As filed with the Securities and Exchange Commission on September 29, 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. 80
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 81
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:
_____ immediately upon filing pursuant to Rule 485(b)
_____ on ___________ pursuant to Rule 485(b)
__X__ 60 days after filing pursuant to Rule 485(a)(1)
_____ 75 days after filing pursuant to Rule 485(a)(2)
_____ on ______________ pursuant to Rule 485(a)
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
<PAGE>
THE MONTGOMERY FUNDS
CONTENTS OF POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the Registrant
contains the following documents:
Facing Sheet
Contents of Post-Effective Amendment
Part A - Prospectus for the Montgomery New Power Fund (formerly called
the Montgomery New Economy 20 Portfolio).
Part B - Statement of Additional Information for the Montgomery New
Power Fund (formerly called the Montgomery New Economy 20
Portfolio).
Part C - Other Information
Signature Page
Exhibits
<PAGE>
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PART A
PROSPECTUS FOR THE
MONTGOMERY NEW POWER FUND
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<PAGE>
Prospectus
November __, 2000
THE MONTGOMERY FUNDS(SM)
New Power Fund
The Montgomery Funds has registered the Fund offered in this prospectus with the
U.S. Securities and Exchange Commission (SEC). That registration does not imply,
however, that the SEC endorses the Fund.
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 Shareholder
Service Representatives
800.572.FUND [3863]
Available 6 A.M. to 5 P.M.
Pacific time
Montgomery Web Site
www.montgomeryfunds.com
E-mail
[email protected]
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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Montgomery New Power Fund .....................................................4
Portfolio Management...........................................................6
Additional Investment Strategies and Related Risks.............................7
Defensive Investments.....................................................7
Portfolio Turnover........................................................7
The Euro: Single European Currency........................................7
Investment Options.............................................................8
Becoming a Montgomery Shareholder.........................................9
How Fund Shares Are Priced...............................................10
Montgomery Online........................................................12
Buying Additional Shares.................................................13
Exchanging Shares........................................................13
Other Exchange Policies..................................................13
Selling Shares...........................................................14
Other Policies...........................................................15
Tax Withholding Information..............................................16
After You Invest.........................................................17
2
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This prospectus contains important information about the investment objective,
strategies and risks of the Montgomery New Power Fund that you should know
before you invest. Please read it carefully and keep it on hand for future
reference. Please be aware that the Fund:
[ ] 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 Fund.
3
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New Power Fund
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Objective
[ ] Seeks long-term capital appreciation
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Principal Strategy [clipart]
Under normal market conditions, the Fund invests at least 65% of its total
assets in the stocks of 'new power' companies. The Fund invests in companies
across multiple sectors that are involved with or support the generation,
transmission, distribution, supply, and conditioning of electricity. These
sectors include utilities, energy, capital goods, and technology. The Fund
emphasizes companies that are expected to benefit from deregulation,
technological innovation, environmental legislation and changes in demand. Such
companies may provide services and equipment to support both traditional and
newer sources of electricity, including solar, wind, hydro, biomass and fuel
cell technologies.
The Fund's portfolio manager seeks well-managed, public and/or private companies
that he believes will be able to increase their sales and corporate earnings on
a sustained basis (even though they may not yet generate profits). He favors
those companies that he believes have a competitive advantage, offer innovative
products or services and may profit from trends associated with deregulation of
the electric power industry, the introduction of new technologies and the
continued support by governments for stricter environmental regulations. The
Fund may participate in initial public offerings (IPOs), although the Fund's
access to IPOs on a continuing basis cannot be guaranteed, and may at times,
dispose shares of those offerings shortly after their acquisition. On a
strategic basis, the Fund's assets may be allocated among countries and market
sectors in an attempt to take advantage of market trends.
Principal Risks [clipart]
The Fund invests in stocks and any stock investment can lose money as a result
of an overall decline in the stock market or a decline in price of the specific
companies in which the Fund invests. 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 the prices of the individual companies in the Fund's
portfolio. Because the Fund invests in New Power companies worldwide, it may own
foreign stocks. 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 Fund is also exposed to currency fluctuation risks.
The Fund is a non-diversified mutual fund which means it may hold a limited
number of individual stock positions. Because the Fund also invests in companies
is a specific sector, its share value may be more volatile than that of
more-diversified mutual funds with exposure to many industry sectors. In
addition, the New Power industries that will be the Fund's focus may be subject
to greater price volatility than many other industries due to changes in
government policies and regulation. Additionally, New Power companies can be
particularly affected by such specific risks such as, among others: aggressive
product pricing by competitors; rapid technological change; government
regulation; failure of new products to meet expectations or reach the
marketplace; inability to recover large capital investment costs.
Many New Power companies may be small- or mid-cap in size. Smaller companies
have less public information generally available, more-limited product lines,
less liquidity, less frequent trading and limited financial resources. The
Fund's participation in IPOs exposes it to the risks generally associated with
investment in companies that have little operating history as public companies.
In addition, the market for IPOs has been volatile, and share prices of certain
newly-public companies have fluctuated significantly over short periods of time.
The Fund also invests in companies that have not yet "gone public," and these
investments create additional risks, such as illiquidity based on legal
restrictions and less publicly available information about the companies.
4
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Past Fund Performance The Fund was launched on May 31, 2000. Performance results
have not been provided because the Fund has not been in existence for a full
calendar year.
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Fees & Expenses [clipart]
<TABLE>
<CAPTION>
The following table shows the fees and expenses you may pay if you buy and hold
shares of this Fund. Montgomery does not impose any front-end or deferred sales
loads on this Fund.
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 2.00%+
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)++
Management Fee# 1.00%
Distribution (12b-1) Fee 0.00%
Other Expenses## 0.93%
Shareholder Service Fee 0.25%
-------------------------------------------------------------------------------------------------------
Total Annual Fund 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 Fund. $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 Fund expenses: This example is intended to help you compare the cost
of investing in the Fund 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 Fund's
actual expenses or returns.
1 Year 3 Years
----------------------
$147 $458
[clipart] [sidebar]
Portfolio Management
David Whittall
For more details see page __
5
<PAGE>
PORTFOLIO MANAGEMENT
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PORTFOLIO MANAGEMENT
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The investment manager of the Fund is Montgomery Asset Management, LLC, 101
California Street, San Francisco, California 94111. Founded in 1990, Montgomery
Asset Management is a subsidiary of Commerzbank AG, one of the largest publicly
held commercial banks in Germany. As of September 30, 2000, Montgomery Asset
Management managed approximately $__ billion on behalf of some _________
investors in The Montgomery Funds. Montgomery may rely on the expertise,
research and resources of Commerzbank AG and its worldwide affiliates in
managing the Fund.
New Power Fund Portfolio
[photo] DAVID WHITTALL, Portfolio Manager
o Montgomery New Power Fund (since 2000)
Mr. Whittall joined Montgomery in 1994 as a senior analyst, and has been
responsible for global infrastructure investments since that time. From 1991 to
1994 he was an associate director at Barings Securities in Hong Kong.
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 Fund.
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)
................................................................................
Montgomery New Power Fund 1.00% 1.45%
6
<PAGE>
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Additional Investment Strategies and Related Risks
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Defensive Investments
At the discretion of its portfolio manager, the Fund may invest up to 100% of
its assets in cash for temporary defensive purposes. The Fund is not required or
expected to take such a defensive posture. But if used, such an unlikely stance
may help the Fund minimize or avoid losses during adverse market, economic or
political conditions. During such a period, the Fund may not achieve its
investment objective. For example, should the market advance during this period,
the Fund may not participate as much as it would have if it had been more fully
invested.
Portfolio Turnover
The Fund's portfolio manager will sell a security when he believes it is
appropriate to do so, regardless of how long the Fund has owned that security.
Buying and selling securities generally involves some expense to the Fund, such
as commission paid to brokers and other transaction costs. By selling a
security, the Fund may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the Fund'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 Fund'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 Fund, is considered high.
