As filed with the Securities and Exchange Commission on December 30, 1999
File 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. 70
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 71
THE MONTGOMERY FUNDS
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
(415) 572-3863
(Registrant's Telephone Number, Including Area Code)
Johanne Castro, Assistant Secretary
101 California Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to Rule 485(b)
X on December 30, 1999 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)
----------
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
<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
Part A - Combined Prospectus for Montgomery Growth 20 Portfolio and
Montgomery International 20 Portfolio.
Part B - Combined Statement of Additional Information for Montgomery
Growth 20 Portfolio and Montgomery International 20 Portfolio.
Part C - Other Information
Signature Page
Exhibits
<PAGE>
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PART A
COMBINED PROSPECTUS FOR
MONTGOMERY GROWTH 20 PORTFOLIO
MONTGOMERY INTERNATIONAL 20 PORTFOLIO
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<PAGE>
Prospectus
December 31, 1999
Montgomery Stock SolutionsSM
The Montgomery Funds
Growth 20 Portfolio
International 20 Portfolio
The Montgomery Funds has registered the Portfolios offered in this prospectus
with the U.S. Securities and Exchange Commission (SEC). That registration does
not imply, however, that the SEC endorses the Portfolios.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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How to Contact Us
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[Sidebar]
Montgomery Web Site
www.montgomeryfunds.com
E-mail
[email protected]
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 6 a.m. to 5 p.m.
Pacific time
Address General
Correspondence to:
The Montgomery Funds
101 California Street
San Francisco, CA
94111-9361
TABLE OF CONTENTS
Growth 20 Portfolio ............................................................
International 20 Portfolio .....................................................
Portfolio Management............................................................
Additional Investment Strategies and Related Risks..............................
Defensive Investments......................................................
Portfolio Turnover.........................................................
The Year 2000..............................................................
Internet Risks ............................................................
Account Information.............................................................
Becoming a Montgomery Shareholder..........................................
How Portfolio Shares Are Priced............................................
Buying Additional Shares...................................................
Exchanging Shares..........................................................
Selling Shares.............................................................
Other Policies.............................................................
Tax Information............................................................
After You Invest...........................................................
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This prospectus contains important information about the investment objectives,
strategies and risks of the Montgomery Growth 20 Portfolio and the Montgomery
International 20 Portfolio (each a "Portfolio" and collectively, the Portfolios)
that you should know before you invest in the Portfolios. Please read it
carefully and keep it on hand for future reference. Please be aware that the
Portfolios:
> Are not bank deposits
> Are not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Portfolios.
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Growth 20 Portfolio|
Objective
[] Seeks long-term capital appreciation through concentrated exposure to
growth-oriented U.S. companies
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Principal Strategy [clipart]
Under normal conditions, the Portfolio invests in a limited number of U.S.
companies, typically between 20 and 30, but never less than 20. The Portfolio
selects companies of any size, but will invest at least 65% of its total assets
in those companies whose shares have a total stock market value (market
capitalization) of at least $1 billion. (Below $1 billion, a company is
generally considered to be a small or micro-cap company.)
The Portfolio's strategy is to identify well-managed U.S. companies whose share
prices appear to be undervalued relative to the firms' growth potential. The
managers rigorously analyze all prospective holdings by subjecting them to the
following three steps of their investment process:
> Identify companies with improving business fundamentals such as improved
price-to-earnings or debt-to-assets ratios
> Conduct in-depth analysis of each company's current business and future
prospects
> Analyze each company's price to determine whether its growth prospects have
been discovered by the market
Principal Risks [clipart]
By investing in stocks, the Portfolio may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. Growth-oriented companies are widely regarded as having more volatile
stock prices than companies considered to be value-oriented. To the extent that
the Portfolio is overweighted in certain market sectors compared with the
Standard and Poor's 500 Composite Price Index, the Portfolio may be more
volatile than the S&P 500. This is a non-diversified mutual fund that typically
invests in the securities of as few as 20 companies. Consequently, the value of
an investment in the Portfolio will vary more in response to developments or
changes in market value affecting particular stocks than an investment in a
diversified mutual fund investing in a greater number of securities.
When the Portfolio's managers think that market conditions are not favorable or
when they are unable to locate attractive investments, they may (but are not
required to) temporarily increase the Portfolio's cash position. Larger cash
positions can be a defensive measure in adverse market conditions. Should the
market advance, however, the Portfolio may not participate as much as it might
have if more of its assets were invested in stocks.
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Past Portfolio Performance The Portfolio was launched on December 31, 1999.
Performance results have not been provided because the Portfolio has not been in
existence for a full calendar year.
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Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of this Portfolio. Montgomery does not impose any front-end or deferred
sales loads on this Portfolio.
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 1.00%*
Annual Portfolio Operating Expenses (expenses that are deducted
from Portfolio assets) **
Management Fee# 1.00%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses## 0.40%
- --------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.40%
* The 1.00% redemption fee applies to those shares redeemed within six months
from the date of purchase and is paid to the Portfolio. $10 will be deducted
from redemption proceeds sent by wire or overnight courier.
** Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Portfolio's total annual operating
expenses (excluding interest and tax expense) to 1.40%. This contract has a
rolling ten-year term.
# The management fee of 1.00% will be reduced to 0.90% for those assets over
$500 million and to 0.80% for those assets over $1 billion.
## Other expenses are based on estimated amounts for the current fiscal year.
Example of Portfolio expenses: This example is intended to help you compare the
cost of investing in the Portfolio with the cost of investing in other mutual
funds. The table below shows what you would pay in expenses over time, whether
or not you sold your shares at the end of each period. It assumes a $10,000
initial investment, 5% total return each year and no changes in expenses. This
example is for comparison purposes only. It does not necessarily represent the
Portfolio's actual expenses or returns.
1 Year 3 Years
- ---------------------
$142 $442
[clipart] [sidebar]
Portfolio Management
Andrew Pratt
and the Growth Equity Team
For more details see page __
5
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International 20 Portfolio|
Objective
[] Seeks long-term capital appreciation through concentrated exposure to
companies in developed stock markets outside the United States
- --------------------------------------------------------------------------------
Principal Strategy [clipart]
Under normal conditions, the Portfolio invests in a limited number of companies
outside the United States, typically between 20 and 30, but never less than 20,
and will invest at least 65% of its total assets in those companies whose shares
have a total stock market value (market capitalization) of at least $1 billion.
The Portfolio concentrates its investments in the stock markets of western
Europe, particularly the United Kingdom, France, Germany, Italy and the
Netherlands, as well as developed markets in Asia, such as Japan and Hong Kong.
The Portfolio typically invests in at least three countries outside the United
States, with no more than 40% of its assets (or twice the benchmark index
weighting used by the Portfolio, whichever is greater) in any one country.
Montgomery currently expects that only those investments in Japan could exceed
that 40% limit.
The portfolio managers seek well-managed companies that they believe will be
able to increase their sales and corporate earnings on a sustained basis. In
addition, the portfolio managers purchase shares of companies that they consider
to be under- or reasonably-valued relative to their long-term prospects. The
managers favor companies that they believe have a competitive advantage, offer
innovative products or services and may profit from such trends as deregulation
and privatization. On a strategic basis, the Portfolio's assets may be allocated
among countries in an attempt to take advantage of market trends. The
Portfolio's managers and analysts frequently travel to the countries in which
the Portfolio invests or may invest to gain firsthand insight into the economic,
political and social trends that affect investments in those countries.
Principal Risks [clipart]
By investing in stocks, the Portfolio may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. This is a non-diversified mutual fund that typically invests in the
securities of as few as 20 companies. Consequently, the value of an investment
in the Portfolio will vary more in response to developments or changes in market
value affecting particular stocks than an investment in a diversified mutual
fund investing in a greater number of securities.
By investing primarily in foreign stocks, the Portfolio may expose shareholders
to additional risks. Foreign stock markets tend to be more volatile than the
U.S. market due to economic and political instability and regulatory conditions
in some countries. To the extent that the Portfolio invests in small-cap foreign
stocks, it may expose shareholders to additional risks. These risks include
limited or inaccurate information; limited product lines, markets or financial
resources; and securities that may trade less frequently and in limited volume.
As a result, small-cap stocks may fluctuate significantly more in value than
larger-cap stocks.
Because of the possible concentration of the Portfolio's investments in Japanese
companies, investors should be aware of the special risks associated with an
emphasis on Japanese stocks. See "Additional Investment Strategy and Related
Risks."
In addition, most of the securities in which the Portfolio invests are
denominated in foreign currencies, whose value may decline against the U.S.
dollar.
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Past Portfolio Performance The Portfolio was launched on December 31, 1999.
Performance results have not been provided because the Portfolio has not been in
existence for a full calendar year.
- --------------------------------------------------------------------------------
Fees & Expenses [clipart]
The following table shows the fees and expenses you may pay if you buy and hold
shares of this Portfolio. Montgomery does not impose any front-end or deferred
sales loads on this Portfolio.
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 1.00%*
Annual Portfolio Operating Expenses (expenses that are
deducted from Portfolio assets) **
Management Fee# 1.10%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses## 0.55%
- --------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.65%
* The 1.00% redemption fee applies to those shares redeemed within six months
from the date of purchase and is paid to the Portfolio. $10 will be deducted
from redemption proceeds sent by wire or overnight courier.
** Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Portfolio's total annual operating
expenses (excluding interest and tax expense) to 1.65%. This contract has a
rolling ten-year term.
# The management fee of 1.10% will be reduced to 1.00% for those assets over
$500 million and to 0.90% for those assets over $1 billion.
## Other expenses are based on estimated amounts for the current fiscal year.
Example of Portfolio expenses: This example is intended to help you compare the
cost of investing in the Portfolio with the cost of investing in other mutual
funds. The table below shows what you would pay in expenses over time, whether
or not you sold your shares at the end of each period. It assumes a $10,000
initial investment, 5% total return each year and no changes in expenses. This
example is for comparison purposes only. It does not necessarily represent the
Portfolio's actual expenses or returns.
1 Year 3 Years
- ----------------------
$167 $519
[clipart] [sidebar]
Portfolio Management
John Boich
Oscar Castro
For more details see page ___
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PORTFOLIO MANAGEMENT
PORTFOLIO MANAGEMENT
The investment manager of the Portfolios is Montgomery Asset Management, LLC,
101 California Street, San Francisco, California 94111. Founded in 1990,
Montgomery Asset Management is a subsidiary of Commerzbank AG, one of the
largest publicly held commercial banks in Germany. As of September 30, 1999,
Montgomery Asset Management managed approximately $3.9 billion on behalf of some
200,000 investors in The Montgomery Funds. Montgomery may rely on the expertise,
research and resources of Commerzbank AG and its worldwide affiliates in
managing the Portfolios.
Growth 20 Portfolio
[photo] ANDREW PRATT, CFA, portfolio manager for the Montgomery Growth 20
Portfolio (since inception 1999). Mr. Pratt joined Montgomery in 1993 from
Hewlett-Packard Company, where, as an equity analyst, he managed a portfolio of
small-cap technology companies and researched private placement and venture
capital investments.
[photo] ROGER HONOUR, portfolio manager for the Montgomery Growth 20 Portfolio
(since inception 1999). Prior to joining Montgomery in 1993 as a senior
portfolio manager and managing director, Mr. Honour was vice president and
portfolio manager at Twentieth Century Investors in Kansas City, Missouri. From
1990 to 1992, he served as vice president and portfolio manager at Alliance
Capital Management.
[photo] KATHRYN PETERS, portfolio manager for the Montgomery Growth 20 Portfolio
(since inception 1999). Ms. Peters joined Montgomery in 1995 as a portfolio
manager. From 1993 to 1995, she was an associate in the investment banking
division of Donaldson, Lufkin & Jenrette in New York. Prior to that she analyzed
mezzanine investments for Barclays Associates Incorporated.
International 20 Portfolio
[photo] JOHN BOICH, CFA, senior portfolio manager for the Montgomery
International 20 Portfolio (since inception 1999). Mr. Boich joined Montgomery
in 1993 as a senior portfolio manager and managing director. From 1990 to 1993,
he was a vice president and portfolio manager at The Boston Company
Institutional Investors, Inc. From 1989 to 1990, he was co-founder and
co-manager of The Common Goal World Fund, a global equity partnership.
[photo] OSCAR CASTRO, CFA, senior portfolio manager for the Montgomery
International 20 Portfolio (since inception 1999). Mr. Castro joined Montgomery
in 1993 as a senior portfolio manager and managing director. From 1991 to 1993
he was a vice president and portfolio manager at G.T. Capital Management, Inc.
From 1989 to 1990, he was co-founder and co-manager of The Common Goal World
Fund, a global equity partnership.
Management Fees and Operating Expense Limits
The table below shows the annual contractual management fee rate and the annual
contractual total operating expense limit (excluding interest and tax expense)
for each Portfolio. The management fee amounts actually paid to Montgomery Asset
Management may vary from year to year, depending on actual expenses. The actual
fee rates may be greater than the contractual rates only to the extent
Montgomery recouped previously deferred fees during the fiscal year.
MANAGEMENT TOTAL EXPENSE
FEES LIMIT
MONTGOMERY PORTFOLIO (annual rate) (annual rate)
Growth 20 Portfolio 1.00% 1.40%
International 20 Portfolio 1.10% 1.65%
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Additional Investment Strategies and Related Risks
Montgomery International 20 Portfolio
To the extent that the Portfolio invests in Japanese securities, the Portfolio
exposes shareholders to special risks. The Portfolio's share value may be more
volatile than that of mutual funds not sharing this geographic concentration.
The value of the Portfolio's shares may vary dramatically in response to
political and economic factors affecting companies in Japan.
Securities in Japan are denominated and quoted in yen. Yen are fully convertible
and transferable based on floating exchange rates into all readily convertible
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. As a result, in the absence of a successful currency
hedge, the value of the Portfolio's assets as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in the value of Japanese yen
relative to the U.S. dollar.
