As filed with the Securities and Exchange Commission on December 30, 1997
Registration Nos. 33-34841
811-6011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 56
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 57
THE MONTGOMERY FUNDS
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
1-800-572-3863
(Registrant's Telephone Number, Including Area Code)
Greg M. Siemons, Assistant Secretary
Montgomery Asset Management, LLC
101 California Street
San Francisco, CA 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
_X_ immediately upon filing pursuant to Rule 485(b)
___ on __________________ pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)(1)
___ 75 days after filing pursuant to Rule 485(a)(2)
___ on _________________ pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1997 was filed on August 28, 1997.
-------------------------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
-2-
<PAGE>
THE MONTGOMERY FUNDS
CONTENTS OF POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the
Registrant contains the following documents.*
Facing Sheet
Contents of Post-Effective Amendment
Cross-Reference Sheet for Class R, Class P and Class L shares of
Montgomery Growth Fund, Montgomery Small Cap Opportunities
Fund, Montgomery Small Cap Fund, Montgomery Micro Cap Fund,
Montgomery Equity Income Fund, Montgomery International Growth
Fund, Montgomery International Small Cap Fund, Montgomery
Emerging Markets Fund, Montgomery Emerging Asia Fund,
Montgomery Latin America Fund, Montgomery Global Opportunities
Fund, Montgomery Global Communications Fund, Montgomery Select
50 Fund, Montgomery U.S. Asset Allocation Fund, Montgomery
Global Asset Allocation Fund, Montgomery Total Return Bond
Fund, Montgomery Short Duration Government Bond Fund,
Montgomery Government Reserve Fund, Montgomery California
Tax-Free Intermediate Bond Fund, Montgomery California
Tax-Free Money Fund and Montgomery Federal Tax-Free Money Fund
Part A - Incorporation of documents in Post-Effective Amendment No.
54 of the Registrant, filed October 15, 1997.
Part B - Statement of Additional Information for Montgomery Growth
Fund, Montgomery Small Cap Opportunities Fund, Montgomery
Small Cap Fund, Montgomery Micro Cap Fund, Montgomery Equity
Income Fund, Montgomery International Growth Fund, Montgomery
International Small Cap Fund, Montgomery Emerging Markets
Fund, Montgomery Emerging Asia Fund, Montgomery Latin America
Fund, Montgomery Global Opportunities Fund, Montgomery Global
Communications Fund, Montgomery Select 50 Fund, Montgomery
U.S. Asset Allocation Fund, Montgomery Global Asset Allocation
Fund, Montgomery Total Return Bond Fund, Montgomery Short
Duration Government Bond Fund, Montgomery Government Reserve
Fund, Montgomery California Tax-Free Intermediate Bond Fund,
Montgomery California Tax-Free Money Fund and Montgomery
Federal Tax-Free Money Fund
Part C - Other Information
Signature Page
Exhibits
- -------------------
* This Amendment does not relate to the following documents: the
prospectus for the Class P shares for Montgomery Growth Fund, Montgomery Small
Cap Opportunities Fund, Montgomery Equity Income Fund, Montgomery International
Growth Fund, Montgomery International Small Cap Fund, Montgomery Emerging
Markets Fund, Montgomery Select 50 Fund, Montgomery U.S. Asset Allocation Fund,
Montgomery Short Duration Government Bond Fund, Montgomery Government Reserve
Fund; the prospectus for the Class P shares of Montgomery Small Cap Fund,
Montgomery Equity Income Fund, Montgomery Emerging Markets Fund; the prospectus
for Montgomery Emerging Markets Fund; the prospectus and Statement of Additional
Information for Montgomery Emerging Europe Fund; the prospectuses and Statement
of Additional Information for Montgomery High Yield Bond Fund and all of its
classes; the prospectus and Statement of Additional Information for Montgomery
Technology Fund; the prospectus and Statement of Additional Information for
Montgomery Growth & Income Fund; and the prospectuses and SAI for Montgomery
Japan Small Cap Fund, and all of its classes.
-3-
<PAGE>
THE MONTGOMERY FUNDS
<TABLE>
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(For Combined Prospectus)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Fees and Expenses of the Funds"
3. Condensed Financial Information Not Applicable
4. General Description of Registrant Cover Page,
"The Funds' Investment Objectives and Policies,"
"Portfolio Securities," "Other Investment Practices,"
"Risk Considerations" and "General Information"
5. Management of "The Funds' Investment Objectives and Policies,"
the Fund "Management of the Funds" and
"How to Invest in the Funds"
5A. Management's Discussion Not Applicable
of Fund Performance
6. Capital Stock and "Dividends and Distributions,"
Other Securities "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Fund,"
Being Offered "How Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the Funds" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
-4-
<PAGE>
Part B: Information Required in
Statement of Additional Information
(Combined Statement of Additional Information)
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------
10. Cover Page Cover Page
11. Table of Content Table of Contents
12. General Information and History "The Trusts" and "General Information"
13. Investment Objectives "Investment Objectives and Policies of the Funds,"
"Risk Factors" and "Investment Restrictions"
14. Management of the Registrant "Trustees and Officers"
15. Control Persons and Principal "Trustees and Officers" and
Holders of Securities "General Information"
16. Investment Advisory and other "Investment Management and Other Services"
Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and Other Securities "The Trusts" and "General Information"
19. Purchase, Redemption and Pricing "Additional Purchase and Redemption Information"
of Securities Being Offered and "Determination of Net Asset Value"
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of Performance Data "Performance Information"
23. Financial Statements "Financial Statements"
</TABLE>
-5-
<PAGE>
--------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
MONTGOMERY GROWTH FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY MICRO CAP FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY LATIN AMERICA FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY U.S. ASSET ALLOCATION FUND
MONTGOMERY GLOBAL ASSET ALLOCATION FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
(800) 572-FUND (3863)
STATEMENT OF ADDITIONAL INFORMATION
October 15, 1997, as supplemented December 30, 1997
The Montgomery Funds and The Montgomery Funds II are open-end
management investment companies organized, respectively, as a Massachusetts and
a Delaware business trust (together, the "Trusts"), each having different series
of shares of beneficial interest. Each of the above-named funds is a series of
The Montgomery Funds, with the exception of the Montgomery U.S. Asset Allocation
Fund, which is a series of The Montgomery Funds II (each a "Fund" and,
collectively, the "Funds"). The Funds are managed by Montgomery Asset
Management, LLC (the "Manager") and their shares are distributed by Funds
Distributor, Inc.(the "Distributor"). This Statement of Additional Information
contains information in addition to that set forth in the following prospectuses
dated October 15, 1997: The combined Prospectus for the Class R shares for all
Funds; the P-Class Shares Prospectus, The G.E. Investment Retirement Services
Prospectus and the Montgomery Emerging Markets Fund Prospectus, and as each
prospectus may be revised from time to time (in reference to the appropriate
Fund or Funds, the "Prospectuses"). The Prospectuses provide the basic
information a prospective investor should know before purchasing shares of any
Fund and may be obtained without charge at the address or telephone number
provided above. This Statement of Additional Information is not a prospectus and
should be read in conjunction with the appropriate Prospectuses.
1
<PAGE>
TABLE OF CONTENTS
Page
----
STATEMENT OF ADDITIONAL INFORMATION............................................1
THE TRUSTS.....................................................................3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS................................3
RISK FACTORS..................................................................19
INVESTMENT RESTRICTIONS.......................................................25
DISTRIBUTIONS AND TAX INFORMATION.............................................28
TRUSTEES AND OFFICERS.........................................................33
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................36
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................41
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................44
DETERMINATION OF NET ASSET VALUE..............................................46
PRINCIPAL UNDERWRITER.........................................................48
PERFORMANCE INFORMATION.......................................................48
GENERAL INFORMATION...........................................................55
FINANCIAL STATEMENTS..........................................................64
Appendix......................................................................65
2
<PAGE>
THE TRUSTS
The Montgomery Funds is an open-end management investment company
organized as a Massachusetts business trust on May 10, 1990, and The Montgomery
Funds II is an open-end management investment company organized as a Delaware
business trust on September 10, 1993. Both are registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act")The Trusts
currently offer shares of beneficial interest, $.01 par value per share, in
various series. Each series offers three classes of shares (Class R, Class P and
Class L).
This Statement of Additional Information pertains to twenty series of
The Montgomery Funds: Montgomery Growth Fund (the "Growth Fund"); Montgomery
Small Cap Opportunities Fund (the "Small Cap Opportunities Fund"); Montgomery
Small Cap Fund (the "Small Cap Fund"); Montgomery Micro Cap Fund (the "Micro Cap
Fund"); Montgomery Equity Income Fund (the "Equity Income Fund"); Montgomery
International Growth Fund (the "International Growth Fund"); Montgomery
International Small Cap Fund (the "International Small Cap Fund"); Montgomery
Emerging Markets Fund (the "Emerging Markets Fund"); Montgomery Emerging Asia
Fund (the "Emerging Asia Fund"); Montgomery Latin America Fund (the "Latin
America Fund"); Montgomery Global Opportunities Fund (the "Opportunities Fund");
Montgomery Global Communications Fund (the "Communications Fund"); Montgomery
Select 50 Fund (the "Select 50 Fund"); Montgomery Global Asset Allocation Fund
(the "Global Asset Allocation Fund"); Montgomery Total Return Bond Fund (the
"Total Return Bond Fund"); Montgomery Short Duration Government Bond Fund
(formerly called the "Montgomery Short Government Bond Fund," the "Short Bond
Fund"); Montgomery Government Reserve Fund (the "Reserve Fund"); Montgomery
California Tax-Free Intermediate Bond Fund (the "California Intermediate Bond
Fund") and Montgomery California Tax-Free Money Fund (the "California Money
Fund"); Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund"); as
well as one series of The Montgomery Funds II, Montgomery U.S. Asset Allocation
Fund, which was formerly called the Montgomery Asset Allocation Fund (the "U.S.
Asset Allocation Fund").
Throughout this Statement of Additional Information, certain Funds may
be referred to together using the following terms: the Growth, Small Cap
Opportunities, Small Cap, Micro Cap and Equity Income Funds as the "U.S. Equity
Funds"; the International Growth, International Small Cap, Emerging Markets,
Emerging Asia, Latin America, Opportunities and Communications Funds as the
"Foreign and Global Equity Funds"; the Select 50, U.S. Asset Allocation and
Global Asset Allocation Funds as the "Multi-Strategy Funds"; the Total Return
Bond, Short Bond and California Intermediate Bond Funds as the "Fixed Income
Funds"; the California Intermediate Bond, California Money and Federal Money
Funds as the "Tax-Free Funds"; the Reserve, California Money and Federal Money
Funds as the "Money Market Funds"; and all of the Funds other than the Tax-Free
Funds as the "Taxable Funds."
Note that the two Trusts share responsibility for the accuracy of the
Prospectuses and this Statement of Additional Information, and that each Trust
may be liable for misstatements in the Prospectuses and the Statement of
Additional Information that relate solely to the other Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The investment objectives and policies of the Funds are described in
detail in the Prospectus. The following discussion supplements the discussion in
the Prospectus.
<PAGE>
Each Fund is a diversified series, except for the Tax-Free Funds, which
are nondiversified series, of either the Montgomery Funds or The Montgomery
Funds II. The achievement of each Fund's investment objective will depend upon
market conditions generally and on the Manager's analytical and portfolio
management skills.
The U.S. Asset Allocation Fund and the Global Asset Allocation Fund are
funds-of-funds. Other than U.S. government securities, neither the U.S. Asset
Allocation Fund nor the Global Asset Allocation Fund owns securities of their
own. Instead, each of the U.S. Asset Allocation Fund and the Global Asset
Allocation Fund invests its assets in a number of funds in The Montgomery Funds
family (each, an "Underlying Fund")Investors of the U.S. Asset Allocation Fund
and the Global Asset Allocation Fund should therefore review the discussion in
this Statement of Additional Information that relates to each Underlying Fund of
the U.S. Asset Allocation Fund and the Global Asset Allocation Fund.
Portfolio Securities
Depositary Receipts. To the extent allowed in the Prospectus, a Fund
may hold securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other similar
global instruments available in emerging markets, or other securities
convertible into securities of eligible issuers. These securities may not
necessarily be denominated in the same currency as the securities for which they
may be exchanged. Generally, ADRs in registered form are designed for use in
U.S. securities markets, and EDRs and other similar global instruments in bearer
form are designed for use in European securities markets. For purposes of a
Fund's investment policies, a Fund's investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. Each Fund, to the extent permitted by the
prospectus, may invest in securities issued by other investment companies. Those
investment companies must invest in securities in which the Fund can invest in a
manner consistent with the Fund's investment objective and policies. Applicable
provisions of the Investment Company Act require that a Fund limit its
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 10% (or 35% for the Money Market Funds) of the value of
a Fund's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either (i) a Fund and affiliated
persons of that Fund not own together more than 3% of the total outstanding
shares of any one investment company at the time of purchase (and that all
shares of the investment company held by that Fund in excess of 1% of the
company's total outstanding shares be deemed illiquid), or (ii) a Fund not
invest more than 5% of its total assets in any one investment company and the
investment not represent more than 3% of the total outstanding voting stock of
the investment company at the time of purchase. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that Fund bears directly in connection with its own operations.
U.S. Government Securities. Some funds may, to the extent allowed by
the prospectus invest a substantial portion, if not all, of their net assets in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities"), these Funds generally will
have a lower yield than if they purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
<PAGE>
Generally, the value of U.S. Government securities held by these Funds
will fluctuate inversely with interest rates. U.S. Government securities in
which these Funds may invest include debt obligations of varying maturities
issued by the U.S. Treasury or issued or guaranteed by an agency or
instrumentality of the U.S. Government, including the Federal Housing
Administration ("FHA"), Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Bank, Farm Credit System Financial Assistance
Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Financing
Corporation, Federal Financing Bank, Federal National Mortgage Association
("FNMA"), Maritime Administration, Tennessee Valley Authority, Resolution
Funding Corporation, Student Loan Marketing Association and Washington
Metropolitan Area Transit Authority. Direct obligations of the U.S. Treasury
include a variety of securities that differ primarily in their interest rates,
maturities and dates of issuance. Because the U.S. Government is not obligated
by law to provide support to an instrumentality that it sponsors, a Fund will
not invest in obligations issued by an instrumentality of the U.S. Government
unless the Manager determines that the instrumentality's credit risk makes its
securities suitable for investment by the Fund.
Mortgage-Related Securities: Government National Mortgage Association.
GNMA is a wholly owned corporate instrumentality of the U.S. Government within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of, and interest on, securities that are based on and
backed by a pool of specified mortgage loans. For these types of securities to
qualify for a GNMA guarantee, the underlying collateral must be mortgages
insured by the FHA under the Housing Act, or Title V of the Housing Act of 1949,
as amended ("VA Loans"), or be pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the U.S. Government is
pledged to the payment of all amounts that may be required to be paid under any
guarantee. In order to meet its obligations under a guarantee, GNMA is
authorized to borrow from the U.S. Treasury with no limitations as to amount.
GNMA pass-through securities may represent a proportionate interest in
one or more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans; (3)
fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured
by manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
Mortgage-Related Securities: Federal National Mortgage Association.
FNMA is a federally chartered and privately owned corporation established under
the Federal National Mortgage Association Charter Act. FNMA was originally
organized in 1938 as a U.S. Government agency to add greater liquidity to the
mortgage market. FNMA was transformed into a private sector corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
<PAGE>
Each FNMA pass-through security represents a proportionate interest in
one or more pools of FHA Loans, VA Loans or conventional mortgage loans (that
is, mortgage loans that are not insured or guaranteed by any U.S. Government
agency)The loans contained in those pools consist of one or more of the
following: (1) fixed-rate level payment mortgage loans; (2) fixed-rate growing
equity mortgage loans; (3) fixed-rate graduated payment mortgage loans; (4)
variable-rate mortgage loans; (5) other adjustable-rate mortgage loans; and (6)
fixed-rate mortgage loans secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage Corporation.
FHLMC is a corporate instrumentality of the United States established by the
Emergency Home Finance Act of 1970, as amended. FHLMC was organized primarily
for the purpose of increasing the availability of mortgage credit to finance
needed housing. The operations of FHLMC currently consist primarily of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in mortgage loans and the resale of the mortgage loans
in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of
fixed-rate or adjustable-rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one-to-four-family residential properties or multifamily projects. Each
mortgage loan must include whole loans, participation interests in whole loans
and undivided interests in whole loans and participation in another FHLMC
security.
Privately Issued Mortgage-Related Securities. To the extent allowed in
the Prospectus, a Fund may invest in mortgage-related securities offered by
private issuers, including pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the collateral pool may cause the various classes of a CMO to be retired
substantially earlier than their stated maturities or final distribution dates.
The principal of and interest on the collateral pool may be allocated among the
several classes of a CMO in a number of different ways. Generally, the purpose
of the allocation of the cash flow of a CMO to the various classes is to obtain
a more predictable cash flow to some of the individual tranches than exists with
the underlying collateral of the CMO. As a general rule, the more predictable
the cash flow is on a CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.
To the extent allowed in the Prospectus, a Fund may invest in, among
other things, "parallel pay" CMOs and Planned Amortization Class CMOs ("PAC
Bonds")Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class which, like the other CMO structures, must be retired by its stated
maturity date or final distribution date, but may be retired earlier. PAC Bonds
are parallel pay CMOs that generally require payments of a specified amount of
principal on each payment date; the required principal payment on PAC Bonds have
the highest priority after interest has been paid to all classes.
<PAGE>
Adjustable-Rate Mortgage-Related Securities. Because the interest rates
on the mortgages underlying adjustable-rate mortgage-related securities ("ARMS")
reset periodically, yields of such portfolio securities will gradually align
themselves to reflect changes in market rates. Unlike fixed-rate mortgages,
which generally decline in value during periods of rising interest rates, ARMS
allow a Fund to participate in increases in interest rates through periodic
adjustments in the coupons of the underlying mortgages, resulting in both higher
current yields and low price fluctuations. Furthermore, if prepayments of
principal are made on the underlying mortgages during periods of rising interest
rates, a Fund may be able to reinvest such amounts in securities with a higher
current rate of return. During periods of declining interest rates, of course,
the coupon rates may readjust downward, resulting in lower yields to a Fund.
Further, because of this feature, the value of ARMS is unlikely to rise during
periods of declining interest rates to the same extent as fixed rate
instruments. For further discussion of the risks associated with
mortgage-related securities generally, see "Risk Considerations" in the
Prospectus.
Variable Rate Demand Notes. Variable rate demand notes ("VRDNs") are
tax-exempt obligations that contain a floating or variable interest rate
adjustment formula and an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
prior to specified dates, generally at 30-, 60-, 90-, 180-, or 365-day
intervals. The interest rates are adjustable at intervals ranging from daily to
six months. Adjustment formulas are designed to maintain the market value of the
VRDN at approximately the par value of the VRDN upon the adjustment date. The
adjustments typically are based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.
The Tax-Free Funds also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution")Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the institution. A Fund has an
undivided interest in the underlying obligation and thus participates on the
same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their creditworthiness
may be a function of the creditworthiness of the issuer, the institution
furnishing the irrevocable letter of credit, or both. Accordingly, the Tax-Free
Funds may invest in such VRDNs, the issuers or underlying institutions of which
the Manager believes are creditworthy and satisfy the quality requirements of
the Funds. The Manager periodically monitors the creditworthiness of the issuer
of such securities and the underlying institution.
During periods of high inflation and periods of economic slowdown,
together with the fiscal measures adopted by governmental authorities to attempt
to deal with them, interest rates have varied widely. While the value of the
underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Funds may invest in VRDNs on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is
<PAGE>
made in relation to movements of various interest rate adjustment indices, the
VRDNs are not comparable to long-term fixed-rate securities. Accordingly,
interest rates on the VRDNs may be higher or lower than current market rates for
fixed-rate obligations of comparable quality with similar maturities.
Municipal Securities. Because the Tax-Free Funds invest at least 80% of
their total assets in obligations either issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies, authorities and instrumentalities,
including industrial development bonds, as well as obligations of certain
agencies and instrumentalities of the U.S. Government, the interest from which
is, in the opinion of bond counsel to the issuer, exempt from federal income tax
("Municipal Securities"), or exempt from federal and California personal income
tax ("California Municipal Securities"), and the California Money Fund invests
at least 65% of its total assets in California Municipal Securities, and may
invest in Municipal Securities, these Funds generally will have a lower yield
than if they primarily purchased higher yielding taxable securities, commercial
paper or other securities with correspondingly greater risk. Generally, the
value of the Municipal Securities and California Municipal Securities held by
these Funds will fluctuate inversely with interest rates.
General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full faith, credit
and taxing power of an issuer. Rather, the principal security for a revenue bond
is generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source. Revenue bonds are issued to finance a wide variety of capital
projects, including electric, gas, water, and sewer systems; highways, bridges,
and tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds, which may
pay tax-exempt interest, are, in most cases, revenue bonds and are issued by or
on behalf of public authorities to raise money to finance various privately
operated facilities for business manufacturing, housing, sports, and pollution
control. These bonds also are used to finance public facilities, such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of the real and
personal property so financed as security for such payment. As a result of 1986
federal tax legislation, industrial revenue bonds may no longer be issued on a
tax-exempt basis for certain previously permissible purposes, including sports
and pollution control facilities.
