As filed with the Securities and Exchange Commission on July 10, 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. 36
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 37
THE MONTGOMERY FUNDS
(Exact Name of Registrant as Specified in its Charter)
600 Montgomery 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:
--- immediately upon filing pursuant to Rule 485(b)
--- on June 30, 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)
X on September 30, 1996 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, 1995 was filed on August 28, 1995.
----------
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 Pacific Basin Fund
Part A - Prospectus for Class R Shares of Montgomery Pacific Basin Fund
Part A - Prospectus for Class P Shares of Montgomery Pacific Basin Fund
Part A - Prospectus for Class L Shares of Montgomery Pacific Basin Fund
Part B - Combined Statement of Additional Information for Class R,
Class P and Class L shares of Montgomery Pacific Basin Fund
Part C - Other Information
Signature Page
Exhibit
- --------
** This Amendment does not relate to the following documents: prospectuses
for the Class R shares, Class P shares and Class L shares for
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 Markets Fund,
Montgomery Select 50 Fund, Montgomery Short Government Bond Fund,
Montgomery Government Reserve Fund, Montgomery California Tax-Free
Intermediate Bond Fund, Montgomery California Tax-Free Money Fund and
Montgomery Advisors Emerging Markets Fund; prospectuses for the Class R
shares, Class P shares and Class L shares for Montgomery Growth and
Income Fund and Montgomery Federal Tax-Free Money Fund; all
prospectuses and the statement of additional information for Montgomery
Technology Fund.
<PAGE>
THE MONTGOMERY FUNDS
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
Part A: Information Required in Prospectus
(For each Prospectus)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------------------------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Fees and Expenses of the Fund"
3. Condensed Financial Not Applicable
4. General Description Cover Page, "The Fund's Investment Objective and
of Registrant Policies," "Portfolio Securities," "Other Investment
Practices," "Risk Considerations" and "General
Information"
5. Management of "The Fund's Investment Objective and Policies,"
the Fund "Management of the Fund" and "How to Invest in the
Fund"
5A. Management's Discussion Not Applicable (contained in the Fund's Annual
of Fund Performance Report)
6. Capital Stock and "Dividends and Distributions,"
Other Securities "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Fund,"
Being Offered "How Net Asset Value is Determined,"
"General Information" and "Backup Withholding
Instructions"
8. Redemption or "How to Redeem an Investment in the Fund" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
</TABLE>
<PAGE>
<TABLE>
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 Contents Table of Contents
12. General Information "The Trust" and "General Information"
and History
13. Investment Objectives "Investment Objective and Policies of the Fund," "Risk
Factors" and "Investment Restrictions"
14. Management of the "Trustees and Officers"
Registrant
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 Trust" 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 A
PROSPECTUS FOR CLASS R SHARES
MONTGOMERY PACIFIC BASIN FUND
---------------------------------------------------------------------
<PAGE>
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
September 30, 1996
Class R shares of the Montgomery Pacific Basin Fund (the "Fund") are offered in
this Prospectus. The Fund seeks long-term capital appreciation through
investment primarily in the equity securities of Pacific Basin companies,
excluding Japan. As is the case for all mutual funds, attainment of the Fund's
investment objective cannot be assured.
The Fund's shares are sold at net asset value with no sales load, no
commissions, no Rule 12b-1 fees and no exchange fees. In general, the minimum
initial investment in the Fund is $1,000, and subsequent investments must be at
least $100. The Manager or the Distributor, under any circumstances that either
deems appropriate, may waive these minimums. See "How to Invest in the Fund."
The Fund, which is a separate series of The Montgomery Funds, an open-end
management investment company, is managed by Montgomery Asset Management, L.P.
(the "Manager"), an affiliate of Montgomery Securities (the "Distributor").
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated September 30, 1996, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (800)
572-FUND. If you are viewing the electronic version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.
The Internet address for The Montgomery Funds is
http://www.xperts.montgomery.com/1.
The Fund may offer other classes of shares to investors eligible to purchase
those shares. The other classes of shares may have different fees and expenses
than the class of shares offered in this Prospectus, and those different fees
and expenses may affect performance. To obtain information concerning the other
classes of shares not offered in this Prospectus, call The Montgomery Funds at
(800) 572-FUND or contact sales representatives or financial intermediaries who
offer those classes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Fees and Expenses of the Fund 3
- --------------------------------------------------------------------------------
The Fund's Investment Objectives and Policies 4
- --------------------------------------------------------------------------------
Portfolio Securities 4
- --------------------------------------------------------------------------------
Other Investment Practices 6
- --------------------------------------------------------------------------------
Risk Considerations 9
- --------------------------------------------------------------------------------
Management of the Fund 11
- --------------------------------------------------------------------------------
How To Invest in the Fund 12
- --------------------------------------------------------------------------------
How To Redeem an Investment in the Fund 16
- --------------------------------------------------------------------------------
Exchange Privileges and Restrictions 18
- --------------------------------------------------------------------------------
How Net Asset Value is Determined 19
- --------------------------------------------------------------------------------
Dividends and Distributions 19
- --------------------------------------------------------------------------------
Taxation 19
- --------------------------------------------------------------------------------
General Information 20
- --------------------------------------------------------------------------------
Backup Withholding Instructions 21
- --------------------------------------------------------------------------------
2
<PAGE>
Fees And Expenses Of The Fund
Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay the following charges when buying or redeeming shares of
the Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load
Imposed on Purchases Imposed on Reinvested Dividends Deferred Sales Load Redemption Fees Exchange Fees
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None None+ None
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)
Montgomery Pacific Basin Fund
- --------------------------------------------------------------------------------
Management Fee* 1.25%
- --------------------------------------------------------------------------------
Other Expenses 0.65%
(after reimbursement)*
- --------------------------------------------------------------------------------
Total Fund Operating Expenses* 1.90%
- --------------------------------------------------------------------------------
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. The Fund reserves the right, upon 60 days' advance
notice to shareholders, to impose a redemption fee of up to 1.00% on shares
redeemed within 90 days of purchase. The Fund also reserves the right to
impose a $20 annual account maintenance fee on accounts that fall below the
minimum investment because of redemption. See "How to Redeem an Investment
in the Fund."
* Expenses for the Fund are estimated. The Manager will reduce its fees and
may absorb or reimburse the Fund for certain expenses to the extent
necessary to limit total annual fund operating expenses to the lesser of the
amount indicated in the table for the Fund or the maximum allowed by
applicable state expense limitations. The Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the two years
following that reduction and only if such reimbursement can be achieved
within the foregoing expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the
Fund for fees and expenses for the current year. Absent the reduction,
actual total Fund operating expenses are estimated to be 3.25% (2.00% other
expenses). The Manager may terminate these voluntary reductions at any time.
See "Management of the Fund."
Example of Expenses for the Fund
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares:
Montgomery Pacific Basin Fund
- --------------------------------------------------------------------------------
1 Year $19
- --------------------------------------------------------------------------------
3 Years $55
- --------------------------------------------------------------------------------
5 Years N/A
- --------------------------------------------------------------------------------
10 Years N/A
- --------------------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
3
<PAGE>
The Fund's Investment Objective And Policies
The investment objective and general investment policies of the Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities" beginning on page 4. Specific investment
practices that may be employed by the Fund are described in "Other Investment
Practices" beginning on page 6. Certain risks associated with investments in the
Fund are described in those sections as well as in "Risk Considerations"
beginning on page 9.
The Investment objective of the Fund is long term capital appreciation, which
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of companies that have their principal activities in the
Pacific Basin, excluding Japan. The Fund currently considers the following to be
Pacific Basin countries: Australia, Bangladesh, China, Hong Kong, India,
Indonesia, Korea, Malaysia, New Zealand, Pakistan, the Philippines, Singapore,
Sri Lanka, Taiwan and Thailand. The Fund will not, however, invest in Japanese
securities. In the future, the Fund may invest in other countries in the Pacific
Basin when their markets become sufficiently developed. Under normal conditions,
the Fund maintains investments in at least three Pacific Basin countries at all
times and invests no more than 35% of its total assets in any one Pacific Basin
country.
The Fund considers a company to be a Pacific Basin company if its securities are
principally traded in the capital market of a Pacific Basin country; it derives
at least 50% of its total revenue from either goods produced or services
rendered in Pacific Basin countries or from sales made in such Pacific Basin
countries, regardless of where the securities of such company are primarily
traded; or it is organized under the laws of, and with a principal office in, a
Pacific Basin country.
Countries in the Pacific Basin are in various stages of economic development
with most being considered emerging markets. Each country has its unique risks.
Most countries in the Pacific Basin are heavily dependent on international
trade. Some have prosperous economies, but are sensitive to world commodity
prices. Others are especially vulnerable to recession in other countries. Some
countries in the Pacific Basin have experienced rapid growth, although many
suffer from obsolete financial systems, economic problems, or archaic legal
systems. The return of Hong Kong to Chinese dominion will affect the entire
Pacific Basin. For information on risks, see "Portfolio Securities," "Risk
Considerations" and the Statement of Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities" and "Risk Considerations." During
the two- to three-month period following commencement of the Fund's operations,
the Fund may have its assets invested substantially in cash and cash
equivalents.
The Fund may invest in certain debt securities issued by the governments of
Pacific Basin countries that are, or may be eligible for, conversion into
investments in Pacific Basin companies under debt conversion programs sponsored
by such governments. If such securities are convertible to equity investments,
the Fund deems them to be equity derivative securities. See "Portfolio
Securities."
_____________ and ___________ are responsible for managing the Fund's portfolio.
See "Management of the Fund."
Portfolio Securities
Equity Securities
In seeking its investment objective, the Fund emphasizes investments in common
stock. The Fund also may invest in other types of equity securities and equity
derivative securities such as preferred stocks, convertible securities,
warrants, units, rights, and options on securities and on securities indices.
Depositary Receipts
The Fund may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs" and other similar global instruments. ADRs typically are issued
by a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. EDRs, sometimes called Continental Depositary
Receipts, are issued in Europe, typically by foreign banks and trust companies,
and evidence ownership of either foreign or domestic underlying securities. GDRs
are issued in foreign countries, typically by foreign banks and trust companies,
and evidence ownership of either foreign or domestic securities. Unsponsored
ADR, EDR and GDR programs are organized without the cooperation of the issuer of
the underlying securities. As a result, available information concerning the
issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the
prices of unsponsored ADRs, EDRs and GDRs may be more volatile.
4
<PAGE>
Convertible Securities
The Fund may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) that may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities are
senior to common stock in a corporation's capital structure but are usually
subordinated to similar non-convertible securities. Through their conversion
feature, they provide an opportunity to participate in capital appreciation
resulting from a market price advance in the underlying common stock. The price
of a convertible security is influenced by the market value of the underlying
common stock and tends to increase as the common stock's market value rises and
decrease as the common stock's market value declines. For purposes of allocating
Fund investments, the Manager regards convertible securities as a form of equity
security.
Securities Warrants and Rights
The Fund may invest up to 5% of its net assets in warrants and rights, including
up to 2% of net assets for those not listed on a securities exchange. A warrant
typically is a long-term option that permits the holder to buy a specified
number of shares of the issuer's underlying common stock at a specified exercise
price by a particular expiration date. Stock index warrants entitle the holder
to receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. A right (also called a
subscription right) is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public, which entitles the holder to buy the new common stock
below the public offering price. A right, like a warrant, is transferable. Also,
a warrant or a right not exercised or disposed of by its expiration date expires
worthless.
Privatizations
The Fund believes that foreign government programs of selling interests in
government-owned or controlled enterprises ("privatizations") may represent
opportunities for significant capital appreciation, and the Fund may invest in
privatizations. The ability of U.S. entities, such as the Fund, to participate
in privatizations may be limited by local law, or the terms for participation
may be less advantageous than for local investors. There can be no assurance
that privatization programs will be successful.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and similar
vehicles (collectively, "special situations") could enhance its capital
appreciation potential. The Fund also may invest in certain types of vehicles or
derivative securities that represent indirect investments in foreign markets or
securities in which it is impractical for the Fund to invest directly.
Investments in special situations may be illiquid, as determined by the Manager
based on criteria reviewed by the Board. The Fund does not invest more than 15%
of its net assets in illiquid investments, including special situations.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. Such investments may involve the
payment of substantial premiums above the net asset value of those investment
companies' portfolio securities and are subject to limitations under the
Investment Company Act. The Fund also may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company" regardless of whether such "passive foreign investment company" makes
distributions to the Fund. See the Statement of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees. In
accordance with applicable state regulatory provisions, the Manager has agreed
to waive its own management fee with respect to the portion of the Fund's assets
invested in other open-end (but not closed-end) investment companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
In selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, the Fund will
not invest more than 5% of its total assets in debt securities rated lower than
BBB by S&P, Baa by Moody's or BBB by Fitch, or in unrated debt securities deemed
to be of comparable quality by the Manager using guidelines approved by the
Board of Trustees. Subject to this limitation, the Fund may invest in any debt
security, including securities in default. After its purchase by the Fund a debt
security may cease to be rated or its rating may be reduced below that required
for purchase by the Fund. Neither event would
5
<PAGE>
require elimination of that security from the Fund's portfolio. However, a
security downgraded below the Fund's minimum credit levels generally would be
retained only if retention was determined by the Manager and subsequently by the
Board to be in the best interests of the Fund. See "Risk Considerations."
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, governmental entities and companies of
Pacific Basin countries.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
the Fund's assets to be invested in equity securities versus debt securities:
levels and anticipated trends in inflation and interest rates; expected rate of
economic growth and corporate profits growth; changes in government policy,
including regulations governing industry, trade, financial markets, and foreign
and domestic investment; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and changes in the terms of
trade.
U.S. Government Securities
The Fund may invest in fixed rate and floating or variable rate U.S. Government
securities. Certain of the obligations, including U.S. Treasury Bills, Notes and
Bonds, and mortgage-related securities of the Government National Mortgage
Association ("GNMA"), are issued or guaranteed by the U.S. Government. Other
securities issued by U.S. Government agencies or instrumentalities are supported
only by the credit of the agency or instrumentality, for example those issued by
the Federal Home Loan Bank, while others, such as those issued by the Federal
National Mortgage Association ("FNMA"), Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. Government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Fund's shares. With respect to U.S. Government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. Government securities may involve risk
of loss of principal and interest.
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more detailed information about certain of these practices, including
limitations designed to reduce risks.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. Government security or other high-grade
liquid debt instrument from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price. The repurchase
price reflects an agreed-upon rate of return not determined by the coupon rate
on the underlying security. Under the Investment Company Act, repurchase
agreements are considered to be loans by the Fund and must be fully
collateralized by cash, letters of credit, U.S. Government securities or other
high-grade liquid debt securities that the Fund's custodian, or a designated
sub-custodian, segregates from other Fund assets ("Segregable Assets"), which
are either placed in a segregated account or separately identified and rendered
unavailable for investment. If the seller defaults on its obligation to
repurchase the underlying security, the Fund may experience delay or difficulty
in exercising its rights to realize upon the security, may incur a loss if the
value of the security declines and may incur disposition costs in liquidating
the security.
Borrowing
The Fund may borrow money from banks and engage in reverse repurchase
transactions, in an amount not to exceed one-third of the value of its total
assets to meet temporary or emergency purposes, and the Fund may pledge its
assets in connection with such borrowings. The Fund may not purchase securities
if such borrowings exceed 10% of its total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse repurchase
agreement, the Fund sells to a financial institution a security that it holds
and agrees to repurchase the same security at an agreed-upon price and date.
6
<PAGE>
Leverage
The Fund may leverage its portfolio to increase total return. Although leverage
creates an opportunity for increased income and gain, it also creates special
risk considerations. For example, leveraging may magnify changes in the net
asset values of the Fund's shares and in the yield on its portfolio. Although
the principal of such borrowings will be fixed, the Fund's assets may change in
value while the borrowing is outstanding. Leveraging creates interest expenses
that can exceed the income from the assets retained.
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of the Fund's total assets. Each
securities loan is collateralized with Segregable Assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest.
When-Issued and Forward Commitment Securities
The Fund may purchase U.S. Government or other securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" or "delayed
delivery" basis. The price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally 7
to 15 days or, in the case of certain CMO issues, 45 to 60 days later.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. No income accrues on securities that have been
purchased pursuant to a forward commitment or on a when-issued basis prior to
delivery to the Fund. If the Fund disposes of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or receive
against a forward commitment, it may incur a gain or loss.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its custodian to segregate Segregable Assets equal
to the value of the when-issued or forward commitment securities and causes the
Segregable Assets to be marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Fund, the Fund may employ certain
risk management practices using the following derivative securities and
techniques (known as "derivatives"): forward currency exchange contracts, stock
options, currency options, and stock and stock index options, futures contracts
and options on futures contracts on foreign government securities and
currencies. The Board of the Trust has adopted derivative guidelines that
require the Board to review each new type of derivative that may be used by the
Fund. Markets in some countries currently do not have instruments available for
hedging transactions relating to currencies or to securities denominated in such
currencies or to securities of issuers domiciled or principally engaged in
business in such countries. To the extent that such markets do not exist, the
Manager may not be able to hedge its investment effectively in such countries.
Furthermore, the Fund engages in hedging activities only when the Manager deems
it to be appropriate and does not necessarily engage in hedging transactions
with respect to each investment.
Forward Currency Contracts
A forward currency contract is individually negotiated and privately traded by
currency traders and their customers and creates an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date. The Fund
normally conducts its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate in the foreign currency exchange market at
the time of the transaction, or through entering into forward contracts to
purchase or sell foreign currencies at a future date. The Fund generally does
not enter into forward contracts with terms greater than one year.
The Fund generally enters into forward contracts only under two circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering into a forward contract to buy the amount of a
foreign currency needed to settle the transaction. Second, if the Manager
believes that the currency of a particular foreign country will substantially
rise or fall against the U.S. dollar, it may enter into a forward contract to
buy or sell the currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency. The Fund will not enter into
a forward contract if, as a result, it would have more than one-third of total
assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate Segregable Assets
having a value sufficient to cover its obligations). Although forward contracts
are used primarily to protect the Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
7
<PAGE>
Options on Securities, Securities Indices and Currencies
The Fund may purchase put and call options on securities and currencies traded
on U.S. exchanges and, to the extent permitted by law, foreign exchanges, as
well as in the over-the-counter market. The Fund may purchase call options on
securities which it intends to purchase (or on currencies in which those
securities are denominated) in order to limit the risk of a substantial increase
in the market price of such security (or an adverse movement in the applicable
currency). The Fund may purchase put options on particular securities (or on
currencies in which those securities are denominated) in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option (or an adverse movement in
the applicable currency relative to the U.S. dollar). Put options allow the Fund
to protect unrealized gain in an appreciated security that it owns without
selling that security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs.
The Fund also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industry-wide stock price fluctuations.
The Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of forward foreign exchange contracts and futures
contracts on currencies.
Futures and Options on Futures
To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell interest rate futures contracts. An interest rate futures
contract is an agreement to purchase or sell debt securities, usually U.S.
Government securities, at a specified date and price. In addition, the Fund may
purchase and sell put and call options on interest rate futures contracts in
lieu of entering into the underlying interest rate futures contracts. The Fund
segregates Segregable Assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
The Fund does not enter into any futures contracts or related options if the sum
of initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options would exceed 5% of its total assets. The Fund does not
purchase futures contracts or related options if, as a result, more than
one-third of its total assets would be so invested.
Hedging Considerations
Hedging transactions involve certain risks. While the Fund may benefit from the
use of hedging transactions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats any securities subject to restrictions on repatriation for more
than seven days and securities issued in connection with foreign debt conversion
programs that are restricted as to remittance of invested capital or profit as
illiquid. The Fund also treats repurchase agreements with maturities in excess
of seven days as illiquid. Illiquid securities do not include securities that
meet the requirements of Rule 144A under the Securities Act of 1933 and that,
subject to the review by the Board and guidelines adopted by the Board, the
Manager has determined to be liquid. State securities laws may impose further
limitations on the amount of illiquid or restricted securities the Fund may
purchase.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. Government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes the Fund's investments whenever it believes doing so will further the
Fund's investment
8
<PAGE>
objective or when it appears that a position of the desired size cannot be
accumulated. Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions, dealer mark-ups and other transaction costs,
and may result in the recognition of capital gains that may be distributed to
shareholders. Portfolio turnover in excess of 100% is considered high and
increases such costs. The annual portfolio turnover for the Fund is expected to
be approximately 175%. Even if the portfolio turnover for the Fund is in excess
of 175%, the Fund would not consider portfolio turnover as a limiting factor.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval, but unless otherwise stated, the Fund's other
investment policies may be changed by the Board. If there is a change in the
investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30 days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this Prospectus.
Risk Considerations
Concentration in Securities of Pacific Basin Companies
The Fund concentrates its investments in companies that have their principal
activities in the Pacific Basin, excluding Japan. Consequently, the Fund's share
value may be more volatile than that of investment companies not sharing this
concentration. The value of the Fund's shares may vary in response to political
and economic factors affecting issuers in Pacific Basin countries. Although the
Fund will not invest in Japanese companies, some Pacific Basin economies are
directly affected by Japanese capital investment in the region and by Japanese
consumer demands. Many of the countries of the Pacific Basin are developing both
economically and politically. Pacific Basin countries may have relatively
unstable governments, economies based on only a few commodities or industries,
and securities markets trading infrequently or in low volumes. Some Pacific
Basin countries restrict the extent to which foreigners may invest in their
securities markets. Securities of issuers located in some Pacific Basin
countries tend to have volatile prices and may offer significant potential for
loss as well as gain. Further, certain companies in the Pacific Basin may not
have firmly established product markets, may lack depth of management, or may be
more vulnerable to political or economic developments such as nationalization of
their own industries.
Small Companies
The Fund may invest in smaller companies that may benefit from the development
of new products and services. These smaller companies may present greater
opportunities for capital appreciation but may involve greater risk than larger,
more mature issuers. Such smaller companies may have limited product lines,
markets or financial resources, and their securities may trade less frequently
and in more limited volume than those of larger, more mature companies. As a
result, the prices of their securities may fluctuate more than the prices of the
securities of larger issuers.
Foreign Securities
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund. The Fund
has the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. The
Fund also may invest in securities of companies domiciled in, and in markets of,
so-called "emerging market countries." These investments may be subject to
higher risks than investments in more developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, the Fund may encounter difficulties in pursuing legal
remedies or in
9
<PAGE>
obtaining judgments in foreign courts. Additional risk factors, including use of
domestic and foreign custodian banks and depositories, are described elsewhere
in the Prospectus and in the Statement of Additional Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments by the Fund in other countries are generally greater than in the
U.S. Foreign markets, have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of the Fund to make intended security
purchases due to settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund if it had
entered into a contract to sell the security. In certain countries, there is
less government supervision and regulation of business and industry practices,
stock exchanges, brokers, and listed companies than in the U.S. The securities
markets of many of the countries in which the Fund may invest may also be
smaller, less liquid, and subject to greater price volatility than those in the
U.S.
Because the securities owned by the Fund may be denominated in foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. The
Fund may be affected either favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations, and the Fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not freely convertible at market rates into the U.S. dollar.
Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments.
Certain countries also limit the amount of foreign capital that can be invested
in their markets and local companies, creating a "foreign premium" on capital
investments available to foreign investors such as the Fund. The Fund may pay a
"foreign premium" to establish an investment position which it cannot later
recoup because of changes in that country's foreign investment laws.
