As filed with the Securities and Exchange Commission on July 31, 1997
File Nos. 33-69686
811-8064
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 22
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
THE MONTGOMERY FUNDS II
(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)
JACK G. LEVIN
600 Montgomery Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to Rule 485(b)
X on July 31, 1997 pursuant to Rule 485(b)
____ 60 days after filing pursuant to Rule 485(a)(1)
____ 75 days after filing pursuant to Rule 485(a)(2)
____ on June 30, 1997 pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the Registrant's fiscal year
ended June 30, 1996 was filed on August 28, 1996.
----------
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
Total number of pages _____. Exhibit Index appears at_____.
<PAGE>
THE MONTGOMERY FUNDS II
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross-Reference Sheet for Montgomery Institutional Series: Emerging
Markets Portfolio
Cross-Reference Sheet for Montgomery Asset Allocation Fund
Part A - Combined Prospectus for Class P shares of Montgomery Asset
Allocation Fund
Part A - Supplement to Prospectus for Class R shares of
Montgomery Institutional Series: Emerging Markets Portfolio
Part A - Supplement to Prospectus for Class R shares of Montgomery
Asset Allocation Fund
Part B - Combined Statement of Additional Information for Class R,
Class P and Class L shares of Montgomery Asset Allocation
Fund
ii
<PAGE>
Part B - Supplement to Statement of Additional Information for
Montgomery Institutional Series: Emerging Markets Portfolio
Part C - Other Information
Signature Page
Exhibits
iii
<PAGE>
THE MONTGOMERY FUNDS II
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
Part A: Information Required in Prospectus
(Combined Prospectus for Class P shares of Montgomery Asset Allocation Fund)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- ------- ----- ----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Montgomery Funds," "Fees and Expenses of the
Funds"
3. Condensed Financial Financial Highlights
Information
4. General Description Cover Page, "Montgomery Funds,""The Funds'
Investment Objective and Policies," "Portfolio
Securities," "Other Investment Practices," "Risk
Considerations" and "General Information"
5. Management of "The Funds' Investment Objective and Policies,"
the Fund "Management of the Funds" and
"How to Invest in the Funds"
5A. Management's Discussion Not Applicable (contained in the Funds' Annual
of Fund Performance Report)
6. Capital Stock and "Montgomery Funds," "Dividends and Distributions,"
Other Securities "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Funds,"
Being Offered "How Net Asset Value is Determined,"
"General Information" and
"Backup Withholding Instructions"
8. Redemption or "How to Redeem an Investment in the Funds" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
</TABLE>
iv
<PAGE>
<TABLE>
PART B: Information Required in
Statement of Additional Information
(Combined Statement of Additional Information)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- ------- ----- ----------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information "The Trusts" and "General Information"
and History
13. Investment Objectives "Investment Objectives and Policies of the Funds,"
"Risk Considerations" and "Investment Restrictions"
14. Management of the "Trustees and Officers"
Registrant
15. Control Persons and "Trustees and Officers" and
Principal Holders of "General Information"
Securities
16. Investment Advisory "Investment Management and Other Services"
and Other Services
17. Brokerage Allocation "Execution of Portfolio Transactions"
18. Capital Stock and "The Trusts" and "General Information"
Other Securities
19. Purchase, Redemption "Additional Purchase and Redemption Information"
and Pricing of and "Determination of Net Asset Value"
Securities Being
Offered
20. Tax Status "Distributions and Tax Information"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED CLASS P PROSPECTUS
Montgomery Growth Fund
Montgomery Equity Income Fund
Montgomery Small Cap Opportunities Fund
Montgomery International Small Cap Fund
Montgomery International Growth Fund
Montgomery Emerging Markets Fund
Montgomery Select 50 Fund
Montgomery Asset Allocation Fund
Montgomery Short Duration Government Bond Fund
Montgomery Government Reserve Fund
---------------------------------------------------------------------
<PAGE>
[LOGO]
Prospectus
July 31, 1997
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND
TABLE OF CONTENTS
- -----------------------------------------------------
The Montgomery Funds ...................................................1
Fees and Expenses of the Funds..........................................4
Financial Highlights....................................................6
The Funds' Investment Objectives and Policies..........................12
Portfolio Securities...................................................16