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States, even
after that market decline. Differences in accounting methods make it difficult
to compare the earning of Japanese companies with those of companies in other
countries, especially the United States.
Defensive Investments
At the discretion of its portfolio manager(s), each Portfolio may invest up to
100% of its assets in cash for temporary defensive purposes. No Portfolio is
required or expected to take such a defensive posture. But if used, such an
unlikely stance may help a Portfolio minimize or avoid losses during adverse
market, economic or political conditions. During such a period, a Portfolio may
not achieve its investment objective. For example, should the market advance
during this period, a Portfolio may not participate as much as it would have if
it had been more fully invested.
Portfolio Turnover
The Portfolios' managers will sell a security when they believe it is
appropriate to do so, regardless of how long a Portfolio has owned that
security. Buying and selling securities generally involves some expense to a
Portfolio, such as commission paid to brokers and other transaction costs. By
selling a security, a Portfolio may realize taxable capital gains that it will
subsequently distribute to shareholders. Generally speaking, the higher a
Portfolio's annual portfolio turnover, the greater its brokerage costs and the
greater the likelihood that it will realize taxable capital gains. Increased
brokerage costs may adversely affect a Portfolio's performance. Also, unless you
are a tax-exempt investor or you purchase shares through a tax-deferred account,
the distribution of capital gains may affect your after-tax return. Annual
portfolio turnover of 100% or more, as is expected for each Portfolio, is
considered high.
The Year 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect a Portfolio's operations,
including pricing, securities trading and the servicing of shareholder accounts.
Montgomery is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during and after 2000. We have completed tests
on our internal systems. Montgomery is diligently working with external
partners, suppliers, vendors and other service providers to ensure that the
systems with which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships,
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Montgomery is further developing contingency plans intended to ensure that
unexpected systems failures will not adversely affect the Portfolios'
operations. Montgomery intends to monitor these processes through the rollover
of 1999 into 2000 and to quickly implement alternative solutions if necessary.
Despite Montgomery's efforts and contingency plans, however, noncompliant
computer systems could have a material adverse effect on a Portfolio's business,
operations or financial condition. Additionally, a Portfolio's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the prices of securities the Portfolio owns. Issuers in countries outside of the
United States, particularly in emerging markets, may not be required to make the
same level of disclosure about Year 2000 readiness as required in the United
States. The Manager, of course, cannot audit any company and its major suppliers
to verify their Year 2000 readiness. Montgomery understands that many foreign
countries and companies are well behind their U.S. counterparts in preparing for
2000.
Internet Risks
An interruption in transmissions over the Internet generally, or a problem in
the transmission of our Web site in particular, could result in a delay or
interruption in your ability to access our Web site, to place purchase or sale
orders with a Portfolio, to receive certain shareholder information
electronically or otherwise to interact with a Portfolio.
The Euro: Single European Currency
Investors in the International 20 Portfolio should note the following: On
January 1, 1999, the European Union (EU) introduced a single European currency
called the euro. Eleven of the fifteen EU members have begun to convert their
currencies to the euro including Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain (leaving out
Britain, Sweden, Denmark and Greece). For the first three years, the euro will
be a phantom currency (only an accounting entry). Euro notes and coins will
begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
[] Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably.
[] The applicable conversion rate for contracts stated in the national currency
of an EU member.
[] The ability of clearing and settlement systems to process transactions
reliably.
[] The effects of the euro on European financial and commercial markets.
[] The effect of new legislation and regulations to address euro-related
issues.
These and other factors could cause market disruptions and affect the value of
your shares in the Portfolio to the extent it invests in companies conducting
business in Europe. Montgomery and its key service providers have taken steps to
address euro-related issues, but there can be no assurance that these efforts
will be sufficient.
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[table]
Investment Options
To open a new account, complete and mail the New Account application included
with this prospectus, or complete the application online by accessing our Web
site at www.montgomeryfunds.com.
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Purchase and redemption requests received after 1:00 p.m. Pacific time (4:00
p.m. eastern time) will be executed at the following business day's closing
price. Once a trade is placed it may not be altered or canceled.
Checks should be made payable to:
Montgomery Stock Solutions
For investors that use our online application the minimum initial investment is
$1,000, otherwise, the Portfolio's minimum is $2,500. The minimum subsequent
investment is $100.
Once an account is established, you can:
[] Buy or sell shares online Access the Portfolios at The Montgomery Funds Web
site at www.montgomeryfunds.com and follow the instructions.
[] Buy, sell or exchange shares by phone. Contact The Montgomery Funds at
800.572.fund [3863]. Press (1) for a shareholder service representative.
Press (2) for the automated Montgomery Star System.
[] Buy or sell shares by mail
Mail buy/sell order(s) with your check:
By regular mail:
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
By express or overnight service:
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1614
[] Buy or sell shares by wiring funds
To: Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: [shareholder(s) name]
Shareholder account number:
[shareholder(s) account number]
Name of Portfolio: [Montgomery Portfolio Name]
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ACCOUNT INFORMATION
What You Need to Know About Your Montgomery Account
You pay no sales charge to invest in the Portfolios. The minimum initial
investment for each Portfolio is $2,500 ($1,000 online). The minimum subsequent
investment is $100. Under certain conditions we may waive these minimums. If you
buy shares through a broker or investment advisor, different requirements may
apply. All investments must be made in U.S. dollars.
We must receive payment from you within three business days of your
purchase. In addition, the Portfolios and the Distributor each reserve the right
to reject all or part of any purchase.
From time to time, Montgomery may close and reopen the Portfolios to new
investors at its discretion. Shareholders who maintain open accounts which meet
the minimum required balance in a Portfolio when it closes may make additional
investments in it. If a Portfolio is closed and you redeem your total investment
in the Portfolio, your account will be closed and you will not be able to make
any additional investments in the Portfolio. The Montgomery Funds reserves the
right to close or liquidate a Portfolio at its discretion.
Becoming a Montgomery Shareholder
To open a new account:
[] Online Go to www.montgomeryfunds.com. Print and complete the online New
Account application and send a check payable to Montgomery Stock Solutions to
the appropriate address (see previous page).
[] By Mail Send your completed application (included with this prospectus or
printed from our Web site at www.montgomeryfunds.com), with a check payable to
Montgomery Stock Solutions, to the appropriate address (see column at right).
Your check must be in U.S. dollars and drawn only on a bank located in the
United States. Dividends do not accrue until your check has cleared. We do not
accept third-party checks, "starter" checks, credit-card checks, instant-loan
checks or cash investments. We may impose a charge on checks that do not clear.
[] By Wire Call us at (800) 572-fund [3863] to let us know that you intend to
make your initial investment by wire. Tell us your name, the amount you want to
invest and Portfolio(s) in which you want to invest. We will give you further
instructions and a fax number to which you should send your completed New
Account application. To ensure that we handle your investment accurately,
include complete account information in all wire instructions. Then request your
bank to wire money from your account to the attention of:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
and include the following:
Account #7526601
Attention: The Montgomery Funds
For credit to: [shareholder(s) name]
Shareholder Account Number:
[shareholder(s) account number]
Name of Portfolio: [Montgomery Portfolio Name]
Please note: Your bank may charge a wire transfer fee.
[] By Phone To make an initial investment by phone, you must have been a current
Montgomery shareholder for at least 30 days. Shares for Individual Retirement
Accounts (IRAs) may not be purchased
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by phone. Your purchase of a new Portfolio must meet its investment minimum and
is limited to the total value of your existing accounts or $10,000, whichever is
greater. To complete the transaction, we must receive payment within three
business days. We reserve the right to collect any losses from your account if
we do not receive payment within that time.
[sidebar]
Getting Started
To invest, complete and send the New Account
application enclosed with this prospectus or
from our Web site at www.montgomeryfunds.com.
Send a check payable to Montgomery Stock
Solutions.
Regular Mail
The Montgomery Funds
c/o DST Systems, Inc.
P.O. Box 219073
Kansas City, MO 64121-9073
Express Mail or Overnight Courier
The Montgomery Funds
c/o DST Systems, Inc.
210 West 10th Street
8th Floor
Kansas City, MO 64105-1614
Foreign Investors:
Foreign citizens and resident aliens of the
United States living abroad may not invest in
the Portfolio
How Portfolio Shares Are Priced
How and when we calculate the Portfolios' price or net asset value (NAV)
determines the price at which you will buy or sell shares. We calculate a
Portfolio's NAV by dividing the total net value of its assets by the number of
outstanding shares. We base the value of the Portfolio's investments on their
market value, usually the last price reported for each security before the close
of market that day. A market price may not be available for securities that
trade infrequently. Occasionally, an event that affects a security's value may
occur after the market closes. This is more likely to happen for foreign
securities traded in foreign markets that have different time zones than in the
United States. Major developments affecting the price of those securities may
happen after the foreign markets in which such securities trade have closed, but
before the Portfolio calculates its NAV. In this case, Montgomery, subject to
the supervision of the Portfolios' Board of Trustees or Pricing Committee, will
make a good-faith estimate of the security's "fair value," which may be higher
or lower than the security's closing price in its relevant market.
We calculate the NAV of each Portfolio after the close of trading on the
New York Stock Exchange (NYSE) every day the NYSE is open. We do not calculate
NAVs on the days on which the NYSE is closed for trading. An exception applies
as described below. If we receive your order by the close of trading on the
NYSE, you can purchase shares at the price calculated for that day. The NYSE
usually closes at 4:00 p.m. eastern time on weekdays, except for holidays. If
your order is received after the NYSE has closed, your shares will be priced at
the next NAV we determine after receipt of your order. More details about how we
calculate the Portfolios' NAVs are in the Statement of Additional Information.
[] The International 20 Portfolio invests in securities denominated in foreign
currencies and traded on foreign exchanges. To determine their value, we convert
their foreign-currency price into U.S. dollars by using the exchange rate last
quoted by a major bank. Exchange rates fluctuate frequently and may affect
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the U.S. dollar value of foreign-denominated securities, even if their market
price does not change. In addition, some foreign exchanges are open for trading
when the U.S. market is closed. As a result, the Portfolio's foreign
securities--and its price--may fluctuate during periods when you can't buy, sell
or exchange shares in the Portfolio.
[sidebar]
trading times
Whether buying, exchanging or selling shares,
transaction requests received after 1:00 p.m.
Pacific time (4:00 p.m. eastern time) will be
executed at the next business day's closing
price.
14
<PAGE>
[Table]
www.montgomeryfunds.com
Manage your account(s) online. Our Account Access area offers free, secure
access to your Montgomery Portfolio account(s) around-the-clock.
At www.montgomeryfunds.com Montgomery shareholders can:
> Check current account balances
> Buy, exchange or sell shares
> View the most recent account activity and up to 80 records of account
history within the past two years
> Receive current versions of a Portfolio's prospectus, annual and
semi-annual reports, proxy statements, confirmations and statements, and
other shareholder information electronically
> Order duplicate statements and tax forms
> View tax summaries
> Change address of record
Access your account(s) online today. Simply click on the Account Access tab and
follow the simple steps to create a secure Personal Identification Number (PIN).
It takes only a minute.
Please note that for your protection, this secure area of our Website requires
the use of browsers with 128-bit encryption. If you are not sure what level of
security your browser supports, click on our convenient browser check.
[clipart]
15
<PAGE>
Buying Additional Shares
[] Online. To buy shares online, you must first set up an Electronic Link
(described in the note at above left). Then visit our Web site,
www.montgomeryfunds.com, where you can purchase up to $25,000 per day in
additional shares of either Portfolio, except those held in a retirement
account. You will be prompted to enter your PIN whenever you perform a
transaction so that we can be sure each purchase is secure. You will then be
asked to (1) affirm your consent to receive all Portfolio documentation
electronically, (2) provide your e-mail address, and (3) affirm that you have
read the appropriate Prospectus. Each Portfolio's current Prospectus will be
readily available for viewing and printing on our Web site. The cost of the
shares will be automatically deducted from your bank account.
[] By Mail. Complete the form at the bottom of any Montgomery statement and mail
it with your check payable to Montgomery Stock Solutions. Or mail the check with
a signed letter noting the name of the Portfolio in which you want to invest,
your account number and telephone number. We will mail you a confirmation of
your investment. Note that we may impose a charge on checks that do not clear.
[] By Phone. Current shareholders are automatically eligible to buy shares by
phone. To buy shares in the Portfolio or to invest in a new Portfolio, call
(800) 572-fund [3863]. Shares for IRAs may not be purchased by phone. Telephone
purchases can be made for up to five times your account value as of the previous
day.
We must receive payment for your purchase within three business days of
your request. To ensure that we do, you can:
> Transfer money directly from your bank account by mailing a written request
and a voided check or deposit slip (for a savings account).
> Send us a check by overnight or second-day courier service.
> Instruct your bank to wire money to our affiliated bank using the information
in "Becoming A Montgomery Shareholder" (page ___).
[] By Wire. There is no need to contact us when buying additional shares by
wire. Instruct your bank to wire funds to our affiliated bank using the
information under "Becoming a Montgomery Shareholder" (page ___).
Exchanging Shares
You may exchange shares of each Portfolio for shares in the same class of
another, in accounts with the same registration, Taxpayer Identification Number
and address. There is a $100 minimum to exchange into a Portfolio you currently
own and a $1,000 minimum for investing in a new Portfolio. Note that an exchange
is treated as a sale may result in a realized gain or loss for tax purposes. You
may exchange shares online at www.montgomeryfunds.com, or by phone at (800)
572-FUND [3863].
Other Exchange Policies
[] We will process your exchange order at the next-calculated NAV.
[] You may exchange shares only if the Portfolios are qualified for sale in your
state. Call (800) 627-7933 for information on availability in your state. You
may not exchange shares in one Portfolio for shares of another that is currently
closed to new shareholders unless you are already a shareholder in the closed
Portfolio.
