not reflect expenses borne indirectly.
** Total return represents aggregate total 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>
33
<PAGE>
III. MISCELLANEOUS ISSUES
A. OTHER BUSINESS
The Board of Trustees of The Montgomery Funds knows of no other
business to be brought before the Shareholder Meeting. If any other matters come
before the Shareholder Meeting, it is the Board's intention that proxies that do
not contain specific restrictions to the contrary will be voted on those matters
in accordance with the judgment of the persons named in the enclosed form of
proxy.
B. NEXT MEETING OF SHAREHOLDERS
The Montgomery Funds is not required and does not intend to hold annual
or other periodic meetings of shareholders except as required by the Investment
Company Act. If the Reorganization is not completed, the next meeting of the
shareholders of the Equity Income Fund will be held at such time as the Board of
Trustees may determine or at such time as may be legally required. Any
shareholder proposal intended to be presented at such meeting must be received
by The Montgomery Funds at its office at a reasonable time before the meeting,
as determined by the Board of Trustees, to be included in The Montgomery Funds'
proxy statement and form of proxy relating to that meeting, and must satisfy all
other legal requirements.
C. LEGAL MATTERS
Certain legal matters as to the tax-free character of the
Reorganization and the valid issuance of the Balanced Fund shares have been
passed upon for The Montgomery Funds and The Montgomery Funds II by Paul,
Hastings, Janofsky & Walker LLP.
D. EXPERTS
The financial statements of the Equity Income Fund for the year ended
June 30, 1999, contained in The Montgomery Funds'1999 Annual Report to
Shareholders, and the financial statements of the Balanced Fund (formerly the
U.S. Asset Allocation Fund) for the year ended June 30, 1999, contained in The
Montgomery Funds II's 1999 Annual Report to Shareholders, have been audited by
PricewaterhouseCoopers LLP, independent auditors, as stated in their reports,
which are incorporated herein by reference, and have been so incorporated in
reliance upon the reports of such firm given their authority as experts in
accounting and auditing.
Please complete, date and sign the enclosed proxy and
return it promptly in the enclosed envelope. You also may vote
by Internet (www.proxyvote.com) and telephone (800.609.6903).
34
<PAGE>
PROXY
FOR SPECIAL MEETING OF SHAREHOLDERS OF
MONTGOMERY EQUITY INCOME FUND
ON FEBRUARY 29, 2000
The undersigned hereby appoints Johanne Castro and Dulce Daclison, and
each of them, proxies for the undersigned, with full power of substitution, to
represent the undersigned and to vote all of the shares of Montgomery Equity
Income Fund (the "Equity Income Fund") of The Montgomery Funds (the "Trust"),
which the undersigned is entitled to vote at the Special Meeting of Shareholders
of the Equity Income Fund to be held on February 29, 2000 and at any adjournment
thereof.
o Proposal to approve or disapprove a reorganization of the Equity
Income Fund providing for (i) the automatic exchange of the Equity
Income Fund shares by the shareholders of record as of the
effective date of the Reorganization (the "Effective Date") for
shares of the Montgomery Balanced Fund (formerly the Montgomery
U.S. Asset Allocation Fund) (the "Balanced Fund"), a separate
series of The Montgomery Funds II, and (ii) the immediate treatment
of the Equity Income Fund as an underlying fund of the Balanced
Fund, all as described in the accompanying Combined Proxy Statement
and Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
And, in their discretion, to transact any other business that may lawfully come
before the meeting or any adjournment(s) thereof.
35
<PAGE>
This proxy is solicited on behalf of the Board of Trustees and will be
voted as you direct on this form. If no direction is given, this proxy will be
voted FOR the proposal.
Dated: ___________________, 2000
----------------------------------
Signature of Shareholder
----------------------------------
Signature of Shareholder
When shares are registered jointly in the names of two or more persons, ALL must
sign. Signature(s) must correspond exactly with the name(s) shown. Please sign,
date and return promptly in the enclosed envelope.
36
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as
of this 31st day of December, 1999, by The Montgomery Funds ("TMF"), a
Massachusetts business trust, for itself and on behalf of the Montgomery Equity
Income Fund (the "Acquired Fund"), a series of TMF, and by The Montgomery Funds
II ("TMF II"), a Delaware business trust, for itself and on behalf of the
Montgomery Balanced Fund (formerly the Montgomery U.S. Asset Allocation Fund)
(the "Acquiring Fund"), a series of TMF II.
In accordance with the terms and conditions set forth in this
Agreement, the parties desire that the shareholders of the Acquired Fund
("Acquired Fund Investors") exchange Class R and Class P shares of the Acquired
Fund (collectively, "Acquired Fund Shares") for Class R and Class P shares of
the Acquiring Fund (collectively, "Acquiring Fund Shares"). Immediately after
the Closing, as defined in this Agreement, the Acquiring Fund would, as a result
of the share exchange, hold 100% of the issued and outstanding Acquired Fund
Shares, and the Acquired Fund would then constitute an underlying fund of the
Acquiring Fund. This Agreement is intended to be and is adopted as a plan of
reorganization within the meaning of Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended (the "Code").
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
covenant and agree as follows:
1. REORGANIZATION OF ACQUIRED FUND
1.1 Subject to the terms and conditions herein set forth, and on the
basis of the representations and warranties contained herein, the Acquiring Fund
will issue full and fractional Class R and Class P shares to Acquired Fund
Investors, who shall exchange full and fractional Class R and Class P shares of
the Acquired Fund on the Closing Date (as defined in paragraph 3.1), for full
and fractional shares of the Acquiring Fund, the number of which shall be
determined by (i) dividing (a) the net asset value of the Acquired Fund Class R
shares ("Acquired Class R Shares") delivered to the Acquiring Fund, computed in
the manner and as of the time and date set forth in paragraph 2.1, by (b) the
net asset value of one Class R share of the Acquiring Fund computed in the
manner and as of the time and date set forth in paragraph 2.2, and by (ii)
dividing (a) the net asset value of the Acquired Fund Class P shares ("Acquired
Class P Shares") issued to the Acquiring Fund, computed in the manner and as of
the time and date set forth in paragraph 2.1, by (b) the net asset value of one
Class P share of the Acquiring Fund computed in the manner and as of the time
and date set forth in paragraph 2.2.
Such exchange of shares shall take place at the Closing provided for in
paragraph 3.1 (hereinafter sometimes referred to as the "Closing"). Such
transaction is hereinafter sometimes referred to as the "Reorganization."
1
<PAGE>
1.2 If any request shall be made for a change of the registration of
shares of the Acquiring Fund to another person from the account of the
stockholder in which name the shares are registered in the records of the
Acquired Fund, it shall be a condition of such registration of shares that there
be furnished to the Acquiring Fund an instrument of transfer properly endorsed,
accompanied by appropriate signature guarantees and otherwise in proper form for
transfer and that the person requesting such registration shall pay to the
Acquiring Fund any transfer or other taxes required by reason of such
registration or establish to the reasonable satisfaction of the Acquiring Fund
that such tax has been paid or is not applicable.
2. VALUATION
2.1 The net asset value of each Class R and Class P share of the
Acquired Fund shall be the net asset value per share computed as of the time at
which its net asset value is calculated pursuant to the valuation procedures set
forth in the Acquiring Fund then-current Prospectus and Statement of Additional
Information on the business day immediately preceding the Closing Date, or at
such time on such earlier or later date as may mutually be agreed upon in
writing among the parties hereto (such time and date being herein called the
"Applicable Valuation Date").
2.2 The net asset value of each share of the Acquiring Fund shall be
the net asset value per share computed on the Applicable Valuation Date, using
the market valuation procedures set forth in the Acquiring Fund's then-current
Prospectus and Statement of Additional Information.
2.3 All computations of value contemplated by this Article 2 shall be
made by the Acquiring Fund administrator in accordance with its regular practice
as pricing agent. The Acquiring Fund shall cause its administrator to deliver a
copy of its respective valuation report to TMF and to the Acquired Fund at the
Closing.