Other Investment Practices.............................................20
Risk Considerations....................................................22
Management of the Funds................................................24
How To Contact the Funds...............................................28
How To Invest in the Funds.............................................29
How To Redeem an Investment in the Funds...............................31
Exchange Privileges and Restrictions...................................33
Brokers and Other Intermediaries.......................................34
How Net Asset Value is Determined......................................34
Dividends and Distributions............................................35
Taxation...............................................................36
General Information....................................................36
Backup Withholding ....................................................38
Glossary ..............................................................39
Each Fund's shares offered in this Prospectus (the Class P shares) are sold only
through financial intermediaries and financial professionals at net asset value
with no sales load, no commissions, and no redemption or exchange fees. The
Class P shares are subject to a Rule 12b-1 distribution fee as described in this
prospectus. The minimum initial investment in each Fund is $1,000, and
subsequent investments must be at least $100. The Manager or the Distributor may
waive these minimums. See "How to Invest in the Funds."
Each Fund is a separate series of either The Montgomery Funds or The Montgomery
Funds II, both open-end management investment companies, and managed by
Montgomery Asset Management, LLC (the "Manager"), a subsidiary of Commerzbank
AG. Fund Distributors, Inc., which is not affiliated with the Manager, is the
distributor of the Funds (the "Distributor"). Each Fund has its own investment
objective and policies designed to meet different investment goals. As with all
mutual funds, attainment of each Fund's investment objective cannot be assured.
Please read this Prospectus before investing and retain it for future reference.
A Statement of Additional Information dated July 31, 1997, as may be revised,
has been filed with the Securities and Exchange Commission, is incorporated by
this reference and is available without charge by calling (800) 572-FUND (3863).
If you are viewing the electronic version of this prospectus through an on-line
computer service, you may request a printed version free of charge by calling
(800) 572-FUND (3863).
The Internet address for The Montgomery Funds is www.xperts.montgomery.com/1.
The Securities and Exchange Commission maintains a web site (www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference, and other information regarding The Montgomery Funds and The
Montgomery Funds II.
An Investment in the Funds Is Neither Insured Nor Guaranteed by the U.S.
Government. There Can Be No Assurance That Montgomery Government Reserve Fund
Will Be Able to Maintain a Stable Net Asset Value of $1.00 per Share.
These Securities Have Not Been Approved or Disapproved by the Securities and
Exchange Commission or Any State Securities Commission Nor Has the Securities
and Exchange Commission or Any State Securities Commission Passed upon the
Accuracy or Adequacy of this Prospectus. Any Representation to the Contrary Is a
Criminal Offense.
<PAGE>
The following ten mutual funds (the "Funds") are offered in this Prospectus:
Fund
Number
Montgomery Emerging/
International Markets Funds
Emerging Markets Fund....................................................618
International Growth Fund................................................623
International Small Cap Fund.............................................628
Montgomery Multi-Strategy Funds
Asset Allocation Fund....................................................624
Select 50 Fund...........................................................629
Montgomery U.S. Equity Funds
Equity Income Fund.......................................................622
Growth Fund..............................................................621
Small Cap Opportunities Fund.............................................625
Montgomery U.S. Fixed-Income and
Money Market Funds
Government Reserve Fund..................................................619
Short Duration Govt Bond Fund............................................620
2
<PAGE>
The Emerging/International Market Funds
Montgomery Emerging Markets Fund
Invests primarily in equity securities of companies in countries having
economies and markets generally considered by the World Bank or the United
Nations to be emerging or developing.
Montgomery International Growth Fund
Invests primarily in equity securities of companies outside the United States
having total market capitalizations of more than $1 billion, sound fundamental
values and potential for long-term growth at a reasonable price.