The Euro: Single European Currency
On January 1, 1999, the European Union (EU) introduced a single European
currency called the euro. Eleven of the 15 EU members have begun to convert
their currencies to the euro: 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
* How clearing and settlement systems needed to process transactions
reliably will work
* What the effects of the euro on European financial and commercial
markets will be
* How new legislation and regulations will affect euro-related issues
These and other factors could cause market disruptions and affect the value of
your shares in the Fund in the event that 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.
7
<PAGE>
[table]
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Investment Options
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To open a new account, complete and mail the New Account application included
with this prospectus, or print an application from www.montgomeryfunds.com.
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Trade requests received after 1:00 P.M. Pacific time (4:00
P.M. eastern time) will be executed at the following
business day's closing price. Once a trade is placed, it may
not be altered or canceled.
Checks should be made payable to: The Montgomery Funds
The minimum initial investment is $1,000 for the Fund. The
minimum subsequent investment is $100.
Once an account is established, you can:
|X| Buy, sell or exchange shares by phone Contact The
Montgomery Funds at 800.572.FUND [3863].
Press (1) for a shareholder service representative.
Press (2) for the automated Montgomery Star System.
|X| Buy, sell or exchange shares online Go to
www.montgomeryfunds.com. Follow the online instructions
to enable this service.
|X| 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
|X| Buy or sell shares by wiring funds
To: State Street Bank and Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For credit to: [shareholder(s) name]
Shareholder account number:
[shareholder(s) account number]
Name of Fund: [Montgomery Fund Name]
8
<PAGE>
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 Fund. The minimum initial investment
for the Fund 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 Fund 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 Fund to new
investors at its discretion. Shareholders who maintain open accounts that meet
the minimum required balance in the Fund when it closes may make additional
investments in it. Employer-sponsored retirement plans, if they are already
invested in the Fund, may be able to open additional accounts for plan
participants. Montgomery may reopen and close the Fund to certain types of new
shareholders in the future. If the Fund is closed and you redeem your total
investment in the Fund, your account will be closed and you will not be able to
make any additional investments in the Fund. The Montgomery Funds reserves the
right to close or liquidate the Fund at its discretion.
Becoming a Montgomery Shareholder
To open a new account:
|X| By Mail Send your signed, 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 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.
|X| 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 Fund. 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:
State Street Bank and 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 Fund: [Montgomery Fund Name]
Please note: Your bank may charge a wire transfer fee.
|X| 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
Fund must meet its investment minimum and is limited to the total value of your
existing accounts or $10,000, whichever is greater. To complete the transaction,
we must receive payment within three business days. We reserve the right to
collect any losses from your account if we do not receive payment within that
time.
9
<PAGE>
|X| Online Visit www.montgomeryfunds.com to print out an application, or to
exchange at least $1,000 from an existing account into a new account.
[sidebar]
Getting Started
To invest, complete the New Account
application enclosed with this
prospectus. Send it with 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 Fund.
How Fund Shares Are Priced
How and when we calculate the Fund's price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate the Fund's NAV by
dividing the total net value of its assets by the number of outstanding shares.
We base the value of the Fund'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 Fund
calculates its NAV. In this case, Montgomery, subject to the supervision of the
Fund'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 Fund's NAV after the close of trading on the New York
Stock Exchange (NYSE) every day the NYSE is open. We do not calculate NAVs on
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 Fund's NAVs are provided in the Statement of Additional Information.
|X| The Fund 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 Fund's foreign securities--and its
price--may fluctuate during periods when you can't buy, sell or exchange shares
in the Fund.
[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.
10
<PAGE>
ACCOUNT INFORMATION
[Table]
www.montgomeryfunds.com
Manage your account(s) online
Our Account Access area offers free, secure, around-the-clock access to your
Montgomery Fund account(s).
At www.montgomeryfunds.com. Montgomery shareholders can:
* Check current account balances
* Buy, exchange or sell shares
* View the most recent account activity and up to 80 records of account
history within the past two years
* View statements
* 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.
For your protection, this secure area of our site 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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11
<PAGE>
Buying Additional Shares
|X| 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 a check with a
signed letter noting the name of the Fund, 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.
|X| By Phone Current shareholders are automatically eligible to buy shares by
phone. To buy shares in the Fund 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 __)
|X| 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 at
www.montgomeryfunds.com to create a PIN for accessing your account(s). You can
purchase up to $25,000 per day in additional shares of any Montgomery Funds,
except those held in a retirement account. The cost of the shares will be
automatically deducted from your bank account.
|X| By Wire There is no need to contact us when buying additional shares by
wire. Instruct your bank to wire funds to our affiliated bank using the
information under "Becoming a Montgomery Shareholder" (page __).
Exchanging Shares
You may exchange shares of the Fund 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
by phone at 800.572-FUND [3863] or through our online Account Access area at
www.montgomeryfunds.com.
Other Exchange Policies
|X| We will process your exchange order at the next-calculated NAV.
|X| You may exchange shares only if the Fund 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 Fund for shares of another Montgomery Fund
that is currently closed to new shareholders unless you are already a
shareholder in the closed Fund.
|X| Because excessive exchanges can harm the Fund'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).
12
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[sidebar]
Our Electronic Link program allows us to automatically debit
or credit your bank account for transactions made by phone
or online. To take advantage of this service, simply mail us
a voided check or preprinted deposit slip from your bank
account along with a request to establish an Electronic
Link.
|X| We may restrict or refuse your exchanges if we receive, or anticipate
receiving, simultaneous orders affecting a large portion of the Fund's assets or
if we detect a pattern of exchanges that suggests a market-timing strategy.
|X| We reserve the right to refuse exchanges into the Fund by any person or
group if, in our judgment, the Fund would be unable to effectively invest the
money in accordance with its investment objective and policies, or might be
adversely affected in other ways.
|X| Any redemption fees will apply to exchanges or redemptions out of the Fund.
Selling Shares
You may sell some or all of your Fund shares on days that the NYSE 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 Fund 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:
|X| By Mail Send us a letter including your name, Montgomery account number, the
name of the Fund and the dollar amount or number of shares you want to sell. You
must sign the letter in 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.
[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.
|X| By Internet or Phone You may accept or decline Internet or telephone
redemption privileges on your New Account application. If you accept, you will
be able to sell up to $50,000 in shares through our Web site at
www.montgomeryfunds.com, 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 Internet and telephone
transaction policies, see "Other Policies."
|X| Redemption Fee The redemption fee is intended to compensate the Fund for the
increased expenses to longer-term shareholders and the disruptive effect on the
Fund 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 Fund 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 Fund below its previously set operating expense
limit. The Investment Management Agreement allows Montgomery three years to
recoup amounts previously reduced or absorbed, provided the Fund 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 Fund has adopted a Shareholder Servicing Plan, under which the Fund pays
Montgomery or its Distributor a shareholder service fee at an annual rate of up
to 0.25% of the Fund'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 Fund redemption proceeds or distributions by check (instead
of by wire) and it does not arrive within a reasonable period of time, call us
at 800.572.FUND [3863]. Please note that we are responsible only for mailing
redemption or distribution checks and not 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.
13
<PAGE>
Transaction Confirmation
If you notice any errors on your confirmation, you must notify the Fund of such
errors within 30 days following mailing of that confirmation. The Fund will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on your confirmation after this 30-day period.
[sidebar]
BUYING AND SELLING SHARES THROUGH SECURITIES BROKERS AND
BENEFIT PLAN ADMINISTRATORS
You may purchase and sell shares through securities brokers
and benefit plan administrators or their subagents. You
should contact them directly for information regarding how
to invest or redeem through them. They may also charge you
service or transaction fees. If you purchase or redeem
shares through them, you will receive the NAV calculated
after receipt of the order by them (generally, 4:00 P.M.
eastern time) on any day the NYSE is open. If your order is
received by them after that time, it will be purchased or
redeemed at the next-calculated NAV. Brokers and benefit
plan administrators who perform shareholder servicing for
the Fund may receive fees from the Fund or Montgomery for
providing these services.