[] Because excessive exchanges can harm a Portfolio's performance, we reserve
the right to terminate your exchange privileges if you make more than four
exchanges out of any one Portfolio during a 12-month period. We may also refuse
an exchange into a Portfolio from which you have sold shares within the previous
90 days (accounts under common control and accounts having the same Taxpayer
Identification Number will be counted together).
16
<PAGE>
[sidebar]
Our Electronic Link program allows us to automatically debit or credit your bank
account for transactions made by phone or online. To take advantage of this
service, simply mail us a voided check or preprinted deposit slip from your bank
account along with a request to establish an Electronic Link.
[] We may restrict or refuse your exchanges if we receive, or anticipate
receiving, simultaneous orders affecting a large portion of a Portfolio's assets
or if we detect a pattern of exchanges that suggests a market-timing strategy.
[] We reserve the right to refuse exchanges into a Portfolio by any person or
group if, in our judgment, the Portfolio would be unable to effectively invest
the money in accordance with its investment objective and policies, or might be
adversely affected in other ways.
[] Any redemption fees will apply to exchanges or redemptions out of a
Portfolio.
Selling Shares
You may sell some or all of your Portfolio shares on days that the New York
Stock Exchange is open for trading. Note that a redemption is treated as a sale
and may result in a realized gain or loss for tax purposes.
Your shares will be sold at the next NAV we calculate for the Portfolio
after receiving your order. We will promptly pay the proceeds to you, normally
within three business days of receiving your order and all necessary documents
(including a written redemption order with the appropriate signature guarantee).
We will mail or wire you the proceeds, depending on your instructions. Shares
purchased by check will be priced upon receipt of you order, but proceeds may
not be paid until your check clears, which may take up to 15 days after the
purchase date. Within this 15-day period, you may choose to exchange into a
Montgomery Money Market fund provided you have received and read the prospectus
for that Money Market fund.
Aside from any applicable redemption fees, we generally will not charge you
any fees when you sell your shares, although there are some minor exceptions:
> For sharers sold by wire pay a $10 wire transfer fee that will be deducted
directly from their proceeds.
> For redemption checks requested by Federal Express, a $10 fee will be deducted
directly from the redemption proceeds.
In accordance with the rules of the Securities and Exchange Commission
(SEC) we reserve the right to suspend redemptions under extraordinary
circumstances.
Shares can be sold in several ways:
[] Online. You can sell up to $50,000 in shares in a regular account in the
Account Access section of www.montgomeryfunds.com.
[] By Mail. Send us a letter including your name, Montgomery account number, the
Portfolio from which you would like to sell shares and the dollar amount or
number of shares you want to sell. You must sign the letter the same way your
account is registered. If you have a joint account, all accountholders must sign
the letter.
If you want the proceeds to go to a party other than the account owner(s)
or your predesignated bank account, or if the dollar amount of your redemption
exceeds $50,000, you must obtain a signature guarantee (not a notarization),
available from many commercial banks, savings associations, stock brokers and
other National Association of Securities Dealers member firms.
If you want to wire your redemption proceeds but do not have a
predesignated bank account, include a preprinted, voided check or deposit slip.
If you do not have a preprinted check, please send a signature-
17
<PAGE>
guaranteed letter along with your bank instructions. The minimum wire amount is
$500. Wire charges, if any, will be deducted from the redemption proceeds. We
may permit lesser wire amounts or fees at our discretion. Call (800) 572-fund
[3863] for more details.
[sidebar]
Shareholder service is available Monday
through Friday from 6:00 a.m. to 5:00 p.m.
Pacific time.
Shareholders can get information or perform
transactions around-the-clock through the
Montgomery Star System or
www.montgomeryfunds.com.
[] By Phone. You may accept or decline telephone redemption privileges on your
New Account application. If you accept, you will be able to sell up to $50,000
in shares through one of our shareholder service representatives or through our
automated Star System at (800) 572-fund [3863]. You may not buy or sell shares
in an IRA account by phone. If you included bank wire information on your New
Account application or made arrangements later for wire redemptions, proceeds
can be wired to your bank account. Please allow at least two business days for
the proceeds to be credited to your bank account. If you want proceeds to arrive
at your bank on the same business day (subject to bank cutoff times), there is a
$10 fee. For more information about our telephone transaction policies, see
"Other Policies."
[] Redemption Fee. The redemption fee is intended to compensate each Portfolio
for the increased expenses to longer-term shareholders and the disruptive effect
on the portfolios caused by short-term investments. The redemption fee will be
assessed on the net asset value of the shares redeemed or exchanged and will be
deducted from the redemption proceeds otherwise payable to the shareholder. Each
Portfolio will retain the fee charged.
Other Policies
Minimum Account Balances
Due to the cost of maintaining small accounts, we require a minimum account
balance of $1,000. If your account balance falls below that amount for any
reason, we will ask you to add to your account. If your account balance is not
brought up to the minimum or you do not send us other instructions, we will
redeem your shares and send you the proceeds. We believe that this policy is in
the best interests of all our shareholders.
Expense Limitations
Montgomery Asset Management may reduce its management fees and absorb expenses
in order to maintain total operating expenses (excluding interest, taxes and
dividend expenses) for each Portfolio below its previously set operating expense
limit. The Investment Management Agreement allows Montgomery three years to
recoup amounts previously reduced or absorbed, provided the Portfolio remains
within the applicable expense limitation. Montgomery generally seeks to recoup
the oldest amounts before seeking payment of fees and expenses for the current
year.
Uncashed Redemption Checks
If you receive your Portfolio redemption proceeds or distributions by check
(instead of by wire) and it does not arrive within a reasonable period of time,
call us at (800) 572-fund [3863]. Please note that we are responsible only for
mailing redemption or distribution checks and are not responsible for tracking
uncashed checks or determining why checks are uncashed. If your check is
returned to us by the U.S. Postal Service or other delivery service, we will
hold it on your behalf for a reasonable period of time. We
18
<PAGE>
will not invest the proceeds in any interest-bearing account. No interest
will accrue on uncashed distribution or redemption proceeds.
Transaction Confirmation
If you notice any errors on your confirmation, you must notify the Portfolios of
such errors within 30 days following mailing of that confirmation. The
Portfolios will not be responsible for any loss, damage, cost or expense arising
out of any transaction that appears on your confirmation after this 30-day
period.
[sidebar]
BUYING AND SELLING SHARES THROUGH SECURITIES BROKERS
AND BENEFIT PLAN ADMINISTRATORS
You may purchase and sell shares through securities brokers and benefit plan
administrators or their subagents. You should contact them directly for
information regarding how to invest or redeem through them. They may also charge
you service or transaction fees. If you purchase or redeem shares through them,
you will receive the NAV calculated after receipt of the order by them
(generally, 4:00 p.m. eastern time) on any day the NYSE is open. If your order
is received by them after that time, it will be purchased or redeemed at the
next-calculated NAV. Brokers and benefit plan administrators who perform
shareholder servicing for the Portfolios may receive fees from the Portfolios or
Montgomery for providing these services.
Telephone Transactions
By buying or selling shares over the phone, you agree to reimburse the
Portfolios for any expenses or losses incurred in connection with transfers of
money from your account. This includes any losses or expenses caused by your
bank's failure to honor your debit or act in accordance with your instructions.
If your bank makes erroneous payments or fails to make payment after you buy
shares, we may cancel the purchase and immediately terminate your telephone
transaction privileges.
The shares you purchase by phone will be priced at the first net asset
value we determine after receiving your request. You will not actually own the
shares, however, until we receive your payment in full. If we do not receive
your payment within three business days of your request, we will cancel your
purchase. You may be responsible for any losses incurred by a Portfolio as a
result.
Please note that we cannot be held liable for following telephone
instructions that we reasonably believe to be genuine. We use the following
safeguards to ensure that the instructions we receive are accurate and
authentic:
> Recording certain calls
> Requiring an authorization number or other personal information not likely to
be known by others
> Sending a transaction confirmation to the investor
The Portfolios and our Transfer Agent may be held liable for any losses due
to unauthorized or fraudulent telephone transactions only if we have not
followed these reasonable procedures.
We reserve the right to revoke the telephone transaction privilege of any
shareholder at any time if he or she has used abusive language or misused the
phone privilege by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, we will temporarily suspend
your telephone redemption privileges until 30 days after your notification to
protect you and your account. We require all redemption requests made during
this period to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption
privileges during periods of
19
<PAGE>
volatile economic or market conditions. In these cases you may want to transmit
your redemption request:
> Online
> Using the automated Star System
> By overnight courier
> By telegram
You may discontinue phone privileges at any time.
Tax Withholding Information
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If you don't have a Social Security Number or TIN, apply
for one immediately by contacting your local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide us
with a TIN or a Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain distributions, and
redemption and exchange proceeds (unless you qualify as an exempt payee under
certain rules).
Other rules about TINs apply for certain investors. For example, if you are
establishing an account for a minor under the Uniform Gifts to Minors Act, you
should furnish the minor's TIN. If the IRS has notified you that you are subject
to backup withholding because you failed to report all interest and dividend
income on your tax return, you must check the appropriate item on the New
Account application. Foreign shareholders should note that any dividends the
Portfolio pays to them may be subject to up to 30% withholding instead of backup
withholding.
[sidebar]
INVESTMENT MINIMUMS
For regular accounts and IRAs, the minimum
initial investment is $2,500 ($1,000 online).
Minimum subsequent investment is $100.
After You Invest
Taxes
IRS rules require that the Portfolios distribute all of their net investment
income and capital gains, if any, to shareholders. Capital gains may be taxable
at different rates depending upon the length of time a Portfolio holds its
assets. We will inform you about the source of any dividends and capital gains
upon payment. After the close of each calendar year, we will advise you of their
tax status. The Portfolios' distributions, whether received in cash or
reinvested, may be taxable. Any redemption of a Portfolio's shares or any
exchange of a Portfolio's shares for another Portfolio will be treated as a
sale, and any gain on the transaction may be taxable.
Additional information about tax issues relating to the Portfolios can be
found in our Statement of Additional Information, available free by calling
(800) 572-fund [3863]. Consult your tax advisor about the potential tax
consequences of investing in the Portfolios.
Dividends and Distributions
As a shareholder in a Portfolio, you may receive income dividends and
capital-gain distributions for which you will owe taxes (unless you invest
solely through a tax-advantaged account such as an IRA or a 401(k) plan). Income
dividends and capital-gain distributions are paid to all shareholders who
maintain accounts with a Portfolio as of its "record date."
20
<PAGE>
If you would like to receive dividends and distributions in cash, indicate
that choice on your New Account application. Otherwise, the distribution will be
reinvested in additional Portfolio shares.
Keeping You Informed
After you invest you will receive, either by regular mail or electronically, our
Shareholder Services Guide, which includes more information about buying,
exchanging and selling shares in the Portfolios. It also describes in more
detail useful tools for investors such as the Montgomery Star System and online
transactions.
During the year, we will also send you, either by mail or electronically,
the following communications:
> Confirmation statements
> Account statements, sent after the close of each calendar quarter
> Annual and semiannual reports, sent approximately 60 days after June 30 and
December 31
> 1099 tax form, sent by January 31
> Annual updated prospectus, sent to existing shareholders in the fall
To save you money, we send only one copy of each shareholder report or
other mailings to your household if you hold accounts under common ownership or
at the same address (regardless of the number of shareholders or accounts at
that household or address), unless you request additional copies. You also have
the option of receiving the shareholder report or other mailings electronically.
Your consent to receive these materials electronically is effective until
further notice by the Portfolios or revocation by you.
[sidebar]
OUR PARTNERS
As a Montgomery shareholder, you may see the
names of our partners on a regular basis. We
all work together to ensure that your
investments are handled accurately and
efficiently.
Funds Distributor, Inc., located in New York
City and Boston, distributes the Portfolios.
Investors Fiduciary Trust Company, located in
Kansas City, Missouri, is the Portfolios'
master transfer agent. It performs certain
recordkeeping and accounting functions for
the Portfolios.
DST Systems, Inc. also located in Kansas
City, Missouri, assists Investors Fiduciary
Trust with certain record keeping and
accounting functions for the Portfolios.
<TABLE>
[table]
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
<S> <C> <C>
Growth 20 Portfolio Declared and paid in the last Declared and paid in the last
quarter of each calendar year* quarter of each calendar year*
International 20 Portfolio Declared and paid in the last Declared and paid in the last
quarter of each calendar year* quarter of each calendar year*
<FN>
*Following their fiscal year end (June 30), the Portfolios may make additional
distributions to avoid the imposition of a tax.
</FN>
</TABLE>
21
<PAGE>
[sidebar]
HOW TO AVOID "BUYING A DIVIDEND"
If you plan to purchase shares in a Portfolio,
check if it is planning to make a
distribution in the near future. Here's why:
If you buy shares of a Portfolio just before a
distribution, you'll pay full price for the
shares but receive a portion of your purchase
price back as a taxable distribution. This is
called "buying a dividend." Unless you hold
that Portfolio in a tax-deferred account, you
will have to include the distribution in your
gross income for tax purposes, even though you
may not have participated in the increase of
that Portfolio's appreciation.
22
<PAGE>
[Outside back cover: The Montgomery Funds; Address; Contact Info; Logo]
You can find more information about the Portfolios' investment policies in the
Statement of Additional Information (SAI), incorporated by reference in this
prospectus, which is available free of charge.
You can also find further information about the Portfolios in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected the Portfolios' performance
during its most recent fiscal period. To request a copy of the most recent
annual or semiannual report, please call us at (800) 572-FUND [3863], option 3.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about the Portfolios, including the SAI, at
the Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. To obtain information on the operation of the Public Reference
Room please call 202.942.8090. Reports and other information about the
Portfolios are available at the SEC's Web site at www.sec.gov. You can also
obtain copies of this information, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C., 20549-6009, or
e-mailing the SEC at [email protected].