Montgomery International Small Cap Fund
Invests primarily in equity securities of companies outside the U.S. having
total market capitalizations of less than $1 billion, sound fundamental values
and potential for long-term growth at a reasonable price.
The Multi-Strategy Funds
Montgomery Asset Allocation Fund
A Fund of Funds that allocates its investments among three asset
classes--domestic stocks, fixed-income securities and cash or cash equivalents
using Funds from The Montgomery Funds family.
Montgomery Select 50 Fund
Invests primarily in at least 50 different equity securities of companies of all
sizes throughout the world.
The U.S. Equity Funds
Montgomery Equity Income Fund
Invests primarily in income-producing equity securities of domestic companies.
Montgomery Growth Fund
Invests primarily in equity securities of domestic companies of all sizes and
emphasizes companies having a total market capitalization of $1 billion or more.
Montgomery Small Cap Opportunities Fund
Invests primarily in equity securities of small-capitalization domestic
companies (less than $1 billion).
The Fixed-Income Funds
Montgomery Government Reserve Fund
Invests only in U.S. government securities, repurchase agreements for U.S.
government securities and other money market funds investing exclusively in U.S.
government securities and such repurchase agreements. It seeks to maintain a
stable net asset value of $1.00 per share.
Montgomery Short Duration Government Bond Fund
Invests primarily in U.S. government securities and maintains an average
portfolio effective duration comparable to or less than three-year U.S. Treasury
notes. It targets higher yields than money market funds generally with less
fluctuation in the value of its shares than long-term bond funds. This Fund does
not maintain a stable net asset value of $1.00 per share.
3
<PAGE>
Fees And Expenses Of The Funds
Shareholder Transaction Expenses
<TABLE>
An investor would pay the following charges when buying or redeeming shares of a
Fund:
<CAPTION>
Maximum Sales Load Maximum Sales Load Imposed
Imposed on Purchases on Reinvested Dividends Deferred Sales Load Redemption Fees+ Exchange Fees
<S> <C> <C> <C> <C>
None None None None None
- ----------------
<FN>
+ Shareholders effecting redemptions via wire transfer may be required to
pay fees, including the wire fee and other fees, that will be directly
deducted from redemption proceeds. Shareholders who request redemption
checks to be sent by Federal Express may be required to pay a $10 fee
that will be directly deducted from redemption proceeds. The Montgomery
Funds reserve the right upon 60 days' advance notice to shareholders to
impose a redemption fee of up to 1% on shares redeemed within 90 days
of purchase.
</FN>
</TABLE>
<TABLE>
Annual Fund Operating Expenses (as a percentage of average net assets):
<CAPTION>
Other
Expenses
(after Total Fund Operating Expenses
reimbursement (after reimbursement
Management Fee* 12b-1 Fee unless noted)* unless noted)*
<S> <C> <C> <C> <C>
The Emerging/International Markets Funds
Emerging Markets Fund 1.06% 0.25% 0.66%+ 1.97%+
International Growth Fund 1.10% 0.25% 0.55% 1.90%
International Small Cap Fund 1.25% 0.25% 0.65% 2.15%
The Multi-Strategy Funds
Asset Allocation Fund 0.00% 0.25% 1.30%#** 1.55%#
Select 50 Fund 1.25% 0.25% 0.55% 2.05%
The U.S. Equity Funds
Equity Income Fund 0.60% 0.25% 0.25% 1.10%
Growth Fund 0.96% 0.25% 0.39%+ 1.60%+
Small Cap Opportunities Fund 1.20% 0.25% 0.30% 1.75%
The Fixed-Income and Money Market Funds
Government Reserve Fund 0.38% 0.25% 0.22% 0.85%
Short Duration Government Bond Fund 0.50% 0.25% 0.20% 0.95%
This table is intended to assist the investor in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's share price. Each Fund estimates that it will have
the expenses listed (expressed as a percentage of average net assets) for the
current fiscal year. Because Rule 12b-1 distribution charges are accounted for
on a class-level basis (and not on an individual shareholders-level basis),
individual long-term investors in the Class P shares of the Fund may over time
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. ("NASD"), even
though all shareholders of that Class in the aggregate will not. This is
recognized and permitted by the NASD.