Lower Quality Debt
The Fund is authorized to invest in medium-quality (rated or equivalent to BBB
by S&P or Fitch's or Baa by Moody's) and in limited amounts of high-risk, lower
quality debt securities (i.e., securities rated below BBB or Baa) or, if
unrated, deemed to be of equivalent investment quality as determined by the
Manager. Medium quality debt securities have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than with higher
grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, the Fund does not invest more than 5% of its total assets in debt
securities rated lower than BBB by S&P or Baa by Moody's or, if unrated, deemed
to be of comparable quality as determined by the Manager using guidelines
approved by the Board. The Board may consider a change in this operating policy
if, in its judgment, economic conditions change such that a higher level of
investment in high-risk, lower quality debt securities would be consistent with
the interests of the Fund and its shareholders. Unrated debt securities are not
necessarily of lower quality than rated securities but may not be attractive to
as many buyers. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) are analyzed by the Manager to determine, to
the extent reasonably possible, that the planned investment is sound. From time
to time, the Fund may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Interest Rates
The market value of debt securities sensitive to prevailing interest rates is
inversely related to actual changes in interest rates. That is, a decline in
interest rates produces an increase in the market value of these securities
while an increase in interest rates produces a decrease. Moreover, the longer
the remaining maturity of a security, the greater the effect of interest rate
change.
10
<PAGE>
Changes in the ability of an issuer to make payments of interest and principal
and in the market's perception of its creditworthiness also affect the market
value of that issuer's debt securities.
Management Of The Fund
The Montgomery Funds has a Board of Trustees that establishes the Fund's
policies and supervises and reviews its management. Day-to-day operations of the
Fund are administered by the officers of the Trust and by the Manager pursuant
to the terms of an investment management agreement with the Fund.
Montgomery Asset Management, L.P., is the Fund's Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Fund. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Fund's Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw upon the research and administrative resources of
Montgomery Securities in its discretion and consistent with applicable
regulations.
Founded in 1969, Montgomery Securities is a fully integrated and highly focused
investment banking partnership specializing in emerging growth companies. The
firm's areas of expertise include research, corporate finance, sales and
trading, and venture capital. Its research department is one of the largest,
most experienced groups headquartered outside the East Coast. Through its
corporate finance department, Montgomery Securities is a well recognized
underwriter of public offerings and provides broad distribution of securities
through its sales and trading organization.
Portfolio Managers
The Fund is managed by the ____________ team, whose key members are
_______________ and _______________.
[Managers profiles to come]
Management Fees and Other Expenses
The Manager provides the Fund with advice on buying and selling securities,
manages the Fund's investments, including the placement of orders for portfolio
transactions, furnishes the Fund with office space and certain administrative
services, and provides personnel needed by the Fund with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Fund. The Manager also compensates the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and shareholder reports for dissemination to prospective investors. As
compensation, the Fund pays the Manager a monthly management fee (accrued daily
but paid when requested by the Manager) based upon the value of its average
daily net assets, according to the following table. The management fee for the
Fund is higher than for most mutual funds.
Average Daily Net Assets Annual Rate
- --------------------------------------------------------------------------------
Montgomery Pacific Basin Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- --------------------------------------------------------------------------------
The Manager also serves as the Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of the Fund's
administrative operations. As compensation, the Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $500 million).
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to the Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
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<PAGE>
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses at or below the lesser of the maximum allowable by
applicable state expense limitations or one and nine-tenths of one percent
(1.90%) of the Fund's average net assets. The Manager also may voluntarily
reduce additional amounts to increase the return to the Fund's investors. The
Manager may terminate these voluntary reductions at any time. Any reductions
made by the Manager in its fees are subject to reimbursement by the Fund within
the following two years, provided that the Fund is able to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Manager generally seeks reimbursement for the oldest reductions and waivers
before payment by the Fund for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers who distribute
the Fund's shares as well as other service providers of shareholder and
administrative services. In addition, the Manager, out of its own funds, may
sponsor seminars and educational programs on the Fund for financial
intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider sale of the Fund's shares as a factor in selecting broker-dealers for
the Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Fund's brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Fund. The Fund will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Board, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
How To Invest In The Fund
The Fund's shares are offered directly to the public, with no sales load, at
their next-determined net asset value after receipt of an order with payment.
The Fund's shares are offered for sale by Montgomery Securities, the Fund's
Distributor, 600 Montgomery Street, San Francisco, California 94111, (800)
572-3863, and through selected securities brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders for Fund shares received after
4:00 p.m., New York time, will be purchased at the next-determined net asset
value after receipt of the order.
The minimum initial investment in the Fund is $1,000 (including IRAs) and $100
for subsequent investments. The Manager or the Distributor, in its discretion,
may waive these minimums. Purchases may also be made in certain circumstances by
payment of securities. See the Statement of Additional Information for further
details.
12
<PAGE>
Initial Investments
Minimum Initial Investment (including IRAs):
$1,000
Mail your completed application and any checks to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
---------------------------------------------------------------------------
Initial Investments by Check
---------------------------------------------------------------------------
o Complete the Account Application. Tell us which Fund(s) you want
to invest and make your check payable to The Montgomery Funds.
o We do not accept third party checks or cash investments. Checks
must be made in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
---------------------------------------------------------------------------
Initial Investments by Wire
---------------------------------------------------------------------------
o Notify the Transfer Agent at (800) 572-3863 that you intend to
make your initial investment by wire. Provide the Transfer Agent
with your name, dollar amount to be invested and the Fund in
which you want to invest. They will provide you with further
instructions to complete your purchase. Complete information
regarding your account must be included in all wire instructions
to ensure accurate handling of your investment.
o Request your bank to transmit immediately available funds by wire
for purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s) account number)
Name of Fund: Montgomery Pacific Basin Fund
o Your bank may charge a fee for any wire transfers.
o The Fund and the Distributor each reserve the right to reject any
purchase order in whole or in part.
---------------------------------------------------------------------------
Subsequent Investments
Minimum Subsequent Investment: $100
Mail any checks and investment instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
13
<PAGE>
---------------------------------------------------------------------------
Subsequent Investments by Check
---------------------------------------------------------------------------
o Make your check payable to The Montgomery Pacific Basin Fund.
o Enclose an investment stub from your confirmation statement.
o If you do not have an investment stub, mail your check with
written instructions indicating the Fund name and account
number to which your investment should be credited.
o We do not accept third party checks or cash investments.
Checks must be made in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
---------------------------------------------------------------------------
Subsequent Investments by Wire
---------------------------------------------------------------------------
o You do not need to contact the Transfer Agent prior to making
subsequent investments by wire. Instruct your bank to wire funds
to the Transfer Agent's affiliated bank by using the bank wire
information under "Initial Investments by Wire."
---------------------------------------------------------------------------
Subsequent Investments by Telephone
---------------------------------------------------------------------------
o Shareholders are automatically eligible to make telephone
purchases by calling the Transfer Agent at (800) 572-3863 before
the Fund cutoff time.
o Shares of IRAs are not eligible for telephone purchases.
o The maximum telephone purchase is an amount up to five times your
account value on the previous day.
o Payments for shares purchased must be received by the Transfer
Agent within three business days after the purchase request.
Write your confirmed purchase number on your check or include it
in your wire instructions.
o You should do one of the following to ensure payment is received
in time:
o Transfer funds directly from your bank account by sending a
letter and a voided check or deposit slip (for a savings
account) to the Transfer Agent.
o Send a check by overnight or 2nd day courier service. Address
courier packages to:
The Montgomery Funds, c/o DST Systems, Inc., 1004
Baltimore St., Kansas City, MO 64105.
o Instruct your bank to wire funds to the Transfer Agent's
affiliated bank by using the bank wire information under the
section titled Initial Investments by Wire.
- --------------------------------------------------------------------------------
14
<PAGE>
Complete information regarding your account must be included in all wire
instructions in order to facilitate the prompt and accurate handling of
investments. Investors may obtain further information from their own banks about
wire transfers and any fees that may be imposed. The Fund and the Distributor
each reserve the right to reject any purchase order in whole or in part.
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not
use an AAB investment to open a new account.
o The minimum automatic investment amount is the Fund's subsequent
investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or
preprinted deposit slip (savings account) from your bank account
to your Montgomery account application or your letter of
instruction. Investments will automatically be transferred into
your Montgomery account from your checking or savings account.
o Investments may be transferred either monthly or quarterly on or
up to two business days before the 5th or 20th day of the month.
If no day is specified on your account application or your letter
of instruction, the 20th of each month will be selected.
o You should allow 20 business days for this service to become
effective.
o You may cancel your AAB at any time by sending a letter to the
Transfer Agent. Your request will be processed upon receipt.
Telephone Transactions
You agree to reimburse the Fund for any expenses or losses that it may incur in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30- days' written notice or any time by you by written notice
to the Fund. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next-determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by the Fund. The Fund and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording the
telephone call, sending a confirmation and requiring the caller to give a
special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Retirement Plans
Shares of the Fund are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. Neither the Fund nor the
Manager administers or acts as custodian for retirement account plans. The Fund
may be available for purchase through administrators for retirement plans.
Investors who purchase shares as a part of a retirement plan should address
inquiries and seek investment servicing from their plan administrators. Plan
administrators may receive compensation from the Fund for performing shareholder
services.
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
15
<PAGE>
How To Redeem An Investment In The Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Fund may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below. Shareholders should note that the
Fund reserves the right upon 60 days' advance notice to shareholders to impose a
redemption fee of up to 1.00% on shares redeemed within 90 days of purchase.
---------------------------------------------------------------------------
Redeeming by Written Instruction
---------------------------------------------------------------------------
o Write a letter indicating your name, account number, the name of
the Fund from which you wish to redeem and the dollar amount or
number of shares you wish to redeem.
o Signature guarantee your letter if you want the redemption
proceeds to go to a party other than the account owner(s), your
predesignated bank account or if the dollar amount of the
redemption exceeds $50,000. Signature guarantees may be provided
by an eligible guarantor institution such as a commercial bank,
an NASD member firm such as a stock broker, a savings association
or national securities exchange. Contact the Transfer Agent if
you need more information.
o If you do not have a predesignated bank account and want to wire
your redemption proceeds, include a voided check or deposit slip
with your letter. The minimum amount that may be wired is $500
(wire charges, if any, will be deducted from redemption
proceeds). The Fund reserves the right to permit lesser wire
amounts or fees in the Manager's discretion.
o Mail your instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141
16
<PAGE>
---------------------------------------------------------------------------
Redeeming By Telephone
---------------------------------------------------------------------------
o Unless you have declined telephone redemption privileges on your
account application, you may redeem shares up to $50,000 by
calling the Transfer Agent before the Fund cutoff time.
o If you included bank wire information on your account application
or made subsequent arrangements to accommodate bank wire
redemptions, you may request that the Transfer Agent wire your
redemption proceeds to your bank account. Allow at least two
business days for redemption proceeds to be credited to your bank
account. If you want to wire your redemption proceeds to arrive
at your bank on the same business day (subject to bank cutoff
times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days after
an address change. All redemption requests during this period
must be in writing with a guaranteed signature.
o This service is not available for IRA accounts.
o Telephone redemption privileges may be cancelled after an account
is opened by instructing the Transfer Agent in writing. Your
request will be processed upon receipt.
---------------------------------------------------------------------------
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
Account Application or by written authorization, the shareholder agrees to be
bound by the telephone redemption instructions given by the shareholder's
designee. The Fund may change, modify or terminate these privileges at any time
upon 60-days' notice to shareholders. The Fund will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See discussion of Fund telephone procedures and liability under "Telephone
Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in the Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from the Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares of the Fund will be
redeemed up to five business days before redemption proceeds are scheduled to be
received by the shareholder. The redemption may result in recognition of gain or
loss for income tax purposes.
Small Accounts/Annual Account Maintenance Fee
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares or to impose a $20 annual account
maintenance fee for any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
the Fund decides to make an involuntary redemption, the shareholder will first
be notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional investment to bring the
value of that account at least to $1,000 before the Fund takes any action.
17
<PAGE>
Exchange Privileges And Restrictions
Exchange Privileges
Shares of the Fund may be exchanged for shares of the other series of the Trust
and The Montgomery Funds II (together with the Fund, the "Montgomery Funds"),
with restrictions noted below, on the basis of their relative net asset values
(with no sales charge or exchange fee) next determined after the time of the
exchange request and provided that you have the current prospectus for the fund
into which you are exchanging shares of the Fund. You are automatically eligible
to make telephone exchanges with your Montgomery account. See discussion of Fund
telephone procedures and limitations of liability under "Telephone
Transactions." Shareholders should note that an exchange may result in
recognition of a gain or loss for income tax purposes.
Exchange Restrictions
A shareholder's privilege of exchanging shares of the Fund has the following
restrictions:
o Shareholders may exchange for shares of a Montgomery fund only in states
where that fund's shares are qualified for sale.
o A shareholder may not exchange for shares of a Montgomery fund that is not
open to new shareholders unless the shareholder has an existing account with
that Montgomery fund.
o Shares of the Fund may not be exchanged for shares of another Montgomery
fund unless the amount to be received in the exchange satisfies that fund's
minimum investment requirement.
o Because excessive exchanges can harm the Fund's performance, the Trust
reserves the right to terminate, either temporarily or permanently, exchange
privileges of any shareholder who makes more than four exchanges out of the
Fund during a twelve-month period and to refuse an exchange into a
Montgomery fund from which the shareholder has redeemed shares within the
previous 90 days (accounts under common ownership or control and accounts
with the same taxpayer identification number will be counted together). This
limit may be modified for accounts in certain institutional retirement plans
to conform to plan exchange limits and U.S. Department of Labor regulations
(for those limits, see plan materials). The Trust reserves the right to
refuse exchanges by any person or group if, in the Manager's judgment, the
Fund would be unable effectively to invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. A shareholder's exchanges may be restricted or refused
if the Fund receives, or the Manager anticipates, simultaneous orders
affecting significant portions of the Fund's assets and, in particular, a
pattern of exchanges coinciding with a "market timing" strategy. Although
the Trust attempts to provide prior notice to affected shareholders when it
is reasonable to do so, it may impose these restrictions at any time. The
Trust reserves the right to terminate or modify the exchange privileges of
Fund shareholders in the future.
Brokers and Other Intermediaries
Investing through Securities Brokers, Dealers and Financial Intermediaries.
Investors may purchase shares of the Fund from other selected securities
brokers, dealers or through financial intermediaries such as benefit plan
administrators. Investors should contact these agents directly for appropriate
instructions, as well as information pertaining to accounts and any service or
transaction fees that may be charged by these agents. Purchase orders through
securities brokers, dealers and other financial intermediaries are effected at
the next-determined net asset value after receipt of the order by such agent,
provided the agent transmits such order on a timely basis to the Transfer Agent
so that it is received by 4:00 p.m., New York time, on days that the Fund issues
shares. Orders received after that time will be purchased at the next-determined
net asset value. To the extent these agents perform shareholder servicing
activities for the Fund, they may receive fees from the Fund for such services.
Repurchase Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Fund by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a repurchase order by such broker-dealer,
provided the broker-dealer transmits such
18
<PAGE>
order on a timely basis to the Transfer Agent so that it is received by 4:00
p.m., New York time, on a day that the Fund redeems shares. Orders received
after that time are entitled to the net asset value next determined after
receipt.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of 4:00 p.m., New
York time, on each day that the NYSE is open for trading. Per-share net asset
value is calculated by dividing the value of the Fund's total net assets by the
total number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset values, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset values may not be reflected in the Fund's
calculation of net asset values unless the Manager, under supervision of the
Board, determines that a particular event would materially affect the Fund's net
asset values.
Dividends And Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The Fund currently intends to make one
or, if necessary to avoid the imposition of tax on the Fund, more distributions
during each calendar year. A distribution may be made between November 1 and
December 31 of each year with respect to any undistributed capital gains earned
during the one-year period ended October 31 of such calendar year. Another
distribution of any undistributed capital gains may also be made following the
Fund's fiscal year end (June 30). The amount and frequency of Fund distributions
are not guaranteed and are at the discretion of the Board.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional shares of the
Fund and credited to the shareholder's account at the closing net asset value on
the reinvestment date.
Taxation
The Fund intends to qualify and elect as soon as possible to be treated as a
regulated investment company under Subchapter M of the Code, by distributing
substantially all of its net investment income and net capital gains to its
shareholders and meeting other requirements of the Code relating to the sources
of its income and diversification of assets. Accordingly, the Fund generally
will not be liable for federal income tax or excise tax based on net income
except to the extent its earnings are not distributed or are distributed in a
manner that does not satisfy the requirements of the Code pertaining to the
timing of distributions. If the Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation. The Fund may also
incur tax liability to the extent it invests in "passive foreign investment
companies." See the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. Part of the distributions paid by the Fund may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of the Fund are treated by shareholders as
19
<PAGE>
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Fund. Additional information on tax matters
relating to the Fund and its shareholders is included in the Statement of
Additional Information.
General Information
The Trust
The Fund is a series of The Montgomery Funds, a Massachusetts business trust
organized on May 10, 1990 (the "Trust"). The Trust's Agreement and Declaration
of Trust permits the Board to issue an unlimited number of full and fractional
shares of beneficial interest, $.01 par value, in any number of series. The
assets and liabilities of each series within the Trust are separate and distinct
from those of each other series.
This Prospectus relates only to the Class R shares of the Fund. The Fund has
designated other classes of shares and may in the future designate other classes
of shares for specific purposes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting all series of the Trust jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees. Except as set forth herein, all
classes of shares issued by the Fund shall have identical voting, dividend,
liquidation and other rights, preferences, and terms and conditions. The only
differences among the various classes of shares relate solely to the following:
(a) each class may be subject to different class expenses; (b) each class may
bear a different identifying designation; (c) each class may have exclusive
voting rights with respect to matters solely affecting such class; (d) each
class may have different exchange privileges; and (e) each class may provide for
the automatic conversion of that class into another class. While the Trust is
not required and does not intend to hold annual meetings of shareholders, such
meetings may be called by the Board at its discretion, or upon demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing or removing Trustees. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees pursuant to the provisions of Section 16(c) of the Investment
Company Act.
Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. Total return information
generally will include the Fund's average annual compounded rate of return over
the most recent four calendar quarters and over the period from the Fund's
inception of operations. The Fund may also advertise aggregate and average total
return information over different periods of time. The Fund's average annual
compounded rate of return is determined by reference to a hypothetical $1,000
investment that includes capital appreciation and depreciation for the stated
period according to a specific formula. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against the Fund's income.
Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return or current yield may be in any
future period.
20
<PAGE>
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. A confirmation statement
will be mailed to your record address each time you request a transaction except
for pre-authorized automatic investment and redemption services (quarterly). All
transactions are recorded on quarterly account statements which you will receive
at the end of each calendar quarter. Your fourth-quarter account statement will
be a year-end statement, listing all transaction activity for the entire year.
Retain this statement for your tax records.
In general, shareholders who redeemed shares from a qualifying Montgomery
account should expect to receive an Average Cost Statement in February of the
following year. Your statement will calculate your average cost using the
average cost single-category method.
Any questions should be directed to The Montgomery Funds at 800-572-FUND
(800-572-3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the
Account Application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item in the Account
Application. Dividends paid to a foreign shareholder's account by the Fund may
be subject to up to 30% withholding instead of backup withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Fund's official sales literature.
21
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-447-4210
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS P SHARES
MONTGOMERY PACIFIC BASIN FUND
---------------------------------------------------------------------
<PAGE>
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
September 30, 1996
Class P shares of the Montgomery Pacific Basin Fund (the "Fund") are offered in
this Prospectus. The Fund seeks long-term capital appreciation through
investment primarily in the equity securities of Pacific Basin companies,
excluding Japan. As is the case for all mutual funds, attainment of the Fund's
investment objective cannot be assured.
The Fund's Class P shares are only sold through financial intermediaries and
financial professionals at net asset value with no sales load, no commissions
and no exchange fees. The Class P shares are subject to a Rule 12b-1
distribution fee as described in this Prospectus. In general, the minimum
initial investment in the Fund is $500, and subsequent investments must be at
least $100. The Manager or the Distributor, under any circumstances that either
deems appropriate, may waive these minimums.
See "How to Invest in the Fund."
The Fund, which is a separate series of The Montgomery Funds, an open-end
management investment company, is managed by Montgomery Asset Management, L.P.
(the "Manager"), an affiliate of Montgomery Securities (the "Distributor").
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated September 30, 1996, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (800)
572-FUND. If you are viewing the electronic version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.
The Internet address for The Montgomery Funds is
http://www.xperts.montgomery.com/1.
The Fund may offer other classes of shares to investors eligible to purchase
those shares. The other classes of shares may have different fees and expenses
than the class of shares offered in this Prospectus, and those different fees
and expenses may affect performance. To obtain information concerning the other
classes of shares not offered in this Prospectus, call The Montgomery Funds at
(800) 572-FUND or contact sales representatives or financial intermediaries who
offer those classes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Fees and Expenses of the Fund 3
- --------------------------------------------------------------------------------
The Fund's Investment Objective and Policies 4
- --------------------------------------------------------------------------------
Portfolio Securities 4
- --------------------------------------------------------------------------------
Other Investment Practices 6
- --------------------------------------------------------------------------------
Risk Considerations 9
- --------------------------------------------------------------------------------
Management of the Fund 11
- --------------------------------------------------------------------------------
How To Invest in the Fund 13
- --------------------------------------------------------------------------------
How To Redeem an Investment in the Fund 17
- --------------------------------------------------------------------------------
Exchange Privileges and Restrictions 19
- --------------------------------------------------------------------------------
How Net Asset Value is Determined 20
- --------------------------------------------------------------------------------
Dividends and Distributions 20
- --------------------------------------------------------------------------------
Taxation 20
- --------------------------------------------------------------------------------
General Information 21
- --------------------------------------------------------------------------------
Backup Withholding Instructions 22
- --------------------------------------------------------------------------------
2
<PAGE>
Fees And Expenses Of The Fund
Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay the following charges when buying or redeeming shares of
the Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load
Imposed on Purchases Imposed on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None 1.00% None
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)
Montgomery Pacific Basin Fund
- --------------------------------------------------------------------------------
Management Fee* 1.25%
- --------------------------------------------------------------------------------
12b-1 Fee 0.25%
- --------------------------------------------------------------------------------
Other Expenses 0.65%
(after reimbursement)*
- --------------------------------------------------------------------------------
Total Fund Operating Expenses* 2.15%
- --------------------------------------------------------------------------------
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year. Because Rule
12b-1 distribution charges are accounted for on a class-level basis (and not on
an individual shareholder-level basis), individual long-term investors in the
Class P shares of the Fund may over time pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"), even though all shareholders of that Class in
the aggregate will not. This is recognized and permitted by the NASD.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. The Fund reserves the right, upon 60 days' advance
notice to shareholders, to impose a redemption fee of up to 1.00% on shares
redeemed within 90 days of purchase. The Fund also reserves the right to
impose a $20 annual account maintenance fee on accounts that fall below the
minimum investment because of redemption. See "How to Redeem an Investment
in the Fund."
* Expenses for the Fund are estimated. The Manager will reduce its fees and
may absorb or reimburse the Fund for certain expenses to the extent
necessary to limit total annual fund operating expenses to the lesser of the
amount indicated in the table for the Fund or the maximum allowed by
applicable state expense limitations. The Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the two years
following that reduction and only if such reimbursement can be achieved
within the for going expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the
Fund for fees and expenses for the current year. Absent the reduction,
actual total Fund operating expenses are estimated to be 3.50% (2.00% other
expenses). The Manager may terminate these voluntary reductions at any time.