2
<PAGE>
3. CLOSING(S) AND CLOSING DATE
3.l The Closing for the Reorganization shall occur on February 29,
2000, and/or on such other date(s) as may be mutually agreed upon in writing by
the parties hereto (each, a "Closing Date"). The Closing(s) shall be held at the
offices of Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San
Francisco, California 94104 or at such other location as is mutually agreeable
to the parties hereto. All acts taking place at the Closing(s) shall be deemed
to take place simultaneously as of 10:00 a.m., local time on the Closing Date
unless otherwise provided.
3.2 The Acquiring Fund's custodian shall deliver at the Closing a
certificate of an authorized officer stating that: (a) the Acquiring Fund Shares
have been issued in proper form to the Acquired Fund Investors on the Closing
Date and (b) all necessary taxes including all applicable federal and state
stock transfer stamps, if any, have been paid, or provision for payment shall
have been made, by the Acquiring Fund in conjunction with that issuance of
shares.
3.3 Notwithstanding anything herein to the contrary, if on the
Applicable Valuation Date (a) the New York Stock Exchange shall be closed to
trading or trading thereon shall be restricted or (b) trading or the reporting
of trading on such exchange or elsewhere shall be disrupted so that, in the
judgment of TMF or TMF II, accurate appraisal of the value of Acquiring Fund
Shares or the Acquired Fund Shares is impracticable, the Applicable Valuation
Date shall be postponed until the first business day after the day when trading
shall have been fully resumed without restriction or disruption and reporting
shall have been restored.
4. COVENANTS WITH RESPECT TO THE ACQUIRING FUND AND THE ACQUIRED FUND
4.1 With respect to the Acquired Fund, TMF has called or will call a
meeting of Acquired Fund Investors to consider and act upon this Agreement and
to take all other actions reasonably necessary to obtain the approval of the
transactions contemplated herein, including approval for the Acquired Fund
Investors' exchange of Acquired Fund Shares for Acquiring Fund Shares
contemplated hereby. TMF, on behalf of the Acquired Fund, shall prepare the
notice of meeting, form of proxy and proxy statement (collectively, "Proxy
Materials") to be used in connection with that meeting.
4.2 TMF, on behalf of the Acquired Fund, covenants that the Acquiring
Fund Shares to be exchanged hereunder are not being acquired for the purpose of
making any distribution thereof, other than in accordance with the terms of this
Agreement.
4.3 TMF, on behalf of the Acquired Fund, will assist the Acquiring Fund
in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Acquired Fund Shares.
4.4 Subject to the provisions hereof, TMF, on its own behalf and on
behalf of the Acquired Fund, and TMF II, on its own behalf and on the behalf of
the Acquiring Fund, will
3
<PAGE>
take, or cause to be taken, all actions, and do, or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated herein.
4.5 TMF II, on behalf of the Acquiring Fund, has prepared and filed, or
will prepare and file, with the Securities and Exchange Commission (the "SEC") a
registration statement on Form N-14 under the Securities Act of 1933, as amended
(the "1933 Act"), relating to the Acquiring Fund Shares (the "Registration
Statement"). TMF, on behalf of the Acquired Fund, has provided or will provide
the Acquiring Fund with the Proxy Materials for inclusion in the Registration
Statement, prepared in accordance with paragraph 4.1, and with such other
information and documents relating to the Acquired Fund as are requested by the
Acquiring Fund and as are reasonably necessary for the preparation of the
Registration Statement.
4.6 As soon after the Closing Date as is reasonably practicable, TMF,
on behalf of the Acquired Fund: (a) shall prepare and file all federal and other
tax returns and reports of the Acquired Fund required by law to be filed with
respect to all periods ending on/or before the Closing Date but not theretofore
filed and (b) shall pay all federal and other taxes shown as due thereon and/or
all federal and other taxes that were unpaid as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES
5.1 TMF II, on behalf of the Acquiring Fund, represents and warrants to
the Acquired Fund as follows:
(a) TMF II was duly created pursuant to its Agreement and
Declaration of Trust by the Trustees for the purpose of acting as a
management investment company under the Investment Company Act of 1940
(the "1940 Act") and is validly existing under the laws of the State of
Delaware, and the Declaration of Trust directs the Trustees to manage
the affairs of TMF II and grants them all powers necessary or desirable
to carry out such responsibility, including administering TMF II's
business as currently conducted by TMF II and as described in the
current prospectuses of TMF II. TMF II is registered as an investment
company classified as an open-end management company, under the 1940
Act and its registration with the SEC as an investment company is in
full force and effect;
(b) The Registration Statement, including the current
prospectus and statement of additional information of the Acquiring
Fund, conforms or will conform, at all times up to and including the
Closing Date, in all material respects to the applicable requirements
of the 1933 Act and the 1940 Act and the regulations thereunder and do
not include or will not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(c) The Acquiring Fund is not in violation of, and the
execution, delivery and performance of this Agreement by TMF II for
itself and on behalf of the Acquiring
4
<PAGE>
Fund does not and will not (i) violate TMF II's Declaration of Trust or
By-Laws, or (ii) result in a breach or violation of, or constitute a
default under, any material agreement or material instrument, to which
TMF II is a party or by which its properties or assets are bound;
(d) Except as previously disclosed in writing to the Acquired
Fund, no litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to TMF
II's knowledge, threatened against TMF II or its business, the
Acquiring Fund or any of its properties or assets, which, if adversely
determined, would materially and adversely affect TMF II or the
Acquiring Fund's financial condition or the conduct of their business.
TMF II knows of no facts that might form the basis for the institution
of any such proceeding or investigation, and the Acquiring Fund is not
a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and
adversely affects, or is reasonably likely to materially and adversely
affect, its business or its ability to consummate the transactions
contemplated herein;
(e) All issued and outstanding shares of the Acquiring Fund,
including shares to be issued and exchanged in connection with the
Reorganization, will, as of the Closing Date, be duly authorized and
validly issued and outstanding, fully paid and non-assessable; the
shares of each class of the Acquiring Fund issued and outstanding
before the Closing Date were offered and sold in compliance with the
applicable registration requirements, or exemptions therefrom, of the
1933 Act, and all applicable state securities laws, and the regulations
thereunder; and the Acquiring Fund does not have outstanding any
option, warrants or other rights to subscribe for or purchase any of
its shares nor is there outstanding any security convertible into any
of its shares;
(f) The execution, delivery and performance of this Agreement
on behalf of the Acquiring Fund will have been duly authorized prior to
the Closing Date by all necessary action on the part of TMF II, the
Trustees and the Acquiring Fund, and this Agreement will constitute a
valid and binding obligation of TMF II and the Acquiring Fund
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, arrangement, moratorium and
other similar laws of general applicability relating to or affecting
creditors, rights and to general equity principles;
(g) On the effective date of the Registration Statement, at
the time of the meeting of the Acquired Fund Investors and on the
Closing Date, any written information furnished by TMF II with respect
to the Acquiring Fund for use in the Proxy Materials, the Registration
Statement or any other materials provided in connection with the
Reorganization does not and will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
information provided not misleading;
(h) No governmental consents, approvals, authorizations or
filings are required under the 1933 Act, the Securities Exchange Act of
1934 (the "1934 Act"), the 1940 Act
5
<PAGE>
or Delaware law for the execution of this Agreement by TMF II, for
itself and on behalf of the Acquiring Fund, or the performance of the
Agreement by TMF II for itself and on behalf of the Acquiring Fund,
except for such consents, approvals, authorizations and filings as have
been made or received, and except for such consents, approvals,
authorizations and filings as may be required after the Closing Date;
(i) The Statement of Assets and Liabilities, Statement of
Operations and Statements of Changes in Net Assets of the Acquiring
Fund as of and for the year ended June 30, 1999, audited by
PricewaterhouseCoopers LLP (copies of which have been or will be
furnished to the Acquired Fund) fairly present, in all material
respects, the Acquiring Fund's financial condition as of such date and
its results of operations for such period in accordance with generally
accepted accounting principles consistently applied, and as of such
dates there were no liabilities of the Acquiring Fund (contingent or
otherwise) known to TMF II that were not disclosed therein but that
would be required to be disclosed therein in accordance with generally
accepted accounting principles;
(j) Since the date of the most recent audited financial
statements, there has not been any material adverse change in the
Acquiring Fund's financial condition, assets, liabilities or business,
other than changes occurring in the ordinary course of business; or any
incurrence by the Acquiring Fund of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise
disclosed in writing to and accepted by the Acquired Fund, prior to the
Closing Date (for the purposes of this subparagraph (j), neither a
decline in the Acquiring Fund's net asset value per share nor a
decrease in the Acquiring Fund's size due to redemptions shall be
deemed to constitute a material adverse change);
(k) For each full and partial taxable year from its inception
through the Closing Date, the Acquiring Fund has qualified as a
separate regulated investment company under the Code and has taken all
necessary and required actions to maintain such status; and
(1) All federal and other tax returns and reports of TMF II
and the Acquiring Fund required by law to be filed on or before the
Closing Date shall have been filed, and all taxes owed by TMF II or the
Acquiring Fund shall have been paid so far as due, and to the best of
TMF II's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to any such return.