Participation Interests. The Tax-Free Funds may purchase from financial
institutions participation interests in Municipal Securities, such as industrial
development bonds and municipal lease/purchase
<PAGE>
agreements. A participation interest gives a Fund an undivided interest in a
Municipal Security in the proportion that the Fund's participation interest
bears to the total principal amount of the Municipal Security. These instruments
may have fixed, floating or variable rates of interest. If the participation
interest is unrated, it will be backed by an irrevocable letter of credit or
guarantee of a bank that the Board of Trustees has approved as meeting the
Board's standards, or, alternatively, the payment obligation will be
collateralized by U.S. Government securities
For certain participation interests, these Funds will have the right to
demand payment, on not more than seven days' notice, for all or any part of
their participation interest in a Municipal Security, plus accrued interest. As
to these instruments, these Funds intend to exercise their right to demand
payment only upon a default under the terms of the Municipal Securities, as
needed to provide liquidity to meet redemptions, or to maintain or improve the
quality of their investment portfolios. The California Intermediate Bond Fund
will not invest more than 15% of its total assets and the California Money Fund
will not invest more than 10% of its total assets in participation interests
that do not have this demand feature, and in other illiquid securities.
Some participation interests are subject to a "nonappropriation" or
"abatement" feature by which, under certain conditions, the issuer of the
underlying Municipal Security may, without penalty, terminate its obligation to
make payment. In such event, the holder of such security must look to the
underlying collateral, which is often a municipal facility used by the issuer.
Custodial Receipts. The Tax-Free Funds may purchase custodial receipts
representing the right to receive certain future principal and interest payments
on Municipal Securities that underlie the custodial receipts. A number of
different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by one
of these Funds should increase the volatility of its net asset value and, thus,
its price per share. These custodial receipts are sold in private placements and
are subject to these Funds' limitation with respect to illiquid investments. The
Tax-Free Funds also may purchase directly from issuers, and not in a private
placement, Municipal Securities having the same characteristics as the custodial
receipts.
Tender Option Bonds. The Tax-Free Funds may purchase tender option
bonds and similar securities. A tender option bond is a Municipal Security,
generally held pursuant to a custodial arrangement, having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term tax-exempt rates, coupled with an agreement of a third
party, such as a bank, broker-dealer or other financial
<PAGE>
institution, granting the security holders the option, at periodic intervals, to
tender their securities to the institution and receive their face value. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal Security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Manager, on behalf of a Tax-Free Fund, considers on a periodic basis the
creditworthiness of the issuer of the underlying Municipal Security, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. The California Intermediate Bond
Fund will not invest more than 15% of its total assets and the California Money
Fund more than 10% of its total assets in securities that are illiquid
(including tender option bonds with a tender feature that cannot be exercised on
not more than seven days' notice if there is no secondary market available for
these obligations).
Obligations with Puts Attached. The Tax-Free Funds may purchase
Municipal Securities together with the right to resell the securities to the
seller at an agreed-upon price or yield within a specified period prior to the
securities' maturity date. Although an obligation with a put attached is not a
put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." These Funds will use such puts in
accordance with regulations issued by the Securities and Exchange Commission
("SEC")In 1982, the Internal Revenue Service (the "IRS") issued a revenue ruling
to the effect that, under specified circumstances, a regulated investment
company would be the owner of tax-exempt municipal obligations acquired with a
put option. The IRS also has issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The last such
ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Funds intend to take the position that they are the owners
of any municipal obligations acquired subject to a stand-by commitment or a
similar put right and that tax-exempt interest earned with respect to such
municipal obligations will be tax exempt in its hands. There is no assurance
that stand-by commitments will be available to these Funds nor have they assumed
that such commitments would continue to be available under all market
conditions. There may be other types of municipal securities that become
available and are similar to the foregoing described Municipal Securities in
which these Funds may invest.
Zero Coupon Bonds. To the extent allowed in the Prospectus, a Fund may
invest in zero coupon securities, which are debt securities issued or sold at a
discount from their face value and do not entitle the holder to any periodic
payment of interest prior to maturity, a specified redemption date or a cash
payment date. The amount of the discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. Zero coupon securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The market
prices of zero coupon securities are generally more volatile than the market
prices of
<PAGE>
interest-bearing securities and respond more to changes in interest rates than
interest-bearing securities with similar maturities and credit qualities.
Risk Factors/Special Considerations Relating to Debt Securities
To the extent allowed in the Prospectus, a Fund may invest in debt
securities that are rated below BBB by Standard & Poor's Corporation ("S&P"),
Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Fitch Investor
Services ("Fitch"), or, if unrated, are deemed to be of equivalent investment
quality by the Manager. As an operating policy, which may be changed by the
Board of Trustees without shareholder approval, a Fund will invest no more than
5% (15% for the Latin America Fund) of its assets in debt securities rated below
Baa by Moody's or BBB by S&P, or, if unrated, of equivalent investment quality
as determined by the Manager. The market value of debt securities generally
varies in response to changes in interest rates and the financial condition of
each issuer. During periods of declining interest rates, the value of debt
securities generally increases. Conversely, during periods of rising interest
rates, the value of such securities generally declines. The net asset value of a
Fund will reflect these changes in market value.
Bonds rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of a Fund to sell the securities at fair
value either to meet redemption requests or to respond to changes in the economy
or financial markets and could adversely affect, and cause fluctuations in, the
per-share net asset value of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low-rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of a Fund to
achieve its investment objectives may, to the extent it invests in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if the Fund invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment-grade
securities. The prices of low-rated debt securities have been found to be less
sensitive to interest rate changes than higher-rated debt securities but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a sharper decline in the prices of low-rated debt
securities because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If the issuer of low-rated debt securities defaults, the Fund may
incur additional expenses to seek financial recovery. The low-rated bond market
is relatively new, and many of the outstanding low-rated bonds have not endured
a major business downturn.
<PAGE>
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate risks a Fund,
to the extent allowed in the Prospectus, may enter into forward foreign currency
exchange contracts ("forward contracts") and foreign currency futures contracts,
as well as purchase put or call options on foreign currencies, as described
below. The Fund also may conduct its foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
To the extent allowed in the Prospectus, a Fund also may purchase other
types of options and futures and may, in the future, write covered options, as
described below and in the Prospectus.
Forward Contracts. To the extent allowed in the Prospectus, a Fund may
enter into forward contracts to attempt to minimize the risk from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract, which is individually negotiated and privately traded by
currency traders and their customers, involves an obligation to purchase or sell
a specific currency for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When a Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.
In connection with a Fund's forward contract transactions, an amount of
the Fund's assets equal to the amount of its commitments will be held aside or
segregated to be used to pay for the commitments. Accordingly, a Fund always
will have cash, cash equivalents or liquid equity or debt securities denominated
in the appropriate currency available in an amount sufficient to cover any
commitments under these contracts. Segregated assets used to cover forward
contracts will be marked to market on a daily basis. While these contracts are
not presently regulated by the Commodity Futures Trading Commission ("CFTC"),
the CFTC may in the future regulate them, and the ability of a Fund to utilize
forward contracts may be restricted. Forward contracts may limit potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance by a Fund than if it had not entered into such contracts. A
Fund generally will not enter into a forward foreign currency exchange contract
with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge against
movements in interest rates, securities prices or currency exchange rates a
Fund, to the extent allowed in the Prospectus, may purchase and sell various
kinds of futures contracts and options on futures contracts. These Funds also
may enter into closing purchase and sale transactions with respect to any such
contracts and options. Futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices.
These Funds have filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant
<PAGE>
to Section 4.5 of the regulations under the Commodity Exchange Act, the notice
of eligibility included the representation that these Funds will use futures
contracts and related options for bona fide hedging purposes within the meaning
of CFTC regulations, provided that a Fund may hold positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions if the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of that Fund's net assets (after
taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded from such 5%.
These Funds will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by these Funds or
which they expect to purchase. These Funds' futures transactions generally will
be entered into only for traditional hedging purposes -- i.e., futures contracts
will be sold to protect against a decline in the price of securities or
currencies and will be purchased to protect a Fund against an increase in the
price of securities it intends to purchase (or the currencies in which they are
denominated)All futures contracts entered into by these Funds are traded on U.S.
exchanges or boards of trade licensed and regulated by the CFTC or on foreign
exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these Funds seek
to establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that these Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
As part of its hedging strategy, a Fund also may enter into other types
of financial futures contracts if, in the opinion of the Manager, there is a
sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in a Fund's portfolio may be more or less volatile than prices of
such futures contracts, the Manager will attempt to estimate the extent of this
difference in volatility based on historical patterns and to compensate for it
by having that Fund enter into a greater or lesser number of futures contracts
or by attempting to achieve only a partial hedge against price changes affecting
that Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities can be substantially
offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of a Fund's portfolio securities could
be offset substantially by a decline in the value of the futures position.
<PAGE>
The acquisition of put and call options on futures contracts gives a
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives a Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
A Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. A Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. To the extent
allowed in the Prospectus, a Fund may purchase put and call options on
securities in which it has invested, on foreign currencies represented in its
portfolios and on any securities index based in whole or in part on securities
in which the Fund may invest. The Fund also may enter into closing sales
transactions in order to realize gains or minimize losses on options they have
purchased.
A Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign
exchanges. Although these Funds will generally purchase only those options for
which there appears to be an active secondary market, there can be no assurance
that a liquid secondary market on an exchange will exist for any particular
option or at any particular time. For some options, no secondary market on an
exchange may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that a Fund would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
<PAGE>
Although the Funds do not currently intend to do so, they may, in the
future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which they may invest. A covered call
option involves a Fund's giving another party, in return for a premium, the
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against the price decline of the underlying security. However, by
writing a covered call option, a Fund gives up the opportunity, while the option
is in effect, to realize gain from any price increase (above the option exercise
price) in the underlying security. In addition, a Fund's ability to sell the
underlying security is limited while the option is in effect unless the Fund
effects a closing purchase transaction.
The Funds also may write covered put options that give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. A Fund will receive a premium for writing a put option but will
be obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, a Fund
will cause its custodian to segregate cash, cash equivalents, U.S. Government
securities or other liquid equity or debt securities with at least the value of
the exercise price of the put options. A Fund will not write put options if the
aggregate value of the obligations underlying the put options exceeds 25% of the
Fund's total assets.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of
the Funds' orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Funds may enter
into repurchase agreements. A Fund's repurchase agreements will generally
involve a short-term investment in a U.S. Government security or other
high-grade liquid debt security, with the seller of the underlying security
agreeing to repurchase it at a mutually agreed-upon time and price. The
repurchase price is generally higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to a Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Manager, acting under the supervision of the Boards,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Funds enter into repurchase
agreements to evaluate potential risk. All repurchase agreements will be made
pursuant to procedures adopted and regularly reviewed by the Boards.
The Funds generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Funds regard repurchase agreements with
maturities in excess of seven days as illiquid. A Fund may not invest more than
15% (10% in the case of the Money Market Funds) of the value of its net assets
in illiquid securities, including repurchase agreements with maturities greater
than seven days.
For purposes of the Investment Company Act, a repurchase agreement is
deemed to be a collateralized loan from a Fund to the seller of the security
subject to the repurchase agreement. It is not clear whether a court
<PAGE>
would consider the security acquired by a Fund subject to a repurchase agreement
as being owned by that Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and a Fund has not perfected a security interest in the
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor. As such, a Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a Fund
also runs the risk that the seller may fail to repurchase the security. However,
the Funds always require collateral for any repurchase agreement to which they
are a party in the form of securities acceptable to them, the market value of
which is equal to at least 100% of the amount invested by the Funds plus accrued
interest, and the Funds make payment against such securities only upon physical
delivery or evidence of book entry transfer to the account of its custodian
bank. If the market value of the security subject to the repurchase agreement
becomes less than the repurchase price (including interest), a Fund, pursuant to
its repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement equals or exceeds the repurchase price (including interest)
at all times.
The Funds may participate in one or more joint accounts with each other
and other series of the Trusts that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. Government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event have a duration
of more than seven days.
Reverse Repurchase Agreements. To the extent allowed in the Prospectus,
a Fund may enter into reverse repurchase agreements, as set forth in the
Prospectus. A Fund typically will invest the proceeds of a reverse repurchase
agreement in money market instruments or repurchase agreements maturing not
later than the expiration of the reverse repurchase agreement. This use of
proceeds involves leverage, and a Fund will enter into a reverse repurchase
agreement for leverage purposes only when the Manager believes that the interest
income to be earned from the investment of the proceeds would be greater than
the interest expense of the transaction. A Fund also may use the proceeds of
reverse repurchase agreements to provide liquidity to meet redemption requests
when sale of the Fund's securities is disadvantageous.
The Funds cause their custodian to segregate liquid assets, such as
cash, U.S. Government securities or other liquid equity or debt securities equal
in value to their obligations (including accrued interest) with respect to
reverse repurchase agreements. Such assets are marked to market daily to ensure
that full collateralization is maintained.
Dollar Roll Transactions. To the extent allowed in the Prospectus, a
Fund may enter into dollar roll transactions. A dollar roll transaction involves
a sale by a Fund of a security to a financial institution concurrently with an
agreement by that Fund to purchase a similar security from the institution at a
later date at
<PAGE>
an agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
At the time a Fund enters into a dollar roll transaction, it causes its
custodian to segregate liquid assets such as cash, U.S. Government securities or
other liquid equity or debt securities having a value equal to the purchase
price for the similar security (including accrued interest) and subsequently
marks the assets to market daily to ensure that full collateralization is
maintained.
Lending of Portfolio Securities. Although the Funds currently do not
intend to do so, a Fund may lend its portfolio securities having a value of up
to 30% of its total assets in order to generate additional income. Such loans
may be made to broker-dealers or other financial institutions whose
creditworthiness is acceptable to the Manager. These loans would be required to
be secured continuously by collateral, including cash, cash equivalents,
irrevocable letters of credit, U.S. Government securities, or other high-grade
liquid debt securities, maintained on a current basis (i.e., marked to market
daily) at an amount at least equal to 100% of the market value of the securities
loaned plus accrued interest. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. Loans are subject
to termination at the option of a Fund or the borrower at any time. Upon such
termination, a Fund is entitled to obtain the return of the securities loaned
within five business days.
For the duration of the loan, a Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to those securities. As with
other extensions of credit, there are risks of delay in recovery or even losses
of rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. To the extent allowed in
the Prospectus, a Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" or "delayed delivery"
basis. The price of such securities is fixed at the time the commitment to
purchase or sell is made, but delivery and payment for the securities take place
at a later date. Normally, the settlement date occurs within one month of the
purchase; during the period between purchase and settlement, no payment is made
by a Fund to the issuer. While the Funds reserve the right to sell when-issued
or delayed delivery securities prior to the settlement date, the Funds intend to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time a Fund makes a
commitment to purchase a security on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. The market value of the when-issued securities may be more
or less than the settlement price. The Funds do not believe that their net asset
values will be adversely affected by their purchase of securities on a
when-issued or delayed delivery basis. The Funds cause their custodian to
segregate cash, U.S. Government securities or other liquid equity or debt
securities with a value equal in value to commitments for when-issued or delayed
delivery securities. The segregated securities either will mature or, if
<PAGE>
necessary, be sold on or before the settlement date. To the extent that assets
of a Fund are held in cash pending the settlement of a purchase of securities,
that Fund will earn no income on these assets.
To the extent allowed in the Prospectus, a Fund may seek to hedge
investments or to realize additional gains through forward commitments to sell
high-grade liquid debt securities it does not own at the time it enters into the
commitments. Such forward commitments effectively constitute a form of short
sale. To complete such a transaction, the Fund must obtain the security which it
has made a commitment to deliver. If the Fund does not have cash available to
purchase the security it is obligated to deliver, it may be required to
liquidate securities in its portfolio at either a gain or a loss, or borrow cash
under a reverse repurchase or other short-term arrangement, thus incurring an
additional expense. In addition, the Fund may incur a loss as a result of this
type of forward commitment if the price of the security increases between the
date the Fund enters into the forward commitment and the date on which it must
purchase the security it is committed to deliver. The Fund will realize a gain
from this type of forward commitment if the security declines in price between
those dates. The amount of any gain will be reduced, and the amount of any loss
increased, by the amount of the interest or other transaction expenses the Fund
may be required to pay in connection with this type of forward commitment.
Whenever this Fund engages in this type of transaction, it will segregate assets
as discussed above.
Illiquid Securities. To the extent allowed in the Prospectus, a Fund
may invest in illiquid securities. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which a Fund has
valued the securities and includes, among others, repurchase agreements maturing
in more than seven days, certain restricted securities and securities that are
otherwise not freely transferable. Illiquid securities also include shares of an
investment company held by a Fund in excess of 1% of the total outstanding
shares of that investment company. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act")Illiquid securities acquired by the Funds may include those that are
subject to restrictions on transferability contained in the securities laws of
other countries. Securities that are freely marketable in the country where they
are principally traded, but that would not be freely marketable in the United
States, will not be considered illiquid. Where registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated
<PAGE>
systems for the trading, clearance and settlement of unregistered securities of
domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified buyers interested in purchasing Rule 144A-eligible restricted
securities, however, could adversely affect the marketability of such portfolio
securities and result in a Fund's inability to dispose of such securities
promptly or at favorable prices.
The Boards of Trustees have delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Boards. The Manager takes into account a number of factors in reaching
liquidity decisions, including, but not limited to: (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers, and (v) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer)The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Boards.
RISK FACTORS
The following describes certain risks involved with investing in the
Funds. Investors in the U.S. Asset Allocation Fund and the Global Asset
Allocation Fund should note the risks involved with each Underlying Fund,
because the U.S. Asset Allocation Fund and the Global Asset Allocation Fund are
"funds-of-funds."
Foreign Securities
Investors in Funds that may, as allowed by the Prospectus, invest in
foreign securities should consider carefully the substantial risks involved in
securities of companies located or doing business in, and governments of,
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There may be less publicly available information about foreign
companies comparable to the reports and ratings published regarding companies in
the United States. Foreign companies are often not subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements often may not be comparable to those applicable to U.S.
companies. Many foreign markets have substantially less volume than either the
established domestic securities exchanges or the OTC markets. Securities of some
foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Commission rates in foreign countries, which may be
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In many foreign countries there is less government supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S., and capital requirements for brokerage firms are generally lower.
Settlement of transactions in foreign securities may, in some instances, be
subject to delays and related administrative uncertainties.
Emerging Market Countries
To the extent allowed in the Prospectus, a Fund may invest in
securities of companies domiciled in, and in markets of, so-called "emerging
market countries." These investments may be subject to potentially higher risks
than investments in developed countries. These risks include (i) volatile
social, political and economic conditions; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price volatility;
(iii) the existence of national policies which may restrict these Funds'
investment opportunities, including restrictions on investment in
<PAGE>
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain emerging market countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in certain emerging market countries may
be slowed or reversed by unanticipated political or social events in such
countries.
Exchange Rates and Polices
Funds, to the extent allowed in the Prospectus, that buy and sell
foreign currencies endeavor to do so on favorable terms. Some price spreads on
currency exchange (to cover service charges) may be incurred, particularly when
these Funds change investments from one country to another or when proceeds from
the sale of shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would prevent
these Funds from repatriating invested capital and dividends, withhold portions
of interest and dividends at the source, or impose other taxes, with respect to
these Funds' investments in securities of issuers of that country. There also is
the possibility of expropriation, nationalization, confiscatory or other
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Boards of both Trusts consider at least annually the likelihood of
the imposition by any foreign government of exchange control restrictions that
would affect the liquidity of the Funds' assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Boards also consider the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
Hedging Transactions
While transactions in forward contracts, options, futures contracts and
options on futures (i.e., "hedging positions") may reduce certain risks, such
transactions themselves entail certain other risks. Thus, while a Fund may
benefit from the use of hedging positions, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in a poorer
overall performance for that Fund than if it had not entered into any hedging
positions. If the correlation between a hedging position and portfolio position
which is intended to be protected is imperfect, the desired protection may not
be obtained, and a Fund may be exposed to risk of financial loss.
Perfect correlation between a Fund's hedging positions and portfolio
positions may be difficult to achieve because hedging instruments in many
foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
<PAGE>
California Municipal Securities
The information set forth below is a general summary intended to give a
recent historical description. It is not a discussion of any specific factors
that may affect any particular issuer of California Municipal Securities. The
information is not intended to indicate continuing or future trends in the
condition, financial or otherwise, of California. Such information is derived
from official statements utilized in connection with securities offerings of the
State of California that have come to the attention of the Trusts and were
available prior to the date of this Statement of Additional Information. Such
information has not been independently verified by the California Intermediate
Bond and California Money Funds.
Because the California Intermediate Bond and California Money Funds
expect to invest substantially all of their assets in California Municipal
Securities, they will be susceptible to a number of complex factors affecting
the issuers of California Municipal Securities, including national and local
political, economic, social, environmental and regulatory policies and
conditions. These Funds cannot predict whether or to what extent such factors or
other factors may affect the issuers of California Municipal Securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by these Funds to pay interest
on, or principal of, such securities. The creditworthiness of obligations issued
by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and there is no responsibility on
the part of the State of California to make payments on such local obligations.
There may be specific factors that are applicable in connection with investment
in the obligations of particular issuers located within California, and it is
possible these Funds will invest in obligations of particular issuers as to
which such specific factors are applicable.