See "Management of the Fund."
Example of Expenses for the Fund
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares:
Montgomery Pacific Basin Fund
- --------------------------------------------------------------------------------
1 Year $22
- --------------------------------------------------------------------------------
3 Years $67
- --------------------------------------------------------------------------------
5 Years N/A
- --------------------------------------------------------------------------------
10 Years N/A
- --------------------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
3
<PAGE>
The Fund's Investment Objective And Policies
The investment objective and general investment policies of the Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities" beginning on page 4. Specific investment
practices that may be employed by the Fund are described in "Other Investment
Practices" beginning on page 6. Certain risks associated with investments in the
Fund are described in those sections as well as in "Risk Considerations"
beginning on page 9.
The Investment objective of the Fund is long term capital appreciation, which
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of companies that have their principal activities in the
Pacific Basin, excluding Japan. The Fund currently considers the following to be
Pacific Basin countries: Australia, Bangladesh, China, Hong Kong, India,
Indonesia, Korea, Malaysia, New Zealand, Pakistan, the Philippines, Singapore,
Sri Lanka, Taiwan and Thailand. The Fund will not, however, invest in Japanese
securities. In the future, the Fund may invest in other countries in the Pacific
Basin when their markets become sufficiently developed. Under normal conditions,
the Fund maintains investments in at least three Pacific Basin countries at all
times and invests no more than 35% of its total assets in any one Pacific Basin
country.
The Fund considers a company to be a Pacific Basin company if its securities are
principally traded in the capital market of a Pacific Basin country; it derives
at least 50% of its total revenue from either goods produced or services
rendered in Pacific Basin countries or from sales made in such Pacific Basin
countries, regardless of where the securities of such company are primarily
traded; or it is organized under the laws of, and with a principal office in, a
Pacific Basin country.
Countries in the Pacific Basin are in various stages of economic development
with most being considered emerging markets. Each country has its unique risks.
Most countries in the Pacific Basin are heavily dependent on international
trade. Some have prosperous economies, but are sensitive to world commodity
prices. Others are especially vulnerable to recession in other countries. Some
countries in the Pacific Basin have experienced rapid growth, although many
suffer from obsolete financial systems, economic problems, or archaic legal
systems. The return of Hong Kong to Chinese dominion will affect the entire
Pacific Basin. For information on risks, see "Portfolio Securities," "Risk
Considerations" and the Statement of Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities" and "Risk Considerations." During
the two- to three-month period following commencement of the Fund's operations,
the Fund may have its assets invested substantially in cash and cash
equivalents.
The Fund may invest in certain debt securities issued by the governments of
Pacific Basin countries that are, or may be eligible for, conversion into
investments in Pacific Basin companies under debt conversion programs sponsored
by such governments. If such securities are convertible to equity investments,
the Fund deems them to be equity derivative securities. See "Portfolio
Securities."
_____________ and _____________ are responsible for managing the Fund's
portfolio. See "Management of the Fund."
Portfolio Securities
Equity Securities
In seeking its investment objective, the Fund emphasizes investments in common
stock. The Fund also may invest in other types of equity securities and equity
derivative securities such as preferred stocks, convertible securities,
warrants, units, rights, and options on securities and on securities indices.
Depositary Receipts
The Fund may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other similar global instruments. ADRs typically are
issued by a U.S. bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. EDRs, sometimes called Continental
Depositary Receipts, are issued in Europe, typically by foreign banks and trust
companies, and evidence ownership of either foreign or domestic underlying
securities. GDRs are issued in foreign countries, typically by foreign banks and
trust companies, and evidence ownership of either foreign or domestic
securities. Unsponsored ADR, EDR and GDR programs are organized without the
cooperation of the issuer of the underlying securities. As a result, available
information concerning the issuer may not be as current as for sponsored ADRs,
EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more
volatile.
4
<PAGE>
Convertible Securities
The Fund may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) that may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities are
senior to common stock in a corporation's capital structure but are usually
subordinated to similar non-convertible securities. Through their conversion
feature, they provide an opportunity to participate in capital appreciation
resulting from a market price advance in the underlying common stock. The price
of a convertible security is influenced by the market value of the underlying
common stock and tends to increase as the common stock's market value rises and
decrease as the common stock's market value declines. For purposes of allocating
Fund investments, the Manager regards convertible securities as a form of equity
security.
Securities Warrants and Rights
The Fund may invest up to 5% of its net assets in warrants and rights, including
up to 2% of net assets for those not listed on a securities exchange. A warrant
typically is a long-term option that permits the holder to buy a specified
number of shares of the issuer's underlying common stock at a specified exercise
price by a particular expiration date. Stock index warrants entitle the holder
to receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index A right (also called a
subscription right) is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public, which entitles the holder to buy the new common stock
below the public offering price. A right, like a warrant, is transferable. Also,
a warrant or a right not exercised or disposed of by its expiration date expires
worthless.
Privatizations
The Fund believes that foreign government programs of selling interests in
government-owned or controlled enterprises ("privatizations") may represent
opportunities for significant capital appreciation, and the Fund may invest in
privatizations. The ability of U.S. entities, such as the Fund, to participate
in privatizations may be limited by local law, or the terms for participation
may be less advantageous than for local investors. There can be no assurance
that privatization programs will be successful.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and similar
vehicles (collectively, "special situations") could enhance its capital
appreciation potential. The Fund also may invest in certain types of vehicles or
derivative securities that represent indirect investments in foreign markets or
securities in which it is impractical for the Fund to invest directly.
Investments in special situations may be illiquid, as determined by the Manager
based on criteria reviewed by the Board. The Fund does not invest more than 15%
of its net assets in illiquid investments, including special situations.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. Such investments may involve the
payment of substantial premiums above the net asset value of those investment
companies' portfolio securities and are subject to limitations under the
Investment Company Act. The Fund also may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company" regardless of whether such "passive foreign investment company" makes
distributions to the Fund. See the Statement of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees. In
accordance with applicable state regulatory provisions, the Manager has agreed
to waive its own management fee with respect to the portion of the Fund's assets
invested in other open-end (but not closed-end) investment companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
In selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, the Fund will
not invest more than 5% of its total assets in debt securities rated lower than
BBB by S&P, Baa by Moody's or BBB by Fitch, or in unrated debt securities deemed
to be of comparable quality by the Manager using guidelines approved by the
Board of Trustees. Subject to this limitation, the Fund may invest in any debt
security, including securities in default. After its purchase by the Fund a debt
security may cease to be rated or its rating may be reduced below that required
for purchase by the Fund. Neither event would
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require elimination of that security from the Fund's portfolio. However, a
security downgraded below the Fund's minimum credit levels generally would be
retained only if retention was determined by the Manager and subsequently by the
Board to be in the best interests of the Fund. See "Risk Considerations."
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, governmental entities and companies of
Pacific Basin countries.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
the Fund's assets to be invested in equity securities versus debt securities:
levels and anticipated trends in inflation and interest rates; expected rate of
economic growth and corporate profits growth; changes in government policy,
including regulations governing industry, trade, financial markets, and foreign
and domestic investment; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and changes in the terms of
trade.
U.S. Government Securities
The Fund may invest in fixed rate and floating or variable rate U.S. Government
securities. Certain of the obligations, including U.S. Treasury Bills, Notes and
Bonds, and mortgage-related securities of the Government National Mortgage
Association ("GNMA"), are issued or guaranteed by the U.S. Government. Other
securities issued by U.S. Government agencies or instrumentalities are supported
only by the credit of the agency or instrumentality, for example those issued by
the Federal Home Loan Bank, while others, such as those issued by the Federal
National Mortgage Association ("FNMA"), Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. Government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Fund's shares. With respect to U.S. Government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. Government securities may involve risk
of loss of principal and interest.
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more detailed information about certain of these practices, including
limitations designed to reduce risks.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. Government security or other high-grade
liquid debt instrument from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price. The repurchase
price reflects an agreed-upon rate of return not determined by the coupon rate
on the underlying security. Under the Investment Company Act, repurchase
agreements are considered to be loans by the Fund and must be fully
collateralized by cash, letters of credit, U.S. Government securities or other
high-grade liquid debt securities that the Fund's custodian, or a designated
sub-custodian, segregates from other Fund assets ("Segregable Assets"), which
are either placed in a segregated account or separately identified and rendered
unavailable for investment. If the seller defaults on its obligation to
repurchase the underlying security, the Fund may experience delay or difficulty
in exercising its rights to realize upon the security, may incur a loss if the
value of the security declines and may incur disposition costs in liquidating
the security.
Borrowing
The Fund may borrow money from banks and engage in reverse repurchase
transactions, in an amount not to exceed one-third of the value of its total
assets to meet temporary or emergency purposes, and the Fund may pledge its
assets in connection with such borrowings. The Fund may not purchase securities
if such borrowings exceed 10% of its total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse repurchase
agreement, the Fund sells to a financial institution a security that it holds
and agrees to repurchase the same security at an agreed-upon price and date.
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Leverage
The Fund may leverage its portfolio to increase total return. Although leverage
creates an opportunity for increased income and gain, it also creates special
risk considerations. For example, leveraging may magnify changes in the net
asset values of the Fund's shares and in the yield on its portfolio. Although
the principal of such borrowings will be fixed, the Fund's assets may change in
value while the borrowing is outstanding. Leveraging creates interest expenses
that can exceed the income from the assets retained.
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of the Fund's total assets. Each
securities loan is collateralized with Segregable Assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest.
When-Issued and Forward Commitment Securities
The Fund may purchase U.S. Government or other securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" or "delayed
delivery" basis. The price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally 7
to 15 days or, in the case of certain CMO issues, 45 to 60 days later.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. No income accrues on securities that have been
purchased pursuant to a forward commitment or on a when-issued basis prior to
delivery to the Fund. If the Fund disposes of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or receive
against a forward commitment, it may incur a gain or loss.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its custodian to segregate Segregable Assets equal
to the value of the when-issued or forward commitment securities and causes the
Segregable Assets to be marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Fund, the Fund may employ certain
risk management practices using the following derivative securities and
techniques (known as "derivatives"): forward currency exchange contracts, stock
options, currency options, and stock and stock index options, futures contracts
and options on futures contracts on foreign government securities and
currencies. The Board of the Trust has adopted derivative guidelines that
require the Board to review each new type of derivative that may be used by the
Fund. Markets in some countries currently do not have instruments available for
hedging transactions relating to currencies or to securities denominated in such
currencies or to securities of issuers domiciled or principally engaged in
business in such countries. To the extent that such markets do not exist, the
Manager may not be able to hedge its investment effectively in such countries.
Furthermore, the Fund engages in hedging activities only when the Manager deems
it to be appropriate and does not necessarily engage in hedging transactions
with respect to each investment.
Forward Currency Contracts
A forward currency contract is individually negotiated and privately traded by
currency traders and their customers and creates an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date. The Fund
normally conducts its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate in the foreign currency exchange market at
the time of the transaction, or through entering into forward contracts to
purchase or sell foreign currencies at a future date. The Fund generally does
not enter into forward contracts with terms greater than one year.
The Fund generally enters into forward contracts only under two circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering into a forward contract to buy the amount of a
foreign currency needed to settle the transaction. Second, if the Manager
believes that the currency of a particular foreign country will substantially
rise or fall against the U.S. dollar, it may enter into a forward contract to
buy or sell the currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency. The Fund will not enter into
a forward contract if, as a result, it would have more than one-third of total
assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate Segregable Assets
having a value sufficient to cover its obligations). Although forward contracts
are used primarily to protect the Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
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Options on Securities, Securities Indices and Currencies
The Fund may purchase put and call options on securities and currencies traded
on U.S. exchanges and, to the extent permitted by law, foreign exchanges, as
well as in the over-the-counter market. The Fund may purchase call options on
securities which it intends to purchase (or on currencies in which those
securities are denominated) in order to limit the risk of a substantial increase
in the market price of such security (or an adverse movement in the applicable
currency). The Fund may purchase put options on particular securities (or on
currencies in which those securities are denominated) in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option (or an adverse movement in
the applicable currency relative to the U.S. dollar). Put options allow the Fund
to protect unrealized gain in an appreciated security that it owns without
selling that security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs.
The Fund also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industry-wide stock price fluctuations.
The Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of forward foreign exchange contracts and futures
contracts on currencies.
Futures and Options on Futures
To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell interest rate futures contracts. An interest rate futures
contract is an agreement to purchase or sell debt securities, usually U.S.
Government securities, at a specified date and price. In addition, the Fund may
purchase and sell put and call options on interest rate futures contracts in
lieu of entering into the underlying interest rate futures contracts. The Fund
segregates Segregable Assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
The Fund does not enter into any futures contracts or related options if the sum
of initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options would exceed 5% of its total assets. The Fund does not
purchase futures contracts or related options if, as a result, more than
one-third of its total assets would be so invested.
Hedging Considerations
Hedging transactions involve certain risks. While the Fund may benefit from the
use of hedging transactions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats any securities subject to restrictions on repatriation for more
than seven days and securities issued in connection with foreign debt conversion
programs that are restricted as to remittance of invested capital or profit as
illiquid. The Fund also treats repurchase agreements with maturities in excess
of seven days as illiquid. Illiquid securities do not include securities that
meet the requirements of Rule 144A under the Securities Act of 1933 and that,
subject to the review by the Board and guidelines adopted by the Board, the
Manager has determined to be liquid. State securities laws may impose further
limitations on the amount of illiquid or restricted securities the Fund may
purchase.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. Government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes the Fund's investments whenever it believes doing so will further the
Fund's investment
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<PAGE>
objective or when it appears that a position of the desired size cannot be
accumulated. Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions, dealer mark-ups and other transaction costs,
and may result in the recognition of capital gains that may be distributed to
shareholders. Portfolio turnover in excess of 100% is considered high and
increases such costs. The annual portfolio turnover for the Fund is expected to
be approximately 175%. Even if the portfolio turnover for the Fund is in excess
of 175%, the Fund would not consider portfolio turnover as a limiting factor.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval, but unless otherwise stated, the Fund's other
investment policies may be changed by the Board. If there is a change in the
investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30 days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this Prospectus.
Risk Considerations
Concentration in Securities of Pacific Basin Companies
The Fund concentrates its investments in companies that have their principal
activities in the Pacific Basin, excluding Japan. Consequently, the Fund's share
value may be more volatile than that of investment companies not sharing this
concentration. The value of the Fund's shares may vary in response to political
and economic factors affecting issuers in Pacific Basin countries. Although the
Fund will not invest in Japanese companies, some Pacific Basin economies are
directly affected by Japanese capital investment in the region and by Japanese
consumer demands. Many of the countries of the Pacific Basin are developing both
economically and politically. Pacific Basin countries may have relatively
unstable governments, economies based on only a few commodities or industries,
and securities markets trading infrequently or in low volumes. Some Pacific
Basin countries restrict the extent to which foreigners may invest in their
securities markets. Securities of issuers located in some Pacific Basin
countries tend to have volatile prices and may offer significant potential for
loss as well as gain. Further, certain companies in the Pacific Basin may not
have firmly established product markets, may lack depth of management, or may be
more vulnerable to political or economic developments such as nationalization of
their own industries.
Small Companies
The Fund may invest in smaller companies that may benefit from the development
of new products and services. These smaller companies may present greater
opportunities for capital appreciation but may involve greater risk than larger,
more mature issuers. Such smaller companies may have limited product lines,
markets or financial resources, and their securities may trade less frequently
and in more limited volume than those of larger, more mature companies. As a
result, the prices of their securities may fluctuate more than the prices of the
securities of larger issuers.
Foreign Securities
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund. The Fund
has the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. The
Fund also may invest in securities of companies domiciled in, and in markets of,
so-called "emerging market countries." These investments may be subject to
higher risks than investments in more developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, the Fund may encounter difficulties in pursuing legal
remedies or in
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<PAGE>
obtaining judgments in foreign courts. Additional risk factors, including use of
domestic and foreign custodian banks and depositories, are described elsewhere
in the Prospectus and in the Statement of Additional Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments by the Fund in other countries are generally greater than in the
U.S. Foreign markets, have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of the Fund to make intended security
purchases due to settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund if it had
entered into a contract to sell the security. In certain countries, there is
less government supervision and regulation of business and industry practices,
stock exchanges, brokers, and listed companies than in the U.S. The securities
markets of many of the countries in which the Fund may invest may also be
smaller, less liquid, and subject to greater price volatility than those in the
U.S.
Because the securities owned by the Fund may be denominated in foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. The
Fund may be affected either favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations, and the Fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not freely convertible at market rates into the U.S. dollar.
Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments.
Certain countries also limit the amount of foreign capital that can be invested
in their markets and local companies, creating a "foreign premium" on capital
investments available to foreign investors such as the Fund. The Fund may pay a
"foreign premium" to establish an investment position which it cannot later
recoup because of changes in that country's foreign investment laws.
Lower Quality Debt
The Fund is authorized to invest in medium-quality (rated or equivalent to BBB
by S&P or Fitch's or Baa by Moody's) and in limited amounts of high-risk, lower
quality debt securities (i.e., securities rated below BBB or Baa) or, if
unrated, deemed to be of equivalent investment quality as determined by the
Manager. Medium quality debt securities have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than with higher
grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, the Fund does not invest more than 5% of its total assets in debt
securities rated lower than BBB by S&P or Baa by Moody's or, if unrated, deemed
to be of comparable quality as determined by the Manager using guidelines
approved by the Board. The Board may consider a change in this operating policy
if, in its judgment, economic conditions change such that a higher level of
investment in high-risk, lower quality debt securities would be consistent with
the interests of the Fund and its shareholders. Unrated debt securities are not
necessarily of lower quality than rated securities but may not be attractive to
as many buyers. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) are analyzed by the Manager to determine, to
the extent reasonably possible, that the planned investment is sound. From time
to time, the Fund may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Interest Rates
The market value of debt securities sensitive to prevailing interest rates is
inversely related to actual changes in interest rates. That is, a decline in
interest rates produces an increase in the market value of these securities
while an increase in interest rates produces a decrease. Moreover, the longer
the remaining maturity of a security, the greater the effect of interest rate
change.
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Changes in the ability of an issuer to make payments of interest and principal
and in the market's perception of its creditworthiness also affect the market
value of that issuer's debt securities.
Management Of The Fund
The Montgomery Funds has a Board of Trustees that establishes the Fund's
policies and supervises and reviews its management. Day-to-day operations of the
Fund are administered by the officers of the Trust and by the Manager pursuant
to the terms of an investment management agreement with the Fund.
Montgomery Asset Management, L.P., is the Fund's Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Fund. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Fund's Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw upon the research and administrative resources of
Montgomery Securities in its discretion and consistent with applicable
regulations.
Founded in 1969, Montgomery Securities is a fully integrated and highly focused
investment banking partnership specializing in emerging growth companies. The
firm's areas of expertise include research, corporate finance, sales and
trading, and venture capital. Its research department is one of the largest,
most experienced groups headquartered outside the East Coast. Through its
corporate finance department, Montgomery Securities is a well recognized
underwriter of public offerings and provides broad distribution of securities
through its sales and trading organization.
Portfolio Managers
The Fund is managed by the ____________ team, whose key members are
_______________ and _______________.
[Managers profiles to come]
Management Fees and Other Expenses
The Manager provides the Fund with advice on buying and selling securities,
manages the Fund's investments, including the placement of orders for portfolio
transactions, furnishes the Fund with office space and certain administrative
services, and provides personnel needed by the Fund with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Fund. The Manager also compensates the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and shareholder reports for dissemination to prospective investors. As
compensation, the Fund pays the Manager a monthly management fee (accrued daily
but paid when requested by the Manager) based upon the value of its average
daily net assets, according to the following table. The management fee for the
Fund is higher than for most mutual funds.
Average Daily Net Assets Annual Rate
- --------------------------------------------------------------------------------
Montgomery Pacific Basin Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- --------------------------------------------------------------------------------
The Manager also serves as the Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of the Fund's
administrative operations. As compensation, the Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $500 million).
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to the Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
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Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of the Fund
have approved, and the Fund has entered into, a Share Marketing Plan (the
"Plan") with the Manager, as the distribution coordinator, for the Class P
shares. Under the Plan, the Fund will pay 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, to reimburse the Manager for its
distribution costs with respect to that Class.
The Plan provides that the Manager may use the distribution fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited to (i) incentive compensation paid to the directors, officers and
employees of, agents for and consultants to, the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Fund to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Fund and that Class; and (iv) costs involved obtaining whatever information,
analysis and reports with respect to marketing and promotional activities that
the Fund may, from time to time, deem advisable with respect to the distribution
of that Class. Distribution fees are accrued daily and paid monthly, and are
charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Fund and the shareholders
of Class P shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for its consideration
in connection with its deliberations as to the continuance of the Plan. In its
review of the Plan, the Board of Trustees is asked to take into consideration
expenses incurred in connection with the separate distribution of the Class P
shares.
The Class P shares are not obligated under the Plan to pay any distribution
expenses in excess of the distribution fee. Thus, if the Plan were terminated or
otherwise not continued, no amounts (other than current amounts accrued but not
yet paid) would be owed by the Class to the Manager.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through broker-dealers without the
assessment of a front-end sales charge and at the same time to permit the
Manager to compensate broker-dealers on an ongoing basis in connection with the
sale of the Class P shares.
The 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 Trustees who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the Independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
All distribution fees paid by the Fund under the Plan will be paid in accordance
with Article III, Section 26 of the Rules of Fair Practice of the NASD, as such
Section may change from time to time.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses (excluding the Rule 12b-1 fee) at or below the lesser
of the maximum allowable by applicable state expense limitations or one and
nine-tenths of one percent (1.90%) of the Fund's average net assets. The Manager
also may voluntarily reduce additional amounts to increase the return to the
Fund's investors. The Manager may terminate these voluntary reductions at any
time. Any reductions made by the Manager in its fees are subject to
reimbursement by the Fund within the following two years, provided that the Fund
is able to effect such reimbursement and remain in compliance with applicable
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Fund for fees and expenses for the
current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers who distribute
the Fund's shares as well as other service providers of shareholder and
administrative services.
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<PAGE>
In addition, the Manager, out of its own funds, may sponsor seminars and
educational programs on the Fund for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider sale of the Fund's shares as a factor in selecting broker-dealers for
the Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Fund's brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Fund. The Fund will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Board, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
How To Invest In The Fund
The Fund's shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Fund's shares are offered for
sale by Montgomery Securities, the Fund's Distributor, 600 Montgomery Street,
San Francisco, California 94111, (800) 572-3863, and through selected securities
brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders for Fund shares received after
4:00 p.m., New York time, will be purchased at the next-determined net asset
value after receipt of the order.
The minimum initial investment in the Fund is $500 (including IRAs) and $100 for
subsequent investments. The Manager or the Distributor, in its discretion, may
waive these minimums. Purchases may also be made in certain circumstances by
payment of securities. See the Statement of Additional Information for further
details.
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<PAGE>
Initial Investments
Minimum Initial Investment (including IRAs): $500
Mail your completed application and any checks to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
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Initial Investments by Check
---------------------------------------------------------------------------
o Complete the Account Application. Tell us which Fund(s) you
want to invest and make your check payable to The Montgomery
Funds.
o We do not accept third party checks or cash investments.
