As filed with the Securities and Exchange Commission on December 4, 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. 43
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 44
THE MONTGOMERY FUNDS
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
1-800-572-3863
(Registrant's Telephone Number, Including Area Code)
JACK G. LEVIN
600 Montgomery Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
-- immediately upon filing pursuant to Rule 485(b)
-- on __________, 1996 pursuant to Rule 485(b)
-- 60 days after filing pursuant to Rule 485(a)(1)
X 75 days after filing pursuant to Rule 485(a)(2)
--
-- on ________________ pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1996 was filed on August 28, 1996.
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
(415) 772-6000
Total number of pages _____. Exhibit Index appears at _____
<PAGE>
THE MONTGOMERY FUNDS
CONTENTS OF POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the
Registrant contains the following documents
Facing Sheet
Contents of Post-Effective Amendment
Cross-Reference Sheet for shares of Montgomery Asset Allocation Fund
II.
Part A - Prospectus for Class R shares of Montgomery Asset Allocation
Fund II
Part B - Statement of Additional Information for Class R shares of
Montgomery Asset Allocation Fund II
Part C - Other Information
Signature Page
Exhibit
<PAGE>
THE MONTGOMERY FUNDS
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
Part A: Information Required in Prospectus
------------------------------------------
(For The 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 of Registrant Cover Page, "The Fund's Investment Objective and 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 Funds' 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
<PAGE>
PART B: Information Required in
Statement of Additional Information
(Statement of Additional Information)
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------
10. Cover Page Cover Page
11. Table of Content 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 Securities and "Determination of Net Asset Value"
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 ASSET ALLOCATION FUND II
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<PAGE>
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
Prospectus
February _______, 1997
Class R shares of the Montgomery Asset Allocation Fund II (the "Fund") are
offered in this Prospectus. The Fund seeks high total return, while also seeking
to reduce risk, through a strategic or active allocation of assets among
domestic stocks, fixed-income securities and cash or cash equivalents. 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 February ________, 1997, 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 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 5
- --------------------------------------------------------------------------------
Risk Considerations 8
- --------------------------------------------------------------------------------
Management Of The Fund 10
- --------------------------------------------------------------------------------
How To Contact The Fund 11
- --------------------------------------------------------------------------------
How To Invest In The Fund 11
- --------------------------------------------------------------------------------
How To Redeem An Investment In The Fund 14
- --------------------------------------------------------------------------------
Exchange Privileges And Restrictions 15
- --------------------------------------------------------------------------------
Brokers and Other Intermediaries 16
- --------------------------------------------------------------------------------
How Net Asset Value Is Determined 16
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Dividends And Distributions 16
- --------------------------------------------------------------------------------
Taxation 17
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General Information 17
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Backup Withholding Instructions 18
- --------------------------------------------------------------------------------
Glossary 19
- --------------------------------------------------------------------------------
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 Reinvested
Imposed on Purchases 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 Asset Allocation Fund II
- --------------------------------------------------------------------------------
Management Fee* 1.00%
- --------------------------------------------------------------------------------
Other Expenses 0.35%
(after reimbursement)*
- --------------------------------------------------------------------------------
Total Fund Operating Expenses* 1.35%
- --------------------------------------------------------------------------------
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. 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 amount
indicated in the table for the Fund. 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 1.95% (0.95% 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 Asset Allocation Fund II
- --------------------------------------------------------------------------------
1 Year $14
- --------------------------------------------------------------------------------
3 Years $43
- --------------------------------------------------------------------------------
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. CERTAIN TERMS USED IN THE PROSPECTUS ARE DEFINED IN THE
GLOSSARY FOUND AT THE END OF THE PROSPECTUS.
The investment objective of the Fund is to seek high total return, while also
seeking to reduce risk, through a strategic or active allocation of assets among
domestic stocks, debt instruments and cash or cash equivalents, coupled with
active management of the individual investments in each asset class. This Fund
adjusts the proportion of its investments in each of these categories as needed
to respond to current market conditions, maintaining from 0 to 100% of total
assets in stocks, 0 to 100% of total assets in debt instruments of any remaining
maturity, and 0 to 100% of total assets in cash or cash equivalents. The Manager
will implement its allocation strategy with the use of a quantitative risk model
and computer optimization program. The Manager may temporarily increase the
Fund's cash allocation from its set strategy in order to meet anticipated
redemptions. The Manager seeks to reduce risk through investment in high-grade
debt instruments and cash or cash equivalents. Under normal conditions, at least
65% of the Fund's total assets are invested in securities issued by domestic
issuers.
The debt instruments in which this Fund invests include U.S. government
securities and other highly rated debt securities. This Fund expects that, under
normal circumstances, the dollar-weighted average maturity of its debt
instruments (or period until next interest rate reset date) may be longer than
three years (see "Duration" discussion below).
The equity securities in which this Fund may invest include common stocks that,
in the opinion of the Manager, have the potential for above-average capital
appreciation as well as warrants, rights and options. The Manager selects equity
securities of issuers exhibiting positive trends in revenue and earnings that,
in the opinion of the Manager, are sustainable. Among the Fund's equity
investments, the Fund may invest up to 35% of its total assets in foreign equity
securities of various countries, primarily those listed on foreign exchanges.
Duration of the Fund's Portfolio Securities. The Fund expects that, under normal
circumstances, the dollar-weighted average maturity (or period until the next
interest rate reset date) of its fixed-income portfolio securities may be longer
than three years but the maturity of individual securities may be up to 30
years.
The equity component of the Fund is managed by the growth equity team, whose key
members are Roger W. Honour and Andrew Pratt. The fixed-income component of the
Fund is managed by William C. Stevens. See "Management of the Fund."
Portfolio Securities
Equity Securities
The Fund emphasizes investments in common stock. The Fund may also invest in
other types of equity securities (such as preferred stocks or convertible
securities) and equity derivative securities.
Depositary Receipts, Convertible Securities and Securities Warrants
The Fund may invest in ADRs, EDRs and GDRs and convertible securities which the
Manager regards as a form of equity security. The Fund may also invest up to 5%
of its net assets in warrants, including up to 2% of net assets for those not
listed on a securities exchange.
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.
The Fund does not intend to invest in other investment companies unless, in the
Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees.
Debt Securities
The Fund may purchase debt securities that complement its objective of capital
appreciation through anticipated favorable changes in relative foreign exchange
rates, in relative interest rate levels, or in the creditworthiness of issuers.