Internet and Telephone Transactions
By buying or selling shares over the Internet or the phone, you agree to
reimburse the Fund 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
Internet and/or telephone transaction privileges.
The shares you purchase over the Internet or 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 Fund
as a result.
Please note that we cannot be held liable for following 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 Fund 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 transaction privileges of any
shareholder at any time if he or she has used abusive language or misused the
Internet or phone privileges 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, or change your address
online, we will temporarily suspend your telephone redemption privileges until
30 days after your notification to protect you and your account. We require that
all redemption requests made during this period to be in writing with a
signature guarantee.
14
<PAGE>
Shareholders may experience delays in exercising Internet an/or telephone
redemption privileges during periods of volatile economic or market conditions.
In these cases you may want to transmit your redemption request:
* Using the automated Star System
* By overnight courier
* By telegram
You may discontinue Internet of telephone privileges at any time.
Tax Withholding Information
Be sure to complete the Taxpayer Identification Number (TIN) section of the New
Account application. If you don't have a Social Security Number or TIN, apply
for one immediately by contacting your local office of the Social Security
Administration or the Internal Revenue Service (IRS). If you do not provide us
with a TIN or a Social Security Number, federal tax law may require us to
withhold 31% of your taxable dividends, capital-gain distributions, and
redemption and exchange proceeds (unless you qualify as an exempt payee under
certain rules).
Other rules about TINs apply for certain investors. For example, if you are
establishing an account for a minor under the Uniform Gifts to Minors Act, you
should furnish the minor's TIN. If the IRS has notified you that you are subject
to backup withholding because you failed to report all interest and dividend
income on your tax return, you must check the appropriate item on the New
Account application. Foreign shareholders should note that any dividends the
Fund 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 Fund. The minimum subsequent
investment is $100.
After You Invest
Taxes
IRS rules require that the Fund distributes all of its net investment income and
capital gains, if any, to shareholders. Capital gains may be taxable at
different rates, depending on the length of time the Fund 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 Fund's distributions, whether received in cash or reinvested, may be
taxable. Any redemption of the Fund's shares or any exchange of the Fund'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 Fund 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 Fund.
Dividends and Distributions
As a shareholder in the Fund, 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 Fund 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 Fund shares.
15
<PAGE>
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 Fund. 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 the following communications:
* Confirmation statements
* Account statements, sent after the close of each calendar quarter
* Annual and semiannual reports, sent approximately 60 days after June 30 and
December 31
* 1099 tax form, sent by January 31
* Annual updated prospectus, sent to existing shareholders in the fall
To save you money, we send only one copy of each shareholder report or
other mailings to your household if you hold accounts under common ownership or
at the same address (regardless of the number of shareholders or accounts at
that household or address), unless you request additional copies.
[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 Fund.
DST Systems, Inc., also located in Kansas City, Missouri, is
the Fund's Master Transfer Agent. It performs certain
recordkeeping and accounting functions for the Fund.
State Street Bank and Trust Company (formerly Investors
Fiduciary Trust Company), also located in Kansas City,
Missouri, assists DST Systems, Inc. with certain
recordkeeping and accounting functions for the Fund.
<TABLE>
<CAPTION>
INCOME Dividends CAPITAL GAINS
<S> <C> <C>
Montgomery New Power Fund 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 Fund 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
Fund, check if it is planning to make a
distribution in the near future. Here's
why: If you buy shares of the Fund 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
Fund 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 Fund's appreciation.
16
<PAGE>
You can find more information about the Fund's investment policies in the
Statement of Additional Information (SAI), incorporated by reference in this
prospectus, which is available free of charge.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about the Fund, 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 Fund 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].
You can also find further information about the Fund in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected the Fund'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.
Corporate Headquarters:
The MONTGOMERY Funds
101 California Street
San Francisco, CA 94111-9361
Owl logo
The MONTGOMERY Funds
Invest wisely(R)
-----------------------------------------------
800.572.FUND [3863]
www.montgomeryfunds.com
-----------------------------------------------
SEC File Nos.: The Montgomery Funds 811-6011
Funds Distributor, Inc. 11/00
<PAGE>
---------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION FOR THE
MONTGOMERY NEW POWER FUND
---------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
THE MONTGOMERY FUNDS
--------------------------------------------------------------------------------
MONTGOMERY NEW POWER FUND
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
November __, 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 Power Fund (the
"Fund") 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 Fund, dated November __, 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 FUND.................................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..........................................29
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................32
DETERMINATION OF NET ASSET VALUE.............................................33
PRINCIPAL UNDERWRITER........................................................35
PERFORMANCE INFORMATION......................................................35
GENERAL INFORMATION..........................................................38
FINANCIAL STATEMENTS.........................................................39
APPENDIX.....................................................................40
B-2
<PAGE>
THE TRUST
The Montgomery Funds is an open-end management investment company
organized as a Massachusetts business trust on May 10, 1990, and is registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The Trust currently offers shares of beneficial interest, $0.01 par value
per share, in various series. This Statement of Additional Information pertains
to the Montgomery New Power Fund (the "Fund").
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Fund 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 Fund are described in detail in the
Prospectus. The following discussion supplements the discussion in the
Prospectus.
The Fund is a non-diversified series of The Montgomery Funds. The
achievement of the Fund's investment objective will depend upon market
conditions generally and on the Manager's analytical and portfolio management
skills.
Alternative Structures
The Fund 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 Fund and the Manager. The Fund 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 Fund has not
proposed instituting this alternative structure.
Portfolio Securities
Depositary Receipts, Convertible Securities and Securities Warrants.
The Fund 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 Fund's investment policies, the Fund's
investments in ADRs, EDRs and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted. The Fund may also invest in
convertible securities and securities warrants.
Other Investment Companies. The Fund may invest in securities issued by
other investment companies. Those investment companies must invest in securities
in which the Fund can invest in a manner consistent with the Fund's investment
objective and policies. Applicable provisions of the Investment Company Act
require that the Fund limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 10% of the value of the
Fund's total assets will be invested in the aggregate in securities of
B-3
<PAGE>
investment companies as a group; and (b) either (i) the Fund and affiliated
persons of the Fund not own together more than 3% of the total outstanding
shares of any one investment company at the time of purchase (and that all
shares of the investment company held by the Fund in excess of 1% of the
company's total outstanding shares be deemed illiquid), or (ii) the Fund not
invest more than 5% of its total assets in any one investment company and the
investment not represent more than 3% of the total outstanding voting stock of
the investment company at the time of purchase.
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 Fund 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 Fund 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 Fund.
The Fund does not intend to invest in other investment companies
unless, in the Manager's judgment, the potential benefits exceed associated
costs. As a shareholder in an investment company, the Fund bears its ratable
share of that investment company's expenses, including advisory and
administration fees, 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 Fund may purchase debt securities that complement
its objective of capital appreciation through anticipated favorable changes in
relative foreign exchange rates, in relative interest rate levels or in the
creditworthiness of issuers. Debt securities may constitute up to 35% of the
Fund'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 Fund may invest up to 5% of its total assets in debt
securities rated lower than investment grade. Subject to this limitation, the
Fund may invest in any debt security, including securities in default. After its
purchase by the Fund, a debt security may cease to be rated or its rating may be
reduced below that required for purchase by the Fund. A security downgraded
below the minimum level may be retained if determined by the Manager and the
Board of Trustees to be in the best interests of the Fund.
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 Fund and will be limited
to 5% of the Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, the Fund may invest in external (i.e., to foreign lenders) debt
obligations issued by the governments, 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.
U.S. Government Securities. The Fund 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 Fund generally
will have a lower
B-4
<PAGE>
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 Fund'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 Fund 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 Fund may invest in
structured notes and indexed securities. Structured notes are debt securities,
the interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent the Fund invests in these
securities, however, the Manager analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk.