Checks must be made in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
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Initial Investments by Wire
---------------------------------------------------------------------------
o Notify the Transfer Agent at (800) 572-3863 that you intend to
make your initial investment by wire. Provide the Transfer
Agent with your name, dollar amount to be invested and the
Fund in which you want to invest. They will provide you with
further instructions to complete your purchase. Complete
information regarding your account must be included in all
wire instructions to ensure accurate handling of your
investment.
o Request your bank to transmit immediately available funds by
wire for purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s)
account number)
Name of Fund: Montgomery Pacific Basin Fund
o Your bank may charge a fee for any wire transfers.
o The Fund and the Distributor each reserve the right to reject
any purchase order in whole or in part.
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Subsequent Investments
Minimum Subsequent Investment: $100
Mail any checks and investment instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
14
<PAGE>
---------------------------------------------------------------------------
Subsequent Investments by Check
---------------------------------------------------------------------------
o Make your check payable to The Montgomery Pacific
Basin Fund.
o Enclose an investment stub from your confirmation
statement.
o If you do not have an investment stub, mail your
check with written instructions indicating the Fund
name and account number to which your investment
should be credited.
o We do not accept third party checks or cash
investments. Checks must be made in U.S. dollars and,
to avoid fees and delays, drawn only on banks located
in the U.S.
o A charge may be imposed on checks that do not clear.
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Subsequent Investments by Wire
---------------------------------------------------------------------------
o You do not need to contact the Transfer Agent prior to making
subsequent investments by wire. Instruct your bank to wire
funds to the Transfer Agent's affiliated bank by using the
bank wire information under "Initial Investments by Wire."
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Subsequent Investments by Telephone
---------------------------------------------------------------------------
o Shareholders are automatically eligible to make telephone
purchases by calling the Transfer Agent at (800) 572-3863
before the Fund cutoff time.
o Shares of IRAs are not eligible for telephone purchases.
o The maximum telephone purchase is an amount up to five times
your account value on the previous day.
o Payments for shares purchased must be received by the Transfer
Agent within three business days after the purchase request.
Write your confirmed purchase number on your check or include
it in your wire instructions.
o You should do one of the following to ensure payment is
received in time:
o Transfer funds directly from your bank account by sending
a letter and a voided check or deposit slip (for a savings
account) to the Transfer Agent.
o Send a check by overnight or 2nd day courier service.
Address courier packages to:
The Montgomery Funds, c/o DST Systems, Inc., 1004
Baltimore St., Kansas City, MO 64105.
o Instruct your bank to wire funds to the Transfer Agent's
affiliated bank by using the bank wire information under
the section titled Initial Investments by Wire.
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15
<PAGE>
Complete information regarding your account must be included in all wire
instructions in order to facilitate the prompt and accurate handling of
investments. Investors may obtain further information from their own banks about
wire transfers and any fees that may be imposed. The Fund and the Distributor
each reserve the right to reject any purchase order in whole or in part.
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not
use an AAB investment to open a new account.
o The minimum automatic investment amount is the Fund's
subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or
preprinted deposit slip (savings account) from your bank
account to your Montgomery account application or your letter
of instruction. Investments will automatically be transferred
into your Montgomery account from your checking or savings
account.
o Investments may be transferred either monthly or quarterly on
or up to two business days before the 5th or 20th day of the
month. If no day is specified on your account application or
your letter of instruction, the 20th of each month will be
selected.
o You should allow 20 business days for this service to become
effective.
o You may cancel your AAB at any time by sending a letter to the
Transfer Agent. Your request will be processed upon receipt.
Telephone Transactions
You agree to reimburse the Fund for any expenses or losses that it may incur in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30- days' written notice or any time by you by written notice
to the Fund. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next-determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by the Fund. The Fund and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording the
telephone call, sending a confirmation and requiring the caller to give a
special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Retirement Plans
Shares of the Fund are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. Neither the Fund nor the
Manager administers or acts as custodian for retirement account plans. The Fund
may be available for purchase through administrators for retirement plans.
Investors who purchase shares as a part of a retirement plan should address
inquiries and seek investment servicing from their plan administrators. Plan
administrators may receive compensation from the Fund for performing shareholder
services.
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
16
<PAGE>
How To Redeem An Investment In The Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Fund may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below. Shareholders should note that the
Fund reserves the right upon 60 days' advance notice to shareholders to impose a
redemption fee of up to 1.00% on shares redeemed within 90 days of purchase.
---------------------------------------------------------------------------
Redeeming by Written Instruction
---------------------------------------------------------------------------
o Write a letter indicating your name, account number, the name
of the Fund from which you wish to redeem and the dollar
amount or number of shares you wish to redeem.
o Signature guarantee your letter if you want the redemption
proceeds to go to a party other than the account owner(s),
your predesignated bank account or if the dollar amount of the
redemption exceeds $50,000. Signature guarantees may be
provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stock broker, a
savings association or national securities exchange. Contact
the Transfer Agent if you need more information.
o If you do not have a predesignated bank account and want to
wire your redemption proceeds, include a voided check or
deposit slip with your letter. The minimum amount that may be
wired is $500 (wire charges, if any, will be deducted from
redemption proceeds). The Fund reserves the right to permit
lesser wire amounts or fees in the Manager's discretion.
o Mail your instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141
17
<PAGE>
---------------------------------------------------------------------------
Redeeming By Telephone
---------------------------------------------------------------------------
o Unless you have declined telephone redemption privileges on
your account application, you may redeem shares up to $50,000
by calling the Transfer Agent before the Fund cutoff time.
o If you included bank wire information on your account
application or made subsequent arrangements to accommodate
bank wire redemptions, you may request that the Transfer Agent
wire your redemption proceeds to your bank account. Allow at
least two business days for redemption proceeds to be credited
to your bank account. If you want to wire your redemption
proceeds to arrive at your bank on the same business day
(subject to bank cutoff times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days
after an address change. All redemption requests during this
period must be in writing with a guaranteed signature.
o This service is not available for IRA accounts.
o Telephone redemption privileges may be cancelled after an
account is opened by instructing the Transfer Agent in
writing. Your request will be processed upon receipt.
---------------------------------------------------------------------------
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
Account Application or by written authorization, the shareholder agrees to be
bound by the telephone redemption instructions given by the shareholder's
designee. The Fund may change, modify or terminate these privileges at any time
upon 60-days' notice to shareholders. The Fund will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See discussion of Fund telephone procedures and liability under "Telephone
Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of $500
or more in the Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from the Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares of the Fund will be
redeemed up to five business days before redemption proceeds are scheduled to be
received by the shareholder. The redemption may result in recognition of gain or
loss for income tax purposes.
Small Accounts/Annual Account Maintenance Fee
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares or to impose a $20 annual account
maintenance fee for any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $500. If
the Fund decides to make an involuntary redemption, the shareholder will first
be notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional investment to bring the
value of that account at least to $500 before the Fund takes any action.
18
<PAGE>
Exchange Privileges And Restrictions
Exchange Privileges
Shares of the Fund may be exchanged for Class P shares of the other series of
the Trust and The Montgomery Funds II (together with the Fund, the "Montgomery
Funds"), with restrictions noted below, on the basis of their relative net asset
values (with no sales charge or exchange fee) next determined after the time of
the exchange request and provided that you have the current prospectus for the
fund into which you are exchanging shares of the Fund. You are automatically
eligible to make telephone exchanges with your Montgomery account. See
discussion of Fund telephone procedures and limitations of liability under
"Telephone Transactions." Shareholders should note that an exchange may result
in recognition of a gain or loss for income tax purposes.
Exchange Restrictions
A shareholder's privilege of exchanging shares of the Fund has the following
restrictions:
o Shareholders may exchange for shares of a Montgomery fund only in states
where that fund's shares are qualified for sale.
o A shareholder may not exchange for shares of a Montgomery fund that is not
open to new shareholders unless the shareholder has an existing account with
that Montgomery fund.
o Shares of the Fund may not be exchanged for shares of another Montgomery
fund unless the amount to be received in the exchange satisfies that fund's
minimum investment requirement.
o Because excessive exchanges can harm the Fund's performance, the Trust
reserves the right to terminate, either temporarily or permanently, exchange
privileges of any shareholder who makes more than four exchanges out of the
Fund during a twelve-month period and to refuse an exchange into a
Montgomery fund from which the shareholder has redeemed shares within the
previous 90 days (accounts under common ownership or control and accounts
with the same taxpayer identification number will be counted together). This
limit may be modified for accounts in certain institutional retirement plans
to conform to plan exchange limits and U.S. Department of Labor regulations
(for those limits, see plan materials). The Trust reserves the right to
refuse exchanges by any person or group if, in the Manager's judgment, the
Fund would be unable effectively to invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. A shareholder's exchanges may be restricted or refused
if the Fund receives, or the Manager anticipates, simultaneous orders
affecting significant portions of the Fund's assets and, in particular, a
pattern of exchanges coinciding with a "market timing" strategy. Although
the Trust attempts to provide prior notice to affected shareholders when it
is reasonable to do so, it may impose these restrictions at any time. The
Trust reserves the right to terminate or modify the exchange privileges of
Fund shareholders in the future.
Brokers and Other Intermediaries
Investing through Securities Brokers, Dealers and Financial Intermediaries.
Investors may purchase shares of the Fund from other selected securities
brokers, dealers or through financial intermediaries such as benefit plan
administrators. Investors should contact these agents directly for appropriate
instructions, as well as information pertaining to accounts and any service or
transaction fees that may be charged by these agents. Purchase orders through
securities brokers, dealers and other financial intermediaries are effected at
the next-determined net asset value after receipt of the order by such agent,
provided the agent transmits such order on a timely basis to the Transfer Agent
so that it is received by 4:00 p.m., New York time, on days that the Fund issues
shares. Orders received after that time will be purchased at the next-determined
net asset value. To the extent these agents perform shareholder servicing
activities for the Fund, they may receive fees from the Fund for such services.
Repurchase Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Fund by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a repurchase order by such broker-dealer,
provided the broker-dealer transmits such
19
<PAGE>
order on a timely basis to the Transfer Agent so that it is received by 4:00
p.m., New York time, on a day that the Fund redeems shares. Orders received
after that time are entitled to the net asset value next determined after
receipt.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of 4:00 p.m., New
York time, on each day that the NYSE is open for trading. Per-share net asset
value is calculated by dividing the value of the Fund's total net assets by the
total number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset values, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset values may not be reflected in the Fund's
calculation of net asset values unless the Manager, under supervision of the
Board, determines that a particular event would materially affect the Fund's net
asset values.
Dividends And Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The Fund currently intends to make one
or, if necessary to avoid the imposition of tax on the Fund, more distributions
during each calendar year. A distribution may be made between November 1 and
December 31 of each year with respect to any undistributed capital gains earned
during the one-year period ended October 31 of such calendar year. Another
distribution of any undistributed capital gains may also be made following the
Fund's fiscal year end (June 30). The amount and frequency of Fund distributions
are not guaranteed and are at the discretion of the Board.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional Class P
shares of the Fund and credited to the shareholder's account at the closing net
asset value on the reinvestment date.
Taxation
The Fund intends to qualify and elect as soon as possible to be treated as a
regulated investment company under Subchapter M of the Code, by distributing
substantially all of its net investment income and net capital gains to its
shareholders and meeting other requirements of the Code relating to the sources
of its income and diversification of assets. Accordingly, the Fund generally
will not be liable for federal income tax or excise tax based on net income
except to the extent its earnings are not distributed or are distributed in a
manner that does not satisfy the requirements of the Code pertaining to the
timing of distributions. If the Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation. The Fund may also
incur tax liability to the extent it invests in "passive foreign investment
companies." See the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. Part of the distributions paid by the Fund may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of the Fund are treated by shareholders as
20
<PAGE>
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Fund. Additional information on tax matters
relating to the Fund and its shareholders is included in the Statement of
Additional Information.
General Information
The Trust
The Fund is a series of The Montgomery Funds, a Massachusetts business trust
organized on May 10, 1990 (the "Trust"). The Trust's Agreement and Declaration
of Trust permits the Board to issue an unlimited number of full and fractional
shares of beneficial interest, $.01 par value, in any number of series. The
assets and liabilities of each series within the Trust are separate and distinct
from those of each other series.
This Prospectus relates only to the Class P shares of the Fund. The Fund has
designated other classes of shares and may in the future designate other classes
of shares for specific purposes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting all series of the Trust jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees. Except as set forth herein, all
classes of shares issued by the Fund shall have identical voting, dividend,
liquidation and other rights, preferences, and terms and conditions. The only
differences among the various classes of shares relate solely to the following:
(a) each class may be subject to different class expenses; (b) each class may
bear a different identifying designation; (c) each class may have exclusive
voting rights with respect to matters solely affecting such class; (d) each
class may have different exchange privileges; and (e) each class may provide for
the automatic conversion of that class into another class. While the Trust is
not required and does not intend to hold annual meetings of shareholders, such
meetings may be called by the Board at its discretion, or upon demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing or removing Trustees. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees pursuant to the provisions of Section 16(c) of the Investment
Company Act.
Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. Performance data may be quoted
separately for the Class P shares as for other classes. Total return information
generally will include the Fund's average annual compounded rate of return over
the most recent four calendar quarters and over the period from the Fund's
inception of operations. The Fund may also advertise aggregate and average total
return information over different periods of time. The Fund's average annual
compounded rate of return is determined by reference to a hypothetical $1,000
investment that includes capital appreciation and depreciation for the stated
period according to a specific formula. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against the Fund's income.
Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return or current yield may be in any
future period.
21
<PAGE>
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. A confirmation statement
will be mailed to your record address each time you request a transaction except
for pre-authorized automatic investment and redemption services (quarterly). All
transactions are recorded on quarterly account statements which you will receive
at the end of each calendar quarter. Your fourth-quarter account statement will
be a year-end statement, listing all transaction activity for the entire year.
Retain this statement for your tax records.
In general, shareholders who redeemed shares from a qualifying Montgomery
account should expect to receive an Average Cost Statement in February of the
following year. Your statement will calculate your average cost using the
average cost single-category method.
Any questions should be directed to The Montgomery Funds at 800-572-FUND
(800-572-3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the
Account Application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item in the Account
Application. Dividends paid to a foreign shareholder's account by the Fund may
be subject to up to 30% withholding instead of backup withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Fund's official sales literature.
20
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-447-4210
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR CLASS L SHARES
MONTGOMERY PACIFIC BASIC FUND
---------------------------------------------------------------------
<PAGE>
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
September 30, 1996
Class L shares of the Montgomery Pacific Basin Fund (the "Fund") are offered in
this Prospectus. The Fund seeks long-term capital appreciation through
investment primarily in the equity securities of Pacific Basin companies,
excluding Japan. As is the case for all mutual funds, attainment of the Fund's
investment objective cannot be assured.
The Fund's Class L shares are only sold through financial intermediaries and
financial professionals at net asset value with no sales load, no commissions
and no exchange fees. The Class L shares are subject to a Rule 12b-1
distribution fee as described in this Prospectus. In general, the minimum
initial investment in the Fund is $500, and subsequent investments must be at
least $100. The Manager or the Distributor, under any circumstances that either
deems appropriate, may waive these minimums. See "How to Invest in the Fund."
The Fund, which is a separate series of The Montgomery Funds, an open-end
management investment company, is managed by Montgomery Asset Management, L.P.
(the "Manager"), an affiliate of Montgomery Securities (the "Distributor").
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated September 30, 1996, as may be
revised, has been filed with the Securities and Exchange Commission, is
incorporated by this reference and is available without charge by calling (800)
572-FUND. If you are viewing the electronic version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.
The Internet address for The Montgomery Funds is
http://www.xperts.montgomery.com/1.
The Fund may offer other classes of shares to investors eligible to purchase
those shares. The other classes of shares may have different fees and expenses
than the class of shares offered in this Prospectus, and those different fees
and expenses may affect performance. To obtain information concerning the other
classes of shares not offered in this Prospectus, call The Montgomery Funds at
(800) 572-FUND or contact sales representatives or financial intermediaries who
offer those classes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Fees and Expenses of the Fund 3
- ------------------------------------------------------------------------------
The Fund's Investment Objective and Policies 4
- ------------------------------------------------------------------------------
Portfolio Securities 4
- ------------------------------------------------------------------------------
Other Investment Practices 6
- ------------------------------------------------------------------------------
Risk Considerations 9
- ------------------------------------------------------------------------------
Management of the Fund 11
- ------------------------------------------------------------------------------
How To Invest in the Fund 13
- ------------------------------------------------------------------------------
How To Redeem an Investment in the Fund 17
- ------------------------------------------------------------------------------
Exchange Privileges and Restrictions 19
- ------------------------------------------------------------------------------
How Net Asset Value is Determined 20
- ------------------------------------------------------------------------------
Dividends and Distributions 20
- ------------------------------------------------------------------------------
Taxation 20
- ------------------------------------------------------------------------------
General Information 21
- ------------------------------------------------------------------------------
Backup Withholding Instructions 22
- ------------------------------------------------------------------------------
2
<PAGE>
Fees And Expenses Of The Fund
Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay the following charges when buying or redeeming shares of
the Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load
Imposed on Purchases Imposed on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
None None None 1.00% None
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)
Montgomery Pacific Basin Fund
- --------------------------------------------------------------------------------
Management Fee* 1.25%
- --------------------------------------------------------------------------------
12b-1 Fee 0.75%
- --------------------------------------------------------------------------------
Other Expenses 0.65%
(after reimbursement)*
- --------------------------------------------------------------------------------
Total Fund Operating Expenses* 2.65%
- --------------------------------------------------------------------------------
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of the Fund. Operating expenses
are paid out of the Fund's assets and are factored into the Fund's share price.
The Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year. Because Rule
12b-1 distribution charges are accounted for on a class-level basis (and not on
an individual shareholder-level basis), individual long-term investors in the
Class L shares of the Fund may over time pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"), even though all shareholders of that Class in
the aggregate will not. This is recognized and permitted by the NASD.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. The Fund reserves the right, upon 60 days' advance
notice to shareholders, to impose a redemption fee of up to 1.00% on shares
redeemed within 90 days of purchase. The Fund also reserves the right to
impose a $20 annual account maintenance fee on accounts that fall below the
minimum investment because of redemption. See "How to Redeem an Investment
in the Fund."
* Expenses for the Fund are estimated. The Manager will reduce its fees and
may absorb or reimburse the Fund for certain expenses to the extent
necessary to limit total annual fund operating expenses to the lesser of the
amount indicated in the table for the Fund or the maximum allowed by
applicable state expense limitations. The Fund is required to reimburse the
Manager for any reductions in the Manager's fee only during the two years
following that reduction and only if such reimbursement can be achieved
within the for going expense limits. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the
Fund for fees and expenses for the current year. Absent the reduction,
actual total Fund operating expenses are estimated to be 4.00% (2.00% other
expenses). The Manager may terminate these voluntary reductions at any time.
See "Management of the Fund."
Example of Expenses for the Fund
Assuming, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of the
Fund's shares would have paid the following total expenses upon redeeming such
shares:
Montgomery Pacific Basin Fund
- --------------------------------------------------------------------------------
1 Year $27
- --------------------------------------------------------------------------------
3 Years $82
- --------------------------------------------------------------------------------
5 Years N/A
- --------------------------------------------------------------------------------
10 Years N/A
- --------------------------------------------------------------------------------
This example is to help potential investors understand the effect of expenses.
Investors should understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.
3
<PAGE>
The Fund's Investment Objective And Policies
The investment objective and general investment policies of the Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities" beginning on page 4. Specific investment
practices that may be employed by the Fund are described in "Other Investment
Practices" beginning on page 6. Certain risks associated with investments in the
Fund are described in those sections as well as in "Risk Considerations"
beginning on page 9.
The Investment objective of the Fund is long term capital appreciation, which
under normal conditions it seeks by investing at least 65% of its total assets
in equity securities of companies that have their principal activities in the
Pacific Basin, excluding Japan. The Fund currently considers the following to be
Pacific Basin countries: Australia, Bangladesh, China, Hong Kong, India,
Indonesia, Korea, Malaysia, New Zealand, Pakistan, the Philippines, Singapore,
Sri Lanka, Taiwan and Thailand. The Fund will not, however, invest in Japanese
securities. In the future, the Fund may invest in other countries in the Pacific
Basin when their markets become sufficiently developed. Under normal conditions,
the Fund maintains investments in at least three Pacific Basin countries at all
times and invests no more than 35% of its total assets in any one Pacific Basin
country.
The Fund considers a company to be a Pacific Basin company if its securities are
principally traded in the capital market of a Pacific Basin country; it derives
at least 50% of its total revenue from either goods produced or services
rendered in Pacific Basin countries or from sales made in such Pacific Basin
countries, regardless of where the securities of such company are primarily
traded; or it is organized under the laws of, and with a principal office in, a
Pacific Basin country.
Countries in the Pacific Basin are in various stages of economic development
with most being considered emerging markets. Each country has its unique risks.
Most countries in the Pacific Basin are heavily dependent on international
trade. Some have prosperous economies, but are sensitive to world commodity
prices. Others are especially vulnerable to recession in other countries. Some
countries in the Pacific Basin have experienced rapid growth, although many
suffer from obsolete financial systems, economic problems, or archaic legal
systems. The return of Hong Kong to Chinese dominion will affect the entire
Pacific Basin. For information on risks, see "Portfolio Securities," "Risk
Considerations" and the Statement of Additional Information.
The Fund invests primarily in common stock but also may invest in other types of
equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities" and "Risk Considerations." During
the two- to three-month period following commencement of the Fund's operations,
the Fund may have its assets invested substantially in cash and cash
equivalents.
The Fund may invest in certain debt securities issued by the governments of
Pacific Basin countries that are, or may be eligible for, conversion into
investments in Pacific Basin companies under debt conversion programs sponsored
by such governments. If such securities are convertible to equity investments,
the Fund deems them to be equity derivative securities. See "Portfolio
Securities."
_____________ and _____________ are responsible for managing the Fund's
portfolio. See "Management of the Fund."
Portfolio Securities
Equity Securities
In seeking its investment objective, the Fund emphasizes investments in common
stock. The Fund also may invest in other types of equity securities and equity
derivative securities such as preferred stocks, convertible securities,
warrants, units, rights, and options on securities and on securities indices.
Depositary Receipts
The Fund may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other similar global instruments. ADRs typically are
issued by a U.S. bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. EDRs, sometimes called Continental
Depositary Receipts, are issued in Europe, typically by foreign banks and trust
companies, and evidence ownership of either foreign or domestic underlying
securities. GDRs are issued in foreign countries, typically by foreign banks and
trust companies, and evidence ownership of either foreign or domestic
securities. Unsponsored ADR, EDR and GDR programs are organized without the
cooperation of the issuer of the underlying securities. As a result, available
information concerning the issuer may not be as current as for sponsored ADRs,
EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more
volatile.
4
<PAGE>
Convertible Securities
The Fund may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) that may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities are
senior to common stock in a corporation's capital structure but are usually
subordinated to similar non-convertible securities. Through their conversion
feature, they provide an opportunity to participate in capital appreciation
resulting from a market price advance in the underlying common stock. The price
of a convertible security is influenced by the market value of the underlying
common stock and tends to increase as the common stock's market value rises and
decrease as the common stock's market value declines. For purposes of allocating
Fund investments, the Manager regards convertible securities as a form of equity
security.