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
investment grade. Subject to this limitation, the Fund may invest in any debt
security, including securities in default. After its purchase by the Fund a debt
security may cease to be rated or its rating may
4
<PAGE>
be reduced below that required for purchase by the Fund. A security downgraded
below the minimum level may be retained if determined by the Manager and the
Board to be in the best interests of the Fund. 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
emerging market countries. The percentage distribution between equity and debt
will vary from country to country based on anticipated trends in inflation and
interest rates; expected rates of economic and corporate profits growth; changes
in government policy; stability, solvency and expected trends of government
finances; and conditions of the balance of payments and terms of trade.
U.S. Government Securities
The Fund may invest 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 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 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.
Mortgage-Related Securities and Derivative Securities
The Fund may invest in mortgage-related securities. A mortgage-related security
is an interest in a pool of mortgage loans and is considered a derivative
security. Most mortgage-related securities are pass-through securities, which
means that investors receive payments consisting of a pro rata share of both
principal and interest (less servicing and other fees), as well as unscheduled
prepayments, as mortgages in the underlying mortgage pool are paid off by the
borrowers. Certain mortgage-related securities are subject to high volatility.
The fund uses these derivative securities in an effort to enhance return and as
a means to make certain investments not otherwise available to the Fund. See
"Hedging and Risk-Management Practices" for a discussion of other reasons why
the Fund invests in derivative securities.
Agency Mortgage-Related Securities
Investors in the Fund should note that the dominant issuers or guarantors of
mortgage-related securities today are GNMA, FNMA and the FHLMC. GNMA creates
pass-through securities from pools of government guaranteed or insured (Federal
Housing Authority or Veterans Administration) mortgages. FNMA and FHLMC issue
pass-through securities from pools of conventional and federally insured and/or
guaranteed residential mortgages. The principal and interest on GNMA
pass-through securities are guaranteed by GNMA and backed by the full faith and
credit of the U.S. Government. FNMA guarantees full and timely payment of all
interest and principal, and FHLMC guarantees timely payment of interest and
ultimate collection of principal of its pass-through securities. Securities from
FNMA and FHLMC are not backed by the full faith and credit of the U.S.
Government but are generally considered to offer minimal credit risks. The
yields provided by these mortgage-related securities have historically exceeded
the yields on other types of U.S. government securities with comparable "lives"
largely due to the risks associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity. The Fund may invest in derivative securities
known as "inverse floaters," the values of which vary in response to interest
rates. These securities may be illiquid and their values may be very volatile.
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
5
<PAGE>
by the Fund and must be fully collateralized by cash, letters of credit, U.S.
government securities or other high-grade liquid debt or equity securities
("collateral assets"). 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.
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 10% of the Fund's total assets. Each
securities loan is collateralized with collateral assets in an amount at least
equal to the current market value of the loaned securities, plus accrued
interest. There is a risk of delay in receiving collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially.
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 supports its obligation with collateral assets equal to the
value of the when-issued or forward commitment securities and causes the
collateral 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 certain derivative securities and techniques
(known as Derivatives). Markets in some countries currently do not have
instruments available for hedging transactions. To the extent that such
instruments 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.
Hedging transactions involve certain risks. While the Fund may benefit from the
use of hedging positions, 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.
Privately Issued Mortgage-Related Securities/Derivatives. The Fund may invest in
mortgage-related securities offered by private issuers, including pass-through
securities for pools of conventional residential mortgage loans; mortgage
pay-through obligations and mortgage-backed bonds, which are considered to be
obligations of the institution issuing the bonds and are
6
<PAGE>
collateralized by mortgage loans; and bonds and CMOs collateralized by
mortgage-related securities issued by GNMA, FNMA, FHLMC or by pools of
conventional mortgages, multi-family or commercial mortgage loans.
Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal.
Structured Notes and Indexed Securities. The Fund may invest in structured notes
and indexed securities. Structured notes are debt securities, the interest rate
or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent the Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk. See "The Fund's Investment Objectives and
Policies - Duration."
Variable Rate Demand Notes
The Fund may invest in variable rate demand notes ("VRDNs").
Zero Coupon Bonds
The Fund may invest in zero coupon bonds. Zero coupon bond prices are highly
sensitive to changes in market interest rates. The original issue discount on
the zero coupon bonds must be included ratably in the income of the Fund as the
income accrues even though payment has not been received. The Fund nevertheless
intends to distribute an amount of cash equal to the currently accrued original
issue discount, and this may require liquidating securities at times they might
not otherwise do so and may result in capital loss. See "Tax Information" in the
Statement of Additional Information.
Asset-Backed Securities
The Fund may invest up to 25% of its total assets in asset-backed securities.
Like mortgage-related securities, these securities are subject to the risk of
prepayment. See "Risk Considerations."
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 any 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 approximately 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.
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
will have collateral 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 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.
7
<PAGE>
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.
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 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 120%. Even if the portfolio turnover for
the Fund is in excess of 100%, 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
Small Companies
The Fund may make investments in smaller companies that may benefit from the
development of new products and services. Such 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
those of larger issuers.
Foreign Securities
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 of loss inherent in domestic
investments.
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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 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.
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. 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.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in the Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Fund, to the extent it retains the same
percentage of debt securities, may have to reinvest the proceeds of prepayments
at lower interest rates than those of their previous investments. If this
occurs, the Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates than other fixed-income securities of comparable
duration, although they may have a comparable risk of decline in market value in
periods of rising interest rates. To the extent that the Fund purchases
mortgage-related securities at a premium, unscheduled prepayments, which are
made at par, result in a loss equal to any unamortized premium. Duration is one
of the fundamental tools used by the Manager in managing interest rate risks
including prepayment risks. See "Duration" in the Glossary.
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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.
Portfolio Managers
Roger W. Honour is a managing director and senior portfolio manager. Prior to
joining Montgomery Asset Management in June 1993, Mr. Honour spent one year as
vice president and portfolio manager at Twentieth Century Investors in Kansas
City, Missouri. From 1990 to 1992, he served as vice president and portfolio
manager at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a vice
president with Merrill Lynch Capital Markets.
Andrew Pratt, CFA, is a vice president and portfolio manager. He joined
Montgomery Asset Management from Hewlett-Packard Company, where he was an equity
analyst, managed a portfolio of small capitalization technology companies, and
researched private placement and venture capital investments. From 1983 through
1988, he worked in the Capital Markets Group at Fidelity Investments in Boston,
Massachusetts.