<FN>
- -----------------
+ These figures show actual expenses; no reimbursements or waivers applied.
# Even if the total expenses of the Underlying Funds exceed 1.10% for the
Montgomery Asset Allocation Fund, the Manager has agreed to limit the
Montgomery Asset Allocation Fund's Total Fund Operating Expenses to 1.55%.
The total expenses for the Underlying Funds for the Montgomery Asset
Allocation Fund (currently estimated to be 1.10%) will depend on the actual
expenses of the Underlying Funds and how the Funds' assets are allocated
among those Underlying Funds.
* Expenses for the Funds are based on actual expenses and expense limitations
for the fiscal year ended June 30, 1996 for the Class P shares (or, if no
Class P shares were outstanding, for another class of shares but adjusted
to include the Rule 12b-1 fee.) The Manager will reduce its fees and may
4
<PAGE>
absorb or reimburse a Fund for certain expenses to the extent necessary to
limit total annual fund operating expenses to the amount indicated in the
table for a Fund. A Fund is required to reimburse the Manager for any
reductions in the Manager's fee only during the three years following that
reduction and only if such reimbursement can be achieved within the
foregoing expense limits. The Manager generally seeks reimbursement for the
oldest reductions and waivers before payment for fees and expenses for the
current year. Absent reduction and including the Rule 12b-1 fee for the
Class P Shares, actual total Fund operating expenses for the period ended
June 30, 1996 (annualized) would have been as follows: Montgomery Equity
Income Fund, 1.70% (0.85% other expenses); Montgomery Small Cap
Opportunities Fund, 2.41% (0.96% other expenses); Montgomery International
Growth Fund, 3.16% (1.81% other expenses); Montgomery International Small
Cap Fund, 3.01% (1.53% other expenses); Montgomery Asset Allocation Fund,
1.80% (0.95% other expenses); Montgomery Select 50 Fund, 2.36% (0.86% other
expenses); Montgomery Short Government Bond Fund, 2.50% (1.05% other
expenses) and Montgomery Government Reserve Fund, 0.99% (0.34% other
expenses). The Manager may terminate these voluntary reductions at any time.
See "Management of the Funds."
** Estimated expenses of Montgomery Asset Allocation Fund (excluding Rule
12b-1 fees and expenses related to the Underlying Funds and after
reimbursement) is 0.20%. Estimated expenses related to the Underlying Funds
for Montgomery Asset Allocation Fund is 1.10%.
</FN>
</TABLE>
Example of Expenses for the Funds
<TABLE>
Assuming, hypothetically, that each Fund's annual return is 5% and that its
operating expenses are as set forth above, an investor buying $1,000 of a Fund's
shares would have paid the following total expenses upon redeeming such shares:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
The Emerging/International Markets Funds
Emerging Markets Fund $20 $62 $106 $230
International Growth Fund $19 $60 $103 $222
International Small Cap Fund $22 $67 $115 $248
The Multi-Strategy Funds
Asset Allocation Fund $16 $49 $84 $185
Select 50 Fund $21 $64 $110 $238
The U.S. Equity Funds
Equity Income Fund $11 $35 $61 $134
Growth Fund $16 $50 $87 $190
Small Cap Opportunities Fund $18 $55 $95 $206
The Fixed-Income and Money Market Funds
Government Reserve Fund $9 $27 $47 $105
Short Duration Government Bond Fund $9 $27 $47 $105
</TABLE>
This example is to show the effect of expenses. This example does not represent
past or future expenses or returns. Actual expenses and returns may vary.