Securities Warrants and Rights
The Fund may invest up to 5% of its net assets in warrants and rights, including
up to 2% of net assets for those not listed on a securities exchange. A warrant
typically is a long-term option that permits the holder to buy a specified
number of shares of he issuer's underlying common stock at a specified exercise
price by a particular expiration date. Stock index warrants entitle the holder
to receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. A right (also called a
subscription right) is a privilege granted to existing shareholders of a
corporation to subscribe to shares of a new issue of common stock before it is
offered to the public, which entitles the holder to buy the new common stock
below the public offering price. A right, like a warrant, is transferable. Also,
a warrant or a right not exercised or disposed of by its expiration date expires
worthless.
Privatizations
The Fund believes that foreign government programs of selling interests in
government-owned or controlled enterprises ("privatizations") may represent
opportunities for significant capital appreciation, and the Fund may invest in
privatizations. The ability of U.S. entities, such as the Fund, to participate
in privatizations may be limited by local law, or the terms for participation
may be less advantageous than for local investors. There can be no assurance
that privatization programs will be successful.
Special Situations
The Fund believes that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and similar
vehicles (collectively, "special situations") could enhance its capital
appreciation potential. The Fund also may invest in certain types of vehicles or
derivative securities that represent indirect investments in foreign markets or
securities in which it is impractical for the Fund to invest directly.
Investments in special situations may be illiquid, as determined by the Manager
based on criteria reviewed by the Board. The Fund does not invest more than 15%
of its net assets in illiquid investments, including special situations.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. Such investments may involve the
payment of substantial premiums above the net asset value of those investment
companies' portfolio securities and are subject to limitations under the
Investment Company Act. The Fund also may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company" regardless of whether such "passive foreign investment company" makes
distributions to the Fund. See the Statement of Additional Information.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees. In
accordance with applicable state regulatory provisions, the Manager has agreed
to waive its own management fee with respect to the portion of the Fund's assets
invested in other open-end (but not closed-end) investment companies.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
In selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers. As an operating policy which may be changed by the Board, the Fund will
not invest more than 5% of its total assets in debt securities rated lower than
BBB by S&P, Baa by Moody's or BBB by Fitch, or in unrated debt securities deemed
to be of comparable quality by the Manager using guidelines approved by the
Board of Trustees. Subject to this limitation, the Fund may invest in any debt
security, including securities in default. After its purchase by the Fund a debt
security may cease to be rated or its rating may be reduced below that required
for purchase by the Fund. Neither event would
5
<PAGE>
require elimination of that security from the Fund's portfolio. However, a
security downgraded below the Fund's minimum credit levels generally would be
retained only if retention was determined by the Manager and subsequently by the
Board to be in the best interests of the Fund. See "Risk Considerations."
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, governmental entities and companies of
Pacific Basin countries.
The percentage distribution between equity and debt will vary from country to
country. The following factors, among others, will influence the proportion of
the Fund's assets to be invested in equity securities versus debt securities:
levels and anticipated trends in inflation and interest rates; expected rate of
economic growth and corporate profits growth; changes in government policy,
including regulations governing industry, trade, financial markets, and foreign
and domestic investment; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and changes in the terms of
trade.
U.S. Government Securities
The Fund may invest in fixed rate and floating or variable rate U.S. Government
securities. Certain of the obligations, including U.S. Treasury Bills, Notes and
Bonds, and mortgage-related securities of the Government National Mortgage
Association ("GNMA"), are issued or guaranteed by the U.S. Government. Other
securities issued by U.S. Government agencies or instrumentalities are supported
only by the credit of the agency or instrumentality, for example those issued by
the Federal Home Loan Bank, while others, such as those issued by the Federal
National Mortgage Association ("FNMA"), Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. Government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Fund's shares. With respect to U.S. Government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. Government securities may involve risk
of loss of principal and interest.
Other Investment Practices
The Fund also may engage in the investment practices described below, each of
which may involve certain special risks. The Statement of Additional
Information, under the heading "Investment Objective and Policies of the Fund,"
contains more detailed information about certain of these practices, including
limitations designed to reduce risks.
Repurchase Agreements
The Fund may enter into repurchase agreements. Pursuant to a repurchase
agreement, the Fund acquires a U.S. Government security or other high-grade
liquid debt instrument from a financial institution that simultaneously agrees
to repurchase the same security at a specified time and price. The repurchase
price reflects an agreed-upon rate of return not determined by the coupon rate
on the underlying security. Under the Investment Company Act, repurchase
agreements are considered to be loans by the Fund and must be fully
collateralized by cash, letters of credit, U.S. Government securities or other
high-grade liquid debt securities that the Fund's custodian, or a designated
sub-custodian, segregates from other Fund assets ("Segregable Assets"), which
are either placed in a segregated account or separately identified and rendered
unavailable for investment. If the seller defaults on its obligation to
repurchase the underlying security, the Fund may experience delay or difficulty
in exercising its rights to realize upon the security, may incur a loss if the
value of the security declines and may incur disposition costs in liquidating
the security.
Borrowing
The Fund may borrow money from banks and engage in reverse repurchase
transactions, in an amount not to exceed one-third of the value of its total
assets to meet temporary or emergency purposes, and the Fund may pledge its
assets in connection with such borrowings. The Fund may not purchase securities
if such borrowings exceed 10% of its total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse repurchase
agreement, the Fund sells to a financial institution a security that it holds
and agrees to repurchase the same security at an agreed-upon price and date.
6
<PAGE>
Leverage
The Fund may leverage its portfolio to increase total return. Although leverage
creates an opportunity for increased income and gain, it also creates special
risk considerations. For example, leveraging may magnify changes in the net
asset values of the Fund's shares and in the yield on its portfolio. Although
the principal of such borrowings will be fixed, the Fund's assets may change in
value while the borrowing is outstanding. Leveraging creates interest expenses
that can exceed the income from the assets retained.
Securities Lending
The Fund may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 30% of the Fund's total assets. Each
securities loan is collateralized with Segregable Assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest.
When-Issued and Forward Commitment Securities
The Fund may purchase U.S. Government or other securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" or "delayed
delivery" basis. The price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally 7
to 15 days or, in the case of certain CMO issues, 45 to 60 days later.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. No income accrues on securities that have been
purchased pursuant to a forward commitment or on a when-issued basis prior to
delivery to the Fund. If the Fund disposes of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or receive
against a forward commitment, it may incur a gain or loss.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its custodian to segregate Segregable Assets equal
to the value of the when-issued or forward commitment securities and causes the
Segregable Assets to be marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Fund, the Fund may employ certain
risk management practices using the following derivative securities and
techniques (known as "derivatives"): forward currency exchange contracts, stock
options, currency options, and stock and stock index options, futures contracts
and options on futures contracts on foreign government securities and
currencies. The Board of the Trust has adopted derivative guidelines that
require the Board to review each new type of derivative that may be used by the
Fund. Markets in some countries currently do not have instruments available for
hedging transactions relating to currencies or to securities denominated in such
currencies or to securities of issuers domiciled or principally engaged in
business in such countries. To the extent that such markets do not exist, the
Manager may not be able to hedge its investment effectively in such countries.
Furthermore, the Fund engages in hedging activities only when the Manager deems
it to be appropriate and does not necessarily engage in hedging transactions
with respect to each investment.
Forward Currency Contracts
A forward currency contract is individually negotiated and privately traded by
currency traders and their customers and creates an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date. The Fund
normally conducts its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate in the foreign currency exchange market at
the time of the transaction, or through entering into forward contracts to
purchase or sell foreign currencies at a future date. The Fund generally does
not enter into forward contracts with terms greater than one year.
The Fund generally enters into forward contracts only under two circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering into a forward contract to buy the amount of a
foreign currency needed to settle the transaction. Second, if the Manager
believes that the currency of a particular foreign country will substantially
rise or fall against the U.S. dollar, it may enter into a forward contract to
buy or sell the currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency. The Fund will not enter into
a forward contract if, as a result, it would have more than one-third of total
assets committed to such contracts (unless it owns the currency that it is
obligated to deliver or has caused its custodian to segregate Segregable Assets
having a value sufficient to cover its obligations). Although forward contracts
are used primarily to protect the Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
7
<PAGE>
Options on Securities, Securities Indices and Currencies
The Fund may purchase put and call options on securities and currencies traded
on U.S. exchanges and, to the extent permitted by law, foreign exchanges, as
well as in the over-the-counter market. The Fund may purchase call options on
securities which it intends to purchase (or on currencies in which those
securities are denominated) in order to limit the risk of a substantial increase
in the market price of such security (or an adverse movement in the applicable
currency). The Fund may purchase put options on particular securities (or on
currencies in which those securities are denominated) in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option (or an adverse movement in
the applicable currency relative to the U.S. dollar). Put options allow the Fund
to protect unrealized gain in an appreciated security that it owns without
selling that security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs.
The Fund also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industry-wide stock price fluctuations.
The Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of forward foreign exchange contracts and futures
contracts on currencies.
Futures and Options on Futures
To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell interest rate futures contracts. An interest rate futures
contract is an agreement to purchase or sell debt securities, usually U.S.
Government securities, at a specified date and price. In addition, the Fund may
purchase and sell put and call options on interest rate futures contracts in
lieu of entering into the underlying interest rate futures contracts. The Fund
segregates Segregable Assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
The Fund does not enter into any futures contracts or related options if the sum
of initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options would exceed 5% of its total assets. The Fund does not
purchase futures contracts or related options if, as a result, more than
one-third of its total assets would be so invested.
Hedging Considerations
Hedging transactions involve certain risks. While the Fund may benefit from the
use of hedging transactions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, the Fund pays commissions and other costs in connection with
such investments.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid securities.
The Fund treats any securities subject to restrictions on repatriation for more
than seven days and securities issued in connection with foreign debt conversion
programs that are restricted as to remittance of invested capital or profit as
illiquid. The Fund also treats repurchase agreements with maturities in excess
of seven days as illiquid. Illiquid securities do not include securities that
meet the requirements of Rule 144A under the Securities Act of 1933 and that,
subject to the review by the Board and guidelines adopted by the Board, the
Manager has determined to be liquid. State securities laws may impose further
limitations on the amount of illiquid or restricted securities the Fund may
purchase.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, the Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. Government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in the Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes the Fund's investments whenever it believes doing so will further the
Fund's investment
8
<PAGE>
objective or when it appears that a position of the desired size cannot be
accumulated. Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions, dealer mark-ups and other transaction costs,
and may result in the recognition of capital gains that may be distributed to
shareholders. Portfolio turnover in excess of 100% is considered high and
increases such costs. The annual portfolio turnover for the Fund is expected to
be approximately 175%. Even if the portfolio turnover for the Fund is in excess
of 175%, the Fund would not consider portfolio turnover as a limiting factor.
Investment Restrictions
The investment objective of the Fund is fundamental and may not be changed
without shareholder approval, but unless otherwise stated, the Fund's other
investment policies may be changed by the Board. If there is a change in the
investment objective or policies of the Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Fund is subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
The Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment objective, policies and restrictions.
At least 30 days' prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this Prospectus.
Risk Considerations
Concentration in Securities of Pacific Basin Companies
The Fund concentrates its investments in companies that have their principal
activities in the Pacific Basin, excluding Japan. Consequently, the Fund's share
value may be more volatile than that of investment companies not sharing this
concentration. The value of the Fund's shares may vary in response to political
and economic factors affecting issuers in Pacific Basin countries. Although the
Fund will not invest in Japanese companies, some Pacific Basin economies are
directly affected by Japanese capital investment in the region and by Japanese
consumer demands. Many of the countries of the Pacific Basin are developing both
economically and politically. Pacific Basin countries may have relatively
unstable governments, economies based on only a few commodities or industries,
and securities markets trading infrequently or in low volumes. Some Pacific
Basin countries restrict the extent to which foreigners may invest in their
securities markets. Securities of issuers located in some Pacific Basin
countries tend to have volatile prices and may offer significant potential for
loss as well as gain. Further, certain companies in the Pacific Basin may not
have firmly established product markets, may lack depth of management, or may be
more vulnerable to political or economic developments such as nationalization of
their own industries.
Small Companies
The Fund may invest in smaller companies that may benefit from the development
of new products and services. These smaller companies may present greater
opportunities for capital appreciation but may involve greater risk than larger,
more mature issuers. Such smaller companies may have limited product lines,
markets or financial resources, and their securities may trade less frequently
and in more limited volume than those of larger, more mature companies. As a
result, the prices of their securities may fluctuate more than the prices of the
securities of larger issuers.
Foreign Securities
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund. The Fund
has the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. The
Fund also may invest in securities of companies domiciled in, and in markets of,
so-called "emerging market countries." These investments may be subject to
higher risks than investments in more developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, the Fund may encounter difficulties in pursuing legal
remedies or in
9
<PAGE>
obtaining judgments in foreign courts. Additional risk factors, including use of
domestic and foreign custodian banks and depositories, are described elsewhere
in the Prospectus and in the Statement of Additional Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments by the Fund in other countries are generally greater than in the
U.S. Foreign markets, have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of the Fund to make intended security
purchases due to settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund if it had
entered into a contract to sell the security. In certain countries, there is
less government supervision and regulation of business and industry practices,
stock exchanges, brokers, and listed companies than in the U.S. The securities
markets of many of the countries in which the Fund may invest may also be
smaller, less liquid, and subject to greater price volatility than those in the
U.S.
Because the securities owned by the Fund may be denominated in foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. The
Fund may be affected either favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations, and the Fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which the Fund may invest may also have fixed or managed
currencies that are not freely convertible at market rates into the U.S. dollar.
Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments.
Certain countries also limit the amount of foreign capital that can be invested
in their markets and local companies, creating a "foreign premium" on capital
investments available to foreign investors such as the Fund. The Fund may pay a
"foreign premium" to establish an investment position which it cannot later
recoup because of changes in that country's foreign investment laws.
Lower Quality Debt
The Fund is authorized to invest in medium-quality (rated or equivalent to BBB
by S&P or Fitch's or Baa by Moody's) and in limited amounts of high-risk, lower
quality debt securities (i.e., securities rated below BBB or Baa) or, if
unrated, deemed to be of equivalent investment quality as determined by the
Manager. Medium quality debt securities have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than with higher
grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, the Fund does not invest more than 5% of its total assets in debt
securities rated lower than BBB by S&P or Baa by Moody's or, if unrated, deemed
to be of comparable quality as determined by the Manager using guidelines
approved by the Board. The Board may consider a change in this operating policy
if, in its judgment, economic conditions change such that a higher level of
investment in high-risk, lower quality debt securities would be consistent with
the interests of the Fund and its shareholders. Unrated debt securities are not
necessarily of lower quality than rated securities but may not be attractive to
as many buyers. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) are analyzed by the Manager to determine, to
the extent reasonably possible, that the planned investment is sound. From time
to time, the Fund may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Interest Rates
The market value of debt securities sensitive to prevailing interest rates is
inversely related to actual changes in interest rates. That is, a decline in
interest rates produces an increase in the market value of these securities
while an increase in interest rates produces a decrease. Moreover, the longer
the remaining maturity of a security, the greater the effect of interest rate
change.
10
<PAGE>
Changes in the ability of an issuer to make payments of interest and principal
and in the market's perception of its creditworthiness also affect the market
value of that issuer's debt securities.
Management Of The Fund
The Montgomery Funds has a Board of Trustees that establishes the Fund's
policies and supervises and reviews its management. Day-to-day operations of the
Fund are administered by the officers of the Trust and by the Manager pursuant
to the terms of an investment management agreement with the Fund.
Montgomery Asset Management, L.P., is the Fund's Manager. The Manager, a
California limited partnership, was formed in 1990 as an investment adviser
registered as such with the SEC under the Investment Advisers Act of 1940, as
amended, and since then has advised private accounts as well as the Fund. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Fund's Distributor. Under the Investment
Company Act, both Montgomery Asset Management, Inc. and Montgomery Securities
may be deemed control persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery Securities,
the Manager may draw upon the research and administrative resources of
Montgomery Securities in its discretion and consistent with applicable
regulations.
Founded in 1969, Montgomery Securities is a fully integrated and highly focused
investment banking partnership specializing in emerging growth companies. The
firm's areas of expertise include research, corporate finance, sales and
trading, and venture capital. Its research department is one of the largest,
most experienced groups headquartered outside the East Coast. Through its
corporate finance department, Montgomery Securities is a well recognized
underwriter of public offerings and provides broad distribution of securities
through its sales and trading organization.
Portfolio Managers
The Fund is managed by the ____________ team, whose key members are
_______________ and _______________.
[Managers profiles to come]
Management Fees and Other Expenses
The Manager provides the Fund with advice on buying and selling securities,
manages the Fund's investments, including the placement of orders for portfolio
transactions, furnishes the Fund with office space and certain administrative
services, and provides personnel needed by the Fund with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with the Fund. The Manager also compensates the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and shareholder reports for dissemination to prospective investors. As
compensation, the Fund pays the Manager a monthly management fee (accrued daily
but paid when requested by the Manager) based upon the value of its average
daily net assets, according to the following table. The management fee for the
Fund is higher than for most mutual funds.
Average Daily Net Assets Annual Rate
- --------------------------------------------------------------------------------
Montgomery Pacific Basin Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
- --------------------------------------------------------------------------------
The Manager also serves as the Fund's Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of the Fund's
administrative operations. As compensation, the Fund pays the Administrator a
monthly fee at the annual rate of seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $500 million).
The Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and recordkeeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to the Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
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<PAGE>
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class L shares of the Fund
have approved, and the Fund has entered into, a Share Marketing Plan (the
"Plan") with the Manager, as the distribution coordinator, for the Class L
shares. Under the Plan, the Fund will pay distribution fees to the Manager at an
annual rate of 0.75% of the Fund's aggregate average daily net assets
attributable to its Class L shares, to reimburse the Manager for its
distribution costs with respect to that Class.
The Plan provides that the Manager may use the distribution fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited to (i) incentive compensation paid to the directors, officers and
employees of, agents for and consultants to, the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Fund to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Fund and that Class; and (iv) costs involved obtaining whatever information,
analysis and reports with respect to marketing and promotional activities that
the Fund may, from time to time, deem advisable with respect to the distribution
of that Class. Distribution fees are accrued daily and paid monthly, and are
charged as expenses of the Class L shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Fund and the shareholders
of Class L shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for its consideration
in connection with its deliberations as to the continuance of the Plan. In its
review of the Plan, the Board of Trustees is asked to take into consideration
expenses incurred in connection with the separate distribution of the Class L
shares.
The Class L shares are not obligated under the Plan to pay any distribution
expenses in excess of the distribution fee. Thus, if the Plan were terminated or
otherwise not continued, no amounts (other than current amounts accrued but not
yet paid) would be owed by the Class to the Manager.
The distribution fee attributable to the Class L shares is designed to permit an
investor to purchase Class L shares through broker-dealers without the
assessment of a front-end sales charge and at the same time to permit the
Manager to compensate broker-dealers on an ongoing basis in connection with the
sale of the Class L shares.
The 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 Trustees who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the Independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class L
shares.
All distribution fees paid by the Fund under the Plan will be paid in accordance
with Article III, Section 26 of the Rules of Fair Practice of the NASD, as such
Section may change from time to time.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses (excluding the Rule 12b-1 fee) at or below the lesser
of the maximum allowable by applicable state expense limitations or one and
nine-tenths of one percent (1.90%) of the Fund's average net assets. The Manager
also may voluntarily reduce additional amounts to increase the return to the
Fund's investors. The Manager may terminate these voluntary reductions at any
time. Any reductions made by the Manager in its fees are subject to
reimbursement by the Fund within the following two years, provided that the Fund
is able to effect such reimbursement and remain in compliance with applicable
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Fund for fees and expenses for the
current year.
In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating expense for which
the Fund is obligated to pay and the performance of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement, the Manager is entitled to seek reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers who distribute
the Fund's shares as well as other service providers of shareholder and
administrative services.
12
<PAGE>
In addition, the Manager, out of its own funds, may sponsor seminars and
educational programs on the Fund for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to, reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Manager also may
consider sale of the Fund's shares as a factor in selecting broker-dealers for
the Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Fund's brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Fund. The Fund will use Montgomery Securities as its broker only when, in the
judgment of the Manager and pursuant to review by the Board, Montgomery
Securities will obtain a price and execution at least as favorable as that
available from other qualified brokers. See "Execution of Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Fund (the "Master Transfer
Agent") and performs certain recordkeeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Fund's principal custodian (the
"Custodian").
How To Invest In The Fund
The Fund's shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Fund's shares are offered for
sale by Montgomery Securities, the Fund's Distributor, 600 Montgomery Street,
San Francisco, California 94111, (800) 572-3863, and through selected securities
brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders for Fund shares received after
4:00 p.m., New York time, will be purchased at the next-determined net asset
value after receipt of the order.
The minimum initial investment in the Fund is $500 (including IRAs) and $100 for
subsequent investments. The Manager or the Distributor, in its discretion, may
waive these minimums. Purchases may also be made in certain circumstances by
payment of securities. See the Statement of Additional Information for further
details.
13
<PAGE>
Initial Investments
Minimum Initial Investment (including IRAs): $500
Mail your completed application and any checks to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
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Initial Investments by Check
---------------------------------------------------------------------------
o Complete the Account Application. Tell us which Fund(s) you
want to invest and make your check payable to The Montgomery
Funds.
o We do not accept third party checks or cash investments.
Checks must be made in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
o A charge may be imposed on checks that do not clear.
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Initial Investments by Wire
---------------------------------------------------------------------------
o Notify the Transfer Agent at (800) 572-3863 that you intend to
make your initial investment by wire. Provide the Transfer
Agent with your name, dollar amount to be invested and the
Fund in which you want to invest. They will provide you with
further instructions to complete your purchase. Complete
information regarding your account must be included in all
wire instructions to ensure accurate handling of your
investment.
o Request your bank to transmit immediately available funds by
wire for purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s)
account number)
Name of Fund: Montgomery Pacific Basin Fund
o Your bank may charge a fee for any wire transfers.
o The Fund and the Distributor each reserve the right to reject
any purchase order in whole or in part.
---------------------------------------------------------------------------
Subsequent Investments
Minimum Subsequent Investment: $100
Mail any checks and investment instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
14
<PAGE>
---------------------------------------------------------------------------
Subsequent Investments by Check
---------------------------------------------------------------------------
o Make your check payable to The Montgomery Pacific
Basin Fund.
o Enclose an investment stub from your confirmation
statement.
o If you do not have an investment stub, mail your
check with written instructions indicating the Fund
name and account number to which your investment
should be credited.
o We do not accept third party checks or cash
investments. Checks must be made in U.S. dollars and,
to avoid fees and delays, drawn only on banks located
in the U.S.
o A charge may be imposed on checks that do not clear.
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Subsequent Investments by Wire
---------------------------------------------------------------------------
o You do not need to contact the Transfer Agent prior to making
subsequent investments by wire. Instruct your bank to wire
funds to the Transfer Agent's affiliated bank by using the
bank wire information under "Initial Investments by Wire."
---------------------------------------------------------------------------
Subsequent Investments by Telephone
---------------------------------------------------------------------------
o Shareholders are automatically eligible to make telephone
purchases by calling the Transfer Agent at (800) 572-3863
before the Fund cutoff time.
o Shares of IRAs are not eligible for telephone purchases.
o The maximum telephone purchase is an amount up to five times
your account value on the previous day.
o Payments for shares purchased must be received by the Transfer
Agent within three business days after the purchase request.