Privatizations. The Fund 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 Fund, to
participate in privatizations may be limited by local law, or the terms for
participation may be less advantageous than for local investors. There can be no
assurance that privatization programs will be successful.
Special Situations. The Fund may invest in special situations. The Fund
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 Fund 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 Fund to invest directly. Investments in
special situations may be illiquid, as determined by the Manager based on
criteria reviewed by the Board of Trustees. The Fund 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 Fund 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 Fund will invest no
more
B-5
<PAGE>
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 Fund will reflect
these changes in market value.
Bonds rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of the Fund to sell the securities at fair
value either to meet redemption requests or to respond to changes in the economy
or financial markets and could adversely affect, and cause fluctuations in, the
per-share net asset value of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low-rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of the Fund to
achieve its investment objectives may, to the extent it invests in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if the Fund invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment-grade
securities. The prices of low-rated debt securities have been found to be less
sensitive to interest rate changes than higher-rated debt securities but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a sharper decline in the prices of low-rated debt
securities because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If the issuer of low-rated debt securities defaults, the Fund may
incur additional expenses to seek financial recovery. The low-rated bond market
is relatively new, and many of the outstanding low-rated bonds have not endured
a major business downturn.
Hedging and Risk Management Practices
The Fund typically will not hedge against the foreign currency exchange
risks associated with its investments in foreign securities. Consequently, the
Fund will be very sensitive to any changes in exchange rates for the currencies
in which its foreign investments are denominated or linked. The Fund 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 Fund 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 Fund might not enter
into such
B-6
<PAGE>
transactions. Such inopportune timing of utilization of hedging practices could
result in substantial losses to the Fund.
The Fund also may conduct its foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
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 Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When the Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, the Fund may enter into a forward contract to sell an amount of
that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when the Fund believes
that the U.S. dollar may suffer a substantial decline against a foreign
currency, the Fund may enter into a forward contract to buy that currency for a
fixed dollar amount.
In connection with the Fund's forward contract transactions, an amount
of the Fund's assets equal to the amount of its commitments will be held aside
or segregated to be used to pay for the commitments. Accordingly, the Fund
always will have cash, cash equivalents or liquid equity or debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of the Fund to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by the Fund than if it had not entered into
such contracts. The Fund generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. The Fund typically
will not hedge against movements in interest rates, securities prices or
currency exchange rates. The Fund may still occasionally purchase and sell
various kinds of futures contracts and options on futures contracts. The Fund
also may enter into closing purchase and sale transactions with respect to any
such contracts and options. Futures contracts may be based on various securities
(such as U.S. government securities), securities indices, foreign currencies and
other financial instruments and indices.
The 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 Fund will use futures contracts
and related options for bona fide hedging purposes within the meaning of CFTC
regulations, provided that the Fund may hold positions in futures contracts and
related options that do not fall within the definition of bona fide hedging
transactions if the aggregate initial margin and premiums required to establish
such positions will not exceed 5% of the Fund's net assets (after taking into
account unrealized profits and unrealized losses on any such positions) and that
in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded from such 5%.
B-7
<PAGE>
The Fund will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund for
which it expects to purchase. When used, the Fund's futures transactions
generally will be entered into only for traditional hedging purposes--i.e.,
futures contracts will be sold to protect against a decline in the price of
securities or currencies and will be purchased to protect the Fund against an
increase in the price of securities it intends to purchase (or the currencies in
which they are denominated). All futures contracts entered into by the Fund are
traded on U.S. exchanges or boards of trade licensed and regulated by the CFTC
or on foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While the Fund's
futures contracts on securities or currencies will usually be liquidated in this
manner, the Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge its positions, the Fund seeks to
establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Fund proposes to acquire. For example, when
interest rates are rising or securities prices are falling, the Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, the
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, the Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. The Fund
can purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency the Fund has acquired or
expects to acquire.
As part of its hedging strategy, the Fund also may enter into other
types of financial futures contracts if, in the opinion of the Manager, there is
a sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in the Fund's portfolio may be more or less volatile than prices
of such futures contracts, the Manager will attempt to estimate the extent of
this difference in volatility based on historical patterns and to compensate for
it by having the Fund enter into a greater or lesser number of futures contracts
or by attempting to achieve only a partial hedge against price changes affecting
the Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities can be substantially
offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of the Fund's portfolio securities could
be offset substantially by a decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives the
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives the Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
The Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. The Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
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Loss from investing in futures transactions by the Fund is potentially
unlimited.
The Fund will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
its qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. The Fund may
purchase put and call options on securities in which it has invested, on foreign
currencies represented in its portfolios and on any securities index based in
whole or in part on securities in which the Fund may invest. The Fund also may
enter into closing sales transactions in order to realize gains or minimize
losses on options it has purchased.
The Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities or a specified amount of a foreign
currency at a specified price during the option period.
The Fund may purchase and sell options traded on U.S. and foreign
exchanges. Although the Fund will generally purchase only those options for
which there appears to be an active secondary market, there can be no assurance
that a liquid secondary market on an exchange will exist for any particular
option or at any particular time. For some options, no secondary market on an
exchange may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that the Fund would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the Fund does 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 Fund's giving another party, in return for a premium, the
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against a price decline of the underlying security. However, by
writing a covered call option, the Fund gives up the opportunity, while the
option is in effect, to realize gain from any price increase (above the option
exercise price) in the underlying security. In addition, the Fund's ability to
sell the underlying security is limited while the option is in effect unless the
Fund effects a closing purchase transaction.
The Fund also may write covered put options that give the holder of the
option the right to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a put option but
will be obligated for as long as the option is outstanding to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise. In order to "cover" put options
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it has written, the Fund will cause its custodian to segregate cash, cash
equivalents, U.S. government securities or other liquid equity or debt
securities with at least the value of the exercise price of the put options. The
Fund will not write put options if the aggregate value of the obligations
underlying the put options exceeds 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of
the Fund's orders.
Equity-Linked Derivatives--SPDRs, WEBS, DIAMONDS and OPALS. The Fund
may invest in Standard & Poor's ("S&P") Depository Receipts ("SPDRs") and S&P's
MidCap 400 Depository Receipts ("MidCap SPDRs"), World Equity Benchmark Series
("WEBS"), Dow Jones Industrial Average instruments ("DIAMONDS") and baskets of
Country Securities ("OPALS"). Each of these instruments is a derivative security
whose value follows a well-known securities index or baskets of securities.
SPDRs and MidCap SPDRs are designed to follow the performance of S&P
500 Index and the S&P MidCap 400 Index, respectively. WEBS are currently
available in 17 varieties, each designed to follow the performance of a
different Morgan Stanley Capital International country index. DIAMONDS are
designed to follow the performance of the Dow Jones Industrial Average which
tracks the composite stock performance of 30 major U.S. companies in a diverse
range of industries.
OPALS track the performance of adjustable baskets of stocks owned by
Morgan Stanley Capital (Luxembourg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALS will receive semi-annual distributions
corresponding to dividends received on shares contained in the underlying basket
of stocks and certain amounts, net of expenses. On the maturity date of the
OPALS, the holders will receive the physical securities comprising the
underlying baskets. OPALS, like many of these types of instruments, represent an
unsecured obligation and therefore carry with them the risk that the
Counterparty will default.
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 Fund may enter into repurchase agreements.
The Fund's repurchase agreements will generally involve a short-term investment
in a U.S. government security or other high-grade liquid debt security, with the
seller of the underlying security agreeing to repurchase it at a mutually
agreed-upon time and price. The repurchase price is generally higher than the
purchase price, the difference being interest income to the Fund. Alternatively,
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on the date of
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the underlying security.
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Under each repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Manager, acting under the supervision of the Board
of Trustees, reviews on a periodic basis the suitability and creditworthiness,
and the value of the collateral, of those sellers with whom the Fund enters into
repurchase agreements to evaluate potential risk. All repurchase agreements will
be made pursuant to procedures adopted and regularly reviewed by the Board of
Trustees.
