THE MONTGOMERY FUNDS RULE 497(e)
600 Montgomery Street 33-34841;811-6011
San Francisco, California 94111
(800) 572-FUND
PROSPECTUS
March 1, 1996
(as amended March 25, 1996)
The following two mutual funds (individually, a "Fund" and, collectively, the
"Funds") are offered in this Prospectus:
* Montgomery Small Cap Opportunities Fund
* Montgomery International Small Cap Fund
Each Fund's shares offered in this Prospectus (the Class P shares) are sold at
net asset value with no sales load, no commissions and no redemption or exchange
fees. The Class P shares are subject to a Rule 12b-1 distribution fee as
described in this Prospectus. In general, the minimum initial investment in each
Fund is $1,000, and subsequent investments must be at least $100. The Manager or
the Distributor, in either's discretion, may waive these minimums. See "How to
Invest in the Funds."
Each Fund is a separate series of The Montgomery Funds, an open-end management
investment company, and managed by Montgomery Asset Management, L.P. (the
"Manager"), an affiliate of Montgomery Securities (the "Distributor"). Each Fund
has its own investment objective and policies designed to meet different
investment goals. As is the case for all mutual funds, attainment of each Fund's
investment objective cannot be assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated February 9, 1996, as may be revised,
has been filed with the Securities and Exchange Commission, is incorporated by
this reference and is available without charge by calling (800) 572-FUND. If you
are viewing the electronic version of this prospectus through an on-line
computer service, you may request a printed version free of charge by calling
(800) 572-FUND.
The Internet address for The Montgomery Funds is
http://www.xperts.montgomery.com/1.
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.
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TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds 3
Fees and Expenses of the Funds 4
Financial Highlights 6
The Funds' Investment Objectives and Policies 7
Portfolio Securities 8
Other Investment Practices 10
Risk Considerations 13
Management of the Funds 14
How To Invest in the Funds 17
How To Redeem an Investment in the Funds 20
Exchange Privileges and Restrictions 22
Brokers and Other Intermediaries 22
How Net Asset Value is Determined 23
Dividends and Distributions 23
Taxation 23
General Information 24
Backup Withholding Instructions 25
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THE MONTGOMERY FUNDS
The Funds' investment objectives are summarized below. See "The Funds'
Investment Objectives and Policies" beginning on page 7, "Portfolio Securities"
beginning on page 8, "Other Investment Practices" beginning on page 10 and "Risk
Considerations" beginning on page 13 for more detailed information.
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
Seeks capital appreciation by investing primarily in equity securities, usually
common stocks, of small-capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations of less
than $1 billion.
MONTGOMERY INTERNATIONAL SMALL CAP FUND
Seeks capital appreciation by investing primarily in equity securities of
companies outside the U.S. having total market capitalizations of less than $1
billion, sound fundamental values and potential for long-term growth at a
reasonable price.
The Funds 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.
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FEES AND EXPENSES OF THE FUNDS
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load Deferred Sales Load
Imposed on Purchases Imposed on Reinvested Dividends Redemption Fees+ Exchange Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NONE None None None None
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
THE EQUITY FUNDS
<CAPTION>
MONTGOMERY SMALL CAP OPPORTUNITIES FUND MONTGOMERY INTERNATIONAL SMALL CAP FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Management Fee* 1.20% 1.25%
- ---------------------------------------------------------------------------------------------------------------------------------
12b-1 Fee 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.30% 0.65%
(after reimbursement)*
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fund Operating Expenses (after Reimbursement)* 1.75% 2.15%
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
The previous tables are intended to assist the investor in understanding the
various direct and indirect costs and expenses of each Fund. Operating expenses
are paid out of a Fund's assets and are factored into the Fund's share price.
Each Fund estimates that it will have the expenses listed (expressed as a
percentage of average net assets) for the current fiscal year. Because Rule
12b-1 distribution charges are accounted for on a class-level basis (and not on
an individual shareholder-level basis), individual long-term investors in the
Class P shares of a Fund may over time pay more than the economic equivalent of
the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"), even though all shareholders of that Class in
the aggregate will not. This is recognized and permitted by the NASD.
+ Shareholders effecting redemptions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted
from redemption proceeds. THE MONTGOMERY FUNDS RESERVE THE RIGHT UPON 60
DAYS' ADVANCE NOTICE TO SHAREHOLDERS TO IMPOSE A REDEMPTION FEE OF UP TO
1.00% ON SHARES REDEEMED WITHIN 90 DAYS OF PURCHASE. The Funds also reserve
the right to impose a $20 annual account maintenance fee on accounts that
fall below the minimum investment because of redemptions. See "How to Redeem
an Investment in the Funds."
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1995 for another class of shares (but
adjusted to include the Rule 12b-1 fee for the Class P shares) because the
Class P shares were not offered that year. The Manager will reduce its fees
and may absorb or reimburse a Fund for certain expenses to the extent
necessary to limit total annual fund operating expenses to the lesser of the
amount indicated in the table for a Fund or the maximum allowed by
applicable state expense limitations. A 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 for fees
and expenses for the current year. Absent reduction and including the Rule
12b-1 fee for the Class P shares, actual total Fund operating expenses for
the period ended June 30, 1995 (annualized) would have been as follows:
Montgomery International Small Cap Fund, 2.75% (1.50% other expenses).