5.2 TMF, on behalf of the Acquired Fund, represents and warrants to the
Acquiring Fund as follows:
(a) TMF was duly created pursuant to its Agreement and
Declaration of Trust by the Trustees for the purpose of acting as a
management investment company under the 1940 Act and is validly
existing under the laws of the Commonwealth of Massachusetts, and the
Agreement and Declaration of Trust directs the Trustees to
6
<PAGE>
manage the affairs of TMF and grants them all powers necessary or
desirable to carry out such responsibility, including administering
TMF's business as currently conducted by TMF and as described in the
current prospectuses of TMF. TMF is registered as an investment company
classified as an open-end management company, under the 1940 Act and
its registration with the SEC as an investment company is in full force
and effect;
(b) All of the issued and outstanding shares of the Acquired
Fund, including shares to be exchanged with the Reorganization, have
been (and will be) offered and sold in compliance in all material
respects with applicable registration or notice requirements of the
1933 Act and state securities laws; all issued and outstanding shares
of each class of the Acquired Fund are, and on the Closing Date will
be, duly authorized and validly issued and outstanding, and fully paid
and non-assessable; and the Acquired Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of
its shares, nor is there outstanding any security convertible into any
of its shares;
(c) The Acquired Fund is not in violation of, and the
execution, delivery and performance of this Agreement by TMF for itself
and on behalf of the Acquired Fund does not and will not (i) violate
TMF's Agreement and Declaration of Trust or By-Laws, or (ii) result in
a breach or violation of, or constitute a default under, any material
agreement or material instrument to which TMF is a party or by its
properties or assets are bound;
(d) Except as previously disclosed in writing to the Acquiring
Fund and the Underlying Fund, no litigation or administrative
proceeding or investigation of or before any court or governmental body
is presently pending or, to TMF's knowledge, threatened against the
Acquired Fund or any of its properties or assets which, if adversely
determined, would materially and adversely affect the Acquired Fund's
financial condition or the conduct of its business, TMF knows of no
facts that might form the basis for the institution of any such
proceeding or investigation, and the Acquired Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court
or governmental body that materially and adversely affects, or is
reasonably likely to materially and adversely affect, its business or
its ability to consummate the transactions contemplated herein;
(e) The Statement of Assets and Liabilities, Statements of
Operations and Statements of Changes in Net Assets of the Acquired Fund
as of and for the period ended June 30, 1999, audited by
PricewaterhouseCoopers LLP (copies of which have been or will be
furnished to the Acquiring Fund) fairly present, in all material
respects, the Acquired Fund's financial condition as of such date and
its results of operations for such period in accordance with generally
accepted accounting principles consistently applied, and as of such
date there were no liabilities of the Acquired Fund (contingent or
otherwise) known to TMF that were not disclosed therein but that would
be required to be disclosed therein in accordance with generally
accepted accounting principles;
7
<PAGE>
(f) Since the date of the most recent audited financial
statements, there has not been any material adverse change in the
Acquired Fund's financial condition, assets, liabilities or business,
other than changes occurring in the ordinary course of business, or any
incurrence by the Acquired Fund of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise
disclosed in writing to and accepted by the Acquiring Fund, prior to
the Closing Date (for the purposes of this subparagraph (f), neither a
decline in the Acquired Fund's net asset value per share nor a decrease
in the Acquired Fund's size due to redemptions shall be deemed to
constitute a material adverse change);
(g) All federal and other tax returns and reports of TMF and
the Acquired Fund required by law to be filed on or before the Closing
Date shall have been filed, and all taxes owed by TMF or the Acquired
Fund shall have been paid so far as due, and to the best of TMF's
knowledge, no such return is currently under audit and no assessment
has been asserted with respect to any such return;
(h) For each full and partial taxable year from its inception
through the Closing Date, the Acquired Fund has qualified as a separate
regulated investment company under the Code and has taken all necessary
and required actions to maintain such status;
(i) The execution, delivery and performance of this Agreement
on behalf of the Acquired Fund will have been duly authorized prior to
the Closing Date by all necessary action on the part of TMF, the
Trustees and the Acquired Fund, and this Agreement will constitute a
valid and binding obligation of TMF and the Acquired Fund enforceable
in accordance with its terms, subject as to enforcement, to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar
laws of general applicability relating to or affecting creditors,
rights and to general equity principles;
(j) From the effective date of the Registration Statement,
through the time of the meeting of the Acquired Fund Investors, and on
the Closing Date, the Proxy Materials (exclusive of the portions of the
Acquiring Fund's Prospectus contained or incorporated by reference
therein, and exclusive of any written information furnished by TMF II
with respect to the Acquiring Fund): (i) will comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act
and the 1940 Act and the regulations thereunder and (ii) do not contain
any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and as of such dates and times, any written
information furnished by TMF, on behalf of the Acquired Fund, for use
in the Registration Statement or in any other manner that may be
necessary in connection with the transactions contemplated hereby does
not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the information provided not
misleading; and
(k) No governmental consents, approvals, authorizations or
filings are required under the 1933 Act, the 1934 Act, the 1940 Act or
Massachusetts law for the execution
8
<PAGE>
of this Agreement by TMF, for itself and on behalf of the Acquired
Fund, or the performance of the Agreement by TMF for itself and on
behalf of the Acquired Fund, except for such consents, approvals,
authorizations and filings as have been made or received, and except
for such consents, approvals, authorizations and filings as may be
required subsequent to the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRED FUND
The obligations of TMF to consummate the Reorganization with respect to
the Acquired Fund shall be subject to the performance by TMF II, for itself and
on behalf of the Acquiring Fund, of all the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions with respect to the Acquiring Fund:
6.1 All representations and warranties of TMF II with respect to the
Acquiring Fund contained herein shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated herein, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date.
6.2 TMF II, on behalf of the Acquiring Fund, shall have delivered to
the Acquired Fund at the Closing a certificate executed on behalf of the
Acquiring Fund by TMF II's President, Vice President, Assistant Vice President,
Secretary or Assistant Secretary in a form reasonably satisfactory to the
Acquired Fund and dated as of the Closing Date, to the effect that the
representations and warranties of TMF II with respect to the Acquiring Fund made
herein are true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated herein, and as to such other matters
as the Acquired Fund shall reasonably request.