Corporate Headquarters:
The Montgomery Funds
101 California Street
San Francisco, CA 94111-9361
- -------------------------
(800) 572-FUND [3863]
www.montgomeryfunds.com
- -------------------------
SEC File Nos.: The Montgomery Funds 811-6011
Funds Distributor, Inc. 12/99
23
<PAGE>
---------------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION FOR
MONTGOMERY GROWTH 20 PORTFOLIO
MONTGOMERY INTERNATIONAL 20 PORTFOLIO
---------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
THE MONTGOMERY FUNDS
- --------------------------------------------------------------------------------
MONTGOMERY GROWTH 20 PORTFOLIO
MONTGOMERY INTERNATIONAL 20 PORTFOLIO
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
December 31, 1999
The Montgomery Funds is an open-end management investment company
organized as a Massachusetts business trust (the "Trust"), having different
series of shares of beneficial interest. The Montgomery Growth 20 Portfolio and
the Montgomery International 20 Portfolio (each a "Portfolio" and collectively,
the "Portfolios") are series of the Trust. This Statement of Additional
Information contains information in addition to that set forth in the combined
prospectus for the Portfolios dated December 31, 1999, as that prospectus may be
revised from time to time (the "Prospectus"). The Prospectus may be obtained
without charge at the address or telephone number provided above. This Statement
of Additional Information is not a prospectus and should be read in conjunction
with the Prospectus.
<PAGE>
TABLE OF CONTENTS
Page
----
STATEMENT OF ADDITIONAL INFORMATION............................................1
THE TRUST......................................................................3
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS...........................3
RISK FACTORS..................................................................14
INVESTMENT RESTRICTIONS.......................................................16
DISTRIBUTIONS AND TAX INFORMATION.............................................19
TRUSTEES AND OFFICERS.........................................................23
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................26
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................29
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................31
DETERMINATION OF NET ASSET VALUE..............................................32
PRINCIPAL UNDERWRITER.........................................................34
PERFORMANCE INFORMATION.......................................................35
GENERAL INFORMATION...........................................................37
FINANCIAL STATEMENTS..........................................................39
APPENDIX......................................................................40
B-2
<PAGE>
THE TRUST
The Montgomery Funds is an open-end management investment company
organized as a Massachusetts business trust on May 10, 1990, and is registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The Trust currently offers shares of beneficial interest, $0.01 par value
per share, in various series. This Statement of Additional Information pertains
to the Montgomery Growth 20 Portfolio (the "Growth 20 Portfolio") and the
Montgomery International 20 Portfolio (the "International 20 Portfolio").
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
The Portfolios are managed by Montgomery Asset Management, LLC (the
"Manager") and their shares are distributed by Funds Distributor, Inc. (the
"Distributor"). The investment objectives and policies of the Portfolios are
described in detail in the combined Prospectus. The following discussion
supplements the discussion in the Prospectus.
Each Portfolio is a non-diversified series of The Montgomery Funds. The
achievement of each Portfolio's investment objective will depend upon market
conditions generally and on the Manager's analytical and portfolio management
skills.
Alternative Structures
Each Portfolio has reserved the right, if approved by the Board of
Trustees, to convert to a "master/feeder" structure. In this structure the
assets of mutual funds with common investment objectives and similar parameters
are combined in a pool, rather than being managed separately. The individual
funds are known as "feeder" funds and the pool as the "master" fund. Although
combining assets in this way allows for economies of scale and other advantages,
this change will not affect the investment objectives, philosophies or
disciplines currently employed by the Portfolios and the Manager. Each Portfolio
would notify its shareholders before it took any action to convert to this
structure. As of the date of this Statement of Additional Information, the
Portfolios have not proposed instituting this alternative structure.
Portfolio Securities
Depositary Receipts, Convertible Securities and Securities Warrants.
Each Portfolio may hold securities of foreign issuers in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depository Receipts ("GDRs"), 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 Portfolio's investment policies, a
Portfolio'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. Each Portfolio may also invest in
convertible securities and securities warrants.
Other Investment Companies. Each Portfolio may invest in securities
issued by other investment companies. Those investment companies must invest in
securities in which the Portfolio can invest in a manner consistent with the
Portfolio's investment objective and policies. Applicable provisions of the
Investment Company Act require that a Portfolio limit its investments so that,
as determined immediately after a securities
B-3
<PAGE>
purchase is made: (a) not more than 10% of the value of a Portfolio's total
assets will be invested in the aggregate in securities of investment companies
as a group; and (b) either (i) a Portfolio and affiliated persons of that
Portfolio 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 Portfolio in excess of 1% of the company's total
outstanding shares be deemed illiquid), or (ii) a Portfolio 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.
Because of restrictions on direct investment by U.S. entities in
certain countries, other investment companies may provide the most practical or
only way for the International 20 Portfolio to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The International 20 Portfolio
also may incur tax liability to the extent that it invests in the stock of a
foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Portfolio.
Each Portfolio does not intend to invest in other investment companies
unless, in the Manager's judgment, the potential benefits exceed associated
costs. As a shareholder in an investment company, these Portfolios bear their
ratable share of that investment company's expenses, including advisory and
administration fees, resulting in an additional layer of management fees and
expenses for shareholders. This duplication of expenses would occur regardless
of the type of investment company, i.e., open-end (mutual fund) or closed-end.
Debt Securities. Each Portfolio may purchase debt securities that
complement its objective of capital appreciation through anticipated favorable
changes in relative foreign exchange rates, in relative interest rate levels or
in the creditworthiness of issuers. Debt securities may constitute up to 35% of
each Portfolio's total assets. In selecting debt securities, the Manager seeks
out good credits and analyzes interest rate trends and specific developments
that may affect individual issuers. As an operating policy, which may be changed
by the Board, the Portfolio may invest up to 5% of its total assets in debt
securities rated lower than investment grade. Subject to this limitation, the
Portfolio may invest in any debt security, including securities in default.
After its purchase by the Portfolio, a debt security may cease to be rated or
its rating may be reduced below that required for purchase by the Portfolio. A
security downgraded below the minimum level may be retained if determined by the
Manager and the Board to be in the best interests of the Portfolio.
Debt securities may also consist of participation certificates in large
loans made by financial institutions to various borrowers, typically in the form
of large unsecured corporate loans. These certificates must otherwise comply
with the maturity and credit-quality standards of the Portfolio and will be
limited to 5% of the Portfolio's total assets.
In addition to traditional corporate, government and supranational debt
securities, the International 20 Portfolio may invest in external (i.e., to
foreign lenders) debt obligations issued by the governments, government entities
and companies of emerging markets countries. The percentage distribution between
equity and debt will vary from country to country, based on anticipated trends
in inflation and interest rates; expected rates of economic and corporate
profits growth; changes in government policy; stability, solvency and expected
trends of government finances; and conditions of the balance of payments and
terms of trade.
B-4
<PAGE>
U.S. Government Securities. Each Portfolio may invest a substantial
portion, if not all, of its net assets in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities, including repurchase
agreements backed by such securities ("U.S. government securities"). A Portfolio
generally will have a lower yield than if it purchased higher yielding
commercial paper or other securities with correspondingly greater risk instead
of U.S. Government securities.
Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of a Portfolio's shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest. The securities issued by these agencies are
discussed in more detail later.
Asset-Backed Securities. Each Portfolio may invest up to 5% of its
total assets in asset-backed securities. These are secured by and payable from
pools of assets, such as motor vehicle installment loan contracts, leases of
various types of real and personal property, and receivables from revolving
credit (e.g., credit card) agreements. Like mortgage-related securities, these
securities are subject to the risk of prepayment.
Structured Notes and Indexed Securities. Each Portfolio may invest in
structured notes and indexed securities. Structured notes are debt securities,
the interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Portfolio invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of that Portfolio's portfolio in an effort
to monitor the Portfolio's interest rate risk.
Privatizations. The International 20 Portfolio may invest in
privatizations. Foreign governmental programs of selling interests in
government-owned or -controlled enterprises ("privatizations") may represent
opportunities for significant capital appreciation and the Portfolio may invest
in privatizations. The ability of U.S. entities, such as the Portfolio, to
participate in privatizations may be limited by local law, or the terms for
participation may be less advantageous than for local investors. There can be no
assurance that privatization programs will be successful.
Special Situations. The International 20 Portfolio may invest in
special situations. The Portfolio believes that carefully selected investments
in joint ventures, cooperatives, partnerships, private placements, unlisted
securities and similar vehicles (collectively, "special situations") could
enhance their capital appreciation potential. The Portfolio also may invest in
certain types of vehicles or derivative securities that represent indirect
investments in foreign markets or securities in which it is impracticable for
the Portfolio to invest directly. Investments in special situations may be
illiquid, as determined by the Manager based on criteria reviewed by the Board.
The Portfolio does not invest more than 15% of its net assets in illiquid
investments, including special situations.
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Risk Factors/Special Considerations Relating to Debt Securities
The International 20 Portfolio may invest in debt securities that are
rated below BBB by S&P, Baa by Moody's or BBB by Fitch, or, if unrated, are
deemed to be of equivalent investment quality by the Manager. As an operating
policy, which may be changed by the Board of Trustees without shareholder
approval, the Portfolio will invest no more than 5% of its assets in debt
securities rated below Baa by Moody's or BBB by S&P, or, if unrated, of
equivalent investment quality as determined by the Manager. The market value of
debt securities generally varies in response to changes in interest rates and
the financial condition of each issuer. During periods of declining interest
rates, the value of debt securities generally increases. Conversely, during
periods of rising interest rates, the value of such securities generally
declines. The net asset value of the Portfolio will reflect these changes in
market value.
Bonds rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of the Portfolio 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 Portfolio.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low-rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of the Portfolio 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 Portfolio 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 Portfolio
may incur additional expenses to seek financial recovery. The low-rated bond
market is relatively new, and many of the outstanding low-rated bonds have not
endured a major business downturn.
Hedging and Risk Management Practices
The International 20 Portfolio typically will not hedge against the
foreign currency exchange risks associated with its investments in foreign
securities. Consequently, the Portfolio will be very sensitive to any changes in
exchange rates for the currencies in which its foreign investments are
denominated or linked. The
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Portfolio 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, in connection with
making an investment or, on rare occasions, to hedge against expected adverse
currency exchange rate changes. Despite their very limited use, the Portfolio
may enter into hedging transactions when, in fact, it is inopportune to do so
and, conversely, when it is more opportune to enter into hedging transactions
the Portfolio might not enter into such transactions. Such inopportune timing of
utilization of hedging practices could result in substantial losses to the
Portfolio.
The International 20 Portfolio 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.
Each Portfolio may purchase options and futures and may write covered
options.
Forward Contracts. A forward contract, which is individually negotiated
and privately traded by currency traders and their customers, involves an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date.
The International 20 Portfolio may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale of a security
denominated in a foreign currency or is expecting a dividend or interest payment
in order to "lock in" the U.S. dollar price of a security, dividend or interest
payment. When the Portfolio 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 Portfolio's portfolio securities denominated in such
currency, or when the Portfolio believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a forward
contract to buy that currency for a fixed dollar amount.
In connection with the Portfolio's forward contract transactions, an
amount of the Portfolio's assets equal to the amount of its commitments will be
held aside or segregated to be used to pay for the commitments. Accordingly, the
Portfolio 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 the Portfolio to utilize forward contracts may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance by the Portfolio than
if it had not entered into such contracts. The Portfolio 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. Each Portfolio
typically will not hedge against movements in interest rates, securities prices
or currency exchange rates. The Portfolio may still occasionally purchase and
sell various kinds of futures contracts and options on futures contracts. The
Portfolio also may enter into closing purchase and sale transactions with
respect to any such contracts and options. Futures contracts may be based on
various securities (such as U.S. government securities), securities indices,
foreign currencies and other financial instruments and indices.
The Trust has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets.
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Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act, the
notice of eligibility included the representation that the Portfolio will use
futures contracts and related options for bona fide hedging purposes within the
meaning of CFTC regulations, provided that the Portfolio may hold positions in
futures contracts and related options that do not fall within the definition of
bona fide hedging transactions if the aggregate initial margin and premiums
required to establish such positions will not exceed 5% of the Portfolio's net
assets (after taking into account unrealized profits and unrealized losses on
any such positions) and that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded from such 5%.
The Portfolio will attempt to determine whether the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Portfolio
for which it expects to purchase. When used, the Portfolio's futures
transactions generally will be entered into only for traditional hedging
purposes--i.e., futures contracts will be sold to protect against a decline in
the price of securities or currencies and will be purchased to protect the
Portfolio against an increase in the price of securities it intends to purchase
(or the currencies in which they are denominated). All futures contracts entered
into by the Portfolio are traded on U.S. exchanges or boards of trade licensed
and regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While the Portfolio's
futures contracts on securities or currencies will usually be liquidated in this
manner, the Portfolio 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, the Portfolio
seeks to establish more certainty than would otherwise be possible with respect
to the effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Portfolio proposes to acquire. For example,
when interest rates are rising or securities prices are falling, the Portfolio
can seek, through the sale of futures contracts, to offset a decline in the
value of its current portfolio securities. When rates are falling or prices are
rising, the Portfolio, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market with
respect to anticipated purchases. Similarly, the Portfolio can sell futures
contracts on a specified currency to protect against a decline in the value of
such currency and its portfolio securities which are denominated in such
currency. The Portfolio can purchase futures contracts on a foreign currency to
fix the price in U.S. dollars of a security denominated in such currency the
Portfolio has acquired or expects to acquire.
As part of its hedging strategy, the Portfolio 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
Portfolio's portfolio securities and such futures contracts. Although under some
circumstances prices of securities in the Portfolio'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 the Portfolio enter into a greater
or lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting the Portfolio'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
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in the value of the Portfolio's portfolio securities could be offset
substantially by a decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives the
Portfolio the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives the Portfolio the benefit of
the futures position if prices move in a favorable direction, and limits its
risk of loss, in the event of an unfavorable price movement, to the loss of the
premium and transaction costs.