Absent reduction and including the Rule 12b-1 fee for the Class P shares,
actual total Fund operating expenses are estimated to be as follows:
Montgomery Small Cap Opportunities Fund, 3.35% (1.85% other expenses). The
Manager may terminate these voluntary reductions at any time. See
"Management of the Funds."
</FN>
</TABLE>
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EXAMPLE OF EXPENSES FOR THE FUNDS
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
MONTGOMERY SMALL CAP MONTGOMERY INTERNATIONAL SMALL CAP
OPPORTUNITIES FUND FUND
- -------------------------------------------------------------------------------
1 Year $18 $22
- -------------------------------------------------------------------------------
3 Years $55 $67
- -------------------------------------------------------------------------------
5 Years NA $115
- -------------------------------------------------------------------------------
10 Years NA $248
- -------------------------------------------------------------------------------
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.
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FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
<TABLE>
The following financial information for the periods ended June 30, 1994 through
June 30, 1995 was audited by Deloitte & Touche LLP, whose report, dated August
11, 1995, appears in the 1995 Annual Report of the Funds. This financial
information relates to another class of shares of the Funds not subject to the
Class P Rule 12b-1 fee because the Class P shares were not offered during the
periods shown.
<CAPTION>
MONTGOMERY INTERNATIONAL SMALL CAP FUND
- ------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
December 31, 1995 Year Ended Inception1 through
(Unaudited) June 30, 1995 June 30, 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year...................... $11.75 $12.02 $12.00
- ------------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income (loss)........................... (0.04) 0.12 0.00+
Net realized and unrealized gain (loss) on investments. 1.47 (0.39) 0.02
---- ------ ----
Total from investment operations....................... 1.43 (0.27) 0.02
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income................... (0.02) (0.00)+ --
Distributions from net realized capital gains.......... -- -- --
Distributions in excess of net realized capital gains.. -- -- --
-- -- --
Total Distributions.................................... (0.02) (0.00)+ --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year............................ $13.16 $11.75 $12.02
==============================================================================================================================
Total Return............................................ 12.19% (2.23)% 0.17%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of year (thousands)..................... $34,680 $28,516 $34,555
Ratio of net operating expense to average net assets
Before expense reimbursement......................... 3.14%2 2.50% 2.32%2
After expense reimbursement.......................... 1.90%2 1.91%* 1.99%2*
Ratio of net investment income (loss) to average net
assets............................................... (0.77)%2 0.95% 0.04%2
Portfolio turnover rate................................. 98.17% 156.13% 123.50%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* Annualized expense ratio excluding interest expense for the period or year
indicated was 1.90%.
+ Amount represents less than $0.01 per share.
1 September 30, 1993 2 Annualized
</FN>
</TABLE>
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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 8. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 10. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 13.
THE DOMESTIC EQUITY FUND
* MONTGOMERY SMALL CAP OPPORTUNITIES FUND
The investment objective of Montgomery Small Cap Opportunities Fund (the "Small
Cap Opportunities Fund") is capital appreciation, which under normal conditions
it seeks by investing at least 65% of its total assets in equity securities of
smallcapitalization domestic companies, which the Fund currently considers to be
companies having total market capitalizations of less than $1 billion. The Small
Cap Opportunities Fund generally invests the remaining 35% of its total assets
in a similar manner but may invest those assets in domestic and foreign
companies having total market capitalizations of $1 billion or more. During the
two to three-month period following commencement of the Fund's operations, the
Fund may have its assets invested substantially in cash and cash equivalents.
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of the companies' developments, such as the introduction of
new products, favorable management changes, new marketing opportunities or
increased market share for existing product lines. Using fundamental research,
the Fund targets businesses having positive internal dynamics that can outweigh
unpredictable macro-economic factors, such as interest rates, commodity prices,
foreign currency rates and overall stock market volatility. The Fund searches
for companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
This Fund invests primarily in common stock. It also may invest in other types
of equity and equity derivative securities (including options on equity
securities, warrants and futures contracts on equity securities). Any debt
securities purchased by the Fund must be rated within the three highest grades
by S&P (AAA to A), Moody's (Aaa to A) or 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 "Portfolio Securities." Current income
from dividends, interest and other sources is only incidental.
The Manager's Growth Equity Team is responsible for managing the Small Cap
Opportunities Fund's portfolio. See "Management of the Fund."
THE INTERNATIONAL FUND
* MONTGOMERY INTERNATIONAL SMALL CAP FUND
The investment objective of Montgomery International Small Cap Fund (the
"International Small Cap Fund") is capital appreciation, which under normal
conditions it seeks by investing at least 65% of its total assets in equity
securities of companies outside the United States having total market
capitalizations of less than $1 billion. The Fund generally invests the
remaining 35% of its total assets in a similar manner but may invest those
assets in companies having market capitalizations of $1 billion or more, or in
debt securities, including up to 5% of its total assets in debt securities rated
below investment grade. See "Portfolio Securities," "Risk Considerations" and
the Appendix in the Statement of Additional Information.
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
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Oscar A. Castro and John D. Boich are responsible for managing the International
Small Cap Fund's portfolio. See "Management of the Funds."
PORTFOLIO SECURITIES
EQUITY SECURITIES
In seeking their respective investment objectives, the Funds emphasize
investments in common stock. The Funds may also invest in other types of equity
securities and equity derivative securities such as preferred stocks,
convertible securities, warrants, units, rights, and options on securities and
on securities indices.