6.3 Unless waived by the Acquired Fund, the Acquired Fund shall have
received at the Closing a favorable opinion of Paul, Hastings, Janofsky & Walker
LLP, counsel to TMF II, dated as of the Closing Date, in a form reasonably
satisfactory to the Acquired Fund, substantially to the effect that:
(a) TMF II is a duly registered, open-end, management
investment company, and its registration with the SEC as an investment
company under the 1940 Act is in full force and effect; (b) the
Acquiring Fund is a separate portfolio of TMF II, which is a business
trust duly created pursuant to its Agreement and Declaration of Trust,
is legally existing and in good standing under the laws of the State of
Delaware and the Agreement and Declaration of Trust directs the
Trustees to manage the affairs of TMF II and grants them all powers
necessary or desirable to carry out such responsibility, including
administering TMF II's business as described in the current
prospectuses of TMF II; (c) this Agreement has been duly authorized,
executed and delivered by TMF II on behalf of TMF II and the Acquiring
Fund and, assuming due authorization, execution and delivery of this
Agreement on behalf of the Acquired Fund, is a valid and binding
obligation of TMF II, enforceable against TMF II in accordance with its
terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, arrangement, moratorium
9
<PAGE>
and other similar laws of general applicability relating to or
affecting creditors, rights and to general equity principles; (d) the
Acquiring Fund Shares to be exchanged for Acquired Fund Shares pursuant
to this Agreement are duly registered under the 1933 Act on the
appropriate form, and are duly authorized and upon such issuance and
exchange will be validly issued and outstanding and fully paid and
non-assessable, and no shareholder of the Acquiring Fund has any
preemptive rights to subscription or purchase in respect thereof; (e)
the Registration Statement has become effective with the SEC and, to
the best of such counsel's knowledge, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or threatened; (f) no
consent, approval, authorization, filing or order of any court or
governmental authority of the United States or any state is required
for the consummation of the Reorganization with respect to the
Acquiring Fund, except for such consents, approvals, authorizations and
filings as have been made or received, and except for such consents,
approvals, authorizations and filings as may be required after the
Closing Date; and (g) to the best knowledge of such counsel, no
litigation or administrative proceeding or investigation of or before
any court or governmental body is presently pending or threatened as to
TMF II or the Acquiring Fund or any of their properties or assets and
neither TMF II nor the Acquiring Fund is a party to or subject to the
provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business.
6.4 As of the Closing Date, there shall have been no material change in
the investment objective, policies and restrictions nor any material change in
the investment management fees, fee levels payable pursuant to any 12b-1 plan of
distribution, other fees payable for services provided to the Acquiring Fund,
fee waiver or expense reimbursement undertakings, or sales loads of the
Acquiring Fund from those fee amounts, undertakings and sales load amounts
described in the prospectus of the Acquiring Fund delivered to the Acquired Fund
pursuant to paragraph 4 and in the Proxy Materials.
6.5 With respect to the Acquiring Fund, the Board of Trustees of TMF II
shall have determined that the Reorganization is in the best interests of the
Acquiring Fund and that the interests of the existing shareholders of the
Acquiring Fund would not be diluted as a result of the Reorganization.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRING FUND
The obligations of TMF II to consummate the Reorganization with respect
to the Acquiring Fund shall be subject to the performance by TMF of all the
obligations to be performed by it hereunder, with respect to the Acquired Fund,
on or before the Closing Date and, in addition thereto, the following
conditions:
7.1 All representations and warranties of TMF with respect to the
Acquired Fund contained herein shall be true and correct in all material
respects as of the date hereof and,
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<PAGE>
except as they may be affected by the transactions contemplated by this
Agreement, as of the Closing Date, with the same force and effect as if made on
and as of the Closing Date.
7.2 TMF, on behalf of the Acquired Fund, shall have delivered to the
Acquiring Fund at the Closing a certificate executed on behalf of the Acquired
Fund, by TMF's President, Vice President, Assistant Vice President, Secretary or
Assistant Secretary, in form and substance satisfactory to the Acquiring Fund
and dated as of the Closing Date, to the effect that the representations and
warranties of TMF with respect to the Acquired Fund made herein are true and
correct at and as of the Closing Date, except as they may be affected by the
transactions contemplated herein and as to such other matters as the Acquiring
Fund shall reasonably request.
7.3 Unless waived by the Acquiring Fund, the Acquiring Fund shall have
received at the Closing a favorable opinion from Paul, Hastings, Janofsky &
Walker LLP, counsel to TMF, dated as of the Closing Date, in a form reasonably
satisfactory to the Acquiring Fund, substantially to the effect that:
(a) TMF is a duly registered, open-end, management investment
company, and its registration with the SEC as an investment company
under the 1940 Act is in full force and effect; (b) the Acquired Fund
is a separate portfolio of TMF, which is a business trust duly created
pursuant to its Agreement and Declaration of Trust, is validly existing
and in good standing under the laws of the Commonwealth of
Massachusetts, and the Agreement and Declaration of Trust directs the
Trustees to manage the affairs of TMF and grants them all powers
necessary or desirable to carry out such responsibility, including
administering TMF's business as described in the current prospectuses
of TMF; (c) this Agreement has been duly authorized, executed and
delivered by TMF on behalf of TMF and the Acquired Fund and, assuming
due authorization, execution and delivery of this Agreement on behalf
of the Acquiring Fund, is a valid and binding obligation of TMF,
enforceable against TMF in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, arrangement,
moratorium and other similar laws of general applicability relating to
or affecting creditors, rights and to general equity principles; (d)
the Acquired Fund Shares to be exchanged for the Acquiring Fund Shares
pursuant to this Agreement are duly registered under the 1933 Act on
the appropriate form, and are duly authorized and upon such issuance
and exchange will be validly issued and outstanding and fully paid and
non-assessable, and no shareholder of the Acquired Fund has any
preemptive rights to subscription or purchase in respect thereof; (e)
the Registration Statement has become effective with the SEC and, to
the best of such counsel's knowledge, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or threatened; (f) no
consent, approval, authorization, filing or order of any court or
governmental authority of the United States or any state is required
for the consummation of the Reorganization with respect to the Acquired
Fund, except for such consents, approvals, authorizations and filings
as have been made or received, and except for such consents, approvals,
authorizations and filings as may be required subsequent to the Closing
Date; and (g) to the best knowledge of such counsel, no litigation or
administrative proceeding
11
<PAGE>
or investigation of or before any court or governmental body is
presently pending or threatened as to TMF or the Acquired Fund or any
of their properties or assets and neither TMF nor the Acquired Fund is
a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body that materially and
adversely effects its business.
7.4 As of the Closing Date, there shall have been no material change in
the investment objective, policies and restrictions nor any material change in
the investment management fees, fee levels payable pursuant to any 12b-1 plan of
distribution, other fees payable for services provided to the Acquired Fund, fee
waiver or expense reimbursement undertakings, or sales loads of the Acquired
Fund from those fee amounts, undertakings and sales load amounts described in
the prospectus of the Acquired Fund delivered to the Acquiring Fund pursuant to
paragraph 4 and in the Proxy Materials.
7.5 With respect to the Acquired Fund, the Board of Trustees of TMF
shall have determined that the Reorganization is in the best interests of the
Acquired Fund.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
AND THE ACQUIRED FUND
The obligations of the Acquiring Fund and of the Acquired Fund herein
are each subject to the further conditions that on or before the Closing Date
with respect to the Acquiring Fund and the Acquired Fund:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Acquired Fund in accordance with the provisions of TMF's Agreement and
Declaration of Trust and the requirements of the 1940 Act, and certified copies
of the resolutions evidencing such approval shall have been delivered to the
Acquiring Fund.
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or any of the transactions contemplated herein.
8.3 All consents of other parties and all other consents, orders,
approvals and permits of federal, state and local regulatory authorities
(including, without limitation, those of the SEC and of state securities
authorities) deemed necessary by TMF, on behalf of the Acquired Fund, and by TMF
II, on behalf of the Acquiring Fund, to permit consummation, in all material
respects, of the transactions contemplated herein shall have been obtained,
except where failure to obtain any such consent, order or permit would not, in
the opinion of the party asserting that the condition to closing has not been
satisfied, involve a risk of a material adverse effect on the assets or
properties of the Acquiring Fund or the Acquired Fund.
12
<PAGE>
8.4 The Registration Statement shall have become effective under the
1933 Act, no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act.
8.5 Unless waived by the Acquiring Fund, the Acquired Fund shall have
declared and paid a dividend or dividends which, together with all previous such
dividends, shall have the effect of distributing to the Acquired Fund's
shareholders substantially all of the Acquired Fund's investment company taxable
income for all taxable years ending on or prior to the Closing Date (computed
without regard to any deduction for dividends paid) and substantially all of its
net capital gain realized in all taxable years ending on or prior to the Closing
Date (after reduction for any capital loss carryover).