Write your confirmed purchase number on your check or include
it in your wire instructions.
o You should do one of the following to ensure payment is
received in time:
o Transfer funds directly from your bank account by sending
a letter and a voided check or deposit slip (for a savings
account) to the Transfer Agent.
o Send a check by overnight or 2nd day courier service.
Address courier packages to:
The Montgomery Funds, c/o DST Systems, Inc., 1004
Baltimore St., Kansas City, MO 64105.
o Instruct your bank to wire funds to the Transfer Agent's
affiliated bank by using the bank wire information under
the section titled Initial Investments by Wire.
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15
<PAGE>
Complete information regarding your account must be included in all wire
instructions in order to facilitate the prompt and accurate handling of
investments. Investors may obtain further information from their own banks about
wire transfers and any fees that may be imposed. The Fund and the Distributor
each reserve the right to reject any purchase order in whole or in part.
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not
use an AAB investment to open a new account.
o The minimum automatic investment amount is the Fund's
subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or
preprinted deposit slip (savings account) from your bank
account to your Montgomery account application or your letter
of instruction. Investments will automatically be transferred
into your Montgomery account from your checking or savings
account.
o Investments may be transferred either monthly or quarterly on
or up to two business days before the 5th or 20th day of the
month. If no day is specified on your account application or
your letter of instruction, the 20th of each month will be
selected.
o You should allow 20 business days for this service to become
effective.
o You may cancel your AAB at any time by sending a letter to the
Transfer Agent. Your request will be processed upon receipt.
Telephone Transactions
You agree to reimburse the Fund for any expenses or losses that it may incur in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30- days' written notice or any time by you by written notice
to the Fund. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next-determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by the Fund. The Fund and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording the
telephone call, sending a confirmation and requiring the caller to give a
special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Retirement Plans
Shares of the Fund are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. Neither the Fund nor the
Manager administers or acts as custodian for retirement account plans. The Fund
may be available for purchase through administrators for retirement plans.
Investors who purchase shares as a part of a retirement plan should address
inquiries and seek investment servicing from their plan administrators. Plan
administrators may receive compensation from the Fund for performing shareholder
services.
Share Certificates
Share certificates will not be issued by the Fund. All shares are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.
16
<PAGE>
How To Redeem An Investment In The Fund
The Fund will redeem all or any portion of an investor's outstanding shares upon
request. Redemptions can be made on any day that the NYSE is open for trading.
The redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, Montgomery Securities or
other securities dealers. Payment of redemption proceeds is made promptly
regardless of when redemption occurs and normally within three days after
receipt of all documents in proper form, including a written redemption order
with appropriate signature guarantee. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instructions. The Fund may suspend
the right of redemption under certain extraordinary circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been notified that the monies used for the purchase have been
collected, which may take up to 15 days from the purchase date. Shares tendered
for redemptions through brokers or dealers (other than the Distributor) may be
subject to a service charge by such brokers or dealers. Procedures for
requesting a redemption are set forth below. Shareholders should note that the
Fund reserves the right upon 60 days' advance notice to shareholders to impose a
redemption fee of up to 1.00% on shares redeemed within 90 days of purchase.
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Redeeming by Written Instruction
---------------------------------------------------------------------------
o Write a letter indicating your name, account number, the name
of the Fund from which you wish to redeem and the dollar
amount or number of shares you wish to redeem.
o Signature guarantee your letter if you want the redemption
proceeds to go to a party other than the account owner(s),
your predesignated bank account or if the dollar amount of the
redemption exceeds $50,000. Signature guarantees may be
provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stock broker, a
savings association or national securities exchange. Contact
the Transfer Agent if you need more information.
o If you do not have a predesignated bank account and want to
wire your redemption proceeds, include a voided check or
deposit slip with your letter. The minimum amount that may be
wired is $500 (wire charges, if any, will be deducted from
redemption proceeds). The Fund reserves the right to permit
lesser wire amounts or fees in the Manager's discretion.
o Mail your instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141
17
<PAGE>
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Redeeming By Telephone
---------------------------------------------------------------------------
o Unless you have declined telephone redemption privileges on
your account application, you may redeem shares up to $50,000
by calling the Transfer Agent before the Fund cutoff time.
o If you included bank wire information on your account
application or made subsequent arrangements to accommodate
bank wire redemptions, you may request that the Transfer Agent
wire your redemption proceeds to your bank account. Allow at
least two business days for redemption proceeds to be credited
to your bank account. If you want to wire your redemption
proceeds to arrive at your bank on the same business day
(subject to bank cutoff times), there is a $10 fee.
o Telephone redemption privileges will be suspended 30 days
after an address change. All redemption requests during this
period must be in writing with a guaranteed signature.
o This service is not available for IRA accounts.
o Telephone redemption privileges may be cancelled after an
account is opened by instructing the Transfer Agent in
writing. Your request will be processed upon receipt.
---------------------------------------------------------------------------
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization. When a shareholder appoints a designee on the
Account Application or by written authorization, the shareholder agrees to be
bound by the telephone redemption instructions given by the shareholder's
designee. The Fund may change, modify or terminate these privileges at any time
upon 60-days' notice to shareholders. The Fund will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See discussion of Fund telephone procedures and liability under "Telephone
Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of $500
or more in the Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from the Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares of the Fund will be
redeemed up to five business days before redemption proceeds are scheduled to be
received by the shareholder. The redemption may result in recognition of gain or
loss for income tax purposes.
Small Accounts/Annual Account Maintenance Fee
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares or to impose a $20 annual account
maintenance fee for any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $500. If
the Fund decides to make an involuntary redemption, the shareholder will first
be notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional investment to bring the
value of that account at least to $500 before the Fund takes any action.
18
<PAGE>
Exchange Privileges And Restrictions
Exchange Privileges
Shares of the Fund may be exchanged for Class L shares of the other series of
the Trust and The Montgomery Funds II (together with the Fund, the "Montgomery
Funds"), with restrictions noted below, on the basis of their relative net asset
values (with no sales charge or exchange fee) next determined after the time of
the exchange request and provided that you have the current prospectus for the
fund into which you are exchanging shares of the Fund. You are automatically
eligible to make telephone exchanges with your Montgomery account. See
discussion of Fund telephone procedures and limitations of liability under
"Telephone Transactions." Shareholders should note that an exchange may result
in recognition of a gain or loss for income tax purposes.
Exchange Restrictions
A shareholder's privilege of exchanging shares of the Fund has the following
restrictions:
o Shareholders may exchange for shares of a Montgomery fund only in states
where that fund's shares are qualified for sale.
o A shareholder may not exchange for shares of a Montgomery fund that is not
open to new shareholders unless the shareholder has an existing account with
that Montgomery fund.
o Shares of the Fund may not be exchanged for shares of another Montgomery
fund unless the amount to be received in the exchange satisfies that fund's
minimum investment requirement.
o Because excessive exchanges can harm the Fund's performance, the Trust
reserves the right to terminate, either temporarily or permanently, exchange
privileges of any shareholder who makes more than four exchanges out of the
Fund during a twelve-month period and to refuse an exchange into a
Montgomery fund from which the shareholder has redeemed shares within the
previous 90 days (accounts under common ownership or control and accounts
with the same taxpayer identification number will be counted together). This
limit may be modified for accounts in certain institutional retirement plans
to conform to plan exchange limits and U.S. Department of Labor regulations
(for those limits, see plan materials). The Trust reserves the right to
refuse exchanges by any person or group if, in the Manager's judgment, the
Fund would be unable effectively to invest the money in accordance with its
investment objective and policies, or would otherwise be potentially
adversely affected. A shareholder's exchanges may be restricted or refused
if the Fund receives, or the Manager anticipates, simultaneous orders
affecting significant portions of the Fund's assets and, in particular, a
pattern of exchanges coinciding with a "market timing" strategy. Although
the Trust attempts to provide prior notice to affected shareholders when it
is reasonable to do so, it may impose these restrictions at any time. The
Trust reserves the right to terminate or modify the exchange privileges of
Fund shareholders in the future.
Brokers and Other Intermediaries
Investing through Securities Brokers, Dealers and Financial Intermediaries.
Investors may purchase shares of the Fund from other selected securities
brokers, dealers or through financial intermediaries such as benefit plan
administrators. Investors should contact these agents directly for appropriate
instructions, as well as information pertaining to accounts and any service or
transaction fees that may be charged by these agents. Purchase orders through
securities brokers, dealers and other financial intermediaries are effected at
the next-determined net asset value after receipt of the order by such agent,
provided the agent transmits such order on a timely basis to the Transfer Agent
so that it is received by 4:00 p.m., New York time, on days that the Fund issues
shares. Orders received after that time will be purchased at the next-determined
net asset value. To the extent these agents perform shareholder servicing
activities for the Fund, they may receive fees from the Fund for such services.
Repurchase Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Fund by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a repurchase order by such broker-dealer,
provided the broker-dealer transmits such
19
<PAGE>
order on a timely basis to the Transfer Agent so that it is received by 4:00
p.m., New York time, on a day that the Fund redeems shares. Orders received
after that time are entitled to the net asset value next determined after
receipt.
How Net Asset Value Is Determined
The net asset value of the Fund is determined once daily as of 4:00 p.m., New
York time, on each day that the NYSE is open for trading. Per-share net asset
value is calculated by dividing the value of the Fund's total net assets by the
total number of the Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trust's officers, and by the manager and the Pricing
Committee of the Board respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
if there has not been any change in the foreign-currency denominated values of
such securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset values, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset values may not be reflected in the Fund's
calculation of net asset values unless the Manager, under supervision of the
Board, determines that a particular event would materially affect the Fund's net
asset values.
Dividends And Distributions
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The Fund currently intends to make one
or, if necessary to avoid the imposition of tax on the Fund, more distributions
during each calendar year. A distribution may be made between November 1 and
December 31 of each year with respect to any undistributed capital gains earned
during the one-year period ended October 31 of such calendar year. Another
distribution of any undistributed capital gains may also be made following the
Fund's fiscal year end (June 30). The amount and frequency of Fund distributions
are not guaranteed and are at the discretion of the Board.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional Class L
shares of the Fund and credited to the shareholder's account at the closing net
asset value on the reinvestment date.
Taxation
The Fund intends to qualify and elect as soon as possible to be treated as a
regulated investment company under Subchapter M of the Code, by distributing
substantially all of its net investment income and net capital gains to its
shareholders and meeting other requirements of the Code relating to the sources
of its income and diversification of assets. Accordingly, the Fund generally
will not be liable for federal income tax or excise tax based on net income
except to the extent its earnings are not distributed or are distributed in a
manner that does not satisfy the requirements of the Code pertaining to the
timing of distributions. If the Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation. The Fund may also
incur tax liability to the extent it invests in "passive foreign investment
companies." See the Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered ordinary
income. Part of the distributions paid by the Fund may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of the Fund are treated by shareholders as
20
<PAGE>
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Fund.
The Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Fund. Additional information on tax matters
relating to the Fund and its shareholders is included in the Statement of
Additional Information.
General Information
The Trust
The Fund is a series of The Montgomery Funds, a Massachusetts business trust
organized on May 10, 1990 (the "Trust"). The Trust's Agreement and Declaration
of Trust permits the Board to issue an unlimited number of full and fractional
shares of beneficial interest, $.01 par value, in any number of series. The
assets and liabilities of each series within the Trust are separate and distinct
from those of each other series.
This Prospectus relates only to the Class L shares of the Fund. The Fund has
designated other classes of shares and may in the future designate other classes
of shares for specific purposes.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting all series of the Trust jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees. Except as set forth herein, all
classes of shares issued by the Fund shall have identical voting, dividend,
liquidation and other rights, preferences, and terms and conditions. The only
differences among the various classes of shares relate solely to the following:
(a) each class may be subject to different class expenses; (b) each class may
bear a different identifying designation; (c) each class may have exclusive
voting rights with respect to matters solely affecting such class; (d) each
class may have different exchange privileges; and (e) each class may provide for
the automatic conversion of that class into another class. While the Trust is
not required and does not intend to hold annual meetings of shareholders, such
meetings may be called by the Board at its discretion, or upon demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing or removing Trustees. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of Trustees pursuant to the provisions of Section 16(c) of the Investment
Company Act.
Performance Information
From time to time, the Fund may publish its total return, such as in
advertisements and communications to investors. Performance data may be quoted
separately for the Class L shares as for other classes. Total return information
generally will include the Fund's average annual compounded rate of return over
the most recent four calendar quarters and over the period from the Fund's
inception of operations. The Fund may also advertise aggregate and average total
return information over different periods of time. The Fund's average annual
compounded rate of return is determined by reference to a hypothetical $1,000
investment that includes capital appreciation and depreciation for the stated
period according to a specific formula. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against the Fund's income.
Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return or current yield may be in any
future period.
21
<PAGE>
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Shareholder Reports and Inquiries
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. A confirmation statement
will be mailed to your record address each time you request a transaction except
for pre-authorized automatic investment and redemption services (quarterly). All
transactions are recorded on quarterly account statements which you will receive
at the end of each calendar quarter. Your fourth-quarter account statement will
be a year-end statement, listing all transaction activity for the entire year.
Retain this statement for your tax records.
In general, shareholders who redeemed shares from a qualifying Montgomery
account should expect to receive an Average Cost Statement in February of the
following year. Your statement will calculate your average cost using the
average cost single-category method.
Any questions should be directed to The Montgomery Funds at 800-572-FUND
(800-572-3863).
Backup Withholding Instructions
Shareholders are required by law to provide the Fund with their correct Social
Security or other Taxpayer Identification Number ("TIN"), regardless of whether
they file tax returns. Failure to do so may subject a shareholder to penalties.
Failure to provide a correct TIN or to check the appropriate boxes in the
Account Application and to sign the shareholder's name could result in backup
withholding by the Fund of an amount of federal income tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account. Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item in the Account
Application. Dividends paid to a foreign shareholder's account by the Fund may
be subject to up to 30% withholding instead of backup withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.
---------------------------------
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus, the Statement of Additional Information, or
in the Fund's official sales literature.
22
<PAGE>
Investment Manager
Montgomery Asset Management, L.P.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
1-415-627-2485
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-447-4210
Legal Counsel
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
<PAGE>
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PART B
STATEMENT OF ADDITIONAL INFORMATION
MONTGOMERY PACIFIC BASIN FUND
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
-------
MONTGOMERY PACIFIC BASIN FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND
------------------------
STATEMENT OF ADDITIONAL INFORMATION
September 30, 1996
The Montgomery Funds (the "Trust") is an open-end management investment
company organized as a Massachusetts business trust with different series of
shares of beneficial interest. Montgomery Pacific Basin Fund (the "Fund") is a
series of the Trust. The Fund is managed by Montgomery Asset Management, L.P.
(the "Manager") and distributed by Montgomery Securities (the "Distributor").
This Statement of Additional Information contains information in addition to
that set forth in the Prospectus for the Fund (the "Prospectus"), dated
September 30, 1996, as may be revised from time to time. The Prospectus provides
the basic information a prospective investor should know before purchasing
shares of the Fund and may be obtained without charge at the address or
telephone number provided above. This Statement of Additional Information is not
a prospectus and should be read in conjunction with the Prospectus.
TABLE OF CONTENTS
Page
----
The Trust................................................................ B- 2
Investment Objective and Policies of the Fund............................ B- 2
Risk Factors............................................................. B-13
Investment Restrictions.................................................. B-15
Distributions and Tax Information........................................ B-19
Trustees and Officers.................................................... B-23
Investment Management and Other Services................................. B-29
Execution of Portfolio Transactions...................................... B-33
Additional Purchase and Redemption Information........................... B-37
Determination of Net Asset Value......................................... B-39
Principal Underwriter.................................................... B-41
Performance Information.................................................. B-42
General Information...................................................... B-45
Financial Statements..................................................... B-46
Appendix A............................................................... B-47
B-1
<PAGE>
THE TRUST
The Trust is an open-end management investment company
organized as a Massachusetts business trust on May 10, 1990, and registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The Trust currently offers shares of beneficial interest, $.01 par value
per share, in various series. Each series offers three classes of shares (Class
R, Class P and Class L). This Statement of Additional Information pertains to
Montgomery Pacific Basin Fund.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The investment objective and policies of the Fund are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
The Fund is a diversified series of the Trust, an open-end
management investment company offering redeemable shares of beneficial interest.
The achievement of the Fund's investment objective will depend on market
conditions generally and on the Manager's analytical and portfolio management
skills.
Portfolio Securities
Depositary Receipts. The Fund may hold securities of foreign
issuers in the form of American Depositary Receipts ("ADRs") and 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 the Fund's investment policies, the Fund's
investments in ADRs, EDRs, and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted.
Other Investment Companies. The Fund may invest 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. Applicable provisions of the Investment Company Act
require that the Fund limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 10% of the value of the
Fund's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either the Fund and affiliated persons
of the Fund not own together more than 3% of the total outstanding shares of any
one investment company at the time of purchase (and that all shares of the
investment company held by the Fund in excess of 1% of the company's total
outstanding shares be deemed illiquid); or the Fund not invest more than 5% of
its total assets in any one
B-2
<PAGE>
investment company and the investment not represent more than 3% of the total
outstanding voting stock of the investment company at the time of purchase. As a
shareholder of another investment company, the 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 the 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 Fund that are invested in other open-end investment companies.
U.S. Government Securities. Generally, the value of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities") held by the Fund will fluctuate
inversely with interest rates.
U.S. Government securities in which the Fund 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, the 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.
Risk Factors/Special Considerations Relating to Debt Securities
The Fund 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, the Fund will invest no more than 5% of its assets in debt
securities rated below Baa by Moody's or BBB by S&P, or, 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
B-3
<PAGE>
periods of rising interest rates, the value of such securities generally
declines. The net asset value of the Fund 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 low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of the Fund to sell the securities at fair
value either to meet redemption requests or to respond to changes in the economy
or financial markets and could adversely affect, and cause fluctuations in, the
per-share net asset value of the Fund.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of
low-rated debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of the Fund to
achieve its investment objectives may, to the extent it invests in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if the Fund invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than
investment-grade securities. The prices of low-rated debt securities have been
found to be less sensitive to interest rate changes than higher-rated debt
securities but more sensitive to adverse economic downturns or individual
corporate developments. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a sharper decline in the prices
of low-rated debt securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. If the issuer of low-rated debt securities defaults, the
Fund may incur additional expenses to seek financial recovery. The low-rated
bond market is relatively new, and many of the outstanding low-rated bonds have
not endured a major business downturn.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate
risks, the Fund may enter into forward foreign currency exchange contracts
("forward contracts") and foreign currency futures
B-4
<PAGE>
contracts, as well as purchase put or call options on foreign currencies, as
described below. The Fund also may conduct its foreign currency exchange
transactions on a spot ( i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
The Fund 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 Fund may enter into forward contracts
to attempt to minimize the risk from adverse changes in the relationship between
the U.S. dollar and foreign currencies. A forward contract, which is
individually negotiated and privately traded by currency traders and their
customers, involves an obligation to purchase or sell a specific currency for an
agreed-upon price at a future date.
The Fund may enter into a forward contract, for example, when
it enters into a contract for the purchase or sale of a security denominated in
a foreign currency or is expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of a security, dividend or interest payment.
When the Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when the Fund believes
that the U.S. dollar may suffer a substantial decline against a foreign
currency, it may enter into a forward contract to buy that currency for a fixed
dollar amount.
In connection with the Fund's forward contract transactions,
an amount of the Fund's assets equal to the amount of its commitments will be
held aside or segregated to be used to pay for the commitments. Accordingly, the
Fund always will have cash, cash equivalents or high-quality liquid debt
securities denominated in the appropriate currency available in an amount
sufficient to cover any commitments under these contracts. Segregated assets
used to cover forward contracts will be marked to market on a daily basis. While
these contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of the Fund to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by the Fund than if it had not entered into
such contracts. The Fund generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates, the Fund may purchase and sell various kinds of futures contracts and
options on futures contracts. The Fund also may enter into closing purchase and
sale transactions with respect to any such contracts and options. Futures
contracts
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may be based on various securities (such as U.S. Government securities),
securities indices, foreign currencies and other financial instruments and
indices.
The Fund has filed a notice of eligibility for exclusion from
the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
that the Fund will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that the Fund
may hold positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
The Fund will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. The Fund's futures transactions
generally will be entered into only for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities or currencies and will be purchased to protect the Fund against an
increase in the price of securities it intends to purchase (or the currencies in
which they are denominated). All futures contracts entered into by the Fund are
traded on U.S. exchanges or boards of trade licensed and regulated by the CFTC
or on foreign exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions, which may result in a profit or a loss. While the Fund's
futures contracts on securities or currencies will usually be liquidated in this
manner, the Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge its positions, the Fund
seeks to establish more certainty than would otherwise be possible with respect
to the effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Fund proposes to acquire. For example, when
interest rates are rising or securities prices are falling, the Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices
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are rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market with
respect to anticipated purchases. Similarly, the Fund can sell futures contracts
on a specified currency to protect against a decline in the value of such
currency and its portfolio securities which are denominated in such currency.
The Fund can purchase futures contracts on a foreign currency to fix the price
in U.S. dollars of a security denominated in such currency that such Fund has
acquired or expects to acquire.
As part of its hedging strategy, the Fund also may enter into
other types of financial futures contracts if, in the opinion of the Manager,
there is a sufficient degree of correlation between price trends for the Fund's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in the Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having 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
the Fund's portfolio securities could be offset substantially by a decline in
the value of the futures position.
The acquisition of put and call options on futures contracts
gives the Fund the right (but not the obligation), for a specified price, to
sell or purchase the underlying futures contract at any time during the option
period. Purchasing an option on a futures contract gives the Fund the benefit of
the futures position if prices move in a favorable direction, and limits its
risk of loss, in the event of an unfavorable price movement, to the loss of the
premium and transaction costs.
The Fund may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. The Fund's ability to establish and close
out positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by the Fund is
potentially unlimited.
The Fund will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. The
Fund may purchase put and call options on securities in which they have
invested, on foreign currencies represented in their portfolios and on any
securities index based in whole or in part on
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securities in which the Fund may invest. The Fund also may enter into closing
sales transactions in order to realize gains or minimize losses on options they
have purchased.
The Fund normally will purchase call options in anticipation
of an increase in the market value of securities of the type in which it may
invest or a positive change in the currency in which such securities are
denominated. The purchase of a call option would entitle the Fund, in return for
the premium paid, to purchase specified securities or a specified amount of a
foreign currency at a specified price during the option period.
The Fund may purchase and sell options traded on U.S. and
foreign exchanges. Although the Fund will generally purchase only those options
for which there appears to be an active secondary market, there can be no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that the Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be
liquid for a variety of reasons including: (i) insufficient trading interest in
certain options; (ii) restrictions on opening transactions or closing
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances which interrupt normal
operations on an exchange; (v) inadequate facilities of an exchange or the
Options Clearing Corporation to handle current trading volume at all times; or
(vi) discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Fund does not currently intend to do so, it may,
in the future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which it may invest. A covered call option
involves a Fund's giving another party, in return for a premium, the right to
buy specified securities owned by 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, the Fund gives up the opportunity, while the option is in
effect, to realize gain from any price increase (above the option exercise
price) in the underlying security. In addition, the Fund's ability to sell the
underlying security is limited while the option is in effect unless the Fund
effects a closing purchase transaction.