The Fund generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Fund regards repurchase agreements with
maturities in excess of seven days as illiquid. The Fund may not invest more
than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase agreement is
deemed to be a collateralized loan from the Fund to the seller of the security
subject to the repurchase agreement. It is not clear whether a court would
consider the security acquired by the Fund subject to a repurchase agreement as
being owned by the Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, the Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and the Fund has not perfected a security interest in
the security, the Fund may be required to return the security to the seller's
estate and be treated as an unsecured creditor. As such, the Fund would be at
risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Manager seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, the Fund
also runs the risk that the seller may fail to repurchase the security. However,
the Fund always requires collateral for any repurchase agreement to which it is
a party in the form of securities acceptable to it, the market value of which is
equal to at least 100% of the amount invested by the Fund plus accrued interest,
and the Fund makes payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement equals or exceeds the repurchase price (including interest)
at all times.
The Fund 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 Fund may enter into reverse
repurchase agreements. The Fund typically will invest the proceeds of a reverse
repurchase agreement in money market instruments or repurchase agreements
maturing not later than the expiration of the reverse repurchase agreement. This
use of proceeds
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involves leverage, and the Fund will enter into a reverse repurchase agreement
for leverage purposes only when the Manager believes that the interest income to
be earned from the investment of the proceeds would be greater than the interest
expense of the transaction. The Fund also may use the proceeds of reverse
repurchase agreements to provide liquidity to meet redemption requests when sale
of the Fund's securities is disadvantageous.
The Fund 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 Fund currently does not
intend to do so, the Fund 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 Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker. Loans are subject to termination at the option of the Fund or the
borrower at any time. Upon such termination, the Fund is entitled to obtain the
return of the securities loaned within five business days.
For the duration of the loan, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to 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 Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer.
While the Fund reserves the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Fund does not believe that its net asset values
will be adversely affected by its purchase of securities on a when-issued or
delayed delivery basis. The Fund 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 Fund are
held in cash pending the settlement of a purchase of securities, the Fund will
earn no income on these assets.
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The Fund may seek to hedge investments or to realize additional gains
through forward commitments to sell high-grade liquid debt securities it does
not own at the time it enters into the commitments. Such forward commitments
effectively constitute a form of short sale. To complete such a transaction, the
Fund must obtain the security which it has made a commitment to deliver. If the
Fund does not have cash available to purchase the security it is obligated to
deliver, it may be required to liquidate securities in its portfolio at either a
gain or a loss, or borrow cash under a reverse repurchase or other short-term
arrangement, thus incurring an additional expense. In addition, the Fund may
incur a loss as a result of this type of forward commitment if the price of the
security increases between the date the Fund enters into the forward commitment
and the date on which it must purchase the security it is committed to deliver.
The Fund will realize a gain from this type of forward commitment if the
security declines in price between those dates. The amount of any gain will be
reduced, and the amount of any loss increased, by the amount of the interest or
other transaction expenses the Fund may be required to pay in connection with
this type of forward commitment. Whenever the Fund engages in this type of
transaction, it will segregate assets as discussed above.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among others, repurchase agreements maturing in more
than seven days, certain restricted securities and securities that are otherwise
not freely transferable. Illiquid securities also include shares of an
investment company held by the Fund in excess of 1% of the total outstanding
shares of that investment company. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act"). Illiquid securities acquired by the Fund may include those that
are subject to restrictions on transferability contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that would not be freely marketable in the
United States, will not be considered illiquid. Where registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A-eligible restricted securities,
however, could
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adversely affect the marketability of such portfolio securities and result in
the Fund'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 Fund'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
Fund in addition to those described in the prospectus or elsewhere in this
Statement of Additional Information.
Foreign Securities
The Fund 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 Fund 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 Fund 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 Fund to make intended security purchases due to settlement difficulties
could cause it to miss attractive investment opportunities. Inability to sell
the Fund security due to settlement problems could result in loss to the Fund if
the value of the portfolio security declined, or result in claims against the
Fund if it had entered into a contract to sell the security. In certain
countries there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
United States. The securities markets of many of the countries in which the Fund
may invest may also be smaller, less liquid and subject to greater price
volatility than those in the 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.
B-14
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dollar results in a corresponding change in the U.S. dollar value of the Fund's
securities denominated in the currency. Such changes also affect the Fund's
income and distributions to shareholders. The Fund may be affected either
favorably or unfavorably by changes in the relative rates of exchange among the
currencies of different nations, and the Fund may therefore engage in foreign
currency hedging strategies. Such strategies, however, involve certain
transaction costs and investment risks, including dependence upon the Manager's
ability to predict movements in exchange rates.
Some countries in which the Fund may invest may also have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies has experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which the Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Exchange Rates and Policies
The Fund 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 Fund 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 Fund from repatriating invested capital and
dividends, withhold portions of interest and dividends at the source, or impose
other taxes, with respect to the Fund'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 Fund 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 Fund'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
B-15
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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 Fund 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 Fund 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 Fund may suffer a loss if the counterparty defaults.
Short Sales
The Fund does not expect to make significant use of short sales, but
the portfolio manager may, from time to time, engage in short sales when
believed to be appropriate. Short sales are transactions in which the Fund sells
a security or other asset which it does not own, in anticipation of a decline in
the market value of the security or other asset. The Fund will realize a profit
or incur a loss depending upon whether the price of the security sold short
decreases or increases in value between the date of the short sale and the date
on which the Fund must replace the borrowed security. Short sales are
speculative investments and involve special risks, including greater reliance on
the Manager's accurately anticipating the future value of a security. Short
sales also may result in the Fund's recognition of gain for certain portfolio
securities.
Until the Fund replaces a borrowed security, it will instruct its
custodian to identify as unavailable for investment cash, U.S. government
securities, or other liquid debt or equity securities such that the amount so
identified plus any amount deposited with a broker or other custodian as
collateral will equal the current value of the security sold short and will not
be less than the value of the security at the time it was sold short. Depending
on arrangements made with the broker or custodian, the Fund may not receive any
payments (including interest) on collateral deposited with the broker or
custodian.
Non-Diversified Fund
The Fund is a "non-diversified" investment company under the Investment
Company Act. This means that, with respect to 50% of the Fund'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 Fund'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 Fund'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.
B-16
<PAGE>
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the Investment Company Act. The Fund may not:
1. 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 Fund 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 Fund, to the extent not otherwise prohibited in the Prospectus or
this Statement of Additional Information, may invest in securities
secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein, including real estate
investment trusts, and may purchase or sell currencies (including
forward currency exchange contracts), futures contracts and related
options generally as described in 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 Fund.
(This is an operating policy that may be changed without
B-17
<PAGE>
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
Fund 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 Fund
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 Fund'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 Fund's total assets.
(This is an operating policy that may be changed without shareholder
approval.)
11. Except as described in the Prospectus and this Statement of Additional
Information, engage in short sales of securities. (This is an operating
policy that may be changed without shareholder approval, consistent
with applicable regulations.)
12. Purchase more than 10% of the outstanding voting securities of any one
issuer. (This is an operating policy that may be changed without
shareholder approval.)
13. Invest in commodities, except for futures contracts or options on
futures contracts if the investments are either (a) for bona fide
hedging purposes within the meaning of CFTC regulations or (b) for
other than bona fide hedging purposes if, as a result thereof, no more
than 5% of the Fund's total assets (taken at market value at the time
of entering into the contract) would be committed to initial deposits
and premiums on open futures contracts and options on such contracts.
To the extent these restrictions reflect matters of operating policy
that may be changed without shareholder vote, these restrictions may be amended
upon approval by the Board of Trustees and notice to shareholders.
B-18
<PAGE>
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Fund 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 Fund's net investment income,
substantially all of which will be declared as dividends to the Fund's
shareholders.