William C. Stevens is a managing director and a senior portfolio manager. At
Barclays de Zoete Wedd Securities from 1991 to 1992, he started 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 was
responsible for the origination and trading of all derivative mortgage-related
securities.
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.
Average Daily Net Assets Annual Rate
- -------------------------------------- -------------------------- --------------
Montgomery Asset Allocation Fund II First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
- -------------------------------------- -------------------------- --------------
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.
The Manager has agreed to reduce its management fee if necessary to keep total
annual operating expenses at or below one and thirty-five hundredths of one
percent (1.35%) 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
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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 Contact The Fund
For information on the Fund or your account, call a Montgomery Shareholder
Service Representative at:
(800) 572-3863
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
Regular Mail Express Mail or Overnight Service
The Montgomery Funds The Montgomery Funds
c/o DST Systems, Inc. c/o DST Systems, Inc.
P.O. Box 419073 1004 Baltimore St.
Kansas City, MO 64141-6073 Kansas City, MO 64105
Visit the Montgomery World Wide Web site at:
www.xperts.montgomery.com/1
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
the Fund's cutoff times will be purchased at the next-determined net asset value
after receipt of the order.
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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. The Fund does not accept third party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the U.S. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
Initial Investments
Minimum Initial Investment (including IRAs): $1,000
Initial Investments by Check
o Complete the Account Application. Tell us in which Fund(s) you
want to invest and make your check payable to The Montgomery
Funds.
o A charge may be imposed on checks that do not clear.
Initial Investments by Wire
o Call the Transfer Agent to tell them you intend to make your
initial investment by wire. Provide the Transfer Agent with your
name, dollar amount to be invested and Fund(s) 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 Asset Allocation Fund II
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 (including IRAs): $100
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an
investment stub with your check. 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 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."
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Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone
purchases. To make a purchase, call the Transfer Agent at (800)
572-3863 before the Fund cutoff time. Shares for IRAs may not be
purchased by phone.
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.
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."
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. 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 incurred 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 at 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
certain telephone calls, 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. The Fund may be available for
purchase through administrators for retirement plans. Investors who purchase
shares as 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.
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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.
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.
Redeeming by Written Instruction
o Write a letter giving 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 for
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.
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 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. This service is not
available for IRA accounts.
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 other 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.
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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 will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, the Fund will
redeem shares from 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 the minimum investment required to open an
account before the Fund takes any action.
Exchange Privileges And Restrictions
You may exchange shares from another fund in the Montgomery Funds family with
the same registration, taxpayer identification number and address. An exchange
may result in a recognized gain or loss for income tax purposes. See the
discussion of Fund telephone procedures and limitations of liability under
"Telephone Transactions."
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with
your Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange
fee) after your request is received. Your request is subject to
the Fund's cut-off times.
o Exchange purchases must meet the minimum investment requirements
of the fund you intend to purchase.
o You may exchange for shares of a fund only in states where that
Montgomery fund's shares are qualified for sale and only after
you have reviewed a prospectus of that fund.
o You may not exchange for shares of a Montgomery fund that is not
open to new shareholders unless you have an existing account with
that fund.
o Because excessive exchanges can harm a fund's performance, the
Trust reserves the right to terminate your exchange privileges if
you make more than four exchanges out of any one fund during a
twelve-month period. The Fund may also refuse an exchange into a
fund from which you have redeemed shares within the previous 90
days (accounts under common control and accounts with the same
taxpayer identification number will be counted together). 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. The Trust reserves the right to refuse
exchanges by any person or group if, in the Manager's judgment, a
fund would be unable to effectively invest the money in
accordance with its investment objective and policies, or would
otherwise be potentially adversely affected. Although the Trust
attempts to provide prior notice to affected shareholders when it
is reasonable to do so, they may impose these restrictions at any
time. The exchange 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 terminate or
modify the exchange privileges of Fund shareholders in the
future.
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of the fixed income funds (which include
the Montgomery Short Government Bond Fund, the Montgomery Government Reserve
Fund, the Montgomery Federal Tax-Free Money Fund, the Montgomery California
Tax-Free Intermediate Bond Fund and the California Tax-Free Money Fund) into the
Fund. The minimum exchange is $100. Periodically investing a set dollar amount
into the Fund is also referred to as dollar-cost averaging because the number of
shares purchased will vary depending on the price per share. Your account with
the Fund must meet the applicable minimum of $1,000. Exchanges out of the fixed
income funds are exempt from the four exchanges limit policy.
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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 that these agents perform shareholder servicing
activities for the Fund, they may receive fees from the Fund for such services.
Redemption 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 redemption order by such broker-dealer,
provided the broker-dealer 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 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.
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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
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
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<PAGE>
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.
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.
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Glossary
--------
o Asset backed securities. Asset backed securities are secured by and payable
from, pools of assets, such as motor vehicle installment sales contracts,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (e.g., credit card)
agreements.
o Cash Equivalents. Cash equivalents are short-term, interest bearing
instruments or deposits and may include, for example, commercial paper,
certificates of deposit, repurchase agreements, bankers' acceptances, U.S.
Treasury bills, bank money market deposit accounts, master demand notes and
money market mutual funds. These consist of high-quality debt obligations,
certificates of deposit and bankers' acceptances rated at least A-1 by S&P
or Prime-1 by Moody's, or the issuer has an outstanding issue of debt
securities rated at least A by S&P or Moody's, or are of comparable quality
in the opinion of the Manager.
o Collateral assets include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities. Collateral
assets are separately identified and rendered unavailable for investment or
sale.
o Collateralized Mortgage Obligations (CMOs). Derivative mortgage-related
securities that separate the cash flows of mortgage pools into different
classes or tranches. Stripped mortgage securities are CMOs that allocate
different proportions of interest and principal payments on a pool of
mortgages. One class may receive all of the interest (the interest only or
"IO" class) while another may receive all of the principal (principal only
or "PO" class). The yield to maturity on any IO or PO class is extremely
sensitive not only to changes in interest rates but also to the rate of
principal payments and prepayments on underlying mortgages. In the most
extreme cases, an IO class may become worthless.
o Convertible security. 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. The price of a convertible security is
influenced by the market value of the underlying common stock.
o Covered call option. A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire such securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option, or owns an offsetting call option.
o Covered put option. A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds
a put option on the underlying security.