The Portfolio may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. The Portfolio's ability to establish and
close out positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by the Portfolio is
potentially unlimited.
The Portfolio 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
its qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. Each
Portfolio 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 that Portfolio
may invest. A Portfolio also may enter into closing sales transactions in order
to realize gains or minimize losses on options they have purchased.
A Portfolio 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 Portfolio, 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 Portfolio may purchase and sell options traded on U.S. and foreign
exchanges. Although a Portfolio 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 Portfolio 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
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outstanding options on that exchange that had been issued by the Options
Clearing Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Although the Portfolios 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 Portfolio's giving another party, in return for a premium, the
right to buy specified securities owned by that Portfolio at a specified future
date and price set at the time of the contract. A covered call option serves as
a partial hedge against a price decline of the underlying security. However, by
writing a covered call option, a Portfolio 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 Portfolio's ability
to sell the underlying security is limited while the option is in effect unless
that Portfolio effects a closing purchase transaction.
Each Portfolio also may write covered put options that give the holder
of the option the right to sell the underlying security to the Portfolio at the
stated exercise price. A Portfolio 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 Portfolio 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
Portfolio will not write put options if the aggregate value of the obligations
underlying the put options exceeds 25% of that Portfolio'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 Portfolios' orders.
Equity-Linked Derivatives--SPDRs, WEBS, DIAMONDS and OPALS. Each
Portfolio may invest in Standard & Poor's ("S&P") Depository Receipts ("SPDRs")
and S&P's MidCap 400 Depository Receipts ("MidCap SPDRs"), World Equity
Benchmark Series ("WEBS"), Dow Jones Industrial Average instruments ("DIAMONDS")
and baskets of Country Securities ("OPALS"). Each of these instruments is a
derivative security whose value follows a well-known securities index or baskets
of securities.
SPDRs and MidCap SPDRs are designed to follow the performance of S&P
500 Index and the S&P MidCap 400 Index, respectively. WEBS are currently
available in 17 varieties, each designed to follow the performance of a
different Morgan Stanley Capital International country index. DIAMONDS are
designed to follow the performance of the Dow Jones Industrial Average which
tracks the composite stock performance of 30 major U.S. companies in a diverse
range of industries.
OPALS track the performance of adjustable baskets of stocks owned by
Morgan Stanley Capital (Luxembourg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALS will receive semi-annual distributions
corresponding to dividends received on shares contained in the underlying basket
of stocks and certain amounts, net of expenses. On the maturity date of the
OPALS, the holders will receive the physical securities comprising the
underlying baskets. Opals, like many of these types of instruments, represent an
unsecured obligation and therefore carry with them the risk that the
Counterparty will default.
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Because the prices of SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALS are
correlated to diversified portfolios, they are subject to the risk that the
general level of stock prices may decline or that the underlying indices
decline. In addition, because SPDRs, MidCap SPDRs, WEBS, DIAMONDS and OPALS will
continue to be traded even when trading is halted in component stocks of the
underlying indices, price quotations for these securities may, at times, be
based upon non-current price information with respect to some of even all of the
stocks in the underlying indices. In addition to the risks disclosed in "Foreign
Securities" below, because WEBS mirror the performance of a single country
index, a economic downturn in a single country could significantly adversely
affect the price of the WEBS for that country.
Other Investment Practices
Repurchase Agreements. Each Portfolio may enter into repurchase
agreements. A Portfolio'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 that
Portfolio. Alternatively, the purchase and repurchase prices may be the same,
with interest at a stated rate due to a Portfolio together with the repurchase
price on the date of repurchase. In either case, the income to a Portfolio is
unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Manager, acting under the supervision of the Board,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Portfolios enter into
repurchase agreements to evaluate potential risk. All repurchase agreements will
be made pursuant to procedures adopted and regularly reviewed by the Board.
The Portfolios generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Portfolios regard repurchase agreements
with maturities in excess of seven days as illiquid. A Portfolio may not invest
more than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is
deemed to be a collateralized loan from a Portfolio to the seller of the
security subject to the repurchase agreement. It is not clear whether a court
would consider the security acquired by a Portfolio subject to a repurchase
agreement as being owned by that Portfolio or as being collateral for a loan by
that Portfolio to the seller. If bankruptcy or insolvency proceedings are
commenced with respect to the seller of the security before its repurchase, a
Portfolio 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 Portfolio
has not perfected a security interest in the security, that Portfolio may be
required to return the security to the seller's estate and be treated as an
unsecured creditor. As such, a Portfolio 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 Portfolio, 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
Portfolio also runs the risk that the seller may fail to repurchase the
security. However, each Portfolio always requires collateral for any repurchase
agreement to which it is a party in the form of securities acceptable to it, the
market value of which is equal to at
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least 100% of the amount invested by the Portfolio plus accrued interest, and
each Portfolio makes payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), a Portfolio, 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 Portfolios 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. Each Portfolio may enter into reverse
repurchase agreements. A Portfolio 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 Portfolio 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
Portfolio also may use the proceeds of reverse repurchase agreements to provide
liquidity to meet redemption requests when sale of the Portfolio's securities is
disadvantageous.
The Portfolios 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.
Lending of Portfolio Securities. Although the Portfolios currently do
not intend to do so, a Portfolio may lend its portfolio securities 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 Portfolio 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 Portfolio or
the borrower at any time. Upon such termination, that Portfolio is entitled to
obtain the return of the securities loaned within five business days.
For the duration of the loan, a Portfolio 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
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creditworthy, and when, in the judgment of the Manager, the income which can be
earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. The Portfolios 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 Portfolio to the
issuer. While the Portfolios reserve the right to sell when-issued or delayed
delivery securities prior to the settlement date, the Portfolios intend to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time a Portfolio 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 Portfolios 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 Portfolios cause their custodian to
segregate cash, U.S. Government securities or other liquid equity or debt
securities with a value equal in value to commitments for when-issued or delayed
delivery securities. The segregated securities either will mature or, if
necessary, be sold on or before the settlement date. To the extent that assets
of a Portfolio are held in cash pending the settlement of a purchase of
securities, that Portfolio will earn no income on these assets.
The Portfolios 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 Portfolio must obtain the security which it has made a
commitment to deliver. If the Portfolio 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 Portfolio may incur a loss as a result of this type of
forward commitment if the price of the security increases between the date the
Portfolio enters into the forward commitment and the date on which it must
purchase the security it is committed to deliver. The Portfolio 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 Portfolio may be required to pay in connection with this type of forward
commitment. Whenever this Portfolio engages in this type of transaction, it will
segregate assets as discussed above.
Illiquid Securities. The Portfolio may invest up to 15% of its net
assets in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which a Portfolio 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 Portfolio 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 a Portfolio 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 Portfolio may be obligated to pay all or part of the registration expenses and
a
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considerable period may elapse between the time of the decision to sell and the
time that Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, that Portfolio might obtain a less favorable price than prevailed
when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A-eligible restricted securities,
however, could adversely affect the marketability of such portfolio securities
and result in a Portfolio's inability to dispose of such securities promptly or
at favorable prices.
The Board has delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board. The Manager takes into account a number of factors in reaching
liquidity decisions, including, but not limited to: (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers, and (v) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Portfolios' portfolios
and reports periodically on such decisions to the Board.
RISK FACTORS
The following describes certain risks involved with investing in the
Portfolios in addition to those described in the prospectus or elsewhere in this
Statement of Additional Information.
Foreign Securities
The Portfolios may purchase securities in foreign countries.
Accordingly, shareholders should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. Foreign investments involve the possibility of expropriation,
nationalization or confiscatory taxation; taxation of income earned in foreign
nations (including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations; foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country and repatriation of investments); default in
foreign government
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securities, and political or social instability or diplomatic developments that
could adversely affect investments. In addition, there is often less publicly
available information about foreign issuers than those in the United States.
Foreign companies are often not subject to uniform accounting, auditing and
financial reporting standards. Further, these Portfolios may encounter
difficulties in pursuing legal remedies or in obtaining judgments in foreign
courts.
Brokerage commissions, fees for custodial services and other costs
relating to investments by the Portfolios in other countries are generally
greater than in the United States. Foreign markets have different clearance and
settlement procedures from those in the United States, and certain markets have
experienced times when settlements did not keep pace with the volume of
securities transactions which resulted in settlement difficulty. The inability
of a Portfolio to make intended security purchases due to settlement
difficulties could cause it to miss attractive investment opportunities.
Inability to sell a portfolio security due to settlement problems could result
in loss to the Portfolio if the value of the portfolio security declined, or
result in claims against the Portfolio if it had entered into a contract to sell
the security. In certain countries there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the United States. The securities markets of many of
the countries in which these Portfolios may invest may also be smaller, less
liquid and subject to greater price volatility than those in the United States.
Because certain securities may be denominated in foreign currencies,
the value of such securities will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a Portfolio's securities denominated in the currency.
Such changes also affect the Portfolio's income and distributions to
shareholders. A Portfolio may be affected either favorably or unfavorably by
changes in the relative rates of exchange among the currencies of different
nations, and a Portfolio may therefore engage in foreign currency hedging
strategies. Such strategies, however, involve certain transaction costs and
investment risks, including dependence upon the Manager's ability to predict
movements in exchange rates.
Some countries in which one of these Portfolios may invest may also
have fixed or managed currencies that are not freely convertible at market rates
into the U.S. dollar. Certain currencies may not be internationally traded. A
number of these currencies have experienced steady devaluation relative to the
U.S. dollar, and such devaluations in the currencies may have a detrimental
impact on the Portfolio. Many countries in which a Portfolio may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuation in inflation rates may have
negative effects on certain economies and securities markets. Moreover, the
economies of some countries may differ favorably or unfavorably from the U.S.
economy in such respects as the rate of growth of gross domestic product, rate
of inflation, capital reinvestment, resource self-sufficiency and balance of
payments. Certain countries also limit the amount of foreign capital that can be
invested in their markets and local companies, creating a "foreign premium" on
capital investments available to foreign investors such as the Portfolios. The
Portfolios may pay a "foreign premium" to establish an investment position which
it cannot later recoup because of changes in that country's foreign investment
laws.
Exchange Rates and Policies
The International 20 Portfolio endeavors to buy and sell foreign
currencies on favorable terms. Some price spreads on currency exchange (to cover
service charges) may be incurred, particularly when the Portfolio changes
investments from one country to another or when proceeds from the sale of shares
in U.S. dollars are
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used for the purchase of securities in foreign countries. Also, some countries
may adopt policies which would prevent the Portfolio from repatriating invested
capital and dividends, withhold portions of interest and dividends at the
source, or impose other taxes, with respect to the Portfolio's investments in
securities of issuers of that country. There also is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
The Portfolio 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 Manager considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions that would
affect the liquidity of the Portfolio's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Manager also considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.
Equity Swaps
The Portfolios may invest in equity swaps. Equity swaps allow the
parties to exchange the dividend income or other components of return on an
equity investment (e.g., a group of equity securities or an index) for a
component of return on another non-equity or equity investment. Equity swaps are
derivatives, and their values can be very volatile. To the extent that the
Manager does not accurately analyze and predict the potential relative
fluctuation of the components swapped with another party, a Portfolio may suffer
a loss. The value of some components of an equity swap (like the dividends on a
common stock) may also be sensitive to changes in interest rates. Furthermore,
during the period a swap is outstanding, the Portfolio may suffer a loss if the
counterparty defaults.
Non-Diversified Portfolio
The Portfolios are "non-diversified" investment companies under the
Investment Company Act. This means that, with respect to 50% of each Portfolio's
total assets, it may not invest more than 5% of its total assets in the
securities of any one issuer (other than the U.S. government). The balance of
its assets may be invested in as few as two issuers. Thus, up to 25% of each
Portfolio's total assets may be invested in the securities of any one issuer.
The investment return on a non-diversified portfolio, however, typically is
dependent upon the performance of a smaller number of issuers relative to the
number of issuers held in a diversified portfolio. If the financial condition or
market assessment of certain issuers changes, a Portfolio's
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policy of acquiring large positions in the obligations of a relatively small
number of issuers may affect the value of its portfolio to a greater extent than
if its portfolio were fully diversified.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Portfolios and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of the Portfolios'
outstanding voting securities as defined in the Investment Company Act. The
Portfolios may not:
1. 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, or (c) to the extent
the entry into a repurchase agreement or a reverse dollar roll
transaction is deemed to be a loan.
2. (a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse
repurchase agreements or dollar roll transactions and
then not in excess of one-third of the value of its
total assets (including the proceeds of such
borrowings, at the lower of cost or fair market
value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of
at least 300% of all borrowings, and no additional
investments may be made while any such borrowings are
in excess of 10% of total assets. Transactions that
are fully collateralized in a manner that does not
involve the prohibited issuance of a "senior
security" within the meaning of Section 18(f) of the
Investment Company Act shall not be regarded as
borrowings for the purposes of this restriction.
(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.
3. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite
securities. (This does not preclude a Portfolio from obtaining
such short-term credit as may be necessary for the clearance
of purchases and sales of its portfolio securities or from
engaging in transactions that are fully collateralized in a
manner that does not involve the prohibited issuance of a
senior security within the meaning of Section 18(f) of the
Investment Company Act.)
4. Buy or sell real estate or commodities or commodity contracts;
however, the Portfolio, 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 this Statement of Additional
Information.
5. Invest in securities of other investment companies, except to
the extent permitted by the Investment Company Act and
discussed in this Statement of Additional Information, or as
such securities may be acquired as part of a merger,
consolidation or acquisition of assets.
