As filed with the Securities and Exchange Commission on June 30, 2000
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. 78
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 79
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)
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It is proposed that this filing will become effective:
_X_ immediately upon filing pursuant to Rule 485(b)
___ on ___________ pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)(1)
___ 75 days after filing pursuant to Rule 485(a)(2)
___ on ______________ pursuant to Rule 485(a)
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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 - Prospectus for the Montgomery New Economy 20 Portfolio.
Part B - Statement of Additional Information for the Montgomery New
Economy 20 Portfolio.
Part C - Other Information
Signature Page
Exhibits
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PART A
PROSPECTUS FOR THE
MONTGOMERY NEW ECONOMY 20 PORTFOLIO
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<PAGE>
Prospectus
June 30, 2000
THE MONTGOMERY FUNDS(SM)
New Economy 20 Portfolio
The Montgomery Funds has registered the Portfolio offered in this prospectus
with the U.S. Securities and Exchange Commission (SEC). That registration does
not imply, however, that the SEC endorses the Portfolio.
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
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TABLE OF CONTENTS
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New Economy 20 Portfolio ....................................................4
Portfolio Management.........................................................6
Additional Investment Strategies and Related Risks...........................7
Defensive Investments...................................................7
Portfolio Turnover......................................................7
Internet Risks .........................................................7
The Euro-Single European Currency.......................................7
Investment Options...........................................................8
Becoming a Montgomery Shareholder.......................................9
How Portfolio Shares Are Priced........................................10
Montgomery Online......................................................12
Buying Additional Shares...............................................13
Exchanging Shares......................................................13
Selling Shares.........................................................14
Other Policies.........................................................15
Tax Information........................................................16
After You Invest.......................................................17
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This prospectus contains important information about the investment objectives,
strategies and risks of the Montgomery New Economy 20 Portfolio (the
"Portfolio") that you should know before you invest in the Portfolio. Please
read it carefully and keep it on hand for future reference. Please be aware that
the Portfolio:
> Is not bank a deposit
> Is 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 Portfolio.
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New Economy 20 Portfolio |
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Objective
* Seeks long-term capital appreciation through concentrated exposure to "new
economy" companies
Principal Strategy [clipart]
Under normal conditions, the Portfolio invests in a limited number of "new
economy" companies worldwide, typically between 20 and 30, and generally never
fewer than 20. Companies generally associated with the new economy are those
companies in the areas of technology (including biotechnology), communications
and media, as well as companies that leverage the Internet (such as Internet
stock brokers) to revolutionize "old economy" businesses.
The portfolio managers seek well-managed companies that they believe will be
able to increase their sales and corporate earnings on a sustained basis (even
though they may not yet generate profits). They will favor those companies that
they believe have a competitive advantage, offer innovative products or services
and may profit from trends associated with the emergence of the new economy. On
a strategic basis, the Portfolio's assets may be allocated among countries and
market sectors in an attempt to take advantage of market trends.
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. The Portfolio 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.
To the extent the Portfolio concentrates its investments in industries generally
associated with the new economy, its share value may be more volatile than that
of more-diversified mutual funds. The Portfolio's share value will reflect
trends specific to new economy industries, which may be subject to greater
changes in governmental policies and regulation than many other industries.
Additionally, new economy companies can be particularly affected by such
specific risks as: aggressive product prices due to competitive pressure from
numerous market entrants, short product cycles, rapid rate of change, and
product obsolescence at a more frequent rate than other types of companies
caused by rapid technological advances; and risks that new products will fail to
meet expectations or even reach the marketplace, among others. In addition,
these companies tend to be capital intensive and, as a result, may not be able
to recover all capital investment costs.
The Portfolio's investment in small- or mid-cap companies worldwide may expose
shareholders to additional risks. Smaller companies have less public information
generally available, more-limited product lines, less liquidity, less frequent
trading and limited financial resources. 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. Additionally, by investing in
securities denominated in foreign currencies, the Portfolio is also exposed to
currency risks since those foreign currencies may decline against the U.S.
dollar.
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Past Portfolio Performance The Portfolio was launched on May 31, 2000.
Performance results have not been provided because the Portfolio has not been in
existence for a full calendar year.
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<TABLE>
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.
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 2.00%+
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets) ++
Management Fee# 1.00%
Distribution (12b-1) Fee 0.00%
Other Expenses## 0.93%
Shareholder Service Fee 0.25%
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Total Annual Portfolio Operating Expenses 2.18%
Fee Reduction and/or Expense Reimbursement 0.73%
Net Expenses 1.45%
<FN>
+ The 2.00% redemption fee applies to those shares redeemed within three
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 Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.45%. This contract has a rolling
10-year term.
# The management fee of 1.00% will be reduced to ____% for those assets over
$____ million and to ____% for those assets over $_____.
## Other expenses are based on estimated amounts for the current fiscal year.
</FN>
</TABLE>
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
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$147 $458
[clipart] [sidebar]
Portfolio Management
John Boich
Oscar Castro
For more details see page __
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PORTFOLIO MANAGEMENT
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PORTFOLIO MANAGEMENT
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The investment manager of the Portfolio 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 December 31, 1999, Montgomery Asset
Management managed approximately $5 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
Portfolio.