DEPOSITARY RECEIPTS
The Funds may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other similar
global instruments. ADRs typically are issued by a U.S. bank or trust company
and evidence ownership of underlying securities issued by a foreign corporation.
EDRs, sometimes called Continental Depositary Receipts, are issued in Europe,
typically by foreign banks and trust companies, and evidence ownership of either
foreign or domestic underlying securities. Unsponsored ADR and EDR programs are
organized without the cooperation of the issuer of the underlying securities. As
a result, available information concerning the issuer may not be as current as
for sponsored ADRs and EDRs, and the prices of unsponsored ADRs and EDRs may be
more volatile.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) that may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities are
senior to common stock in a corporation's capital structure but are usually
subordinated to similar non-convertible securities. Through their conversion
feature, they provide an opportunity to participate in capital appreciation
resulting from a market price advance in the underlying common stock. The price
of a convertible security is influenced by the market value of the underlying
common stock and tends to increase as the common stock's market value rises and
decrease as the common stock's market value declines. For purposes of allocating
Fund investments, the Manager regards convertible securities as a form of equity
security.
SECURITIES WARRANTS
The Funds may invest up to 5% of their net assets in warrants, including up to
2% of net assets for warrants not listed on a securities exchange. A warrant
typically is a long-term option that permits the holder to buy a specified
number of shares of the issuer's underlying common stock at a specified exercise
price by a particular expiration date. Stock index warrants entitle the holder
to receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. A warrant not exercised or
disposed of by its expiration date expires worthless.
PRIVATIZATIONS
The International Small Cap Fund believes that foreign government programs of
selling interests in government-owned or controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation, and the Fund may invest in privatizations. The ability of U.S.
entities, such as the Fund, to participate in privatizations may be limited by
local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
SPECIAL SITUATIONS
The International Small Cap Fund believes that carefully selected investments in
joint ventures, cooperatives, partnerships, private placements, unlisted
securities and similar vehicles (collectively, "special situations") could
enhance their capital appreciation potential. The Fund also may invest in
certain types of vehicles or derivative securities that represent an indirect
investment in foreign markets or securities in which it is impracticable for the
Fund to directly invest. Investments in special situations may be illiquid, as
determined by the Manager based on criteria reviewed by the Board. The Fund does
not invest more than 15% of its net assets in illiquid investments, including
special situations.
INVESTMENT COMPANIES
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International Small Cap Fund to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment
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companies' portfolio securities and are subject to limitations under the
Investment Company Act. The International Small Cap Fund also may incur tax
liability to the extent it invests in the stock of a foreign issuer that is a
"passive foreign investment company" regardless of whether such "passive foreign
investment company" makes distributions to the Fund. See the Statement of
Additional Information.
The Funds do 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 Funds bear their ratable share of that
investment company's expenses, including advisory and administration fees. In
accordance with applicable state regulatory provisions, the Manager has agreed
to waive its own management fee with respect to the portion of the Funds' assets
invested in other open-end (but not closed-end) investment companies.
DEBT SECURITIES
The International Small Cap Fund may purchase debt securities that complements
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, this Fund will not invest more than 5% of its total assets in debt
securities rated lower than BBB by S&P, Baa by Moody's or BBB by Fitch, or in
unrated debt securities deemed to be of comparable quality by the Manager using
guidelines approved by the Board of Trustees. Subject to this limitation, the
Fund may invest in any debt security, including securities in default. After its
purchase by the Fund a debt security may cease to be rated or its rating may be
reduced below that required for purchase by the Fund. Neither event would
require elimination of that security from the Fund's portfolio. However, a
security downgraded below the Fund's minimum credit levels generally would be
retained only if retention was determined by the Manager and subsequently by the
Board to be in the best interests of the Fund. See "Risk Considerations."
In addition to traditional corporate, government and supranational debt
securities, the International Small Cap 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. The following factors, among others, will influence the proportion of
the International Small Cap Fund's assets to be invested in equity securities
versus debt securities: levels and anticipated trends in inflation and interest
rates; expected rates of economic growth and corporate profits growth; changes
in government policy, including regulations governing industry, trade, financial
markets, and foreign and domestic investment; stability, solvency and expected
trends of government finances; and conditions of the balance of payments and
changes in the terms of trade.
U.S. GOVERNMENT SECURITIES
The Funds may invest in fixed rate and floating or variable rate U.S. Government
securities. Certain of the obligations, including U.S. Treasury Bills, Notes and
Bonds, and mortgage-related securities of the Government National Mortgage
Association ("GNMA"), are issued or guaranteed by the U.S. Government. Other
securities issued by U.S. Government agencies or instrumentalities are supported
only by the credit of the agency or instrumentality, for example those issued by
the Federal Home Loan Bank, while others, such as those issued by the Federal
National Mortgage Association ("FNMA"), Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. Government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Funds' 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.
STRUCTURED NOTES AND INDEXED SECURITIES
The Funds 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
either 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 "Risk
Considerations -- Interest Rates."
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ASSET-BACKED SECURITIES
Each of the Funds may invest up to 5% of its total assets in asset-backed
securities, which represent a direct or indirect participation in, or are
secured by and payable from, pools of assets, such as motor 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. Payments or distributions of principal and interest on asset-backed
securities may be supported by credit enhancements, such as various forms of
cash collateral accounts or letters of credit. Like mortgage-related securities,
these securities are subject to the risk of prepayment. See "Risk
Considerations."
