As filed with the Securities and Exchange Commission on November 19, 1996
Registration Nos. 33-34841
811-6011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 42
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 43
THE MONTGOMERY FUNDS
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
1-800-572-3863
(Registrant's Telephone Number, Including Area Code)
JACK G. LEVIN
600 Montgomery Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
X immediately upon filing pursuant to Rule 485(b)
---
__ on __________, 1996 pursuant to Rule 485(b)
__ 60 days after filing pursuant to Rule 485(a)(1)
__ 75 days after filing pursuant to Rule 485(a)(2)
__ on ________________ pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1996 was filed on August 28, 1996.
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
(415) 772-6000
Total number of pages _____. Exhibit Index appears at _____
<PAGE>
THE MONTGOMERY FUNDS
CONTENTS OF POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the
Registrant contains the following documents* :
Facing Sheet
Contents of Post-Effective Amendment
Cross-Reference Sheet for shares of Montgomery Growth Fund, Montgomery
Equity Income Fund, Montgomery Small Cap Fund, Montgomery
Small Cap Opportunities Fund, Montgomery Micro Cap Fund,
Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery International Small Cap Fund,
Montgomery International Growth Fund, Montgomery Emerging Asia
Fund, Montgomery Emerging Markets Fund, Montgomery Select 50
Fund, Montgomery Asset Allocation Fund, Montgomery Short
Government Bond Fund, Montgomery Government Reserve Fund,
Montgomery Tax-Free Money Fund, Montgomery California Tax-Free
Intermediate Bond Fund and Montgomery California Tax-Free
Money Fund
Part B - Combined Statement of Additional Information for Class R,
Class P and Class L shares of Montgomery Growth Fund,
Montgomery Equity Income Fund, Montgomery Small Cap Fund,
Montgomery Small Cap Opportunities Fund, Montgomery Micro Cap
Fund, Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery International Small Cap Fund,
Montgomery International Growth Fund, Montgomery Emerging Asia
Fund, Montgomery Emerging Markets Fund, Montgomery Select 50
Fund, Montgomery Asset Allocation Fund, Montgomery Short
Government Bond Fund, Montgomery Government Reserve Fund,
Montgomery Tax-Free Money Fund, Montgomery California Tax-Free
Intermediate Bond Fund and Montgomery California Tax-Free
Money Fund
Part C - Other Information
Signature Page
Exhibit
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* This Amendment does not relate to the following documents:
prospectuses for the Class R shares, Class P shares and Class L shares for all
of the above series and the prospectus for Montgomery Advisors Emerging Markets
Fund; prospectus and statement of additional information for Montgomery
Technology Fund.
<PAGE>
THE MONTGOMERY FUNDS
<TABLE>
CROSS REFERENCE SHEET
FORM N-1A
PART B: Information Required in
Statement of Additional Information
(Combined Statement of Additional Information)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Content Table of Contents
12. General Information "The Trusts" and "General Information"
and History
13. Investment Objectives "Investment Objectives and Policies of Funds," "Risk
Factors" and "Investment Restrictions"
14. Management of the
Registrant "Trustees and Officers"
15. Control Persons and "Trustees and Officers" and
Principal Holders of "General Information"
Securities
16. Investment Advisory "Investment Management and Other Services"
and other Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and "The Trusts" and "General Information"
Other Securities
19. Purchase, Redemption "Additional Purchase and Redemption Information"
and Pricing of and "Determination of Net Asset Value"
Securities Being
Offered
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
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PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
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<PAGE>
THE MONTGOMERY FUNDS
---------------------------
MONTGOMERY GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY MICRO CAP FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY ADVISORS EMERGING MARKETS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY ASSET ALLOCATION FUND
MONTGOMERY SHORT GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND
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STATEMENT OF ADDITIONAL INFORMATION
November 18, 1996
The Montgomery Funds and The Montgomery Funds II are open-end
management investment companies organized, respectively, as a Massachusetts and
a Delaware business trust (together, the "Trusts"), each having different series
of shares of beneficial interest. Each of the above-named funds is a series of
The Montgomery Funds, with the exception of the Montgomery Asset Allocation
Fund, which is a series of The Montgomery Funds II (each a "Fund" and,
collectively, the "Funds"). The Funds are managed by Montgomery Asset
Management, L.P. (the "Manager") and their shares are distributed by Montgomery
Securities (the "Distributor"). This Statement of Additional Information
contains information in addition to that set forth in the combined prospectuses
for all Funds (other than the Montgomery Advisors Emerging Markets Fund) dated
November 12, 1996 (with respect to the Class R shares), dated November 12, 1996
(with respect to the Class P shares for various series) and dated November 12,
1996 (with respect to the Class L shares for various series), the prospectus for
the Montgomery Advisors Emerging Markets Fund, dated November 13, 1995 and as
each prospectus may be revised from time to time (in reference to the
appropriate Fund or Funds, the "Prospectuses"). The Prospectuses provide the
basic information a prospective investor should know before purchasing shares of
any Fund and may be obtained without charge at the address or telephone number
provided above. This Statement of Additional Information is not a prospectus and
should be read in conjunction with the appropriate Prospectuses.
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TABLE OF CONTENTS
Page
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THE TRUSTS...................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS..............................B-4
RISK FACTORS................................................................B-24
INVESTMENT RESTRICTIONS.....................................................B-31
DISTRIBUTIONS AND TAX INFORMATION...........................................B-36
TRUSTEES AND OFFICERS.......................................................B-42
INVESTMENT MANAGEMENT AND OTHER SERVICES....................................B-48
EXECUTION OF PORTFOLIO TRANSACTIONS.........................................B-54
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................B-58
DETERMINATION OF NET ASSET VALUE............................................B-60
PRINCIPAL UNDERWRITER.......................................................B-63
PERFORMANCE INFORMATION.....................................................B-64
GENERAL INFORMATION.........................................................B-71
FINANCIAL STATEMENTS........................................................B-79
Appendix A..................................................................B-80
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THE TRUSTS
The Montgomery Funds is an open-end management investment
company organized as a Massachusetts business trust on May 10, 1990, and The
Montgomery Funds II is an open-end management investment company organized as a
Delaware business trust on September 10, 1993. Both are registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Trusts currently offer shares of beneficial interest, $.01 par value per share,
in various series. Each series (other than the Montgomery Advisors Emerging
Markets Fund) offers three classes of shares (Class R, Class P and Class L).
This Statement of Additional Information pertains to eighteen
series of The Montgomery Funds: Montgomery Growth Fund (the "Growth Fund"),
Montgomery Equity Income Fund (the "Equity Income Fund"), Montgomery Small Cap
Fund (the "Small Cap Fund"), Montgomery Small Cap Opportunities Fund (the "Small
Cap Opportunities Fund"), Montgomery Micro Cap Fund (the "Micro Cap Fund"),
Montgomery Global Opportunities Fund (the "Opportunities Fund"), Montgomery
Global Communications Fund (the "Communications Fund"), Montgomery International
Growth Fund (the "International Growth Fund"), Montgomery International Small
Cap Fund (the "International Small Cap Fund"), Montgomery Emerging Asia Fund
(the "Emerging Asia Fund"), Montgomery Emerging Markets Fund (the "Emerging
Markets Fund"), Montgomery Advisors Emerging Markets Fund (the "Advisors Fund"),
Montgomery Select 50 Fund (the "Select 50 Fund"), Montgomery Short Government
Bond Fund (the "Short Fund"), Montgomery Government Reserve Fund (the "Reserve
Fund"), Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund"),
Montgomery California Tax-Free Intermediate Bond Fund (the "California
Intermediate Bond Fund") and Montgomery California Tax-Free Money Fund (the
"California Money Fund"); as well as one series of The Montgomery Funds II,
Montgomery Asset Allocation Fund (the "Allocation Fund").
Throughout this Statement of Additional Information, certain
Funds may be referred to together using the following terms: the Small Cap,
Small Cap Opportunities, Micro Cap, Equity Income and Growth Funds as the
"Domestic Equity Funds"; the Emerging Asia, Emerging Markets, Advisors,
International Small Cap and International Growth Funds as the "International
Funds"; the Opportunities and Communications Funds as the "Global Funds"; the
Select 50 and Allocation Funds as the "Multi-Strategy Funds";the Short, Reserve,
Federal Money, California Intermediate Bond and California Money Funds as the
"Fixed Income Funds"; the Federal Money, California Intermediate Bond and
California Money Funds as the "Tax-Free Funds"; the Reserve, Federal Money and
California Money Funds as the "Money Market Funds"; and all of the Funds other
than the Tax-Free Funds as the "Taxable Funds."
Note that the two Trusts share responsibility for the accuracy
of the Prospectuses and this Statement of Additional Information, and that each
Trust may be liable for misstatements in
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the Prospectuses and the Statement of Additional Information that relate solely
to the other Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The investment objectives and policies of the Funds are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
Each Fund is a diversified series, except for the Tax-Free
Funds, which are nondiversified series, of either the Montgomery Funds or The
Montgomery Funds II. The achievement of each Fund's investment objective will
depend upon market conditions generally and on the Manager's analytical and
portfolio management skills.
Portfolio Securities
Depositary Receipts. The Domestic Equity, Select 50,
Allocation, International and Global Funds may hold securities of foreign
issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and other similar global instruments available in
emerging markets, or other securities convertible into securities of eligible
issuers. These securities may not necessarily be denominated in the same
currency as the securities for which they may be exchanged. Generally, ADRs in
registered form are designed for use in U.S. securities markets, and EDRs and
other similar global instruments in bearer form are designed for use in European
securities markets. For purposes of these Funds' investment policies, these
Funds' investments in ADRs, EDRs and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted.
Other Investment Companies. Each of the Equity Income, Select
50, International, Global, Allocation and Fixed Income Funds may invest up to
10% of its total assets in securities issued by other investment companies
investing in securities in which the Fund can invest provided that such
investment companies invest in portfolio securities in a manner consistent with
the Fund's investment objective and policies, except for the Money Market Funds,
which may so invest up to 35% of their total assets (and, except for the Money
Market Funds, not in money market funds). Applicable provisions of the
Investment Company Act require that a Fund limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than
10% (or 35% for the Money Market Funds) of the value of a Fund's total assets
will be invested in the aggregate in securities of investment companies as a
group; and (b) either (i) a Fund and affiliated persons of that Fund not own
together more than 3% of the total outstanding shares of any one investment
company at the time of purchase (and that all shares of the investment company
held by that Fund in excess of 1% of the company's total outstanding shares be
deemed illiquid), or (ii) a Fund not invest more than 5% of its total assets in
any one investment company and the investment not
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<PAGE>
represent more than 3% of the total outstanding voting stock of the investment
company at the time of purchase. As a shareholder of another investment company,
a Fund would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees. These expenses
would be in addition to the advisory and other expenses that Fund bears directly
in connection with its own operations.
In accordance with applicable regulatory provisions of the
State of California, the Manager has agreed to waive its management fee with
respect to assets of the Funds that are invested in other open-end investment
companies.
U.S. Government Securities. Because the Short and Reserve
Funds invest a substantial portion, if not all, of their net assets, and the
Equity Income and Allocation Funds may invest a substantial portion of their net
assets, in obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities ("U.S. Government securities"), these Funds generally will
have a lower yield than if they purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
Generally, the value of U.S. Government securities held by the
Funds will fluctuate inversely with interest rates. U.S. Government securities
in which the Funds may invest include debt obligations of varying maturities
issued by the U.S. Treasury or issued or guaranteed by an agency or
instrumentality of the U.S. Government, including the Federal Housing
Administration ("FHA"), Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Bank, Farm Credit System Financial Assistance
Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Financing
Corporation, Federal Financing Bank, Federal National Mortgage Association
("FNMA"), Maritime Administration, Tennessee Valley Authority, Resolution
Funding Corporation, Student Loan Marketing Association and Washington
Metropolitan Area Transit Authority. Direct obligations of the U.S. Treasury
include a variety of securities that differ primarily in their interest rates,
maturities and dates of issuance. Because the U.S. Government is not obligated
by law to provide support to an instrumentality that it sponsors, a Fund will
not invest in obligations issued by an instrumentality of the U.S. Government
unless the Manager determines that the instrumentality's credit risk makes its
securities suitable for investment by the Fund.
Mortgage-Related Securities: Government National Mortgage
Association. GNMA is a wholly owned corporate instrumentality of the U.S.
Government within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of, and interest on, securities
B-5
<PAGE>
that are based on and backed by a pool of specified mortgage loans. For these
types of securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V of the
Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate
interest in one or more pools of the following types of mortgage loans: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment
mortgage loans; (3) fixed-rate growing equity mortgage loans; (4) fixed-rate
mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on
multifamily residential properties under construction; (6) mortgage loans on
completed multifamily projects; (7) fixed-rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans
that provide for adjustments on payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes.
Mortgage-Related Securities: Federal National Mortgage
Association. FNMA is a federally chartered and privately owned corporation
established under the Federal National Mortgage Association Charter Act. FNMA
was originally organized in 1938 as a U.S. Government agency to add greater
liquidity to the mortgage market. FNMA was transformed into a private sector
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
Each FNMA pass-through security represents a proportionate
interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (that is, mortgage loans that are not insured or guaranteed by any U.S.
Government agency). The loans contained in those pools consist of one or more of
the following: (1) fixed-rate level payment mortgage loans; (2) fixed-rate
growing equity mortgage loans; (3) fixed-rate graduated payment mortgage loans;
(4) variable-rate mortgage loans; (5) other adjustable-rate mortgage loans; and
(6) fixed-rate mortgage loans secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage
Corporation. FHLMC is a corporate instrumentality of the United States
established by the Emergency Home Finance Act of 1970, as amended. FHLMC was
organized primarily for the purpose of increasing the availability of mortgage
credit to finance needed
B-6
<PAGE>
housing. The operations of FHLMC currently consist primarily of the purchase of
first lien, conventional, residential mortgage loans and participation interests
in mortgage loans and the resale of the mortgage loans in the form of
mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically
consist of fixed-rate or adjustable-rate mortgage loans with original terms to
maturity of between ten and 30 years, substantially all of which are secured by
first liens on one-to-four-family residential properties or multifamily
projects. Each mortgage loan must include whole loans, participation interests
in whole loans and undivided interests in whole loans and participation in
another FHLMC security.
Privately Issued Mortgage-Related Securities. As set forth in
the Prospectus, the Allocation and Short Funds may invest in mortgage-related
securities offered by private issuers, including pass-through securities
comprised of pools of conventional residential mortgage loans; mortgage-backed
bonds which are considered to be obligations of the institution issuing the
bonds and are collateralized by mortgage loans; and bonds and collateralized
mortgage obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on the collateral pool may cause the various classes of a CMO to be
retired substantially earlier than their stated maturities or final distribution
dates. The principal of and interest on the collateral pool may be allocated
among the several classes of a CMO in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to some of the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on mortgage-related securities. Certain classes of CMOs may have priority
over others with respect to the receipt of prepayments on the mortgages.
These Funds may invest in, among other things, "parallel pay"
CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class which, like the
other CMO structures, must be retired by its stated maturity date or final
distribution date, but may be retired earlier. PAC Bonds are parallel pay CMOs
that generally require payments of a specified amount of principal on each
payment date; the required principal payment on PAC Bonds have the highest
priority after interest has been paid to all classes.
Adjustable-Rate Mortgage-Related Securities. Because the
interest rates on the mortgages underlying adjustable-rate
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mortgage-related securities ("ARMS") reset periodically, yields of such
portfolio securities will gradually align themselves to reflect changes in
market rates. Unlike fixed-rate mortgages, which generally decline in value
during periods of rising interest rates, ARMS allow the Allocation and Short
Funds to participate in increases in interest rates through periodic adjustments
in the coupons of the underlying mortgages, resulting in both higher current
yields and low price fluctuations. Furthermore, if prepayments of principal are
made on the underlying mortgages during periods of rising interest rates, these
Funds may be able to reinvest such amounts in securities with a higher current
rate of return. During periods of declining interest rates, of course, the
coupon rates may readjust downward, resulting in lower yields to these Funds.
Further, because of this feature, the value of ARMS is unlikely to rise during
periods of declining interest rates to the same extent as fixed rate
instruments. For further discussion of the risks associated with
mortgage-related securities generally, see "Risk Considerations" in the
Prospectus.
Variable Rate Demand Notes. Variable rate demand notes
("VRDNs") are tax-exempt obligations that contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30-, 60-, 90-, 180-, or
365-day intervals. The interest rates are adjustable at intervals ranging from
daily to six months. Adjustment formulas are designed to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments typically are based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
The Tax-Free Funds also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the institution. A Fund has an
undivided interest in the underlying obligation and thus participates on the
same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their
creditworthiness may be a function of the creditworthiness of the issuer, the
institution furnishing the irrevocable letter of credit, or both. Accordingly,
the Tax-Free Funds may invest in such VRDNs, the issuers or underlying
institutions of which the Manager believes are creditworthy and satisfy the
quality
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requirements of the Funds. The Manager periodically monitors the
creditworthiness of the issuer of such securities and the underlying
institution.