5
<PAGE>
Financial Highlights
Selected Per Share Data and Ratios
<TABLE>
The following financial information for the periods ended June 30, 1992
through June 30, 1996 was audited by Deloitte & Touche LLP, whose report, dated
August 16, 1996, appears in the 1996 Annual Report of the Funds. The financial
information for periods indicated with the note "R" relate to another class of
shares of the Funds not subject to the Class P Rule 12b-1 fee because the Class
P shares were not offered during those periods.
EMERGING MARKETS FUND
<CAPTION>
Period Ending FISCAL YEAR ENDED JUNE 30
SELECTED PER SHARE DATA FOR THE December 31,----------------------------------------------------------
YEAR OR PERIOD ENDED: 1996
(UNAUDITED) 1996(a) 1995++R 1994R 1993R 1992(a)R
<S> <C> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $14.19 $12.62 $13.68 $11.07 $9.96 $10.00
Net investment income/(loss) 0.01 0.01 0.03 (0.03) 0.07 0.03
Net realized and unrealized gain/(loss) on invesments (0.31) 1.56 0.25## 2.92 1.05 (0.07)
Net increase/(decrease) in net assets resulting
from investment operations (0.30) 1.57 0.28 2.89 1.12 (0.04)
Distributions:
Dividends from net investment income (0.06) -- -- -- (0.01) --
Distributions from net realized capital gains -- -- (0.42) (0.28) (0.00)# --
Distributions in excess of net realized capital gains -- -- (0.37) -- -- --
Total distributions (0.06) -- (0.79) (0.28) (0.01) --
Net asset value -- end of year $13.83 $14.19 $13.17 $13.68 $11.07 $9.96
Total Return** (2.12)% 12.44% 1.40% 26.10% 11.27% (0.40)%
Ratios to Average Net Assets/Supplemental Data
Net assets, end of year (in 000's) $ 7 $ 2 $998,083 $654,960 $206,617 $54,625
Ratio of net investment income/(loss) (0.22)%+ 0.33%+ 0.23% (0.14)% 0.66% 1.70%+
to average net assets
Ratio of expenses to average net assets 1.92 %+ 1.97%+ 1.80% 1.85% 1.90% 1.90%+
Portfolio turnover rate 36.30% 109.92% 92.09% 63.79% 21.40% 0.19%
Average commission rate paid+++ $0.0007 $0.0007 N/A N/A N/A N/A
Net investment income/(loss) before deferral of
fees and absorption of expenses by Manager -- -- -- -- $0.06 $0.01
Expense ratio before deferral of fees by Manager
including interest expense -- -- -- -- 1.93% 2.80%+
Expense ratios including interest expense -- -- -- -- -- --
- --------------
<FN>
(a) The Emerging Market Fund's Class R and Class P Shares commenced operations
on March 1, 1992 and March 12, 1996, respectively.
(b) The International Growth Fund's Class P Shares commenced operations on March
12, 1996
(c) The International Small Cap Fund's Class R Shares commenced operations on
September 30, 1993.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH
FUND INTERNATIONAL SMALL CAP FUND
Period Ending Fiscal Year Ended Period Ending FISCAL YEAR ENDED JUNE 30
December 31, 1996 June 30, December 31, ------------------------------------------------
(UNAUDITED) 1996(b) 1996R
(UNAUDITED) 1996R 1995R 1994(c)R
<S> <C> <C> <C> <C> <C> <C>
$15.31 $13.66 $14.86 11.75 $12.02 $12.00
0.00 0.00# (0.06) 0.03 0.12 0.00#
0.77 1.65 0.33 3.10 (0.39) 0.02
0.77 1.65 0.27 3.13 (0.27) 0.02
-- -- -- (0.02) (0.00)# --
(1.68) -- -- -- -- --
-- -- -- -- -- --
(1.68) -- -- (0.02) (0.00)# --
$14.40 15.31 $15.13 14.86 $11.75 $12.02
5.71% 12.08% 1.82% 26.68% (2.23)% 0.17%
$ 1 $ 1 $40,500 $41,640 $28,516 $34,555