OTHER INVESTMENT PRACTICES
The Funds 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 Objectives and Policies of the
Funds," contains more detailed information about certain of these practices,
including limitations designed to reduce risks.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements. Pursuant to a repurchase
agreement, a Fund acquires a U.S. Government security or other high-grade liquid
debt instrument from a financial institution that simultaneously agrees to
repurchase the same security at a specified time and price. The repurchase price
reflects an agreed-upon rate of return not determined by the coupon rate on the
underlying security. Under the Investment Company Act, repurchase agreements are
considered to be loans by a Fund and must be fully collateralized by cash,
letters of credit, U.S. Government Securities or other high-grade liquid debt
securities ("Segregable Assets"), either placed in a segregated account or
separately identified and rendered unavailable for investment. If the seller
defaults on its obligation to repurchase the underlying security, a 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. See the Statement of Additional
Information for further information.
BORROWING
The Funds may borrow money from banks, each in an aggregate amount not to exceed
one-third of the value of the Fund's total assets, for temporary or emergency
purposes, and the Funds may pledge their assets in connection with such
borrowings. A Fund will not purchase any securities while any such borrowings
exceed 5% of its total assets, except that the International Small Cap Fund may
not purchase securities if such borrowings exceed 10% of its total assets.
REVERSE REPURCHASE AGREEMENTS
The International Small Cap Fund may enter into reverse repurchase agreements.
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. If the Fund fully collateralizes a reverse
repurchase agreement with Segregable Assets, it does not aggregate that
transaction with its bank borrowings in applying its borrowing limit. See the
Statement of Additional Information for further information.
LEVERAGE
Each Fund may leverage its portfolio in an effort 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. To the extent
income derived from securities purchased with borrowed funds exceeds the
interest owed, the Fund's net income will be greater than if leveraging were not
used and, to the extent such income is less, the Fund's net income will be less
than if leveraging were not used.
SECURITIES LENDING
The Funds may lend securities to brokers, dealers and other financial
organizations. These loans may not exceed 10% of the value of a Fund's total
assets. Each securities loan is collateralized with Segregable Assets in an
amount at least equal to the current market value of the loaned securities, plus
accrued interest. See Statement of Additional Information for further
information.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Funds 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
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and payment for the securities take place at a later date, normally 7 to 15 days
or, in the case of certain Collateralized Mortgage Obligation ("CMO") issues, 45
to 60 days later. 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, 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 a Fund. If a 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 a Fund enters into a transaction on a when-issued or forward
commitment basis, it causes its custodian to segregate Segregable Assets equal
to the value of the when-issued or forward commitment securities and causes the
Segregable Assets to be marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
HEDGING AND RISK MANAGEMENT PRACTICES
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds may employ
certain risk management practices using the following derivative securities and
techniques (known as "derivatives"): forward currency exchange contracts, stock
options, currency options, and stock and stock index options, futures contracts,
swaps and options on futures contracts on U.S. Government and foreign government
securities and currencies. The Board has adopted derivative guidelines that
require the Board to review each new type of derivative that may be used by the
Funds. Markets in some countries currently do not have instruments available for
hedging transactions relating to currencies or to securities denominated in such
currencies or to securities of issuers domiciled or principally engaged in
business in such countries. To the extent that such markets do not exist, the
Manager may not be able to hedge its investment effectively in such countries.
Furthermore, a 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. See the Statement of Additional Information for
further information on related risks and other special 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. A 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 Funds generally do not enter into forward contracts with terms greater than
one year.
A Fund generally enters into forward contracts only under two circumstances.
First, if a 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 a Fund's
portfolio securities denominated in such currency. A 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 a Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately predicted.
OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCIES. The Funds may purchase
put and call options on securities and currencies traded on U.S. exchanges and,
to the extent permitted by law, foreign exchanges. 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). Put options allow a Fund
to protect unrealized gain in an appreciated security that it owns without
selling that security. Prior to expiration, most options are expected to be sold
in a closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs.
The Funds also may purchase put and call options on stock indices in order to
hedge against risks of stock market or industry-wide stock price fluctuations. A
Fund may purchase options on currencies in order to hedge its positions in a
manner similar to its use of forward foreign exchange contracts and futures
contracts on currencies.
The Small Cap Opportunities Fund may seek to enhance income or hedge against a
decrease in its portfolio value by writing (i.e., selling) covered call options.
A call option is "covered" if the Fund owns the optioned securities or has the
right to acquire such securities without additional consideration, the Fund
causes its custodian to segregate Segregable Assets having a value sufficient to
meet its obligations under the option, or the Fund owns an offsetting call
option.
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FUTURES AND OPTIONS ON FUTURES. To protect against the effect of adverse changes
in interest rates, a 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. A
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. Conversely, a Fund may purchase an interest rate futures
contract (i.e., enter into a futures contract to purchase an underlying
security) to hedge against interest rate decreases and corresponding increases
in the value of debt securities it anticipates purchasing. In addition, a 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. Each Fund
segregates Segregable Assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
A Fund does not enter into any futures contracts or related options if the sum
of initial margin deposits on futures contracts, related options (including
options on securities, securities indices and currencies) and premiums paid for
any such related options would exceed 5% of its total assets. A Fund does not
purchase futures contracts or related options if, as a result, more than
one-third of its total assets would be so invested.