o Depositary receipts include American depositary receipts ("ADRs"), European
depositary receipts ("EDRs"), global depositary receipts ("GDRs") and other
similar instruments. Depositary receipts are receipts typically issued in
connection with a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign corporation.
o Derivatives include forward currency exchange contracts, currency options,
futures contracts, swaps and options on futures contracts on U.S.
government and foreign government securities and currencies.
o Dollar roll transaction. A dollar roll transaction is similar to a reverse
repurchase agreement except it requires a Fund to repurchase a similar
rather than the same security.
o Duration. Traditionally, a debt security's "term to maturity" characterizes
a security's sensitivity to changes in interest rates. However, "term to
maturity" measures only the time until a debt security provides its final
payment, taking no account of pre-maturity payments. Most debt securities
provide interest ("coupon") payments in addition to a final ("par") payment
at maturity, and some securities have call provisions allowing the issuer
to repay the instrument in full before maturity date, each of which affect
the security's response to interest rate changes. "Duration" is considered
a more precise measure of interest rate risk than "term to maturity."
Determining duration may involve the Manager's estimates of future economic
parameters, which may vary from actual future values. Fixed-income
securities with effective durations of three years are more responsive to
interest rate fluctuations than those with effective durations of one year.
For example, if interest rates rise by 1%, the value of securities having
an effective duration of three years will generally decrease by
approximately 3%.
o Equity derivative securities include, among other things, options on equity
securities, warrants and future contracts on equity securities.
o Equity swaps. Equity swaps allow the parties to exchange the dividend
income or other components of return on an equity investment (e.g., a group
of equity securities or an index) for a component of return on another
non-equity or equity investment. Equity swaps transitions may be volatile
and may present the Fund with counterparty risks.
o FHLMC. The Federal Home Loan Mortgage Corporation.
o FNMA. The Federal National Mortgage Association.
o Forward currency contracts. A forward currency contract is a contract
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 generally do 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
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deliver or has collateral assets 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.
o Futures and options on futures. 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. For example, the Fund may sell
interest rate futures contracts (i.e., enter into a futures contract to
sell the underlying debt security) in an attempt to hedge against an
anticipated increase in interest rates and a corresponding decline in debt
securities it owns. The Fund will have collateral assets equal to the
purchase price of the portfolio securities represented by the underlying
interest rate futures contracts it has an obligation to purchase.
o GNMA. The Government National Mortgage Association.
o Highly rated debt securities. Debt securities rated within the three
highest grades by Standard & Poor's Corporation ("S&P") (AAA to A), Moody's
Investors Services, Inc. ("Moody's") (Aaa to A) or Fitch Investor Services,
Inc. ("Fitch") (AAA to A), or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees. See the Appendix to the Statement of Additional Information for a
description of these ratings.
o 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 are restricted from
trading on formal markets for some period of time but for which an active
informal market exists, or securities that meet the 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.
o Investment grade. Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB), Moody's (at least Baa) or
Fitch (at least Baa) or in unrated debt securities deemed to be of
comparable quality by the Manager using guidelines approved by the Board of
Trustees.
o Leverage. Some Funds may use leverage in an effort to increase return.
Although leverage creates an opportunity for increased income and gain, it
also creates special risk considerations. Leveraging also creates interest
expenses that can exceed the income from the assets retained.
o Options on securities, securities indices and currencies. A 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). A 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). 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. A Fund may purchase put and call
options on stock indices in order to hedge against risks of stock market or
industry-wide stock price fluctuations.
o Repurchase agreement. With a repurchase agreement, a Fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the
Money Market Funds, the instrument must be rated in the highest grade) from
a financial institution that simultaneously agrees to repurchase the same
security at a specified time and price.
o Reverse dollar roll transactions. When a Fund engages in a reverse dollar
roll, it purchases a security from a financial institution and concurrently
agrees to resell a similar security to that institution at a later date at
an agreed-upon price.
o Reverse repurchase agreement. In a reverse repurchase agreement, a 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.
o S&P 500. Standard & Poor's 500 Composite Price Index.
o Securities lending. A fund may lend securities to brokers, dealers and
other financial organizations. Each securities loan is collateralized with
collateral assets in an amount at least equal to the current market value
of the loaned securities, plus accrued interest. There is a risk of delay
in receiving collateral or in recovering the securities loaned or even a
loss of rights in collateral should the borrower fail financially.
o U.S. government securities include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
o Variable rate demand notes. Variable rate demand notes ("VRDNs") are
instruments with rates of interest adjusted periodically or which "float"
continuously according to specific formulae and often have a demand feature
entitling the purchaser to resell the securities.
o Warrant. 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. A warrant
not exercised or disposed of by its expiration date expires worthless.
o 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. When-issued securities and
forward commitments may be sold prior to the settlement date, but a Fund
will enter into when-issued and forward commitments only with the intention
of actually receiving or delivering the securities. No income accrues on
securities that have been purchased pursuant to a forward commitment or on
a when-issued basis prior to delivery to a Fund. At the time a Fund enters
into a transaction on a when-issued or forward commitment basis, it
supports its obligation with collateral assets equal to the value of the
when-
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issued or forward commitment securities and causes the collateral 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.
o Zero coupon bonds. Zero coupon bonds are debt obligations that do not pay
current interest and are consequently issued at a significant discount from
face value. The discount approximates the total interest the bonds will
accrue and compound over the period to maturity or the first
interest-payment date at a rate of interest reflecting the market rate of
interest at the time of issuance.
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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 ASSET ALLOCATION FUND II
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------------
----------
MONTGOMERY ASSET ALLOCATION FUND II
-----------------------------------
101 California Street
San Francisco, California 94111
1-800-572-FUND
--------------------
STATEMENT OF ADDITIONAL INFORMATION
February __, 1997
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 Asset Allocation Fund II (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 February __, 1997, 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
The Trust......................................................................2
Investment Objective And Policies Of The Fund..................................2
Risk Factors..................................................................10
Investment Restrictions.......................................................11
Distributions And Tax Information.............................................14
Trustees And Officers.........................................................18
B-1
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Investment Management And Other Services......................................23
Execution Of Portfolio Transactions...........................................26
Additional Purchase And Redemption Information................................29
Determination Of Net Asset Value..............................................31
Principal Underwriter.........................................................33
Performance Information.......................................................34
General Information...........................................................36
Financial Statements..........................................................38
Appendix A....................................................................39
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 (except the Montgomery Asset Allocation Fund II)
offers three classes of shares (Class R, Class P and Class L). This Statement of
Additional Information pertains to Class R shares of Montgomery Growth Fund II.