New Economy 20 Portfolio
[photo] JOHN BOICH, CFA, Senior Portfolio Manager and Principal
o Montgomery New Economy 20 Portfolio (since 2000)
Prior to joining Montgomery, Mr. Boich was vice president and portfolio manager
at The Boston Company Institutional Investors, Inc., with responsibility for the
development and subsequent management of their flagship international equity
product. Before joining The Boston Company, he was a founder and co-manager of
The Common Goal World Fund, a global equity partnership. Mr. Boich holds a
bachelor of arts degree in economics from the University of Colorado, and is a
Chartered Financial Analyst.
[photo] OSCAR CASTRO, CFA, Senior Portfolio Manager and Principal
o Montgomery New Economy 20 Portfolio (since 2000)
Prior to joining Montgomery, Mr. Castro was vice president and portfolio manager
at G.T. Capital Management, where he helped launch and manage mutual funds
specializing in global telecommunications and Latin America. Preceding this he
was a founder and co-manager of The Common Goal World Fund, a global equity
partnership. Mr. Castro holds a master of business administration degree in
finance from Drexel University, Pennsylvania and a bachelor of science degree in
chemical engineering from Simon Bolivar University in Venezuela, and is a
Chartered Financial Analyst.
Management Fee and Operating Expense Limit
The table below shows the management fee rate to be paid to Montgomery Asset
Management and the contractual limit on total operating expenses for the
Portfolio. The management fee amount shown may vary from year to year, depending
on actual expenses. Actual fee rates may be greater than contractual rates to
the extent Montgomery recouped previously deferred fees during the fiscal year.
LOWER OF TOTAL
MANAGEMENT EXPENSE LIMIT OR
FEES ACTUAL TOTAL EXPENSES
MONTGOMERY FUND (annual rate) (annual rate)
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Montgomery New Economy 20 Portfolio 1.00% 1.45%
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Additional Investment Strategies and Related Risks
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Defensive Investments
At the discretion of its portfolio manager, the Portfolio may invest up to 100%
of its assets in cash for temporary defensive purposes. The Portfolio is not
required or expected to take such a defensive posture. But if used, such an
unlikely stance may help the Portfolio minimize or avoid losses during adverse
market, economic or political conditions. During such a period, the Portfolio
may not achieve its investment objective. For example, should the market advance
during this period, the Portfolio may not participate as much as it would have
if it had been more fully invested.
Portfolio Turnover
The Portfolio's manager will sell a security when he believes it is appropriate
to do so, regardless of how long the Portfolio has owned that security. Buying
and selling securities generally involves some expense to the Portfolio, such as
commission paid to brokers and other transaction costs. By selling a security,
the Portfolio may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the 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 the 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 the Portfolio, is considered high.
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 the Portfolio, to receive certain shareholder information
electronically or otherwise to interact with the Portfolio.
The Euro: Single European Currency
Investors 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>
[table]
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Investment Options
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<CAPTION>
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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<S> <C>
Purchase and redemption requests received after 1:00 P.M. Once an account is established, you can:
Pacific time (4:00 P.M. eastern time) will be executed at
the following business day's closing price. Once a trade is * Buy or sell shares online
placed it may not be altered or canceled.
Access the Portfolio at The Montgomery Funds Web site
Checks should be made payable to: at www.montgomeryfunds.com and follow the instructions.
The Montgomery Funds
* Buy, sell or exchange shares by phone
The minimum initial investment is $1,000 for the Portfolio. Contact The Montgomery Funds at 800.572.FUND [3863].
The minimum subsequent investment is $100. 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]
</TABLE>
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ACCOUNT INFORMATION
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What You Need to Know About Your Montgomery Account
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You pay no sales charge to invest in the Portfolio. The minimum initial
investment for the Portfolio is $1,000. 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 Portfolio 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 Portfolio to new
investors at its discretion. Shareholders who maintain open accounts which meet
the minimum required balance in the Portfolio when it closes may make additional
investments in it. If the 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 the 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 The Montgomery Funds 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
The Montgomery Funds, to the appropriate address. 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 the name of the Portfolio. 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 by phone. Your purchase of the
Portfolio must meet its investment minimum and is limited to the total
9
<PAGE>
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 The Montgomery
Funds.
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 Portfolio's price or net asset value (NAV)
determines the price at which you will buy or sell shares. We calculate the
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 Portfolio's 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 the 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 Portfolio's NAVs are in the Statement of Additional Information.
* The 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 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
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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.
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<TABLE>
[Table]
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www.montgomeryfunds.com
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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:
<S> <C>
> Check current account balances > Receive current versions of the Portfolio's prospectus,
annual and semi-annual reports, proxy statements,
> Buy, exchange or sell shares confirmations and statements, and other shareholder
information electronically
> View the most recent account activity and up to 80
records of account history within the past two years > 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]
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</TABLE>
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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 the 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. The 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 The Montgomery Funds. Or mail the check with
a signed letter noting the name of the Portfolio, 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 Montgomery Fund,
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 12).
* 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 12).
Exchanging Shares
You may exchange shares of the 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 Montgomery fund you
currently own, otherwise the minimum is $1,000. Note that an exchange is treated
as a sale and 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 Portfolio is qualified for sale in your
state. Call (800) 572-FUND [3863] for information on availability in your state.