HEDGING CONSIDERATIONS. There can be no assurance that hedging transactions by
the Funds will be successful, and a Fund may be exposed to risk if it is unable
to close out its futures or options positions due to an illiquid secondary
market. Futures, options and options on futures have effective durations that,
in general, are closely related to the effective duration of their underlying
securities. Holding purchased futures or call option positions (backed by
Segregable Assets) lengthens the effective duration of a Fund's portfolio. While
the utilization of options, futures contracts and related options and similar
instruments may be advantageous to a Fund, its performance will be impaired if
the Manager is unsuccessful in employing such instruments or in predicting
market changes. In addition, a Fund pays commissions and other costs in
connection with such investments. Further discussion of the possible risks is
contained in the Statement of Additional Information.
ILLIQUID SECURITIES
Neither Fund may invest more than 15% of its net assets in illiquid securities.
The Funds treat 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 Funds also treat 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. State securities laws may impose further limitations on the amount of
illiquid or restricted securities a Fund may purchase.
DEFENSIVE INVESTMENTS AND PORTFOLIO TURNOVER
Notwithstanding its investment objective, each 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 a 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 a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate,
regardless of how long the securities have been held. The Manager therefore
changes a 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 a 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. For the fiscal year ended June 30,
1995, the portfolio turnover for the International Small Cap Fund was 156% (124%
for 1994). The annual portfolio turnover for the Small Cap Opportunities Fund is
expected to be approximately 100%. However, even when portfolio turnover exceeds
100% for a Fund that Fund does not regard portfolio turnover as a limiting
factor.
INVESTMENT RESTRICTIONS
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by the Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment
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<PAGE>
in light of their then-current financial positions and needs. The Funds are
subject to additional investment policies and restrictions described in the
Statement of Additional Information, some of which are fundamental.
The Small Cap Opportunities 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 Funds emphasize 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, 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
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds. The
Funds have the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. The
International Small Cap Fund may invest in securities of companies domiciled in,
and in the markets of, so-called "emerging market countries." These investments
may be subject to higher risks than investments in more developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, the Funds 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 Funds 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 a Fund to make intended security
purchases due to settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security due to
settlement problems could result in loss to the Fund if the value of the
portfolio security declined or result in claims against the Fund if it had
entered into a contract to sell the security. In certain countries, there is
less government supervision and regulation of business and industry practices,
stock exchanges, brokers, and listed companies than in the U.S. The securities
markets of many of the countries in which the Funds 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 Funds may be denominated in foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. A Fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange between the currencies of different nations, and a Fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Manager's ability to predict movements in exchange rates.
Some countries in which one of the Funds may invest may also have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities
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<PAGE>
markets. Moreover, the economies of some countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments.
Certain countries also limit the amount of foreign capital that can be invested
in their markets and local companies, creating a "foreign premium" on capital
investments available to foreign investors such as the Fund. The Fund may pay a
"foreign premium" to establish an investment position which it cannot later
recoup because of changes in that country's foreign investment laws.
LOWER QUALITY DEBT
The International Small Cap Fund is authorized to invest in medium-quality
(rated or equivalent to BBB by S&P or Fitch's or Baa by Moody's) and in limited
amounts of high-risk, lower quality debt securities (i.e., securities rated
below BBB or Baa) or, if unrated, deemed to be of equivalent investment quality
as determined by the Manager. Medium quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, the International Small Cap Fund does not invest more than 5% of its
total assets in debt securities rated lower than BBB by S&P or Baa by Moody's
or, if unrated, deemed to be of comparable quality as determined by the Manager
using guidelines approved by the Board. The Board may consider a change in this
operating policy if, in its judgment, economic conditions change such that a
higher level of investment in high- risk, lower quality debt securities would be
consistent with the interests of the Fund and its shareholders. Unrated debt
securities are not necessarily of lower quality than rated securities but may
not be attractive to as many buyers. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) are analyzed by
the Manager to determine, to the extent reasonably possible, that the planned
investment is sound. From time to time, the Fund may purchase defaulted debt
securities if, in the opinion of the Manager, the issuer may resume interest
payments in the near future.
INTEREST RATES
The market value of debt securities that are sensitive to prevailing interest
rates is inversely related to actual changes in interest rates. That is, an
interest rate decline produces an increase in a security's market value and an
interest rate increase produces a decrease in value. 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 a 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.
Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, affecting a Fund's yield. 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.
Duration is one of the fundamental tools used by the Manager in managing
interest rate risks including prepayment risks. Fixed-income securities with
effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. If interest rates
rise by 1%, the value of securities having an effective duration of three years
will decrease by 3%. See "The Funds' Investment Objectives and Policies."
MANAGEMENT OF THE FUNDS
The Montgomery Funds (the "Trust") has a Board of Trustees that establishes the
Funds' policies and supervises and reviews their management. Day-to-day
operations of the Funds are administered by the officers of the Trust and by the
Manager pursuant to the terms of an investment management agreement with each
Fund.
Montgomery Asset Management, L.P., is the Funds' 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 Funds. Its
general partner is Montgomery Asset Management, Inc., and its sole limited
partner is Montgomery Securities, the Funds' 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
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upon the research and administrative resources of Montgomery Securities in its
discretion and consistent with applicable regulations.