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"), 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
B-2
<PAGE>
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 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.
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Hedging and Risk Management Practices
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
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 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
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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 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
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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.
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 liquid equity or 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
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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.
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
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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 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 liquid equity or 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
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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
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer.
While the Fund reserves the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Fund does not believe that its net asset value
will be adversely affected by its purchase of securities on a when-issued or
delayed delivery basis. The Fund causes its custodian to segregate cash, U.S.
Government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund will earn no
income on these assets.
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
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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 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
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
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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 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
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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, 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.)
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 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.)
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.
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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.
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.)
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.)
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.)
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.
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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.
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 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
B-14
<PAGE>
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 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
B-15
<PAGE>
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 "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
B-16
<PAGE>
derived by the Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code rather than
as 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.
B-17
<PAGE>
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 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)
101 California 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 43)
101 California Street, San Francisco, California 94111. Mr. Geist has
been the President and a Director of Montgomery Asset Management, Inc.
and President of the Manager since April 1990. From October 1988 until
March 1990, Mr. Geist was a Senior Vice President of Analytic
Investment Management. From January 1986 until October 1988, Mr. Geist
was a Vice President with RCB Trust Co. Prior to January 1986, Mr.
Geist was the Pension Fund Administrator for St. Regis Co., a
manufacturing concern.
Jack G. Levin, Secretary (Age 49)
600 Montgomery Street, San Francisco, California 94111. Mr. Levin has
been Director of Legal and Regulatory Affairs for Montgomery Securities
since January 1983.
- --------------------------
* Trustee deemed an "interested person" of the Fund as defined in the
Investment Company Act.
B-18
<PAGE>
John T. Story, Executive Vice President (Age 56)
101 California Street, San Francisco, California 94111. Mr. Story has
been the Managing Director of Mutual Funds and Executive Vice President
of Montgomery Asset Management, L.P. since January 1994. From December
1978 to January 1994, he was Managing Director - Senior Vice President
of Alliance Capital Management.
David E. Demarest, Chief Administrative Officer (Age 42)
101 California Street, San Francisco, California 94111. Mr. Demarest
has been the Chief Administrative Officer since 1994. From 1991 until
1994, he was Vice President of Copeland Financial Services. Prior to
joining Copeland, Mr. Demarest was Vice President/Manager for the
Overland Express Funds Division for Wells Fargo Bank.
Mary Jane Fross, Treasurer (Age 44)
101 California Street, San Francisco, California 94111. Ms. Fross is
Manager of Mutual Fund Administration and Finance for the Manager. From
November 1990 to her arrival at the Manager in 1993, Ms. Fross was
Financial Analyst/Senior Accountant with Charles Schwab, San Francisco,
California. From 1989 to November 1990, Ms. Fross was Assistant
Controller of Bay Bank of Commerce, San Leandro, California.
Roger W. Honour, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Mr. Honour is a
Managing Director and Senior Portfolio Manager for the Manager. Roger
Honour joined the Manager in June 1993 as Managing Director and
Portfolio Manager responsible for mid and large capitalization growth
stock investing. Prior to joining Montgomery Asset Management, he was
Vice President and Portfolio Manager at Twentieth Century Investors
from 1992 to 1993. Mr. Honour was a Vice President and Portfolio
Manager at Alliance Capital Management from 1990 to 1992. Mr. Honour
was a Vice President of Institutional Equity Research and Sales at
Merrill Lynch Capital Markets from 1980 to 1990.
Stuart O. Roberts, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr. Roberts is
a Managing Director and Portfolio Manager for the Manager. For the five
years prior to his start with the Manager in 1990, Mr. Roberts was a
portfolio manager and analyst at Founders Asset Management.
Oscar A. Castro, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr. Castro,
CFA, is a Managing Director and Portfolio Manager for the Manager.
Before joining the Manager, he was vice president/portfolio manager at
G.T. Capital Management, Inc. from 1991 to 1993. From 1989 to 1990, he
was co-founder and co-manager of The Common Goal World
B-19
<PAGE>
Fund, a global equity partnership. From 1987 to 1989, Mr. Castro was
deputy portfolio manager/analyst at Templeton International.
John D. Boich, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr. Boich, CFA,
is a Managing Director and Portfolio Manager. Prior to joining the
Manager, Mr. Boich was vice president and portfolio manager at The
Boston Company Institutional Investors Inc. from 1990 to 1993. From
1989 to 1990, Mr. Boich was the founder and co-manager of The Common
Goal World Fund, a global equity partnership. From 1987 to 1989, Mr.
Boich worked as a financial adviser with Prudential-Bache Securities
and E.F. Hutton & Company.
Josephine S. Jimenez, Vice President (Age 42)
101 California Street, San Francisco, California 94111. Ms. Jimenez,
CFA, is a Managing Director and Portfolio Manager for the Manager. From
1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C. as senior
analyst and portfolio manager.
Bryan L. Sudweeks, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Dr. Sudweeks,
Ph.D., CFA, is a Managing Director and Portfolio Manager for the
Manager. Prior to joining the Manager, he was a senior analyst and
portfolio manager at Emerging Markets Investors Corporation/Emerging
Markets Management in Washington, D.C. Previously, Dr. Sudweeks was a
Professor of International Finance and Investments at George Washington
University and also served as an Adjunct Professor of International
Investments from 1988 until May 1991.
William C. Stevens, Vice President (Age 40)
101 California Street, San Francisco, California 94111. Mr. Stevens is
a Portfolio Manager and Managing Director for the Manager. At Barclays
de Zoete Wedd Securities from 1991 to 1992, he was responsible for
starting its CMO and asset-backed securities trading. Mr. Stevens
traded stripped mortgage securities and mortgage-related interest rate
swaps for the First Boston Corporation from 1990 to 1991 and while with
Drexel Burnham Lambert from 1984 to 1990. He was responsible for the
origination and trading of all derivative mortgage-related securities
with more than $10 billion in total issuance.
John H. Brown, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr. Brown, CFA,
is a Senior Portfolio Manager and Managing Director for the Manager.
Preceding his arrival at the Manager in May 1994, Mr. Brown was an
analyst and portfolio manager at Merus Capital Management in San
Francisco, California from June 1986.