You may not exchange shares in the Portfolio for shares of another Montgomery
fund that is currently closed to new shareholders unless you are already a
shareholder in the closed fund.
* Because excessive exchanges can harm the Portfolio's performance, we reserve
the right to terminate your exchange privileges if you make more than four
exchanges out of any one Montgomery fund during a 12-month period. We may also
refuse an exchange into a Montgomery fund 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).
[sidebar]
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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 the 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 the 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 the
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 shares 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 name of the Portfolio 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-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.
14
<PAGE>
[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 the Portfolio
for the increased expenses to longer-term shareholders and the disruptive effect
on the Portfolio 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. The
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 the 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.
Shareholder Servicing Plan
The Portfolio has adopted a Shareholder Servicing Plan, under which the
Portfolio pays Montgomery or its Distributor a shareholder service fee at an
annual rate of up to 0.25% of the Portfolio's average daily net assets. The fee
is intended to reimburse the recipient for providing or arranging for services
to shareholders. The fee may also be used to pay certain brokers, transfer
agents and other financial intermediaries for providing shareholder services.
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
15
<PAGE>
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 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 Portfolio of
such errors within 30 days following mailing of that confirmation. The Portfolio
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.
Telephone Transactions
By buying or selling shares over the phone, you agree to reimburse the Portfolio
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 the 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 Portfolio 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 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.
16
<PAGE>
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
The minimum initial investment is
$1,000 for the Portfolio. The
minimum subsequent investment is
$100.
After You Invest
Taxes
IRS rules require that the Portfolio distributes all of its net investment
income and capital gains, if any, to shareholders. Capital gains may be taxable
at different rates depending upon the length of time the 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 Portfolio's distributions, whether received in cash or
reinvested, may be taxable. Any redemption of the Portfolio's shares or any
exchange of the Portfolio's shares for another Montgomery Fund will be treated
as a sale, and any gain on the transaction may be taxable.
Additional information about tax issues relating to the Portfolio 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 Portfolio.
Dividends and Distributions
As a shareholder in the 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 the Portfolio as of its "record date."
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 Portfolio. 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:
17
<PAGE>
> 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 Portfolio 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 Portfolio.
Investors Fiduciary Trust Company, located in Kansas
City, Missouri, is the Portfolio's master transfer
agent. It performs certain recordkeeping and accounting
functions for the Portfolio.
DST Systems, Inc. also located in Kansas City,
Missouri, assists Investors Fiduciary Trust with
certain record keeping and accounting functions for the
Portfolio.
<TABLE>
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
---------------- -------------
<S> <C> <C>
New Economy 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 Portfolio may make additional
distributions to avoid the imposition of a tax.
</FN>
</TABLE>
[sidebar]
HOW TO AVOID "BUYING A DIVIDEND"
If you plan to purchase shares in
the Portfolio, check if it is
planning to make a distribution
in the near future. Here's why:
If you buy shares of the
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 the
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
the Portfolio's appreciation.
18
<PAGE>
You can find more information about the Portfolio's 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 Portfolio in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected the Portfolio's 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 Portfolio, 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
Portfolio 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. 6/00
19
<PAGE>
---------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION FOR THE
MONTGOMERY NEW ECONOMY 20 PORTFOLIO
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
MONTGOMERY NEW ECONOMY 20 PORTFOLIO
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
STATEMENT OF ADDITIONAL INFORMATION
June 30, 2000
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 New Economy 20 Portfolio
(the "Portfolio") is a series of the Trust. This Statement of Additional
Information contains information in addition to that set forth in the combined
prospectus for the Montgomery New Economy 20 Portfolio dated June 30, 2000, 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 OBJECTIVE AND POLICIES OF THE PORTFOLIO.............................3
RISK FACTORS..................................................................14
INVESTMENT RESTRICTIONS......................................................167
DISTRIBUTIONS AND TAX INFORMATION.............................................19
TRUSTEES AND OFFICERS.........................................................23
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................26
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................30
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................32
DETERMINATION OF NET ASSET VALUE..............................................33
PRINCIPAL UNDERWRITER.........................................................35
PERFORMANCE INFORMATION.......................................................36
GENERAL INFORMATION...........................................................38
FINANCIAL STATEMENTS..........................................................40
APPENDIX......................................................................41
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 New Economy 20 Portfolio (the "Portfolio").
INVESTMENT OBJECTIVE AND POLICIES OF THE PORTFOLIO
The Portfolio is managed by Montgomery Asset Management, LLC (the
"Manager") and its shares are distributed by Funds Distributor, Inc. (the
"Distributor"). The investment objective and policies of the Portfolio are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
The Portfolio is a non-diversified series of The Montgomery Funds. The
achievement of the Portfolio's investment objective will depend upon market
conditions generally and on the Manager's analytical and portfolio management
skills.
Alternative Structures
The 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 Portfolio and the Manager. The 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
Portfolio has not proposed instituting this alternative structure.
Portfolio Securities
Depositary Receipts, Convertible Securities and Securities Warrants.
The 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 the Portfolio's investment policies, the
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. The Portfolio may also invest in
convertible securities and securities warrants.