8.6 The Montgomery Funds shall have received the opinion of Paul,
Hastings, Janofsky & Walker LLP addressed to the Acquiring Fund and the Acquired
Fund (and based on customary representation certificates from TMF, TMF II, the
Acquiring Fund and the Acquired Fund) substantially to the effect that, for
federal income tax purposes:
(a) the exchange of Acquired Fund Shares by the Acquired Fund
Investors for the Acquiring Fund Shares will constitute a
"reorganization" within the meaning of Section 368(a)(1) of the Code
and the Acquiring Fund and the Acquired Fund each are a "party to a
reorganization" within the meaning of Section 368(b) of the Code; (b)
no gain or loss will be recognized by the Acquiring Fund upon the
receipt of Acquired Fund Shares solely in exchange for the Acquiring
Fund Shares; (c) no gain or loss will be recognized by the Acquired
Fund Investors upon the exchange of their Acquired Fund Shares for the
Acquiring Fund Shares; (d) the aggregate tax basis for the Acquiring
Fund Shares received by each of the Acquired Fund Investors pursuant to
the Reorganization will be the same as the aggregate tax basis of the
Acquired Fund Shares held by such Investor immediately prior to the
Reorganization, and the holding period of the Acquiring Fund Shares to
be received by each Acquired Fund Investor will include the period
during which the Acquired Fund Shares exchanged therefor were held by
such Investor (provided the Acquired Fund Shares were held as capital
assets on the date of the Reorganization); and (e) the tax basis of the
Acquired Fund Shares received by the Acquiring Fund will be the same as
the tax basis of such shares to the Acquired Fund immediately prior to
the Reorganization, and the holding period of the Acquired Fund Shares
in the hands of the Acquiring Fund will include the period during which
those shares were held by the Acquired Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Acquired Fund may waive the condition set forth in this paragraph 8.6.
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<PAGE>
9. EXPENSES
9.1 Except as may be otherwise provided herein, each of the Acquired
Fund and the Acquiring Fund shall be liable for its respective expenses incurred
in connection with entering into and carrying out the provisions of this
Agreement, whether or not the transactions contemplated hereby are consummated.
The expenses payable by the Acquired Fund hereunder shall include (i) fees and
expenses of its counsel and independent auditors incurred in connection with the
Reorganization; (ii) expenses associated with printing and mailing the
Prospectus/Proxy Statement and soliciting proxies in connection with the meeting
of shareholders of the Acquired Fund referred to in paragraph 4.1 hereof; (iii)
fees and expenses of the Acquired Fund's custodian and transfer agent(s)
incurred in connection with the Reorganization; and (iv) any special pricing
fees associated with the valuation of the Acquired Fund's portfolio on the
Applicable Valuation Date. Montgomery Asset Management, LLC, has agreed to pay
for the expenses listed in items (i), (ii), (iii) and (iv) above. The expenses
payable by the Acquiring Fund hereunder shall include (i) fees and expenses of
its counsel and independent auditors incurred in connection with the
Reorganization; (ii) expenses associated with preparing this Agreement and
preparing and filing the Registration Statement under the 1933 Act covering the
Acquiring Fund Shares to be issued in the Reorganization; (iii) registration or
qualification fees and expenses of preparing and filing such forms, if any, as
are necessary under applicable state securities laws to qualify the Acquiring
Fund Shares to be issued in connection with the Reorganization; (iv) any fees
and expenses of the Acquiring Fund's custodian and transfer agent(s) incurred in
connection with the Reorganization; and (v) any special pricing fees associated
with the valuation of the Acquiring Fund's portfolio on the Applicable Valuation
Date. Montgomery Asset Management, LLC, has agreed to pay for the expenses
listed in items (i), (ii), (iii), (iv) and (v) above.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the
parties and supersedes any prior or contemporaneous understanding or arrangement
with respect to the subject matter hereof.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated herein.
11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time before the Closing by the mutual written
consent of the Acquiring Fund, and the Acquired Fund.
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<PAGE>
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of TMF,
acting on behalf of the Acquired Fund and by the authorized officers of TMF II,
acting on behalf of the Acquiring Fund; provided, however, that following the
meeting of the shareholders of the Acquired Fund, no such amendment may have the
effect of changing the provisions for determining the number of shares of the
Acquiring Fund to be to the Acquired Fund Investors under this Agreement to the
detriment of such Acquired Fund Investors, or otherwise materially and adversely
affecting the Acquired Fund, without the Acquired Fund obtaining the Acquired
Fund Investors' further approval except that nothing in this paragraph 12 shall
be construed to prohibit the Acquiring Fund and the Acquired Fund from amending
this Agreement to change the Closing Date or Applicable Valuation Date by mutual
agreement.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provision of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy, certified mail or overnight express courier addressed to:
For TMF, on behalf of itself and the
Acquired Fund or for TMF II, on behalf
of itself and the Acquiring Fund:
The Montgomery Funds
101 California Street
San Francisco, California 94111
Attention:
----------------------
----------------------
With a copy to:
David A. Hearth, Esq.
Paul, Hastings, Janofsky & Walker LLP
345 California St., 29th Floor
San Francisco, California 94104
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF
LIABILITY
14.1 The article and paragraph headings contained herein are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. All references herein to Articles, paragraphs,
subparagraphs or Exhibits shall be construed as referring to Articles,
paragraphs or subparagraphs hereof or Exhibits hereto, respectively.
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<PAGE>
Whenever the terms "hereto", "hereunder", "herein" or "hereof" are used in this
Agreement, they shall be construed as referring to this entire Agreement, rather
than to any individual Article, paragraph, subparagraph or sentence.
14.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other parties. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed by its authorized officer.
The Montgomery Funds,
for itself and on behalf of
the Montgomery Equity Income Fund
By: /s/ Dulce Daclison
-----------------------------
Dulce Daclison
Assistant Vice President
The Montgomery Funds II,
for itself and on behalf of
the Montgomery Balanced Fund
By: /s/ Dulce Daclison
-----------------------------
Dulce Daclison
Assistant Vice President
16
<PAGE>
-----------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR THE REORGANIZATION OF
MONTGOMERY EQUITY INCOME FUND
INTO
MONTGOMERY BALANCED FUND
-----------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
------------------------------
101 California Street
San Francisco, California 94111
1-800-572-FUND
-----------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 20, 2000
FOR REGISTRATION STATEMENT ON FORM N-14
This Statement of Additional Information is not a prospectus
and should be read in conjunction with the Combined Proxy Statement and
Prospectus dated January 20, 2000, which has been filed by The Montgomery Funds
II (the "Trust") in connection with a Special Meeting of Shareholders of the
Montgomery Equity Income Fund (the "Equity Income Fund"), a series of The
Montgomery Funds ("TMF"), that has been called to vote on an Agreement and Plan
of Reorganization (and the transactions contemplated thereby). Copies of the
Combined Proxy Statement and Prospectus may be obtained at no charge by writing
The Montgomery Funds II at the address indicated above or by calling toll-free
(800) 572-FUND [3863].
Unless otherwise indicated, capitalized terms used herein and
not otherwise defined have the same meanings as are given to them in the
Combined Proxy Statement and Prospectus.
Further information about the Trust, TMF, the Equity Income
Fund, and the Montgomery Balanced Fund (formerly U.S. Asset Allocation Fund)
(the "Balanced Fund"), a series of TMF II, (collectively, the "Funds") is
contained in the Funds' Combined Prospectus (including other series of The
Montgomery Funds and The Montgomery Funds II) dated October 31, 1999, and the
Annual Report for the Funds (including other series of The Montgomery Funds and
The Montgomery Funds II) for the fiscal year ended June 30, 1999. The Funds'
Statement of Additional Information (including other series of The Montgomery
Funds and The Montgomery Funds II), dated October 31, 1999, is incorporated by
reference in this Statement of Additional Information and is available without
charge by calling the Montgomery Funds toll-free at (800) 572-FUND [3863].
Pro-forma financial statements are attached hereto as Exhibit A.