Frank Chiang, Vice President (Age 47)
B-20
<PAGE>
101 California Street, San Francisco, California 94111. Mr. Chiang is a
Vice President and Portfolio Manager for the Manager. Before joining
the Manager, Mr. Chiang was Managing Director and Portfolio Manager at
TCW Asia Ltd. in Hong Kong.
Angeline Ee, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Ms. Ee is a
Vice President and Portfolio Manager for the Manager. From 1990 until
joining the Manager in July 1994, Ms. Ee was an Investment Manager with
AIG Investment Corp. in Hong Kong. From June 1989 until September 1990,
Ms. Ee was a co-manager of a portfolio of Asian equities and bonds at
Chase Manhattan Bank in Singapore.
Jerome C. Philpott, Vice President (Age 33)
101 California Street, San Francisco, California 94111. Jerome C. (Cam)
Philpott, CFA, is a Vice President and Portfolio Manager for the
Manager. Before joining the Manager, Mr. Philpott was a securities
analyst with Boettcher & Company in Denver from 1988 to 1991.
Bradford D. Kidwell, Vice President (Age 39)
101 California Street, San Francisco, California 94111. Bradford D.
Kidwell is a Vice President and Portfolio Manager for the Manager. Mr.
Kidwell joined the Manager in 1991 from the position he held since 1989
as the sole general partner and portfolio manager of Oasis Financial
Partners, an affiliate of the Distributor that invested in savings and
loans. Before then, he covered the savings and loan industry for Dean
Witter Reynolds from 1987 to 1989.
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner of Pearson, Caldwell & Farnsworth, Inc., an
executive search consulting firm. From May 1988 to September 1991, Mr.
Farnsworth was the Managing Partner of the San Francisco office of Ward
Howell International, Inc., an executive recruiting firm. From May 1987
until May 1988, Mr. Farnsworth was Managing Director of Jeffrey Casdin
& Company, an investment management firm specializing in biotechnology
companies. From May 1984 until May 1987, Mr. Farnsworth served as a
Senior Vice President of Bank of America and head of the U.S. Private
Banking Division.
Andrew Cox, Trustee (Age 52)
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.
B-21
<PAGE>
Cecilia Herbert, Trustee (Age 47)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was
Managing Director of Morgan Guaranty Trust Company. From 1983 to 1991
she was General Manager of the bank's San Francisco office, with
responsibility for lending, corporate finance and investment banking.
Ms. Herbert is a member of the board of Schools of the Sacred Heart,
and is on the Archdiocese of San Francisco Finance Council, where she
chairs the Investment Committee.
Jerome S. Markowitz, Trustee-designate* (Age 57)
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.
<TABLE>
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, 1996 by all of the registered investment
companies to which the Manager provides investment advisory services, are set
forth below.
<CAPTION>
Pension or Retirement Total Compensation From the
Aggregate Compensation Benefits Accrued as Part of Trust and Fund Complex
Name of Trustee from the Trust Fund Expenses* (2 additional Trusts)
- --------------- --------- -------------- ---------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
John A. Farnsworth $25,000 -- $32,500
Andrew Cox $25,000 -- $32,500
Cecilia H. Herbert $25,000 -- $32,500
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
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.
B-22
<PAGE>
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
percent (1.00%) of the first $500 million in average daily net assets and
nine-tenths of one percent (0.90%) of the next $500 million of average daily net
assets, and eight-tenths of one percent (0.80%) of average daily 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
one and thirty-five one hundredths of one percent (1.35%) of the Fund's 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 limitation. 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
B-23
<PAGE>
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.
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
B-24
<PAGE>
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. 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
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branches and agencies throughout the world. The Custodian has entered into
agreements with foreign sub-custodians approved by the Trustees pursuant to Rule
17f-5 under the Investment Company Act. The Custodian, its branches and
sub-custodians generally hold certificates for the securities in their custody,
but may, in certain cases, have book records with domestic and foreign
securities depositories, which in turn have book records with the transfer
agents of the issuers of the securities. Compensation for the services of the
Custodian is based on a schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the 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 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
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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 Funds are made independently from those of
other client accounts of the Manager or its affiliates, and suitability is
always a paramount consideration. Nevertheless, it is possible that at times the
same securities will be acceptable for the Fund and for one or more of such
client accounts. The Manager and its personnel may have interests in one or more
of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Fund and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and the Fund seek to
acquire the same security at the same general time (especially if the security
is thinly traded or is a small cap stock), 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 that the Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between the Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. In many cases, the Fund's transactions are bunched with the
transactions for other client accounts. It is recognized that in
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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 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
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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 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
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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 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
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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
(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
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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 Committee pursuant to procedures approved by or
under the direction of the Board of Trustees.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange, are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments or by an independent pricing service, approved by
the Board 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.
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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 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.
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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
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
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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.
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.
B-35
<PAGE>
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, Barings, The WEFA Group,
Consensus Estimate, Datastream, Micropal, 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.
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.
B-36
<PAGE>
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 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.
B-37
<PAGE>
FINANCIAL STATEMENTS
The Fund has recently commenced operations and, therefore, has not yet prepared
financial statements for public distribution.
B-38
<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.
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:
B-39
<PAGE>
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 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.
B-40
<PAGE>
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-41
<PAGE>
---------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Portfolio Investments as of June 30, 1996;
Statements of Assets and Liabilities as of June 30,
1996; Statements of Operations For the Year Ended
June 30, 1996; Statement of Cash Flows for year
ended June 30, 1996; Statements of Changes in Net
Assets for the Year Ended June 30, 1996; Financial
Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1996
for Montgomery Growth Fund, Montgomery Micro Cap
Fund, Montgomery Small Cap Fund, Montgomery Small
Cap Opportunities Fund, Montgomery Equity Income
Fund, Montgomery Asset Allocation Fund, Montgomery
Select 50 Fund, Montgomery Global Opportunities
Fund, Montgomery Global Communications Fund,
Montgomery International Small Cap Fund, Montgomery
International Growth Fund, Montgomery Emerging
Markets Fund, Montgomery Short Government Bond
Fund, Montgomery Government Reserve Fund,
Montgomery California Tax-Free Intermediate Bond
Fund and Montgomery California Tax-Free Money Fund;
Notes to Financial Statements; Independent
Auditors' Report on the foregoing, all incorporated
by reference to the Annual Report to Shareholders
of the above-named funds.
(b) Exhibits:
(1)(A) Agreement and Declaration of Trust is incorporated by
reference to the Registrant's Registration
Statement as filed with the Commission on May 16,
1990 ("Registration Statement").