The amount of ordinary income dividend payments by the Fund is
dependent upon the amount of net investment income received by the Fund from its
portfolio holdings, is not guaranteed and is subject to the discretion of the
Fund's Board of Trustees. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
The Fund also may derive capital gains or losses in connection with
sales or other dispositions of its portfolio securities. Any net gain the Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from 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 Fund realizes a
net gain on transactions involving investments held for the period required for
long-term capital gain or loss recognition or otherwise producing long-term
capital gains and losses, the Fund will have a net long-term capital gain. After
deduction of the amount of any net short-term capital loss, the balance (to the
extent not offset by any capital losses carried over from the eight previous
taxable years) will be distributed and treated as long-term capital gains in the
hands of the shareholders regardless of the length of time the Fund's shares may
have been held by the shareholders.
The maximum long-term federal capital gains rate for individuals is 20%
with respect to capital assets held for more than 12 months. The maximum capital
gains rate for corporate shareholders is the same as the maximum tax rate for
ordinary income.
Any dividend or distribution per share paid by the Fund 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 Fund unless the shareholder has otherwise indicated. Investors
have the right to change their elections with respect to the reinvestment of
dividends and distributions by notifying the Transfer Agent in writing, but any
such change will be effective only as to dividends and other distributions for
which the record date is seven or more business days after the Transfer Agent
has received the written request.
Tax Information. The Fund 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 Fund's policy is to distribute to its shareholders all of its investment
company taxable income and any net realized capital gains for each fiscal year
B-19
<PAGE>
in a manner that complies with the distribution requirements of the Code, so the
Fund will not be subject to any federal income tax or excise taxes based on net
income. However, the Board of Trustees may elect to pay such excise taxes if it
determines that payment is, under the circumstances, in the best interests of
the Fund.
In order to qualify as a regulated investment company, the Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in 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 Fund's assets or 10% of the voting securities of the
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, the Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If the Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains
by the Fund will be taxable to shareholders whether made in cash or reinvested
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 Fund on
the reinvestment date. Fund distributions also will be included in individual
and corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Fund or any securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, the Fund will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required certifications on the
Account Application Form or with respect to which the Fund or the securities
dealer has been notified by the IRS that the number furnished is incorrect or
that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, the Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To
the extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
B-20
<PAGE>
If more than 50% in value of the total assets of the Fund at the end of
its fiscal year is invested in stock or other securities of foreign
corporations, the Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by the Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of any foreign income taxes paid by the Fund, and (ii) entitled
either to deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code, including certain holding period
requirements. In this case, shareholders will be informed in writing by the Fund
at the end of each calendar year regarding the availability of any credits on
and the amount of foreign source income (including or excluding foreign income
taxes paid by the Fund) to be included in their income tax returns. If 50% or
less in value of the Fund's total assets at the end of its fiscal year are
invested in stock or other securities of foreign corporations, the Fund will not
be entitled under the Code to pass through to its shareholders their pro rata
share of the foreign income taxes paid by the Fund. In this case, these taxes
will be taken as a deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. The Fund may
invest up to 10% of its total assets in the stock of foreign investment
companies. 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 Fund derives from
PFIC stock may be subject to a non-deductible federal income tax at the Fund
level. In some cases, the Fund may be able to avoid this tax by electing to be
taxed currently on its share of the PFIC's income, whether or not such income is
actually distributed by the PFIC. The Fund will endeavor to limit its exposure
to the PFIC tax by investing in PFICs only where the election to be taxed
currently will be made. Because it is not always possible to identify a foreign
issuer as a PFIC in advance of making the investment, the Fund may incur the
PFIC tax in some instances.
Hedging. The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by the Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by the Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
B-21
<PAGE>
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code, rather than
as capital gain or loss.
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. All or a portion of a loss realized upon the redemption of
shares of the Fund may be disallowed to the extent shares of the Fund are
purchased (including shares acquired by means of reinvested dividends) within 30
days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Fund. 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 Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the overall management of
the Fund, including establishing the Fund'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 Fund's daily operations, are appointed by
the Board of Trustees. The current Trustees and officers of the Trust performing
a policy-making function and their affiliations and principal occupations for
the past five years are set forth below:
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
B-22
<PAGE>
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.
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.
B-23
<PAGE>
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.
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.
B-24
<PAGE>
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 Fund and Funds Distributor, Inc., will receive commissions for
executing portfolio transactions for the Fund. The Trustees who are not
affiliated with the Manager or the Distributor receive an annual retainer and
fees and expenses for each regular Board of Trustees meeting attended. The
aggregate compensation paid by the Trust to each of the Trustees for the fiscal
year ended June 30, 2000, and the aggregate compensation to be paid to each of
the Trustees for the fiscal year ending June 30, 2001, 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, 2000
----------------------------------------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Fiscal Year Ending June 30, 2001
----------------------------------------------------------------------------------------------------------
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 $41,364 -- $65,000
---------------------------- -----------------------------------------------------------------------------
Andrew Cox $41,364 -- $65,000
---------------------------- -----------------------------------------------------------------------------
Cecilia H. Herbert $41,364 -- $65,000
---------------------------- -----------------------------------------------------------------------------
<FN>
--------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
B-25
<PAGE>
Shares of the Fund 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 Fund by Montgomery Asset Management LLC
(the "Manager"), pursuant to an Investment Management Agreement between the
Manager and The Montgomery Funds dated July 31, 1997 (the "Agreement").
The Agreement is in effect with respect to the Fund for two years after
the Fund's inclusion in its Trust's Agreement (on or around its beginning of
public operations) and then continue for 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 Fund, 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 Fund or the Manager upon 60 days' written notice, and
are automatically terminated in the event of its assignment as defined in the
Investment Company Act.
For services performed under the Agreement, the Fund pays the Manager a
management fee (accrued daily but paid when requested by the Manager) based upon
the average daily net assets of the Fund at the following annual rates:
--------------------------------------------------------------------------------
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
--------------------------------------------------------------------------------
Montgomery New Power Fund 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 Fund 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 Fund'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
Fund's investors. Any reductions made by the Manager in its fees are subject to
reimbursement by the Fund within the following three years provided the Fund is
able to effect such reimbursement and remain in compliance with the foregoing
expense limitations. The Manager generally seeks reimbursement for the oldest
reductions and waivers before payment by the Fund for fees and expenses for the
current year.
Operating expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions,
Rule 12b-1 fees, expenses incurred in connection with any merger or
reorganization or extraordinary expenses such as litigation.
B-26
<PAGE>
The Agreement was approved with respect to the Fund 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 Fund's ability to
effect such reimbursement and remain in compliance with applicable expense
limitations in place at that time. Second, the Manager must specifically request
the reimbursement from the Board of Trustees. Third, the Board of Trustees must
approve such reimbursement as appropriate and not inconsistent with the best
interests of the Fund and the shareholders at the time such reimbursement is
requested. Because of these substantial contingencies, the potential
reimbursements will be accounted for as contingent liabilities that are not
recordable on the balance sheet of the Fund until collection is probable; but
the full amount of the potential liability will appear in a footnote to the
Fund's financial statements. At such time as it appears probable that the Fund
is able to effect such reimbursement, that the Manager intends to seek such
reimbursement and that the Board of Trustees has or is likely to approve the
payment of such reimbursement, the amount of the reimbursement will be accrued
as an expense of the Fund for that current period.
Information regarding advisory fees actually paid to the Manager has
not been provided since the Fund was launched on May 31, 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.
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 Fund is
pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Fund.
Shareholder Services Plan. The Trust has adopted a Shareholder Services
Plan (the "Services Plan") with respect to the Fund. The Manager (or its
affiliate) serves as the service provider under the Services Plan and, as such,
receives any fees paid by the Fund pursuant to the Services Plan.
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 Fund.
Under the Services Plan, the covered shares of the Fund will pay a
continuing service fee to the Manager, the Distributor or other service
providers, in an amount, computed and prorated on a daily basis, equal to 0.25%
per annum of the average daily net assets of the covered shares of the Fund.