Other Investment Companies. The 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 the Portfolio limit its investments so that,
as determined immediately after a
B-3
<PAGE>
securities purchase is made: (a) not more than 10% of the value of the
Portfolio's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either (i) the Portfolio and affiliated
persons of the 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 the Portfolio in excess of 1% of the
company's total outstanding shares be deemed illiquid), or (ii) the 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 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 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.
The 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, the Portfolio bears its
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. The 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
the 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 of Trustees, 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 of Trustees 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 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. The 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"). The
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 the 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. The 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. The 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 the Portfolio invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Portfolio's portfolio in an effort
to monitor the Portfolio's interest rate risk.
Privatizations. The 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. 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 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 its 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 of
B-5
<PAGE>
Trustees. The Portfolio does not invest more than 15% of its net assets in
illiquid investments, including special situations.
Risk Factors/Special Considerations Relating to Debt Securities
The 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.
B-6
<PAGE>
Hedging and Risk Management Practices
The 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 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 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.
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 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, the Portfolio 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, the Portfolio 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. The 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
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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. 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 its 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
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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 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. The 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 the Portfolio may invest. The
Portfolio also may enter into closing sales transactions in order to realize
gains or minimize losses on options it has purchased.
The 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 the 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.
The Portfolio may purchase and sell options traded on U.S. and foreign
exchanges. Although the 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 the 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
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handle current trading volume at all times; or (vi) discontinuance in the future
by one or more exchanges for economic or other reasons, of trading of options
(or of a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Although the Portfolio does currently intend to do so, it may, in the
future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which they may invest. A covered call
option involves the Portfolio's giving another party, in return for a premium,
the right to buy specified securities owned by the 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, the 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, the Portfolio's ability to sell the underlying security is limited
while the option is in effect unless the Portfolio effects a closing purchase
transaction.
The 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. The 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, the 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. The
Portfolio will not write put options if the aggregate value of the obligations
underlying the put options exceeds 25% of the 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 Portfolio's orders.
Equity-Linked Derivatives--SPDRs, WEBS, DIAMONDS and OPALS. The
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
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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.
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 or 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, an economic downturn in a single country could significantly adversely
affect the price of the WEBS for that country.
Other Investment Practices
Repurchase Agreements. The Portfolio may enter into repurchase
agreements. The 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 the
Portfolio. Alternatively, the purchase and repurchase prices may be the same,
with interest at a stated rate due to the Portfolio together with the repurchase
price on the date of repurchase. In either case, the income to the 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
of Trustees, reviews on a periodic basis the suitability and creditworthiness,
and the value of the collateral, of those sellers with whom the Portfolio enters
into repurchase agreements to evaluate potential risk. All repurchase agreements
will be made pursuant to procedures adopted and regularly reviewed by the Board
of Trustees.
The Portfolio generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Portfolio regards repurchase agreements
with maturities in excess of seven days as illiquid. The 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 the 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 the Portfolio subject to a repurchase
agreement as being owned by the Portfolio or as being collateral for a loan by
the Portfolio to the seller. If bankruptcy or insolvency proceedings are
commenced with respect to the seller of the security before its repurchase, the
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 the
Portfolio has not perfected a security interest in the security, the Portfolio
may be required to return the security to the seller's estate and be treated as
an unsecured creditor. As such, the 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 the
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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, the
Portfolio also runs the risk that the seller may fail to repurchase the
security. However, the 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 least 100% of the amount invested by the
Portfolio plus accrued interest, and the 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), the 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 Portfolio may participate in one or more joint accounts with other
series of the Trust 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. The Portfolio may enter into reverse
repurchase agreements. The 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 the 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. The
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 Portfolio will cause its custodian to segregate liquid assets, such
as cash, U.S. government securities or other liquid equity or debt securities
equal in value to its obligations (including accrued interest) with respect to
reverse repurchase agreements. Such assets are marked to market daily to ensure
that full collateralization is maintained.
Lending of Portfolio Securities. Although the Portfolio currently does
not intend to do so, the 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. The 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 the Portfolio
or the borrower at any time. Upon such termination, the Portfolio is entitled to
obtain the return of the securities loaned within five business days.
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For the duration of the loan, the 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 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 Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" or "delayed delivery" basis. The price of such
securities is fixed at the time the commitment to purchase or sell is made, but
delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Portfolio to the
issuer. While the Portfolio reserves the right to sell when-issued or delayed
delivery securities prior to the settlement date, the Portfolio intends to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time the 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 Portfolio does not believe that its net
asset values will be adversely affected by its purchase of securities on a
when-issued or delayed delivery basis. The Portfolio will cause its custodian to
segregate cash, U.S. government securities or other liquid equity or debt
securities with a value equal in value to commitments for when-issued or delayed
delivery securities. The segregated securities either will mature or, if
necessary, be sold on or before the settlement date. To the extent that assets
of the Portfolio are held in cash pending the settlement of a purchase of
securities, the Portfolio will earn no income on these assets.
The Portfolio 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 the 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 the 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
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company held by the 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 the 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, the Portfolio may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Portfolio may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the 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 the Portfolio's inability to dispose of such securities promptly
or at favorable prices.
The Board of Trustees has delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board of Trustees. 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 Portfolio's portfolio and
reports periodically on such decisions to the Board of Trustees.