(1)(B) Amendment to Agreement and Declaration of Trust is
incorporated by reference to Post-Effective
Amendment No. 17 to the Registration Statement as
filed with the Commission on December 30, 1993
("Post-Effective Amendment No. 17").
(1)(C) Amended and Restated Agreement and Declaration of Trust is
incorporated by reference to Post-Effective
Amendment No. 28 to the Registration Statement as
filed with the Commission on September 13, 1995
("Post-Effective Amendment No. 28").
(2) By-Laws are incorporated by reference to the Registration
Statement.
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5)(A) Form of Investment Management Agreement is incorporated by
reference to Pre-Effective Amendment No. 1 to the
Registration Statement as filed with the
Commission on July 5, 1990 ("Pre-Effective
Amendment No. 1").
<PAGE>
(5)(B) Form of Amendment to Investment Management Agreement is
incorporated by reference to Post-Effective
Amendment No. 24 to the Registration Statement as
filed with the Commission on March 31, 1995
("Post-Effective Amendment No. 24").
(6)(A) Form of Underwriting Agreement is incorporated by reference
to Pre-Effective Amendment No. 1.
(6)(B) Form of Selling Group Agreement is incorporated by reference
to Pre-Effective Amendment No. 1.
(7) Benefit Plan(s) - Not applicable.
(8) Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 24.
(9)(A) Form of Administrative Services Agreement is incorporated by
reference to Post-Effective Amendment No. 15.
(9)(B) Form of Multiple Class Plan is incorporated by reference to
Post-Effective Amendment No. 28.
(9)(C) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 28.
(10) Consent and Opinion of Counsel as to legality of shares is
incorporated by reference to Pre-Effective
Amendment No. 1.
(11) Independent Auditors' Consent. - Not Applicable.
(12) Financial Statements omitted from Item 23 - Not applicable.
(13) Letter of Understanding re: Initial Shares is incorporated
by reference to Pre-Effective Amendment No. 1.
(14) Model Retirement Plan Documents are incorporated by
reference to Post-Effective Amendment No. 2 to the
Registration Statement as filed with the
Commission on March 4, 1991 ("Post-Effective
Amendment No. 2").
(15) Form of Share Marketing Plan is incorporated by reference to
Post-Effective Amendment No. 28.
(16)(A) Performance Computation for Montgomery Short Government Bond
Fund is incorporated by reference to
Post-Effective Amendment No. 13.
(16)(B) Performance Computation for Montgomery Government Reserve
Fund is incorporated by reference to
Post-Effective Amendment No. 12.
(16)(C) Performance Computation for Montgomery California Tax-Free
Intermediate Bond Fund is incorporated by
reference to Post-Effective Amendment No. 17.
(16)(D) Performance Computation for the other series of Registrant
is incorporated by reference to Post-Effective
Amendment No. 2.
(27) Financial Data Schedule is incorporated by reference to Form
N-SAR filed for the period ended June 30, 1996.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, L.P., a California limited partnership, is
the manager of each series of the Registrant, of The Montgomery Funds II, a
Delaware business trust, and of The Montgomery Funds III, a Delaware business
trust. Montgomery Asset Management, Inc., a California corporation is the
general partner of Montgomery Asset Management, L.P., and Montgomery Securities
is its sole limited partner. The Registrant, The Montgomery Funds II and The
Montgomery Funds III are deemed to be under the common control of each of those
three entities.
<TABLE>
Item 26. Number of Holders of Securities
<CAPTION>
Number of Record Holders
Title of Class as of October 31, 1996
-------------- -----------------------
Shares of Beneficial
Interest, $0.01 par value
-------------------------
<S> <C>
Montgomery Small Cap Fund (Class R) 5,889
Montgomery Growth Fund (Class R) 47,759
Montgomery Emerging Markets 44,504
Fund (Class R)
Montgomery International Small Cap Fund (Class R) 1,797
Montgomery Global Opportunities Fund (Class R) 1,133
Montgomery Global Communications Fund (Class R) 11,681
Montgomery Equity Income Fund (Class R) 1,055
Montgomery Short Government Bond Fund (Class R) 762
Montgomery California Tax-Free 157
Intermediate Bond Fund (Class R)
Montgomery Government Reserve Fund (Class R) 6,120
Montgomery California Tax-Free 995
Money Fund (Class R)
Montgomery Micro Cap Fund (Class R) 10,409
Montgomery International Growth Fund (Class R) 526
Montgomery Advisors Emerging Markets Fund (Class R) 21
Montgomery Select 50 Fund (Class R) 5,519
Montgomery Small Cap Opportunities Fund (Class R) 12,174
Montgomery Federal Tax-Free Money Fund (Class R) 219
Montgomery Technology Fund 0
Montgomery Emerging Asia Fund 370
</TABLE>
C-3
<PAGE>
Item 27. Indemnification
Article VII, Section 3 of the Agreement and Declaration of Trust
empowers the Trustees of the Trust, to the full extent permitted by law, to
purchase with Trust assets insurance for indemnification from liability and to
pay for all expenses reasonably incurred or paid or expected to be paid by a
Trustee or officer in connection with any claim, action, suit or proceeding in
which he or she becomes involved by virtue of his or her capacity or former
capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is and other amounts or
was an agent of the Trust, against expenses, judgments, fines, settlement and
other amounts actually and reasonable incurred in connection with such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best interests of the Trust. Indemnification will not be
provided in certain circumstances, however, including instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Trustees, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable in the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Montgomery Securities, which is a broker-dealer and the principal
underwriter of The Montgomery Funds, is the sole limited partner of the
investment manager, Montgomery Asset Management, L.P. ("MAM, L.P."). The general
partner of MAM, L.P. is a corporation, Montgomery Asset Management, Inc. ("MAM,
Inc."), certain of the officers and directors of which serve in similar
capacities for MAM, L.P. One of these officers and directors, Mr. R. Stephen
Doyle, also is a capital limited partner of Montgomery Securities, and Mr. Jack
G. Levin, Secretary of The Montgomery Funds, is a Managing Director of
Montgomery Securities. R. Stephen Doyle is the Chairman and Chief Executive
Officer of MAM, L.P.; Mark B. Geist is the President; John T. Story is the
Managing Director of Mutual Funds and Executive Vice President; David E.