Founded in 1969, Montgomery Securities is a fully integrated and highly focused
investment banking partnership specializing in emerging growth companies. The
firm's areas of expertise include research, corporate finance, sales and
trading, and venture capital. Its research department is one of the largest,
most experienced groups headquartered outside the East Coast. Through its
corporate finance department, Montgomery Securities is a well recognized
underwriter of public offerings and provides broad distribution of securities
through its sales and trading organization.
PORTFOLIO MANAGERS
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
The Manager's Growth Equity Team, which consists of many experienced investment
professionals working as an investment committee, is responsible for managing
the Fund's portfolio. In the future, the Manager may focus responsibility for
managing the Fund on one or two portfolio managers, but will notify Fund
shareholders in advance of that development.
MONTGOMERY INTERNATIONAL SMALL CAP FUND
Oscar A. Castro is a Managing Director and Portfolio Manager. Before joining the
Manager, he was vice president/portfolio manager at G.T. Capital Management,
Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder and co-manager of
The Common Goal World Fund, a global equity partnership. From 1987 to 1989, he
was deputy portfolio manager/analyst at Templeton International.
John D. Boich is a Managing Director and Portfolio Manager. From 1990 to 1993,
he was vice president and portfolio manager at The Boston Company Institutional
Investors Inc. From 1989 to 1990, he 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.
MANAGEMENT FEES AND OTHER EXPENSES
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services, and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trust's Boards
of Trustees who are interested persons of the Manager, and assumes the cost of
printing prospectuses and shareholder reports for dissemination to prospective
investors. As compensation, each Fund pays the Manager a management fee (accrued
daily but paid when requested by the Manager) based upon the value of the
average daily net assets of that Fund, according to the following table.
<TABLE>
The management fees for the Funds are higher than for most mutual funds.
<CAPTION>
Average Daily Net Assets Annual Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
- -----------------------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: seven one-hundredths of one percent
(0.07%) of average daily net assets (0.06% of daily net assets over $250
million).
Each 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 that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
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<PAGE>
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of each Fund
have approved, and each Fund has entered into, a Share Marketing Plan (the
"Plan") with the Manager, as the distribution coordinator, for the Class P
shares. Under the Plan, each Fund will pay distribution fees to the Manager at
an annual rate of 0.25% of the Fund's aggregate average daily net assets
attributable to its Class P shares, to reimburse the Manager for its
distribution costs with respect to that Class.
The Plan provides that the Manager may use the distribution fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited to (i) incentive compensation paid to the directors, officers and
employees of, agents for and consultants to, the Manager or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Funds to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that Class; and (iv) costs involved obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that Class. Distribution fees are accrued daily and paid
monthly, and are charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Funds and the shareholders
of Class P shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for their consideration
in connection with their deliberations as to the continuance of the Plan. In
their review of the Plan, the Board of Trustees are asked to take into
consideration expenses incurred in connection with the separate distribution of
the Class P shares.
The Class P shares are not obligated under the Plan to pay any distribution
expenses in excess of the distribution fee. Thus, if the Plan was terminated or
otherwise not continued, no amounts (other than current amounts accrued but not
yet paid) would be owed by the Class to the Manager.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through financial planners, retirement and
pension plan administrators, broker-dealers and other financial intermediaries
without the assessment of a front-end sales charge and at the same time to
permit the Manager to compensate those persons on an ongoing basis in connection
with the sale of the Class P shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trusts, including a majority of
the Trustees who are not "interested persons" of the Trusts (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the Independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
All distribution fees paid by the Funds under the Plan will be paid in
accordance with Article III, Section 26 of the Rules of Fair Practice of the
NASD, as such Section may change from time to time.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses at or below the lesser of the
maximum allowable by applicable state expense limitations or the following
percentages of each Fund's average net assets: the Small Cap Opportunities Fund,
one and seventy-five one-hundredths of one percent (1.75%); the International
Small Cap Fund, two and fifteen one-hundredths of one percent (2.15%). The
Manager also may voluntarily reduce additional amounts to increase the return to
a Fund's investors. The Manager may terminate these voluntary reductions at any
time. Any reductions made by the Manager in its fees are subject to
reimbursement by that 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 Funds for fees and
expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay in order to increase the return to that Fund's investors. To
the extent the Manager performs a service or assumes an operating expense for
which a 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 that
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
and other intermediaries that distribute a Fund's shares as well as other
service providers of shareholder and
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<PAGE>
administrative services. In addition, the Manager, out of its own funds, may
sponsor seminars and educational programs on the Funds for financial
intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each 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 Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. It is anticipated that Montgomery Securities
may act as one of the Funds' brokers in the purchase and sale of portfolio
securities and, in that capacity, will receive brokerage commissions from the
Funds. The Funds 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 Funds (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 Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
HOW TO INVEST IN THE FUNDS
The Funds' shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Funds' shares are offered for
sale by Montgomery Securities, the Funds' 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, or Montgomery Securities or certain administrators of 401(k) and other
retirement plans by 4:00 P.M., New York time, on any day that the New York Stock
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders for Fund shares received after
4:00 p.m., New York time, will be purchased at the next-determined net asset
value after receipt of the order.
The minimum initial investment in each Fund is $500 (including IRAs) and $100
for subsequent investments. Keogh plans, 401(k) plans and other retirement plans
may also be opened for $500, although the Funds do not act as custodians for
those accounts. The Manager or the Distributor, in its discretion, may waive
these minimums. Purchases may also be made in certain circumstances by payment
of securities. See the Statement of Additional Information for further details.