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The Fund 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. The Fund will receive a premium for writing a put
option but will be obligated for as long as the option is outstanding to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise. In order to "cover" put options
it has written, the Fund will cause its custodian to segregate cash, cash
equivalents, U.S. Government securities or other high-grade liquid debt
securities with at least the value of the exercise price of the put options. In
segregating such assets, the custodian either deposits such assets in a
segregated account or separately identifies such assets and renders them
unavailable for investment. The 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 Fund's orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Fund
may enter into repurchase agreements. The Fund's repurchase agreements generally
will involve a short-term investment in a U.S. Government security or other high
grade liquid debt security, with the seller of the underlying security agreeing
to repurchase it from the Fund at a mutually agreed-upon time and price. The
repurchase price generally is higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price on the date of repurchase. In either case, the income
to the Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. The Manager, acting under the supervision of
the Board of Trustees, reviews on a periodic basis the suitability and
creditworthiness, and the value of the collateral, of those sellers with whom
the Fund enters into repurchase agreements to evaluate potential risk. All
repurchase agreements will be made pursuant to procedures adopted and regularly
reviewed by the Trust's Board of Trustees.
The Fund generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Fund regards repurchase agreements
with maturities in excess of seven days as illiquid. The Fund may not invest
more than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
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For purposes of the Investment Company Act, a repurchase
agreement is deemed to be a collateralized loan from the Fund to the seller of
the security subject to the repurchase agreement. It is not clear whether a
court would consider the security acquired by the Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the
Fund to the seller. If bankruptcy or insolvency proceedings are commenced with
respect to the seller of the security before its repurchase under a repurchase
agreement, the Fund may encounter delays and incur costs before being able to
sell the security. Delays may involve loss of interest or a decline in price of
the security. If a court characterizes such a transaction as a loan and the Fund
has not perfected a security interest in the security, the Fund may be required
to return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for the Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings,
the Fund also runs the risk that the seller may fail to repurchase the security.
However, the Fund always requires collateral for any repurchase agreement to
which it is a party in the form of securities acceptable to it, the market value
of which is equal to at least 100% of the amount invested by the Fund plus
accrued interest, and the Fund makes payment against such securities only upon
physical delivery or evidence of book entry transfer to the account of its
custodian bank. If the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including interest), the Fund,
pursuant to its repurchase agreement, may require the seller of the security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement at all times equals or exceeds the repurchase price
(including interest) at all times.
The Fund may participate in one or more joint accounts with
other funds of the Trust that may invest in repurchase agreements collateralized
either by (i) obligations issued or guaranteed as to principal and interest by
the U.S. Government or by one of its agencies or instrumentalities, or (ii)
privately issued mortgage-related securities that are in turn collateralized by
securities issued by GNMA, FNMA or FHLMC, and are rated in the highest rating
category by a nationally recognized statistical rating organization, or, if
unrated, are deemed by the Manager to be of comparable quality using objective
criteria. Any such repurchase agreement will have, with rare exceptions, an
overnight, over-the-weekend or over-the-holiday duration, and in no event will
have a duration of more than seven days.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements, as set forth in the Prospectus. The Fund typically will
invest the proceeds of a reverse repurchase agreement in money market
instruments or repurchase agreements maturing not later than the expiration of
the reverse repurchase
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agreement. This use of proceeds involves leverage, and the Fund will enter into
a reverse repurchase agreement for leverage purposes only when the Manager
believes that the interest income to be earned from the investment of the
proceeds would be greater than the interest expense of the transaction. The Fund
also may use the proceeds of reverse repurchase agreements to provide liquidity
to meet redemption requests when sale of the Fund's securities is
disadvantageous.
The Fund causes its custodian to segregate liquid assets, such
as cash, U.S. Government securities or other high-grade liquid debt securities
equal in value to its obligations (including accrued interest) with respect to
reverse repurchase agreements. In segregating such assets, the custodian either
places such securities in a segregated account or separately identifies such
assets and renders them unavailable for investment. Such assets are marked to
market daily to ensure that full collateralization is maintained.
Lending of Portfolio Securities. Although the Fund does not
currently intend to do so, the Fund may lend its portfolio securities having a
value of up to 30% 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. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. Loans are subject
to termination at the option of the Fund or the borrower at any time. Upon such
termination, the Fund is entitled to obtain the return of the securities loaned
within five business days.
For the duration of the loan, the Fund will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned, will receive proceeds from the investment of the collateral
and will continue to retain any voting rights with respect to the securities. As
with other extensions of credit, there are risks of delay in recovery or even
losses of rights in the securities loaned should the borrower of the securities
fail financially. However, the loans will be made only to borrowers deemed by
the Manager to be creditworthy, and when, in the judgment of the Manager, the
income which can be earned currently from such loans justifies the attendant
risk.
When-Issued and Forward Commitment Securities. The Fund may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" or "delayed delivery" basis. The price of such
securities is fixed at the time the commitment to purchase or sell is made, but
delivery and payment for the securities take place at a later date. Normally,
the
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settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer.
While the Fund reserves the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Fund does not believe that its net asset value
will be adversely affected by its purchase of securities on a when-issued or
delayed delivery basis. The Fund causes its custodian to segregate cash, U.S.
Government securities or other high grade liquid debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund will earn no
income on these assets.
Illiquid Securities. The Fund may invest up to 15% of its net
assets in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which a Fund has valued the
securities and includes, among others, repurchase agreements maturing in more
than seven days, certain restricted securities and securities that are otherwise
not freely transferable. Illiquid securities also include shares of an
investment company held by the Fund in excess of 1% of the total outstanding
shares of that investment company. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). Illiquid securities acquired by the Fund may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that would not be freely marketable in the
United States, will not be considered illiquid. Where registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not
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seek to sell these instruments to the general public, but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be resold readily or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not determinative of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities sold pursuant to Rule 144A in many cases provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Fund, however, could affect adversely the marketability
of such portfolio securities, and the Fund might be unable to dispose of such
securities promptly or at favorable prices.
The Board of Trustees has delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Board. The Manager takes into account a number of factors in
reaching liquidity decisions, including but not limited to (i) the frequency of
trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Fund's portfolio and
reports periodically on such decisions to the Board of Trustees.
RISK FACTORS
Foreign Securities
Investors in the Fund should consider carefully the
substantial risks involved in securities of companies located or doing business
in, and governments of, foreign nations, which are in addition to the usual
risks inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published regarding companies in the U.S. Foreign companies are 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
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securities exchanges or the OTC markets. Securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which may be fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S., and capital requirements for
brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties.
Emerging Market Countries
The Fund invests 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 the Fund's 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 Fund endeavors to buy and sell foreign currencies on
favorable terms. Some price spreads on currency exchange (to cover service
charges) may be incurred, particularly when the Fund 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 the Fund from repatriating invested
capital and dividends, withhold portions of interest and dividends at the
source, or impose other taxes, with respect to the Fund's investments in
securities of issuers of that country. There also is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the
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currencies of different nations, exchange control regulations and indigenous
economic and political developments.
The Board of the Trust considers at least annually the
likelihood of the imposition by any foreign government of exchange control
restrictions that would affect the liquidity of the Fund's assets maintained
with custodians in foreign countries, as well as the degree of risk from
political acts of foreign governments to which such assets may be exposed. The
Board also considers the degree of risk attendant to holding portfolio
securities in domestic and foreign securities depositories (see "Investment
Management and Other Services").
Hedging Transactions
While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while the
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for the Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and the Fund may be exposed to risk of financial loss.
Perfect correlation between the Fund's hedging positions and
portfolio positions may be difficult to achieve because hedging instruments in
many foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by the Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of the Fund's outstanding
voting securities as defined in the Investment Company Act. The Fund may not:
1. With respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. Government and its agencies
and instrumentalities) if immediately after and as a result of such investment
more than 5% of the total assets of the Fund would be invested in such issuer.
There are no limitations with respect to the remaining 25% of its total assets,
except to the extent other investment restrictions may be applicable.
2. Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and policies, (b)
through the lending of up to 30% of its
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portfolio securities as described above and in its Prospectus, or (c) to the
extent the entry into a repurchase agreement is deemed to be a loan.
3. (a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse repurchase agreements, 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 such borrowings are in excess of
10% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other hedging transactions.
4. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
5. Buy or sell real estate (including interests in real estate
limited partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts; however,
the Fund, to the extent not otherwise prohibited in 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
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 Fund may invest in real estate investment trusts only up to 10% of its total
assets.
6. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude permissible investments
in marketable securities of issuers engaged in such activities.)
7. 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.)
8. (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
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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.)
9. Invest, in the aggregate, more than 15% of its net assets
in illiquid securities, including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A- eligible restricted securities),
securities which are not otherwise readily marketable, repurchase agreements
that mature in more than seven days and over-the-counter options (and securities
underlying such options) purchased by a Fund. (This is an operating policy which
may be changed without shareholder approval consistent with the Investment
Company Act and changes in relevant SEC interpretations.)
10. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company Act.)
11. Invest more than 25% of the market value of its total
assets in the securities of companies engaged in any one industry. (This does
not apply to investment in the securities of the U.S. Government, its agencies
or instrumentalities.) For purposes of this restriction, the Fund generally
relies on the U.S. Office of Management and Budget's Standard Industrial
Classifications.
12. Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to prohibit the
Fund from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
13. Except as described in the Prospectus and this Statement
of Additional Information, acquire or dispose of put, call, straddle or spread
options and subject to the following conditions:
(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.)
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<PAGE>
14. (a) Except as and unless 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) The 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 the 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.)
15. Invest in warrants, valued at the lower of cost or market,
in excess of 5% of the value of the Fund's net assets. Included in such amount,
but not to exceed 2% of the value of the Fund's net assets, may be warrants
which are not listed on the New York Stock Exchange or American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value. (This is an operating policy which may be changed without
shareholder approval, consistent with the regulations of the State of Texas.)
16. (a) Purchase or retain in the 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 is an operating policy which may be
changed without shareholder approval, consistent with the regulations of the
State of Ohio.)
17. Invest in commodities, except for futures contracts or
options on futures contracts if, as a result thereof, more than 5% of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to initial deposits and premiums on open futures contracts
and options on such contracts.
To the extent these restrictions reflect matters of operating
policy which may be changed without shareholder vote, these restrictions may be
amended upon approval by the Board of Trustees and notice to shareholders.
If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage resulting from a
change in the values of assets will not constitute a violation of that
restriction, except as otherwise noted.
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<PAGE>
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Fund will receive income in the form of
dividends and interest earned on its investments in securities. This income,
less the expenses incurred in its operations, is the Fund's net investment
income, substantially all of which will be declared as dividends to the Fund's
shareholders.
The amount of income dividend payments by the Fund is
dependent upon the amount of net investment income received by the Fund from its
portfolio holdings, is not guaranteed and is subject to the discretion of the
Fund's Board. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
The Fund also may derive capital gains or losses in connection
with sales or other dispositions of its portfolio securities. Any net gain the
Fund may realize from transactions involving investments held less than the
period required for long-term capital gain or loss recognition or otherwise
producing short-term capital gains and losses (taking into account any carryover
of capital losses from 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 the Fund realizes a net gain on transactions involving
investments held more than the period required for long-term capital gain or
loss recognition or otherwise producing long-term capital gains and losses, the
Fund will have a net long-term capital gain. After deduction of the amount of
any net short-term capital loss, the balance (to the extent not offset by any
capital losses carried over from previous years) will be distributed and treated
as long-term capital gains in the hands of the shareholders regardless of the
length of time the Fund's shares may have been held.
Any dividend or distribution paid by the Fund reduces the
Fund's net asset value per share on the date paid by the amount of the dividend
or distribution per share. Accordingly, a dividend or distribution paid shortly
after a purchase of shares by a shareholder would represent, in substance, a
partial return of capital (to the extent it is paid on the shares so purchased),
even though it would be subject to income taxes.
Dividends and other distributions will be made in the form of
additional shares of the 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. The Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for each taxable year by
complying with all applicable requirements regarding the source of its income,
the diversification of its
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<PAGE>
assets, and the timing of its distributions. The Fund's policy is to distribute
to its shareholders all of its investment company taxable income and any net
realized capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the Board of
Trustees may elect to pay such excise taxes if it determines that payment is,
under the circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the
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 stock or securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency, (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 the Fund's assets or 10% of the voting securities
of the issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, the 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 the Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized
capital gains by the Fund will be taxable to shareholders whether made in cash
or reinvested by the Fund 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
the Fund on the reinvestment date. Fund distributions also will be included in
individual and corporate shareholders' income on which the alternative minimum
tax may be imposed.
The Fund or the securities dealer effecting a redemption of
the Fund's shares by a shareholder will be required to file information reports
with the Internal Revenue Service ("IRS") with respect to distributions and
payments made to the shareholder. In
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<PAGE>
addition, the Fund will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and certain required certifications on the
Account Application Form or with respect to which the Fund or the securities
dealer has been notified by the IRS that the number furnished is incorrect or
that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other
distributions, as stated in the Prospectus. In order to avoid the payment of any
federal excise tax based on net income, the Fund must declare on or before
December 31 of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
The Fund may receive dividend distributions from U.S.
corporations. To the extent that the Fund receives such dividends and
distributes them to its shareholders, and meets certain other requirements of
the Code, corporate shareholders of the Fund may be entitled to the "dividends
received" deduction. Availability of the deduction is subject to certain holding
period and debt-financing limitations.
If more than 50% in value of the total assets of the Fund at
the end of its fiscal year is invested in stock or securities of foreign
corporations, the Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by the Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of the Fund's foreign source income (including any foreign income
taxes paid by the Fund), and (ii) entitled either to deduct their share of such
foreign taxes in computing their taxable income or to claim a credit for such
taxes against their U.S. income tax, subject to certain limitations under the
Code. In this case, shareholders will be informed by the Fund at the end of each
calendar year regarding the availability of any credits on and the amount of
foreign source income (including or excluding foreign income taxes paid by the
Fund) to be included in their income tax returns. If not more than 50% in value
of the Fund's total assets at the end of its fiscal year is invested in stock or
securities of foreign corporations, the Fund will not be entitled under the Code
to pass through to its shareholders their pro rata share of the foreign taxes
paid by the Fund. In this case, these taxes will be taken as a deduction by the
Fund.
The Fund may be subject to foreign withholding taxes on
dividends and interest earned with respect to securities of foreign
corporations. The Fund may invest up to 10% of its total assets in the stock of
foreign investment companies that may be treated as
B-21
<PAGE>
"passive foreign investment companies" ("PFICs") under the Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that the Fund
derives from PFIC stock may be subject to a non-deductible federal income tax at
the Fund level. In some cases, the Fund may be able to avoid this tax by
electing to be taxed currently on its share of the PFIC's income, whether or not
such income is actually distributed by the PFIC. The Fund will endeavor to limit
its exposure to the PFIC tax by investing in PFICs only where the election to be
taxed currently will be made. Because it is not always possible to identify a
foreign issuer as a PFIC in advance of making the investment, the Fund may incur
the PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into
futures contracts and forward contracts and purchasing options, involves complex
rules that will determine the character and timing of recognition of the income
received in connection therewith by the Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by the Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when the Fund purchases an option,
the premium paid by the Fund is recorded as an asset and is subsequently
adjusted to the current market value of the option. Any gain or loss realized by
the Fund upon the expiration or sale of such options held by the Fund generally
will be capital gain or loss.
Any security, option, or other position entered into or held
by the Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on
B-22
<PAGE>
these deemed sales and 60% of any net gain or loss realized from any actual
sales of Section 1256 Contracts will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code rather than
as capital gain or loss.
Redemptions and exchanges of shares of the Fund will result in
gains or losses for tax purposes to the extent of the difference between the
proceeds and the shareholder's adjusted tax basis for the shares. Any loss
realized upon the redemption or exchange of shares within six months from their
date of purchase will be treated as a long-term capital loss to the extent of
distributions of long-term capital gain dividends during such six-month period.
All or a portion of a loss realized upon the redemption of shares may be
disallowed to the extent shares are purchased (including shares acquired by
means of reinvested dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and
local income taxes, and the treatment thereof may differ from the federal income
tax treatment. Foreign taxes may apply to non-U.S.
investors.
The above discussion and the related discussion in the
Prospectus are not intended to be complete discussions of all applicable federal
tax consequences of an investment in the Fund. 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 Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
TRUSTEES AND OFFICERS
The Trustees are responsible for the overall management of the
Fund, including general supervision and review of its investment activities. The
officers, who administer the Fund's daily operations, are appointed by the Board
of Trustees. The
B-23
<PAGE>
current Trustees and officers of the Trust performing a policy-making function
and their affiliations and principal occupations for the past five years are set
forth below:
R. Stephen Doyle, Chairman of the Board, Chief Executive Officer,
Principal Financial and Accounting Officer and Trustee.* (Age 55)
600 Montgomery Street, San Francisco, California 94111. Mr. Doyle has
been the Chairman and a Director of Montgomery Asset Management, Inc.,
the general partner of the Manager, and Chairman of the Manager since
April 1990. Mr. Doyle is a managing director of the investment banking
firm of Montgomery Securities, the Fund's Distributor, and has been
employed by Montgomery Securities since October 1983.
Mark B. Geist, President (Age 42)
600 Montgomery 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 47)
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 55)
600 Montgomery 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 41)
600 Montgomery 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
- --------
* Trustee deemed an "interested person" of the Fund as defined in the
Investment Company Act.
B-24
<PAGE>
Copeland, Mr. Demarest was Vice President/Manager for the Overland
Express Funds Division for Wells Fargo Bank.
Mary Jane Fross, Treasurer (Age 43)
600 Montgomery 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.
Roger W. Honour, Vice President (Age 41)
600 Montgomery 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 40)
600 Montgomery 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 40)
600 Montgomery 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 34)
600 Montgomery 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
B-25
<PAGE>
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 41)
600 Montgomery 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
Corporation/Emerging Markets Management in Washington, D.C. as senior
analyst and portfolio manager.
Bryan L. Sudweeks, Vice President (40)
600 Montgomery 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 39)
600 Montgomery 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 34)
600 Montgomery 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 34)
600 Montgomery Street, San Francisco, California 94111. Mr. Haslett is
a Vice President and Portfolio Manager for
B-26
<PAGE>
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 34)
600 Montgomery 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 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)
600 Montgomery 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 33)
600 Montgomery 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)
600 Montgomery 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 53)
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
B-27
<PAGE>
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 51)
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 Herbert, Trustee (Age 46)
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 on the Archdiocese of San Francisco Finance Council, where she
chairs the Investment Committee.
Jerome S. Markowitz, Trustee-designate* (Age 56)
600 Montgomery Street, San Francisco, California 94111. Mr. Markowitz
was elected as a trustee-designate effective November 16, 1995. As a
trustee-designate, Mr. Markowitz attends meetings of the Board of
Trustees 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.
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from the
Trust for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Fund and Montgomery Securities will receive commissions for
executing portfolio transactions for the Fund. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by the Trust to each of the Trustees during the fiscal year
ended June 30, 1995, and the aggregate compensation paid to each of the Trustees
during the fiscal year ended June 30, 1995 by all of the registered
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<PAGE>
investment companies to which the Manager provides investment advisory services,
are set forth below.
Pension or Total Compensation
Retirement From the Trust and
Aggregate Benefits Accrued Fund Complex
Compensation from as Part of Fund (2 additional
Name of Trustee the Trust Expenses* Trusts)
- ------------------ ----------------- ---------------- ------------------
R. Stephen Doyle None -- None
John A. Farnsworth $22,500 -- $27,500
Andrew Cox $22,500 -- $27,500
Cecilia H. Herbert $22,500 -- $27,500
* The Trusts do not maintain pension or retirement plans.
Each of the above persons serves in the same capacity for The
Montgomery Funds II and The Montgomery Funds III, investment companies
registered under the Investment Company Act, with separate series of funds
managed by the Manager.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus,
investment management services are provided to the Fund by Montgomery Asset
Management, L.P., the Manager, pursuant to an Investment Management Agreement
initially dated July 13, 1990 (the "Agreement"). The Agreement is in effect with
respect to the Fund for two years after the Fund's inclusion in the Trust's
Agreement (on or around the beginning of public operations) and shall continue
in effect thereafter for periods not exceeding one year so long as such
continuation is approved at least annually by (i) the Board of Trustees of the
Trust or the vote of a majority of the outstanding shares of the Fund, and (ii)
a majority of the Trustees who are not interested persons of any party to the
Agreement, in each case by a vote cast in person at a meeting called for the
purpose of voting on such approval. The Agreement may be terminated at any time,
without penalty, by the Fund or the Manager upon 60 days' written notice, and is
automatically terminated in the event of its assignment as defined in the
Investment Company Act.
For services performed under the Agreement, the Fund pays the
Manager a monthly management fee (accrued daily but paid when requested by the
Manager) based upon the average daily net assets of the Fund, at the annual rate
of one and twenty-five one-hundredths of one percent (1.25%) of the first $500
million in average daily net assets; one and ten one-hundredths of one percent
(1.10%) of the next $500 million in average daily net assets and one percent
(1.00%) of average daily net assets over $1 billion.
As noted in the Prospectus, the Manager has agreed to reduce
some or all of its management fee if necessary to keep total operating expenses
(excluding any Rule 12b-1 fees), expressed on an annualized basis, at or below
the maximum allowable by applicable
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state expense limitations or one and sixty-five one-hundredths of one percent
(1.65%) of the Fund's average net assets. 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 the Fund's investors. Any reductions made by the Manager in its fees
are subject to reimbursement by the Fund within the following two years provided
the Fund is able to effect such reimbursement and remain in compliance with the
foregoing expense limitations. The Manager generally seeks reimbursement for the
oldest reductions and waivers before payment by the Fund for fees and expenses
for the current year.
Operating expenses for purposes of the Agreement include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, if any, expenses incurred in connection with any merger or
reorganization, any extraordinary expenses such as litigation, and such other
expenses as may be deemed excludable with the prior written approval of any
state securities commission imposing an expense limitation. The Manager may also
at its discretion from time to time pay for other Fund expenses from its own
funds or reduce the management fee of the Fund in excess of that required.
The Agreement was approved with respect to the Fund by the
Board of Trustees of the Trust at a duly called meeting. In considering the
Agreement, the Trustees specifically considered and approved the provision which
permits the Manager to seek reimbursement of any reduction made to its
management fee within the three-year period following such reduction subject to
the Fund's ability to effect such reimbursement and remain in compliance with
applicable expense limitations. The Trustees also considered that any such
management fee reimbursement will be accounted for on the financial statements
of the Fund as a contingent liability of the Fund and will appear as a footnote
to the Fund's financial statements until such time as it appears that the Fund
will be able to effect such reimbursement. At such time as it appears probable
that the Fund is able to effect such reimbursement, the amount of reimbursement
that the Fund is able to effect will be accrued as an expense of the Fund for
that current period.
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trust and who are also affiliated
persons of the Manager.
The use of the name "Montgomery" by the Trust and by the Fund
is pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Fund.
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Share Marketing Plan. The Trust has adopted a Share Marketing
Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Fund 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 Fund pursuant to the 12b-1 Plan.
The Board of Trustees of the Trust, including a majority of
the Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the 12b-1 Plan or in any
agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the Class P and Class L
shares of the Fund. The initial shareholder of the Class P and Class L shares of
the Fund approved the 12b-1 Plan covering each Class prior to offering those
Classes to the public. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, the 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 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 Fund 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.