Such amounts are
B-27
<PAGE>
compensation for providing certain services to clients owning those shares of
the Fund, including personal services such as processing purchase and redemption
transactions, assisting in change of address requests and similar administrative
details, and providing other information and assistance with respect to the
Fund, including responding to shareholder inquiries.
The Distributor. Funds Distributor, Inc., the Distributor, may provide
certain administrative services to the Fund on behalf of the Manager. The
Distributor will also perform investment banking, investment advisory and
brokerage services for persons other than the Fund, including issuers of
securities in which the Fund may invest. These activities from time to time may
result in a conflict of interests of the Distributor with those of the Fund, and
may restrict the ability of the Distributor to provide services to the Fund.
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 Fund 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.
The Custodian. The Chase Manhattan Bank serves as principal Custodian
of the Fund'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 Fund 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 Fund 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 Fund: (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 Fund pays the Administrator an administrative fee based upon a
percentage of the average daily net assets of the Fund. The fee may vary from an
annual rate of 0.07% to 0.04% depending on the Fund and the level of assets.
B-28
<PAGE>
Chase Global Funds Services Company ("Chase"), 73 Tremont Street,
Boston, Massachusetts 02108, serves as the Sub-Administrator to the Fund
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 Fund. 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 Fund. 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 Fund. 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 Fund's assets,
(ii) calculating net asset values of the Fund, (iii) accounting for dividends
and distributions made by the Fund, and (iv) assisting the Fund'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 Fund was launched on May 31, 2000.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available. The
Manager determines which securities are to be purchased and sold by the Fund and
which broker-dealers are eligible to execute the Fund's portfolio transactions,
subject to the instructions of, and review by, the Fund and the Board of
Trustees. Purchases and sales of securities within the U.S. other than on a
securities exchange will generally be executed directly with a "market-maker"
unless, in the opinion of the Manager or the Fund, a better price and execution
can otherwise be obtained by using a broker for the transaction.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The
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<PAGE>
full range and quality of services available will be considered in making these
determinations, such as the firm's ability to execute trades in a specific
market required by the Fund, such as in an emerging market, the size of the
order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities, and other
factors.
Provided the Trust's officers are satisfied that the Fund is receiving
the most favorable price and execution available, the Manager may also consider
the sale of the Fund's shares as a 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 Fund is subject to rules adopted by
NASD Regulation, Inc.
While the Fund's general policy is to seek first to obtain the most
favorable price and execution available in selecting a broker-dealer to execute
portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Fund or to the Manager, even if the specific services were not imputed just to
the Fund and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, the Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to the Fund or
assist the Manager in carrying out its responsibilities to the Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Fund. 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 Fund.
Investment decisions for the Fund 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 Fund and for one or more of
such client accounts. The Manager and its personnel may have interests in one or
more of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Fund and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Manager's client accounts and the Fund seek to
acquire the same security at the same general time (especially if that security
is thinly traded or is a small-cap stock), the Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, the Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that the Fund is
purchasing or selling, each day's
B-30
<PAGE>
transactions in such security generally will be allocated between the Fund and
all such client accounts in a manner deemed equitable by the Manager, taking
into account the respective sizes of the accounts, the amount being purchased or
sold and other factors deemed relevant by the Manager. In many cases, the Fund's
transactions are bunched with the transactions for other client accounts. It is
recognized that in some cases this system could have a detrimental effect on the
price or value of the security insofar as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to participate in volume
transactions may produce better executions for the Fund.
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 Fund, sell decisions at the country level are dependent on the
results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of
factors including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and a
declining financial flexibility may also signal a sell.
Information regarding brokerage commissions has not been provided since
the Fund was launched on May 31, 2000.
The Fund 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 Fund.
However, brokers who execute brokerage transactions as described above may from
time to time effect purchases of shares of the Fund for its customers.
Depending on the Manager's view of market conditions, the Fund may or
may not purchase securities with the expectation of holding them to maturity,
although its general policy is to hold securities to maturity. The Fund may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i) suspend the
continued offering of Fund's shares, and (ii) reject purchase orders in whole or
in part when in the judgment of the Manager or the Distributor such suspension
or rejection is in the best interest of the Fund.
When in the judgment of the Manager it is in the best interests of the
Fund, an investor may purchase shares of the Fund by tendering payment in-kind
in the form of securities, provided that any such tendered securities are
readily marketable (e.g., the Fund will not acquire restricted securities),
their acquisition is consistent with the Fund's investment objective and
policies, and the tendered securities are otherwise
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<PAGE>
acceptable to the Manager. Such securities are acquired by the Fund only for the
purpose of investment and not for resale. For the purposes of sales of shares of
the Fund for such securities, the tendered securities shall be valued at the
identical time and in the identical manner that the portfolio securities of the
Fund are valued for the purpose of calculating the net asset value of the Fund's
shares. A shareholder who purchases shares of the Fund by tendering payment for
the shares in the form of other securities may be required to recognize gain or
loss for income tax purposes on the difference, if any, between the adjusted
basis of the securities tendered to the Fund and the purchase price of the
Fund's shares acquired by the shareholder.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as promptly as possible but no later than three days after
receipt by the Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectus, except that the Fund may
suspend the right of redemption or postpone the date of payment during any
period when (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 Fund pursuant to Section 22(e) of the Investment Company Act) making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable; or (iii) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Fund may
make payment partly in its portfolio securities with a current amortized cost or
market value, as appropriate, equal to the redemption price. Although the Fund
does not anticipate that 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 Fund 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 Fund's
portfolio securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Fund are available for purchase by any
retirement plan, including Keogh plans, 401(k) plans, 403(b) plans and
individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Fund through an IRA,
there is available through the Fund a prototype individual retirement account
and custody agreement. The custody agreement provides that DST Systems, Inc.
will act as custodian under the plan, and will furnish custodial services for an
annual maintenance fee per participating account of $10. (These fees are in
addition to the normal custodian charges paid by the Fund and will be deducted
automatically from each Participant's account.) For further details, including
the right to appoint a successor custodian, see the plan and custody agreements
and the IRA Disclosure Statement as provided by the Fund. An IRA that invests in
shares of the Fund may also be used by employers who have adopted a Simplified
Employee Pension Plan. Individuals or employers who wish to invest in shares of
the Fund under a custodianship with another bank or trust company must make
individual arrangements with such institution. 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.
B-32
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As noted in the Prospectus, the net asset value of shares of the Fund
generally will be determined at least once daily as of 4:00 P.M. eastern time
(or earlier when trading closes earlier), on each day the NYSE is open for
trading. It is expected that the NYSE will be closed on Saturdays and Sundays
and for New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The
Fund 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 Fund's net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which the Fund calculates its net asset value may occur between the
times when such securities are valued and the close of the NYSE that will not be
reflected in the computation of the Fund'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 Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Board of Trustees.
The Fund's 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 Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities and U.S. government securities held by the
Fund 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
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<PAGE>
from dealers, market transactions in comparable securities, analyses and
evaluations of various relationships between securities and yield-to-maturity
information.
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Board of Trustees.
If any securities held by the Fund are restricted as to resale or do
not have readily available market quotations, the Manager and the Trust's
Pricing 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 Fund could reasonably expect to
realize from an orderly disposition of such securities over a reasonable period
of time. The valuation procedures applied in any specific instance are likely to
vary from case to case. However, consideration is generally given to the
financial position of the issuer and other fundamental analytical data relating
to the investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by the Fund
in connection with such disposition). In addition, specific factors are also
generally considered, such as the cost of the investment, the market value of
any unrestricted securities of the same class (both at the time of purchase and
at the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board of Trustees in good faith will establish a conversion rate for such
currency.