During periods of high inflation and periods of economic
slowdown, together with the fiscal measures adopted by governmental authorities
to attempt to deal with them, interest rates have varied widely. While the value
of the underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Funds may invest in VRDNs on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
Municipal Securities. Because the Tax-Free Funds invest at
least 80% of their total assets in obligations either issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. Government,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal income tax ("Municipal Securities"), or exempt from federal and
California personal income tax ("California Municipal Securities"), and the
California Money Fund invests at least 65% of its total assets in California
Municipal Securities, and may invest in Municipal Securities, these Funds
generally will have a lower yield than if they primarily purchased higher
yielding taxable securities, commercial paper or other securities with
correspondingly greater risk. Generally, the value of the Municipal Securities
and California Municipal Securities held by these Funds will fluctuate inversely
with interest rates.
General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts. The proceeds of
these obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
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Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the principal security for
a revenue bond is generally the net revenue derived from a particular facility,
group of facilities or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds,
which may pay tax-exempt interest, are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money to finance various
privately operated facilities for business manufacturing, housing, sports, and
pollution control. These bonds also are used to finance public facilities, such
as airports, mass transit systems, ports and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for such payment. As a result
of 1986 federal tax legislation, industrial revenue bonds may no longer be
issued on a tax-exempt basis for certain previously permissible purposes,
including sports and pollution control facilities.
Participation Interests. The Tax-Free Funds may purchase from
financial institutions participation interests in Municipal Securities, such as
industrial development bonds and municipal lease/purchase agreements. A
participation interest gives a Fund an undivided interest in a Municipal
Security in the proportion that the Fund's participation interest bears to the
total principal amount of the Municipal Security. These instruments may have
fixed, floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Board of Trustees has approved as meeting the Board's standards,
or, alternatively, the payment obligation will be collateralized by U.S.
Government securities.
For certain participation interests, these Funds will have the
right to demand payment, on not more than seven days' notice, for all or any
part of their participation interest in a Municipal Security, plus accrued
interest. As to these instruments, these Funds intend to exercise their right to
demand payment only upon a default under the terms of the Municipal
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Securities, as needed to provide liquidity to meet redemptions, or to maintain
or improve the quality of their investment portfolios. The California
Intermediate Bond Fund will not invest more than 15% of its total assets and the
California Money Fund will not invest more than 10% of its total assets in
participation interests that do not have this demand feature, and in other
illiquid securities.
Some participation interests are subject to a
"nonappropriation" or "abatement" feature by which, under certain conditions,
the issuer of the underlying Municipal Security may, without penalty, terminate
its obligation to make payment. In such event, the holder of such security must
look to the underlying collateral, which is often a municipal facility used by
the issuer.
Custodial Receipts. The Tax-Free Funds may purchase custodial
receipts representing the right to receive certain future principal and interest
payments on Municipal Securities that underlie the custodial receipts. A number
of different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by one
of these Funds should increase the volatility of its net asset value and, thus,
its price per share. These custodial receipts are sold in private placements and
are subject to these Funds' limitation with respect to illiquid investments. The
Tax-Free Funds also may purchase directly from issuers, and not in a private
placement, Municipal Securities having the same characteristics as the custodial
receipts.
Tender Option Bonds. The Tax-Free Funds may purchase tender
option bonds and similar securities. A tender option bond is a Municipal
Security, generally held pursuant to a custodial arrangement, having a
relatively long maturity and bearing interest
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at a fixed rate substantially higher than prevailing short-term tax-exempt
rates, coupled with an agreement of a third party, such as a bank, broker-dealer
or other financial institution, granting the security holders the option, at
periodic intervals, to tender their securities to the institution and receive
their face value. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the Municipal
Security's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Manager, on behalf of a Tax-Free Fund, considers on a
periodic basis the creditworthiness of the issuer of the underlying Municipal
Security, of any custodian and of the third party provider of the tender option.
In certain instances and for certain tender option bonds, the option may be
terminable in the event of a default in payment of principal or interest on the
underlying Municipal Obligations and for other reasons. The California
Intermediate Bond Fund will not invest more than 15% of its total assets and the
California Money Market Fund more than 10% of its total assets in securities
that are illiquid (including tender option bonds with a tender feature that
cannot be exercised on not more than seven days' notice if there is no secondary
market available for these obligations).
Obligations with Puts Attached. The Tax-Free Funds may
purchase Municipal Securities together with the right to resell the securities
to the seller at an agreed-upon price or yield within a specified period prior
to the securities' maturity date. Although an obligation with a put attached is
not a put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." These Funds will use such puts in
accordance with regulations issued by the Securities and Exchange Commission
("SEC"). In 1982, the Internal Revenue Service (the "IRS") issued a revenue
ruling to the effect that, under specified circumstances, a regulated investment
company would be the owner of tax-exempt municipal obligations acquired with a
put option. The IRS also has issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The last such
ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Funds intend to take the position that they are the owners
of any municipal obligations acquired subject to a stand-by commitment or a
similar put right and that tax-exempt interest earned with
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respect to such municipal obligations will be tax exempt in its hands. There is
no assurance that stand-by commitments will be available to these Funds nor have
they assumed that such commitments would continue to be available under all
market conditions. There may be other types of municipal securities that become
available and are similar to the foregoing described Municipal Securities in
which these Funds may invest.
Zero Coupon Bonds. The Allocation and Fixed Income Funds may
invest in zero coupon securities, which are debt securities issued or sold at a
discount from their face value and do not entitle the holder to any periodic
payment of interest prior to maturity, a specified redemption date or a cash
payment date. The amount of the discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. Zero coupon securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The market
prices of zero coupon securities are generally more volatile than the market
prices of interest-bearing securities and respond more to changes in interest
rates than interest-bearing securities with similar maturities and credit
qualities.
Risk Factors/Special Considerations Relating to Debt Securities
The Select 50, International and the Global Funds may invest
in debt securities that are rated below BBB by Standard & Poor's Corporation
("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Fitch
Investor Services ("Fitch"), or, if unrated, are deemed to be of equivalent
investment quality by the Manager. As an operating policy, which may be changed
by the Board of Trustees without shareholder approval, these Funds will invest
no more than 5% of their assets in debt securities rated below Baa by Moody's or
BBB by S&P, or, if unrated, of equivalent investment quality as determined by
the Manager. The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. The net asset value of these Funds will
reflect these changes in market value.
Bonds rated C by Moody's are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which
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low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of these Funds to sell the securities at
fair value either to meet redemption requests or to respond to changes in the
economy or financial markets and could adversely affect, and cause fluctuations
in, the per-share net asset value of these Funds.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of
low-rated debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of these Funds to
achieve their investment objectives may, to the extent they invest in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if these Funds invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than
investment-grade securities. The prices of low-rated debt securities have been
found to be less sensitive to interest rate changes than higher-rated debt
securities but more sensitive to adverse economic downturns or individual
corporate developments. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low-rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low-rated debt securities defaults, these
Funds may incur additional expenses to seek financial recovery. The low-rated
bond market is relatively new, and many of the outstanding low-rated bonds have
not endured a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate
risks, the Select 50, International, Global, Equity Income and Allocation Funds
may enter into forward foreign currency exchange contracts ("forward contracts")
and foreign currency futures contracts, as well as purchase put or call options
on foreign currencies, as described below. These Funds also may conduct their
foreign currency exchange transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market.
The Funds (except the Money Market Funds) also may purchase
other types of options and futures and may, in the future, write covered
options, as described below and in the Prospectus.
Forward Contracts. The Select 50, International, Global and
Allocation Funds may enter into forward contracts to attempt to minimize the
risk from adverse changes in the relationship between
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the U.S. dollar and foreign currencies. A forward contract, which is
individually negotiated and privately traded by currency traders and their
customers, involves an obligation to purchase or sell a specific currency for an
agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency or is expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of a security, dividend or interest payment.
When a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that currency for a fixed dollar
amount.
In connection with a Fund's forward contract transactions, an
amount of the Fund's assets equal to the amount of its commitments will be held
aside or segregated to be used to pay for the commitments. Accordingly, a Fund
always will have cash, cash equivalents or liquid equity or debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of these Funds to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by a Fund than if it had not entered into
such contracts. The Funds generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates, the Funds (except the Money Market Funds) may purchase and sell various
kinds of futures contracts and options on futures contracts. These Funds also
may enter into closing purchase and sale transactions with respect to any such
contracts and options. Futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices.
These Funds have filed a notice of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
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<PAGE>
that these Funds will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that a Fund
may hold positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
that Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
These Funds will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
these Funds or which they expect to purchase. These Funds' futures transactions
generally will be entered into only for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities or currencies and will be purchased to protect a Fund against an
increase in the price of securities it intends to purchase (or the currencies in
which they are denominated). All futures contracts entered into by these Funds
are traded on U.S. exchanges or boards of trade licensed and regulated by the
CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these
Funds seek to establish more certainty than would otherwise be possible with
respect to the effective price, rate of return or currency exchange rate on
portfolio securities or securities that these Funds propose to acquire. For
example, when interest rates are rising or securities prices are falling, a Fund
can seek, through the sale of futures contracts, to offset a decline in the
value of its current portfolio securities. When rates are falling or prices are
rising, a Fund, through the purchase of futures contracts, can attempt to secure
better rates or prices than might later be available in the market with respect
to anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
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<PAGE>
As part of its hedging strategy, a Fund also may enter into
other types of financial futures contracts if, in the opinion of the Manager,
there is a sufficient degree of correlation between price trends for the Fund's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in a Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having that Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting that Fund's securities portfolio. When
hedging of this character is successful, any depreciation in the value of
portfolio securities can be substantially offset by appreciation in the value of
the futures position. However, any unanticipated appreciation in the value of a
Fund's portfolio securities could be offset substantially by a decline in the
value of the futures position.
The acquisition of put and call options on futures contracts
gives a Fund the right (but not the obligation), for a specified price, to sell
or purchase the underlying futures contract at any time during the option
period. Purchasing an option on a futures contract gives a Fund the benefit of
the futures position if prices move in a favorable direction, and limits its
risk of loss, in the event of an unfavorable price movement, to the loss of the
premium and transaction costs.
A Fund may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. A Fund's ability to establish and close
out positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts
and related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies.
These Funds may purchase put and call options on securities in which they have
invested, on foreign currencies represented in their portfolios and on any
securities index based in whole or in part on securities in which these Funds
may invest. These Funds also may enter into closing sales transactions in order
to realize gains or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of
an increase in the market value of securities of the type in which it may invest
or a positive change in the currency in which such securities are denominated.
The purchase of a call option would entitle a Fund, in return for the premium
paid,
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<PAGE>
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and
foreign exchanges. Although these Funds will generally purchase only those
options for which there appears to be an active secondary market, there can be
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that a Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be
liquid for a variety of reasons including: (i) insufficient trading interest in
certain options; (ii) restrictions on opening transactions or closing
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances which interrupt normal
operations on an exchange; (v) inadequate facilities of an exchange or the
Options Clearing Corporation to handle current trading volume at all times; or
(vi) discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although these Funds do not currently intend to do so, they
may, in the future, write (i.e., sell) covered put and call options on
securities, securities indices and currencies in which they may invest. A
covered call option involves a Fund's giving another party, in return for a
premium, the right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. A covered call option
serves as a partial hedge against the price decline of the underlying security.
However, by writing a covered call option, a Fund gives up the opportunity,
while the option is in effect, to realize gain from any price increase (above
the option exercise price) in the underlying security. In addition, a Fund's
ability to sell the underlying security is limited while the option is in effect
unless the Fund effects a closing purchase transaction.
These Funds also may write covered put options that give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. A Fund will receive a premium for writing a put
option but will be obligated for as long as the option is outstanding to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise. In order to "cover" put options
it has
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written, a Fund will cause its custodian to segregate cash, cash equivalents,
U.S. Government securities or other liquid equity or debt securities with at
least the value of the exercise price of the put options. A Fund will not write
put options if the aggregate value of the obligations underlying the put options
exceeds 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and result in the
institution by an exchange of special procedures that may interfere with the
timely execution of the Funds' orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Funds
may enter into repurchase agreements. A Fund's repurchase agreements will
generally involve a short-term investment in a U.S. Government security or other
high-grade liquid debt security, with the seller of the underlying security
agreeing to repurchase it at a mutually agreed-upon time and price. The
repurchase price is generally higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to a Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. The Manager, acting under the supervision of
the Boards, reviews on a periodic basis the suitability and creditworthiness,
and the value of the collateral, of those sellers with whom the Funds enter into
repurchase agreements to evaluate potential risk. All repurchase agreements will
be made pursuant to procedures adopted and regularly reviewed by the Boards.
The Funds generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Funds regard repurchase agreements
with maturities in excess of seven days as illiquid. A Fund may not invest more
than 15% (10% in the case of the Money Market Funds) of the value of its net
assets in illiquid securities, including repurchase agreements with maturities
greater than seven days.
For purposes of the Investment Company Act, a repurchase
agreement is deemed to be a collateralized loan from a Fund to the seller of the
security subject to the repurchase agreement. It is not clear whether a court
would consider the security acquired by a Fund subject to a repurchase agreement
as being owned by that Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect
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to the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and a Fund has not perfected a security interest in the
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor. As such, a Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a
Fund also runs the risk that the seller may fail to repurchase the security.
However, the Funds always require collateral for any repurchase agreement to
which they are a party in the form of securities acceptable to them, the market
value of which is equal to at least 100% of the amount invested by the Funds
plus accrued interest, and the Funds make payment against such securities only
upon physical delivery or evidence of book entry transfer to the account of its
custodian bank. If the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including interest), a Fund,
pursuant to its repurchase agreement, may require the seller of the security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement equals or exceeds the repurchase price (including
interest) at all times.
The Funds may participate in one or more joint accounts with
each other and other series of the Trusts that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. Government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event have a duration
of more than seven days.
Reverse Repurchase Agreements. The Domestic Equity, Select 50,
International, Opportunities, Allocation, Short, Reserve and Tax-Free Funds may
enter into reverse repurchase agreements, as set forth in the Prospectus. These
Funds typically will invest the proceeds of a reverse repurchase agreement in
money market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. This use of proceeds involves
leverage, and a Fund will enter into a reverse repurchase agreement for leverage
purposes only when the Manager believes that the interest income to be earned
from the investment of the proceeds would be greater than the interest expense
of the
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transaction. These Funds also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when sale of the
Fund's securities is disadvantageous.
These Funds cause their custodian to segregate liquid assets,
such as cash, U.S. Government securities or other liquid equity or debt
securities equal in value to their obligations (including accrued interest) with
respect to reverse repurchase agreements. Such assets are marked to market daily
to ensure that full collateralization is maintained.
Dollar Roll Transactions. The Allocation, Short and California
Intermediate Bond Funds may enter into dollar roll transactions, as discussed in
the Prospectus. A dollar roll transaction involves a sale by a Fund of a
security to a financial institution concurrently with an agreement by that Fund
to purchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
At the time a Fund enters into a dollar roll transaction, it
causes its custodian to segregate liquid assets such as cash, U.S. Government
securities or other liquid equity or debt securities having a value equal to the
purchase price for the similar security (including accrued interest) and
subsequently marks the assets to market daily to ensure that full
collateralization is maintained.
Lending of Portfolio Securities. Although the Funds currently
do not intend to do so, a Fund may lend its portfolio securities having a value
of up to 10% (30% in the case of the Select 50, Global, International Growth,
Equity Income, Allocation, Short and California Intermediate Bond Funds) of its
total assets in order to generate additional income. Such loans may be made to
broker-dealers or other financial institutions whose creditworthiness is
acceptable to the Manager. These loans would be required to be secured
continuously by collateral, including cash, cash equivalents, irrevocable
letters of credit, U.S. Government securities, or other high-grade liquid debt
securities, maintained on a current basis (i.e., marked to market daily) at an
amount at least equal to 100% of the market value of the securities loaned plus
accrued interest. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the income earned on
the cash to the borrower or placing broker. Loans are subject to termination at
the option of a Fund or the borrower at any time. Upon such
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termination, a Fund is entitled to obtain the return of the securities loaned
within five business days.
For the duration of the loan, a Fund will continue to receive
the equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to those securities. As with
other extensions of credit, there are risks of delay in recovery or even losses
of rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. The Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" or "delayed delivery" basis. The price of such
securities is fixed at the time the commitment to purchase or sell is made, but
delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their custodian to segregate cash, U.S.
Government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of a Fund are held in cash
pending the settlement of a purchase of securities, that Fund will earn no
income on these assets.
The Short Fund may seek to hedge investments or to realize
additional gains through forward commitments to sell high-grade liquid debt
securities it does not own at the time it enters into the commitments. Such
forward commitments effectively constitute a form of short sale. To complete
such a transaction, this Fund must obtain the security which it has made a
commitment to deliver. If this Fund does not have cash available to purchase the
security it is obligated to deliver, it may be required to liquidate securities
in its portfolio at either a gain or a loss, or borrow cash under a reverse
repurchase or other short-term arrangement, thus incurring an additional
expense. In addition, this Fund may incur a loss as a result of this type of
forward
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commitment if the price of the security increases between the date this Fund
enters into the forward commitment and the date on which it must purchase the
security it is committed to deliver. This Fund will realize a gain from this
type of forward commitment if the security declines in price between those
dates. The amount of any gain will be reduced, and the amount of any loss
increased, by the amount of the interest or other transaction expenses this Fund
may be required to pay in connection with this type of forward commitment.