From mid-1990 to late 1993, California suffered the most severe
recession in the State since the 1930s. Construction, manufacturing (especially
aerospace), exports and financial services, among other industries, have been
severely affected. Since the start of 1994, however, California's economy has
been on a steady recovery. The rate of economic growth in California in 1996, in
terms of job gains, exceeded that of the rest of the United States. The State
added nearly 350,000 jobs during 1996, surpassing its pre-recession employment
peak of 12.7 million jobs. Another 380,000 jobs are expected to be created in
1997. The unemployment rate, while still higher than the national average, fell
to the low 6 percent range in mid-1997, compared to over 10 percent during the
recession. Many of the new jobs were created in such industries as computer
services, software design, motion pictures and high technology manufacturing.
Business services, export trade and other manufacturing also experienced growth.
All major economic regions of the State grew, with particularly large gains in
the Silicon Valley region of Northern California.
The recession severely affected State revenues while the State's health
and welfare costs were increasing. Consequently, the State had a lengthy period
of budget imbalance; the State's accumulated budget deficit approached $2.8
billion at its peak at June 30, 1993. A consequence of the large budget deficits
has been that the State depleted its available cash resources and had to use a
series of external borrowings to meet its cash needs. With the end of the
recession, the State's financial condition has improved in the 1995-96 and
1996-97 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint.
As of June 30, 1997, the State's budget reserve had a positive cash balance of
$281 million. No deficit borrowing has occurred at the end of the last two
fiscal years and the State's cash flow borrowing was limited to $3 billion in
1996-97.
In each of these two fiscal years, the State budget contained the
following major features:
<PAGE>
1. Expenditures for K-14 schools grew significantly, as new
revenues were directed to school spending under Proposition
98.
2. The budgets restrained health and welfare spending levels and
attempted to reduce General Fund spending by calling for
greater support from the federal government. The State also
attempted to shift to the federal government a larger share of
the cost of incarceration and social services for illegal
immigrants. Federal support never reached the levels
anticipated when the budgets were enacted. These funding
shortfalls were filled, however, by revenue collections which
exceeded expectations.
3. General Fund support for the University of California and
California State Universities grew by an average of 5.2
percent and 3.3 percent per year, respectively, and there were
no increases in student fees.
4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons
were approved for construction, however.
5. There were no tax increases and, starting January 1, 1997,
there was a 5 percent cut in corporate taxes. The suspension
of the Renters Tax Credit was continued.
As noted, the economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (around $2.2
billion in 1995-96 and $1.6 billion in 1996-97) than were initially planned when
the budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. As a result, there was not any dramatic increase
in budget reserves, although the accumulated budget deficit from the recession
years was finally eliminated in the past fiscal years.
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The
Budget Act anticipates General Fund revenues and transfers of $52.5 billion (a
6.8 percent increase over the final 1996-97 levels), and expenditures of $52.8
billion (an 8.0 percent increase from the 1996-97 levels)On a budgetary basis,
the budget reserve (SFEU) is projected to decrease from $408 million at June 30,
1997 to $112 million at June 30, 1998. The Budget Act also includes Special Fund
expenditures of $14.4 billion (as against estimated Special Fund revenues of
$14.0 billion), and $2.1 billion of expenditures from various Bond Funds.
Following enactment of the Budget Act, the State implemented its annual cash
flow borrowing program, issuing $3 billion of notes which mature on June 30,
1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large
increase in funding for K-14 education, reflecting strong
revenues which have exceeded initial budgeted amounts. Part of
the nearly $1.75 billion in increased spending is allocated to
prior fiscal years.
2. The Budget Act reflects a $1.235 billion pension case judgment
payment, and returns funding of the State's pension
contribution to the quarterly basis existing prior to the
deferral actions invalidated by the courts.
<PAGE>
3. Continuing the third year of a four-year "compact" which the
State Administration has made with higher education units,
funding from the General Fund for the University of California
and California State University has increased by about 6
percent ($121 million and $107 million, respectively), and
there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels.
5. Health and welfare costs are contained, continuing generally
the grant levels from prior years, as part of the initial
implementation of the new CalWORKs welfare reform program.
6. Unlike prior years, this Budget Act does not depend on
uncertain federal budget actions. About $300 million in
federal funds, already included in the federal FY 1997 and
1998 budgets, are included in the Budget Act, to offset
incarceration costs for illegal immigrants.
7. The Budget Act contains no tax increases, and no tax
reductions. The Renters Tax Credit was suspended for another
year, saving approximately $500 million.
After enactment of the Budget Act, and prior to the end of the
Legislative Session on September 12, 1997, the Legislature and the Governor
reached certain agreements related to State expenditures and taxes. The
Legislature passed a bill restoring $203 million of education-related
expenditures which the Governor had vetoed in the original Budget Act, based on
agreement with the Governor on an education testing program. The Legislature
also passed a bill to restore $48 million of welfare cost savings which had been
part of earlier legislation vetoed by the Governor. The Legislature also passed
several bills encompassing a coordinated package of fiscal reforms, mostly to
take effect after the 1997-98 Fiscal Year. Included in the legislation already
signed by the Governor are a variety of phased-in tax cuts, conformity with
certain provisions of the federal tax reform law passed earlier in the year, and
reform of funding for county trial courts, with the State to assume greater
financial responsibility.
Because of the deterioration in the State's budget and cash situation,
the State's credit ratings have been reduced. Since late 1991, all three major
nationally recognized statistical rating organizations have lowered their
ratings for general obligation bonds of the State from the highest ranking of
"AAA" to "A+" by S&P, "A1" by Moody's and "A+" by Fitch Investors Service, Inc.
However, prior to the October 8, 1997, sale of $1 billion in general obligation
bonds, Fitch raised California's general obligation bond rating from "A+" to
"AA-", however S&P and Moody's did not follow suit, confirming those ratings at
"A+" and "A1", respectively. It is not presently possible to determine whether,
or the extent to which, Moody's, S&P or Fitch will change such ratings in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to the creditworthiness of obligations
issued by the State, and there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
Constitutional and Statutory Limitations. Article XIII A of the
California Constitution (which resulted from the voter approved Proposition 13
in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an increase in ad
valorem taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash value" of property may be adjusted annually to
reflect increases (not to
<PAGE>
exceed two percent) or decreases, in the consumer price index or comparable
local data, or to reflect reductions in property value caused by substantial
damage, destruction or other factors, or when there is a "change in ownership"
or "new construction".
Constitutional challenges to Article XIII A to date have been
unsuccessful. In 1992, the United States Supreme Court ruled that
notwithstanding the disparate property tax burdens that Proposition 13 might
place on otherwise comparable properties, those provisions of Proposition 13 do
not violate the Equal Protection Clause of the United States Constitution.
In response to the significant reduction in local property tax revenue
caused by the passage of Proposition 13, the State enacted legislation to
provide local governments with increased expenditures from the General Fund.
This fiscal relief has ended, however.
Article XIII B of the California Constitution generally limits the
amount of appropriations of the State and of local governments to the amount of
appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, the California Supreme Court recently
upheld Proposition 62's requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This recent
decision may invalidate other taxes that have been imposed by local governments
in California and make it more difficult for local governments to raise taxes.
In 1988 and 1990, California voters approved initiatives known as
Proposition 98 and Proposition 111, respectively. These initiatives changed the
State's appropriations limit under Article XIII B to (i) require that the State
set aside a prudent reserve fund for public education, and (ii) guarantee a
minimum level of State funding for public elementary and secondary schools and
community colleges.
In November 1996, California voters approved Proposition 218. The
initiative applied the provisions of Proposition 62 to all entities, including
charter cities. It requires that all taxes for general purposes obtain a simple
majority popular vote and that taxes for special purposes obtain a two-thirds
majority vote. Prior to the effectiveness of Proposition 218, charter cities
could levy certain taxes such as transient occupancy taxes and utility user's
taxes without a popular vote. Proposition 218 will also limit the authority of
local governments to impose property-related assessments, fees and charges,
requiring that such assessments be limited to the special benefit conferred and
prohibiting their use for general governmental services. Proposition 218 also
allows voters to use their initiative power to reduce or repeal
previously-authorized taxes, assessments, fees and charges.
The effect of constitutional and statutory changes and of budget
developments on the ability of California issuers to pay interest and principal
on their obligations remains unclear, and may depend on whether a particular
bond is a general obligation or limited obligation bond (limited obligation
bonds being generally less affected)There is no assurance that any California
issuer will make full or timely payments of principal or interest or remain
solvent. For example, in December 1994, Orange County filed for bankruptcy
<PAGE>
Certain tax-exempt securities in which a Fund may invest may be
obligations payable solely from the revenues of specific institutions, or may be
secured by specific properties, which are subject to provisions of California
law that could adversely affect the holders of such obligations. For example,
the revenues of California health care institutions may be subject to state
laws, and California law limits the remedies of a creditor secured by a mortgage
or deed of trust on real property.
In addition, it is impossible to predict the time, magnitude, or
location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck the Los Angeles area, causing
significant damage in a four-county area. The possibility exists that another
such earthquake could create a major dislocation of the California economy.
The Tax-Free Funds' (other than the Federal Money Fund) concentration
in California Municipal Securities provides a greater level of risk than a fund
that is diversified across numerous states and municipal entities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of a Fund's outstanding voting
securities as defined in the Investment Company Act. A Fund may not:
1. In the case of each Fixed Income Fund, purchase any common
stocks or other equity securities, except that a Fund may
invest in securities of other investment companies as
described above and consistent with restriction number 9
below.
2. With respect to 75% (100% for the Federal Money Fund) of its
total assets, invest in the securities of any one issuer
(other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of
such investment more than 5% of the total assets of a Fund
would be invested in such issuer. There are no limitations
with respect to the remaining 25% of its total assets, except
to the extent other investment restrictions may be applicable
(not applicable to the Federal Money Fund). This investment
restriction does not apply to the U.S. Asset Allocation and
Global Asset Allocation Funds nor the California Intermediate
Bond Fund.
3. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objective and
policies, (b) through the lending of up to 30% of its
portfolio securities as described above and in its Prospectus,
or (c) to the extent the entry into a repurchase agreement or
a reverse dollar roll transaction is deemed to be a loan.
4.
(a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse
repurchase agreements or dollar roll transactions for
a Fund that uses such investment techniques and then
not in excess of one-third of the value of its total
assets (at the lower of cost or fair market value)Any
such borrowing will be made only if immediately
thereafter there is an asset coverage of at least
300% of all borrowings
<PAGE>
(excluding any fully collateralized reverse
repurchase agreements and dollar roll transactions
the Fund may enter into), and no additional
investments may be made while any such borrowings are
in excess of 10% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and
permissible forward contracts, futures contracts,
option contracts or other hedging transactions.
5. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite
securities(This does not preclude a Fund from obtaining such
short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities.)
6. Buy or sell real estate or commodities or commodity contracts;
however, a Fund, to the extent not otherwise prohibited in the
Prospectus or this Statement of Additional Information, may
invest in securities secured by real estate or interests
therein or issued by companies which invest in real estate or
interests therein, including real estate investment trusts,
and may purchase or sell currencies (including forward
currency exchange contracts), futures contracts and related
options generally as described in the Prospectus and this
Statement of Additional Information.
7. Invest in securities of other investment companies, except to
the extent permitted by the Investment Company Act and
discussed in the Prospectus or this Statement of Additional
Information, or as such securities may be acquired as part of
a merger, consolidation or acquisition of assets.
8. Invest, in the aggregate, more than 15% (10% for the Money
Market Funds) of its net assets in illiquid securities,
including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A-eligible restricted
securities), securities which are not otherwise readily
marketable, repurchase agreements that mature in more than
seven days and over-the-counter options (and securities
underlying such options) purchased by a Fund(This is an
operating policy which may be changed without shareholder
approval, consistent with the Investment Company Act, changes
in relevant SEC interpretations).
9. Invest in any issuer for purposes of exercising control or
management of the issuer(This is an operating policy which may
be changed without shareholder approval, consistent with the
Investment Company Act.)
10. Except with respect to communications companies for the
Communications Fund, as described in the Prospectus, invest
more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry(This does
not apply to investment in the securities of the U.S.
Government, its agencies or instrumentalities or California
Municipal Obligations or Municipal Obligations for the
Tax-Free Funds.) For purposes of this restriction, the Funds
generally rely on the U.S. Office of Management and Budget's
Standard Industrial Classifications.
11. Issue senior securities, as defined in the Investment Company
Act, except that this restriction shall not be deemed to
prohibit a Fund from (a) making any permitted borrowings,
mortgages or pledges, or (b) entering into permissible
repurchase and dollar roll transactions.
<PAGE>
12. Except as described in the Prospectus and this Statement of
Additional Information, acquire or dispose of put, call,
straddle or spread options subject to the following conditions
(for other than the Total Return Bond, Short Bond and
California Intermediate Bond Funds):
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of the Fund's
total assets.
(This is an operating policy which may be changed without
shareholder approval.)
13. Except as described in the Prospectus and this Statement of
Additional Information, engage in short sales of
securities(This is an operating policy which may be changed
without shareholder approval, consistent with applicable
regulations.)
14. Purchase more than 10% of the outstanding voting securities of
any one issuer. This investment restriction does not relate to
the Fixed Income Funds(This is an operating policy which may
be changed without shareholder approval.)
15. Invest in commodities, except for futures contracts or options
on futures contracts if, as a result thereof, more than 5% of
a Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to initial
deposits and premiums on open futures contracts and options on
such contracts. The Money Market Funds may not enter into a
futures contract or option on a futures contract regardless of
the amount of the initial deposit or premium.
To the extent these restrictions reflect matters of operating policy
which may be changed without shareholder vote, these restrictions may be amended
upon approval by the appropriate Board and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
The Board of Trustees of The Montgomery Funds has elected to value the
assets of the Money Market Funds in accordance with Rule 2a-7 under the
Investment Company Act. This Rule also imposes various restrictions on these
Funds' portfolios which are, in some cases, more restrictive than these Funds'
stated fundamental policies and investment restrictions. Due to amendments to
Rule 2a-7 adopted by the SEC in 1991, any fund which holds itself out as a money
market fund must also follow certain portfolio provisions of Rule 2a-7 regarding
the maturity and quality of each portfolio investment, and the diversity of such
investments. Thus, although the restrictions imposed by Rule 2a-7 are not
fundamental policies of these Funds, these Funds must comply with these
provisions unless their shareholders vote to change their policies of being
money market funds.
<PAGE>
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds receive income in the form of dividends and
interest earned on their investments in securities. This income, less the
expenses incurred in their operations, is the Funds' net investment income,
substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of income dividend payments by the Funds is dependent upon
the amount of net investment income received by the Funds from their portfolio
holdings, is not guaranteed and is subject to the discretion of the Funds'
Board. These Funds do not pay "interest" or guarantee any fixed rate of return
on an investment in their shares.
The Funds also may derive capital gains or losses in connection with
sales or other dispositions of their portfolio securities. Any net gain a Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year a Fund realizes a
net gain on transactions involving investments held for the period required for
long-term capital gain or loss recognition or otherwise producing long-term
capital gains and losses, the Fund will have a net long-term capital gain. After
deduction of the amount of any net short-term capital loss, the balance (to the
extent not offset by any capital losses carried over from the eight previous
taxable years) will be distributed and treated as long-term capital gains in the
hands of the shareholders regardless of the length of time that Fund's shares
may have been held by the shareholders.
Any dividend or distribution per share paid by a Fund reduces that
Fund's net asset value per share on the date paid by the amount of the dividend
or distribution per share. Accordingly, a dividend or distribution paid shortly
after a purchase of shares by a shareholder would represent, in substance, a
partial return of capital (to the extent it is paid on the shares so purchased),
even though it would be subject to income taxes (except for distributions from
the Tax-Free Funds to the extent not subject to income taxes).
Dividends and other distributions will be reinvested in additional
shares of the applicable Fund unless the shareholder has otherwise indicated.
Investors have the right to change their elections with respect to the
reinvestment of dividends and distributions by notifying the Transfer Agent in
writing, but any such change will be effective only as to dividends and other
distributions for which the record date is seven or more business days after the
Transfer Agent has received the written request.
Tax Information. Each Fund intends to qualify and elect to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), for each taxable year by complying with
all applicable requirements regarding the source of its income, the
diversification of its assets, and the timing of its distributions. Each Fund
that has filed a tax return has so qualified and elected in prior tax years.
Each Fund's policy is to distribute to its shareholders all of its investment
company taxable income and any net realized capital gains for each fiscal year
in a manner that complies with the distribution requirements of the Code, so
that Fund will not be subject to any federal income tax or excise taxes based on
net income. However, the Board of Trustees may elect to pay such excise taxes if
it determines that payment is, under the circumstances, in the best interests of
a Fund.
In order to qualify as a regulated investment company, each Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and
<PAGE>
securities, gains from the sale or other disposition of stock or securities or
foreign currency gains related to investments in stocks or other securities, or
other income (generally including gains from options, futures or forward
contracts) derived with respect to the business of investing in stock,
securities or currency, (b) for taxable years beginning or before August 5,
1997, derive less than 30% of its gross income each year from the sale or other
disposition of stock or securities (or options thereon) held less than three
months (excluding some amounts otherwise included in income as a result of
certain hedging transactions), and (c) diversify its holdings so that, at the
end of each fiscal quarter, (i) at least 50% of the market value of its assets
is represented by cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities limited, for purposes
of this calculation, in the case of other securities of any one issuer to an
amount not greater than 5% of that Fund's assets or 10% of the voting securities
of the issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies)As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If a Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains
by a Fund will be taxable to shareholders whether made in cash or reinvested in
shares. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from the eight prior taxable years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of a Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Funds or any securities dealer effecting a redemption of the Funds'
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, the Funds will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required certifications on the
Account Application Form or with respect to which a Fund or the securities
dealer has been notified by the IRS that the number furnished is incorrect or
that the account is otherwise subject to withholding.
The Funds intend to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, each Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
A Fund may receive dividend distributions from U.S. corporations. To
the extent that a Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of a Fund at the end of
its fiscal year is invested in stock or other securities of foreign
corporations, that Fund may elect to pass through to its shareholders the pro
rata
<PAGE>
share of all foreign income taxes paid by that Fund. If this election is made,
shareholders will be (i) required to include in their gross income their pro
rata share of any foreign income taxes paid by that Fund, and (ii) entitled
either to deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code, including certain holding period
requirements. In this case, shareholders will be informed in writing by that
Fund at the end of each calendar year regarding the availability of any credits
on and the amount of foreign source income (including or excluding foreign
income taxes paid by that Fund) to be included in their income tax returns. If
50% or less in value of that Fund's total assets at the end of its fiscal year
are invested in stock or other securities of foreign corporations, that Fund
will not be entitled under the Code to pass through to its shareholders their
pro rata share of the foreign income taxes paid by that Fund. In this case,
these taxes will be taken as a deduction by that Fund
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. A Fund may
invest up to 10% of its total assets in the stock of foreign investment
companies. Such companies are likely to be treated as "passive foreign
investment companies" ("PFICs") under the Code. Certain other foreign
corporations, not operated as investment companies, may nevertheless satisfy the
PFIC definition. A portion of the income and gains that these Funds derive from
PFIC stock may be subject to a non-deductible federal income tax at the Fund
level. In some cases, a Fund may be able to avoid this tax by electing to be
taxed currently on its share of the PFIC's income, whether or not such income is
actually distributed by the PFIC. A Fund will endeavor to limit its exposure to
the PFIC tax by investing in PFICs only where the election to be taxed currently
will be made. Because it is not always possible to identify a foreign issuer as
a PFIC in advance of making the investment, a Fund may incur the PFIC tax in
some instances.
The Tax-Free Funds. Provided that, as anticipated, each Tax-Free Fund
qualifies as a regulated investment company under the Code, and, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of each of the California Intermediate Bond and California Money Funds consist
of obligations (including California Municipal Securities) the interest on which
is exempt from California personal income taxation under the laws of California,
such Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by the Fund on such
obligations, are exempt from California personal income tax. If at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Federal Money Fund consists of obligations (including Municipal
Securities) the interest on which is exempt from federal personal income
taxation under the Constitution or laws of the United States, the Federal Money
Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by the Fund on such
obligations, are exempt from federal personal income tax. The total amount of
exempt-interest dividends paid by these Funds to their shareholders with respect
to any taxable year cannot exceed the amount of interest received by these Funds
during such year on tax-exempt obligations less any expenses attributable to
such interest. Income from other transactions engaged in by these Funds, such as
income from options, repurchase agreements and market discount on tax-exempt
securities purchased by these Funds, will be taxable distributions to its
shareholders.
The Code may also subject interest received on certain otherwise
tax-exempt securities to an alternative minimum tax. In addition, certain
corporations which are subject to the alternative minimum tax may have to
include a portion of exempt-interest dividends in calculating their alternative
minimum taxable income.
<PAGE>
Exempt-interest dividends paid to shareholders that are corporations
subject to California franchise tax will be taxed as ordinary income to such
shareholders. Moreover, no exempt-interest dividends paid by these Funds will
qualify for the corporate dividends-received deduction for federal income tax
purposes.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of these Funds is not deductible for federal income tax
purposes. Under regulations used by the IRS for determining when borrowed funds
are considered used for the purposes of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the purchase
of shares of these Funds. California personal income tax law restricts the
deductibility of interest on indebtedness incurred by a shareholder to purchase
or carry shares of a fund paying dividends exempt from California personal
income tax, as well as the allowance of losses realized upon a sale or
redemption of shares, in substantially the same manner as federal tax law.
Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their own tax
advisers before investing in these Funds.
Up to 85% of social security or railroad retirement benefits may be
included in federal (but not California) taxable income for benefit recipients
whose adjusted gross income (including income from tax-exempt sources such as
tax-exempt bonds and these Funds) plus 50% of their benefits exceeding certain
base amounts. Income from these Funds, and other funds like them, is included in
the calculation of whether a recipient's income exceeds these base amounts, but
is not taxable directly.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. It can be expected that similar proposals may
be introduced in the future. Proposals by members of state legislatures may also
be introduced which could affect the state tax treatment of these Funds'
distributions. If such proposals were enacted, the availability of Municipal
Securities for investment by these Funds and the value of these Funds'
portfolios would be affected. In such event, these Funds would reevaluate their
investment objectives and policies.
Hedging. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when a Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by a Fund upon the
expiration or sale of such options held by a Fund generally will be capital gain
or loss.
Any security, option, or other position entered into or held by a Fund
that substantially diminishes a Fund's risk of loss from any other position held
by that Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting
<PAGE>
position; that a Fund's holding period in certain straddle positions not begin
until the straddle is terminated (possibly resulting in the gain being treated
as short-term capital gain rather than long-term capital gain); and that losses
recognized with respect to certain straddle positions, which would otherwise
constitute short-term capital losses, be treated as long-term capital losses.
Different elections are available to a Fund that may mitigate the effects of the
straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. Any loss realized upon the redemption or exchange of shares of
a Tax-Free Fund within six months from their date of purchase will be disallowed
to the extent of distributions of exempt-interest dividends with respect to such
shares during such six-month period. All or a portion of a loss realized upon
the redemption of shares of a Fund may be disallowed to the extent shares of the
same Fund are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Funds. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
<PAGE>
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts have the same members on
their Boards, are responsible for the overall management of the Funds, including
general supervision and review of their investment activities. The officers (the
two Trusts, as well as an affiliated Trust, The Montgomery Funds III, have the
same officers), who administer the Funds' daily operations, are appointed by the
Boards of Trustees. The current Trustees and officers of the Trusts performing a
policy-making function and their affiliations and principal occupations for the
past five years are set forth below:
Richard W. Ingram, President and Treasurer (Age 42)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Ingram is the
Executive Vice President and Director of Client Services and Treasury
Administration of FDI; Senior Vice President of Premier Mutual Fund Services,
Inc., an affiliate of FDI (Premier Mutual) and an officer of certain investment
companies advised or administered by JP Morgan (Morgan), Dreyfus Corporation
(Dreyfus), Waterhouse Asset Management, Inc. (Waterhouse), RCM Capital
Management LLC (RCM) and Harris Trust and Savings Bank (Harris) or their
respective affiliates. Prior to April 1997, Mr. Ingram was Senior Vice President
and Director of Client Services and Treasury Administration of FDI. From March
1994 to November 1995, Mr. Ingram was Vice President and Division Manager of
First Data Investor Services Group, Inc. From 1989 to 1994, Mr. Ingram was Vice
President, Assistant Treasurer and Tax Director Mutual Funds of The Boston
Company, Inc.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 30)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
(TBCA)
Elizabeth A. Keeley, Vice President and Assistant Secretary (Age 28)
200 Park Avenue, New York, New York 10166. Ms. Keeley is the Vice President and
Senior Counsel of FDI and Premier Mutual, and an officer of certain investment
companies advised or administered by Morgan, Dreyfus, RCM, Waterhouse and Harris
or their respective affiliates. Prior to August 1996, Ms. Keeley was Assistant
Vice President and Counsel of FDI and premier Mutual. Prior to September 1995,
Ms. Keeley was enrolled at Fordham University School of Law and received her
J.D. in May 1995. Prior to September 1995, Ms. Keeley was an Assistant at the
National Association for Public Interest Law.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 32)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
<PAGE>
Mary A. Nelson, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of Bay. Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 28)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (Age 35)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
<PAGE>
John A. Farnsworth, Trustee (Age 55)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner off Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
and executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (Age 53)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 48)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Board
of Schools of the Sacred Heart, and is a member of the Archdiocese of San
Francisco Finance Council, where she chairs the Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (Age 56).*
101 California Street, San Francisco, California 94111.R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E. F.
Hutton & Co. as a Vice President with responsibility for both retail and
institutional accounts. Mr. Doyle was also with Connecticut General Insurance,
where he served as a Consultant to New York Stock Exchange Member Firms in the
area of financial planning.
<TABLE>
The officers of the Trusts, and the Trustees who are considered
"interested persons" of the Trusts, receive no compensation directly from the
Trusts for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Funds and Funds Distributor, Inc. will receive commissions for
executing portfolio transactions for the Funds. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board meeting attended. The aggregate
compensation paid by each Trust to each of the Trustees during the fiscal year
ended
- -----------------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
<PAGE>
June 30, 1997, and the aggregate compensation paid to each of the Trustees
during the fiscal year ended June 30, 1997 by all of the registered investment
companies to which the Manager provides investment advisory services, are set
forth below.
<CAPTION>
NAME OF TRUSTEE AGGREGATE AGGREGATE COMPENSATION PENSION OR RETIREMENT TOTAL COMPENSATION FROM THE
COMPENSATION FROM FROM THE MONTGOMERY FUNDS BENEFITS ACCRUED AS PART OF TRUSTS AND FUND COMPLEX (1
THE MONTGOMERY FUNDS II FUND EXPENSES* ADDITIONAL TRUST)
<S> <C> <C> <C> <C>
R. Stephen Doyle None None -- None
John A. Farnsworth $25,000 $5,000 -- $35,000
Andrew Cox $25,000 $5,000 -- $35,000
Cecilia H. Herbert $25,000 $5,000 -- $35,000
<FN>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus, investment
management services are provided to the Funds (except the U.S. Asset Allocation
Fund) by Montgomery Asset Management LLC, the Manager, pursuant to an Investment
Management Agreement between the Manager and The Montgomery Funds dated July 31,
1997; and to the U.S. Asset Allocation Fund by the Manager pursuant to an
Investment Management Agreement between the Manager and The Montgomery Funds II
dated July 31, 1997(together, the "Agreements").
The Agreements are in effect with respect to each Fund for two years
after the Fund's inclusion in its Trust's Agreement (on or around its beginning
of public operations) and then continue for each Fund for periods not exceeding
one year so long as such continuation is approved at least annually by (1) the
Board of the appropriate Trust or the vote of a majority of the outstanding
shares of that Fund, and (2) a majority of the Trustees who are not interested
persons of any party to the relevant Agreement, in each case by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Agreements may be terminated at any time, without penalty, by a Fund or the
Manager upon 60 days' written notice, and are automatically terminated in the
event of its assignment as defined in the Investment Company Act.
<TABLE>
For services performed under the Agreements, each Fund pays the Manager
a management fee (accrued daily but paid when requested by the Manager) based
upon the average daily net assets of the Fund at the following annual rates:
<CAPTION>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
U.S. Equity Funds
<S> <C> <C>
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Montgomery Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
<PAGE>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Foreign and Global Equity Funds
Montgomery International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
Montgomery Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Latin America Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global Opportunities Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global Communications Fund First $250 million 1.25%
Over $250 million 1.00%
Multi-Strategy Funds
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Montgomery U.S. Asset Allocation Fund All Amounts None
Montgomery Global Asset Allocation Fund All Amounts 0.20%*
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery Short Duration Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
Montgomery California Tax-Free Intermediate Bond Fund First $500 million 0.50%
Over $500 million 0.40%
Montgomery California Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
<PAGE>
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
Montgomery Federal Tax-Free Money Fund First $500 million 0.40%
Over $500 million 0.30%
<FN>
* This amount represents only the management fee of the U.S. Asset
Allocation Fund and does not include management fees attributable to
the Underlying Funds which ultimately are to be borne by shareholders
of the Global Asset Allocation Fund.
** This amount represents only the management fee of the Global Asset
Allocation Fund and does not include management fees attributable to
the Underlying Funds which ultimately are to be borne by shareholders
of the Global Asset Allocation Fund.
</FN>
</TABLE>
As noted in the Prospectus, the Manager has agreed to reduce some or
all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below the following percentages of each
Fund's average net assets (excluding Rule 12b-1 fees): International Small Cap,
Emerging Markets, Emerging Asia, Latin America, Opportunities and Communications
Funds, one and nine-tenths of one percent (1.90%) each; Select 50 Fund, one and
eight-tenths of one percent (1.80%); Micro Cap Fund, one and three-fourths
percent (1.75%); International Growth Fund, one and sixty-five one-hundredths of
one percent (1.65%); Growth and Small Cap Opportunities Fund, one and
five-tenths of one percent (1.50%); Small Cap Fund, one and four-tenths of one
percent (1.40%); U.S. Asset Allocation Fund, one and three-tenths percent
(1.30%); Global Asset Allocation Fund, five-tenths of one percent (0.50%) of the
Global Asset Allocation Fund's average net assets (excluding expenses related to
the Underlying Funds) or one and seventy-five one-hundredths of one percent
(1.75%) (including total expenses of the Underlying Funds), the Short Bond,
Total Return Bond, and California Intermediate Bond Funds, seven-tenths of one
percent (0.70%) each; the Equity Income Fund, eighty-five-one-hundredths of one
percent (0.85%); and the Money Market Funds, six-tenths of one percent (0.60%),
each. The Manager also may voluntarily reduce additional amounts to increase the
return to a Fund's investors. Any reductions made by the Manager in its fees are
subject to reimbursement by that Fund within the following three years provided
the Fund is able to effect such reimbursement and remain in compliance with the
foregoing expense limitations. The Manager generally seeks reimbursement for the
oldest reductions and waivers before payment by the Funds for fees and expenses
for the current year.
Operating expenses for purposes of the Agreements include the Manager's
management fee but do not include any taxes, interest, brokerage commissions,
expenses incurred in connection with any merger or reorganization or
extraordinary expenses such as litigation.
The Agreements were approved with respect to each Fund by the Board of
the Trust at duly called meetings. In considering the Agreements, the Trustees
specifically considered and approved the provision which permits the Manager to
seek reimbursement of any reduction made to its management fee within the
three-year period. The Manager's ability to request reimbursement is subject to
various conditions. First, any reimbursement is subject to a Fund's ability to
effect such reimbursement and remain in compliance with applicable expense
limitations in place at that time. Second, the Manager must specifically request
the reimbursement from the Board of Trustees. Third, the Board of Trustees must
approve such reimbursement as appropriate and not inconsistent with the best
interests of the Fund and the shareholders at the time such reimbursement is
requested. Because of these substantial contingencies, the potential
reimbursements will be accounted for as contingent liabilities that are not
recordable on the balance sheet of a Fund until collection is
<PAGE>
probable; but the full amount of the potential liability will appear footnote to
each Fund's financial statements. At such time as it appears probable that a
Fund is able to effect such reimbursement, that the Manager intends to seek such
reimbursement and that the Board of Trustees has or is likely to approve the
payment of such reimbursement, the amount of the reimbursement will be accrued
as an expense of that Fund for that current period.
<TABLE>
As compensation for its investment management services, each of the
following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
<CAPTION>
Fund Year or Period Ended June 30,
1997 1996 1995
<S> <C> <C> <C>
U.S. Equity Funds
Montgomery Growth Fund $ 9,429,758 $ 8,336,529 $ 5,566,892
Montgomery Small Cap Opportunities Fund $ 2,352,549 $ 217,603 N/A
Montgomery Small Cap Fund $ 2,290,187 $ 2,364,834 $ 2,095,945
Montgomery Micro Cap Fund $ 4,042,815 $ 3,732,720 $ 703,124
Montgomery Equity Income Fund $ 244,249 $ 101,709 $ 12,589
Foreign and Global Equity Funds
Montgomery International Growth Fund $ 378,515 $ 97,137 N/A
Montgomery International Small Cap Fund $ 823,594 $ 611,587 $ 473,200
Montgomery Emerging Markets Fund $10,621,310 $10,262,601 $ 9,290,178
Montgomery Emerging Asia Fund $ 257,092 N/A N/A
Montgomery Latin America Fund N/A N/A N/A
Montgomery Global Opportunities Fund $ 562,210 $ 381,316 $ 226,283
Montgomery Global Communications Fund $ 2,298,528 $ 3,186,649 $ 2,952,058
Multi-Strategy Funds
Montgomery Select 50 Fund $ 1,366,989 $ 359,453 N/A
Montgomery U.S. Asset Allocation Fund $ 1,211,759 $ 998,198 $ 150,882
Montgomery Global Asset Allocation Fund $ 1,231 N/A N/A
U.S. Fixed-Income and Money Market Funds
Montgomery Total Return Bond Fund N/A N/A N/A
Montgomery Short Duration Government Bond Fund $ 231,870 $ 93,531 $ 99,249
Montgomery Government Reserve Fund $ 2,175,561 $ 1,703,723 $ 1,440,964
Montgomery California Tax-Free Intermediate Bond Fund $ 103,992 $ 48,596 $ 43,889
Montgomery California Tax-Free Money Fund $ 640,819 $ 538,030 $ 149,574
Montgomery Federal Tax-Free Money Fund $ 319,348 N/A N/A
</TABLE>
The Manager also may act as an investment adviser or administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trusts and who are also affiliated persons of the
Manager.
<PAGE>
The use of the name "Montgomery" by the Trusts and by the Funds is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share Marketing Plan
(or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds pursuant to
Rule 12b-1 under the Investment Company Act. The Distributor serves as the
distribution coordinator under the 12b-1 Plan and, as such, receives any fees
paid by the Funds pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Funds offered only one class of shares.
On that date, the Board of Trustees of the Trusts, including a majority of the
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the 12b-1 Plan or in any
agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of each Fund approved the 12b-1 Plan covering each
Class. The single class of shares existing before that date was redesignated the
Class R shares. Class R shares are not covered by the 12b-1 Plan.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Distributor at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares and at an annual rate of 0.75% of the
Fund's aggregate average daily net assets attributable to its Class L shares,
respectively, to reimburse the Distributor for its expenses in connection with
the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Distributor may use the distribution
fees received from the Class of the Fund covered by the 12b-1 Plan only to pay
for the distribution expenses of that Class. Distribution fees are accrued daily
and paid monthly, and are charged as expenses of the Class P and Class L shares
as accrued.
Class P and Class L shares are not obligated under the 12b-1 Plan to
pay any distribution expense in excess of the distribution fee. Thus, if the
12b-1 Plan were terminated or otherwise not continued, no amounts (other than
current amounts accrued but not yet paid) would be owed by the Class to the
Distributor.
The 12b-1 Plan provides that it shall continue in effect from year to
year provided that a majority of the Board of Trustees of the Trust, including a
majority of the Independent Trustees, vote annually to continue the 12b-1 Plan.
The 12b-1 Plan (and any distribution agreement between the Fund, the Distributor
or the Manager and a selling agent with respect to the Class P or Class L
shares) may be terminated without penalty upon at least 60-days' notice by the
Distributor or the Manager, or by the Fund by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding shares (as
defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies.
All distribution fees paid by the Funds under the 12b-1 Plan will be
paid in accordance with Rule 2830 of the NASD Rules of Conduct, as such Rule may
change from time to time. Pursuant to the 12b-1 Plan, the Boards of Trustees
will review at least quarterly a written report of the distribution expenses
incurred by the Manager on behalf of the Class P and Class L shares of each
Fund. In addition, as long as the 12b-1 Plan remains in effect, the selection
and nomination of Trustees who are not interested persons (as defined in the
Investment Company Act) of the Trust shall be made by the Trustees then in
office who are not interested persons of the Trust.
Shareholder Services Plan. The Trusts have adopted a Shareholder
Services Plan (the "Services Plan") with respect to the Funds. The Manager (or
its affiliate) serves as the service provider under the Services Plan
<PAGE>
and, as such, receives any fees paid by the Funds pursuant to the Services Plan.
The Trusts have not yet implemented the Services Plan for any Fund and have not
set a date for implementation. Affected shareholders will be notified at least
60 days before implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trusts, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Services
Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the Services Plan for
the newly designated Class P and Class L shares of each Fund. The initial
shareholder of the Class P and Class L shares, if any, of each Fund approved the
Services Plan covering each Class. Class R shares are not covered by the
Services Plan.
Under the Services Plan, when implemented, Class P and Class L of each
Fund will pay a continuing service fee to the Manager, the Distributor or other
service providers, in an amount, computed and prorated on a daily basis, equal
to 0.25% per annum of the average daily net assets of Class P and Class L shares
of each Fund. Such amounts are compensation for providing certain services to
clients owning shares of Class P or Class L of the Funds, including personal
services such as processing purchase and redemption transactions, assisting in
change of address requests and similar administrative details, and providing
other information and assistance with respect to a Fund, including responding to
shareholder inquiries.
The Distributor. The Distributor may provide certain administrative
services to the Funds on behalf of the Manager. The Distributor will also
perform investment banking, investment advisory and brokerage services for
persons other than the Funds, including issuers of securities in which the Funds
may invest. These activities from time to time may result in a conflict of
interests of the Distributor with those of the Funds, and may restrict the
ability of the Distributor to provide services to the Funds.
The Custodian. Morgan Stanley Trust Company serves as principal
Custodian of the Funds' assets, which are maintained at the Custodian's
principal office and at the offices of its branches and agencies throughout the
world. The Custodian has entered into agreements with foreign sub-custodians
approved by the Trustees pursuant to Rule 17f-5 under the Investment Company
Act. The Custodian, its branches and sub-custodians generally hold certificates
for the securities in their custody, but may, in certain cases, have book
records with domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the securities.
Compensation for the services of the Custodian is based on a schedule of charges
agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Agreements, the Manager determines which securities are to be
purchased and sold by the Funds and which broker-dealers are eligible to execute
the Funds' portfolio transactions, subject to the instructions of, and review
by, the Funds and the Boards. Purchases and sales of securities within the U.S.
other than on a securities exchange will generally be executed directly with a
"market-maker" unless, in the opinion of the Manager or a Fund, a better price
and execution can otherwise be obtained by using a broker for the transaction.
The Foreign and Global Equity Funds contemplate purchasing most equity
securities directly in the securities markets located in emerging or developing
countries or in the over-the-counter markets. A Fund
<PAGE>
purchasing ADRs and EDRs may purchase those listed on stock exchanges, or traded
in the over-the-counter markets in the U.S. or Europe, as the case may be. ADRs,
like other securities traded in the U.S., will be subject to negotiated
commission rates. The foreign and domestic debt securities and money market
instruments in which a Fund may invest may be traded in the over-the-counter
markets.
Purchases of portfolio securities for the Funds also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Funds will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the firm's ability to execute trades in a specific
market required by a Fund, such as in an emerging market, the size of the order,
the difficulty of execution, the operational facilities of the firm involved,
the firm's risk in positioning a block of securities, and other factors.
Provided the Trusts' officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
While the Funds' general policy is to seek first to obtain the most
favorable price and execution available, in selecting a broker-dealer to execute
portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by that Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to that Fund or
assist the Manager in carrying out its responsibilities to that Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Funds. The Boards review all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Funds.
Investment decisions for the Funds are made independently from those of
other client accounts of the Manager or its affiliates, and suitability is
always a paramount consideration. Nevertheless, it is possible that at times the
same securities will be acceptable for one or more Funds and for one or more of
such client accounts.
<PAGE>
The Manager and its personnel may have interests in one or more of those client
accounts, either through direct investment or because of management fees based
on gains in the account. The Manager has adopted allocation procedures to ensure
the fair allocation of securities and prices between the Funds and the Manager's
various other accounts. These procedures emphasize the desirability of bunching
trades and price averaging (see below) to achieve objective fairness among
clients advised by the same portfolio manager or portfolio team. Where trades
cannot be bunched, the procedures specify alternatives designed to ensure that
buy and sell opportunities are allocated fairly and that, over time, all clients
are treated equitably. The Manager's trade allocation procedures also seek to
ensure reasonable efficiency in client transactions, and they provide portfolio
managers with reasonable flexibility to use allocation methodologies that are
appropriate to their investment discipline on client accounts.
To the extent any of the Manager's client accounts and a Fund seek to
acquire the same security at the same general time (especially if the security
is thinly traded or is a small cap stock), that Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, a Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. In many cases, the Funds' transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that Fund is concerned. In other cases, however, it is believed that
the ability of the Fund to participate in volume transactions may produce better
executions for the Fund.
Other than for the U.S. Fixed Income and Money Market Funds, the
Manager's sell discipline for investments in issuers is based on the premise of
a long-term investment horizon; however, sudden changes in valuation levels
arising from, for example, new macroeconomic policies, political developments,
and industry conditions could change the assumed time horizon. Liquidity,
volatility, and overall risk of a position are other factors considered by the
Manager in determining the appropriate investment horizon. These Funds will
limit investments in illiquid securities to 15% of net assets.
For each Fund, sell decisions at the country level are dependent on the
results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of
factors including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and a
declining financial flexibility may also signal a sell.
For the year ended June 30, 1997, the Funds total securities
transactions generated commissions of $12,725,341, of which $27,015 was paid to
Montgomery Securities.