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6. Invest, in the aggregate, more than 15% of its net assets in
illiquid securities, including (under current SEC
interpretations) restricted securities (excluding liquid Rule
144A-eligible restricted securities), securities which are not
otherwise readily marketable, repurchase agreements that
mature in more than seven days and over-the-counter options
(and securities underlying such options) purchased by a
Portfolio. (This is an operating policy that may be changed
without shareholder approval, consistent with the Investment
Company Act and changes in relevant SEC interpretations).
7. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy that
may be changed without shareholder approval, consistent with
the Investment Company Act.)
8. Invest more than 25% of the market value of its total assets
in the securities of companies engaged in any one industry.
(This does not apply to investment in the securities of the
U.S. government, its agencies or instrumentalities.) For
purposes of this restriction, the Portfolios generally rely on
the U.S. Office of Management and Budget's Standard Industrial
Classifications.
9. Issue senior securities, as defined in the Investment Company
Act, except that this restriction shall not be deemed to
prohibit a Portfolio from (a) making any permitted borrowings,
mortgages or pledges, or (b) entering into permissible
repurchase and dollar roll transactions.
10. Except as described in this Statement of Additional
Information, acquire or dispose of put, call, straddle or
spread options unless:
(a) such options are written by other persons or are put
options written with respect to securities
representing 25% or less of a Portfolio's total
assets, and
(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of a
Portfolio's total assets.
(This is an operating policy that may be changed without
shareholder approval.)
11. Except as described in the Prospectus and this Statement of
Additional Information, engage in short sales of securities.
(This is an operating policy that may be changed without
shareholder approval, consistent with applicable regulations.)
12. Purchase more than 10% of the outstanding voting securities of
any one issuer. (This is an operating policy that may be
changed without shareholder approval.)
13. Invest in commodities, except for futures contracts or options
on futures contracts if the investments are either (a) for
bona fide hedging purposes within the meaning of CFTC
regulations or (b) for other than bona fide hedging purposes
if, as a result thereof, no more than 5% of a Portfolio'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.
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To the extent these restrictions reflect matters of operating policy
that may be changed without shareholder vote, these restrictions may be amended
upon approval by the 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.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Portfolios 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 Portfolios' net investment income,
substantially all of which will be declared as dividends to the Portfolios'
shareholders.
The amount of ordinary income dividend payments by a Portfolio is
dependent upon the amount of net investment income received by that Portfolio
from its portfolio holdings, is not guaranteed and is subject to the discretion
of the Portfolio's Board. The Portfolios do not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
The Portfolios also may derive capital gains or losses in connection
with sales or other dispositions of their portfolio securities. Any net gain a
Portfolio 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
Portfolio 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, that Portfolio 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 the Portfolio's shares may have been held by the
shareholders.
The maximum long-term federal capital gains rate for individuals is 20%
with respect to capital assets held for more than 12 months. The maximum capital
gains rate for corporate shareholders is the same as the maximum tax rate for
ordinary income.
Any dividend or distribution per share paid by a Portfolio reduces its
net asset value per share on the date paid by the amount of the dividend or
distribution per share. Accordingly, a dividend or distribution paid shortly
after a purchase of shares by a shareholder would represent, in substance, a
partial return of capital (to the extent it is paid on the shares so purchased),
even though it would be subject to income taxes.
Dividends and other distributions will be reinvested in additional
shares of the Portfolio 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 Portfolio has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the
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"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. A Portfolio that has filed a tax return has so
qualified and elected in prior tax years. The Portfolios' policy is to
distribute to their shareholders all of their 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 the Portfolios 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
the Portfolios.
In order to qualify as a regulated investment company, each Portfolio
must, among other things, (a) derive at least 90% of its gross income each year
from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock or securities or
foreign currency gains related to investments in stocks or other securities, or
other income (generally including gains from options, futures or forward
contracts) derived with respect to the business of investing in stock,
securities or currency, and (b) 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 Portfolio's assets or 10% of the voting securities
of the issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, the Portfolios 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 Portfolio 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 Portfolio 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 Portfolio
on the reinvestment date. Portfolio distributions also will be included in
individual and corporate shareholders' income on which the alternative minimum
tax may be imposed.
The Portfolios or any securities dealer effecting a redemption of the
Portfolios' 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 Portfolios 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 the
Portfolios 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 Portfolios 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, the Portfolios 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
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undistributed amounts of ordinary income and capital gains (in excess of capital
losses) from the previous calendar year.
The Portfolios may receive dividend distributions from U.S.
corporations. To the extent that a Portfolio receives such dividends and
distributes them to its shareholders, and meets certain other requirements of
the Code, corporate shareholders of that Portfolio 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 Portfolio at the end
of its fiscal year is invested in stock or other securities of foreign
corporations, that Portfolio may elect to pass through to its shareholders the
pro rata share of all foreign income taxes paid by the Portfolio. 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 the Portfolio,
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 Portfolio at the end of each calendar year regarding the
availability of any credits on and the amount of foreign source income
(including or excluding foreign income taxes paid by the Portfolio) to be
included in their income tax returns. If 50% or less in value of a Portfolio's
total assets at the end of its fiscal year are invested in stock or other
securities of foreign corporations, that Portfolio will not be entitled under
the Code to pass through to its shareholders their pro rata share of the foreign
income taxes paid by the Portfolio. In this case, these taxes will be taken as a
deduction by the Portfolio.
A Portfolio may be subject to foreign withholding taxes on dividends
and interest earned with respect to securities of foreign corporations. Each
Portfolio 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 a Portfolio derives from
PFIC stock may be subject to a non-deductible federal income tax at the
Portfolio level. In some cases, that Portfolio 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. Each Portfolio 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
Portfolio may incur the PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by a Portfolio. 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 Portfolio 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 Portfolio purchases an option, the
premium paid by that Portfolio is recorded as an asset and is subsequently
adjusted to the current market value of the option. Any gain or loss realized by
a Portfolio upon the expiration or sale of such options held by that Portfolio
generally will be capital gain or loss.
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Any security, option, or other position entered into or held by a
Portfolio that substantially diminishes that Portfolio's risk of loss from any
other position held by that Portfolio 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 Portfolio's gains and losses with
respect to straddle positions by requiring, among other things, that the loss
realized on disposition of one position of a straddle be deferred until gain is
realized on disposition of the offsetting position; that a Portfolio'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
Portfolio 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 Portfolio 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 Portfolio. 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 Portfolio'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 Portfolio 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. All or a portion of a loss realized upon the
redemption of shares of a Portfolio may be disallowed to the extent shares of
that Portfolio 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 Portfolios. 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
Portfolios. 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 Portfolios.
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TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the overall management of
the Portfolios, including establishing the Portfolios' policies, general
supervision and review of their investment activities. The officers (the Trust,
as well as two affiliated Trusts, The Montgomery Funds II and The Montgomery
Funds III, have the same officers), who administer the Portfolios' daily
operations, are appointed by the Board of Trustees. The current Trustees and
officers of the Trust performing a policy-making function and their affiliations
and principal occupations for the past five years are set forth below:
George A. Rio, President and Treasurer (born 1955)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. (since
April 1998). From June 1995 to March 1998, he was Senior Vice President, Senior
Key Account Manager for Putnam Mutual Funds. From May 1994 to June 1995, he was
Director of business development for First Data Corporation. From September 1993
to May 1994, he was Senior Vice President and Manager of Client Services; and
Director of Internal Audit at the Boston Company.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (born 1966)
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)
Margaret W. Chambers, Secretary (born 1959)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of Funds Distributor Inc. (since April 1998).
From August 1996 to March 1998, Ms. Chambers was Vice President and Assistant
General Counsel for Loomis, Sayles & Company, L.P. From January 1986 to July
1996, she was an associate with the law firm of Ropes & Gray.
Christopher J. Kelley, Vice President and Assistant Secretary (born 1964)
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.
Mary A. Nelson, Vice President and Assistant Treasurer (born 1964)
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.
B-23
<PAGE>
John P. Covino, Vice President (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Covino is a Vice
President and Treasury Group Manager of Treasury Servicing and Administration of
FDI. From February 1995 to November 1998, Mr. Covino was employed by Fidelity
Investments where he held multiple positions in its Institutional Brokerage
Group. Prior to joining Fidelity Mr. Covino was employed by SunGard Brokerage
systems where he was responsible for the technology and development of the
accounting product group.
Marie E. Connolly, Vice President and Assistant Treasurer (born 1957)
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 (born 1969)
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 (born 1962)
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.
John A. Farnsworth, Trustee (born 1941)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner of Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
an executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
B-24
<PAGE>
Andrew Cox, Trustee (born 1944)
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 (born 1949)
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 (born 1939)+
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 Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from the
Trust for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Portfolios and Funds Distributor, Inc., will receive commissions
for executing portfolio transactions for the Portfolios. 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 to be paid by the Trust to each of the Trustees during the fiscal
year ending June 30, 2000, and the aggregate compensation to be paid to each of
the Trustees during the fiscal year ending June 30, 2000, by all of the
registered investment companies to which the Manager provides investment
advisory services, are set forth below.
<CAPTION>
----------------------------------------------------------------------------
Fiscal Year Ended June 30, 1999
---------------------------------------------------------------------------------------------------
Total Compensation From
Aggregate Pension or Retirement the Trust and Fund
Compensation from The Benefits Accrued as Part Complex
Name of Trustee Montgomery Funds of Fund Expenses* (2 additional Trusts)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
---------------------------------------------------------------------------------------------------
John A. Farnsworth $35,000 -- $55,000
---------------------------------------------------------------------------------------------------
Andrew Cox $35,000 -- $55,000
---------------------------------------------------------------------------------------------------
Cecilia H. Herbert $35,000 -- $55,000
---------------------------------------------------------------------------------------------------
<FN>
- --------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-25
<PAGE>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
Shares of the Portfolios are all sold without a sales load. Therefore,
there is no existing arrangement to reduce or eliminate any sales loads for
Trustees and other affiliated persons of the Trust.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus, investment
management services are provided to the Portfolios by Montgomery Asset
Management LLC (the "Manager"), pursuant to an Investment Management Agreement
between the Manager and The Montgomery Funds dated July 31, 1997 (the
"Agreement").
The Agreement is in effect with respect to the Portfolios for two years
after each Portfolio's inclusion in its Trust's Agreement (on or around its
beginning of public operations) and then continue for periods not exceeding one
year so long as such continuation is approved at least annually by (1) the Board
of the Trust or the vote of a majority of the outstanding shares of the
Portfolios, and (2) a majority of the Trustees who are not interested persons of
any party to the Agreement, in each case by a vote cast in person at a meeting
called for the purpose of voting on such approval. The Agreement may be
terminated at any time, without penalty, by the Portfolios or the Manager upon
60 days' written notice, and are automatically terminated in the event of its
assignment as defined in the Investment Company Act.
For services performed under the Agreement, each Portfolio pays the
Manager a management fee (accrued daily but paid when requested by the Manager)
based upon the average daily net assets of the Portfolio at the following annual
rates:
PORTFOLIO AVERAGE DAILY NET ASSETS ANNUAL RATE
First $500 million 1.00%
Montgomery Growth 20 Portfolio Next $500 million 0.90%
Over $1 billion 0.80%
First $500 million 1.10%
Montgomery International 20 Portfolio Next $500 million 1.00%
Over $1 billion 0.90%
As noted in the Prospectus, the Manager has agreed in an Operating
Expense Agreement with the Trust to reduce some or all of its management fee
(and to reimburse other Portfolio expenses) if necessary to keep total operating
expenses (excluding interest, taxes, dividend expenses and Rule 12b-1 Plan
fees), expressed on an annualized basis, at or below 1.40% of the Growth 20
Portfolio's average net assets, and at or below 1.65% of the International 20
Portfolio's average net assets.
The Operating Expense Agreement has a 10-year rolling term. The Manager
also may voluntarily reduce additional amounts to increase the return to the
Portfolios' investors. Any reductions made by the Manager in its fees are
subject to reimbursement by the Portfolios within the following three years
provided the Portfolios are
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<PAGE>
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 Portfolios for fees and expenses
for the current year.
Operating expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions,
Rule 12b-1 fees, expenses incurred in connection with any merger or
reorganization or extraordinary expenses such as litigation.
The Agreement was approved with respect to the Portfolios by the Board
at duly called meetings. In considering the Agreement, the Trustees specifically
considered and approved the provision that 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 the Portfolios' 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. Third, the Board must approve such
reimbursement as appropriate and not inconsistent with the best interests of the
Portfolios 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 the Portfolios until collection is probable; but the full amount of the
potential liability will appear in a footnote to the Portfolios' financial
statements. At such time as it appears probable that the Portfolios are 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
the Portfolios for that current period.
Information regarding advisory fees actually paid to the Manager has
not been provided since the Portfolios were launch on December 31, 1999.
The Manager also may act as an investment adviser or administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and trustees who are
affiliated persons of the Trust and who are also affiliated persons of the
Manager.
The use of the name "Montgomery" by the Trust and by the Portfolio is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Portfolios.
The Distributor. Funds Distributor, Inc., the Distributor, may provide
certain administrative services to the Portfolios on behalf of the Manager. The
Distributor will also perform investment banking, investment advisory and
brokerage services for persons other than the Portfolios, including issuers of
securities in which the Portfolios may invest. These activities from time to
time may result in a conflict of interests of the Distributor with those of the
Portfolios, and may restrict the ability of the Distributor to provide services
to the Portfolios.
Referral Arrangements. The Distributor from time to time compensates
other parties for the solicitation of additional investments by existing
shareholders or new shareholder accounts. The Portfolios will not pay this
compensation out of their assets unless they have adopted a Rule 12b-1 plan. The
Distributor pays compensation only to those who have a written agreement with
the Distributor or the Manager. The only agreement currently in place is with
Round Hill Securities, Inc. ("Round Hill") and relates to a very limited number
of its registered representatives. The Distributor currently pays Round Hill at
the annual rate of 0.25%
B-27
<PAGE>
of average daily assets introduced and maintained in customer accounts of these
representatives. The Distributor also may reimburse certain solicitation
expenses.