Whenever this Fund engages in this type of transaction, it will segregate assets
as discussed above.
Illiquid Securities. A Fund may invest up to 15% (10% for the
Money Market Funds and 5% for the Small Cap Fund) of its net assets in illiquid
securities. The term "illiquid securities" for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which a Fund has valued the securities and
includes, among others, repurchase agreements maturing in more than seven days,
certain restricted securities and securities that are otherwise not freely
transferable. Illiquid securities also include shares of an investment company
held by a Fund in excess of 1% of the total outstanding shares of that
investment company. Restricted securities may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). Illiquid securities acquired by the Funds may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that would not be freely marketable in the
United States, will not be considered illiquid. Where registration is required,
a Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
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Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities sold pursuant to Rule 144A in many cases provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities, however, could adversely affect the marketability of such portfolio
securities and result in a Fund's inability to dispose of such securities
promptly or at favorable prices.
The Boards of Trustees have delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Boards. The Manager takes into account a number of factors in
reaching liquidity decisions, including, but not limited to: (i) the frequency
of trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Boards.
RISK FACTORS
Foreign Securities
Investors in the Select 50, International, Global and
Allocation Funds should consider carefully the substantial risks involved in
securities of companies located or doing business in, and governments of,
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There may be less publicly available information about foreign
companies comparable to the reports and ratings published regarding companies in
the U.S. Foreign companies are often not subject to uniform accounting, auditing
and financial reporting standards, and auditing practices and requirements often
may not be comparable to those applicable to U.S. companies. Many foreign
markets have substantially less volume than either the established domestic
securities exchanges or the OTC markets. Securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which may be fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S., and capital requirements for
brokerage firms are generally lower.
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Settlement of transactions in foreign securities may, in some instances, be
subject to delays and related administrative uncertainties.
Emerging Market Countries
The Select 50, International and Global Funds, particularly
the Emerging Asia, Emerging Markets and Advisors Funds, may invest in securities
of companies domiciled in, and in markets of, so-called "emerging market
countries." These investments may be subject to potentially higher risks than
investments in developed countries. These risks include (i) volatile social,
political and economic conditions; (ii) the small current size of the markets
for such securities and the currently low or nonexistent volume of trading,
which result in a lack of liquidity and in greater price volatility; (iii) the
existence of national policies which may restrict these Funds' investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; (v) the absence
of developed structures governing private or foreign investment or allowing for
judicial redress for injury to private property; (vi) the absence, until
recently in certain emerging market countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent favorable
economic developments in certain emerging market countries may be slowed or
reversed by unanticipated political or social events in such countries.
Exchange Rates and Polices
The Select 50, International and Global Funds endeavor to buy
and sell foreign currencies on favorable terms. Some price spreads on currency
exchange (to cover service charges) may be incurred, particularly when these
Funds change investments from one country to another or when proceeds from the
sale of shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would prevent
these Funds from repatriating invested capital and dividends, withhold portions
of interest and dividends at the source, or impose other taxes, with respect to
these Funds' investments in securities of issuers of that country. There also is
the possibility of expropriation, nationalization, confiscatory or other
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Boards of both Trusts consider at least annually the
likelihood of the imposition by any foreign government of exchange
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control restrictions that would affect the liquidity of the Funds' assets
maintained with custodians in foreign countries, as well as the degree of risk
from political acts of foreign governments to which such assets may be exposed.
The Boards also consider the degree of risk attendant to holding portfolio
securities in domestic and foreign securities depositories (see "Investment
Management and Other Services").
Hedging Transactions
While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while a
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for that Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and a Fund may be exposed to risk of financial loss.
Perfect correlation between a Fund's hedging positions and
portfolio positions may be difficult to achieve because hedging instruments in
many foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
California Municipal Securities
The information set forth below is a general summary intended
to give a recent historical description. It is not a discussion of any specific
factors that may affect any particular issuer of California Municipal
Securities. The information is not intended to indicate continuing or future
trends in the condition, financial or otherwise, of California. Such information
is derived from official statements utilized in connection with securities
offerings of the State of California that have come to the attention of the
Trusts and were available prior to the date of this Statement of Additional
Information. Such information has not been independently verified by the
California Intermediate Bond and California Money Funds.
Because the California Intermediate Bond and California Money
Funds expect to invest substantially all of their assets in California Municipal
Securities, they will be susceptible to a number of complex factors affecting
the issuers of California Municipal Securities, including national and local
political, economic, social, environmental and regulatory policies and
conditions. These Funds cannot predict whether or to what extent such factors or
other factors may affect the issuers of California Municipal Securities, the
market value or marketability of such
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securities or the ability of the respective issuers of such securities acquired
by these Funds to pay interest on, or principal of, such securities. The
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no responsibility on the part of the State of
California to make payments on such local obligations. There may be specific
factors that are applicable in connection with investment in the obligations of
particular issuers located within California, and it is possible these Funds
will invest in obligations of particular issuers as to which such specific
factors are applicable.
From mid-1990 to late 1993, California suffered the most
severe recession in the State since the 1930s. Construction, manufacturing
(especially aerospace), exports and financial services, among other industries,
have been severely affected. Since the start of 1994, however, California's
economy has been on a steady recovery. Employment grew significantly during 1994
and 1995, especially in export-related industries, business services,
electronics, entertainment and tourism.
The recession severely affected State revenues while the
State's health and welfare costs were increasing. Consequently, the State had a
lengthy period of budget imbalance; the State's accumulated budget deficit
approached $2.8 billion at its peak at June 30, 1993. The 1993-94 Budget Act
proposed to repay the $2.8 billion deficit over two fiscal years, but as a
result of the recession the projected excess of revenues over expenditures did
not materialize. The accumulated budget deficit at June 30, 1994 was about $1.8
billion, and a second two-year plan was implemented in 1994-95 to eliminate the
budget deficit. An additional consequence of the large budget deficits has been
that the State depleted its available cash resources and has had to use a series
of external borrowings to meet its cash needs, including borrowings extending
into the next fiscal year. The State anticipates that it will not have to resort
to such "cross-year" borrowing during the 1995-96 fiscal year.
The 1994-95 Budget Act recognized that the accumulated $2
billion budget deficit could not be repaid in one year, and proposed a two-year
solution to eliminate the deficit with operating surpluses for 1994-95 and
1995-96. The 1994-95 Budget Act projected revenues and transfers of $41.9
billion (up $2.1 billion from 1993-94, and reflecting the Governor's forecast of
an improving economy), and expenditures of $40.9 billion (up $1.6 billion from
1993-94). Principal features of the 1994-95 Budget Act included:
1. Receipt of about $760 million of federal aid for certain
costs related to refugees and undocumented immigrants. Only about $33
million of this amount was received, with another approximately $98
million scheduled to be received during 1995-96.
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2. Reductions of about $1.1 billion in health and welfare
costs. A 2.3 percent reduction in Aid to Families with Dependent
Children has been enjoined pending further litigation, however.
3. An increase in Proposition 98 funding for K-14 schools of
$526 million.
4. Additional miscellaneous cuts and fund transfers of $755
million.
5. A further one-year suspension (for 1995) of the renter's
personal income tax credit.
The 1994-95 Budget Act contained no tax increases other than
the suspension of the renter's credit. As a result of the improving economy, the
California Department of Finance's final estimates for 1994-95 showed revenues
and transfers of $42.7 billion and expenditures of $42 billion.
The 1995-96 Budget Act was enacted on August 3, 1995, 34 days
after the start of the fiscal year.
The 1995-96 Budget Act projects General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from 1994-95, and General
Fund expenditures of $43.4 billion, a 4 percent increase from 1994-95. Special
Fund revenues are estimated at $12.7 billion, and Special Fund expenditures of
$13 billion have been appropriated. The 1995-96 Budget Act projects that the
General Fund will end the 1995-96 fiscal year with a slight surplus at June 30,
1996, and that all of the accumulated budget deficits will have been repaid.
Principal features of the 1995-96 Budget Act include:
1. An increase in Proposition 98 funding for K-14 schools of
about $1.2 billion.
2. Reductions in health and welfare costs of about $900
million (about $500 million of which depends upon federal legislative
approval).
3. A 3.5 percent increase for the University of California and
the California State University system.
4. Receipt of an additional $278 million in federal aid for
costs of illegal immigrants, above commitments already made by the
federal government.
5. An increase of about 8 percent in General Fund support for
the Department of Corrections, reflecting estimates of an increased
prison population.
The Governor's proposed budget for 1996-97, released on
January 10, 1996, updated the projections for 1995-96; revenues and transfers
are estimated to be $45 billion and expenditures to be
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$44.2 billion. As a result, the budget reserve was projected to have a positive
balance of about $50 million on June 30, 1996, with available cash (after
payment of all obligations due) of about $2.2 billion.
The Governor's proposed budget for 1996-97 projected General
Fund revenues and transfers of about $45.6 billion and requested total General
Fund appropriations of about $45.2 billion, which would leave a budget reserve
of about $400 million on June 30, 1997. The Governor's proposed budget renewed a
proposal, which had been rejected by the Legislature in 1995, for a 15 percent
cut in personal and corporate tax rates, phased in over a three-year period. On
the assumption that the proposed tax rate cut would be enacted, the Governor's
proposed budget shows a reduction in revenues of about $600 million for 1996-97.
The Governor's proposed budget also projects external cash flow borrowing of up
to $3.2 billion, to mature by June 30, 1997.
The foregoing discussion of the 1994-95, 1995-96 and 1996-97
fiscal year budgets is based on the Budget Acts for those years, which include
estimates and projections of revenues and expenditures, and should not be
construed as a statement of fact. The assumptions used to construct a budget may
be affected by numerous factors, including future economic conditions in
California and the nation. There can be no assurance that the estimates will be
achieved.
Certain issuers of California Municipal Securities receive
subventions from the State which are eligible to be used to make payments on
such Securities. No prediction can be made as to what effect any decrease in
subventions may have on the ability of some issuers to make such payments.
Because of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since late 1991, all
three major nationally recognized statistical rating organizations have lowered
their ratings for general obligation bonds of the State from the highest ranking
of "AAA" to "A" by S&P, "A1" by Moody's and "A+" by Fitch Investors Service,
Inc. It is not presently possible to determine whether, or the extent to which,
Moody's, S&P or Fitch will change such ratings in the future. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State, and
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Constitutional and Statutory Limitations. Article XIII A of
the California Constitution (which resulted from the voter approved Proposition
13 in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an
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increase in ad valorem taxes on real property in excess of one percent for
certain bonded indebtedness approved by two-thirds of the voters voting on the
proposed indebtedness. The "full cash value" of property may be adjusted
annually to reflect increases (not to exceed two percent) or decreases, in the
consumer price index or comparable local data, or to reflect reductions in
property value caused by substantial damage, destruction or other factors, or
when there is a "change in ownership" or "new construction".
Constitutional challenges to Article XIII A to date have been
unsuccessful. In 1992, the United States Supreme Court ruled that
notwithstanding the disparate property tax burdens that Proposition 13 might
place on otherwise comparable properties, those provisions of Proposition 13 do
not violate the Equal Protection Clause of the United States Constitution.
In response to the significant reduction in local property tax
revenue caused by the passage of Proposition 13, the State enacted legislation
to provide local governments with increased expenditures from the General Fund.
This fiscal relief has ended, however.
Article XIII B of the California Constitution generally limits
the amount of appropriations of the State and of local governments to the amount
of appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute
known as Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional. The California Supreme Court recently
upheld Proposition 62's requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This recent
decision may invalidate other taxes that have been imposed by local governments
in California and make it more difficult for local governments to raise taxes.
In 1988 and 1990, California voters approved initiatives known
as Proposition 98 and Proposition 111, respectively. These initiatives changed
the State's appropriations limit under Article XIII B to (i) require that the
State set aside a prudent reserve fund for public education, and (ii) guarantee
a minimum level of State funding for public elementary and secondary schools and
community colleges.
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The effect of constitutional and statutory changes and of
budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected). There is no assurance that any
California issuer will make full or timely payments of principal or interest or
remain solvent. For example, in December 1994, Orange County filed for
bankruptcy.
In addition, it is impossible to predict the time, magnitude,
or location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck the Los Angeles area, causing
significant damage in a four-county area. The possibility exists that another
such earthquake could create a major dislocation of the California economy.
The Tax-Free Funds' (other than the Federal Money Fund)
concentration in California Municipal Securities provides a greater level of
risk than a fund that is diversified across numerous states and municipal
entities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by each Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of a Fund's outstanding
voting securities as defined in the Investment Company Act. A Fund may not:
1. In the case of each Fixed Income Fund, purchase any common
stocks or other equity securities, except that a Fund may invest in securities
of other investment companies as described above and consistent with restriction
number 9 below.
2. With respect to 75% (100% for the Federal Money Fund) 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 a 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 (not applicable to the Federal Money Fund). This
investment restriction does not apply to the California Intermediate Bond Fund.
3. Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and policies, (b)
through the lending of up to 10% (30% in the case of the Select 50 Fund, Global
Funds, International Growth Fund, Equity Income Fund, Allocation Fund, Short
Fund and California Intermediate Bond Fund) of its portfolio securities as
described above and in its Prospectus, or (c) to the extent the
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entry into a repurchase agreement or a reverse dollar roll transaction is deemed
to be a loan.
4. (a) For the Growth Fund, Small Cap Opportunities Fund,
Select 50 Fund, International Growth Fund, Equity Income Fund, Micro Cap Fund,
International Small Cap Fund, Opportunities Fund and Allocation Fund only:
Borrow money, except for temporary or emergency purposes from a bank, or
pursuant to reverse repurchase agreements or dollar roll transactions for a Fund
that uses such investment techniques and then not in excess of one-third (10% in
the case of the Growth Fund) of the value of its total assets (at the lower of
cost or fair market value). Any such borrowing will be made only if immediately
thereafter there is an asset coverage of at least 300% of all borrowings, and no
additional investments may be made while any such borrowings are in excess of
10% of total assets.
(b) For the Small Cap Fund, Emerging Asia Fund,
Emerging Markets Fund, Advisors Fund, Communications Fund, Federal Money Fund,
California Money Fund and Reserve Fund only: Borrow money, except temporarily
for extraordinary or emergency purposes from a bank and then not in excess of
10% (one-third in the case of the Communications Fund) of its total assets (at
the lower of cost or fair market value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least 300% of all
borrowings, and no additional investments may be made while any such borrowings
are in excess of 5% of total assets.
(c) For the Short Fund and California Intermediate
Bond Fund only: Borrow money, except temporarily for extraordinary or emergency
purposes from a bank or pursuant to reverse repurchase or dollar roll
transactions and then not in excess of one-third of the value of its total
assets (at the lower of cost or fair market value). Any such borrowing will be
made only if immediately thereafter there is an asset coverage of at least 300%
of all borrowings, and no additional investments may be made while any
borrowings (excluding any permissible reverse repurchase agreements and dollar
roll transactions the Fund may enter into) are in excess of 5% of the Fund's
total assets.
(d) 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.
5. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude a Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
6. Buy or sell real estate (including interests in real estate
limited partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts; however, a
Fund, to the extent not otherwise
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prohibited in the Prospectus or this Statement of Additional Information, may
invest in securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein, including real
estate investment trusts, and may purchase or sell currencies (including forward
currency exchange contracts), futures contracts and related options generally as
described in the Prospectus and this Statement of Additional Information. As an
operating policy which may be changed without shareholder approval, consistent
with the laws of the State of Texas, the Funds may invest in real estate
investment trusts only up to 10% of their total assets.
7. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude permissible investments
in marketable securities of issuers engaged in such activities.)
8. Except for the California Intermediate Bond and Money
Market Funds, invest more than 5% of the value of its total assets in securities
of any issuer which has not had a record, together with its predecessors, of at
least three years of continuous operation. (This is an operating policy which
may be changed without shareholder approval consistent with the regulations of
the State of Arkansas.)
9. (a) Invest in securities of other investment companies,
except to the extent permitted by the Investment Company Act and discussed in
the Prospectus or this Statement of Additional Information, or as such
securities may be acquired as part of a merger, consolidation or acquisition of
assets.
(b) Invest in securities of other investment companies
except by purchase in the open market where no commission or profit to a sponsor
or dealer results from the purchase other than the customary broker's
commission, or except when the purchase is part of a plan of merger,
consolidation, reorganization or acquisition. (This is an operating policy which
may be changed without shareholder approval, consistent with the regulations of
the State of Ohio.)
10. Invest, in the aggregate, more than 15% (10% for the Money
Market Funds) 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 a Fund. (This is
an operating policy which may be changed without shareholder approval,
consistent with the Investment Company Act, changes in relevant SEC
interpretations). Pursuant to state law restrictions, this limitation has been
modified to 5% for the Small Cap Fund.
11. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy
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which may be changed without shareholder approval, consistent with the
Investment Company Act.)
12. Except with respect to communications companies for the
Communications Fund, as described in the Prospectus, 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 or California Municipal
Obligations or Municipal Obligations for the Tax-Free Funds.) For purposes of
this restriction, the Funds generally rely on the U.S.
Office of Management and Budget's Standard Industrial
Classifications.
13. Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to prohibit a Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b) entering
into permissible repurchase and dollar roll transactions.