<PAGE>
For the year ended June 30, 1996, the Funds' total securities
transactions generated commissions of $14,874,777, of which $164,056 was paid to
Montgomery Securities. For the year ended June 30, 1995, the Funds' total
securities transactions generated commissions of $11,840,329, of which $74,850
was paid to Montgomery Securities. Throughout those fiscal years, Montgomery
Securities was affiliated with the Funds through its ownership of Montgomery
Asset Management L.P., the former Manager of the Funds.
The Funds do not effect securities transactions through brokers in
accordance with any formula, nor do they effect securities transactions through
such brokers solely for selling shares of the Funds. However, brokers who
execute brokerage transactions as described above may from time to time effect
purchases of shares of the Funds for their customers.
Depending on the Manager's view of market conditions, the Funds may or
may not purchase securities with the expectation of holding them to maturity,
although their general policy is to hold securities to maturity. The Funds may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Trust reserves the right in its sole discretion to (i) suspend the
continued offering of its Funds' shares, and (ii) reject purchase orders in
whole or in part when in the judgment of the Manager or the Distributor such
suspension or rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best interests of a
Fund, an investor may purchase shares of that Fund by tendering payment in kind
in the form of securities, provided that any such tendered securities are
readily marketable (e.g., the Funds will not acquire restricted securities),
their acquisition is consistent with that Fund's investment objective and
policies, and the tendered securities are otherwise acceptable to that Fund's
Manager. Such securities are acquired by that Fund only for the purpose of
investment and not for resale. For the purposes of sales of shares of that Fund
for such securities, the tendered securities shall be valued at the identical
time and in the identical manner that the portfolio securities of that Fund are
valued for the purpose of calculating the net asset value of that Fund's shares.
A shareholder who purchases shares of a Fund by tendering payment for the shares
in the form of other securities may be required to recognize gain or loss for
income tax purposes on the difference, if any, between the adjusted basis of the
securities tendered to the Fund and the purchase price of the Fund's shares
acquired by the shareholder.
Payments to shareholders for shares of a Fund redeemed directly from
that Fund will be made as promptly as possible but no later than three days
after receipt by the Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that a Fund
may suspend the right of redemption or postpone the date of payment during any
period when (i) trading on the New York Stock Exchange ("NYSE") is restricted as
determined by the SEC or the NYSE is closed for other than weekends and
holidays; (ii) an emergency exists as determined by the SEC (upon application by
a Fund pursuant to Section 22(e) of the Investment Company Act) making disposal
of portfolio securities or valuation of net assets of a Fund not reasonably
practicable; or (iii) for such other period as the SEC may permit for the
protection of the Fund's shareholders.
The Funds intend to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Funds may
make payment partly in their portfolio securities with a current
<PAGE>
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Funds do not anticipate that they will make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trusts have
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Funds pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of a Fund's portfolio
securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Taxable Funds are available for
purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Taxable Funds
through an IRA, there is available through these Funds a prototype individual
retirement account and custody agreement. The custody agreement provides that
DST Systems, Inc. will act as custodian under the plan, and will furnish
custodial services for an annual maintenance fee per participating account of
$10 (These fees are in addition to the normal custodian charges paid by these
Funds and will be deducted automatically from each Participant's account.) For
further details, including the right to appoint a successor custodian, see the
plan and custody agreements and the IRA Disclosure Statement as provided by
these Funds. An IRA that invests in shares of these Funds may also be used by
employers who have adopted a Simplified Employee Pension Plan. Individuals or
employers who wish to invest in shares of a Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
The IRA Disclosure Statement available from the Taxable Funds contains
more information on the amount investors may contribute and the deductibility of
IRA contributions. In summary, an individual may make deductible contributions
to the IRA of up to 100% of earned compensation, not to exceed $2,000 annually
(or $2,250 to two IRAs if there is a non-working spouse)For tax years beginning
after 1996, however, the $2,250 limitation is expended to $4,000. An IRA may be
established whether or not the amount of the contribution is deductible.
Generally, a full deduction for federal income tax purposes will only be allowed
to taxpayers who meet one of the following two additional tests:
(A) the individual and the individual's spouse are each not an
active participant in an employer's qualified retirement plan,
or
(B) the individual's adjusted gross income (with some
modifications) before the IRA deduction is (i) $40,000 or less
for married couples filing jointly, or (ii) $25,000 or less
for single individuals. The maximum deduction is reduced for a
married couple filing jointly with a combined adjusted gross
income (before the IRA deduction) between $40,000 and $50,000,
and for a single individual with an adjusted gross income
(before the IRA deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant with respect to the requirements of such plans and
the tax aspects thereof.
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is calculated as follows:
all liabilities incurred or accrued are deducted from the valuation of total
assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of that Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of the Funds
generally will be determined at least once daily as of 4:00 p.m. (12:00 noon for
the Money Market Funds), eastern time, (or earlier when trading closes earlier)
on each day the NYSE is open for trading (except national bank holidays for the
Fixed Income Funds). It is expected that the NYSE will be closed on Saturdays
and Sundays and on New Year's Day, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The national bank holidays, in addition to New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas, include January 2, Good Friday, Columbus Day,
Veteran's Day and December 26. The Funds may, but do not expect to, determine
the net asset values of their shares on any day when the NYSE is not open for
trading if there is sufficient trading in their portfolio securities on such
days to affect materially per-share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Board.
The Funds' securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Manager to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Boards.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to a Fund if
acquired within 60 days of maturity or, if already held by a Fund on the 60th
day, based on the value determined on the 61st day.
<PAGE>
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Funds are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
appropriate Board, or at fair value as determined in good faith by procedures
approved by the Boards. Any such pricing service, in determining value, will use
information with respect to transactions in the securities being valued,
quotations from dealers, market transactions in comparable securities, analyses
and evaluations of various relationships between securities and yield to
maturity information.
An option that is written by a Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Boards.
If any securities held by a Fund are restricted as to resale or do not
have readily available market quotations, the Manager and the Trusts' Pricing
Committees determine their fair value, following procedures approved by the
Boards. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition)In addition, specific factors are also generally considered, such as
the cost of the investment, the market value of any unrestricted securities of
the same class (both at the time of purchase and at the time of valuation), the
size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Boards in good faith will establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the Boards
in good faith deem appropriate to reflect their fair value.
The Money Market Funds value their portfolio instruments at amortized
cost, which means that securities are valued at their acquisition cost, as
adjusted for amortization of premium or discount, rather than at current market
value. Calculations are made at least weekly to compare the value of these
Funds' investments valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the
<PAGE>
instruments. The amortized cost method of valuation seeks to maintain a stable
$1.00 per-share net asset value even where there are fluctuations in interest
rates that affect the value of portfolio instruments. Accordingly, this method
of valuation can in certain circumstances lead to a dilution of shareholders'
interest. If a deviation of 0.50% or more were to occur between the net asset
value per share calculated by reference to market values and these Fund's $1.00
per-share net asset value, or if there were any other deviation which the Board
of Trustees believed would result in a material dilution to shareholders or
purchasers, the Board would promptly consider what action, if any, should be
initiated. If these Funds' per-share net asset values (computed using market
values) declined, or were expected to decline, below $1.00 (computed using
amortized cost), the Board might temporarily reduce or suspend dividend payments
or take other action in an effort to maintain the net asset value at $1.00 per
share. As a result of such reduction or suspension of dividends or other action
by the Board, an investor would receive less income during a given period than
if such a reduction or suspension had not taken place. Such action could result
in investors receiving no dividend for the period during which they hold their
shares and receiving, upon redemption, a price per share lower than that which
they paid. On the other hand, if these Funds' per-share net asset values
(computed using market values) were to increase, or were anticipated to
increase, above $1.00 (computed using amortized cost), the Board might
supplement dividends in an effort to maintain the net asset value at $1.00 per
share.
PRINCIPAL UNDERWRITER
The Distributor acts as the Funds' principal underwriter in a
continuous public offering of the Funds' shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in effect thereafter for periods
not exceeding one year if approved at least annually by (i) the appropriate
Board of Trustees or the vote of a majority of the outstanding securities of
that Fund (as defined in the Investment Company Act), and (ii) a majority of the
Trustees who are not interested persons of any such party, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement with respect to each Fund may be terminated
without penalty by the parties thereto upon 60 days' written notice and is
automatically terminated in the event of its assignment as defined in the
Investment Company Act. There are no underwriting commissions paid with respect
to sales of the Funds' shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time, quote
various performance figures in advertisements and investor communications to
illustrate their past performance. Performance figures will be calculated
separately for the Class R, Class P and Class L shares.
The Money Market Funds. Current yield reflects the interest income per
share earned by these Funds' investments. Current yield is computed by
determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
<PAGE>
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission formula:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
The Short Bond Fund and California Intermediate Bond Fund. These Funds'
30-day yield figure described in the Prospectus is calculated according to a
formula prescribed by the SEC, expressed as follows:
6
YIELD = 2[(((A-B)/CD)+1) -1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by these Funds at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest
rates, these Funds' yields will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, will tend to be somewhat
lower. In addition, when interest rates are falling, monies received by these
Funds from the continuous sale of their shares will likely be invested in
instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund that
invests in tax-exempt obligations. The tax equivalent yield for one of the
Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 45.22%, based on a California tax rate of
9.3% combined with a 39.6% federal tax rate. The Federal Money Fund assumes a
federal tax rate of 39.6% The effective rate used in determining such yield does
not reflect the tax costs resulting from the loss of the benefit of personal
exemptions and itemized deductions that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
certain levels. The tax equivalent yield may be higher than the rate stated for
taxpayers subject to the loss of these benefits.
<TABLE>
Yields. The yields for the indicated periods ended June 30, 1997, were
as follows:
<PAGE>
<CAPTION>
FUND YIELD EFFECTIVE TAX-EQUIV. CURRENT TAX-EQUIV. YIELD*
(7-DAY) YIELD EFFECTIVE YIELD* YIELD (30-DAY)
(7-DAY) (7-DAY) (30-DAY)
<S> <C> <C> <C> <C> <C>
Montgomery Total Return Bond Fund N/A N/A N/A N/A N/A
Montgomery Short Duration Government N/A N/A N/A 6.03% N/A
Bond Fund
Montgomery Government Reserve Fund 5.10% 5.23% N/A 5.09% N/A
Montgomery Federal Tax-Free Money Fund 3.61% 3.67% 6.08% 3.29% 5.45%
Montgomery California Tax-Free N/A N/A N/A 4.19% 7.65%
Intermediate Bond Fund
Montgomery California Tax-Free Money 3.43% 3.49% 6.37% 3.21% 5.86%
Fund
<FN>
* Calculated using a combined federal and California income tax rate of 46.24%
for the California Funds and a federal rate of 39.6% for the Federal Money Fund.
</FN>
</TABLE>
Average Annual Total Return. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of
$1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a 1-, 5- or
10-year period at the end of each
respective period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Aggregate Total Return. A Fund's "aggregate total return" figures
represent the cumulative change in the value of an investment in that Fund for
the specified period and are computed by the following formula:
<PAGE>
ERV - P
-------
P
Where: P = a hypothetical initial payment of
$1,000.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a l-, 5- or
10-year period at the end of a l-,
5- or 10-year period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Each Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
<TABLE>
The average annual total return for each Fund for the periods indicated
was as follows:
<CAPTION>
FUND YEAR 5-YEARS INCEPTION*
ENDED ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1997
<S> <C> <C> <C>
Montgomery Growth Fund 20.44% N/A 26.78%
Montgomery Small Cap Opportunities Fund 10.97% N/A 28.65%
Montgomery Small Cap Fund 6.81% 18.07% 20.47%
Montgomery Micro Cap Fund 14.77% N/A 24.26%
Montgomery Equity Income Fund 26.02% N/A 23.67%
Montgomery International Growth Fund 19.20% N/A 23.43%
Montgomery International Small Cap Fund 15.48% N/A 10.06%
Montgomery Emerging Markets Fund 19.34% 12.84% 11.91%
Montgomery Emerging Asia Fund 57.80% N/A 57.80%
Montgomery Latin America Fund N/A N/A N/A
Montgomery Global Opportunities Fund 18.71% N/A 16.09%
Montgomery Global Communications Fund 14.43% N/A 14.30%
Montgomery Select 50 Fund 26.35% N/A 37.38%
Montgomery U.S. Asset Allocation Fund 14.65% N/A 23.21%
Montgomery Global Asset Allocation Fund 19.20% N/A 23.43%
Montgomery Total Return Bond Fund N/A N/A N/A
Montgomery Short Duration Government Bond Fund 6.79% N/A 6.38%
Montgomery Government Reserve Fund 5.03% N/A 4.30%
Montgomery California Tax-Free Intermediate Bond Fund 6.91% N/A 5.17%
Montgomery California Tax-Free Money Fund 2.95% N/A 3.15%
Montgomery Federal Tax-Free Money Fund N/A N/A 3.26%
<FN>
- ----------------
<PAGE>
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception for the Funds were:
Growth Fund, September 30, 1993; Small Cap Opportunities Fund, December
29, 1995; Small Cap Fund, July 13, 1990; Micro Cap Fund, December 30,
1994; Equity Income Fund, September 30, 1994; International Growth
Fund, June 30, 1995; International Small Cap Fund, September 30, 1993;
Emerging Markets Fund, March 1, 1992; Emerging Asia Fund, September 30,
1996; Latin America Fund, June 30, 1997; Global Opportunities Fund,
September 30, 1993; Global Communications Fund, June 1, 1993; Select 50
Fund, October 27, 1995; U.S. Asset Allocation Fund, March 31, 1994;
Global Asset Allocation Fund, January 2, 1997; Total Return Bond Fund,
June 30, 1997; Short Duration Government Bond Fund, December 18, 1992;
Government Reserve Fund, September 14, 1992; California Intermediate
Bond Fund, July 1, 1993; California Tax-Free Money Fund, September 30,
1994; and Federal Tax-Free Money Fund, June 30, 1996.
</FN>
</TABLE>
Presentation of Other Performance Information Regarding the Opportunities Fund
John Boich and Oscar Castro jointly managed a limited partnership
called the Common Goal World Fund Limited Partnership (the "Partnership") before
joining the Manager. John Boich has served as the Partnership's General Partner
since its inception on January 7, 1990 until April 1993, when Mr. Castro and Mr.
Boich joined the Manager as Managing Directors and Portfolio Managers. On
September 30, 1993, the Montgomery Global Opportunities Fund, which has a
similar investment strategy as the partnership, was launched On October 1, 1993,
the Partnership was dissolved and the assets were transferred in-kind into the
Opportunities Fund. Consistent with applicable law, the Managers may advertise
the performance of the Partnership as part of materials concerning the
Opportunity Fund.
<TABLE>
The annual total return for the Partnership for the periods indicated
was as follows:
<CAPTION>
-----------------------------------------------------------------------------------------------
PERIOD PARTNERSHIP ANNUAL TOTAL RETURN (NET OF FEES)
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Year ended Dec. 31, 1990* 2.04%
-----------------------------------------------------------------------------------------------
Year ended Dec. 31, 1991 25.32%
-----------------------------------------------------------------------------------------------
Year ended Dec. 31, 1992 4.53%
-----------------------------------------------------------------------------------------------
9-month Period ended Sept. 30, 1993 17.29%
-----------------------------------------------------------------------------------------------
<FN>
* The Partnership commenced operations on January 7, 1990.
</FN>
</TABLE>
Presentation of Other Performance Information Regarding the Emerging Asia Fund
<TABLE>
From time to time, the Manager may advertise the performance of a
related mutual fund sold only in Canada and advised by the Manager that has a
substantially similar investment objective as the Emerging Asia Fund. The
related mutual fund, called the "Navigator Asia Pacific Fund" commenced
operations on May 19, 1995. The Manager managed that Fund until July 31, 1997.
The performance information of the Navigator Asia Pacific Fund (net of fees) was
as follows:
<PAGE>
<CAPTION>
--------------------------------------------------------------------------------
PERIOD AGGREGATE TOTAL RETURN (NET OF FEES)
--------------------------------------------------------------------------------
<S> <C> <C>
Year to date ended July 31, 1997 42.09%
--------------------------------------------------------------------------------
Since inception 78.70%
--------------------------------------------------------------------------------
</TABLE>
Comparisons. To help investors better evaluate how an investment in the
Funds might satisfy their investment objectives, advertisements and other
materials regarding the Funds may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. Publications, indices and
averages, including but not limited to, the following may be used in discussion
of a Fund's performance or the investment opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of
the Morgan Stanley Capital International Indices, and one or
more of the International Finance Corporation Indices.
b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
c) Lipper--Mutual Fund Performance Analysis and Lipper Fixed
Income Fund Performance Analysis--A ranking service that
measures total return and average current yield for the mutual
fund industry and ranks individual mutual fund performance
over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report--Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and
government money funds.
e) Salomon Brothers Bond Market Roundup--A weekly publication
which reviews yield spread changes in the major sectors of the
money, government agency, futures, options, mortgage,
corporate, Yankee, Eurodollar, municipal, and preferred stock
markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices--Lehman Brothers fixed-income indices
may be used for appropriate comparisons.
g) other indices--including Consumer Price Index, Ibbotson,
Micropal, CNBC/Financial News Composite Index, MSCI EAFE Index
(Morgan Stanley Capital International, Europe, Australasia,
Far East Index--a capitalization-weighted index that includes
all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000 and IFC
Emerging Markets Database.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by the Funds to calculate
their figures.
<PAGE>
The Funds may also publish their relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.
and Morningstar, Inc.
Investors should note that the investment results of the Funds will
fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Funds. From time to time, the Funds may
publish or distribute information and reasons supporting the Manager's belief
that a particular Fund may be appropriate for investors at a particular time.
The information will generally be based on internally generated estimates
resulting from the Manager's research activities and projections from
independent sources. These sources may include, but are not limited to,
Bloomberg, Morningstar, Barings, WEFA, Consensus Estimates, Datastream,
Micropal, I/B/E/S Consensus Forecast, Worldscope and Reuters as well as both
local and international brokerage firms. For example, the Funds may suggest that
certain countries or areas may be particularly appealing to investors because of
interest rate movements, increasing exports and/or economic growth. The Funds
may, by way of further example, present a region as possessing the fastest
growing economies and may also present projected gross domestic product (GDP)
for selected economies. In using this information, the Montgomery Emerging Asia
Fund also may claim that certain Asian countries are regarded as having high
rates of growth for their economies (GDP), international trade and corporate
earnings; thus producing what the Manager believes to be a favorable investment
climate.
Research. The Manager has developed its own tradition of intensive
research and has made intensive research one of the important characteristics of
the Montgomery Funds style
The portfolio managers for Montgomery's Foreign and Global Equity Funds
work extensively on developing an in-depth understanding of particular foreign
markets and particular companies. And they very often discover that they are the
first analysts from the United States to meet with representatives of foreign
companies, especially those in emerging markets nations.
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that crosses a number of the Funds
and is reflected in the number of Funds oriented towards smaller capitalization
businesses
In-depth research, however, goes beyond gaining an understanding of
unknown opportunities. The portfolio analysts have also developed new ways of
gaining information about well-known parts of the domestic market. The growth
equity team, for example, has developed its own strategy and proprietary
database for analyzing the growth potential of U.S. companies, often large,
well-known companies.
From time to time, advertising and sales materials for the Montgomery
Funds may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (currently $9 billion
for retail and institutional investors) and total shareholders invested in the
Funds (currently around 307,000).
<PAGE>
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress through
periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund; all
expenses incurred in connection with the organization of The Montgomery Funds II
have been assumed by Montgomery Institutional Series: Emerging Markets Portfolio
and the Manager. Expenses incurred in connection with the establishment and
registration of shares of each of the other funds constituting Trusts as
separate series of the Trusts have been assumed by each respective Fund. The
expenses incurred in connection with the establishment and registration of
shares of the Funds as separate series of the Trusts have been assumed by the
respective Funds and are being amortized over a period of five years commencing
with their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after commencement of those Funds'
operations. Investors purchasing shares of a Fund bear such expenses only as
they are amortized daily against that Fund's investment income.
As noted above, Morgan Stanley Trust Company (the "Custodian") acts as
custodian of the securities and other assets of the Funds. The Custodian does
not participate in decisions relating to the purchase and sale of securities by
the Funds.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, is the Funds' Master Transfer Agent. The Master Transfer Agent
has delegated certain transfer agent functions to DST Systems, Inc., P.O. Box
419073, Kansas City, Missouri 64141-6073, the Funds' Transfer and Dividend
Disbursing Agent.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco, California
94105, are the independent auditors for the Funds.
The validity of shares offered hereby will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
The shareholders of The Montgomery Funds (but not The Montgomery Funds
II) as shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust ("Declaration of Trust")
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust. The Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Funds' assets for any shareholder held
personally liable for obligations of the Funds or Trust. The Declaration of
Trust provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Funds or
Trust and satisfy any judgment thereon. All such rights are limited to the
assets of the Funds. The Declaration of Trust further provides that the Trust
may maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents to cover possible tort and other
liabilities. Furthermore, the activities of the Trust as an investment company
as distinguished from an operating company would not likely give rise to
liabilities in excess of the Funds' total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
extremely remote because it is limited to the unlikely circumstances in which
both inadequate insurance exists and a Fund itself is unable to meet its
obligations.