The Custodian. The Chase Manhattan Bank serves as principal Custodian
of the Portfolios' assets, which are maintained at the Custodian's office at 4
Chase MetroTech Center, Brooklyn, New York, 11245, and at the offices of its
branches and agencies throughout the world. The Board has delegated various
foreign custody responsibilities to the Custodian, as the "Foreign Custody
Manager" for the Portfolios to the extent permitted by Rule 17f-5. The Custodian
has entered into agreements with foreign sub-custodians in accordance with
delegation instructions approved by the Board 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.
Administrative and Other Services. Montgomery Asset Management, LLC
("MAM") serves as the Administrator to the Portfolio a pursuant to an
Administrative Services Agreement among the Trusts and MAM (the "Agreement"). In
approving the Agreement, the Board of the Trust, including a majority of the
independent Trustees, recognizes that the Agreement involves an affiliate of the
Trust; however, it has made separate determinations that, among other things,
the nature and quality of the services rendered under the Agreement are at least
equal to the nature and quality of the service that would be provided by an
unaffiliated entity. Subject to the control of the Trust and the supervision of
the Board of the Trust, the Administrator performs the following types of
services for the Portfolios: (i) furnish performance, statistical and research
data; (ii) prepare and file various reports required by federal, state and other
applicable laws and regulations; (iii) prepare and print of all documents,
prospectuses and reports to shareholders; (iv) prepare financial statements; (v)
prepare agendas, notices and minutes for each meeting of the Board; (vi) develop
and monitor compliance procedures; (vii) monitor Blue Sky filings and (viii)
manage legal services. For its services performed under the Agreement, each
Portfolio pays the Administrator an administrative fee based upon a percentage
of the average daily net assets of each Portfolio. The fee may vary from an
annual rate of 0.07% to 0.04% depending on the Portfolio and the level of
assets.
Chase Global Funds Services Company ("Chase"), 73 Fremont Street,
Boston, Massachusetts 02108, serves as the Sub-Administrator to the Portfolios
pursuant to a Mutual Funds Service Agreement (the "Sub-Agreement") between Chase
and MAM. Subject to the control, direction and supervision of MAM and the
Trusts, Chase assists MAM in providing administrative services to the
Portfolios. As compensation for the services rendered pursuant to the
Sub-Agreement, MAM pays Chase an annual sub-administrative fee based upon a
percentage of the average net assets in the aggregate of the Trust, The
Montgomery Funds II and The Montgomery Funds III. The sub-administrative fee is
paid monthly for the month or portion of the month Chase assists MAM in
providing administrative services to the Portfolios. This fee is based on all
assets of the Trust and related trusts or funds and is equal to an annual rate
of 0.01625% of the first $3 billion, plus 0.0125% of the next $2 billion and
0.0075% of amounts over $5 billion. The sub-administrative fee paid to Chase is
paid from the administrative fees paid to MAM by the Portfolio. Chase succeeded
First Data Corporation as sub-administrator.
Chase also serves as Fund Accountant to the Trusts pursuant to a Mutual
Funds Service Agreement ("Fund Accounting Agreement") entered into between the
Trust and Chase on May 3, 1999. By entering into the Fund Accounting Agreement,
Chase also succeeds First Data Corporation as Fund Accountant to the Trust.
B-28
<PAGE>
As Fund Accountant, Chase provides the Trust with various services, including,
but are not limited to: (i) maintaining the books and records for the
Portfolios' assets, (ii) calculating net asset values of the Portfolios, (iii)
accounting for dividends and distributions made by the Portfolios, and (iv)
assisting the Portfolios' independent auditors with respect to the annual audit.
This fee is based on all assets of the Trust and related trusts or funds and is
equal to an annual rate of 0.04875% of the first $3 billion, plus 0.0375% of the
next $2 billion and 0.0225% of amounts over $5 billion.
Information regarding administrative and accounting fees has not been
provided since the Portfolios were launch on December 31, 1999.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Portfolio, the primary
consideration is to obtain the most favorable price and execution available. The
Manager determines which securities are to be purchased and sold by the
Portfolio and which broker-dealers are eligible to execute the Portfolio's
portfolio transactions, subject to the instructions of, and review by, the
Portfolio and its Board. Purchases and sales of securities within the U.S. other
than on a securities exchange will generally be executed directly with a
"market-maker" unless, in the opinion of the Manager or the Portfolio, a better
price and execution can otherwise be obtained by using a broker for the
transaction.
Purchases of portfolio securities for the Portfolio 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 Portfolio will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the firm's ability to execute trades in a specific
market required by the Portfolio, such as in an emerging market, the size of the
order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities, and other
factors.
Provided the Trust's officers are satisfied that the Portfolio is
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Portfolio's 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 Portfolio is
subject to rules adopted by NASD Regulation, Inc.
While the Portfolio's general policy is to seek first to obtain the
most favorable price and execution available in selecting a broker-dealer to
execute portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Portfolio or to the Manager, even if the specific services were not imputed just
to the Portfolio 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
B-29
<PAGE>
indeterminable value. In negotiating any commissions with a broker or evaluating
the spread to be paid to a dealer, the Portfolio may therefore pay a higher
commission or spread than would be the case if no weight were given to the
furnishing of these supplemental services, provided that the amount of such
commission or spread has been determined in good faith by the Portfolio and the
Manager to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer, which services either produce
a direct benefit to the Portfolio or assist the Manager in carrying out its
responsibilities to the Portfolio. The standard of reasonableness is to be
measured in light of the Manager's overall responsibilities to the Portfolio.
The Board reviews 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
Portfolio.
Investment decisions for the Portfolio 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 Portfolios and for one or
more of such client accounts. The Manager and its personnel may have interests
in one or more of those client accounts, either through direct investment or
because of management fees based on gains in the account. The Manager has
adopted allocation procedures to ensure the fair allocation of securities and
prices between the Portfolio 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 Portfolio seek
to acquire the same security at the same general time (especially if that
security is thinly traded or is a small-cap stock), the Portfolio may not be
able to acquire as large a portion of such security as it desires, or it may
have to pay a higher price or obtain a lower yield for such security. Similarly,
the Portfolio may not be able to obtain as high a price for, or as large an
execution of, an order to sell any particular security at the same time. If one
or more of such client accounts simultaneously purchases or sells the same
security that the Portfolio is purchasing or selling, each day's transactions in
such security generally will be allocated between the Portfolio 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 Portfolio's
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 the Portfolio is concerned. In other
cases, however, it is believed that the ability of the Portfolio to participate
in volume transactions may produce better executions for the Portfolio.
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.
For the Portfolio, 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
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<PAGE>
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.
Information regarding brokerage commissions has not been provided since
the Portfolio was launched on December 31, 1999.
The Portfolios do not direct brokerage or 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
Portfolios. However, brokers who execute brokerage transactions as described
above may from time to time effect purchases of shares of the Portfolios for
their customers.
Depending on the Manager's view of market conditions, the Portfolios
may or may not purchase securities with the expectation of holding them to
maturity, although its general policy is to hold securities to maturity. The
Portfolios may, however, sell securities prior to maturity to meet redemptions
or as a result of a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i) suspend the
continued offering of Portfolios' shares, and (ii) reject purchase orders in
whole or in part when in the judgment of the Manager or the Distributor such
suspension or rejection is in the best interest of the Portfolios.
When in the judgment of the Manager it is in the best interests of a
Portfolio, an investor may purchase shares of a Portfolio by tendering payment
in-kind in the form of securities, provided that any such tendered securities
are readily marketable (e.g., the Portfolio will not acquire restricted
securities), their acquisition is consistent with that Portfolio's investment
objective and policies, and the tendered securities are otherwise acceptable to
the Manager. Such securities are acquired by that Portfolio only for the purpose
of investment and not for resale. For the purposes of sales of shares of that
Portfolio for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of that
Portfolio are valued for the purpose of calculating the net asset value of that
Portfolio's shares. A shareholder who purchases shares of a Portfolio 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 that Portfolio and the
purchase price of that Portfolio's shares acquired by the shareholder.
Payments to shareholders for shares of a Portfolio redeemed directly
from that Portfolio 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 that
Portfolio 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 that Portfolio pursuant to Section 22(e) of the Investment
Company Act) making disposal of portfolio securities or valuation
B-31
<PAGE>
of net assets of the Portfolio not reasonably practicable; or (iii) for such
other period as the SEC may permit for the protection of that Portfolio's
shareholders.
The Portfolios intend to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions that make payment in cash unwise, the
Portfolios may make payment partly in its portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Portfolios 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 Trust has
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Portfolios 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 Portfolio's
portfolio securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Portfolios 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 Portfolios through
an IRA, there is available through the Portfolios a prototype individual
retirement account and custody agreement. The custody agreement provides that
DST Systems, Inc. will act as custodian under the plan, and will furnish
custodial services for an annual maintenance fee per participating account of
$10. (These fees are in addition to the normal custodian charges paid by the
Portfolios and will be deducted automatically from each Participant's account.)
For further details, including the right to appoint a successor custodian, see
the plan and custody agreements and the IRA Disclosure Statement as provided by
the Portfolios. An IRA that invests in shares of the Portfolios may also be used
by employers who have adopted a Simplified Employee Pension Plan. Individuals or
employers who wish to invest in shares of the Portfolios under a custodianship
with another bank or trust company must make individual arrangements with such
institution. Information about Roth IRAs is also available from those materials.
It is advisable for an investor considering the funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant with respect to the requirements of such plans and
the tax aspects thereof.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is calculated as
follows: all liabilities incurred or accrued are deducted from the valuation of
total assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of the Portfolio 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 each
Portfolio generally will be determined at least once daily as of 4:00 P.M.
eastern time (or earlier when trading closes earlier), on each day the NYSE is
open for trading. It is expected that the NYSE will be closed on Saturdays and
Sundays and for New Year's Day, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The Portfolios may, but do not expect to, determine the net asset
values of
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<PAGE>
their shares on any day when the NYSE is not open for trading if there is
sufficient trading in its portfolio securities on such days to 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 Portfolios' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Portfolio 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 Portfolio'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, a Portfolio's investments are valued at market value or, in
the absence of a market value, at fair value as determined in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Board.
A Portfolio's equity 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. Equity securities that are
traded on more than one exchange are valued on the exchange determined by the
Manager to be the primary market. Securities traded in the over-the-counter
market are valued at the mean between the last available bid and asked price
prior to the time of valuation. Securities and assets for which market
quotations are not readily available (including restricted securities which are
subject to limitations as to their sale) are valued at fair value as determined
in good faith by or under the direction of the Board.
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 Portfolio if
acquired within 60 days of maturity or, if already held by that Portfolio on the
60th day, based on the value determined on the 61st day.
Corporate debt securities and U.S. government securities held by a
Portfolio are valued on the basis of valuations provided by dealers in those
instruments, by an independent pricing service, or at fair value as determined
in good faith by procedures approved by the Board. 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 Portfolio 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 Portfolio 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 Board.
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<PAGE>
If any securities held by a Portfolio are restricted as to resale or do
not have readily available market quotations, the Manager and the Trust's
Pricing Committees determine their fair value, following procedures approved by
the Board. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Portfolio 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 Portfolio in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of the Portfolios are valued in such manner as the
Board in good faith deem appropriate to reflect their fair value.
PRINCIPAL UNDERWRITER
The Distributor, Funds Distributor, Inc., 60 State Street, Suite 1300,
Boston, Massachusetts 02109, also acts as the Portfolios' principal underwriter
in a continuous public offering of the Portfolios' 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 the Portfolios and the Distributor is in effect for the
Portfolios for the same periods as the Agreement, and shall continue in effect
thereafter for periods not exceeding one year if approved at least annually by
(i) the appropriate Board or the vote of a majority of the outstanding
securities of the Portfolios (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 the
Portfolios 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 Portfolios' shares. The Principal
Underwriter has not been paid any underwriting commissions for underwriting
securities of the Portfolios during the Portfolios' last three fiscal years.
B-34
<PAGE>
PERFORMANCE INFORMATION
As noted in the Prospectus, the Portfolios may, from time to time,
quote various performance figures in advertisements and other communications to
illustrate its past performance. Performance figures will be calculated
separately for different classes of shares.
Average Annual Total Return. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return for a Portfolio will be accompanied by information on
that Portfolio's average annual compounded rate of return over the most recent
four calendar quarters and the period from that Portfolio's inception of
operations. A Portfolio may also advertise aggregate and average total return
information over different periods of time. A Portfolio's "average annual total
return" figures are computed according to a formula prescribed by the SEC
expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5- or 10-year period at the end of
each respective period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
Aggregate Total Return. The Portfolio's "aggregate total return"
figures represent the cumulative change in the value of an investment in the
Portfolio for the specified period and are computed by the following formula:
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.
A Portfolio'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 Portfolio'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 a Portfolio with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing a Portfolio's performance with that of other investment companies
should give consideration to the quality and maturity of the respective
investment companies' portfolio securities.
The information regarding average annual total returns for the
Portfolios has not been provided since the Portfolios were launched on December
31, 1999.
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<PAGE>
Comparisons. To help investors better evaluate how an investment in the
Portfolios might satisfy their investment objectives, advertisements and other
materials regarding the Portfolios 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 the Portfolios' 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 Portfolios.
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 a Portfolio's portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by that Portfolio to
calculate its figures.
The Portfolios may also publish its relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.
and Morningstar, Inc.
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<PAGE>
Investors should note that the investment results of the Portfolios
will fluctuate over time, and any presentation of the Portfolios' 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 Portfolios. From time to time, the Portfolios
may publish or distribute information and reasons supporting the Manager's
belief that the Portfolios 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 Portfolios 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 Portfolios 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.
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.