Complete information regarding your account must be included in all wire
instructions in order to facilitate the prompt and accurate handling of
investments. Investors may obtain further information from their own banks about
wire transfers and any fees that may be imposed. The Funds and the Distributor
each reserve the right to reject any purchase order in whole or in part.
INITIAL INVESTMENTS
Minimum Initial Investment (including IRAs): $1,000
Mail your completed application and any checks to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
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<PAGE>
INITIAL INVESTMENTS BY CHECK
O Complete the Account Application.
O Tell us in which Funds you want to invest and make your
check payable to THE MONTGOMERY FUNDS.
O We do not accept third party checks or cash investments.
Checks must be in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
O A charge may be imposed on checks that do not clear.
INITIAL INVESTMENTS BY WIRE
O Notify the Transfer Agent at (800) 572-3863 that you intend
to make your initial investment by wire. Provide the
Transfer Agent with your name, dollar amount to be invested
and Fund(s) in which you want to invest. They will provide
you with further instructions to complete your purchase.
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 Fund name)
O Your bank may charge a fee for any wire transfers.
SUBSEQUENT INVESTMENTS
Minimum Subsequent Investment (including IRAs): $100
Mail any checks and investment instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141-6073
SUBSEQUENT INVESTMENTS BY CHECK
O Make your check payable to The Montgomery Funds.
O Enclose an investment stub from your confirmation statement.
O If you do not have an investment stub, mail your check with
written instructions indicating the Fund name and account
number to which your investment should be credited.
O We do not accept third party checks or cash investments.
Checks must be made in U.S. dollars and, to avoid fees and
delays, drawn only on banks located in the U.S.
O A charge may be imposed on checks that do not clear.
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SUBSEQUENT INVESTMENTS BY WIRE
O You do not need to contact the Transfer Agent prior to
making subsequent investments by wire. Instruct your bank to
wire funds to the Transfer Agent's affiliated bank by using
the bank wire information under "Initial Investments by
Wire."
SUBSEQUENT INVESTMENTS BY TELEPHONE
O Shareholders are automatically eligible to make telephone
purchases. To make a purchase, call the Transfer Agent at
(800) 572-3863 before the Fund cutoff time.
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.
O Shares for IRAs are not eligible for telephone purchases.
O You should do one of the following to ensure payment is
received in time:
O Transfer funds directly from your bank account
by sending a letter and a voided check or
deposit slip (for a savings account) to the
Transfer Agent.
O Send a check by overnight or 2nd day courier
service. Address courier packages to THE
MONTGOMERY FUNDS, C/O DST SYSTEMS, INC., 1004
BALTIMORE ST., KANSAS CITY, MO 64105.
O Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire
information under the section titled "Initial
Investments by Wire."
AUTOMATIC ACCOUNT BUILDER
Under the Automatic Account Builder plan, a shareholder may arrange to make
additional purchases (minimum $100) of shares automatically on a monthly or
quarterly basis by electronic funds transfer from a checking or savings account,
if the bank at which the account is maintained is a member of the Automated
Clearing House, or by preauthorized checks drawn on the shareholder's bank
account. A shareholder may terminate the program at any time with seven business
days' notice by delivering a written instruction to the Transfer Agent. The
Account Application contains the requirements for this program. An initial
investment in check form of at least $1,000 must be submitted to the Transfer
Agent to initiate this program.
TELEPHONE TRANSACTIONS
You agree to reimburse the Funds for any expenses or losses that they may incur
in connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Funds upon 30 days' written notice or at any time by you by written
notice to the Funds. Your request will be processed upon receipt.
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Write your confirmed purchase number on any check. 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 a Fund. The Funds
or the Transfer Agent will not be liable for following instructions communicated
by telephone reasonably believed to be genuine. The Funds employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures include recording the telephone conversation 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 Funds are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. None of the Funds or the
Manager administers retirement account plans. Certain of the Funds are 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 Funds for performing shareholder services.
SHARE CERTIFICATES
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
HOW TO REDEEM AN INVESTMENT IN THE FUNDS
The Funds 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 Funds may
suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the SEC. In the case of shares purchased by check
and redeemed shortly after the purchase, the Transfer Agent will not mail
redemption proceeds until it has been notified that the monies used for the
purchase have been collected, which may take up to 15 days from the purchase
date. Shares tendered for redemptions through brokers or dealers (other than the
Distributor) may be subject to a service charge by such brokers or dealers.
Procedures for requesting a redemption are set forth below. SHAREHOLDERS SHOULD
NOTE THAT THE FUNDS RESERVE THE RIGHT UPON 60 DAYS' ADVANCE NOTICE TO
SHAREHOLDERS TO IMPOSE A REDEMPTION FEE OF UP TO 1.00% ON SHARES REDEEMED WITHIN
90 DAYS OF PURCHASE.
REDEEMING BY WRITTEN INSTRUCTION
O Write a letter indicating your name, account
number, the name of the Fund from which you wish
to redeem and the dollar amount or number of
shares you wish to redeem.
O Signature guarantee your letter if you want the
redemption proceeds to go to a party other than
the account owner(s), your predesignated bank
account or if the dollar amount of the redemption
exceeds $50,000. Signature guarantees may be
provided by an eligible guarantor institution such
as a commercial bank, an NASD member firm such as
a stock broker, a savings association or national
securities exchange. Contact the Transfer Agent if
you need more information.