RISK FACTORS
The following describes certain risks involved with investing in the
Portfolio in addition to those described in the prospectus or elsewhere in this
Statement of Additional Information.
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Foreign Securities
The Portfolio 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 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, the Portfolio
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 Portfolio 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 the Portfolio to make intended security purchases due to settlement
difficulties could cause it to miss attractive investment opportunities.
Inability to sell the 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 the Portfolio 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 the Portfolio's securities denominated in the currency.
Such changes also affect the Portfolio's income and distributions to
shareholders. The Portfolio may be affected either favorably or unfavorably by
changes in the relative rates of exchange among the currencies of different
nations, and the 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 the Portfolio 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 has 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 the 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
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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 Portfolio. The Portfolio 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 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 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 Portfolio 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, the 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.
B-16
<PAGE>
Non-Diversified Portfolio
The Portfolio is a "non-diversified" investment company under the
Investment Company Act. This means that, with respect to 50% of the 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 the
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, the Portfolio's 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 Portfolio and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Portfolio's outstanding voting
securities as defined in the Investment Company Act. The Portfolio 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 the 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,
B-17
<PAGE>
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.
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 the
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 Portfolio generally relies
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 the 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 the 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 the
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.)
B-18
<PAGE>
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 the 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.
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 of Trustees and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Portfolio receives income in the form of dividends
and interest earned on their investments in securities. This income, less the
expenses incurred in its operations, is the Portfolio's net investment income,
substantially all of which will be declared as dividends to the Portfolio's
shareholders.
The amount of ordinary income dividend payments by the Portfolio is
dependent upon the amount of net investment income received by the Portfolio
from its portfolio holdings, is not guaranteed and is subject to the discretion
of the Portfolio's Board of Trustees. The Portfolio does not pay "interest" or
guarantee any fixed rate of return on an investment in its shares.
The Portfolio also may derive capital gains or losses in connection
with sales or other dispositions of its portfolio securities. Any net gain the
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 the
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, the 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.
B-19
<PAGE>
Any dividend or distribution per share paid by the 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. The 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 "Code"), for each taxable
year by complying with all applicable requirements regarding the source of its
income, the diversification of its assets, and the timing of its distributions.
The Portfolio's policy is to distribute to its shareholders all of its
investment company taxable income and any net realized capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so the Portfolio 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 Portfolio.
In order to qualify as a regulated investment company, the 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 the 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 Portfolio will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If the 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 the 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 the
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 Portfolio or any securities dealer effecting a redemption of the
Portfolio's shares by a shareholder will be required to file information reports
with the IRS with respect to distributions and payments made to the
B-20
<PAGE>
shareholder. In addition, the Portfolio 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 Portfolio 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 Portfolio intends to declare and pay dividends and other
distributions, as stated in the Prospectus. In order to avoid the payment of any
federal excise tax based on net income, the Portfolio must declare on or before
December 31 of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
The Portfolio may receive dividend distributions from U.S.
corporations. To the extent that the Portfolio receives such dividends and
distributes them to its shareholders, and meets certain other requirements of
the Code, corporate shareholders of the 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 the Portfolio at the
end of its fiscal year is invested in stock or other securities of foreign
corporations, the 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 the 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 the Portfolio's
total assets at the end of its fiscal year are invested in stock or other
securities of foreign corporations, the 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.
The Portfolio may be subject to foreign withholding taxes on dividends
and interest earned with respect to securities of foreign corporations. The
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 the Portfolio derives
from PFIC stock may be subject to a non-deductible federal income tax at the
Portfolio level. In some cases, the 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. The 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, the
Portfolio may incur the PFIC tax in some instances.
B-21
<PAGE>
Hedging. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by the 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 the 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 the Portfolio purchases an option, the
premium paid by the Portfolio is recorded as an asset and is subsequently
adjusted to the current market value of the option. Any gain or loss realized by
the Portfolio upon the expiration or sale of such options held by the Portfolio
generally will be capital gain or loss.
Any security, option, or other position entered into or held by the
Portfolio that substantially diminishes the Portfolio's risk of loss from any
other position held by the 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 the 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 the 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 the
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 the 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 the 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 the 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 the 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
B-22
<PAGE>
the Portfolio may be disallowed to the extent shares of the 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 Portfolio. 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
Portfolio. 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 Portfolio.
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the overall management of
the Portfolio, including establishing the Portfolio's 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 Portfolio's daily
operations, are appointed by the Board of Trustees. The current Trustees and
officers of the Trust performing a policy-making function and their affiliations
and principal occupations for the past five years are set forth below:
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. ("FDI")
and an officer of certain investment companies distributed by FDI or its
affiliates (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 Vice President and Senior Counsel of FDI and an officer of certain
investment companies distributed by FDI or its affiliates. From June 1994 to
January 1996, Ms. Jacoppo-Wood was a Manager, SEC Registration, Scudder, Stevens
& Clark, Inc.
Margaret W. Chambers, Secretary (born 1959)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of FDI and an officer of certain investment
companies distributed by FDI or its affiliates (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.
B-23
<PAGE>
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 Senior Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies distributed by FDI or its affiliates.
From April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum
Financial Group.
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 distributed by FDI or its
affiliates. From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client
Manager for The Boston Company, Inc.