TABLE OF CONTENTS
Page
----
General Information ........................................................ B-3
Exhibit A .................................................................. B-4
B-2
<PAGE>
GENERAL INFORMATION
The shareholders of the Equity Income Fund are being asked to
approve a form of Agreement and Plan of Reorganization (the "Plan") combining
the Equity Income Fund into the Balanced Fund (and the transactions contemplated
thereby). The Plan contemplates the transfer of all of the assets and
liabilities of the Equity Income Fund as of the Effective Date to the Montgomery
Growth Fund, an underlying fund of the Balanced Fund, and the assumption by the
Growth Fund of the liabilities of the Equity Income Fund, in exchange for Class
R and Class P shares of the Balanced Fund. Immediately after the Effective Date,
the Equity Income Fund will distribute to its Class R and Class P shareholders
of record as of the close of business on the Effective Date the Class R and
Class P shares of the Balanced Fund received. The shares of the Balanced Fund
that will be issued for distribution to the Equity Income Fund's shareholders
will have an aggregate net asset value equal to the aggregate net asset value of
the shares of the Equity Income Fund held as of the Closing Date. The Trust will
then take all necessary steps to terminate the qualification, registration and
classification of the Equity Income Fund. All issued and outstanding shares of
the Equity Income Fund will be canceled on the Equity Income Fund's books.
Shares of the Balanced Fund will be represented only by book entries; no share
certificates will be issued.
A Special Meeting of the Equity Income Fund's shareholders to
consider the transaction will be held at the offices of the Trust, 101
California Street, 35th Floor, San Francisco, California 94111 on February 29,
2000 at 10 a.m., local time.
For further information about the transaction, see the
Combined Proxy Statement and Prospectus. For further information about the
Trust, The Montgomery Funds, the Equity Income Fund and the Balanced Fund, see
the Funds' Combined Statement of Additional Information, dated October 31, 1999,
which is available without charge by calling the Trust at (800) 572-FUND [3863].
B-3
<PAGE>
Exhibit A
Pro Forma Financial Statements
B-4
<PAGE>
Montgomery U.S. Asset Allocation Fund
and
Montgomery Equity Income Fund
Proforma Combining Financial Statements (Unaudited)
The accompanying unaudited proforma combining investment portfolio and statement
of assets and liabilities assumes that the exchange described in the next
paragraph occurred as of June 30, 1999 and the unaudited proforma combining
statements of operations of Montgomery U.S. Asset Allocation Fund as if the
combination with Montgomery Equity Income Fund has been consummated at July 1,
1998. These historical statements have been derived from Montgomery U.S. Asset
Allocation Fund's and Montgomery Equity Income Fund's audited financial
statements at June 30, 1999, and for the year then ended.
The proforma statements give effect to the proposed transfer of all assets of
Montgomery Equity Income Fund to Montgomery U.S. Asset Allocation Fund in
exchange for the assumption by Montgomery U.S. Asset Allocation Fund of all of
the liabilities of Montgomery Equity Income Fund and for a number of U.S. Asset
Allocation Fund's shares equal in value to the value of the net assets of
Montgomery Equity Income Fund. Under generally accepted accounting principles,
the historical cost of investment securities will be carried forward to the
surviving entity and the results of operations of Montgomery U.S. Asset
Allocation Fund for pre-combining periods will not be restated. The proforma
statements of assets and liabilities and of operations do not reflect the
expenses of either fund in carrying out its obligations under the Agreement and
Plan of Reorganization. Under the Agreement and Plan of Reorganization,
Montgomery Asset Management, LLC has agreed to reimburse the funds for expenses
incurred in connection with the reorganization.
The unaudited proforma combining statements should be read in conjunction with
the separate financial statements of Montgomery U.S. Asset Allocation Fund and
Montgomery Equity Income Fund incorporated by reference in this statement of
additional information.
<PAGE>
Montgomery U.S. Asset Allocation Fund
and
Montgomery Equity Income Fund
Notes to Proforma Combining Financial Statements (Unaudited)
June 30, 1999
The proforma financial statements do not include trading activity for trade date
June 30, 1999. The proforma adjustments to these proforma financial statements
are comprised of the following:
(A) Issuance of Montgomery U.S. Asset Allocation Fund shares to the holders
of shares of Montgomery Equity Income Fund.
(B) Elimination and reduction of duplicative expenses as a result of the
merger.
<PAGE>
<TABLE>
Equity Income Fund/ U.S. Asset Allocation Fund Merged Portfolios
June 30, 1999
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SHARES SECURITY DESCRIPTION COST MARKET VALUE
- ----------------------------------------------------------------------------------------------------------------------------
EQUITY MUTUAL FUND
<S> <C> <C> <C> <C>
3,981,067 75.3% Montgomery Growth Fund 72,578,764 83,657,244
----------------------------------
BOND MUTUAL FUND - TAXABLE
2,381,523 25.0% Montgomery Total Return Bond Fund 28,950,932 27,816,192
----------------------------------
----------------------------------
TOTAL INVESTMENTS 100.3% $101,529,696 $111,473,436
----------------------------------
OTHER ASSETS AND LIABILITIES (NET) ($321,964)
-------------------
NET ASSETS - 100% 100% $111,151,472
===================
</TABLE>
<PAGE>
<TABLE>
Montgomery U.S. Asset Allocation Fund
Pro Forma Statement of Operations
Year Ended June 30, 1999 (Unaudited)
<CAPTION>
U.S. Pro Pro
Asset Equity Forma Forma
Allocation Income Adjustments Combined
<S> <C> <C> <C> <C>
Investment Income:
Interest 3,100 $ 63,569 66,669
Dividends 3,117,168 865,200 3,982,368
Securities lending income -- 215 215
------------------------------------------------------------
Total Income 3,120,268 928,984 -- 4,049,252
------------------------------------------------------------
Expenses:
Management fee -- $ 303,646 (303,646) (B) --
Transfer agency 238,629 81,400 320,029
Custodian fee 6,067 14,931 (14,931) (B) 6,067
Administration fee -- 25,341 (25,341) (B) --
Share marketing plan fee 165 7,483 (7,483) (B) 165
Legal and audit 21,013 25,168 (16,181) (B) 30,000
Accounting expenses 14,323 11,543 (6,543) (B) 19,323
Printing fees 32,293 18,661 (8,661) (B) 42,293
Trustees' fees 7,649 5,371 (3,020) (B) 10,000
Registration fees 43,246 28,294 71,540
Amortization of organization expenses 4,511 2,878 7,389
Interest expense -- 1,670 (1,670) (B) --
Other 92,861 7,752 (21,752) (B) 78,861
------------------------------------------------------------
Total Expenses 460,757 534,138 (409,228) 585,667
Fees deferred by manager (207,593) (217,211) 66,955 (357,849)
------------------------------------------------------------
Net Expenses 253,164 316,927 (342,273) 227,818
------------------------------------------------------------
Net Investment Income/(Loss) 2,867,104 612,057 342,273 3,821,434
------------------------------------------------------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) from:
Securities transactions 1,328,853 2,848,156 -- 4,177,009
Futures contracts -- -- -- --
Foreign currency transactions and other assets -- -- -- --
------------------------------------------------------------
Net Realized Gain/(Loss) on Investments 1,328,853 2,848,156 -- 4,177,009
------------------------------------------------------------
Net Change in unrealized appreciation/(depreciation) of:
Securities 4,581,206 1,204,992 -- 5,786,198
Forward foreign-currency exchange contracts -- -- --
Futures contracts -- -- -- --
Foreign currency transactions and other assets -- -- --
------------------------------------------------------------
Net Unrealized Appreciation of Investments 4,581,206 1,204,992 -- 5,786,198
------------------------------------------------------------
Net Realized and Unrealized Gain on Investments 5,910,059 4,053,148 -- 9,963,207
------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $ 8,777,163 $ 4,665,205 $ 13,442,368
------------------------------------------------------------
</TABLE>
<PAGE>
-----------------------------------------
PART C
------
THE MONTGOMERY FUNDS II
OTHER INFORMATION
-----------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
-------------------------------
FORM N-14
-------------------------------
PART C
-------------------------------
ITEM 15. INDEMNIFICATION
Article VII, Section 3 of the Agreement and Declaration of Trust
empowers the Trustees of the Trust, to the full extent permitted by law, to
purchase with Trust assets insurance for indemnification from liability and to
pay for all expenses reasonably incurred or paid or expected to be paid by a
Trustee or officer in connection with any claim, action, suit or proceeding in
which he or she becomes involved by virtue of his or her capacity or former
capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is or was an agent of
the Trust, against expenses, judgments, fines, settlement and other amounts
actually and reasonable incurred in connection with such proceeding if that
person acted in good faith and reasonably believed his or her conduct to be in
the best interests of the Trust. Indemnification will not be provided in certain
circumstances, however, including instances of willful misfeasance, bad faith,
gross negligence, and reckless disregard of the duties involved in the conduct
of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Trustee, officers, and controlling persons
of the Registrant, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable in the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issues.