All other assets of the Fund are valued in such manner as the Board of
Trustees in good faith 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 Fund's principal underwriter in a
continuous public offering of the Fund's shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, 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 Fund and the Distributor is in effect for the Fund 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 Fund (as
defined in the Investment Company Act), and (ii) a majority of the Trustees who
are not interested persons
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<PAGE>
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 Fund may be terminated without penalty by the parties thereto upon 60
days' written notice and is automatically terminated in the event of its
assignment as defined in the Investment Company Act. There are no underwriting
commissions paid with respect to sales of the Fund's shares. The Principal
Underwriter has not been paid any underwriting commissions for underwriting
securities of the Fund during the Fund's last three fiscal years.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Fund 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 Fund will be accompanied by information on
the Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from the Fund's inception of operations. The
Fund may also advertise aggregate and average total return information over
different periods of time. The Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of
$1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a 1-, 5- or
10-year period at the end of each
respective period (or fractional
portion thereof), assuming
reinvestment of all dividends and
distributions and complete
redemption of the hypothetical
investment at the end of the
measuring period.
Aggregate Total Return. The Fund's "aggregate total return" figures
represent the cumulative change in the value of an investment in the Fund for
the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of
$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 Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing
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<PAGE>
the Fund's performance with that of other investment companies should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The information regarding average annual total returns for the Fund has
not been provided since the Fund was launched on May 31, 2000.
Comparisons. To help investors better evaluate how an investment in the
Fund might satisfy their investment objectives, advertisements and other
materials regarding the Fund may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. Publications, indices and
averages, including but not limited to, the following may be used in discussion
of the Fund's performance or the investment opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of
the Morgan Stanley Capital International Indices, and one or
more of the International Finance Corporation Indices.
b) Bank Rate Monitor--A weekly publication which reports various
bank investments, such as certificate of deposit rates,
average savings account rates and average loan rates.
c) Lipper Mutual Fund Performance Analysis and Lipper Fixed
Income Fund Performance Analysis--A ranking service that
measures total return and average current yield for the mutual
fund industry and ranks individual mutual fund performance
over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report--Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and
government money funds.
e) Salomon Brothers Bond Market Roundup--A weekly publication
which reviews yield spread changes in the major sectors of the
money, government agency, futures, options, mortgage,
corporate, Yankee, Eurodollar, municipal, and preferred stock
markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices--Lehman Brothers fixed-income indices
may be used for appropriate comparisons.
g) other indices--including Consumer Price Index, Ibbotson,
Micropal, CNBC/Financial News Composite Index, MSCI EAFE Index
(Morgan Stanley Capital International, Europe, Australasia,
Far East Index--a capitalization-weighted index that includes
all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000 and IFC
Emerging Markets Database.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Fund's portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by the Fund to calculate its
figures.
B-36
<PAGE>
The Fund 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 Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Fund. From time to time, the Fund may publish
or distribute information and reasons supporting the Manager's belief that the
Fund may be appropriate for investors at a particular time. The information will
generally be based on internally generated estimates resulting from the
Manager's research activities and projections from independent sources. These
sources may include, but are not limited to, Bloomberg, Morningstar, Barings,
WEFA, consensus estimates, Datastream, Micropal, I/B/E/S Consensus Forecast,
Worldscope and Reuters as well as both local and international brokerage firms.
For example, the Fund may suggest that certain countries or areas may be
particularly appealing to investors because of interest rate movements,
increasing exports and/or economic growth. The Fund may, by way of further
example, present a region as possessing the fastest growing economies and may
also present projected gross domestic product (GDP) for selected economies.
Research. The Manager has developed its own tradition of intensive
research and has made intensive research one of the important characteristics of
the Montgomery Funds style.
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that crosses a number of the
Montgomery Funds and is reflected in the number of Montgomery Funds oriented
towards smaller capitalization businesses.
In-depth research, however, goes beyond gaining an understanding of
unknown opportunities. The portfolio analysts have also developed new ways of
gaining information about well-known parts of the domestic market. The growth
equity team, for example, has developed its own strategy and proprietary
database for analyzing the growth potential of U.S. companies, often large,
well-known companies.
From time to time, advertising and sales materials for the Montgomery
Funds may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (as of September 30,
2000 approximately $__ billion for retail and institutional investors in The
Montgomery Funds) and total shareholders invested in the Montgomery Funds (as of
September 30, 2000, around 200,000).
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund. Expenses
incurred in connection with the establishment and registration of shares of the
Fund constituting separate series of the Trust have been assumed by the Fund.
The Manager has agreed, to the
B-37
<PAGE>
extent necessary, to advance the organizational expenses incurred by the Fund
and will be reimbursed for such expenses during the first fiscal year after
commencement of the Fund's operations, subject to the Fund's expense limitation.
As noted above, The Chase Manhattan Bank (the "Custodian") acts as
custodian of the securities and other assets of the Fund. The Custodian does not
participate in decisions relating to the purchase and sale of securities by the
Fund.
DST Systems, Inc., 333 West 11th Street, Kansas City, Missouri 64105,
the Fund's Master Transfer Agent and Paying Agent.
_________________, 333 Market Street, San Francisco, California 94105,
is the independent auditor for the Fund.
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 Fund's assets for any shareholder held personally liable for
obligations of the Fund or Trust. The Declaration of Trust provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund or Trust and satisfy any
judgment thereon. All such rights are limited to the assets of the Fund. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the Trust as an investment company as distinguished from an operating company
would not likely give rise to liabilities in excess of the Fund's total assets.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is extremely remote because it is limited to the unlikely
circumstances in which both inadequate insurance exists and the Fund itself is
unable to meet its obligations.
Among the 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 October 31, 2000, to the knowledge of the Fund, the following
shareholders owned of record 5 percent or more of the outstanding shares of the
Fund:
--------------------------------------------------------------------------------
NAME AND ADDRESS OF RECORD OWNER NUMBER OF PERCENT
SHARES OWNED OF SHARES
--------------------------------------------------------------------------------
As of October 31, 2000, officers and directors of the Montgomery Funds
owned, in aggregate, of record more than 1% of the outstanding of the Fund.
B-38
<PAGE>
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 Fund. The Prospectus
and this Statement of Additional Information omit certain of the information
contained in the Registration Statements filed with the SEC. Copies of the
Registration Statements may be obtained from the SEC upon payment of the
prescribed fee.
FINANCIAL STATEMENTS
There are no financial statements for the Fund since it was launched on
May 31, 2000.
B-39
<PAGE>
Appendix
Description ratings for Standard & Poor's Ratings Group ("S&P");
Moody's Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P.
("Fitch") and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
B-40
<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-41
<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
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to
B-42
<PAGE>
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
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B-43
<PAGE>
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.
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.
B-44
<PAGE>
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Ratings
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
B-45
<PAGE>
Commercial Paper Ratings
Duff-1 The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having
very high certainty of timely payment with excellent liquidity
factors which are supported by ample asset protection. Risk
factors are minor.
Duff-2 Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are
small.
Duff-3 Paper rated Duff-3 is regarded as having satisfactory
liquidity and other protection factors. Risk factors are
larger and subject to more variation. Nevertheless, timely
payment is expected.
Duff-4 Paper rated Duff-4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of
variation.
Duff-5 Paper rated Duff-5 is in default. The issuer has failed to
meet scheduled principal and/or interest payments.
<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 is incorporated by
reference to Post-Effective Amendment No. 78.
(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.
<PAGE>
(n) Financial Data Schedule - Not applicable.
(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.
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
Dr. Friedrich Schmitz 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>
<CAPTION>
(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 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 28th day of September, 2000.
THE MONTGOMERY FUNDS
By: George A. Rio*
--------------
George A. Rio
President and Principal Executive Officer;
Treasurer and Principal Financial and
Accounting Officer
<TABLE>
<CAPTION>
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.
<S> <C> <C>
George A. Rio* President and September 28, 2000
-------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the September 28, 2000
------------------ Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee September 28, 2000
------------
Andrew Cox
Cecilia H. Herbert * Trustee September 28, 2000
--------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee September 28, 2000
--------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-------------------
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed.
</TABLE>