Kathleen K. Morrisey, Vice President and Assistant Treasurer (born 1972)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Morrisey is the
Assistant Vice President and Manager of Financial Administration of FDI and an
officer of certain investment companies distributed by FDI or its affiliates.
From July 1994 to November 1995, Ms. Morrisey was a Fund Accountant II for
Investors Bank & Trust Company.
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 distributed
by FDI or its 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 a Vice
President and Senior Client Service Manager of FDI, and an officer of certain
investment companies distributed by FDI or its affiliates. From January 1995 to
June 1998, Mr. Conroy was the Assistant Vice President and Manager of Treasury
Services and Administration. From April 1993 to January 1995, Mr. Conroy was a
Senior Fund Accountant at Investors Bank & Trust Company.
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.
B-24
<PAGE>
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.
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 Boards
of Groton School and Catholic Charities of San Francisco. Ms. Herbert is also 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 Portfolio and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Portfolio. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board of Trustees 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
-----------------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-25
<PAGE>
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>
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
Shares of the Portfolio 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 Portfolio 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 Portfolio for two years
after the 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 Trustees or the vote of a majority of the outstanding shares of the
Portfolio, 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 Portfolio 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, the 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:
B-26
<PAGE>
PORTFOLIO AVERAGE DAILY NET ASSETS ANNUAL RATE
--------- ------------------------ -----------
Montgomery New Economy 20 Portfolio First $____ million 1.00%
Next $______million [___%]
Over $_____________ [___%]
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 1.45% of 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
Portfolio's investors. Any reductions made by the Manager in its fees are
subject to reimbursement by the Portfolio within the following three years
provided the Portfolio is able to effect such reimbursement and remain in
compliance with the foregoing expense limitations. The Manager generally seeks
reimbursement for the oldest reductions and waivers before payment by the
Portfolio 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 Portfolio by the Board
of Trustees 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 Portfolio's
ability to effect such reimbursement and remain in compliance with applicable
expense limitations in place at that time. Second, the Manager must specifically
request the reimbursement from the Board of Trustees. Third, the Board of
Trustees must approve such reimbursement as appropriate and not inconsistent
with the best interests of the Portfolio 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 Portfolio until collection is
probable; but the full amount of the potential liability will appear in a
footnote to the Portfolio's financial statements. At such time as it appears
probable that the Portfolio is able to effect such reimbursement, that the
Manager intends to seek such reimbursement and that the Board of Trustees has or
is likely to approve the payment of such reimbursement, the amount of the
reimbursement will be accrued as an expense of the Portfolio for that current
period.
Information regarding advisory fees actually paid to the Manager has
not been provided since the Portfolio was launched on June 30, 2000.
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.
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The Trust and the Manager have adopted a Code of Ethics pursuant to
Section 17(j) of the Investment Company Act and Rule 17j-1 thereunder. The Code
of Ethics conforms to the provisions of Rule 17j-1 as adopted by the SEC on
October 29, 1999. Currently, the Code of Ethics permits personnel subject to the
Code of Ethics to buy and sell securities for their individual account, unless
such securities at the time of such purchase or sale: (i) are being considered
for purchase or sale by a client account of the Manager in the next seven (7)
business days; (ii) are being purchased or sold by a client account of the
Manager; or (iii) were purchased or sold by a client account of the Manager
within the most recent seven (7) business days. These restrictions are not
required to be met where the trade in question meets certain di minimis
requirements and is not being purchased or sold by a client account 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 Portfolio.
Shareholder Services Plan. The Trust has adopted a Shareholder Services
Plan (the "Services Plan") with respect to the Portfolio. The Manager (or its
affiliate) serves as the service provider under the Services Plan and, as such,
receives any fees paid by the Portfolio pursuant to the Services Plan.
On August 24, 1995, the Board of Trustees of the Trust, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Services
Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the Services Plan for
the Class P and Class L shares of each series. [The Plan was later amended to
cover Class R shares of the Portfolio.]
Under the Services Plan, the covered shares of the Portfolio will pay a
continuing service fee to the Manager, the Distributor or other service
providers, in an amount, computed and prorated on a daily basis, equal to 0.25%
per annum of the average daily net assets of the covered shares of the
Portfolio. Such amounts are compensation for providing certain services to
clients owning those shares of the Portfolio, including personal services such
as processing purchase and redemption transactions, assisting in change of
address requests and similar administrative details, and providing other
information and assistance with respect to the Portfolio, including responding
to shareholder inquiries.
The Distributor. Funds Distributor, Inc., the Distributor, may provide
certain administrative services to the Portfolio on behalf of the Manager. The
Distributor will also perform investment banking, investment advisory and
brokerage services for persons other than the Portfolio, including issuers of
securities in which the Portfolio may invest. These activities from time to time
may result in a conflict of interests of the Distributor with those of the
Portfolio, and may restrict the ability of the Distributor to provide services
to the Portfolio.
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 Portfolio will not pay this
compensation out of its 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% of average daily assets introduced and maintained in
customer accounts of these representatives. The Distributor also may reimburse
certain solicitation expenses.