O If you do not have a predesignated bank account
and want to wire your redemption proceeds, include
a voided check or deposit slip with your letter.
The minimum amount that may be wired is $500 (wire
charges, if any, will be deducted from redemption
proceeds). The Fund reserves the right to permit
lesser wire amounts or fees in the Manager's
discretion.
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<PAGE>
O Mail your instructions to:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 419073
Kansas City, MO 64141
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.
By establishing telephone redemption privileges, a shareholder authorizes the
Funds 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. Telephone redemption privileges will be suspended for 30 days after
any address change. All redemption requests during this period must be submitted
in writing with the signature guaranteed. The Funds may change, modify or
terminate these privileges at any time upon 60 days' notice to shareholders. The
Funds 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 decline telephone redemption privileges after an account is
opened by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire) of $100 or more from the shareholder's account in
that Fund on a monthly or quarterly basis. 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. Dividends and distributions on shares held in a Systematic Withdrawal
Plan account will be reinvested in additional shares of that Fund at net asset
value.
SMALL ACCOUNTS/ANNUAL ACCOUNT MAINTENANCE FEE
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to redeem shares or to impose a $20 annual account
maintenance fee for any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
a 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
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<PAGE>
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 with the same registration, taxpayer
identification number and address. You should note that an exchange may result
in recognition of a 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 Funds'
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 Fund's
shares are qualified for sale and only for Funds offered by this
prospectus.
O You may not exchange for shares of a 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, EITHER TEMPORARILY OR PERMANENTLY,
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 A FUND
RECEIVES, OR THE MANAGER ANTICIPATES, SIMULTANEOUS ORDERS AFFECTING
SIGNIFICANT PORTIONS OF THAT 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, IT 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.
BROKERS AND OTHER INTERMEDIARIES
INVESTING THROUGH SECURITIES BROKERS, DEALERS AND FINANCIAL INTERMEDIARIES
Investors may purchase shares of a 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.
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<PAGE>
REPURCHASE ORDERS THROUGH BROKERAGE ACCOUNTS
Shareholders also may sell shares back to the Funds by wire or telephone through
Montgomery Securities or selected securities brokers or dealers. Shareholders
should contact their securities broker or dealer for appropriate instructions
and for information concerning any transaction or service fee that may be
imposed by the broker or dealer. Shareholders are entitled to the net asset
value next determined after receipt of a repurchase order by such broker-dealer,
provided the broker-dealer transmits such 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 each 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 each Fund's total net assets by the
total number of that 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.
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 Funds
determine their net asset values, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Funds calculate their net asset value may not be reflected in the Funds'
calculation of net asset values unless the Manager, under supervision of the
Board, determines that a particular event would materially affect a Fund's net
asset value.
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. Each Fund currently intends to make one
or, if necessary to avoid the imposition of tax on a 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 each
Fund's fiscal year end (June 30). The amount and frequency of Fund distributions
are not guaranteed and are at the discretion of the Board.
Unless investors request cash distributions in writing at least seven business
days prior to the distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional Class P
shares of the applicable Fund and credited to the shareholder's account at the
closing net asset value on the reinvestment date.
TAXATION
Except for the newer Funds that intend to qualify and elect as soon as possible,
each of the Funds has qualified and elected and intends to continue to qualify
and elect 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 Funds generally will not be liable for federal income tax or
excise tax based on net income except to the extent their earnings are not
distributed
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<PAGE>
or are distributed in a manner that does not satisfy the requirements of the
Code pertaining to the timing of distributions. If a Fund is unable to meet
certain Code requirements, it may be subject to taxation as a corporation. The
International Small Cap Fund may also incur tax liability to the extent it
invests in "passive foreign investment companies." See "Portfolio Securities"
and 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 Funds are considered ordinary
income. Part of the distributions paid by the Funds 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 a 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 Funds.
Each 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 Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
GENERAL INFORMATION
THE TRUST
All of the Funds are series of The Montgomery Funds, a Massachusetts business
trust organized on May 10, 1990. The Agreement and Declarations of the 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 of the Trust are separate and distinct from each
other series.
This Prospectus relates only to the Class P shares of the Funds. The Funds have
designated other classes of shares and may in the future designate other classes
of shares for specific purposes.
SHAREHOLDER RIGHTS
Shares issued by the Funds 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 each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of the Trust,
votes separately on matters affecting only that 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 of the Trust. Except
as set forth herein, all classes of shares issued by a 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 Trust's 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 Funds may publish their total return, and, in the case of
certain Funds, current yield in advertisements and communications to investors.
Performance data may be quoted separately for the Class P shares as for other
classes. Total
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<PAGE>
return information generally will include a 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. A Fund may also advertise aggregate and
average total return information over different periods of time. Each Fund's
average annual compounded rate of return is determined by reference to a
hypothetical $1,000 investment that includes capital appreciation and
depreciation for the stated period according to a specific formula. Aggregate
total return is calculated in a similar manner, except that the results are not
annualized. Total return figures will reflect all recurring charges against each
Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized.
See "Performance Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield 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. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND.
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 Funds 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 Funds of an amount of 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
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<PAGE>
item in the Account Application. Dividends paid to a foreign shareholder's
account by a 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 Funds' official sales literature.
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INVESTMENT MANAGER
Montgomery Asset Management, L.P.
600 Montgomery 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
1-800-572-3863
AUDITORS
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