14. Except as described in the Prospectus and this Statement
of Additional Information, acquire or dispose of put, call, straddle or spread
options subject to the following conditions (for other than the Short Fund and
California Intermediate Bond Fund):
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options
which are held at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without shareholder approval,
consistent with state regulations.)
15. (a) Except as described in the Prospectus and this
Statement of Additional Information, engage in short sales of securities. (This
is an operating policy which may be changed without shareholder approval,
consistent with applicable regulations.)
(b) A Fund may not invest more than 25% of its net assets
in short sales, and the value of the securities of any one issuer in which a
Fund is short may not exceed the lesser of 2% of the value of the Fund's net
assets or 2% of the securities of any class of any issuer. In addition, short
sales may be made only in those securities that are fully listed on a national
securities exchange. (This is an operating policy which may be changed without
shareholder approval, consistent with the regulations of the State of Texas.)
16. Invest in warrants, valued at the lower of cost or market,
in excess of 5% of the value of a Fund's net assets. Included in such amount,
but not to exceed 2% of the value of a Fund's net assets, may be warrants which
are not listed on the New
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York Stock Exchange or American Stock Exchange. Warrants acquired by a Fund in
units or attached to securities may be deemed to be without value. This
investment restriction does not relate to the Fixed Income Funds. (This is an
operating policy which may be changed without shareholder approval, consistent
with the regulations of the State of Texas.)
17. (a) Purchase or retain in a Fund's portfolio any security
if any officer, trustee or shareholder of the issuer is at the same time an
officer, trustee or employee of the Trust or of its investment adviser and such
person owns beneficially more than 1/2 of 1% of the securities and all such
persons owning more than 1/2 of 1% own more than 5% of the outstanding
securities of the issuer.
(b) Purchase more than 10% of the outstanding voting
securities of any one issuer. This investment restriction does not relate to the
Fixed Income Funds. (This is an operating policy which may be changed without
shareholder approval, consistent with the regulations of the State of Ohio.)
18. Invest in commodities, except for futures contracts or
options on futures contracts if, as a result thereof, more than 5% of a 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. The Money Market Funds may not enter into a
futures contract or option on a futures contract regardless of the amount of the
initial deposit or premium.
To the extent these restrictions reflect matters of operating
policy which may be changed without shareholder vote, these restrictions may be
amended upon approval by the appropriate Board and notice to shareholders.
If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage resulting from a
change in the values of assets will not constitute a violation of that
restriction, except as otherwise noted.
The Board of Trustees of The Montgomery Funds has elected to
value the assets of the Money Market Funds in accordance with Rule 2a-7 under
the Investment Company Act. This Rule also imposes various restrictions on these
Funds' portfolios which are, in some cases, more restrictive than these Funds'
stated fundamental policies and investment restrictions. Due to amendments to
Rule 2a-7 adopted by the SEC in 1991, any fund which holds itself out as a money
market fund must also follow certain portfolio provisions of Rule 2a-7 regarding
the maturity and quality of each portfolio investment, and the diversity of such
investments. Thus, although the restrictions imposed by Rule 2a-7 are not
fundamental policies of these Funds, these Funds must comply with these
provisions unless their shareholders vote to change their policies of being
money market funds.
B-35
<PAGE>
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds receive income in the form of
dividends and interest earned on their investments in securities. This income,
less the expenses incurred in their operations, is the Funds' net investment
income, substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not pay "interest" or guarantee any fixed rate
of return on an investment in their shares.
The Funds also may derive capital gains or losses in
connection with sales or other dispositions of their portfolio securities. Any
net gain a Fund may realize from transactions involving investments held less
than the period required for long-term capital gain or loss recognition or
otherwise producing short-term capital gains and losses (taking into account any
carryover of capital losses from previous years), while a distribution from
capital gains, will be distributed to shareholders with and as a part of income
dividends. If during any year a Fund realizes a net gain on transactions
involving investments held for the period required for long-term capital gain or
loss recognition or otherwise producing long-term capital gains and losses, the
Fund will have a net long-term capital gain. After deduction of the amount of
any net short-term capital loss, the balance (to the extent not offset by any
capital losses carried over from previous years) will be distributed and treated
as long-term capital gains in the hands of the shareholders regardless of the
length of time that Fund's shares may have been held.
Any dividend or distribution per share paid by a Fund reduces
that Fund's net asset value per share on the date paid by the amount of the
dividend or distribution per share. Accordingly, a dividend or distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes (except for
distributions from the Tax-Free Funds to the extent not subject to income
taxes).
Dividends and other distributions will be reinvested in
additional shares of the applicable Fund unless the shareholder has otherwise
indicated. Investors have the right to change their election with respect to the
reinvestment of dividends and distributions by notifying the Transfer Agent in
writing, but any such change will be effective only as to dividends and other
distributions for which the record date is seven or more business days after the
Transfer Agent has received the written request.
Tax Information. Each Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M
B-36
<PAGE>
of the Internal Revenue Code of 1986, as amended (the "Code"), for each taxable
year by complying with all applicable requirements regarding the source of its
income, the diversification of its assets, and the timing of its distributions.
Each Fund that has filed a tax return has so qualified and elected in prior tax
years. Each Fund's policy is to distribute to its shareholders all of its
investment company taxable income and any net realized capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so that Fund will not be subject to any federal income tax or excise taxes
based on net income. However, the Board of Trustees may elect to pay such excise
taxes if it determines that payment is, under the circumstances, in the best
interests of a Fund.
In order to qualify as a regulated investment company, each
Fund must, among other things, (a) derive at least 90% of its gross income each
year from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock or securities or
foreign currency gains related to investments in stocks or other securities, or
other income (generally including gains from options, futures or forward
contracts) derived with respect to the business of investing in stock,
securities or currency, (b) derive less than 30% of its gross income each year
from the sale or other disposition of stock or securities (or options thereon)
held less than three months (excluding some amounts otherwise included in income
as a result of certain hedging transactions), and (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the market value of
its assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
for purposes of this calculation, in the case of other securities of any one
issuer to an amount not greater than 5% of that Fund's assets or 10% of the
voting securities of the issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment companies). As
such, and by complying with the applicable provisions of the Code, a Fund will
not be subject to federal income tax on taxable income (including realized
capital gains) that is distributed to shareholders in accordance with the timing
requirements of the Code. If a Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation.
Distributions of net investment income and net realized
capital gains by a Fund will be taxable to shareholders whether made in cash or
reinvested in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of a Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
B-37
<PAGE>
The Funds or any securities dealer effecting a redemption of
the Funds' shares by a shareholder will be required to file information reports
with the IRS with respect to distributions and payments made to the shareholder.
In addition, the Funds will be required to withhold federal income tax at the
rate of 31% on taxable dividends, redemptions and other payments made to
accounts of individual or other non-exempt shareholders who have not furnished
their correct taxpayer identification numbers and made certain required
certifications on the Account Application Form or with respect to which a Fund
or the securities dealer has been notified by the IRS that the number furnished
is incorrect or that the account is otherwise subject to withholding.
The Funds intend to declare and pay dividends and other
distributions, as stated in the Prospectus. In order to avoid the payment of any
federal excise tax based on net income, each Fund must declare on or before
December 31 of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
A Fund may receive dividend distributions from U.S.
corporations. To the extent that a Fund receives such dividends and distributes
them to its shareholders, and meets certain other requirements of the Code,
corporate shareholders of the Fund may be entitled to the "dividends received"
deduction. Availability of the deduction is subject to certain holding period
and debt-financing limitations.
In the case of the Select 50, International and Global Funds,
if more than 50% in value of the total assets of a Fund at the end of its fiscal
year is invested in stock or other securities of foreign corporations, that Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by that Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of any
foreign income taxes paid by that Fund, and (ii) entitled either to deduct their
share of such foreign taxes in computing their taxable income or to claim a
credit for such taxes against their U.S. income tax, subject to certain
limitations under the Code. In this case, shareholders will be informed by that
Fund at the end of each calendar year regarding the availability of any credits
on and the amount of foreign source income (including or excluding foreign
income taxes paid by that Fund) to be included in their income tax returns. If
50% or less in value of that Fund's total assets at the end of its fiscal year
are invested in stock or other securities, securities of foreign corporations,
that Fund will not be entitled under the Code to pass through to its
shareholders their pro rata share of the foreign income taxes paid by that Fund.
In this case, these taxes will be taken as a deduction by that Fund.
B-38
<PAGE>
The Select 50, International and Global Funds may be subject
to foreign withholding taxes on dividends and interest earned with respect to
securities of foreign corporations. These Funds may invest up to 10% of their
total assets in the stock of foreign investment companies. Such companies are
likely to be treated as "passive foreign investment companies" ("PFICs") under
the Code. Certain other foreign corporations, not operated as investment
companies, may nevertheless satisfy the PFIC definition. A portion of the income
and gains that these Funds derive from PFIC stock may be subject to a
non-deductible federal income tax at the Fund level. In some cases, these Funds
may be able to avoid this tax by electing to be taxed currently on their share
of the PFIC's income, whether or not such income is actually distributed by the
PFIC. These Funds will endeavor to limit their exposure to the PFIC tax by
investing in PFICs only where the election to be taxed currently will be made.
Because it is not always possible to identify a foreign issuer as a PFIC in
advance of making the investment, these Funds may incur the PFIC tax in some
instances.
The Tax-Free Funds. Provided that, as anticipated, each
Tax-Free Fund qualifies as a regulated investment company under the Code, and,
at the close of each quarter of its taxable years, at least 50% of the value of
the total assets of each of the California Intermediate Bond and California
Money Funds consist of obligations (including California Municipal Securities)
the interest on which is exempt from California personal income taxation under
the Constitution or laws of California or of the United States, such Fund will
be qualified to pay exempt-interest dividends to its shareholders that, to the
extent attributable to interest received by the Fund on such obligations, are
exempt from California personal income tax. If at the close of each quarter of
its taxable years, at least 50% of the value of the total assets of the Federal
Money Fund consists of obligations (including Municipal Securities) the interest
on which is exempt from federal personal income taxation under the Constitution
or laws of the United States, the Federal Money Fund will be qualified to pay
exempt-interest dividends to its shareholders that, to the extent attributable
to interest received by the Fund on such obligations, are exempt from federal
personal income tax. The total amount of exempt-interest dividends paid by these
Funds to their shareholders with respect to any taxable year cannot exceed the
amount of interest received by these Funds during such year on tax-exempt
obligations less any expenses attributable to such interest. Income from other
transactions engaged in by these Funds, such as income from options, repurchase
agreements and market discount on tax-exempt securities purchased by these
Funds, will be taxable distributions to its shareholders.
The Code may also subject interest received on certain
otherwise tax-exempt securities to an alternative minimum tax. In addition,
certain corporations which are subject to the alternative minimum tax may have
to include a portion of exempt-interest dividends in calculating their
alternative minimum taxable income.
B-39
<PAGE>
Exempt-interest dividends paid to shareholders that are
corporations subject to California franchise tax will be taxed as ordinary
income to such shareholders. Moreover, no dividends paid by these Funds will
qualify for the corporate dividends-received deduction for federal income tax
purposes.
Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of these Funds is not deductible for
federal income tax purposes. Under regulations used by the IRS for determining
when borrowed funds are considered used for the purposes of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares of these Funds. California personal income
tax law restricts the deductibility of interest on indebtedness incurred by a
shareholder to purchase or carry shares of a fund paying dividends exempt from
California personal income tax, as well as the allowance of losses realized upon
a sale or redemption of shares, in substantially the same manner as federal tax
law. Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their tax advisers
before investing in these Funds.
Up to 85% of social security or railroad retirement benefits
may be included in federal (but not California) taxable income for benefit
recipients whose adjusted gross income (including income from tax-exempt sources
such as tax-exempt bonds and these Funds) plus 50% of their benefits exceeding
certain base amounts. Income from these Funds, and other funds like them, is
included in the calculation of whether a recipient's income exceeds these base
amounts, but is not taxable directly.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. It can be expected that similar
proposals may be introduced in the future. Proposals by members of state
legislatures may also be introduced which could affect the state tax treatment
of these Funds' distributions. If such proposals were enacted, the availability
of Municipal Securities for investment by these Funds and the value of these
Funds' portfolios would be affected. In such event, these Funds would reevaluate
their investment objectives and policies.
Hedging. The use of hedging strategies, such as entering into
futures contracts and forward contracts and purchasing options, involves complex
rules that will determine the character and timing of recognition of the income
received in connection therewith by a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
B-40
<PAGE>
For accounting purposes, when a Fund purchases an option, the
premium paid by the Fund is recorded as an asset and is subsequently adjusted to
the current market value of the option. Any gain or loss realized by a Fund upon
the expiration or sale of such options held by a Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held
by a Fund that substantially diminishes a Fund's risk of loss from any other
position held by that Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of a Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in
gains or losses for tax purposes to the extent of the difference between the
proceeds and the shareholder's adjusted tax basis for the shares. Any loss
realized upon the redemption or exchange of
B-41
<PAGE>
shares within six months from their date of purchase will be treated as a
long-term capital loss to the extent of distributions of long-term capital gain
dividends with respect to such shares during such six-month period. Any loss
realized upon the redemption or exchange of shares of a Tax-Free Fund within six
months from their date of purchase will be disallowed to the extent of
distributions of exempt-interest dividends with respect to such shares during
such six-month period. All or a portion of a loss realized upon the redemption
of shares of a Fund may be disallowed to the extent shares of the same Fund are
purchased (including shares acquired by means of reinvested dividends) within 30
days before or after such redemption.
Distributions and redemptions may be subject to state and
local income taxes, and the treatment thereof may differ from the federal income
tax treatment. Foreign taxes may apply to non-U.S.
investors.
The above discussion and the related discussion in the
Prospectus are not intended to be complete discussions of all applicable federal
tax consequences of an investment in the Funds. The law firm of Heller, Ehrman,
White & McAuliffe has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts have the same
members on their Boards, except for Jerome S. Markowitz who is a Trustee of the
Montgomery Funds II) are responsible for the overall management of the Funds,
including general supervision and review of their investment activities. The
officers (the two Trusts, as well as an affiliated Trust, The Montgomery Funds
III, have the same officers), who administer the Funds' daily operations, are
appointed by the Boards of Trustees. The current Trustees and officers of the
Trusts performing a policy-making function and their affiliations and principal
occupations for the past five years are set forth below:
R. Stephen Doyle, Chairman of the Board, Chief Executive
Officer, Principal Financial and Accounting Officer and
Trustee (Age 55).*
101 California Street, San Francisco, California 94111.
Mr. Doyle has been the Chairman and a Director of
- --------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-42
<PAGE>
Montgomery Asset Management, Inc., the general partner of the
Manager, and Chairman of the Manager since April 1990. Mr.
Doyle is a managing director of the investment banking firm of
Montgomery Securities, the Fund's Distributor, and has been
employed by Montgomery Securities since October 1983.
Mark B. Geist, President (Age 43)
101 California Street, San Francisco, California 94111. Mr.
Geist has been the President and a Director of Montgomery
Asset Management, Inc. and President of the Manager since
April 1990. From October 1988 until March 1990, Mr. Geist was
a Senior Vice President of Analytic Investment Management.
From January 1986 until October 1988, Mr. Geist was a Vice
President with RCB Trust Co. Prior to January 1986, Mr. Geist
was the Pension Fund Administrator for St. Regis Co., a
manufacturing concern.
Jack G. Levin, Secretary (Age 49)
600 Montgomery Street, San Francisco, California 94111. Mr.
Levin has been Director of Legal and Regulatory Affairs for
Montgomery Securities since January 1983.
John T. Story, Executive Vice President (Age 56)
101 California Street, San Francisco, California 94111. Mr.
Story has been the Managing Director of Mutual Funds and
Executive Vice President of Montgomery Asset Management, L.P.
since January 1994. From December 1978 to January 1994, he was
Managing Director - Senior Vice President of Alliance Capital
Management.
David E. Demarest, Chief Administrative Officer (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Demarest has been the Chief Administrative Officer since 1994.
From 1991 until 1994, he was Vice President of Copeland
Financial Services. Prior to joining Copeland, Mr. Demarest
was Vice President/Manager for the Overland Express Funds
Division for Wells Fargo Bank.
Mary Jane Fross, Treasurer (Age 44)
101 California Street, San Francisco, California 94111. Ms.
Fross is Manager of Mutual Fund Administration and Finance for
the Manager. From November 1990 to her arrival at the Manager
in 1993, Ms. Fross was Financial Analyst/Senior Accountant
with Charles Schwab, San Francisco, California. From 1989 to
November 1990, Ms. Fross was Assistant Controller of Bay Bank
of Commerce, San Leandro, California.
B-43
<PAGE>
Roger W. Honour, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Honour is a Managing Director and Senior Portfolio Manager for
the Manager. Roger Honour joined the Manager in June 1993 as
Managing Director and Portfolio Manager responsible for mid
and large capitalization growth stock investing. Prior to
joining Montgomery Asset Management, he was Vice President and
Portfolio Manager at Twentieth Century Investors from 1992 to
1993. Mr. Honour was a Vice President and Portfolio Manager at
Alliance Capital Management from 1990 to 1992. Mr. Honour was
a Vice President of Institutional Equity Research and Sales at
Merrill Lynch Capital Markets from 1980 to 1990.