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Pursuant to the 12b-1 Plan, the Board 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 the Fund. In addition, as long as the 12b-1
Plan remains in effect, the selection and nomination of Trustees who are not
interested persons (as defined in the Investment Company Act) of the Trust shall
be made by the Trustees then in office who are not interested persons of the
Trust.
Shareholder Services Plan. The Trust has adopted a Shareholder
Services Plan (the "Services Plan") with respect to the Fund. The Manager (or
its affiliate) serves as the service provider under the Services Plan and, as
such, receives any fees paid by the Fund pursuant to the Services Plan. The
Trust has not yet implemented the Services Plan for the Fund and has not set a
date for implementation. Affected shareholders will be notified at least 60 days
before implementation of the Services Plan.
The Board of Trustees of the Trust, including a majority of
the Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the Services Plan or in any
agreement related to the Services Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the Services Plan for the Class P and Class L
shares of the Fund. The initial shareholder of the Class P and Class L shares of
the Fund approved the Services Plan covering each Class prior to offering those
Classes to the public. Class R shares are not covered by the Services Plan.
Under the Services Plan, when implemented, Class P and Class L
of the 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 the Fund. Such amounts are compensation for providing certain services
to clients owning shares of Class P or Class L of the Fund, including personal
services such as processing purchase and redemption transactions, assisting in
change of address requests and similar administrative details, and providing
other information and assistance with respect to the Fund, including responding
to shareholder inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Fund on behalf of the Manager. The Distributor
will also perform investment banking, investment advisory and brokerage services
for persons other than the Fund, including issuers of securities in which the
Fund may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Fund, and may restrict the
ability of the Distributor to provide services to the Fund.
The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Fund's 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
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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 Fund, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreement, the Manager determines which securities
are to be purchased and sold by the Fund and which broker-dealers are eligible
to execute the Fund's portfolio transactions, subject to the instructions of,
and review by, the Fund and the Trust's Board of Trustees. Purchases and sales
of securities within the U.S. other than on a securities exchange will generally
be executed directly with a "market-maker" unless, in the opinion of the Manager
or the Fund, a better price and execution can otherwise be obtained by using a
broker for the transaction.
The Fund contemplates purchasing most equity securities
directly in the securities markets located in emerging or developing countries
or in the over-the-counter markets. 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 the Fund may
invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for the Fund also may be
made directly from issuers or from underwriters. Where possible, purchase and
sale transactions will be effected through dealers (including banks) which
specialize in the types of securities which the Fund will be holding, unless
better executions are available elsewhere. Dealers and underwriters usually act
as principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such
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<PAGE>
as the firm's ability to execute trades in a specific market required by the
Fund, such as in an emerging market, the size of the order, the difficulty of
execution, the operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and other factors.
Provided the Trust's officers are satisfied that the Fund is
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Fund's shares as a factor in the selection of
broker-dealers to execute its portfolio transactions. The placement of portfolio
transactions with broker-dealers who sell shares of the Fund is subject to rules
adopted by the National Association of Securities Dealers, Inc. ("NASD").
While the Fund's general policy is to seek first to obtain the
most favorable price and execution available, in selecting a broker-dealer to
execute portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Fund or to the Manager, even if the specific services were not imputed just to
the Fund and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, the Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to the Fund or
assist the Manager in carrying out its responsibilities to the Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Fund.
Investment decisions for the Fund are made independently from
those of other client accounts of the Manager or its affiliates. Nevertheless,
it is possible that at times the same securities will be acceptable for the Fund
and for one or more of such client accounts. The Manager and its personnel may
have interests in one or more of those client accounts, either through direct
investment or because of management fees based on gains in the account. To the
extent any of these client accounts and the Fund seek to acquire the same
security at the same time, the Fund may not be able to acquire as large a
portion of such security as it desires, or it may have to pay a higher price or
obtain a lower yield for such security. Similarly, the Fund may not be able to
obtain as high a price for, or as large an execution of, an order to sell any
particular security at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security the Fund is purchasing or
selling, each day's transactions in such security will be allocated between the
Fund and all such client accounts in a manner deemed equitable by the Manager,
taking into account the respective sizes of the accounts, the amount being
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<PAGE>
purchased or sold and other factors deemed relevant by the Manager. It is
recognized that in some cases this system could have a detrimental effect on the
price or value of the security insofar as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to participate in volume
transactions may produce better executions for the Fund.
In addition, on occasion, situations may arise in which legal
and regulatory considerations will preclude trading for the Fund's account by
reason of activities of Montgomery Securities or its affiliates. It is the
judgment of the Board of Trustees that the Fund 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 Fund's investment in
issuers is based on the premise of a long-term investment horizon; however,
sudden changes in valuation levels arising from, for example, new macroeconomic
policies, political developments, and industry conditions could change the
assumed time horizon. Liquidity, volatility, and overall risk of a position are
other factors considered by the Manager in determining the appropriate
investment horizon. The Fund will limit investments in illiquid securities to
15% of net assets.
Sell decisions at the country level are dependent on the
results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
Because Montgomery Securities is a member of the NASD, it is
sometimes entitled to obtain certain fees when the Fund tenders portfolio
securities pursuant to a tender-offer solicitation. As a means of recapturing
brokerage commissions for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Montgomery Securities if it is
legally permissible to do so. In turn, the next management fee payable to the
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 Fund may use Montgomery
Securities as a broker to execute portfolio
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<PAGE>
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 which are designed to provide that commissions
payable to Montgomery Securities are reasonable and fair as 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 Fund that such
commissions will be, in the judgment of the Manager, (i) at least as favorable
as those which would be charged the Fund 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 Fund does not deem it practicable and in its best interest 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 Board of Trustees reviews the procedures adopted by the Trust with respect
to the payment of brokerage commissions at least annually to ensure their
continuing appropriateness, and determines, on at least a quarterly basis, that
all such transactions during the preceding quarter were effected in compliance
with such procedures.
The Fund has also adopted certain procedures, pursuant to Rule
10f-3 under the Investment Company Act, which must be followed any time the 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 Board of Trustees of the Trust will
review such procedures at least annually for their continuing appropriateness
and determine, on at least a quarterly basis, that any such purchases made
during the preceding quarter were effected in compliance with such procedures.
The Fund does not effect securities transactions through
brokers in accordance with any formula, nor does it effect securities
transactions through such brokers solely for selling shares of the Fund.
However, as stated above, Montgomery Securities may act as one of the Fund's
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 Fund for their customers.
Depending on the Manager's view of market conditions, the Fund
may or may not purchase securities with the expectation of holding them to
maturity, although its general policy is to hold securities to maturity. The
Fund may, however, sell securities
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<PAGE>
prior to maturity to meet redemptions or as a result of a revised management
evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i)
suspend the continued offering of the Fund's shares, and (ii) reject purchase
orders in whole or in part when in the judgment of the Manager or the
Distributor such suspension or rejection is in the best interest of the Fund.
When in the judgment of the Manager it is in the best
interests of the Fund, an investor may purchase shares of the Fund by tendering
payment in kind in the form of securities, provided that any such tendered
securities are readily marketable, their acquisition is consistent with the
Fund's investment objective and policies, and the tendered securities are
otherwise acceptable to the Fund's Manager. For the purposes of sales of shares
of the Fund for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of the
Fund are valued for the purpose of calculating the net asset value of the Fund's
shares. A shareholder who purchases shares of the Fund by tendering payment for
the shares in the form of other securities may be required to recognize gain or
loss for income tax purposes on the difference, if any, between the adjusted
basis of the securities tendered to the Fund and the purchase price of the
Fund's shares acquired by the shareholder.
Payments to shareholders for shares of the Fund redeemed
directly from the Fund will be made as promptly as possible but no later than
three days after receipt by the Transfer Agent of the written request in proper
form, with the appropriate documentation as stated in the Prospectus, except
that the Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange
("NYSE") is restricted as determined by the SEC or the NYSE is closed for other
than weekends and holidays; (b) an emergency exists as determined by the SEC
(upon application by the Fund pursuant to Section 22(e) of the Investment
Company Act) making disposal of portfolio securities or valuation of net assets
of the Fund not reasonably practicable; or (c) for such other period as the SEC
may permit for the protection of the Fund's shareholders.
The Fund intends to pay cash (U.S. dollars) for all shares
redeemed, but, as described below or under abnormal conditions that make payment
in cash unwise, the Fund may make payment partly in its portfolio securities
with a current amortized cost or market value, as appropriate, equal to the
redemption price. Although the Fund does not anticipate that it will normally
make any part of a redemption payment in securities, if such payment were made,
an investor may incur brokerage costs in converting such securities to cash. The
Trust has elected to be governed by the provisions of Rule 18f-1 under the
Investment Company Act, which require that the Fund pay in cash all requests
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for redemption by any shareholder of record limited in amount, however, during
any 90-day period to the lesser of $250,000 or 1% of the value of the Trust's
net assets at the beginning of such period.
When in the judgment of the Manager it is in the best
interests of the Fund, an investor may redeem shares of the Fund and receive
securities from the Fund's portfolio selected by the Manager in its sole
discretion, provided that such redemption is not expected to affect the Fund's
ability to attain its investment objective or otherwise materially affect its
operations. For the purposes of redemptions in kind, the redeemed securities
shall be valued at the identical time and in the identical manner that the other
portfolio securities are valued for purposes of calculating the net asset value
of the Fund's shares.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Fund are available for
purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Fund
through an IRA, there is available through the Fund a prototype individual
retirement account and custody agreement. The custody agreement provides that
DST Systems, Inc. will act as custodian under the plan, and will furnish
custodial services for an annual maintenance fee per participating account of
$10. (These fees are in addition to the normal custodian charges paid by the
Fund and will be deducted automatically from each Participant's account.) For
further details, including the right to appoint a successor custodian, see the
plan and custody agreements and the IRA Disclosure Statement as provided by the
Fund. An IRA that invests in shares of the Fund may also be used by employers
who have adopted a Simplified Employee Pension Plan. Individuals or employers
who wish to invest in shares of the Fund under a custodianship with another bank
or trust company must make individual arrangements with such institution.
The IRA Disclosure Statement available from the Fund 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
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<PAGE>
(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 the Fund is calculated as
follows: all liabilities incurred or accrued are deducted from the valuation of
total assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of the Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of
the Fund generally will be determined at least once daily as of 4:00 p.m., New
York City time, on each day the NYSE is open for trading. It is expected that
the Exchange 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 Fund may, but does not expect to, determine
the net asset value of its shares on any day when the NYSE is not open for
trading if there is sufficient trading in its portfolio securities on such days
to materially affect the per share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Fund's net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which the Fund calculates its net asset value may occur between the
times when such securities are valued and the close of the NYSE which will not
be reflected in the computation of the Fund's net asset value unless the
Trustees or their delegates deem that such events would materially affect the
net asset value, in which case an adjustment would be made.
Generally, the Fund's investments are valued at market value
or, in the absence of a market value, at fair value as determined in good faith
by the Manager and the Trust's Pricing
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Committee pursuant to procedures approved by or under the direction of the Board
of Trustees.
The Fund's securities, including ADRs and EDRs, which are
traded on securities exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange, are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in
excess of 60 days are valued at current market prices, as discussed above.
Short-term securities with 60 days or less remaining to maturity are, unless
conditions indicate otherwise, amortized to maturity based on their cost to the
Fund if acquired within 60 days of maturity or, if already held by the Fund on
the 60th day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and
asset-backed securities held by the Fund are valued on the basis of valuations
provided by dealers in those instruments or by an independent pricing service,
approved by the Board of Trustees. Any such pricing service, in determining
value, will use information with respect to transactions in the securities being
valued, quotations from dealers, market transactions in comparable securities,
analyses and evaluations of various relationships between securities and yield
to maturity information.
An option that is written by the Fund is generally valued at
the last sale price or, in the absence of the last sale price, the last offer
price. An option that is purchased by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last bid price. The
value of a futures contract equals the unrealized gain or loss on the contract
that is determined by marking the contract to the current settlement price for a
like contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Trust's Board of Trustees.
If any securities held by the Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trust's
Pricing Committee determine their fair value, following procedures approved by
the Board of Trustees. The Trustees periodically review such valuations and
valuation procedures. The fair value of such securities is generally
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determined as the amount which the Fund could reasonably expect to realize from
an orderly disposition of such securities over a reasonable period of time. The
valuation procedures applied in any specific instance are likely to vary from
case to case. However, consideration is generally given to the financial
position of the issuer and other fundamental analytical data relating to the
investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by the Fund
in connection with such disposition). In addition, specific factors are also
generally considered, such as the cost of the investment, the market value of
any unrestricted securities of the same class (both at the time of purchase and
at the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
Any assets or liabilities initially expressed in terms of
foreign currencies are translated into U.S. dollars at the official exchange
rate or, alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board of Trustees in good faith will establish a conversion rate for such
currency.
All other assets of the Fund are valued in such manner as the
Board of Trustees in good faith deems appropriate to reflect their fair value.
PRINCIPAL UNDERWRITER
The Distributor acts as the Fund's principal underwriter in a
continuous public offering of the Fund's shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, and is a member
of most of the principal securities exchanges in the U.S. and is a member of the
NASD. The Underwriting Agreement between the Fund and the Distributor is in
effect for two years from when the Fund commences public offerings, and shall
continue in effect thereafter for periods not exceeding one year if approved at
least annually by (i) the Board of Trustees of the Trust or the vote of a
majority of the outstanding securities of the Fund (as defined in the Investment
Company Act), and (ii) a majority of the Trustees who are not interested persons
of any such party, in each case by a vote cast in person at a meeting called for
the purpose of voting on such approval. The Underwriting Agreement may be
terminated without penalty by the parties thereto upon 60 days' written notice,
and is automatically terminated in the event of its assignment as defined in the
Investment Company Act. There are no underwriting commissions paid with respect
to sales of the Fund's shares.
B-41
<PAGE>
PERFORMANCE INFORMATION
As noted in the Prospectus, the Fund may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate its past performance. Performance figures will be calculated
separately for Class R, Class P and Class L shares.
Average Annual Total Return. Total return may be stated for
any relevant period as specified in the advertisement or communication. Any
statements of total return for the Fund will be accompanied by information on
the Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from the Fund's inception of operations. The
Fund may also advertise aggregate and average total return information over
different periods of time. The Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC, expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
1-, 5- or 10-year period at the end of each
respective period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
Aggregate Total Return. The Fund's "aggregate total return"
figures represent the cumulative change in the value of an investment in the
Fund for the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of
a l-, 5- or 10-year period at the end of a
l-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and complete
redemption of
B-42
<PAGE>
the hypothetical investment at the end of
the measuring period.
The Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. The total return information also assumes cash investments and
redemptions and, therefore, includes the applicable expense reimbursement fees
discussed in the Prospectus. Consequently, any given performance quotation
should not be considered representative of the Fund's performance for any
specified period in the future. In addition, because performance will fluctuate,
it may not provide a basis for comparing an investment in the Fund with certain
bank deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing the Fund's performance with that of other investment
companies should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
Comparisons. To help investors better evaluate how an
investment in the Fund might satisfy their investment objectives, advertisements
and other materials regarding the Fund may discuss various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. The
following publications, indices and averages may be used:
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.
c) Lipper - Mutual Fund Performance Analysis and Lipper Fixed Income
Fund Performance Analysis -- A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Salomon Brothers Bond Market Roundup -- A weekly publication which
reviews yield spread changes in the major sectors of the money, government
agency, futures, options, mortgage, corporate, Yankee, Eurodollar, municipal,
and preferred stock markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
In addition, one or more portfolio managers or other employees
of the Manager may be interviewed by print media, such as by the Wall Street
Journal or Business Week, or electronic news media, and such interviews may be
reprinted or excerpted for the purpose of advertising regarding the Fund.
B-43
<PAGE>
In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments in the reported
indices and averages is not identical to the Fund's portfolios, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formulae used by the
Fund to calculate its figures.
The Fund may also publish its relative rankings as determined
by independent mutual fund ranking services like Lipper Analytical Services,
Inc. and Morningstar, Inc.
Investors should note that the investment results of the Fund
will fluctuate over time, and any presentation of the Fund's total return for
any period should not be considered as a representation of what an investment
may earn or what an investor's total return may be in any future period.
Reasons to Invest in the Fund. From time to time the Fund may
publish or distribute information and reasons supporting the Manager's belief
that a particular Fund may be appropriate for investors at a particular time.
The information will generally be based on internally generated estimates
resulting from the Manager's research activities and projections from
independent sources. These sources may include, but are not limited to, I/B/E/S
Consensus Forecast, Worldscope and Reuters as well as both local and
international brokerage firms. For example, the Fund may suggest that certain
countries or areas may be particularly appealing to investors because of
interest rate movements, increasing exports and/or economic growth.
Research. 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 may be used for
the Fund.
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts have also
developed new ways of gaining information about well-known parts of the domestic
market.
B-44
<PAGE>
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the Trust's organization
and the registration of shares of the Fund as one of the three initial series of
the Trust have been assumed pro rata by each series; expenses incurred in
connection with the establishment and registration of shares of any other funds
constituting a separate series of the Trust will be assumed by each respective
series. The expenses incurred in connection with the establishment and
registration of shares of the Fund as a separate series of the Trust have been
assumed by the Fund and are being amortized over a period of five years
commencing with the date of the Fund's inception. The Manager has agreed, to the
extent necessary, to advance the organizational expenses incurred by the Fund
and will be reimbursed for such expenses after commencement of the Fund's
operations. Investors purchasing shares of the Fund bear such expenses only as
they are amortized daily against the Fund's investment income.
As noted above, Morgan Stanley and Trust Company (the
"Custodian") acts as custodian of the securities and other assets of the Fund.
The Custodian does not participate in decisions relating to the purchase and
sale of securities by the Fund.
Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, is the Fund's Master Transfer Agent. The Master
Transfer Agent has delegated certain transfer agent functions to DST Systems,
Inc., P.O. Box 419073, Kansas City, Missouri 64141-6073, the Fund's Transfer and
Dividend Disbursing Agent.
[______________________], 50 Fremont Street, San Francisco,
California 94105, are the independent auditors for the Fund.
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, 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 Fund's assets for any shareholder held personally liable for
obligations of the Fund or Trust. The Declaration of Trust provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund or Trust and satisfy any
judgment thereon. All such rights are limited to the
B-45
<PAGE>
assets of the Fund. 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 Fund's 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 the Fund itself is unable to meet its
obligations.
Among the Trustees' powers enumerated in the Declaration of
Trust is the authority to terminate the Trust or any series of the Trust, or to
merge or consolidate the Trust or one or more of its series with another trust
or company without the need to seek shareholder approval of any such action.
The Trust is registered with the Securities and Exchange
Commission as a non-diversified management investment company, although the Fund
is a diversified series of the Trust. Such a registration does not involve
supervision of the management or policies of the Fund. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of the Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.
FINANCIAL STATEMENTS
The Fund has recently commenced operations and, therefore, has
not yet prepared financial statements for public distribution.
B-46
<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 as
"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-47
<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
B-48
<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-49
<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, 1995; Statements of
Assets and Liabilities as of June 30, 1995; Statements of
Operations For the Year Ended June 30, 1995; Statement of Cash
Flows for year ended June 30, 1995; Statements of Changes in
Net Assets for the Year Ended June 30, 1995; Financial
Highlights for a Fund share outstanding throughout each year,
including the year ended June 30, 1995 for Montgomery Growth
Fund, Montgomery Micro Cap Fund, Montgomery Small Cap Fund,
Montgomery Equity Income Fund, Montgomery Asset Allocation
Fund, Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery International Small Cap 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.
(2) Portfolio Investments as of December 31, 1995; Statements of
Assets and Liabilities as of December 31, 1995; Statements of
Operations for the Six Months Ended December 31, 1995;
Statement of Cash Flows for the Six Months ended December 31,
1995; Statements of Changes in Net Assets for the Six Months
Ended December 31, 1995; Financial Highlights for a Fund share
outstanding throughout each period, including the six months
ended June 30, 1995 (all unaudited) for Montgomery Growth
Fund, Montgomery Micro Cap Fund, Montgomery Small Cap Fund,
Montgomery Equity Income Fund, Montgomery Asset Allocation
Fund, Montgomery Select 50 Fund, Montgomery Global
Opportunities Fund, Montgomery Global Communications Fund,
Montgomery International Growth Fund, Montgomery International
Small Cap 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; all incorporated by reference to the
Semi-Annual Report to Shareholders of the above-named funds.
(3) Portfolio Investments as of March 31, 1996; Statements of
Assets and Liabilities as of March 31, 1996; Statements of
Operations for the Period Ended March 31, 1996; Statements of
Changes in Net Assets for the Period Ended March 31, 1996;
Financial Highlights for a Fund share outstanding throughout
the period, for each of Montgomery Select 50 Fund, Montgomery
Advisors Emerging Markets Fund and Montgomery Small Cap
Opportunities Fund; and Notes to Financial Statements (all
unaudited); all included with and incorporated by reference to
Part B.
C-1
<PAGE>
(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").
(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) Consent of Independent Public Accountants.
(12) Financial Statements omitted from Item 23 - Not applicable.
C-2
<PAGE>
(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 - Not Applicable
C-3
<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 June 30, 1996
-------------- ------------------------
Shares of Beneficial
Interest, $0.01 par value
Montgomery Small Cap Fund (Class R) 6,084
Montgomery Growth Fund (Class R) 48,043
Montgomery Emerging Markets
Fund (Class R) 45,287
Montgomery International Small Cap Fund (Class R) 1,856
Montgomery Global Opportunities Fund (Class R) 1,115
Montgomery Global Communications Fund (Class R) 12,902
Montgomery Equity Income Fund (Class R) 1,050
Montgomery Short Government Bond Fund (Class R) 693
Montgomery California Tax-Free
Intermediate Bond Fund (Class R) 174
Montgomery Government Reserve Fund (Class R) 5,299
Montgomery California Tax-Free
Money Fund (Class R) 924
Montgomery Micro Cap Fund (Class R) 10,977
Montgomery International Growth Fund (Class R) 452
Montgomery Advisors Emerging Markets Fund (Class R) 39
Montgomery Select 50 Fund (Class R) 4,974
Montgomery Small Cap Opportunities Fund (Class R) 9,319
Montgomery Technology Fund 0
Montgomery Pacific Basin Fund 0
C-4
<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-5
<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.
(b) The following information is furnished with respect to the
officers and general partners of Montgomery Securities:
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
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 None
Officer
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
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
C-6
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
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
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
C-7
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ------------------ -------------------------- ---------------------
Logan Investments, Inc. General Partner None
SEWEL Investments, Inc. General Partner None
MMJ Investments, Inc. General Partner None
Skeen Investments, Inc. General Partner None
* 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.
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 600 Montgomery Street, San Francisco,
California 94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to file a post-effective
amendment including financial statements of Montgomery Technology Fund,
Montgomery Growth & Income Fund or Montgomery Federal Tax-Free Money Fund, which
need not be certified, within four to six months from the later of the effective
date of those series of the Registrant or the commencement of operations of
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 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 10th day of July, 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 * Principal Executive July 10, 1996
- ----------------- Officer; Principal
R. Stephen Doyle Financial and Accounting
Officer; and Trustee
Andrew Cox * Trustee July 10, 1996
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee July 10, 1996
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee July 10, 1996
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-----------------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed.