ITEM 16. EXHIBITS
(1) Amended and Restated Agreement and Declaration of Trust is
incorporated by reference to Post-Effective Amendment No. 37
to Registration Statement N-1A (the "Registration
Statement"), as filed with the Commission on October 29, 1998
("Post-Effective Amendment No. 37") under File Nos. 33-69686
and 811-8064.
(2) Amended and Restated By-Laws are incorporated by reference to
Post-Effective Amendment No. 37.
(3) Voting Trust Agreement - Not applicable.
(4) Form of Agreement and Plan of Reorganization is included in
Part A.
C-2
<PAGE>
(5) Specimen Share Certificate - Not applicable.
(6) Investment Advisory Contracts--Form of Investment Management
Agreement is incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement as filed with
the Commission on July 31, 1997 ("Post-Effective Amendment
No. 22").
(7)(A) Form of Underwriting Agreement is incorporated by reference
to Post-Effective Amendment No. 22.
(7)(B) Form of Selling Group Agreement - Not applicable.
(8) Benefit Plan(s) - Not applicable.
(9) Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 37.
(10) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 37.
(11) Consent and Opinion of Counsel as to legality of shares Plan
is incorporated by reference to Post-Effective Amendment No.
49 as filed with the Commission on October 29, 1999.
(12) Opinion and Consent as to Tax Matters - Filed herewith.
(13)(A) Form of Administrative Services Agreement is incorporated by
reference to Post-Effective Amendment No. 22.
(13)(B) 18f-3 Plan - Form of Amended and Restated Multiple Class Plan
is incorporated by reference to Post-Effective Amendment No.
37.
(14) Independent Auditors' Consent - Filed herewith.
(15) Not Applicable.
(16) Power of Attorney is incorporated by reference to the initial
filing of Form N-14 filed with the Commission on November 24,
1999.
(17) Not Applicable.
C-3
<PAGE>
ITEM 17. UNDERTAKINGS.
(1) Registrant agrees that, prior to any public reoffering of the
securities registered through the use of a prospectus which
is part of this registration statement by any person or party
who is deemed to be an underwriter within the meaning of Rule
145(c) of the Securities Act of 1933, the reoffering
prospectus will contain the information called for by the
applicable registration form for the reofferings by persons
who may be deemed underwriters, in addition to the
information called for by the other items of the applicable.
(2) The undersigned Registrant agrees that every prospectus that
is filed under paragraph (a) above will be filed as part of
an amendment to the Registration Statement and will not be
used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933,
each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein,
and the offering of the securities at that time shall be
deemed to be the initial bona fide offering of them.
C-4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration
statement has been signed on behalf of the Registrant, in the City of San
Francisco and State of California, on the 19th day of January, 2000.
THE MONTGOMERY FUNDS II
George A. Rio*
---------------------------------------
George A. Rio
President and Principal Executive
Officer; Treasurer and Principal
Financial and Accounting Officer
<TABLE>
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated:.
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
George A. Rio* President and January 19, 2000
- -------------- Principal Executive Officer;
George A. Rio Treasurer and Principal
Financial and Accounting Officer
R. Stephen Doyle* Chairman of the January 19, 2000
- ----------------- Board of Trustees
R. Stephen Doyle
Andrew Cox.* Trustee January 19, 2000
- ------------
Andrew Cox
Cecilia H. Herbert* Trustee January 19, 2000
- -------------------
Cecilia H. Herbert
John A. Farnsworth* Trustee January 19, 2000
- -------------------
John A. Farnsworth
*By: /s/ David A. Hearth
-----------------------------------
David A. Hearth, Attorney-in-Fact
Pursuant to Power of Attorney
filed herewith
</TABLE>
C-5
<PAGE>
SEC File No. 333-91625
THE MONTGOMERY FUNDS II
FORM N-14
EXHIBIT INDEX
Number Exhibit
- ------ --------
12 Opinion and Consent to Tax matters - Paul, Hastings,
Janofsky & Walker LLP
14 Independent Auditors' Consent - Pricewaterhouse Coopers LLP
C-6
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Twenty-Third Floor
Los Angeles, California 90071-2371
January 18, 2000
The Montgomery Funds 27287.82488
The Montgomery Funds II
101 California Street
San Francisco, California 94111
Re: Reorganization of Montgomery Equity Income
Fund into Montgomery Balanced Fund
(formerly Montgomery U.S. Asset Allocation Fund)
-------------------------------------------------
Ladies and Gentlemen:
You have requested our opinion as counsel for both The Montgomery
Funds, a Massachusetts business trust ("Trust I"), and The Montgomery Fund II, a
Delaware business trust ("Trust II"), with respect to certain federal income tax
matters in connection with the reorganization by and between the Montgomery
Balanced Fund, formerly the Montgomery U.S. Asset Allocation Fund (the
"Acquiring Fund"), a series of Trust II, and the Montgomery Equity Income Fund
(the "Acquired Fund"), a series of Trust I. This opinion is rendered in
connection with the transaction described in the Agreement and Plan of
Reorganization dated as of December 31, 1999 (the "Reorganization Agreement") by
Trust I on behalf of the Acquired Fund and by Trust II on behalf of the
Acquiring Fund and adopts the applicable defined terms therein.
This letter and the opinion expressed herein are for delivery to Trust
I and Trust II and may be relied upon only by Trust I and Trust II, the
Acquiring Fund, the Acquired Fund, and their shareholders. This opinion also may
be disclosed by Trust I, Trust II, Acquiring Fund and Acquired Fund, or any of
their shareholders in connection with an audit or other administrative
proceeding before the Internal Revenue Service (the "Service") affecting Trust
I, Trust II, Acquiring Fund and Acquired Fund, or any of their shareholders or
in connection with any judicial proceeding relating to the federal, state or
local tax liability of Trust I, Trust II, Acquiring Fund and Acquired Fund or
any of their shareholders.
<PAGE>
The Montgomery Funds
January 18, 2000
Page 2
For purposes of this opinion we have assumed the truth and accuracy of
the following facts:
Trust I was duly created pursuant to its Agreement and Declaration of
Trust by the Trustees for the purpose of acting as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and is validly existing under the laws of the Commonwealth of Massachusetts.
Trust I is registered as an investment company classified as a diversified,
open-end management company, under the 1940 Act.
Trust II was duly created pursuant to its Agreement and Declaration of
Trust by the Trustees for the purpose of acting as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and is validly existing under the laws of the State of Delaware. Trust II is
registered as an investment company classified as a diversified, open-end
management company, under the 1940 Act.
The Acquiring Fund is a series of Trust II duly established under the
laws of the State of Delaware, and is validly existing under the laws of that
State. The shares of the Acquiring Fund are widely held. The Acquiring Fund has
an authorized capital of an unlimited number of shares and each outstanding
share of the Acquiring Fund is fully transferable and has full voting rights.
The Acquired Fund is a series of the Trust I duly established under the
laws of the Commonwealth of Massachusetts, and is validly existing under the
laws of that Commonwealth. The shares of the Acquired Fund are widely held. The
Acquired Fund has an authorized capital of an unlimited number of shares and
each outstanding share of the Acquired Fund is fully transferable and has full
voting rights.
For valid business purposes, the following transaction will take place
in accordance with the laws of the Commonwealth of Massachusetts and pursuant to
the Reorganization Agreement:
On the date of the closing (the "Closing Date"), the shareholders of
the Acquired Fund will transfer all of their stock in Acquired Fund to the
Acquiring Fund. Solely in exchange therefor, Trust II will cause the Acquiring
Fund to deliver to the shareholders of the Acquired Fund a number of Class R and
Class P shares (the "Acquiring Fund Shares") of voting common stock of the
Acquiring Fund.