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that crosses a number of the
Montgomery Funds and is reflected in the number of Montgomery 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 (as of September 30,
1999 approximately $3.9 billion for retail and institutional investors in The
Montgomery Funds) and total shareholders invested in the Portfolios (as of
September 30, 1999, around 200,000).
GENERAL INFORMATION
Investors in the Portfolios will be informed of the Portfolios'
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. Expenses incurred in connection with the establishment and registration of
shares of the Portfolios constituting separate series of the Trust have been
assumed by the Portfolios. The Manager has agreed, to the extent necessary, to
advance the organizational expenses incurred by the Portfolios and will be
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<PAGE>
reimbursed for such expenses during the first fiscal year after commencement of
the Portfolios' operations, subject to the Portfolios' expense limitation.
As noted above, The Chase Manhattan Bank (the "Custodian") acts as
custodian of the securities and other assets of the Portfolios. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Portfolios.
DST Systems, Inc., 333 West 11th Street, Kansas City, Missouri 64105,
the Portfolios' Master Transfer Agent and Paying Agent.
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, is the independent auditor for the Portfolio.
The validity of shares offered hereby has been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
The shareholders of The Montgomery Funds as shareholders of a
Massachusetts business trust could, under certain circumstances, be held
personally liable as partners for its obligations. However, the Trust's
Agreement and Declaration of Trust ("Declaration of Trust") contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Portfolios' assets for any shareholder held personally
liable for obligations of the Portfolios 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 Portfolios or
Trust and satisfy any judgment thereon. All such rights are limited to the
assets of the Portfolios. 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 Portfolio's total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
extremely remote because it is limited to the unlikely circumstances in which
both inadequate insurance exists and the Portfolio itself is unable to meet its
obligations.
Among the Board's powers enumerated in the Agreement and Declaration of
Trust is the authority to terminate the Trust or any of its series, or to merge
or consolidate the Trust or one or more of its series with another trust or
company without the need to seek shareholder approval of any such action.
As of December 31, 1999, the sole initial shareholder of the Portfolio,
the Distributor, held substantially all the shares of the Portfolios for
organizational purposes.
The Trust is registered with the Securities and Exchange Commission as
non-diversified management investment companies. Such a registration does not
involve supervision of the management or policies of the Portfolio. 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.
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<PAGE>
FINANCIAL STATEMENTS
There are no financial statements for the Portfolios since the
Portfolios were launched on December 31, 1999.
B-39
<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.
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<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.
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<PAGE>
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have 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
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<PAGE>
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.
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
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<PAGE>
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 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.
B-44
<PAGE>
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.
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.
B-45
<PAGE>
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.
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.
B-46
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 23. Exhibits
(a) Amended and Restated Agreement and Declaration of Trust as
incorporated by reference to Post-Effective Amendment No. 61
to the Registration Statement as filed with the Commission on
October 29, 1998 ("Post-Effective Amendment No. 61").
(b) Amended and Restated By-Laws is incorporated by reference to
Post-Effective Amendment No. 61.
(c) Instruments Defining Rights of Security Holder - Not
applicable.
(d) Investment Advisory Contracts - 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").
(e) Form of Underwriting Agreement is incorporated by reference to
Post-Effective Amendment No. 52.
(f) Bonus or Profit Sharing Contracts - Not applicable.
(g) Form of Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 61.
(h) Other Material Contracts:
(1) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective Amendment
No. 52.
(2) Form of Shareholder Services Plan is incorporated by
reference to Post-Effective Amendment No. 61.
(i) Opinion of Counsel as to legality of shares - Filed herewith.
(j) Other Opinions: Independent Auditors' Consent - Not
applicable.
(k) Omitted Financial Statements - Not applicable.
(l) Initial Capital Agreements: Letter of Understanding re:
Initial Shares is incorporated by reference to Post-Effective
Amendment No. 61.
(m) Rule 12b-1 Plan: Form of Share Marketing Plan (Rule 12b-1
Plan) is incorporated by reference to Post-Effective Amendment
No. 52.
(n) Financial Data Schedule - Not applicable.
B-47
<PAGE>
(o) 18f-3 Plan - Form of Amended and Restated Multiple Class Plan
is incorporated by reference to Post-Effective Amendment No.
61.
Item 24. Persons Controlled by or Under Common Control with the Fund
Montgomery Asset Management, LLC, a Delaware limited liability company,
is the manager of each series of the Registrant, of The Montgomery Funds II, a
Delaware business trust, and of The Montgomery Funds III, a Delaware business
trust. Montgomery Asset Management, LLC is a subsidiary of Commerzbank AG based
in Frankfurt, Germany. 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.
Item 25. Indemnification
Article VII of the Agreement and Declaration of Trust empowers the
Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is and other amounts or
was an agent of the Trust, against expenses, judgments, fines, settlement and
other amounts actually and reasonable incurred in connection with such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best interests of the Trust. Indemnification will not be
provided in certain circumstances, however, including instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act"), 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 1933 Act 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 1933 Act
and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
Effective July 31, 1997, Montgomery Asset Management, 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 A.G.
Information about the officers and directors of MAM, LLC is provided below. The
address for the following persons is 101 California Street, San Francisco,
California 94111.
R. Stephen Doyle Chairman of the Board of Directors and
Chief Executive Officer of MAM, LLC
Mark B. Geist President and Director of MAM, LLC
F. Scott Tuck Executive Vice President of MAM, LLC
David E. Demarest Secretary, Treasurer and Executive Vice
President of MAM, LLC
C-2
<PAGE>
The following directors of MAM, LLC also are officers of Commerzbank
AG. The address for the following persons is Neue Mainzer Strasse 32-36,
Frankfurt am Main, Germany.
Heinz Josef Hockmann Director of MAM, LLC
Dietrich-Kurt Frowein Director of MAM, LLC
Andreas Kleffel Director of MAM, LLC
Item 27. Principal Underwriter
(a) Funds Distributor, Inc. (the "Distributor") acts as principal
underwriter for the following investment companies.
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Institutional Funds
J.P. Morgan Funds
JPM Series Trust
JPM Series Trust II
LaSalle Partners Funds, Inc.
Kobrick-Cendant Investment Trust
Merrimac Series
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
National Investors Cash Management Fund, Inc.
Orbitex Group of Funds
SG Cowen Funds, Inc.
SG Cowen Income + Growth Fund, Inc.
SG Cowen Standby Reserve Fund, Inc.
SG Cowen Standby Tax-Exempt Reserve Fund, Inc.
SG Cowen Series Funds, Inc.
C-3
<PAGE>
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
The Distributor 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 is
located at 60 State Street, Suite 1300, Boston, Massachusetts
02109. Funds Distributor is an indirect wholly owned
subsidiary of Boston Institutional Group, Inc., a holding
company all of whose outstanding shares are owned by key
employees.
(b) 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 George A. Rio
Executive Vice President Donald R. Roberson
Executive Vice President William S. Nichols
Senior Vice President,
General Counsel, Chief
Compliance Officer,
Secretary and Clerk Margaret W. Chambers
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President,
Treasurer and
Chief Financial Officer Joseph F. Tower, III
Senior Vice President Paula R. David
Senior Vice President Allen B. Closser
Senior Vice President Bernard A. Whalen
Chairman and Director William J. Nutt
(c) Not Applicable.
Item 28. 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, as amended (the "Investment
Company Act") will be kept by the Registrant's Transfer Agent, DST Systems,
Inc., P.O. Box 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 29. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 30. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last
annual report to shareholders, upon request and without
charge.
C-4
<PAGE>
(c) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act 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.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, 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 Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, the State of California, on this 29th day of December , 1999.
THE MONTGOMERY FUNDS
By: George A. Rio*
--------------
George A. Rio
President and Principal Executive Officer;
Treasurer and Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
George A. Rio* President and December 29, 1999
- -------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the December 29, 1999
- ------------------ Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee December 29, 1999
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee December 29, 1999
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee December 29, 1999
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-----------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
C-6
- --------------------------------------------------------------------------------
Exhibit 23 (i)
Consent and Opinion of Counsel as to Legality of Shares
- --------------------------------------------------------------------------------
C-7
<PAGE>
December 28, 1999
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
Re: The Montgomery Funds
Ladies and Gentlemen:
We have acted as counsel to The Montgomery Funds, a Massachusetts
business trust (the "Trust"), in connection with Post-Effective Amendments to
the Trust's Registration Statement filed on Form N-1A with the Securities and
Exchange Commission (the "Post-Effective Amendments") and relating to the
issuance by the Trust of an indefinite number of $0.01 par value shares of
beneficial interest (the "Shares") for the following series of the Trust:
Montgomery Growth Fund, Montgomery U.S. Emerging Growth Fund, Montgomery Small
Cap Fund, Montgomery Equity Income Fund, Montgomery International Growth Fund,
Montgomery International Small Cap Fund, Montgomery Global Opportunities Fund,
Montgomery Global Communications Fund, Montgomery Emerging Markets Fund,
Montgomery Asia Fund, Montgomery Select 50 Fund, Montgomery Total Return Bond
Fund, Montgomery Short Duration Government Bond Fund, Montgomery Money Market
Fund, Montgomery Federal Tax-Free Money Fund, Montgomery California Tax-Free
Intermediate Bond Fund, Montgomery California Tax-Free Money Fund, Montgomery
Growth 20 Portfolio and Montgomery International 20 Portfolio (each a "Fund" and
collectively the "Funds").
In connection with this opinion, we have assumed the authenticity of
all records, documents and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of all natural persons, and
the conformity to the originals of all records, documents, and instruments
submitted to us as copies. We have based our opinion on the following:
<PAGE>
The Montgomery Funds
December 28, 1999
Page 2
(a) the Trust's Agreement and the Declaration of Trust dated May 10,
1990, as amended on November 11, 1993 (the "Declaration of Trust"). The
Declaration of Trust as amended has been in full force and effect from May 10,
1990, through the date hereof;
(b) the Trust's Certificate of Trust as originally filed with the
Secretary of State of Massachusetts on May 16, 1990, and as amended on November
11, 1993 and amended on May 23, 1995; and the Amended and Restated Certificate
of Trust, as filed with the Secretary of State of Massachusetts on May 26, 1995
(the "Certificate of Trust"). The Certificate of Trust, as amended, has been in
full effect from May 16, 1990 (or from the date of the relevant amendment),
through the date hereof;
(c) the Trust's By-laws, as amended and restated on November 11, 1993
and August 16, 1994. The By-laws, as amended, have been in full force and effect
from the original date of its adoption through the date hereof;
(d) resolutions of the Trustees of the Trust authorizing the
establishment of the Funds and the issuance of their respective Shares, as
adopted at meetings on July 9, 1990; November 11, 1991; January 30, 1992; April
27, 1992; July 30, 1992; November 12, 1992; February 4, 1993; May 13, 1993;
September 8, 1993; November 11, 1993; February 11, 1994; May 23, 1994; August
16, 1994; November 17, 1994; March 2, 1995; May 23, 1995; November 16, 1995;
February 15, 1996; May 2, 1996; May 29, 1996; November 20, 1996; September 30,
1997 and November 16, 1999, certified by an officer of the Trust as being in
full force and effect through the date hereof;
(e) the respective Post-Effective Amendment for each series; and
(f) a certificate of an officer of the Trust as to certain factual
matters relevant to this opinion.
Our opinion below is limited to the federal law of the United States of
America and the business trust law of the Commonwealth of Massachusetts. We are
not licensed to practice law in the Commonwealth of Massachusetts, and we have
based our opinion below solely on our review of Chapter 182 of the General Laws
of the Commonwealth of Massachusetts and the case law interpreting such Chapter
as reported in Massachusetts Corporation Law & Practice (Aspen Law & Business
1997 & Supp. 1999). We have not undertaken a review of other Massachusetts law
or of any administrative or court decisions in connection with rendering this
opinion. We disclaim any opinion as to any law other than that of the United
States of America and the business trust law of the Commonwealth of
Massachusetts as described above, and we disclaim any opinion as to any statute,
rule, regulation, ordinance, order or other promulgation of any regional or
local governmental authority.
<PAGE>
The Montgomery Funds
December 28, 1999
Page 3
We note that pursuant to certain decisions of the Supreme Judicial
Court of the Commonwealth of Massachusetts, shareholders of a Massachusetts
business trust may, in certain circumstances, be held personally liable as
partners for the obligations or liabilities of the trust. However, we also note
that Article VIII, Section 1 of the Declaration of Trust provides that all
persons extending credit to, contracting with or having any claim against the
Trust or the Funds shall look only to the assets of the Trust or the Funds for
payment thereof and that the shareholders shall not be personally liable
therefor, and further provides that every note, bond, contract, instrument,
certificate or undertaking made or issued on behalf of the Trust may include a
notice that such instrument was executed on behalf of the Trust and that the
obligations of such instruments are not binding upon any of the shareholders of
the Trust individually, but are binding only on the assets and property of the
Trust.
Based on the foregoing and our examination of such questions of law as
we have deemed necessary and appropriate for the purpose of this opinion, and
assuming that (i) all of the Shares will be issued and sold for cash at the
per-share public offering price on the date of their issuance in accordance with
statements in the Trust's Prospectus included in the Post-Effective Amendment
and in accordance with the Trust Instrument, (ii) all consideration for the
Shares will be actually received by the Trust, and (iii) all applicable
securities laws will be complied with, it is our opinion that, when issued and
sold by the Trust, the Shares will be legally issued, fully paid and
nonassessable.
This opinion is rendered to you in connection with the Post-Effective
Amendments and is solely for your benefit. This opinion may not be relied upon
by you for any other purpose or relied upon by any other person, firm,
corporation or other entity for any purpose, without our prior written consent.
We disclaim any obligation to advise you of any developments in areas covered by
this opinion that occur after the date of this opinion.
We hereby consent to (i) the reference to our firm as Legal Counsel in
the Prospectus included in the applicable Post-Effective Amendments, and (ii)
the filing of this opinion as an exhibit to those Post-Effective Amendments.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
-----------------------------------------