<PAGE>
Among the Boards' powers enumerated in the Agreements and Declaration
of Trust is the authority to terminate the Trusts or any of their series, or to
merge or consolidate the Trusts or one or more of their series with another
trust or company without the need to seek shareholder approval of any such
action.
<TABLE>
As of November 28, 1997 to the knowledge of the Funds, the following
shareholders owned of record 5 percent or more of the outstanding Class R Shares
of the respective Funds indicated:
<CAPTION>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
Growth Fund
<S> <C> <C>
Charles Schwab & Co., Inc. 19,132,033 35.43
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 4,210,462 7.80
For The Exclusive Benefit of Our Customers ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Opportunities Fund
Charles Schwab & Co., Inc. 4,631,188 35.62
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,086,377 8.36
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Fund
The Trust Company of 729,365 7.88
Knoxville
620 Market Street, #300
Knoxville, TN 37902-2232
Charles Schwab & Co., Inc. 1,538,792 16.62
101 Montgomery Street
San Francisco, CA 94104-4122
Micro Cap Fund
Charles Schwab & Co., Inc. 6,317,277 36.81
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,021,606 5.95
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
New York, NY 10008-3730
Equity Income Fund
Charles Schwab & Co., Inc. 1,068,652 51.80
101 Montgomery Street
San Francisco, CA 94104-4122
International Growth Fund
Charles Schwab & Co., Inc. 452,521 20.46
101 Montgomery Street
San Francisco, CA 94104-4122
Stanley S. Schwartz TR 174,270 7.88
U/A December 20, 1988 Stanley S. Schwartz Rev Living Trust/Arista Foundation
International Small Cap Fund
Charles Schwab & Co., Inc. 1,075,850 40.08
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp for the Exclusive Use of Our Customers 222,824 8.30
Attn: Mutual Funds
PO Box 3730
Church Street Station
New York, NY 10008-3730
Emerging Markets Fund
Charles Schwab & Co., Inc. 34,944,313 45.82
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 6,705,402 8.79
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
Emerging Asia Fund
Charles Schwab & Co., Inc. 1,043,728 33.18
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 359,643 11.43
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Wertheim Schroeder & Co., Inc 613,717 19.51
Mutual Fund Control A/C
c/o Leweo Sec Attn: Tony Muoio/Robt
34 Exchange Pl. FL4
Jersey City, NJ 07302-3901
Latin America Fund
Charles Schwab & Co., Inc. 105,902 14.16
101 Montgomery Street
San Francisco, CA 94104-9122
National Financial Services Corp. 108,808 14.55
For the Exclusive Benefit of Our
Customers - Ath Mutual Funds
P.O. Bos 3730 Church Street Station
New York, NY 10008-3730
Montgomery Securities 46,785 6.26
401K Deferred Compensation Plan
For the Exclusive Benefit of Clients
Attn: Jeanette Harrison
600 Montgomery Street
San Francisco, CA 94111-2777
Nations Banc Montgomery Securities 83,333 11.14
001-00200-14
Attn: Mutual Funds, 5th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
J. Clifford Findeiss ttee FBO 10,997,805 7.93
J. Clifford Findeiss Revocable
Trust Dtd 6/9/93
8220 State Road 84, Suite 200
Davie, FL 33324-4625
Jere'd Creed ttee FBO The 11,421,775 8.24
Jere'd Creed Revocable Trust
Dtd 6/9/93
5901 Almond Terrace
Plantation, FL 33317-2501
Global Opportunities Fund
Charles Schwab & Co., Inc. 305,621 23.65
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 104,347 8.07
For The Exclusive Benefit of Our Customers --ATTN: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Wayne Boich 133,435 10.33
155 East Broad, No. 23
Columbus, OH 43215-3609
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
Global Communications Fund
Charles Schwab & Co., Inc. 2,849,542 39.29
101 Montgomery Street
San Francisco, CA 94104-4122
Select 50 Fund
Charles Schwab & Co., Inc. 3,328,407 29.61
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 1,143,517 10.17
For the Exclusive Benefit of Our Customers
Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
U.S. Asset Allocation Fund
Charles Schwab & Co., Inc. 2,150,374 32.97
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 930,917 14.27
For the Exclusive Benefit of Our Customers Attn Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Total Return Bond Fund
Asset Allocation Fund 7,091,128 93.96
Attn: Gina Lopez
101 California Street
San Francisco, CA 94111-5802
Short Duration Government Bond Fund
Charles Schwab & Co., Inc. 1,520,185 28.42
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson, Lufkin & Jenrette 486,388 9.09
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
KONIAG Inc. 568,930 10.64
c/o Montgomery Asset Management
Attn: Carl Obeck
600 Montgomery Street
San Francisco, CA 94111-2702
Prudential Securities Inc. 572,765 10.71
Petterson & Co 575,397 10.76
P.O. Box 7829
Philadelphia, PA 19101-7829
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
Special Custody Account for The Exclusive Benefit of Customers-PC
1 New York Plaza
Attn: Mutual Funds
New York, NY 10004-1902
Wertheim Schroeder & Co. Inc. 307,533 5.75
Mutual Fund Control A/C
c/o LEWCO Securities
Attn: Tony Muoia
34 Exchange Place, Floor 4
Jersey City, NJ 07302-3901
Government Reserve Fund
Mary Miner, Trustee for Robert 39,070,626 5.97
Miner and Mary Miner Trust
U/A dated 3/14/94
1832 Baker Street
San Francisco, CA 94115-2011
California Tax-Free Intermediate Bond Fund
Charles Schwab & Co., Inc. 943,198 45.91
101 Montgomery Street
San Francisco, CA 94104-4122
Japan Small Cap Fund
Charles Schwab & Co. Inc 35,907 80.41
101 Montgomery Street
San Francisco, CA 94104-4122
Charles Schwab & Co. Inc 8,333 18.66
FBO Mark Geist 124423887
101 California Street
San Francisco CA 94104-5802
As of November 28, 1997, to the knowledge of the Funds, the following
shareholders owned of record 5 percent or more of the outstanding Class P Shares
of the respective Funds indicated:
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
Growth Fund
Dreyfus Investment Services Corp. 1,014 24.08
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Dreyfus Investment Services Corp. 238 5.66
FBO 659026941
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Gruntal & Co. 357 8.47
FBO 210-08164-18
14 Wall Street
New York, NY 10005-2101
ABN AMRO Chicago Corp. 239 5.67
FBO 086-79443-16
Attn: Mutual Fund Operations
P.O. Box 6108
Chicago, IL 60680-6108
Gruntal & Co., LLC 244 5.79
FBO 825-28374-12
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 281 6.67
FBO 886-09481-19
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 281 6.67
FBO 886-09482-18
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 237 5.64
FBO 886-09483-17
14 Wall Street
New York, NY 10005-2101
Dreyfus Investment Services 233 5.54
FBO 640201421
2 Mellon Bank Ctr
Room 177
Pittsburgh, PA 15259
US Clearing Corp 296 7.02
FBO 720-90905-18
26 Broadway
New York, NY 10004
Small Cap Opportunities Fund
E*Trade Securities Inc. 348 60.91
A/C 7880-1618
Thomas S. Smogolski C/F
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3317
U.S. Clearing Corp. 138 24.20
FBO 720-90531-10
26 Broadway
New York, NY 1004-1798
Gruntal & Co., LLC 85 14.83
FBO 886-10149-11
14 Wall Street
New York, NY 10005-2101
PaineWebber for the Benefit of 282 100
PaineWebber, Inc.
Non-Proprietary M/F
1000 Harbor Blvd.
Weehawken, NJ 07087
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
Small Cap Fund
State Street Bank & Trust Co. 186,623 33.88
U/A July 01, 1996
McClaren/Hart Employee Ret. Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. 82,665 15.01
U/A January 2, 1996
Waretek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. Tr. 43,673 7.93
GE 401K Trac Plans
c/o Defined Contributions BFDS
P.O. Box 8705
Boston, MA 0226-8705
State Street Bank & Trust Co. Tr. 102,200 18.56
U/A December 1, 1993
Ameridata Tech. Employee Svgs. Plan
Attn: Steven Shipman - Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
State Street Bank & Trust Co. 62,850 11.41
The Bordon Group, Inc.
401K Retirement & P.S.P.
P.O. Box 1992
Boston, MA 02105-1992
State Street 72,772 13.21
Retirement Savings Plan
P.O. Box 1992
Boston, MA 02105-1992
International Growth Fund
Gruntal & Co. L.L.C. 272 100
FBO
14 Wall Street
New York, NY 10005-2101
Equity-Income Fund
State Street Bank & Trust Co. Tr. 73,668 99.98
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
No. Quincy, MA 02171-2126
Emerging Markets Fund
State Street Bank & Trust Co. 27,270 65.68
V/A Jan. 2, 1996
Waretek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
US Clearing Corp. 2,199 5.30
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
FB0 720-90531-10
26 Broadway
New York, NY 1004-1798
US Clearing Corp. 5,851 14.09
FBO 780-16649-18
26 Broadway
New York, NY 10004-1798
U.S. Asset Allocation Fund
Gruntal & Co., LLC 316 26.59
FBO 886-09482-18
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 316 26.59
FBO 886-09481-19
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 290 24.36
FBO 880-12981-11
14 Wall Street
New York, NY 10005-2101
<PAGE>
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
Gruntal & Co., LLC 267 22.46
FBO 886-09483-17
14 Wall Street
New York, NY 10005-2101
</TABLE>
As of December 22, 1997, officers and directors of the Montgomery Funds
owned, in aggregate, of record more than 1% of the outstanding shares in:
Montgomery California Tax-Free Intermediate Bond Fund (holding a combined 2.4%
of shares outstanding); Montgomery Global Opportunities Fund (holding a combined
1.5% of shares outstanding).
The Trusts are registered with the Securities and Exchange Commission
as non-diversified management investment companies, although each Fund, except
for the Tax-Free Funds, is a diversified series of the Trust. Such a
registration does not involve supervision of the management or policies of the
Funds. The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statements filed with the SEC.
Copies of the Registration Statements may be obtained from the SEC upon payment
of the prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending June 30,
1997, for the Growth, Micro Cap, Small Cap, Small Cap Opportunities, Equity
Income, Opportunities, Communications, International Growth, International Small
Cap, Emerging Markets, Select 50, U.S. Asset Allocation, Global Asset
Allocation, Short Bond, Reserve, Federal Tax-Free Money, California Intermediate
Bond and California Money Funds, as contained in the Annual Report to
Shareholders of such Funds for the fiscal year ended June 30, 1997 (the
"Report"), are incorporated herein by reference to the Report.
Unaudited financial statements for period from June 30, 1997, through
October 31, 1997, for the Latin America and Total Return Bond Funds follows.
<PAGE>
<TABLE>
MONTGOMERY LATIN AMERICA FUND
Portfolio Investments
<CAPTION>
October 31, 1997 (unaudited)
Value
Shares (Note 1)
- ---------- ------------
<S> <C> <C>
COMMON STOCKS - 89.1%
Argentina - 4.4%
4,100 Banco Frances del Rio de la Plata, ADR (Banks)........................................ $ 100,962
11,000 Banco Rio de la Plata, ADR+ (Banks)................................................... 115,500
15,000 Transportadora de Gas del Sur, ADR (Pipelines)........................................ 141,563
------------
358,025
------------
Brazil - 37.5%
26,500,000 Banco do Brasil S.A. (Banks).......................................................... 223,547
14,000 Companhia Energetica de Sao Paulo, ADR+ (Electric Utilities).......................... 281,750
6,600 Companhia Fabricadora de Pecas, ADR+ (Auto/Auto Parts)................................ 94,050
181,000 Companhia Riograndense de Telecomunicacoes+ (Telephone/Regional - Local).............. 139,553
763,000 Electrobras (Electric Utilities)...................................................... 307,982
2,100 Electrobras, GDS (Electric Utilities)................................................. 251,738
46,500 Electrolux do Brasil S.A., ADR+ (Home Appliance)...................................... 267,608
17,000 Makro Atacadista S.A., GDR (Retail)................................................... 173,825
2,600 Telebras, ADR (Telephone/Networks).................................................... 263,900
9,330,000 Telec Brasileiras-Telebras ON (Telephone/Networks).................................... 829,286
37,000 TV Filme, Inc., ADR+ (Cable Television)............................................... 215,063
------------
3,048,302
------------
Canada - 5.4%
26,000 Bell Canada International Inc.+ (Telecommunications)................................. 438,750
------------
Chile - 1.1%
4,500 Empresa Nacional Electricidad S.A. (Electric Utilities).............................. 90,563
------------
Colombia - 6.7%
11,100 Banco Ganadero, ADR (Banks).......................................................... 266,400
52,000 Carulla Y Cia S.A., ADR (Retail)..................................................... 279,500
------------
545,900
------------
Mexico - 30.4%
55,000 Acer Computer Latino America S.A. de C.V. + (Computers
& Office Equipment).............................................................. 171,566
91,200 Corporacion Interamericana de Entretenimiento S.A., Series B+ (Entertainment)....... 522,699
1,659,000 Grupo Fernandez Editores S.A. de C.V., Series B+ (Newspapers/Publishing)............ 374,389
115,000 Grupo Financiero Banorte S.A. de C.V., Series B+ (Holding).......................... 157,910
635,700 Grupo Herdez S.A., Series B (Food & Beverage)....................................... 414,438
8,200 Grupo Televisa S.A., GDR+ (Broadcasting/Advertising)................................ 254,200
35,400 Pepsi-Gemex S.A., GDR (Food & Beverage)............................................. 482,325
2,200 Telefonos de Mexico S.A., ADR (Telephone/Long Distance)............................. 95,150
------------
2,472,677
------------
Venezuela - 3.6%
42,000 Corimon C.A., ADR+ (Paint).......................................................... 288,750
------------
TOTAL COMMON STOCKS
(Cost $8,607,977)............................................................... 7,242,967
------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MONTGOMERY LATIN AMERICA FUND
Portfolio Investments - (continued)
October 31, 1997 (unaudited)
<CAPTION>
Value
Shares (Note 1)
- ---------- ------------
<S> <C> <C>
PREFERRED STOCKS - 12.6%
Brazil - 12.6%
28,000,000 Banco de Credito Nacional (Banks) ................................................... $ 222,232
166,000 Confab Industrial S.A.+ (Steel)...................................................... 301,147
20,000 Companhia Fabricadora de Pecas+ (Auto/Auto Parts).................................... 126,990
1,492,000 Petroleo Brasileiro (Oil) ........................................................... 277,437
1,030,000 Telec do Rio Janeiro S.A.+ (Telephone/Networks)...................................... 94,363
-------------
TOTAL PREFERRED STOCKS
(Cost $1,547,390)............................................................... 1,022,169
-------------
RIGHTS - 0.0%#
Brazil - 0.0%# - (Cost $0)
39,964 Telec do Rio Janeiro S.A.+ (Telephone/Networks)...................................... 0
-------------
TOTAL INVESTMENTS (Cost $10,155,367*)............................................................... 101.7% 8,265,136
OTHER ASSETS AND LIABILITIES (Net).................................................................. (1.7) (137,361)
----- -------------
NETS ASSETS......................................................................................... 100.0% $ 8,127,775
===== =============
<FN>
- --------------------------
* Aggregate cost for Federal tax purposes.
# Amount represents less than 0.1%.
+ Non-income producing security.
Abbreviations:
ADR American Depositary Receipt
GDR Global Depositary Receipt
GDS Global Depositary Share
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MONTGOMERY TOTAL RETURN BOND FUND
Portfolio Investments
October 31, 1997 (Unaudited)
<CAPTION>
Principal Value
Amount (Note 1)
------------------ --------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS - 6.1%
$1,184,973 CIT Group Securitization Corporation, Series 1995-1A1,
7.700% due 08/15/20...................................................................... 1,192,259
4,000,000 Citicorp Mortgage Securities, Inc., Series 1990-17B,
9.500% due 11/25/20...................................................................... 4,082,400
116,667 Household Affinity Credit Card Master Trust I, Series 1994-2A,
7.000% due 12/15/99...................................................................... 116,766
250,000 UCFC Home Equity Loan, Series 1996-B1A2,
7.075% due 04/15/10...................................................................... 251,16
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $5,632,907)........................................................................ 5,642,594
------------
CORPORATE BONDS - 12.1%
2,000,000 Deere (John) Capital Corporation, MTN,
5.300% due 04/15/98**.................................................................... 2,000,060
805,000 Ford Motor Company, Senior Notes,
6.500% due 02/28/02...................................................................... 812,044
200,000 Franchise Finance Corporation, MTN,
6.780% due 02/20/02...................................................................... 202,750
650,000 General Motors Acceptance Corporation, Senior Notes,
6.750% due 02/07/02...................................................................... 663,812
1,205,000 Hunt (J.B.) Transport Services, Inc., Notes,
6.250% due 09/01/03...................................................................... 1,186,925
875,000 IRT Property Company, Notes,
7.450% due 04/01/01...................................................................... 902,344
950,000 Irvine Apartment Communities, Notes,
7.000% due 10/01/07...................................................................... 964,250
Kimco Realty Corporation:
900,000 Notes, 7.910% due 04/26/05............................................................... 973,125
650,000 Senior Notes, 6.500% due 10/01/03........................................................ 651,625
110,000 Occidental Petroleum Corporation, MTN,
9.750% due 06/15/01...................................................................... 122,375
1,000,000 Security Capital Pacific Trust, Notes,
7.550% due 08/01/08...................................................................... 1,070,000
500,000 Smith Barney Holdings, MTN,
5.625% due 11/15/98...................................................................... 498,980
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MONTGOMERY TOTAL RETURN BOND FUND
Portfolio Investments - (Continued)
October 31, 1997 (Unaudited)
<CAPTION>
Principal Value
Amount (Note 1)
------------------ --------
<S> <C> <C>
CORPORATE BONDS - continued
Union Acceptance Corporation:
$15,902,574 Series 1995-C,
3.000% due 10/02/02...................................................................... $ 206,237
7,282,944 Series 1995-D,
3.000% due 02/07/99...................................................................... 129,993
122,000 U.S. West Communications Corporation, MTN,
5.580% due 03/15/99**.................................................................... 120,649
645,000 Vastar Resources, MTN,
6.960% due 02/26/07...................................................................... 662,738
------------
TOTAL CORPORATE BONDS
(Cost $10,820,886)...................................................................... 11,167,907
------------
FEDERAL HOME LOAN BANK (FHLB) - 9.3%
Agencies:
1,200,000 1.520% (FLTR) due 05/07/98**............................................................. 1,169,175
1,000,000 3.010% (FLTR) due 07/15/98**............................................................. 979,925
500,000 3.256% (FLTR) due 07/16/98**............................................................. 490,612
2,000,000 4.490% (FLTR) due 08/24/98**............................................................. 1,970,437
2,000,000 5.570% (FLTR) due 05/12/99**............................................................. 1,982,505
1,650,000 4.670% (FLTR) due 03/22/00**............................................................. 1,601,098
350,000 4.500% (FLTR) due 04/14/00**............................................................. 343,538
------------
TOTAL FEDERAL HOME LOAN BANK
(Cost $8,531,642)....................................................................... 8,537,290
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) - 19.8%
Pass-throughs:
3,512,379 5.500% Pass-through Pools due 04/01/11 - 06/01/11................................. 3,392,189
3,219,866 9.000% Pass-through Pools due 07/01/07 - 09/01/12................................. 3,417,895
REMIC:
211,226 1374Z 7.000% due 10/15/22......................................................... 200,863
900,000 1487F 6.000% due 11/15/20......................................................... 890,719
1,066,456 1502PX 7.000% due 04/15/23........................................................ 1,037,961
1,423,926 1546C 5.500% due 10/15/13......................................................... 1,420,680
1,144,069 1560PD (PAC) 5.500% due 01/15/13.................................................. 1,142,284
2,000,000 1604D (PAC) 5.250% due 07/15/04................................................... 1,991,031
2,000,000 1610PG (PAC) 6.000% due 03/15/19.................................................. 1,993,750
332,711 1655C (PAC) 5.250% due 06/15/03................................................... 331,690
1,000,000 1657C (PAC) 5.500% due 11/15/11................................................... 996,094
1,480,000 1676KD (AD) 6.250% due 03/15/06................................................... 1,482,544
------------
TOTAL FEDERAL HOME LOAN
MORTGAGE CORPORATION
(Cost $17,975,487)............................................................... 18,297,700
------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MONTGOMERY TOTAL RETURN BOND FUND
Portfolio Investments - (Continued)
October 31, 1997 (Unaudited)
<CAPTION>
Principal Value
Amount (Note 1)
------------------ --------
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - 19.8%
$215,943 9.500% due 12/01/01................................................................. $ 223,839
2,737,328 9.250% due 10/01/15................................................................. 2,964,869
219,313 9.500% due 12/01/03................................................................. 229,628
500,000 5.000% (FLTR) due 03/03/00**........................................................ 490,203
12,000,000 7.000% due TBA...................................................................... 12,047,354
969,102 1988-16B (PAC), 9.500% due 06/25/18................................................. 1,049,513
252,456 1991-94C (PAC), Zero Coupon due 07/25/21............................................ 244,195
171,000 1993-143D (PAC), 5.000% due 08/25/23................................................ 169,348
905,934 1993-159PA (PAC), Zero Coupon due 01/25/21.......................................... 839,829
------------
TOTAL FEDERAL NATIONAL
MORTGAGE ASSOCIATION
(Cost $18,148,381)................................................................ 18,258,778
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - 0.7%
(Cost $631,668)
Pass-throughs:
603,702 8.500% Pass-through Pools due 01/15/23 - 07/15/23................................... 635,770
------------
U.S. TREASURY BONDS - 13.4%
3,900,000 U.S. Treasury Bonds, 8.875% due 02/15/19 .......................................... 5,112,042
6,975,000 U.S. Treasury Bonds, 6.500% due 11/15/26............................................ 7,270,321
------------
TOTAL U.S. TREASURY BONDS
(Cost $11,495,350)................................................................ 12,382,363
------------
U.S. TREASURY NOTES - 21.3%
7,100,000 U.S. Treasury Notes, 6.625% due 06/30/01............................................ 7,300,788
11,890,000 U.S. Treasury Notes, 6.500% due 05/15/05............................................ 12,337,777
------------
TOTAL U.S. TREASURY NOTES
(Cost $19,306,042)................................................................ 19,638,565
------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MONTGOMERY TOTAL RETURN BOND FUND
Portfolio Investments - (Continued)
October 31, 1997 (Unaudited)
<CAPTION>
Principal Value
Amount (Note 1)
------------------ --------
<S> <C> <C>
REPURCHASE AGREEMENTS - 8.9%
$4,085,000 Agreement with Bear Stearns, Inc., Tri-Party, 5.780% dated 10/31/97,
to be repurchased at $4,086,968 on 11/03/97, collateralized by $198,242,313
market value of U.S. government securities, having
various maturities and various interest rates....................................... $ 4,085,000
4,085,000 Agreement with HSBC Securities Inc., Tri-Party, 5.780% dated
10/31/97, to be repurchased at $4,086,968 on 11/03/97,collateralized by
$163,202,367 market value of U.S. government securities, having
various maturities and various interest rates....................................... 4,085,000
------------
TOTAL REPURCHASE AGREEMENTS
(Cost $8,170,000)................................................................. 8,170,000
------------
TOTAL INVESTMENTS (Cost $100,712,363*)...................................................................... 111.4% 102,730,967
OTHER ASSETS AND LIABILITIES (Net).......................................................................... (11.4) (10,548,455)
------ ------------
NET ASSETS ................................................................................................. 100.0% 92,182,512
====== ============
<FN>
- --------------------------
* Aggregate cost for Federal tax purposes.