<PAGE>
The Montgomery Funds
January 18, 2000
Page 3
In rendering the opinions stated below, we have examined and relied
upon the following, assuming the truth and accuracy of any statements contained
therein:
(1) The Reorganization Agreement; and
(2) Such other documents, records and instruments as we have
deemed necessary in order to enable us to render the opinions
referred to in this letter.
For purposes of rendering the opinions stated below, we have in
addition relied upon the following representations by Trust I and Trust II on
behalf of the Acquired Fund and the Acquiring Fund, respectively, as applicable:
(a) The fair market value of the Acquiring stock received by each
Target shareholder will be approximately equal to the fair market value of
Target stock surrendered in the exchange.
(b) There is no plan or intention by any of the shareholders of Target
to sell, exchange, or otherwise dispose of a number of shares of Acquiring stock
received in the transaction that would reduce the Target shareholders' ownership
of Acquiring stock to a number of shares having a value, as of the date of the
transaction, of less than 50 percent of the value of all of the formerly
outstanding stock of Target as of the same date. Moreover, shares of Target
stock and shares of Acquiring stock held by Target shareholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the transaction will be
considered in making this representation.
(c) Target has no plan or intention (and Acquiring has no plan or
intention to cause Target) to issue additional shares of its stock that would
result in Acquiring losing control of Target within the meaning of section
368(c).
(d) Acquiring has no plan or intention to liquidate Target; to merge
Target into another corporation; to cause Target to sell or otherwise dispose of
any of its assets, except for dispositions made in the ordinary course of
business and dispositions described above; or to sell or otherwise dispose of
any of the Target stock acquired in the transaction, except for transfers
described in section 368(a)(2)(C).
(e) Acquiring has no plan or intention to reacquire any of its stock
issued in the transaction.
<PAGE>
The Montgomery Funds
January 18, 2000
Page 4
(f) Acquiring, Target, and the shareholders of Target will pay their
respective expenses, if any, incurred in connection with the transaction, except
that Target and Sub are bearing most of the cost of preparing and filing the
ruling request.
(g) Acquiring will acquire Target stock solely in exchange for
Acquiring voting stock. For purposes of this representation, Target stock
redeemed for cash or other property furnished by Acquiring will be considered as
acquired by Acquiring. Further, no liabilities of Target or the Target
shareholders will be assumed by Acquiring, nor will any of the Target stock be
subject to any liabilities.
(h) At the time of the transaction, Target will not have outstanding
any warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire stock in Target that, if exercised or
converted, would effect Acquiring's acquisition or retention of control of
Target, as defined in section 368(c).
(i) Acquiring does not own, directly or indirectly, nor has it owned
during the past five years, directly or indirectly, any stock of Target.
(j) Following the transaction, Target will continue its historic
business or use a significant portion of its historic business assets in a
business as described above.
(k) No two parties to the transaction are investment companies as
defined in section 368(a)(2)(F)(iii) and (iv).
(l) There will be no dissenters to the transaction.
(m) On the date of the transaction, the fair market value of the assets
of Target will exceed the sum of its liabilities plus the liabilities, if any,
to which the assets are subject.
(n) None of the compensation received by any shareholder-employees of
Target will be separate consideration for, or allocable to, any of their shares
of Target stock; none of the shares of Acquiring stock received by any
shareholder-employees will be separate consideration for, or allocable to, any
employment agreement; and the compensation paid to any shareholder-employees
will be for services actually rendered and will be commensurate with amounts
paid to third parties bargaining at arm's-length for similar services.
<PAGE>
The Montgomery Funds
January 18, 2000
Page 5
(o) Acquiring will pay or assume only those expenses of Target and
Target's shareholders that are solely and directly related to the transaction in
accordance with the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.
Our opinions set forth in this letter are based upon the Code,
regulations of the Treasury Department, published administrative announcements
and rulings of the Service and court decisions, all as of the date of this
letter. Based on the foregoing facts and representations, and provided that the
transaction will take place in accordance with the terms of the Reorganization
Agreement, and further provided that the Acquired Fund distributes the shares of
Acquiring Fund received in the transaction as soon as practicable, we are of the
opinion that:
(1) The transfer by the shareholders of the Acquired Fund of all of
their shares in the Acquired Fund to the Acquiring Fund solely in exchange for
shares of the Acquiring Fund will be a reorganization within the meaning of
Section 368(a)(1)(B) of the Code. The Acquiring Fund and the Acquired Fund each
are a "party to a reorganization" within the meaning of Section 368(b) of the
Code.
(2) The Acquired Fund will recognize no gain or loss on its transfer of
substantially all of its assets to the Acquiring Fund in exchange solely for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the Acquired
Fund's liabilities, or on distribution of such Acquiring Fund Shares to its
shareholders.
(3) The Acquiring Fund will recognize no gain or loss on its receipt of
substantially all of the assets of the Acquired Fund and the assumption by the
Acquiring Fund of the Acquired Fund's liabilities in exchange solely for the
Acquiring Fund Shares.
(4) The Acquiring Fund's basis in the assets received from the Acquired
Fund in the transaction will equal the basis of such assets in the hands of the
Acquired Fund immediately prior to the transaction.
(5) The Acquiring Fund's holding period for the assets received in the
Reorganization will include the period during which the Acquired Fund held such
assets.
(6) The shareholders of the Acquired Fund will recognize no gain or
loss on the receipt of the Acquiring Fund Shares (including any fractional share
interests to which they may be entitled) solely in exchange for their Acquired
Fund stock.
<PAGE>
The Montgomery Funds
January 18, 2000
Page 6
(7) The basis of the Acquiring Fund Shares received by each of the
Acquired Fund's shareholders in the transaction (including fractional shares to
which they may be entitled) will equal the basis of the Acquired Fund stock
surrendered in exchange therefor.
(8) The holding period of the Acquiring Fund Shares received by each of
the Acquired Fund's shareholders in exchange for their Acquired Fund stock
(including fractional shares to which they may be entitled) will include the
period that the shareholder held the Acquired Fund stock exchange therefor,
provided that the shareholder held such stock as a capital asset on the date of
the exchange.
The opinions set forth above represent our conclusions as to the
application of federal income tax law existing as of the date of this letter to
the transactions described above, and we can give no assurance that legislative
enactments, administrative changes or court decisions may not be forthcoming
which would require modifications or revocations of our opinions expressed
herein. Moreover, there can be no assurance that positions contrary to our
opinions will not be taken by the Service, or that a court considering the
issues would not hold contrary to such opinions. Further, all the opinions set
forth above represent our conclusions based upon the documents and facts
referred to above. Any material amendments to such documents or changes in any
significant facts would affect the opinions referred to herein. Although we have
made such inquiries and performed such investigation as we have deemed necessary
to fulfill our professional responsibilities, we have not undertaken an
independent investigation of the facts referred to in this letter.
We express no opinion as to any federal income tax issue or other
matter except those set forth above.
We hereby consent to the filing of this opinion as an exhibit to Trust
II's Registration Statement on Form N-14 (and our being named therein) filed by
Trust II in connection with the Reorganization.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
EXHIBIT 14
Independent Auditors' Consent - PricewaterhouseCoopers LLP
C-8
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement and Statement of Additional Information constituting parts of this
Registration Statement on Form N-14 of our report dated August 18, 1999,
relating to the financial statements and financial highlights appearing in the
June 30, 1999 Annual Report to Shareholders of Montgomery U.S. Allocation Fund
and Montgomery Equity Income Fund.. We also consent to the references to us
under the headings "Financial Highlights" and "Experts" in the Prospectus/Proxy
Statement. Further, we consent to the references to us under the heading
"Financial Highlights" in the Prospectus and under the heading "General
Information" in the Statement of Additional Information constituting parts of
Post-Effective Amendment No. 69 and No. 49 to the registration statement on Form
N-1A dated October 31, 1999 of The Montgomery Funds and The Montgomery Funds II,
respectively, which is also incorporated by reference into this Registration
Statement on Form N-14.
San Francisco, California
January 18, 2000