Demarest is Chief Administrative Officer; Mary Jane Fross is Manager of Mutual
Fund Administration and Finance; and Josephine Jimenez, Bryan L. Sudweeks,
Stuart O. Roberts, John H. Brown, William C. Stevens, Roger Honour, Oscar Castro
and John Boich are Managing Directors of MAM, L.P. Information about the
individuals who function as officers of MAM, L.P. (namely, R. Stephen Doyle,
Mark B. Geist, John T. Story, David E. Demarest, Mary Jane Fross and the eight
Managing Directors) is set forth in Part B.
Item 29. Principal Underwriter.
(a) Montgomery Securities is the principal underwriter of The
Montgomery Funds, The Montgomery Funds II and The Montgomery
Funds III. Montgomery Securities acts as the principal
underwriter, depositor and/or investment adviser and/or
trustee for The Montgomery Funds, an investment company
registered under the Investment Company Act of 1940, as
amended, and for the following private investment partnerships
or trusts:
Montgomery Bridge Fund Liquidating Trust
Montgomery Bridge Fund II, Liquidating Trust
Montgomery Bridge Investments Limited, Liquidating Trust
Montgomery Private Investments Partnership, Liquidating Trust
Pathfinder Montgomery Fund I, L.P., Liquidating Trust
C-4
<PAGE>
Montgomery Growth Partners, L.P.
Montgomery Small Cap Partners II, L.P.
Montgomery Small Cap Partners III, L.P.
Montgomery Capital Partners, L.P.
Montgomery Capital Partners II, L.P.
Montgomery Emerging Markets Fund Limited
Montgomery Emerging World Partners, L.P.
<TABLE>
(b) The following information is furnished with respect to the
officers and general partners of Montgomery Securities:
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ---------------
<S> <C> <C>
Lewis W. Coleman Senior Managing Director None
J. Richard Fredericks Senior Managing Director None
Robert L. Kahan Senior Managing Director None
Kent A. Logan Senior Managing Director None
Jerome S. Markowitz Senior Managing Director Trustee Designate
Karl L. Matthies Senior Managing Director None
J. Sanford Miller Senior Managing Director None
Joseph M. Schell Senior Managing Director None
John K. Skeen Senior Managing Director None
Thomas W. Weisel Chairman and Chief Executive Officer None
Stephen T. Aiello Managing Director None
John A. Berg Managing Director None
Howard S. Berl Managing Director None
Charles R. Brama Managing Director None
Robert V. Cheadle Managing Director None
Jeffrey B. Child Managing Director None
M. Allen Chozen Managing Director None
Frank J. Connelly Managing Director None
David K. Crossen Managing Director None
Glen C. Dailey Managing Director None
C-5
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ---------------
Michael G. Dorey Managing Director None
Dennis Dugan Managing Director None
Frank M. Dunlevy Managing Director None
William A. Falk Managing Director None
Paul G. Fox Managing Director None
Clark L. Gerhardt, Jr. Managing Director None
Seth J. Gersch Managing Director None
Robert G. Goddard Managing Director None
P. Joseph Grasso Managing Director None
James C. Hale, III Managing Director None
Wilson T. Hileman, Jr. Managing Director None
Brett A. Hodess Managing Director None
Ben Howe Managing Director None
Craig R. Johnson Managing Director None
Joseph A. Jolson Managing Director None
Scott C. Kovalik Managing Director None
Kurt H. Kruger Managing Director None
Guy A. Lampard Managing Director None
David S. Lehmann Managing Director None
Derek Lemke-von Ammon Managing Director None
Jack G. Levin, Esq. Managing Director Secretary
Merrill S. Lichtenfeld Managing Director None
James F. McMahon Managing Director None
Michael G. Mueller Managing Director None
Bernard M. Notas Managing Director None
Bruce G. Potter Managing Director None
C-6
<PAGE>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ---------------
David B. Readerman Managing Director None
Rand Rosenberg Managing Director None
Alice S. Ruth Managing Director None
Richard A. Smith Managing Director None
Kathleen Smythe-de Urquieta Managing Director None
Peter B. Stoneberg Managing Director None
Thomas Tashjian Managing Director None
Thomas A. Thornhill, III Managing Director None
John Tinker Managing Director None
Otto V. Tschudi Managing Director None
Stephan P. Vermut Managing Director None
John W. Weiss Managing Director None
George W. Yandell, III Managing Director None
Ross Investments, Inc. General Partner None
LWC Investments, Inc. General Partner None
RLK Investments, Inc. General Partner None
Logan Investments, Inc. General Partner None
SEWEL Investments, Inc. General Partner None
MMJ Investments, Inc. General Partner None
Skeen Investments, Inc. General Partner None
<FN>
* The principal business address of persons and entities listed is 600
Montgomery Street, San Francisco, California 94111.
The above list does not include limited partners or special limited
partners who are not Managing Directors of Montgomery Securities.
</FN>
</TABLE>
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
C-7
<PAGE>
documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9),
(10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at 101
California Street, San Francisco, California 94111.
Item 31. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to file a post-effective amendment
including financial statements of Montgomery Technology Fund, Montgomery Growth
& Income Fund, Montgomery Federal Tax-Free Money Fund, Montgomery Emerging Asia
Fund or Montgomery Global Asset Allocation Fund, which need not be certified,
within four to six months from the effective date of Registrant's 1933 Act
registration statement as to those series.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
(d) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act of 1940, as amended, which requires the prompt convening
of a meeting of shareholders to elect trustees to fill existing vacancies in the
Registrant's Board of Trustees in the event that less than a majority of the
trustees have been elected to such position by shareholders. Registrant has also
undertaken promptly to call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee or Trustees when requested in
writing to do so by the record holders of not less than 10 percent of the
Registrant's outstanding shares and to assist its shareholders in communicating
with other shareholders in accordance with the requirements of Section 16(c) of
the Investment Company Act of 1940, as amended.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 2nd day of December, 1996.
THE MONTGOMERY FUNDS
By: R. Stephen Doyle*
----------------------------
Chairman and Principal Executive
Officer
<TABLE>
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.
<CAPTION>
<S> <C> <C>
R. Stephen Doyle* Officer; Principal December 2, 1996
- ----------------- Financial and Accounting
R. Stephen Doyle Officer; and Trustee
Andrew Cox * Trustee December 2, 1996
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee December 2, 1996
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee December 2, 1996
- --------------------
John A. Farnsworth
<FN>
* By: /s/ Julie Allecta
______________________________________
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed.
</FN>
</TABLE>