** Floating rate note reflects the rate in effect at October 31, 1997.
Abbreviations:
AD Accretion Directed: These bonds receive, as principal,
the negative amortization from the accrual tranche(s) in
a deal. These securities often have guaranteed final
maturities.
FLTR Floating-Rate Securities: bonds with coupon rates that
adjust in proportion to an index.
MTN Medium-Term Note.
PAC Planned Amortization Class: bonds that are protected in
part from variations in prepayments, generally resulting
in greater stability.
REMIC Real Estate Mortgage Investment Conduit.
TBA To-Be-Announced Security.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
THE MONTGOMERY FUNDS
Statements of Assets and Liabilities
October 31, 1997 (Unaudited)
<CAPTION>
Montgomery Montgomery
Latin America Total Return
Fund Bond Fund
------------- -------------
ASSETS:
Investments in securities, at value (Note 1)
<S> <C> <C>
Securities ............................................. $ 8,265,136 $ 94,560,967
Repurchase agreements .................................. -- 8,170,000
------------- -------------
Total investments ............................................. 8,265,136 102,730,967
Receivables:
Dividends .............................................. 4,935 --
Interest ............................................... -- 1,305,811
Shares of beneficial interest sold ..................... 9,703 56,990
Expenses absorbed by Manager ........................... 8,089 --
Investment securities sold ............................. 804,660 7,024,987
Variation margin ....................................... -- 2,813
Other Assets:
Organizational costs (Note 1) .......................... 2,791 29,541
Prepaid expenses and other assets ...................... 14,213 --
------------- -------------
Total Assets .................................................. 9,109,527 111,151,109
LIABILITIES:
Payables:
Deferred fee income on dollar roll transactions ........ -- 5,250
Deferred gain on dollar roll transactions .............. -- 86,250
Investment securities purchased ........................ 291,373 18,689,909
Repurchases of investments under dollar roll agreements -- 16,953
Management fee ......................................... -- 32,771
Administration fee ..................................... 611 10,063
Custodian fee .......................................... 3,578 3,650
Trustees' fees and expenses ............................ 976 1,003
Transfer agency and servicing fees ..................... 70 6,049
Due to Custodian ....................................... 682,833 45,213
Organizational costs ................................... -- 36,982
Accrued liabilities and expenses ....................... 2,311 34,504
------------- -------------
Total Liabilities ............................................. 981,752 18,968,597
============= =============
Net Assets .................................................... $ 8,127,775 $ 92,182,512
============= =============
Investments at Identified Cost ................................ $ 10,155,367 $ 100,712,363
============= =============
Net Assets Consist of:
Undistributed net investment income/(Distributions in excess of
net investment income) ..................................... $ 43,532 $ (4,403)
Accumulated net realized gain on investments sold, forward
foreign exchange contracts, futures contracts and foreign
currency transactions ...................................... 76,630 736,466
Net unrealized appreciation/(depreciation) of securities,
forward foreign exchange contracts, futures contracts,
foreign currency transactions and net other assets ......... (1,890,227) 2,034,859
Paid-in capital ............................................... 9,897,840 89,415,590
------------- -------------
Net Assets .................................................... $ 8,127,775 $ 92,182,512
============= =============
Net Asset Value, offering and redemption price per share
outstanding ................................................ $ 10.13 $ 12.35
============= =============
Number of Fund shares outstanding ............................. 802,495 7,461,609
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
THE MONTGOMERY FUNDS
Statements of Operations
For the Period Ended October 31, 1997 (Unaudited)*
<CAPTION>
Montgomery Montgomery
Latin America Total Return
Fund Bond Fund
------------- -------------
<S> <C> <C>
Investment Income:
Interest ........................................................ $ 11,359 $ 1,676,928
Dividends (net of foreign withholding taxes of $579
and $0, respectively) ........................................ 32,176 --
----------- -----------
Total Income ............................................. 43,535 1,676,928
----------- -----------
Expenses:
Management fee (Note 2) ......................................... 39,975 125,313
Custodian fee ................................................... 7,396 5,013
Transfer agency and servicing fees .............................. 5,756 7,609
Administration fee (Note 2) ..................................... 2,239 22,556
Legal fees ...................................................... 1,658 2,405
Audit fees ...................................................... 6,630 9,436
Trustees' fees and expenses ..................................... 1,658 1,685
Registration fees ............................................... -- 27,569
Amortization of organization costs (Note 1) ..................... 259 7,575
Other ........................................................... 6,709 4,669
Interest expense ................................................ -- 57,447
----------- -----------
Total Expenses .................................................. 72,280 271,277
Fees deferred and expenses absorbed by Manager (Note 2) ......... (72,277) (38,392)
----------- -----------
Net Expenses ................................................. 3 232,885
----------- -----------
Net Investment Income ........................................... 43,532 1,444,043
----------- -----------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain/(loss) from:
Security transactions .................................... 91,775 694,900
Forward foreign currency exchange contracts .............. (12,231) --
Foreign currency transactions ............................ (2,914) --
Futures contracts ........................................ -- 41,566
----------- -----------
Net Realized Gain on Investments During the Period .............. 76,630 736,466
----------- -----------
Net change in unrealized appreciation/(depreciation) of:
Securities ............................................... (1,890,231) 2,018,604
Forward foreign currency exchange contracts .............. -- --
Futures contracts ........................................ -- 16,255
Foreign currency and net other assets .................... 4 --
----------- -----------
Net Unrealized Appreciation/(Depreciation) of Investments During
the Period ................................................... (1,890,227) 2,034,859
----------- -----------
Net Realized and Unrealized Gain/(Loss) on Investments .......... (1,813,597) 2,771,325
=========== ===========
Net Increase/(Decrease) in Net Assets Resulting from Operations .
$(1,770,065) $ 4,215,368
=========== ===========
<FN>
- ----------------
* The Montgomery Latin America Fund and The Montgomery Total Return Bond Fund
commenced operations on June 30, 1997.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
THE MONTGOMERY FUNDS
Statements of Changes in Net Assets
For the Period Ended October 31, 1997 (Unaudited)*
<CAPTION>
Montgomery Montgomery
Latin America Total Return
Fund Bond Fund
------------- -------------
<S> <C> <C>
Increase/(Decrease) in Net Assets from Operations:
Net investment income ........................................... $ 43,532 $ 1,444,043
Net realized gain on securities, forward foreign currency
exchange contracts and foreign currency transactions
during the period .......................................... 76,630 736,466
Net unrealized appreciation/(depreciation) of securities,
forward foreign currency exchange contracts, foreign
currency, futures contracts and net other assets during
the period ................................................. (1,890,227) 2,034,859
------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from Operations . (1,770,065) 4,215,368
Distributions to Shareholders:
From net investment income ................................. -- (1,448,446)
Beneficial Interest Transactions:
Net increase from beneficial interest transactions (Note 4) ..... 8,897,840 89,415,590
------------ ------------
Net Increase in Net Assets ...................................... 7,127,775 92,182,512
Net Assets:
Beginning of Period ............................................. 1,000,000 --
------------ ------------
End of Period ................................................... $ 8,127,775 $ 92,182,512
============ ============
Accumulated Undistributed Net Investment Income/(Distributions
in Excess of Net Investment Income) .......................... $ 43,532 $ (4,403)
============ ============
<FN>
- ------------
* The Montgomery Latin America Fund and The Montgomery Total Return Bond Fund
commenced operations on June 30, 1997.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
The Montgomery Funds
Statement of Cash Flows
October 31, 1997
MONTGOMERY TOTAL RETURN BOND FUND
<CAPTION>
Cash flows from operating activities:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income received ................................................................................... $ 524,618
Fee income received ............................................................................... 40,461
Operating expenses paid ........................................................................... (79,957)
Proceeds from sales of long-term securities and purchased options ................................. 53,671,600
Net proceeds from futures and short sales transactions ............................................ 41,566
Net unrealized appreciation from futures contracts ................................................ 13,442
Purchases of long-term securities and purchased options ........................................... (134,906,934)
Net proceeds from short-term investments .......................................................... (7,288,966)
-------------
Cash Used by Operating Activities .................................................................... $ (87,984,170)
=============
Cash flows from Financing Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from subscriptions ....................................................................... 93,023,564
Payments on shares redeemed ....................................................................... (5,087,284)
Net dollar roll deferral .......................................................................... 86,250
Cash dividends paid* .............................................................................. (26,126)
Reverse repurchase agreement interest expense ..................................................... (57,447)
-------------
Cash Provided by Financing Activities ................................................................ 87,938,957
-------------
Decrease in cash .................................................................................... (45,213)
Cash at beginning of period ......................................................................... 0
-------------
Cash at end of period ............................................................................... $ (45,213)
=============
Reconciliation of Net Increase in Net Assets from Operations to Cash Provided by Operating Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ................................................. $ 4,215,368
Increase in investments ........................................................................... $(102,730,967)
Increase in interest and dividends receivable ..................................................... (1,305,811)
Increase in deferred fee income from dollar roll transactions ..................................... 5,250
Increase in other assets .......................................................................... 7,441
Increase in receivables for investments sold ...................................................... (7,024,987)
Increase in payable for investments purchased ..................................................... 18,689,909
Increase in variation margin ...................................................................... (2,813)
Increase in payable for dollar roll transactions .................................................. 16,953
Increase in accrued expenses ...................................................................... 88,040
Interest expense .................................................................................. 57,447
-------------
Total adjustments ................................................................................. (92,199,538)
-------------
Cash Used by Operating Activities .................................................................... $ (87,984,170)
=============
<FN>
- ------------------------
* Non-cash activities include reinvestment of dividends of $1,422,320.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MONTGOMERY LATIN AMERICA FUND
Financial Highlights
For a Fund share outstanding throughout the period
<CAPTION>
Period Ended
October 31,
1997*
(Unaudited)
-----------------
<S> <C>
Net asset value - beginning of period........................................... $ 12.00
-----------------
Net investment income........................................................... 0.05
Net realized and unrealized gain/(loss) on investments.......................... (1.92)
-----------------
Net increase/(decrease) in net assets resulting from investment operations...... (1.87)
-----------------
Net asset value - end of period................................................. $ 10.13
=================
Total return +.................................................................. (15.58)%
=================
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000's)............................................ $8,128
Ratio of operating expenses to average net assets............................... 0.00%**
Ratio of net investment income to average net assets............................ 1.35%**
Portfolio turnover rate......................................................... 43.00%
Net investment loss before deferral of fees and absorption of
expenses by Manager.......................................................... ($0.04)
Average commission rate (per share of security)................................. $0.0005
Expense ratio before deferral of fees by Manager................................ 2.24%**
<FN>
- ----------------------
* Montgomery Latin America Fund commenced operations on June 30, 1997.
** Annualized.
+ Total return represents aggregate total return for the period indicated.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MONTGOMERY TOTAL RETURN BOND FUND
Financial Highlights
For a Fund share outstanding throughout the period
<CAPTION>
Period Ended
October 31,
1997*
(Unaudited)
----------------
<S> <C>
Net asset value - beginning of period........................................... $ 12.00
----------------
Net investment income........................................................... 0.24
Net realized and unrealized gain on investments................................. 0.35
----------------
Net increase in net assets resulting from investment operations................. 0.59
----------------
Distributions:
Dividends from net investment income......................................... (0.24)
----------------
Total distributions............................................................. (0.24)
----------------
Net asset value - end of period................................................. $ 12.35
================
Total return +.................................................................. 4.93%
================
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000's)............................................ $92,183
Ratio of operating expenses to average net assets............................... 0.70%**
Ratio of net investment income to average net assets............................ 5.76%**
Portfolio turnover rate......................................................... 108.00%
Net investment income before deferral of fees and absorption of
expenses by Manager.......................................................... $0.23
Expense ratio before deferral of fees by Manager................................ 1.08%**
Expense ratio including interest expense........................................ 0.93%**
<FN>
- ----------------------
* Montgomery Total Return Bond Fund commenced operations on June 30, 1997.
** Annualized.
+ Total return represents aggregate total return for the period indicated.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
THE MONTGOMERY FUNDS
Notes to Financial Statements(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Montgomery Latin America Fund and Montgomery Total Return Bond Fund
(individually, the "Fund" and, collectively, the "Funds", series' of The
Montgomery Funds, the "Trust") are registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as diversified, open-end management
investment companies. The Trust was organized as a Massachusetts business trust
on May 10, 1990.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
The following is a summary of significant accounting policies.
a. PORTFOLIO VALUATION - 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 in the case of fixed income
securities, the mean of the closing bid and asked prices.
Portfolio securities that are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sales price on the respective exchanges or markets; except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market or on the NASDAQ National Market are valued at the mean between the last
available bid and ask price prior to the time of valuation.
Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations as to their sale) are
valued at fair market value as determined in good faith by or under the
supervision of the Trusts' officers in accordance with methods authorized by the
Trusts' Board of Trustees. Short-term securities with maturities of 60 days or
less are carried at amortized cost, which approximates market value.
b. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The Latin America Fund may
engage in forward foreign currency exchange contracts with off-ballance sheet
risk in the normal course of investing activities in order to manage exposure to
market risks. Forward foreign currency exchange contracts are valued at the
forward rate and are marked-to-market daily. The change in market value is
recorded by the Fund asan unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed. Forward foreign currency exchange contracts
limit the risk of loss due to a decline in the value of the hedged currency,
they also limit any potential gain that might result should the value of the
currency increase. In addition, a Fund could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their contracts.
<PAGE>
THE MONTGOMERY FUNDS
Notes to Financial Statements (continued)(unaudited)
c. FOREIGN CURRENCY - Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates prevailing at
the end of the period, and purchases and sales of investment securities and
income and expenses are translated on the respective dates of such transactions.
Unrealized gains and losses that result from changes in foreign currency
exchange rates on investments have been included in the unrealized appreciation/
(depreciation) of securities. Net realized foreign currency gains and losses
resulting from movement in exchange rates include foreign currency gains and
losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interests and dividends recorded on the books of a Fund and the
amount actually received and the portion of foreign currency gains and losses
related to fluctuations in exchange rates between the initial purchase trade
date and subsequent sale trade date.
d. REPURCHASE AGREEMENTS - Both Funds may engage in repurchase agreement
transactions either individually or jointly through a joint repurchase account
with other series of the Trusts pursuant to a joint repurchase agreement. Under
the terms of a typical repurchase agreement, a Fund writes a financial contract
with a counterparty and takes possession of a government debt obligation as
collateral. The Fund also agrees with the counterparty to allow the counterparty
to repurchase the financial contract at a specified date and price, thereby
determining the yield during the Fund's holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the collateral is atleast equal at all times
to the total amount of the repurchase obligations, including interest. In the
event of counterparty default, a Fund has the right to use the collateral to
offset losses incurred. There could be potential loss to the Fund in the event a
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period while a Fund seeks to assert its
rights. The Fund's investment manager, acting under supervision of the Board of
Trustees, reviews the value of the collateral and the creditworthiness of those
banks and dealers with which a Fund enters into repurchase agreements to
evaluate potential risks. The Funds may also participate on an individual or
joint basis in tri-party repurchase agreements which involve a counterparty and
a custodian bank.
e. DOLLAR ROLL TRANSACTIONS - The Total Return Bond Fund may enter into dollar
roll transactions with financial institutions to take advantage of opportunities
in the mortgage market. A dollar roll transaction involves a sale by the Fund of
securities with a simultaneous agreement to repurchase substantially similar
securities at an agreed upon price at a future date. The securities repurchased
will bear the same interest as those sold but generally will be collateralized
by different pools of mortgages with different prepayment histories. During the
period between the sale and repurchase, the Fund will not be entitled to receive
interest and principal payments on the securities sold. The Fund will invest the
proceeds of the sale in additional instruments, the income from which, together
with any additional fee income received for the dollar roll, may or may not
generate income for the Fund exceeding the yield on the securities sold. Dollar
roll transactions involve the risk that the market value of the securities sold
by the Fund may decline below the repurchase price of those securities.
<PAGE>
THE MONTGOMERY FUNDS
Notes to Financial Statements (continued)(unaudited)
f. REVERSE REPURCHASE AGREEMENTS - Both Funds may enter into reverse repurchase
agreement transactions with member banks on the Federal Reserve Bank of New
York's list of reporting dealers for leverage purposes. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase the same securities at an agreed upon price
and date. A reverse repurchase agreement involves the risk that the market value
of the securities sold by the Fund may decline below the repurchase price of the
securities. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Each Fund establishes a segregated account with its
custodian in which the Fund maintains cash, U.S. government securities or other
liquid high-grade debt obligations equal in value to its obligations with
respect to reverse repurchase agreements.
g. REVERSE DOLLAR ROLL TRANSACTIONS - The Total Return Bond Fund may enter into
reverse dollar roll transactions. When a Fund engages in a reverse dollar roll,
it purchases a security from a financial institution and concurrently agrees to
resell a similar security to that institution at a later date at an agreed-upon
price. Under the 1940 Act, reverse dollar roll transactions are considered to be
loans by a Fund and must be fully collateralized. 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.
h. FUTURES CONTRACTS - Both Funds may enter into futures contracts. Upon
entering into a futures contract, a Fund is required to deposit with the
custodian on behalf of the broker an amount of cash or cash equivalents equal to
a certain percentage of the contract amount. This is known as the "initial
margin." Subsequent payments ("variation margin") are made or received by a Fund
each day, depending on the daily fluctuation of the value of the contract.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk a Fund
may not be able to enter into a closing transaction because of an illiquid
secondary market.
i. DIVIDENDS AND DISTRIBUTIONS - Dividends, if any, from net investment income
of the Latin America Fund will be declared and paid at least annually. Dividends
from net investment income of the Total Return Bond Fund are declared daily and
paid monthly.
Distributions of any short-term capital gains earned by a Fund are distributed
no less frequently than annually. Additional distributions of net investment
income and capital gains for each Fund may be made in order to avoid the
application of a 4% non-deductible excise tax on certain undistributed amounts
of ordinary income and capital gains. Income distributions and capital gain
distributions are determined in accordance with income tax regulations, which
may differ from generally accepted accounting principles. These
<PAGE>
THE MONTGOMERY FUNDS
Notes to Financial Statements (continued)(unaudited)
differences are primarily due to differing treatments of income and gains on
various investment securities held by a Fund, timing differences and differing
characterization of distributions made by a Fund.
j. SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
recorded on a trade-date basis. Realized gain and loss from securities
transactions are recorded on the specific identified cost basis. Dividend income
is recognized on the ex-dividend date. Dividend income on foreign securities is
recognized as soon as a Fund is informed of the ex-dividend date. Interest
income is recognized on the accrual basis. Securities purchased on a when-issued
or delayed-delivery basis may be settled a month or more after the trade date;
interest income is not accrued until settlement date. The Funds instruct their
custodian to segregate assets in a separate account with a current value at
least equal to the amount of its when-issued purchase commitments.
k. FEDERAL INCOME TAXES - Each Fund has elected and qualified, and it is the
intention of each Fund to continue to qualify, as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Code, and to make
distributions of taxable income to shareholders sufficient to relieve each Fund
from all or substantially all federal income taxes.
l. ORGANIZATION COSTS - Expenses incurred in connection with the organization of
each Fund are amortized on a straight-line basis over a period of five years
from the commencement of operations.
m. EXPENSES - General expenses of the Trust are allocated to the relevant Funds
based upon relative net assets. Operating expenses directly attributable to a
Fund are charged to that Fund's operations.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH
AFFILIATES AND OTHER CONTRACTUAL COMMITMENTS:
a. Montgomery Asset Management, L.P. is the Fund's Manager (the "Manager"). The
Manager, a California limited partnership, is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers Act of
1940, as amended (the "Advisers Act"). Its general partner is Montgomery Asset
Management, Inc. and its sole limited partner is an affiliate of Montgomery
Securities, the Funds' distributor. Under the Advisers Act, both Montgomery
Asset Management, Inc. and Montgomery Securities may be deemed controlling
persons of the Manager. Although the operations and management of the Manager
are independent from those of Montgomery Securities, it is expected that the
Manager may draw upon the research and administrative resources of Montgomery
Securities at its discretion in a manner consistent with applicable regulations.