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The Custodian. The Chase Manhattan Bank serves as principal Custodian
of the Portfolio's 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 of Trustees has delegated
various foreign custody responsibilities to the Custodian, as the "Foreign
Custody Manager" for the Portfolio 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 of Trustees pursuant to Rule
17f-5 under the Investment Company Act. The Custodian, its branches and
sub-custodians generally hold certificates for the securities in their custody,
but may, in certain cases, have book records with domestic and foreign
securities depositories, which in turn have book records with the transfer
agents of the issuers of the securities. Compensation for the services of the
Custodian is based on a schedule of charges agreed on from time to time.
Administrative and Other Services. Montgomery Asset Management, LLC
("MAM") serves as the Administrator to the Portfolio a pursuant to an
Administrative Services Agreement between the Trust and MAM (the "Agreement").
In approving the Agreement, the Board of Trustees, 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 Trustees, the Administrator performs the following types of
services for the Portfolio: (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 of Trustees;
(vi) develop and monitor compliance procedures; (vii) monitor Blue Sky filings
and (viii) manage legal services. For its services performed under the
Agreement, the Portfolio pays the Administrator an administrative fee based upon
a percentage of the average daily net assets of the 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 Portfolio
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 Trust,
Chase assists MAM in providing administrative services to the Portfolio. 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 Portfolio. 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 Trust 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. As
Fund Accountant, Chase provides the Trust with various services, including, but
are not limited to: (i) maintaining the books and records for the Portfolio's
assets, (ii) calculating net asset values of the Portfolio, (iii)
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accounting for dividends and distributions made by the Portfolio, and (iv)
assisting the Portfolio's 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 Portfolio was launched on June 30, 2000.
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 the Board of Trustees. Purchases and sales of securities within
the U.S. other than on a securities exchange will generally be executed directly
with a "market-maker" unless, in the opinion of the Manager or the 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 indeterminable
value. In negotiating any commissions with a broker or evaluating the spread to
be paid to a
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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 of Trustees 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 Portfolio 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 the 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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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 June 30, 2000.
The Portfolio does 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
Portfolio. However, brokers who execute brokerage transactions as described
above may from time to time effect purchases of shares of the Portfolio for its
customers.
Depending on the Manager's view of market conditions, the Portfolio 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 Portfolio
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 Portfolio's shares, and (ii) reject purchase orders in
whole or in part when in the judgment of the Manager or the Distributor such
suspension or rejection is in the best interest of the Portfolio.
When in the judgment of the Manager it is in the best interests of the
Portfolio, an investor may purchase shares of the 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 the Portfolio's investment
objective and policies, and the tendered securities are otherwise acceptable to
the Manager. Such securities are acquired by the Portfolio only for the purpose
of investment and not for resale. For the purposes of sales of shares of the
Portfolio for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of the
Portfolio are valued for the purpose of calculating the net asset value of the
Portfolio's shares. A shareholder who purchases shares of the 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 the Portfolio and the
purchase price of the Portfolio's shares acquired by the shareholder.
Payments to shareholders for shares of the Portfolio redeemed directly
from the 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 the
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 the Portfolio
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pursuant to Section 22(e) of the Investment Company Act) making disposal of
portfolio securities or valuation of net assets of the Portfolio not reasonably
practicable; or (iii) for such other period as the SEC may permit for the
protection of the Portfolio's shareholders.
The Portfolio intends to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions that make payment in cash unwise, the
Portfolio 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 Portfolio does 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 Portfolio pays 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 the Portfolio's
portfolio securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Portfolio 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 Portfolio through an
IRA, there is available through the Portfolio 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 Portfolio 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 Portfolio. An IRA
that invests in shares of the Portfolio 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 Portfolio 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 the 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 the
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
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Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The Portfolio may,
but does not expect to, determine the net asset values of its shares on any day
when the NYSE is not open for trading if there is sufficient trading in its
portfolio securities on such days to 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 Portfolio's net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which the 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 the Portfolio's net asset value unless
the Board of Trustees or its delegates deem that such events would materially
affect the net asset value, in which case an adjustment would be made.
Generally, the 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 of Trustees.
The 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 of Trustees.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Portfolio
if acquired within 60 days of maturity or, if already held by the Portfolio on
the 60th day, based on the value determined on the 61st day.
Corporate debt securities and U.S. government securities held by the
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 of Trustees. Any such pricing
service, in determining value, will use information with respect to transactions
in the securities being valued, quotations from dealers, market transactions in
comparable securities, analyses and evaluations of various relationships between
securities and yield-to-maturity information.
An option that is written by the 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 the 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
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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 of Trustees.
If any securities held by the 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 of Trustees. The Board of Trustees periodically reviews such
valuations and valuation procedures. The fair value of such securities is
generally determined as the amount which the 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
the 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 of Trustees in good faith will establish a conversion rate for such
currency.
All other assets of the Portfolio are valued in such manner as the
Board of Trustees 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 Portfolio's principal underwriter
in a continuous public offering of the Portfolio's 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 Portfolio and the Distributor is in effect for the
Portfolio 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 Board of Trustees or the vote of a majority of the outstanding
securities of the Portfolio (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 Portfolio 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 Portfolio's shares. The Principal Underwriter has not
been paid
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any underwriting commissions for underwriting securities of the Portfolio during
the Portfolio's last three fiscal years.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Portfolio 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 the Portfolio will be accompanied by information
on the Portfolio's average annual compounded rate of return over the most recent
four calendar quarters and the period from the Portfolio's inception of
operations. The Portfolio may also advertise aggregate and average total return
information over different periods of time. The 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.