Stuart O. Roberts, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Roberts is a Managing Director and Portfolio Manager for the
Manager. For the five years prior to his start with the
Manager in 1990, Mr. Roberts was a portfolio manager and
analyst at Founders Asset Management.
Oscar A. Castro, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Castro, CFA, is a Managing Director and Portfolio Manager for
the Manager. Before joining the Manager, he was vice
president/portfolio manager at G.T. Capital Management, Inc.
from 1991 to 1993. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity
partnership. From 1987 to 1989, Mr. Castro was deputy
portfolio manager/analyst at Templeton International.
John D. Boich, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Boich, CFA, is a Managing Director and Portfolio Manager.
Prior to joining the Manager, Mr. Boich was vice president and
portfolio manager at The Boston Company Institutional
Investors Inc. from 1990 to 1993. From 1989 to 1990, Mr. Boich
was the founder and co-manager of The Common Goal World Fund,
a global equity partnership. From 1987 to 1989, Mr. Boich
worked as a financial adviser with Prudential-Bache Securities
and E.F. Hutton & Company.
Josephine S. Jimenez, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Ms.
Jimenez, CFA, is a Managing Director and Portfolio Manager for
the Manager. From 1988 through 1991, Ms. Jimenez worked at
Emerging Markets Investors
B-44
<PAGE>
Corporation/Emerging Markets Management in Washington, D.C. as
senior analyst and portfolio manager.
Bryan L. Sudweeks, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Dr.
Sudweeks, Ph.D., CFA, is a Managing Director and Portfolio
Manager for the Manager. Prior to joining the Manager, he was
a senior analyst and portfolio manager at Emerging Markets
Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, Dr. Sudweeks was a Professor of
International Finance and Investments at George Washington
University and also served as an Adjunct Professor of
International Investments from 1988 until May 1991.
William C. Stevens, Vice President (Age 40)
101 California Street, San Francisco, California 94111. Mr.
Stevens is a Portfolio Manager and Managing Director for the
Manager. At Barclays de Zoete Wedd Securities from 1991 to
1992, he was responsible for starting its CMO and asset-backed
securities trading. Mr. Stevens traded stripped mortgage
securities and mortgage-related interest rate swaps for the
First Boston Corporation from 1990 to 1991 and while with
Drexel Burnham Lambert from 1984 to 1990. He was responsible
for the origination and trading of all derivative
mortgage-related securities with more than $10 billion in
total issuance.
John H. Brown, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Brown, CFA, is a Senior Portfolio Manager and Managing
Director for the Manager. Preceding his arrival at the Manager
in May 1994, Mr. Brown was an analyst and portfolio manager at
Merus Capital Management in San Francisco, California from
June 1986.
Thomas R. Haslett, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Haslett is a Vice President and Senior Portfolio Manager for
the Manager. From September 1987 until joining the Manager in
April 1992, Mr. Haslett was a Portfolio Manager with Gannett,
Welsh and Kotler in Boston, Massachusetts.
Angeline Ee, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Ms. Ee
is a Vice President and Portfolio Manager for the Manager.
From 1990 until joining the Manager in July, 1994, Ms. Ee was
an Investment Manager with AIG Investment Corp. in Hong Kong.
From June, 1989 until
B-45
<PAGE>
September, 1990, Ms. Ee was a co-manager of a portfolio of
Asian equities and bonds at Chase Manhattan Bank in Singapore.
Michael Carmen, Vice President (Age 34)
101 California Street, San Francisco, California 94111.
Michael Carmen, CFA, is a Vice President and Senior Portfolio
Analyst for the Manager. From 1993 until joining the Manager
in 1996, he was a Vice President and Associate Portfolio
Manager with State Street Research and Management Company in
Boston where he assisted with the management of capital
appreciation and growth portfolios. Before then, he was a
Senior Equity Analyst with State Street and, from 1991 to
1992, with Cigna Investments in Hartford.
Jerome C. Philpott, Vice President (Age 34)
101 California Street, San Francisco, California 94111. Jerome
C. (Cam) Philpott, CFA, is a Vice President and Portfolio
Manager for the Manager. Before joining the Manager, Mr.
Philpott was a securities analyst with Boettcher & Company in
Denver from 1988 to 1991.
Bradford D. Kidwell, Vice President (Age 39)
101 California Street, San Francisco, California 94111.
Bradford D. Kidwell is a Vice President and Portfolio Manager
for the Manager. Mr. Kidwell joined the Manager in 1991 from
the position he held since 1989 as the sole general partner
and portfolio manager of Oasis Financial Partners, an
affiliate of the Distributor that invested in savings and
loans. Before then, he covered the savings and loan industry
for Dean Witter Reynolds from 1987 to 1989.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California
94111. Mr. Farnsworth is a partner of Pearson, Caldwell &
Farnsworth, Inc., an executive search consulting firm. From
May 1988 to September 1991, Mr. Farnsworth was the Managing
Partner of the San Francisco office of Ward Howell
International, Inc., an executive recruiting firm. From May
1987 until May 1988, Mr. Farnsworth was Managing Director of
Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until
May 1987, Mr. Farnsworth served as a Senior Vice President of
Bank of America and head of the U.S. Private Banking Division.
Andrew Cox, Trustee (Age 52)
B-46
<PAGE>
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr.
Cox has been engaged as an independent investment consultant.
From September 1976 until June 1988, Mr. Cox was a Vice
President of the Founders Group of Mutual Funds, Denver,
Colorado, and Portfolio Manager or Co-Portfolio Manager of
several of the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 47)
2636 Vallejo Street, San Francisco, California 94123. Ms.
Herbert was Managing Director of Morgan Guaranty Trust
Company. From 1983 to 1991 she was General Manager of the
bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a
member of the Board of Schools of the Sacred Heart, and is a
member of the Archdiocese of San Francisco Finance Council,
where she chairs the Investment Committee.
Jerome S. Markowitz, Trustee and Trustee-designate* (Age 57)
600 Montgomery Street, San Francisco, California 94111. Mr.
Markowitz was elected as a trustee of The Montgomery Funds II
and as a trustee-designate of The Montgomery Funds, effective
November 16, 1995. As a trustee- designate, Mr. Markowitz
attends meetings of the Board of Trustees of the Montgomery
Funds but is not eligible to vote. Mr. Markowitz has been the
Senior Managing Director of Montgomery Securities (the
Distributor) since January 1991. Mr. Markowitz joined
Montgomery Securities in December 1987.
<TABLE>
The officers of the Trusts, and the Trustees who are
considered "interested persons" of the Trusts, receive no compensation directly
from the Trusts for performing the duties of their offices. However, those
officers and Trustees who are officers or partners of the Manager or the
Distributor may receive remuneration indirectly because the Manager will receive
a management fee from the Funds and Montgomery Securities will receive
commissions for executing portfolio transactions for the Funds. The Trustees who
are not affiliated with the Manager or the Distributor receive an annual
retainer and fees and expenses for each regular Board meeting attended. The
aggregate compensation paid by each Trust to each of the Trustees during the
fiscal year ended June 30, 1996, and the aggregate compensation paid to each of
the Trustees during the fiscal year ended June 30, 1996 by all of the registered
investment companies to which the Manager provides investment advisory services,
are set forth below.
B-47
<PAGE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement From the
Aggregate Compensation Benefits Trusts and
Compensation from The Accrued as Fund Complex
from The Montgomery Part of Fund (1 additional
Name of Trustee Montgomery Funds Funds II Expenses* Trust)
- --------------- ---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
R. Stephen Doyle None None -- None
Jerome S. Markowitz None None -- None
John A. Farnsworth $25,000 $5,000 -- $32,500
Andrew Cox $25,000 $5,000 -- $32,500
Cecilia H. Herbert $25,000 $5,000 -- $32,500
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus,
investment management services are provided to the Funds (except the Allocation
Fund) by Montgomery Asset Management, L.P., the Manager, pursuant to an
Investment Management Agreement initially dated July 13, 1990; and to the
Allocation Fund pursuant to an Investment Management Agreement initially dated
November 18, 1993 (together, the "Agreements"). The Agreements are in effect
with respect to each Fund for two years after the Fund's inclusion in its
Trust's Agreement (on or around its beginning of public operations) and then
continue for each Fund for periods not exceeding one year so long as such
continuation is approved at least annually by (1) the Board of the appropriate
Trust or the vote of a majority of the outstanding shares of that Fund, and (2)
a majority of the Trustees who are not interested persons of any party to the
relevant Agreement, in each case by a vote cast in person at a meeting called
for the purpose of voting on such approval. The Agreements may be terminated at
any time, without penalty, by a Fund or the Manager upon 60 days' written
notice, and are automatically terminated in the event of its assignment as
defined in the Investment Company Act.
For services performed under the Agreements, each Fund pays
the Manager a management fee (accrued daily but paid when requested by the
Manager) based upon the average daily net assets of the Fund at the following
annual rates:
Average Daily Net Annual
Fund Assets Rate
- ---- ----------------- ------
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
B-48
<PAGE>
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Small Cap First $200 million 1.20%
Opportunities Fund Next $300 million 1.10%
Over $500 million 1.00%
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Global First $500 million 1.25%
Opportunities Fund Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global First $250 million 1.25%
Communications Fund Over $250 million 1.00%
Montgomery International First $250 million 1.25%
Small Cap Fund Over $250 million 1.00%
Montgomery International First $500 million 1.10%
Growth Fund Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Emerging Markets First $250 million 1.25%
Fund Over $250 million 1.00%
Montgomery Advisors Emerging First $300 million 1.20%
Markets Fund Next $700 million 1.00%
Over $1 billion 0.90%
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Montgomery Asset Allocation First $500 million 0.80%
Fund Over $500 million 0.65%
Montgomery Short Government First $500 million 0.50%
Bond Fund Over $500 million 0.40%
Montgomery Government Reserve First $250 million 0.40%
Fund Next $250 million 0.30%
Over $500 million 0.20%
Montgomery Federal Tax-Free First $500 million 0.40%
Money Fund Over $500 million 0.30%
Montgomery California Tax- First $500 million 0.50%
Free Intermediate Bond Fund Over $500 million 0.40%
Montgomery California Tax- First $500 million 0.40%
Free Money Fund Over $500 million 0.30%
B-49
<PAGE>
As noted in the Prospectus, the Manager has agreed to reduce
some or all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below the lesser of the maximum
allowable by applicable state expense limitations and the following percentages
of each Fund's average net assets (excluding Rule 12b-1 fees): Emerging Asia,
Emerging Markets, International Small Cap, Opportunities and Communications
Funds, one and nine-tenths of one percent (1.90%) each; Select 50 Fund, one and
eight-tenths of one percent (1.80%); Micro Cap Fund, one and three-fourths
percent (1.75%); International Growth Fund, one and sixty-five one-hundredths of
one percent (1.65%); Growth, Small Cap Opportunities and Advisors Funds, one and
five-tenths of one percent (1.50%); Small Cap Fund, one and four-tenths of one
percent (1.40%); Allocation Fund, one and three-tenths percent (1.30%); the
Short and California Intermediate Bond Funds, seven-tenths of one percent
(0.70%) each; the Equity Income Fund, eighty-five-one-hundredths of one percent
(0.85%); and the Money Market Funds, six-tenths of one percent (0.60%), each.
Currently, the most restrictive state limitation is two and one-half percent (2
1/2%) of the first $30,000,000 of average net assets of a Fund, two percent (2%)
of the next $70,000,000, and one and one-half percent (1 1/2%) of the value of
the remaining average net assets. The Manager also may voluntarily reduce
additional amounts to increase the return to a Fund's investors. Any reductions
made by the Manager in its fees are subject to reimbursement by that Fund within
the following two years (three years for the Allocation Fund) provided the Fund
is able to effect such reimbursement and remain in compliance with the foregoing
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Funds for fees and expenses for the
current year.
Operating expenses for purposes of the Agreements include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, expenses incurred in connection with any merger or reorganization,
extraordinary expenses such as litigation, and such other expenses as may be
deemed excludable with the prior written approval of any state securities
commission imposing an expense limitation. The Manager may also, at its
discretion from time to time, pay for other Fund expenses from its own funds or
reduce the management fee of each Fund in excess of that required.
The Agreements were approved with respect to each Fund by the
Board of the Trust at duly called meetings. In considering the Agreements, the
Trustees specifically considered and approved the provision which permits the
Manager to seek reimbursement of any reduction made to its management fee within
the two-year period (three-year period for the Allocation Fund) following such
reduction subject to each Fund's ability to effect such reimbursement and remain
in compliance with applicable expense limitations. The Boards also considered
that any such management fee reimbursement will be accounted for on the
financial statements of each Fund as a contingent liability of that Fund and
will appear as a footnote to that Fund's financial statements until such time as
it appears that such Fund will be able to effect such
B-50
<PAGE>
reimbursement. At such time as it appears probable that a Fund is able to effect
such reimbursement, the amount of reimbursement that such Fund is able to effect
will be accrued as an expense of that Fund for that current period.
<TABLE>
As compensation for its investment management services, each
of the following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<CAPTION>
Fund Year or Period Ended June 30,
- ----
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Montgomery Growth Fund $8,336,529 $5,566,892 $290,908
Montgomery Equity Income $101,709 $12,589 NA
Fund
Montgomery Small Cap Fund $2,364,834 $2,095,945 $2,368,563
Montgomery Small Cap $217,603 NA NA
Opportunities Fund
Montgomery Micro Cap Fund $3,732,720 $703,124 NA
Montgomery Global $381,316 $226,283 $99,102
Opportunities Fund
Montgomery Global $3,186,649 $2,952,058 $2,261,713
Communications Fund
Montgomery International $611,587 $473,200 $300,614
Small Cap Fund
Montgomery International $97,137 NA NA
Growth Fund
Montgomery Emerging Asia NA NA NA
Fund
Montgomery Emerging $10,262,601 $9,290,178 $5,678,053
Markets Fund
Montgomery Advisors $43,843 NA NA
Emerging Markets Fund
Montgomery Select 50 Fund $359,453 NA NA
Montgomery Asset $998,198 $150,882 $2,232
Allocation Fund
Montgomery Short $93,531 $99,249 $117,470
Government Bond Fund
Montgomery Government $1,703,723 $1,440,964 $633,266
Reserve Fund
Montgomery Federal Tax- NA NA NA
Free Money Fund
B-51
<PAGE>
Montgomery California Tax- $48,596 $43,889 $49,676
Free Intermediate Bond
Fund
Montgomery California Tax- $538,030 $149,574 NA
Free Money Fund
</TABLE>
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trusts and who are also
affiliated persons of the Manager.
The use of the name "Montgomery" by the Trusts and by the
Funds is pursuant to the consent of the Manager, which may be withdrawn if the
Manager ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share
Marketing Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds
pursuant to Rule 12b-1 under the Investment Company Act. The Manager serves as
the distribution coordinator under the 12b-1 Plan and, as such, receives any
fees paid by the Funds pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Funds offered only one class of
shares. On that date, the Board of Trustees of the Trusts, including a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the 12b-1 Plan or in
any agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of each Fund approved the 12b-1 Plan covering each
Class. The single class of shares existing before that date was redesignated the
Class R shares. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Manager at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares and at an annual rate of 0.75% of the
Fund's aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Manager for its expenses in connection with the
promotion and distribution of those Classes.
The 12b-1 Plan provides that the Manager may use the
distribution fees received from the Class of the Fund covered by the 12b-1 Plan
only to pay for the distribution expenses of that Class. Distribution fees are
accrued daily and paid monthly, and are charged as expenses of the Class P and
Class L shares as accrued.
Class P and Class L shares are not obligated under the 12b-1
Plan to pay any distribution expense in excess of the distribution fee. Thus, if
the 12b-1 Plan were terminated or otherwise not continued, no amounts (other
than current amounts
B-52
<PAGE>
accrued but not yet paid) would be owed by the Class to the Manager.
The 12b-1 Plan provides that it shall continue in effect from
year to year provided that a majority of the Board of Trustees of the Trust,
including a majority of the Independent Trustees, vote annually to continue the
12b-1 Plan. The 12b-1 Plan (and any distribution agreement between the Fund, the
Distributor or the Manager and a selling agent with respect to the Class P or
Class L shares) may be terminated without penalty upon at least 60-days' notice
by the Distributor or the Manager, or by the Fund by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding shares (as
defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies.
All distribution fees paid by the Funds under the 12b-1 Plan
will be paid in accordance with Article III, Section 26 of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as such
Section may change from time to time. Pursuant to the 12b-1 Plan, the Boards of
Trustees will review at least quarterly a written report of the distribution
expenses incurred by the Manager on behalf of the Class P and Class L shares of
each Fund. In addition, as long as the 12b-1 Plan remains in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the Investment Company Act) of the Trust shall be made by the Trustees then
in office who are not interested persons of the Trust.
Shareholder Services Plan. The Trusts have adopted a
Shareholder Services Plan (the "Services Plan") with respect to the Funds. The
Manager (or its affiliate) serves as the service provider under the Services
Plan and, as such, receives any fees paid by the Funds pursuant to the Services
Plan. The Trusts have not yet implemented the Services Plan for any Fund and
have not set a date for implementation. Affected shareholders will be notified
at least 60 days before implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trusts,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Services Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the Services Plan for
the newly designated Class P and Class L shares of each Fund. The initial
shareholder of the Class P and Class L shares, if any, of each Fund approved the
Services Plan covering each Class. Class R shares are not covered by the
Services Plan.