Pursuant to investment management agreements ("Investment Management
Agreements"), the Manager provides each Fund with advice on buying and selling
securities, manages the investments of each Fund including the placement of
orders for portfolio transactions, furnishes each Fund with office space and
certain administrative services, and provides the personnel needed by the Trust
with respect to the Manager's responsibilities under such agreement. The Manager
has agreed to reduce some or all of its management fee or absorb fund expenses
if necessary to keep each Fund's annual operating expenses, exclusive of
interest
<PAGE>
THE MONTGOMERY FUNDS
Notes to Financial Statements (continued)(unaudited)
and taxes, at or below the following percentages of each Fund's average net
assets: Latin America Fund and Total Return Bond Fund; 0.70%. Any reductions or
absorptions made to a Fund by the Manager are subject to recovery within the
following two years provided a Fund is able to affect such reimbursement and
remain in compliance with applicable expense limitations. The Manager may
terminate these reductions or absorptions at any time.
Montgomery Asset Management, L.P. serves as the Funds' administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of each Fund's administrative operations.
As compensation, each Fund has accrued a monthly management and administration
fee (accrued daily) based upon the average daily net assets of each Fund.
b. Certain officers and Trustees of the Trust are, with respect to the Trusts'
Manager and/or principal underwriter, "affiliated persons" as defined in the
1940 Act. Each Trustee who is not an "affiliated person" will receive an annual
retainer and quarterly meeting fee totaling $35,000 per annum, as well as
reimbursement for expenses, for service as a Trustee of all Trusts advised by
the Manager ($25,000 of which will be allocated to the Montgomery Funds).
c. The Shares of the Funds have no sales load.
3. TRANSACTIONS IN SHARES OF A BENEFICIAL INTEREST:
The Trusts have authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Transactions in shares of beneficial interest
for the period indicated below:
Period Ended
Latin America Fund: October 31, 1997*
-----------------
Shares Amount
------ ------
Shares sold ...................... 1,353,746 $ 16,429,706
Shares redeemed .................. (634,584) (7,531,866)
------------ ------------
Net Increase ..................... 719,162 $ 8,897,840
============ ============
Period Ended
Total Return Bond Fund: October 31, 1997*
-----------------
Shares Amount
------ ------
Shares sold ................................ 7,762,803 $ 93,080,554
Issued as reinvestment of dividends ........ 116,229 1,422,320
Shares redeemed ............................ (417,423) (5,087,284)
------------ ------------
Net Increase ............................... 7,461,609 $ 89,415,590
============ ------------
- --------------
<PAGE>
THE MONTGOMERY FUNDS
Notes to Financial Statements (continued)(unaudited)
* The Latin America Fund and Total Return Bond Fund commenced operations on June
30, 1997.
4. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. Government securities, during the period ended October
31, 1997 were:
Name of Fund Purchases Sales
- ------------ --------- -----
Latin America Fund ..................... $13,268,697 $ 3,205,105
Total Return Bond Fund ................. 6,877,754 3,881,308
The aggregate amount of purchases and sales of long-term U.S. government
securities for Total Return Bond Fund, during the period ended October 31, 1997
was $88,630,676 and $59,215,279, respectively.
b. At October 31, 1997, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value were as follows:
Tax Basis Unrealized Tax Basis Unrealized
Name of Fund Appreciation Depreciation
- ------------ ------------ ------------
Latin America Fund .............. $ 151,151 $2,041,382
Total Return Bond Fund .......... 2,043,594 24,990
<TABLE>
c. Information regarding transactions under dollar roll transactions was as follows:
<CAPTION>
Maximum Average Average Average
Amount Amount Amount Shares Debt per Share
Outstanding Outstanding Outstanding Outstanding Outstanding Fee Income
Name of Fund During Period as of 10/31/97 During Period During Period During Period Earned
------------ ------------- -------------- ------------- ------------- ------------- ------
Total Return
<S> <C> <C> <C> <C> <C> <C>
Bond Fund...... $10,559,063 $10,541,016 $5,262,525 5,288,618 $1.00 $35,211
</TABLE>
5. FOREIGN SECURITIES:
The Latin America Fund may purchase securities on foreign security exchanges.
Securities of foreign companies and foreign governments involve special risks
and considerations not typically associated with investing in U.S. companies and
the U.S. government. These risks include, among others, revaluation of
currencies, less-reliable information about issuers, different securities
transactions clearance and settlement
<PAGE>
THE MONTGOMERY FUNDS
Notes to Financial Statements (continued)(unaudited)
practices and potential future adverse political and economic developments.
These risks are heightened for investments in emerging markets countries.
Moreover, securities of many foreign companies and foreign governments and their
markets may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies and the U.S. government.
<PAGE>
Appendix
Description ratings for Standard & Poor's Ratings Group ("S&P");
Moody's Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P.
("Fitch") and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
<PAGE>
S&P's letter ratings may be modified by the addition of a plus
(+) or a minus (-) sign designation, which is used to show relative
standing within the major rating categories, except in the AAA (Prime
Grade) category.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Issues assigned an A rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with
doubtful capacity for payment.
D Issues carrying this designation are in default, and payment
of interest and/or repayment of principal is in arrears.
Moody's Investors Service, Inc.
Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
generally are known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are
<PAGE>
to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered
adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
Commercial Paper Ratings
The rating Prime-1 (P-1) is the highest commercial paper
rating assigned by Moody's. Issuers of P-1 paper must have a superior
capacity for repayment of short-term promissory obligations, and
ordinarily will be evidenced by leading market positions in well
established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
<PAGE>
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest
<PAGE>
reflects the obligor's limited margin of safety and the need
for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
<PAGE>
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Ratings
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes.
Overall quality may move up or down frequently within the
category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
Commercial Paper Ratings
Duff-1 The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having
very high certainty of timely payment with excellent liquidity
factors which are supported by ample asset protection. Risk
factors are minor.
Duff-2 Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are
small.
<PAGE>
Duff-3 Paper rated Duff-3 is regarded as having satisfactory
liquidity and other protection factors. Risk factors are
larger and subject to more variation. Nevertheless, timely
payment is expected.
Duff-4 Paper rated Duff-4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of
variation.
Duff-5 Paper rated Duff-5 is in default. The issuer has failed to meet
scheduled principal and/or interest payments.
<PAGE>
---------------------------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------------------------
-7-
<PAGE>
THE MONTGOMERY FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Portfolio Investments as of June 30, 1997; Statements
of Assets and Liabilities as of June 30, 1997;
Statements of Operations for the year ended June 30,
1997; Statement of Cash Flows for year ended June 30,
1997; Statements of Changes in Net Assets for the
year ended June 30, 1997; Financial Highlights for a
Fund share outstanding throughout each year,
including the year ended June 30, 1997 for Montgomery
Growth Fund, Montgomery Small Cap Fund, Montgomery
Micro Cap Fund, Montgomery Small Cap Opportunities
Fund, Montgomery Equity Income Fund, Montgomery
International Growth Fund, Montgomery International
Small Cap Fund, Montgomery Emerging Markets Fund,
Montgomery Global Opportunities Fund, Montgomery
Global Communications Fund, Montgomery Select 50
Fund, , Montgomery Global Asset Allocation Fund,
Montgomery Short Duration Government Bond Fund,
Montgomery Government Reserve Fund, Montgomery
California Tax-Free Intermediate Bond Fund,
Montgomery California Tax-Free Money Fund and
Montgomery Federal Tax-Free Money Fund; Notes to
Financial Statements; Independent Auditors' Report on
the foregoing, all incorporated by reference to the
Annual Report to Shareholders of the above-named
funds.
(b) Exhibits:
(1)(A) Agreement and Declaration of Trust is incorporated by
reference to the Registrant's Registration Statement
as filed with the Commission on May 16, 1990
("Registration Statement").
(1)(B) Amendment to Agreement and Declaration of Trust is
incorporated by reference to Post-Effective Amendment
No. 17 to the Registration Statement as filed with
the Commission on December 30, 1993 ("Post-Effective
Amendment No. 17").
(1)(C) Amended and Restated Agreement and Declaration of
Trust is incorporated by reference to Post-Effective
Amendment No. 28 to the Registration Statement as
filed with the Commission on September 13, 1995
("Post-Effective Amendment No. 28").
(2) By-Laws are incorporated by reference to the
Registration Statement.
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
<PAGE>
(5) Form of Investment Management Agreement is
incorporated by reference to Post-Effective Amendment
No. 52 to the Registration Statement as filed with
the Commission on July 31, 1997 ("Post-Effective
Amendment No. 52")
(6)(A) Form of Underwriting Agreement is incorporated by
reference to Post-Effective Amendment No. 52.
(6)(B) Form of Selling Group Agreement is incorporated by
reference to Pre-Effective Amendment No. 1.
(7) Benefit Plan(s) - Not applicable.
(8) Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 24.
(9)(A) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective Amendment
No. 52.
(9)(B) Form of Multiple Class Plan is incorporated by
reference to Post-Effective Amendment No. 28.
(9)(C) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 28.
(10) Consent and Opinion of Counsel as to legality of
shares is incorporated by reference to Pre-Effective
Amendment No. 1.
(11) Independent Auditors' Consent - Not applicable
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Letter of Understanding re: Initial Shares is
incorporated by reference to Pre-Effective Amendment
No. 1.
(14) Model Retirement Plan Documents are incorporated by
reference to Post-Effective Amendment No. 2 to the
Registration Statement as filed with the Commission
on March 4, 1991 ("Post-Effective Amendment No. 2").
(15) Form of Share Marketing Plan (Rule 12b-1 Plan) is
incorporated by reference to Post-Effective Amendment
No. 52.
(16)(A) Performance Computation for Montgomery Short
Government Bond Fund is incorporated by reference to
Post-Effective Amendment No. 13.
(16)(B) Performance Computation for Montgomery Government
Reserve Fund is incorporated by reference to
Post-Effective Amendment No. 12.
(16)(C) Performance Computation for Montgomery California
Tax-Free Intermediate Bond Fund is incorporated by
reference to Post-Effective Amendment No. 17.
(16)(D) Performance Computation for the other series of
Registrant is incorporated by reference to
Post-Effective Amendment No. 2.
(27) Financial Data Schedule for Montgomery Latin America
Fund and Montgomery Total Return Bond Fund filed
herewith
-9-
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, LLC, a Delaware limited liability company,
is the manager of each series of the Registrant, of each series of The
Montgomery Funds II, a Delaware business trust, and of each series of The
Montgomery Funds III, a Delaware business trust. Montgomery Asset Management,
LLC is a subsidiary of Commerzbank AG based in Frankfurt. The Registrant, The
Montgomery Funds II and The Montgomery Funds III are deemed to be under the
common control of each of those two entities.
<TABLE>
Item 26. Number of Holders of Securities
<CAPTION>
Number of Record Holders
Title of Class as November 28, 1997
-------------- ---------------------
Shares of Beneficial
Interest, $0.01 par value
-------------------------
<S> <C> <C>
Montgomery Growth Fund (Class R) 58,753
Montgomery Small Cap Opportunities Fund (Class R) 16,746
Montgomery Small Cap Fund (Class R) 6,357
Montgomery Micro Cap Fund (Class R) 12,459
Montgomery Equity Income Fund (Class R) 1,836
Montgomery International Growth Fund (Class R) 1,177
Montgomery International Small Cap Fund (Class R) 2,159
Montgomery Emerging Markets 49,734
Fund (Class R)
Montgomery Emerging Asia Fund 3,454
Montgomery Latin America Fund 1,062
Montgomery Global Opportunities Fund (Class R) 1,526
Montgomery Global Communications Fund (Class R) 12,268
Montgomery Global Asset Allocation Fund 360
Montgomery Select 50 Fund (Class R) 11,017
Montgomery Total Return Bond Fund 112
Montgomery Short Duration Government Bond Fund 1,230
(Class R)
Montgomery Government Reserve Fund (Class R) 12,254
Montgomery California Tax-Free 226
Intermediate Bond Fund (Class R)
Montgomery California Tax-Free 1,815
-10-
<PAGE>
Money Fund (Class R)
Montgomery Federal Tax-Free Money Fund (Class R) 1,256
Montgomery Growth & Income Fund 0
Montgomery Technology Fund 0
Montgomery Japan Small Cap Fund 55
</TABLE>
Item 27. Indemnification
Article VII, Section 3 of the Agreement and Declaration of Trust
empowers the Trustees of the Trust, to the full extent permitted by law, to
purchase with Trust assets insurance for indemnification from liability and to
pay for all expenses reasonably incurred or paid or expected to be paid by a
Trustee or officer in connection with any claim, action, suit or proceeding in
which he or she becomes involved by virtue of his or her present or former
capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is or was an agent of
the Trust, against expenses, judgments, fines, settlement and other amounts
actually and reasonably incurred in connection with such proceeding if that
person acted in good faith and reasonably believed his or her conduct to be in
the best interests of the Trust. Indemnification will not be provided in certain
circumstances, however, including instances of willful misfeasance, bad faith,
gross negligence, and reckless disregard of the duties involved in the conduct
of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Trustees, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable in the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Effective July 31, 1997, MAM, L.P. completed the sale of substantially
all of its assets to the current investment manager -- Montgomery Asset
Management, LLC (`MAM, LLC"), a subsidiary of Commerzbank AG. Mr. R. Stephan
Doyle is the Chief Executive Officer, Mr. Kevin T. Hamilton is a Managing
Director, Mr. John T. Story is an Executive Vice President and Mr. David E.
Demarest is a Managing Director and Chief Administrative Officer of MAM, LLC. In
addition to their positions as officers, each of them is also a Director of MAM,
LLC. Furthermore, Mr. Heinz Josef Hockmann, Mr. Dietrich-Kurt Frowein and Mr.
Andreas Kleffel (each of whom is an officer of Commerzbank) are each a Director
of MAM, LLC.
Prior to July 31, 1997, Montgomery Securities, which is a broker-dealer
and the prior principal underwriter of The Montgomery Funds, was the sole
limited partner of the prior investment manager, Montgomery Asset Management,
L.P. ("MAM, L.P."). The general partner of MAM, L.P. was a corporation,
Montgomery Asset Management, Inc. ("MAM, Inc."), certain of the officers and
directors of which serve in similar capacities for MAM, L.P. Mr. R. Stephen
Doyle was the Chairman and Chief Executive Officer of MAM, L.P.; Mr. John T.
Story was the Managing Director of Mutual Funds and Executive Vice President;
and Mr. David E. Demarest was Chief Administrative Officer; Information about
the individuals who functioned as officers of MAM, L.P. was set forth in
-11-
<PAGE>
Part B of Post-Effective Amendment No. 51 to the Registration Statement as filed
with the Commission on July 16, 1997 and is herein incorporated by reference.
Item 29. Principal Underwriter.
(a) Funds Distributor, Inc. currently acts as distributor for:
BJB Investment Funds
Burridge Funds
The Brinson Funds
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
The JPM Advisor Funds
The JPM Institutional Funds
The JPM Pierpont Funds
The JPM Series Trust
The JPM Series Trust II
Monetta Fund, Inc.
Monetta Trust
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
Orbitex Group of Funds
The PanAgora Institutional Funds
RCM Capital Funds, Inc.
RCM Equity Funds, Inc.
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Cash Management Fund, Inc.
WEBS Index Fund, Inc.
Funds Distributor, Inc., is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers. Funds Distributor, Inc., is an indirect wholly-owned
subsidiary of Boston Institutional Group, Inc., a holding company all of whose
outstanding shares are owned by key employees.
The following is a list of the executive officers, directors and
partners of Funds Distributor, Inc.:
Director, President and Chief Executive Officer - Marie E. Connolly
Executive Vice President - Richard W. Ingram
Executive Vice President - Donald R. Roberson
Senior Vice President - Michael S. Petrucelli
Director, Senior Vice President, Treasurer and - Joseph F. Tower, III
Chief Financial Officer
Senior Vice President - Paula R. David
Senior Vice President - Bernard A. Whalen
Director - William J. Nutt
(c) Not applicable.
-12-
<PAGE>
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 will be kept by the
Registrant's Transfer Agent, DST Systems, Inc., 1004 Baltimore, Kansas City,
Missouri 64105, except those records relating to portfolio transactions and the
basic organizational and Trust documents of the Registrant (see Subsections
(2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule 31a-1(b)), which will
be kept by the Registrant at 101 California Street, San Francisco, California
94111.
Item 31. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to file a post-effective amendment
including financial statements of Montgomery Technology Fund, Montgomery Growth
& Income Fund and Montgomery High Yield Bond Fund, which need not be certified,
within four to six months from the effective date of Registrant's 1933 Act
registration statement as to those series.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
(d) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act of 1940, as amended, which requires the prompt convening
of a meeting of shareholders to elect trustees to fill existing vacancies in the
Registrant's Board of Trustees in the event that less than a majority of the
trustees have been elected to such position by shareholders. Registrant has also
undertaken promptly to call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee or Trustees when requested in
writing to do so by the record holders of not less than 10 percent of the
Registrant's outstanding shares and to assist its shareholders in communicating
with other shareholders in accordance with the requirements of Section 16(c) of
the Investment Company Act of 1940, as amended.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Amendment pursuant to Rule 485(b) under
the Securities Act of 1933, as amended, and that the Registrant has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco and State
of California on this 26 day of December, 26 1997.
THE MONTGOMERY FUNDS
By: Richard W. Ingram*
------------------------
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
R. Stephen Doyle* Trustee December 26, 1997
- -----------------
R. Stephen Doyle
Andrew Cox * Trustee December 26, 1997
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee December 26, 1997
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee December 26, 1997
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
---------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed.
<PAGE>
EHIBIT INDEX
EXHIBIT EXHIBIT
NO.
- ------- -------------------------
(27) Financial Data Schedules
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 221
<NAME> MONTGOMERY TOTAL RETURN BOND FUND
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 100,712,363
<INVESTMENTS-AT-VALUE> 102,730,967
<RECEIVABLES> 8,390,601
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 29,541
<TOTAL-ASSETS> 111,151,109
<PAYABLE-FOR-SECURITIES> 18,869,909
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 278,688
<TOTAL-LIABILITIES> 18,968,597
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 89,415,590
<SHARES-COMMON-STOCK> 7,461,609
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (4,403)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 736,466
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,034,859
<NET-ASSETS> 92,182,512
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,676,928
<OTHER-INCOME> 0
<EXPENSES-NET> 232,885
<NET-INVESTMENT-INCOME> 1,444,043
<REALIZED-GAINS-CURRENT> 736,466
<APPREC-INCREASE-CURRENT> 2,034,859
<NET-CHANGE-FROM-OPS> 4,215,368
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,448,446)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,762,803
<NUMBER-OF-SHARES-REDEEMED> (417,423)
<SHARES-REINVESTED> 116,229
<NET-CHANGE-IN-ASSETS> 92,182,512
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 125,313
<INTEREST-EXPENSE> 57,447
<GROSS-EXPENSE> 271,277
<AVERAGE-NET-ASSETS> 74,373,036
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 0.35
<PER-SHARE-DIVIDEND> (0.24)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.35
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 231
<NAME> MONTGOMERY LATIN AMERICA FUND
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 10,155,367
<INVESTMENTS-AT-VALUE> 8,265,136
<RECEIVABLES> 827,387
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 17,004
<TOTAL-ASSETS> 9,109,527
<PAYABLE-FOR-SECURITIES> 291,373
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 690,379
<TOTAL-LIABILITIES> 981,752
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,897,840
<SHARES-COMMON-STOCK> 802,495
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 43,532
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 76,630
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,890,227)
<NET-ASSETS> 8,127,775
<DIVIDEND-INCOME> 32,176
<INTEREST-INCOME> 11,359
<OTHER-INCOME> 0
<EXPENSES-NET> 3
<NET-INVESTMENT-INCOME> 43,532
<REALIZED-GAINS-CURRENT> 76,630
<APPREC-INCREASE-CURRENT> (1,890,227)
<NET-CHANGE-FROM-OPS> (1,770,065)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,437,079
<NUMBER-OF-SHARES-REDEEMED> (634,584)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7,127,755
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 39,975
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 72,280
<AVERAGE-NET-ASSETS> 9,588,164
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> (1.92)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.13
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