The 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 the 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 the Portfolio with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing the Portfolio's performance with that of other investment companies
should give consideration to the quality and maturity of the respective
investment companies' portfolio securities.
B-36
<PAGE>
The information regarding average annual total returns for the
Portfolio has not been provided since the Portfolio was launched on June 30,
2000.
Comparisons. To help investors better evaluate how an investment in the
Portfolio might satisfy their investment objectives, advertisements and other
materials regarding the Portfolio 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 Portfolio's performance or the investment opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of
the Morgan Stanley Capital International Indices, and one or
more of the International Finance Corporation Indices.
b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
c) Lipper Mutual Fund Performance Analysis and Lipper Fixed
Income Fund Performance Analysis--A ranking service that
measures total return and average current yield for the mutual
fund industry and ranks individual mutual fund performance
over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report--Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and
government money funds.
e) Salomon Brothers Bond Market Roundup--A weekly publication
which reviews yield spread changes in the major sectors of the
money, government agency, futures, options, mortgage,
corporate, Yankee, Eurodollar, municipal, and preferred stock
markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices--Lehman Brothers fixed-income indices
may be used for appropriate comparisons.
g) other indices--including Consumer Price Index, Ibbotson,
Micropal, CNBC/Financial News Composite Index, MSCI EAFE Index
(Morgan Stanley Capital International, Europe, Australasia,
Far East Index--a capitalization-weighted index that includes
all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000 and IFC
Emerging Markets Database.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Portfolio.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the 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 the Portfolio to calculate
its figures.
B-37
<PAGE>
The Portfolio may also publish its relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.
and Morningstar, Inc.
Investors should note that the investment results of the Portfolio will
fluctuate over time, and any presentation of the Portfolio's total return for
any period should not be considered as a representation of what an investment
may earn or what an investor's total return may be in any future period.
Reasons to Invest in the Portfolio. From time to time, the Portfolio
may publish or distribute information and reasons supporting the Manager's
belief that the Portfolio 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 Portfolio 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 Portfolio 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 December 31,
1999 approximately $5 billion for retail and institutional investors in The
Montgomery Funds) and total shareholders invested in the Montgomery Funds (as of
December 31, 1999, around 200,000).
GENERAL INFORMATION
Investors in the Portfolio will be informed of the Portfolio's progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the 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
B-38
<PAGE>
by the Small Cap Fund. Expenses incurred in connection with the establishment
and registration of shares of the Portfolio constituting separate series of the
Trust have been assumed by the Portfolio. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by the Portfolio and
will be reimbursed for such expenses during the first fiscal year after
commencement of the Portfolio's operations, subject to the Portfolio's expense
limitation.
As noted above, The Chase Manhattan Bank (the "Custodian") acts as
custodian of the securities and other assets of the Portfolio. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Portfolio.
DST Systems, Inc., 333 West 11th Street, Kansas City, Missouri 64105,
the Portfolio's Master Transfer Agent and Paying Agent.
_________________, 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 Portfolio's assets for any shareholder held personally
liable for obligations of the Portfolio 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 Portfolio or Trust
and satisfy any judgment thereon. All such rights are limited to the assets of
the Portfolio. 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 of Trustees' 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 June 30, 2000, the Distributor was the sole initial shareholder
of the Portfolio and held substantially shares of the Portfolio 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.
B-39
<PAGE>
FINANCIAL STATEMENTS
There are no financial statements for the Portfolio since it was
launched on June 30, 2000.
B-40
<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.
B-41
<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.
B-42
<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
B-43
<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
B-44
<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-45
<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.
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<PAGE>
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
Commercial Paper Ratings
Duff-1 The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having
very high certainty of timely payment with excellent liquidity
factors which are supported by ample asset protection. Risk
factors are minor.
Duff-2 Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are
small.
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-47
<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.
<PAGE>
(o) 18f-3 Plan-Form of Amended and Restated Multiple Class Plan is
incorporated by reference to Post-Effective Amendment No. 61.
(p) Code of Ethics is incorporated by reference to Post-Effective
Amendment No. 76 as filed with the Commission on April 19,
2000.
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
Mark B. Geist Chief Executive Officer of MAM, LLC
F. Scott Tuck President of MAM, LLC
<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.
<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.
<TABLE>
(b) The following is a list of the executive officers, directors
and partners of Funds Distributor, Inc.
<S> <C>
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 Margaret W. Chambers
Compliance Officer, Secretary and Clerk
Senior Vice President Michael S. Petrucelli
Director, Senior Vice President, Treasurer and Joseph F. Tower, III
Chief Financial Officer
Senior Vice President Paula R. David
Senior Vice President Allen B. Closser
Senior Vice President Bernard A. Whalen
Chairman and Director William J. Nutt
</TABLE>
(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.
<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.
<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 1993 Act 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 June, 2000.
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 June 30, 2000
-------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the June 30, 2000
------------------ Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee June 30, 2000
------------
Andrew Cox
Cecilia H. Herbert * Trustee June 30, 2000
--------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee June 30, 2000
--------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-----------------
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed.