Under the Services Plan, when implemented, Class P and Class L
of each Fund will pay a continuing service fee to the Manager, the Distributor
or other service providers, in an amount, computed and prorated on a daily
basis, equal to 0.25% per annum of the average daily net assets of Class P and
Class L shares of each Fund. Such amounts are compensation for providing certain
services to clients owning shares of Class P or Class L of the Funds, including
personal services such as processing purchase and redemption transactions,
assisting in change of address requests
B-53
<PAGE>
and similar administrative details, and providing other information and
assistance with respect to a Fund, including responding to shareholder
inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Funds on behalf of the Manager. The Distributor
will also perform investment banking, investment advisory and brokerage services
for persons other than the Funds, including issuers of securities in which the
Funds may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Funds, and may restrict the
ability of the Distributor to provide services to the Funds.
The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Funds' assets, which are maintained at the
Custodian's principal office and at the offices of its branches and agencies
throughout the world. The Custodian has entered into agreements with foreign
sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the
Investment Company Act. The Custodian, its branches and sub-custodians generally
hold certificates for the securities in their custody, but may, in certain
cases, have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreements, the Manager determines which securities
are to be purchased and sold by the Funds and which broker-dealers are eligible
to execute the Funds' portfolio transactions, subject to the instructions of,
and review by, the Funds and the Boards. Purchases and sales of securities
within the U.S. other than on a securities exchange will generally be executed
directly with a "market-maker" unless, in the opinion of the Manager or a Fund,
a better price and execution can otherwise be obtained by using a broker for the
transaction.
The International and Global Funds contemplate purchasing most
equity securities directly in the securities markets located in emerging or
developing countries or in the over-the-counter markets. A Fund purchasing ADRs
and EDRs may purchase those listed on stock exchanges, or traded in the
over-the-counter markets in the U.S. or Europe, as the case may be. ADRs, like
other securities traded in the U.S., will be subject to negotiated commission
rates. The foreign and domestic debt securities and money market instruments in
which a Fund may invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for the Funds also may be
made directly from issuers or from underwriters. Where possible, purchase and
sale transactions will be effected through
B-54
<PAGE>
dealers (including banks) which specialize in the types of securities which the
Funds will be holding, unless better executions are available elsewhere. Dealers
and underwriters usually act as principals for their own account. Purchases from
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter that has
provided research or other services as discussed below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such as the firm's ability to execute trades in a specific
market required by a Fund, such as in an emerging market, the size of the order,
the difficulty of execution, the operational facilities of the firm involved,
the firm's risk in positioning a block of securities, and other factors.
Provided the Trusts' officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
While the Funds' general policy is to seek first to obtain the
most favorable price and execution available, in selecting a broker-dealer to
execute portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by that Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to that Fund or
assist the Manager in carrying out its responsibilities to that Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Funds. The Boards review all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Funds.
B-55
<PAGE>
Investment decisions for the Funds are made independently from
those of other client accounts of the Manager or its affiliates, and suitability
is always a paramount consideration. Nevertheless, it is possible that at times
the same securities will be acceptable for one or more Funds and for one or more
of such client accounts. The Manager and its personnel may have interests in one
or more of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Funds and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and a Fund seek to
acquire the same security at the same general time (especially if the security
is thinly traded or is a small cap stock), that Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, a Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. In many cases, the Funds' transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that Fund is concerned. In other cases, however, it is believed that
the ability of the Fund to participate in volume transactions may produce better
executions for the Fund.
In addition, on occasion, situations may arise in which legal
and regulatory considerations will preclude trading for the Funds' accounts by
reason of activities of Montgomery Securities or its affiliates. It is the
judgment of the Boards that the Funds will not be materially disadvantaged by
any such trading preclusion and that the desirability of continuing its advisory
arrangements with the Manager and the Manager's affiliation with Montgomery
Securities and other affiliates of Montgomery Securities outweigh any
disadvantages that may result from the foregoing.
The Manager's sell discipline for the Domestic Equity, Select
50, Allocation, International and Global Funds' investment in issuers is based
on the premise of a long-term investment
B-56
<PAGE>
horizon; however, sudden changes in valuation levels arising from, for example,
new macroeconomic policies, political developments, and industry conditions
could change the assumed time horizon. Liquidity, volatility, and overall risk
of a position are other factors considered by the Manager in determining the
appropriate investment horizon. These Funds will limit investments in illiquid
securities to 15% of net assets.
For the Select 50, International and Global Funds, sell
decisions at the country level are dependent on the results of the Manager's
asset allocation model. Some countries impose restrictions on repatriation of
capital and/or dividends which would lengthen the Manager's assumed time horizon
in those countries. In addition, the rapid pace of privatization and initial
public offerings creates a flood of new opportunities which must continually be
assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
Because Montgomery Securities is a member of the National
Association of Securities Dealers, Inc., it is sometimes entitled to obtain
certain fees when a Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage commissions for the benefit of
the Funds, any portfolio securities tendered by a Fund will be tendered through
Montgomery Securities if it is legally permissible to do so. In turn, the next
management fee payable to a Fund's Manager (an affiliate of Montgomery
Securities) under the Agreement will be reduced by the amount of any such fees
received by Montgomery Securities in cash, less any costs and expenses incurred
in connection therewith.
Subject to the foregoing policies, the Funds may use
Montgomery Securities as a broker to execute portfolio transactions. In
accordance with the provisions of Section 17(e) of the Investment Company Act
and Rule 17e-1 promulgated thereunder, the Trust has adopted certain procedures
designed to provide that commissions payable to Montgomery Securities are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on securities or options exchanges during a comparable period
of time. In determining the commissions to be paid to Montgomery Securities, it
is the policy of the Funds that such commissions will be, in the judgment of the
Manager, (i) at least as favorable as those which would be charged the Funds by
other qualified unaffiliated brokers having comparable execution capability, and
(ii) at least as favorable as commissions contemporaneously charged by
Montgomery Securities on comparable transactions for its most favored
unaffiliated customers, except for (a) accounts for which Montgomery Securities
acts as a clearing broker for another brokerage firm, and (b) any customers of
Montgomery Securities considered by a majority of the Trustees who are not
interested persons to be not comparable to the Fund. The
B-57
<PAGE>
Funds do not deem it practicable and in their best interests to solicit
competitive bids for commission rates on each transaction. However,
consideration is regularly given to information concerning the prevailing level
of commissions charged on comparable transactions by other qualified brokers.
The Boards review the procedures adopted by the Trusts with respect to the
payment of brokerage commissions at least annually to ensure their continuing
appropriateness, and determine, on at least a quarterly basis, that all such
transactions during the preceding quarter were effected in compliance with such
procedures.
The Trusts have also adopted certain procedures, pursuant to
Rule 10f-3 under the Investment Company Act, which must be followed any time a
Fund purchases or otherwise acquires, during the existence of an underwriting or
selling syndicate, a security of which Montgomery Securities is an underwriter
or member of the underwriting syndicate. The Boards determine, on at least a
quarterly basis, that any such purchases made during the preceding quarter were
effected in compliance with such procedures.
For the year ended June 30, 1996, the Funds' total securities
transactions generated commissions of $14,874,777, of which $164,056 was paid to
Montgomery Securities. For the year ended June 30, 1995, the Funds' total
securities transactions generated commissions of $11,840,329, of which $74,850
was paid to Montgomery Securities. For the year ended June 30, 1994, the Funds'
total securities transactions generated commissions of $586,092, of which $168
was paid to Montgomery Securities.
The Funds do not effect securities transactions through
brokers in accordance with any formula, nor do they effect securities
transactions through such brokers solely for selling shares of the Funds.
However, as stated above, Montgomery Securities may act as one of the Funds'
brokers in the purchase and sale of portfolio securities, and other brokers who
execute brokerage transactions as described above may from time to time effect
purchases of shares of the Funds for their customers.
Depending on the Manager's view of market conditions, the
Funds may or may not purchase securities with the expectation of holding them to
maturity, although their general policy is to hold securities to maturity. The
Funds may, however, sell securities prior to maturity to meet redemptions or as
a result of a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Trust reserves the right in its sole discretion to (i)
suspend the continued offering of its Funds' shares, and (ii) reject purchase
orders in whole or in part when in the judgment of the Manager or the
Distributor such suspension or rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best
interests of a Fund, an investor may purchase shares of that Fund by tendering
payment in kind in the form of securities, provided
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<PAGE>
that any such tendered securities are readily marketable (e.g., the Funds will
not acquire restricted securities), their acquisition is consistent with that
Fund's investment objective and policies, and the tendered securities are
otherwise acceptable to that Fund's Manager. Such securities are acquired by
that Fund only for the purpose of investment and not for resale. For the
purposes of sales of shares of that Fund for such securities, the tendered
securities shall be valued at the identical time and in the identical manner
that the portfolio securities of that Fund are valued for the purpose of
calculating the net asset value of that Fund's shares. A shareholder who
purchases shares of a Fund by tendering payment for the shares in the form of
other securities may be required to recognize gain or loss for income tax
purposes on the difference, if any, between the adjusted basis of the securities
tendered to the Fund and the purchase price of the Fund's shares acquired by the
shareholder.
Payments to shareholders for shares of a Fund redeemed
directly from that Fund will be made as promptly as possible but no later than
three days after receipt by the Transfer Agent of the written request in proper
form, with the appropriate documentation as stated in the Prospectus, except
that a Fund may suspend the right of redemption or postpone the date of payment
during any period when (i) trading on the New York Stock Exchange ("NYSE") is
restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (ii) an emergency exists as determined by the SEC (upon
application by a Fund pursuant to Section 22(e) of the Investment Company Act)
making disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable; or (iii) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Funds intend to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions that make payment in cash unwise, the
Funds may make payment partly in their portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Funds do not anticipate that they will make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trusts have
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Funds pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of a Fund's
portfolio securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Taxable Funds are available
for purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
B-59
<PAGE>
For individuals who wish to purchase shares of the Taxable
Funds through an IRA, there is available through these Funds a prototype
individual retirement account and custody agreement. The custody agreement
provides that DST Systems, Inc. will act as custodian under the plan, and will
furnish custodial services for an annual maintenance fee per participating
account of $10. (These fees are in addition to the normal custodian charges paid
by these Funds and will be deducted automatically from each Participant's
account.) For further details, including the right to appoint a successor
custodian, see the plan and custody agreements and the IRA Disclosure Statement
as provided by these Funds. An IRA that invests in shares of these Funds may
also be used by employers who have adopted a Simplified Employee Pension Plan.
Individuals or employers who wish to invest in shares of a Fund under a
custodianship with another bank or trust company must make individual
arrangements with such institution.
The IRA Disclosure Statement available from the Taxable Funds
contains more information on the amount investors may contribute and the
deductibility of IRA contributions. In summary, an individual may make
deductible contributions to the IRA of up to 100% of earned compensation, not to
exceed $2,000 annually (or $2,250 to two IRAs if there is a non-working spouse).
An IRA may be established whether or not the amount of the contribution is
deductible. Generally, a full deduction for federal income tax purposes will
only be allowed to taxpayers who meet one of the following two additional tests:
(A) the individual and the individual's spouse are each
not an active participant in an employer's qualified retirement
plan, or
(B) the individual's adjusted gross income (with some
modifications) before the IRA deduction is (i) $40,000 or less for married
couples filing jointly, or (ii) $25,000 or less for single individuals. The
maximum deduction is reduced for a married couple filing jointly with a combined
adjusted gross income (before the IRA deduction) between $40,000 and $50,000,
and for a single individual with an adjusted gross income (before the IRA
deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant with respect to the requirements of such plans and
the tax aspects thereof.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is calculated as
follows: all liabilities incurred or accrued are deducted from the valuation of
total assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of that Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
B-60
<PAGE>
As noted in the Prospectus, the net asset value of shares of
the Funds generally will be determined at least once daily as of 4:00 p.m.
(12:00 noon for the Money Market Funds), New York City time, on each day the
NYSE is open for trading (except national bank holidays for the Fixed Income
Funds). It is expected that the NYSE will be closed on Saturdays and Sundays and
on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas. The national bank holidays, in
addition to New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas, include January 2,
Martin Luther King Day, Good Friday, Columbus Day, Veteran's Day and December
26. The Funds may, but do not expect to, determine the net asset values of their
shares on any day when the NYSE is not open for trading if there is sufficient
trading in their portfolio securities on such days to affect materially
per-share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value
or, in the absence of a market value, at fair value as determined in good faith
by the Manager and the Trust's Pricing Committee pursuant to procedures approved
by or under the direction of the Board.
The Funds' securities, including ADRs, EDRs and GDRs, which
are traded on securities exchanges are valued at the last sale price on the
exchange on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any reported sales, at the mean
between the last available bid and asked price. Securities that are traded on
more than one exchange are valued on the exchange determined by the Manager to
be the primary market. Securities traded in the over-the-counter market are
valued at the mean between the last available bid and asked price prior to the
time of valuation. Securities and assets for which market quotations are not
readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Boards.
Short-term debt obligations with remaining maturities in
excess of 60 days are valued at current market prices, as discussed above.
Short-term securities with 60 days or less remaining to maturity are, unless
conditions indicate otherwise, amortized to
B-61
<PAGE>
maturity based on their cost to a Fund if acquired within 60 days of maturity
or, if already held by a Fund on the 60th day, based on the value determined on
the 61st day.
Corporate debt securities, mortgage-related securities and
asset-backed securities held by the Funds are valued on the basis of valuations
provided by dealers in those instruments, by an independent pricing service,
approved by the appropriate Board, or at fair value as determined in good faith
by procedures approved by the Boards. Any such pricing service, in determining
value, will use information with respect to transactions in the securities being
valued, quotations from dealers, market transactions in comparable securities,
analyses and evaluations of various relationships between securities and yield
to maturity information.
An option that is written by a Fund is generally valued at the
last sale price or, in the absence of the last sale price, the last offer price.
An option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Boards.
If any securities held by a Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trusts'
Pricing Committees determine their fair value, following procedures approved by
the Boards. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of
foreign currencies are translated into U.S. dollars at the official exchange
rate or, alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes
B-62
<PAGE>
into account the quotes provided by a number of such major banks. If neither of
these alternatives is available or both are deemed not to provide a suitable
methodology for converting a foreign currency into U.S. dollars, the Boards in
good faith will establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the
Boards in good faith deem appropriate to reflect their fair value.
The Money Market Funds value their portfolio instruments at
amortized cost, which means that securities are valued at their acquisition
cost, as adjusted for amortization of premium or discount, rather than at
current market value. Calculations are made at least weekly to compare the value
of these Funds' investments valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the instruments. The amortized cost method
of valuation seeks to maintain a stable $1.00 per-share net asset value even
where there are fluctuations in interest rates that affect the value of
portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of shareholders' interest. If a deviation of
0.50% or more were to occur between the net asset value per share calculated by
reference to market values and these Fund's $1.00 per-share net asset value, or
if there were any other deviation which the Board of Trustees believed would
result in a material dilution to shareholders or purchasers, the Board would
promptly consider what action, if any, should be initiated. If these Funds'
per-share net asset values (computed using market values) declined, or were
expected to decline, below $1.00 (computed using amortized cost), the Board
might temporarily reduce or suspend dividend payments or take other action in an
effort to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board, an investor
would receive less income during a given period than if such a reduction or
suspension had not taken place. Such action could result in investors receiving
no dividend for the period during which they hold their shares and receiving,
upon redemption, a price per share lower than that which they paid. On the other
hand, if these Funds' per-share net asset values (computed using market values)
were to increase, or were anticipated to increase, above $1.00 (computed using
amortized cost), the Board might supplement dividends in an effort to maintain
the net asset value at $1.00 per share.
PRINCIPAL UNDERWRITER
The Distributor acts as the Funds' principal underwriter in a
continuous public offering of the Funds' shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
B-63
<PAGE>
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
Board of Trustees or the vote of a majority of the outstanding securities of
that Fund (as defined in the Investment Company Act), and (ii) a majority of the
Trustees who are not interested persons of any such party, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement with respect to each Fund may be terminated
without penalty by the parties thereto upon 60 days' written notice and is
automatically terminated in the event of its assignment as defined in the
Investment Company Act. There are no underwriting commissions paid with respect
to sales of the Funds' shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate their past performance. Performance figures will be calculated
separately for the Class R, Class P and Class L shares.
The Money Market Funds. Current yield reflects the interest
income per share earned by these Funds' investments. Current yield is computed
by determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission for
mula:
365/7
Effective Yield = [(Base Period Return + 1) ] -1
The Short Fund and California Intermediate Bond Fund. These
Funds' 30-day yield figure described in the Prospectus is calculated according
to a formula prescribed by the SEC, expressed as follows:
6
YIELD=2[(a-b +1) -1]
cd
Where: a = dividends and interest earned during
the period.
b = expenses accrued for the period (net
of reimbursement).
B-64
<PAGE>
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share
on the last day of the period.
For the purpose of determining the interest earned (variable
"a" in the formula) on debt obligations that were purchased by these Funds at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
Investors should recognize that, in periods of declining
interest rates, these Funds' yields will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, will tend to
be somewhat lower. In addition, when interest rates are falling, monies received
by these Funds from the continuous sale of their shares will likely be invested
in instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the
taxable yield necessary to produce an after-tax yield equivalent to that of a
fund that invests in tax-exempt obligations. The tax equivalent yield for one of
the Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 46.24% (45.22% beginning 1996). The Federal
Money Fund assumes a federal tax rate of 39.6% The effective rate used in
determining such yield does not reflect the tax costs resulting from the loss of
the benefit of personal exemptions and itemized deductions that may result from
the receipt of additional taxable income by taxpayers with adjusted gross
incomes exceeding certain levels. The tax equivalent yield may be higher than
the rate stated for taxpayers subject to the loss of these benefits.
<TABLE>
Yields. The yields for the indicated periods ended June 30,
1996, were as follows:
<CAPTION>
Tax-
Equiv. Tax-
Yield Effective Effective Current Equiv.
(7- Yield Yield* Yield Yield*
Fund day) (7-day) (7-Day) (30-day) (30-day)
- ---- ----- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Montgomery Short NA NA NA 6.03% NA
Government Bond
Fund
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<PAGE>
Montgomery 4.97% 5.11% NA NA NA
Government
Reserve Fund
Montgomery NA NA NA NA NA
Federal Tax-Free
Money Fund
Montgomery NA NA NA 4.40% 8.18%
California Tax-
Free
Intermediate
Bond Fund
Montgomery 2.89% 2.94% 5.47% NA NA
California Tax-
Free Money Fund
<FN>
*Calculated using a combined federal and California income tax rate of 46.24%
for the California Funds and a federal rate of 39.6% for the Federal Money Fund.
</FN>
</TABLE>
Average Annual Total Return. Total return may be stated for
any relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
n
P(1 + T) =ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning
of a 1-, 5- or 10-year period at the end
of each respective period (or fractional
portion thereof), assuming reinvestment
of all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
Aggregate Total Return. A Fund's "aggregate total return"
figures represent the cumulative change in the value of an investment in that
Fund for the specified period and are computed by the following formula:
B-66
<PAGE>
ERV - P
-------
P
Where: P = a hypothetical initial payment of
$10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning
of a l-, 5- or 10-year period at the end
of a l-, 5- or 10-year period (or
fractional portion thereof), assuming
reinvestment of all dividends and
distributions and complete redemption of
the hypothetical investment at the end of
the measuring period.
Each Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The average annual total return for each Fund for the periods
indicated was as follows:
Year Inception*
Ended Through
Fund June 30, 1996 June 30, 1996
---- ------------- -------------
Montgomery Growth Fund 24.85% 29.17%
Montgomery Equity Income 24.56% 22.34%
Fund
Montgomery Small Cap Fund 39.28% 22.92%
Montgomery Small Cap NA 31.67%
Opportunities Fund
Montgomery Micro Cap Fund 30.95% 31.00%
Montgomery Select 50 Fund NA 37.75%
Montgomery Global
Opportunities Fund 28.64% 15.15%
Montgomery Global
Communications Fund 17.06% 14.25%
Montgomery International
Small Cap Fund 26.68% 8.16%
B-67
<PAGE>
Montgomery International 27.58% 27.58%
Growth Fund
Montgomery Emerging Asia NA NA
Fund
Montgomery Emerging
Markets Fund 7.74% 10.26%
Montgomery Advisors NA 16.60%
Emerging Markets Fund
Montgomery Asset
Allocation Fund 23.92% 27.22%
Montgomery Short
Government Bond Fund 5.74% 6.27%
Montgomery Government
Reserve Fund 5.28% 4.12%
Montgomery Federal Tax-
Free Money Fund NA NA
Montgomery California Tax-
Free Intermediate Bond
Fund 6.11% 4.60%
Montgomery California Tax-
Free Money Fund 3.03% 3.27%
- ----------------
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception for the Funds were: Growth
Fund, September 30, 1993; Small Cap Fund, July 13, 1990; Opportunities Fund,
September 30, 1993; Global Communications Fund, June 1, 1993; International
Small Cap Fund, September 30, 1993; Emerging Asia Fund, September 30, 1996;
Emerging Markets Fund, March 1, 1992; Allocation Fund, March 31, 1994; Short
Government Bond Fund, December 18, 1992; Government Reserve Fund, September 14,
1992; California Intermediate Bond Fund, July 1, 1993; Equity Income and
California Money Funds, September 30, 1994; Micro Cap Fund, December 30, 1994;
International Growth Fund, June 30, 1995; Select 50 Fund, October 27, 1995;
Advisors Fund, November 13, 1995; Small Cap Opportunities Fund, December 29,
1995 and Federal Tax-Free Money Fund, June 30, 1996.
Presentation of Other Performance Information Regarding the
Opportunities Fund
John Boich and Oscar Castro jointly managed a limited partnership
called the Common Goal World Fund Limited Partnership (the "Partnership") before
joining the Manager. John Boich has served as the Partnership's General Partner
since its inception on January 7, 1990 until April 1993, when Mr. Castro and Mr.
Boich joined the Manager as Managing Directors and Portfolio Managers.
B-68
<PAGE>
On September 30, 1993, the Montgomery Global Opportunities Fund, which has a
similar investment strategy as the partnership, was launched. On October 1,
1993, the Partnership was dissolved and the assets were transferred in-kind into
the Opportunities Fund. Consistent with applicable law, the Managers may
advertise the performance of the Partnership as part of materials concerning the
Opportunity Fund.
The annual total return for the Partnership for the periods indicated was as
follows:
Partnership Annual Total Return
Period (Net of Fees)
------ -------------------------------
Year ended Dec. 31, 1990* 2.04%
Year ended Dec. 31, 1991 25.32%
Year ended Dec. 31, 1992 4.53%
9-month period ended Sept. 30, 1993 17.29%
* The Partnership commenced operations on Jan. 7, 1990.
Presenation of Other Performance Information Regarding the Emerging Asia Fund.
From time to time, the Manager may advertise the performance of a related
mutual fund sold only in Canada and advised by the Manager that has a
substantially similar investment objective as the Emerging Asia Fund. The
related mutual fund, called the Navigator Asia Pacific Fund, commenced
operations on May 19, 1995. The performance information of the Navigator Asia
Pacific Fund (net of fees) was as follows:
3 months ended Sept. 30, 1996 -4.55%
Year to date ended Sept. 30, 1996 10.85%
One year ended Sept.30, 1996 7.76%
Since inception 2.70%
Comparisons. To help investors better evaluate how an
investment in the Funds might satisfy their investment objectives,
advertisements and other materials regarding the Funds may discuss various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Publications, indices and averages, including but not limited to, the following
may be used in discussion of a Fund's performance or the investment
opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.
c) Lipper - Mutual Fund Performance Analysis and Lipper Fixed Income
Fund Performance Analysis -- A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report -- Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
e) Salomon Brothers Bond Market Roundup -- A weekly publication which
reviews yield spread changes in the major sectors of the money, government
agency, futures, options, mortgage, corporate, Yankee, Eurodollar, municipal,
and preferred stock markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices -- Lehman Brothers fixed-income indices may
be used for appropriate comparisons.
g) other indices -- including Consumer Price Index, Ibbotson, Micropal,
CNBC/Financial News Compsite Index, MSCI EAFE Index (Morgan Stanley Capital
International Europe, Australasia, Far East Index, a capitalization-weighted
index that includes all developed world markets except those in North America),
Datastream, Worldscope, NASDAQ, Russell 2000 and IFC Emerging Markets Database.
In addition, one or more portfolio managers or other employees
of the Manager may be interviewed by print media, such as by the Wall Street
Journal or Business Week, or electronic news media, and such interviews may be
reprinted or excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments in the reported
indices and averages is not identical to the Funds' portfolios, that the
averages are generally unmanaged, and that the
B-69
<PAGE>
items included in the calculations of such averages may not be identical to the
formulae used by the Funds to calculate their figures.
The Funds may also publish their relative rankings as
determined by independent mutual fund ranking services like Lipper Analytical
Services, Inc. and Morningstar, Inc.
Investors should note that the investment results of the Funds
will fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Funds. From time to time, the Funds
may publish or distribute information and reasons supporting the Manager's
belief that a particular Fund may be appropriate for investors at a particular
time. The information will generally be based on internally generated estimates
resulting from the Manager's research activities and projections from
independent sources. These sources may include, but are not limited to,
Bloomberg, Morningstar, Barings, the WEFA Group, Consensus Estimates,
Datastream, Micropal, I/B/E/S Consensus Forecast, Worldscope and Reuters as well
as both local and international brokerage firms. For example, the Funds may
suggest that certain countries or areas may be particularly appealing to
investors because of interest rate movements, increasing exports and/or economic
growth. The Funds may, by way of further example, present a region as possessing
the fastest growing economies and may also present projected gross domestic
product (GDP) for selected economies. In using this information, the Montgomery
Emerging Asia Fund also may claim that certain Asian countries are regarded as
having high rates of growth for their economies (GDP), international trade and
corporate earnings; thus producing what the Manager believes to be a favorable
investment climate.
Research. Largely inspired by its affiliate, Montgomery
Securities -- which has established a tradition for specialized research in
emerging growth companies -- the Manager has developed its own tradition of
intensive research. The Manager has made intensive research one of the important
characteristics of the Montgomery Funds style.
The portfolio managers for Montgomery's global and
international Funds work extensively on developing an in-depth understanding of
particular foreign markets and particular companies. And they very often
discover that they are the first analysts from the United States to meet with
representatives of foreign companies, especially those in emerging markets
nations.
Extensive research into companies that are not well known --
discovering new opportunities for investment -- is a theme that crosses a number
of the Funds and is reflected in the number of Funds oriented towards lower
capitalization businesses.
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts have also
developed new ways of gaining information about well-known parts of the domestic
market. The growth equity team, for example, has developed its own strategy and
proprietary database for analyzing the growth potential of U.S. companies, often
large, well-known companies.
From time to time, advertising and sales materials for the
Montgomery Funds may include biographical information about portfolio manager as
well as commentary by portfolio managers regarding investment strategy, asset
growth, current or part economic, political or financial conditions that may be
of interest to investors. Also, from time to time, the Manager may refer to its
quality and size, including references to its total assets under management
(currently $7 billion for retail and institutional investors) and total
shareholders invested in the Funds (currently around 225,000).
B-70
<PAGE>
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund; all
expenses incurred in connection with the organization of The Montgomery Funds II
have been assumed by Montgomery Institutional Series: Emerging Markets Portfolio
and the Manager. Expenses incurred in connection with the establishment and
registration of shares of each of the other funds constituting Trusts as
separate series of the Trusts have been assumed by each respective Fund. The
expenses incurred in connection with the establishment and registration of
shares of the Funds as separate series of the Trusts have been assumed by the
respective Funds and are being amortized over a period of five years commencing
with their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after commencement of those Funds'
operations. Investors purchasing shares of a Fund bear such expenses only as
they are amortized daily against that Fund's investment income.
As noted above, Morgan Stanley Trust Company (the "Custodian")
acts as custodian of the securities and other assets of the Funds. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Funds.
Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, is the Funds' Master Transfer Agent. The Master
Transfer Agent has delegated certain transfer agent functions to DST Systems,
Inc., P.O. Box 419958, Kansas City, Missouri 64141, the Funds' Transfer and
Dividend Disbursing Agent.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco,
California 94105, are the independent auditors for the Funds.
The validity of shares offered hereby will be passed on by
Heller, Ehrman, White & McAuliffe, 333 Bush Street, San
Francisco, California 94104.
The shareholders of The Montgomery Funds (but not The
Montgomery Funds II) as shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Agreement and Declaration of Trust
("Declaration of Trust") contains an express disclaimer of shareholder liability
for acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses out of the Funds' assets for any
shareholder held personally liable for obligations of the Funds or Trust. The
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made
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<PAGE>
against any shareholder for any act or obligation of the Funds or Trust and
satisfy any judgment thereon. All such rights are limited to the assets of the
Funds. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents to cover possible tort and other liabilities.
Furthermore, the activities of the Trust as an investment company as
distinguished from an operating company would not likely give rise to
liabilities in excess of the Funds' total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
extremely remote because it is limited to the unlikely circumstances in which
both inadequate insurance exists and a Fund itself is unable to meet its
obligations.
Among the Boards' powers enumerated in the Agreements and
Declaration of Trust is the authority to terminate the Trusts or any of their
series, or to merge or consolidate the Trusts or one or more of their series
with another trust or company without the need to seek shareholder approval of
any such action.
As of October 31, 1996 to the knowledge of the Funds, the
following shareholders owned of record 5 percent or more of the outstanding
Class R shares of the respective Funds indicated:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Growth Fund
Charles Schwab & Co., Inc. 17,568,792 37.18
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 3,765,062 7.97
For The Exclusive Benefit of Our
Customers - ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Fund
Boston Safe Deposit & Trust Co. 2,631,004 18.65
Trust for the Eastman Kodak
Employee Savings and
Investment Plan
P.O. Box 3198
Pittsburgh, PA 15230-3198
Charles Schwab & Co., Inc. 1,720,311 12.20
101 Montgomery Street
San Francisco, CA 94104-4122
B-72
<PAGE>
Boston Safe Deposit & Trust Co. 744,193 5.28
Trust ADT Security Systems
Mutual Fund Operations
P.O. Box 3198
Pittsburg, PA 15230-3198
Global Opportunities Fund
Charles Schwab & Co., Inc. 664,160 37.41
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 134,502 7.58
For The Exclusive Benefit of Our
Customers - ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Wayne Boich 125,990 7.10
155 East Broad, No. 23
Columbus, OH 43215-3609
Global Communications Fund
Charles Schwab & Co., Inc. 4,518,202 43.13
101 Montgomery Street
San Francisco, CA 94104-4122
B-73
<PAGE>
International Small Cap Fund
Charles Schwab & Co., Inc. 1,300,329 46.20
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp 211,400 7.51
for the Exclusive Use of Our
Customers
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
International Growth Fund
Charles Schwab & Co., Inc. 183,932 12.96
101 Montgomery Street
San Francisco, CA 94104-4122
Stanley S. Schwartz TR 135,636 9.56
U/A December 20, 1988 Stanley S.
Schwartz Rev Living Trust/Arista
Foundation
Montgomery Asset Management
Attn: S. Wang
600 Montgomery Street
San Francisco, CA 94111-2702
Emerging Markets Fund
Charles Schwab & Co., Inc. 29,005,735 43.68
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 4,825,268 7.27
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Allocation Fund
Charles Schwab & Co., Inc. 2,738,505 35.85
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 1,039,669 13.61
For the Exclusive Benefit of Our
Customers - Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
B-74
<PAGE>
Short Government Bond Fund
Charles Schwab & Co., Inc. 1,462,645 40.21
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson Lufkin & Jenrette 196,035 5.39
Securities Corp.
Mutual Funds Department, 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
KONIAG Inc. 380,408 10.46
c/o Montgomery Asset Management
Attn: Carl Obeck
600 Montgomery Street
San Francisco, CA 94111-2702
California Tax-Free Intermediate Bond
Fund
Charles Schwab & Co., Inc. 252,936 18.94
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Securities 94,371 7.07
110-02832-15
600 Montgomery Street
San Francisco, CA 94111-2777
Virginia L. Bowman Revocable Living 84,824 6.35
Trust dated 1/22/90
c/o Montgomery Securities
101 California Street
San Francisco, CA 49111-2703
Collier Kimball 115,005 8.61
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
Bruce L. Cronander 106,322 7.96
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
B-75
<PAGE>
Government Reserve Fund
Mary Miner, Trustee for Robert 94,632,984 21.00
Miner and Mary Miner Trust
U/A dated 2/29/84
1832 Baker Street
San Francisco, CA 94115-2011
Equity Income Fund
Charles Schwab & Co., Inc. 699,373 46.80
101 Montgomery Street
San Francisco, CA 94104-4122
Micro Cap Fund
Charles Schwab & Co., Inc. 6,518,951 36.59
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,001,723 5.62
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Select 50 Fund
Charles Schwab & Co., Inc. 1,377,779 25.49
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 519,463 9.61
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
FTC & CO 327,125 6.05
Attn: Datalynx #118
P.O. Box 173736
Denver, CO 80217-3736
Advisors Emerging Markets Fund
Charles Schwab & Co., Inc. 442,438 98.55
101 Montgomery Street
San Francisco, CA 94104-4122
B-76
<PAGE>
Small Cap Opportunities Fund
Charles Schwab & Co., Inc. 4,211,005 36.61
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 907,777 7.89
For the Exclusive Benefit of Our
Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Montgomery Federal Tax-Free Money Fund
Peter V. Sperling TTEE FBO 9,283,152 16.53
Peter V. Sperling Revocable Trust
DTD 01/31/95
Apollo Group Inc.
4615 East Elwood Street, 4th Floor
Phoenix, AZ 85040-1958
J. Douglas Perry & Robert C. 3,630,509 6.46
Miller TTEES FBO the Patricia W.
Perry Grantor Retained Annuity
Trust DTD 04/03/95
1413 North Bayshore Drive
Virginia Beach, VA 23451-3718
Montgomery Emerging Asia Fund
Charles Schwab & Co. Inc. 55,061 11.57
101 Montgomery Street
San Francisco, CA 94104-4122
Montgomery Asset Management LP 83,333 17.51
Attn: Mary Jane Fross
101 California Street
San Francisco, CA 94111-5802
Montgomery Securities 41,667 8.75
104-02089-18
Attn: Mutual Funds -- 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2777
As of August 31, 1996 to the knowledge of the Funds, the following
shareholders owned of record 5 percent or more of the outstanding Class P Shares
of the respective Funds indicated:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Growth Fund
Dreyfus Investment Services Corp. 985 74.84
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Dreyfus Investment Services Corp. 231 17.58
FBO 659026941
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Equity-Income Fund
State Street Bank & Trust Co. Tr. 5,155 100.00
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
Small Cap Fund
State Street Bank & Trust Co. 120,500 88.63
U/A July 01, 1996
McClaren/Hart Employee Ret. Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. Tr. 15,454 11.37
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Small Cap Opportunities Fund
E*Trade Securities Inc. 348 100.00
A/C 7880-1618
Thomas S. Smogolski C/F
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3317
Emerging Markets Fund
Canada Life Ins. Co. Of America 166 100.00
Attn: Maria-Luz Manalo
330 University Avenue, SP12
Toronto Ontario M5G 1R8
Canada
As of August 31, 1996, the Trustees and officers of the
Trusts, as a group, owned less than 1% of the outstanding shares of each Fund
except the Opportunities, Short and California Intermediate Bond Funds. As of
August 31, 1996, the Trustees and officers of the Trusts, as a group, owned
approximately 1.2 percent of the Opportunities Fund, 1.0 percent of the Short
Fund and 4.9 percent of the California Intermediate Bond Fund.
The Trusts are registered with the Securities and Exchange
Commission as non-diversified management investment companies, although each
Fund, except for the Tax-Free Funds, is a diversified series of the Trust. Such
a registration does not involve supervision of the management or policies of the
Funds. The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statements filed with the SEC.
Copies of the Registration Statements may be obtained from the SEC upon payment
of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending
June 30, 1996, for the Growth, Micro Cap, Small Cap, Small Cap Opportunities,
Equity Income, Opportunities, Communications, International Growth,
International Small Cap, Emerging Markets, Advisors, Select 50, Asset
Allocation, Short, Reserve, California Intermediate Bond and California Money
Funds, as contained in the Annual Report to Shareholders of such Funds for the
fiscal year ended June 30, 1996 (the "Report"), are incorporated herein by
reference to the Reports.
Attached to this Statement of Additional Information is
certain unaudited financial information for the Federal Money Fund as of or for
the period ended September 30, 1996.
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<PAGE>
Appendix A
Description of Moody's corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to a
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
B-78
<PAGE>
Nonrated - where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such
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<PAGE>
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
C1 - The rating C1 is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-) - The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR - indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fitch Investor's Service
AAA - Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA - Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA-rated securities, and more subject to possible change
over the term of the issue.
A - Bonds and notes rated A are regarded as being of good quality. The obligor's
ability to pay interest and repay principal is strong but may be more vulnerable
to adverse changes in economic conditions and circumstances than bonds and notes
with higher ratings.
BBB - Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or a minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
B-80
<PAGE>
Commercial Paper Ratings
Moody's commercial paper ratings are assessments of the issuer's
ability to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers: Prime 1--highest quality; Prime
2--higher quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A- 1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
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<PAGE>
---------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Portfolio Investments as of June 30, 1996;
Statements of Assets and Liabilities as of June 30,
1996; Statements of Operations For the Year Ended
June 30, 1996; Statement of Cash Flows for year
ended June 30, 1996; Statements of Changes in Net
Assets for the Year Ended June 30, 1996; Financial
Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1996
for Montgomery Growth Fund, Montgomery Micro Cap
Fund, Montgomery Small Cap Fund, Montgomery Small
Cap Opportunities Fund, Montgomery Equity Income
Fund, Montgomery Asset Allocation Fund, Montgomery
Select 50 Fund, Montgomery Global Opportunities
Fund, Montgomery Global Communications Fund,
Montgomery International Small Cap Fund, Montgomery
International Growth Fund, Montgomery Emerging
Markets Fund, Montgomery Short Government Bond
Fund, Montgomery Government Reserve Fund,
Montgomery California Tax-Free Intermediate Bond
Fund and Montgomery California Tax-Free Money Fund;
Notes to Financial Statements; Independent
Auditors' Report on the foregoing, all incorporated
by reference to the Annual Report to Shareholders
of the above-named funds.
(b) Exhibits:
(1)(A) Agreement and Declaration of Trust is
incorporated by reference to the Registrant's
Registration Statement as filed with the
Commission on May 16, 1990 ("Registration
Statement").
(1)(B) Amendment to Agreement and Declaration of Trust
is incorporated by reference to Post-Effective
Amendment No. 17 to the Registration Statement as
filed with the Commission on December 30, 1993
("Post-Effective Amendment No. 17").
(1)(C) Amended and Restated Agreement and Declaration of
Trust is incorporated by reference to
Post-Effective Amendment No. 28 to the
Registration Statement as filed with the
Commission on September 13, 1995 ("Post-Effective
Amendment No. 28").
(2) By-Laws are incorporated by reference to the
Registration Statement.
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5)(A) Form of Investment Management Agreement is
incorporated by reference to Pre-Effective
Amendment No. 1 to the Registration Statement as
filed with the Commission on July 5, 1990
("Pre-Effective Amendment No. 1").
<PAGE>
(5)(B) Form of Amendment to Investment Management
Agreement is incorporated by reference to
Post-Effective Amendment No. 24 to the
Registration Statement as filed with the
Commission on March 31, 1995 ("Post-Effective
Amendment No. 24").
(6)(A) Form of Underwriting Agreement is incorporated by
reference to Pre-Effective Amendment No. 1.
(6)(B) Form of Selling Group Agreement is incorporated
by reference to Pre-Effective Amendment No. 1.
(7) Benefit Plan(s) - Not applicable.
(8) Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 24.
(9)(A) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective
Amendment No. 15.
(9)(B) Form of Multiple Class Plan is incorporated by
reference to Post-Effective Amendment No. 28.
(9)(C) Form of Shareholder Services Plan is incorporated
by reference to Post-Effective Amendment No. 28.
(10) Consent and Opinion of Counsel as to legality of
shares is incorporated by reference to
Pre-Effective Amendment No. 1.
(11) Independent Auditors' Consent.
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Letter of Understanding re: Initial Shares is
incorporated by reference to Pre-Effective
Amendment No. 1.
(14) Model Retirement Plan Documents are incorporated
by reference to Post-Effective Amendment No. 2 to
the Registration Statement as filed with the
Commission on March 4, 1991 ("Post-Effective
Amendment No. 2").
(15) Form of Share Marketing Plan is incorporated by
reference to Post-Effective Amendment No. 28.
(16)(A) Performance Computation for Montgomery Short
Government Bond Fund is incorporated by reference
to Post-Effective Amendment No. 13.
(16)(B) Performance Computation for Montgomery Government
Reserve Fund is incorporated by reference to
Post-Effective Amendment No. 12.
(16)(C) Performance Computation for Montgomery California
Tax-Free Intermediate Bond Fund is incorporated
by reference to Post-Effective Amendment No. 17.
(16)(D) Performance Computation for the other series of
Registrant is incorporated by reference to
Post-Effective Amendment No. 2.
(27) Financial Data Schedule is incorporated by
reference to Form N-SAR filed for the period
ended June 30, 1996.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, L.P., a California limited partnership, is
the manager of each series of the Registrant, of The Montgomery Funds II, a
Delaware business trust, and of The Montgomery Funds III, a Delaware business
trust. Montgomery Asset Management, Inc., a California corporation is the
general partner of Montgomery Asset Management, L.P., and Montgomery Securities
is its sole limited partner. The Registrant, The Montgomery Funds II and The
Montgomery Funds III are deemed to be under the common control of each of those
three entities.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of October 31, 1996
-------------- ----------------------
Shares of Beneficial
Interest, $0.01 par value
-------------------------
Montgomery Small Cap Fund (Class R) 5,889
Montgomery Growth Fund (Class R) 47,759
Montgomery Emerging Markets 42,504
Fund (Class R)
Montgomery International Small Cap Fund (Class R) 1,797
Montgomery Global Opportunities Fund (Class R) 1,133
Montgomery Global Communications Fund (Class R) 11,681
Montgomery Equity Income Fund (Class R) 1,055
Montgomery Short Government Bond Fund (Class R) 762
Montgomery California Tax-Free 157
Intermediate Bond Fund (Class R)
Montgomery Government Reserve Fund (Class R) 6,120
Montgomery California Tax-Free 995
Money Fund (Class R)
Montgomery Micro Cap Fund (Class R) 10,409
Montgomery International Growth Fund (Class R) 526
Montgomery Advisors Emerging Markets Fund (Class R) 21
Montgomery Select 50 Fund (Class R) 5,519
Montgomery Small Cap Opportunities Fund (Class R) 12,174
Montgomery Federal Tax-Free Money Fund (Class R) 219
Montgomery Technology Fund 0
Montgomery Emerging Asia Fund 370
C-3
<PAGE>
Item 27. 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 and other amounts or
was an agent of the Trust, against expenses, judgments, fines, settlement and
other amounts actually and reasonable incurred in connection with such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best interests of the Trust. Indemnification will not be
provided in certain circumstances, however, including instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Trustees, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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 issue.
Item 28. Business and Other Connections of Investment Adviser.
Montgomery Securities, which is a broker-dealer and the principal
underwriter of The Montgomery Funds, is the sole limited partner of the
investment manager, Montgomery Asset Management, L.P. ("MAM, L.P."). The general
partner of MAM, L.P. is a corporation, Montgomery Asset Management, Inc. ("MAM,
Inc."), certain of the officers and directors of which serve in similar
capacities for MAM, L.P. One of these officers and directors, Mr. R. Stephen
Doyle, also is a capital limited partner of Montgomery Securities, and Mr. Jack
G. Levin, Secretary of The Montgomery Funds, is a Managing Director of
Montgomery Securities. R. Stephen Doyle is the Chairman and Chief Executive
Officer of MAM, L.P.; Mark B. Geist is the President; John T. Story is the
Managing Director of Mutual Funds and Executive Vice President; David E.
Demarest is Chief Administrative Officer; Mary Jane Fross is Manager of Mutual
Fund Administration and Finance; and Josephine Jimenez, Bryan L. Sudweeks,
Stuart O. Roberts, John H. Brown, William C. Stevens, Roger Honour, Oscar Castro
and John Boich are Managing Directors of MAM, L.P. Information about the
individuals who function as officers of MAM, L.P. (namely, R. Stephen Doyle,
Mark B. Geist, John T. Story, David E. Demarest, Mary Jane Fross and the eight
Managing Directors) is set forth in Part B.
Item 29. Principal Underwriter.
(a) Montgomery Securities is the principal underwriter of The
Montgomery Funds, The Montgomery Funds II and The Montgomery
Funds III. Montgomery Securities acts as the principal
underwriter, depositor and/or investment adviser and/or trustee
for The Montgomery Funds, an investment company registered under
the Investment Company Act of 1940, as amended, and for the
following private investment partnerships or trusts:
Montgomery Bridge Fund Liquidating Trust
Montgomery Bridge Fund II, Liquidating Trust
Montgomery Bridge Investments Limited, Liquidating Trust
Montgomery Private Investments Partnership, Liquidating Trust
C-4
<PAGE>
Pathfinder Montgomery Fund I, L.P., Liquidating Trust
Montgomery Growth Partners, L.P.
Montgomery Small Cap Partners II, L.P.
Montgomery Small Cap Partners III, L.P.
Montgomery Capital Partners, L.P.
Montgomery Capital Partners II, L.P.
Montgomery Emerging Markets Fund Limited
Montgomery Emerging World Partners, L.P.
<TABLE>
(b) The following information is furnished with respect to the
officers and general partners of Montgomery Securities:
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ---------------
<S> <C> <C>
Lewis W. Coleman Senior Managing Director None
J. Richard Fredericks Senior Managing Director None
Robert L. Kahan Senior Managing Director None
Kent A. Logan Senior Managing Director None
Jerome S. Markowitz Senior Managing Director Trustee Designate
Karl L. Matthies Senior Managing Director None
J. Sanford Miller Senior Managing Director None
Joseph M. Schell Senior Managing Director None
John K. Skeen Senior Managing Director None
Thomas W. Weisel Chairman and Chief Executive Officer None
Stephen T. Aiello Managing Director None
John A. Berg Managing Director None
Howard S. Berl Managing Director None
Charles R. Brama Managing Director None
Robert V. Cheadle Managing Director None
Jeffrey B. Child Managing Director None
M. Allen Chozen Managing Director None
Frank J. Connelly Managing Director None
David K. Crossen Managing Director None
C-5
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ---------------
Glen C. Dailey Managing Director None
Michael G. Dorey Managing Director None
Dennis Dugan Managing Director None
Frank M. Dunlevy Managing Director None
William A. Falk Managing Director None
Paul G. Fox Managing Director None
Clark L. Gerhardt, Jr. Managing Director None
Seth J. Gersch Managing Director None
Robert G. Goddard Managing Director None
P. Joseph Grasso Managing Director None
James C. Hale, III Managing Director None
Wilson T. Hileman, Jr. Managing Director None
Brett A. Hodess Managing Director None
Ben Howe Managing Director None
Craig R. Johnson Managing Director None
Joseph A. Jolson Managing Director None
Scott C. Kovalik Managing Director None
Kurt H. Kruger Managing Director None
Guy A. Lampard Managing Director None
David S. Lehmann Managing Director None
Derek Lemke-von Ammon Managing Director None
Jack G. Levin, Esq. Managing Director Secretary
Merrill S. Lichtenfeld Managing Director None
James F. McMahon Managing Director None
Michael G. Mueller Managing Director None
Bernard M. Notas Managing Director None
C-6
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ---------------
Bruce G. Potter Managing Director None
David B. Readerman Managing Director None
Rand Rosenberg Managing Director None
Alice S. Ruth Managing Director None
Richard A. Smith Managing Director None
Kathleen Smythe-de Urquieta Managing Director None
Peter B. Stoneberg Managing Director None
Thomas Tashjian Managing Director None
Thomas A. Thornhill, III Managing Director None
John Tinker Managing Director None
Otto V. Tschudi Managing Director None
Stephan P. Vermut Managing Director None
John W. Weiss Managing Director None
George W. Yandell, III Managing Director None
Ross Investments, Inc. General Partner None
LWC Investments, Inc. General Partner None
RLK Investments, Inc. General Partner None
Logan Investments, Inc. General Partner None
SEWEL Investments, Inc. General Partner None
MMJ Investments, Inc. General Partner None
Skeen Investments, Inc. General Partner None
<FN>
* The principal business address of persons and entities listed is 600
Montgomery Street, San Francisco, California 94111.
The above list does not include limited partners or special limited
partners who are not Managing Directors of Montgomery Securities.
</FN>
</TABLE>
C-7
<PAGE>
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 will be kept by the
Registrant's Transfer Agent, DST Systems, Inc., 1004 Baltimore, Kansas City,
Missouri 64105, except those records relating to portfolio transactions and the
basic organizational and Trust documents of the Registrant (see Subsections
(2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule 31a-1(b)), which will
be kept by the Registrant at 101 California Street, San Francisco, California
94111.
Item 31. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to file a post-effective amendment
including financial statements of Montgomery Technology Fund, Montgomery Growth
& Income Fund, Montgomery Federal Tax-Free Money Fund, Montgomery Emerging Asia
Fund or Montgomery Global Asset Allocation Fund, which need not be certified,
within four to six months from the effective date of Registrant's 1933 Act
registration statement as to those series.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
(d) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act of 1940, as amended, which requires the prompt convening
of a meeting of shareholders to elect trustees to fill existing vacancies in the
Registrant's Board of Trustees in the event that less than a majority of the
trustees have been elected to such position by shareholders. Registrant has also
undertaken promptly to call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee or Trustees when requested in
writing to do so by the record holders of not less than 10 percent of the
Registrant's outstanding shares and to assist its shareholders in communicating
with other shareholders in accordance with the requirements of Section 16(c) of
the Investment Company Act of 1940, as amended.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Amendment pursuant to Rule 485(b) under
the Securities Act of 1933, as amended, and that the Registrant has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco and State
of California on this 15th day of November, 1996.
THE MONTGOMERY FUNDS
By: R. Stephen Doyle*
---------------------------------
Chairman and Principal Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
R. Stephen Doyle* Officer; Principal November 15, 1996
- ----------------------- Financial and Accounting
R. Stephen Doyle Officer; and Trustee
Andrew Cox * Trustee November 15, 1996
- -----------------------
Andrew Cox
Cecilia H. Herbert * Trustee November 15, 1996
- -----------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee November 15, 1996
- -----------------------
John A. Farnsworth
* By: -----------------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed.
<PAGE>
Exhibit(s) Index
Exhibit No. Document Page No.
----------- -------- --------
(11) Independent Auditors' Consent
Deloitte &
Touche LLP
- ------------- ----------------------------------------------------------------
[LOGO] 50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
The Montgomery Funds:
We consent to the incorportion by reference in this Post-Effective Amendment
No. 42 to Registration Statement No. 33-34841 of The Montgomery Funds on Form
N-1A of our report dated August 16, 1996 appearing in the Annual Report to
shareholders.
/s/ Deloitte & Touche LLP
November 14, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