(0.20)%+ 0.01%+ (0.78)%+ 0.20% 0.95% 0.04%+
1.91%+ 1.90%+ 1.91%+ 1.90% 1.90% 1.90%+
42.35% 238.91% 37.79% 177.36% 156.13% 123.50%
$0.0227 N/A $0.0142 $0.0123 N/A N/A
$(0.08) ($0.05) (0.16) ($0.08) $0.05 ($0.02)
3.01%+ 3.16%+ 3.16% 2.76% 2.50% 2.32%+
-- -- -- 1.96% 1.91% 1.99%+
- ------------
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ Per share numbers have been calculated using the average shares method,
which more appropriately represents the per share data for the period since
the use of the undistributed income method did not accord with the results
of operations.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
## The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
ASSET ALLOCATION FUND SELECT 50 FUND
<CAPTION>
FISCAL YEAR ENDED
PERIOD ENDING JUNE 30 PERIOD ENDING FYE
SELECTED PER SHARE DATE FOR THE DECEMBER 31, DECEMBER 31, June 30
YEAR OR PERIOD ENDED: 1996 -------------------------- 1996(b) 1996(b)R
(UNAUDITED) (UNAUDITED)
1996(a) 1995R 1994(a)R
<S> <C> <C> <C> <C> <C> <C>
Net asset value-- beginning of year $19.33 $17.86 $12.24 $12.00 $15.89 $12.00
Net investment income/(loss) 0.21 0.09 0.25 0.06 -- 0.06
Net realized and unrealized gain (loss) on investments 0.58 1.38 4.11 0.18 0.14 4.45
Net increase (decrease) in net assets resulting
from investment operations 0.79 1.47 4.36 0.24 0.14 4.51
Distributions:
Dividends from net investment income (0.34) -- (0.17) -- -- (0.04)
Distributions from net realized capital gains (1.66) -- (0.10) -- -- --
Distribution in excess of net realized capital gains -- -- -- -- -- (0.01)
Total distributions (2.00) -- (0.27) -- -- (0.05)
Net asset value -- end of year $18.12 $19.33 $16.33 $12.24 $16.03 $16.46
Total return** 4.18% 8.23% 35.99% 2.00% 0.88% 37.75%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $ 48 $ 43 $60,234 $1,548 $ 51 $77,955
Ratio of net investment income (loss) 2.37%+ 1.60%+ 3.43% 2.54%+ (0.46)%+ 0.42%+
to average net assets
Ratio of expenses to average net assets, 1.55%+ 1.55%+ 1.30% 1.30%+ 2.06%+ 1.80%+
excluding interest expense
Portfolio turnover rate 93.70% 225.91% 95.75% 190.94% 85.34% 105.98%
Average commission rate paid+++ $0.0603 $0.0595 N/A N/A $0.0070 $0.0097
Net investment income/(loss) before deferral of
fees and absorption of expenses by Manager $0.20 $0.08 $0.19 $(0.11) $(0.01) $0.02
Expense ratio before deferral of fees and absorption
of expenses by Manager, including interest expense 1.84%+ 1.80%+ 2.07% 9.00%+ 2.32%+ 2.11%+
Expense ratios including interest expense 1.67%+ 1.67%+ 1.31% 1.43%+ -- --
- ----------------
<FN>
(a) The Asset Allocation Fund's Class R and Class P Shares commenced operations
on March 31, 1994 and January 3, 1996, respectively.
(b) The Select 50 Fund's Class R and Class P Shares commenced operations on
October 2, 1995 and December 12, 1996, respectively.
(c) The Equity Income Fund's Class R and Class P Shares commenced operations on
September 30, 1994 and March 12, 1996, respectively.
(d) The Growth Fund's Class R and Class P Shares commenced operations on
September 30, 1993 and January 12, 1996, respectively.
(e) The Small Cap Opportunities Fund's Class R and Class P Shares commenced
operations on December 29, 1995 and July 29, 1996, respectively.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
EQUITY INCOME FUND GROWTH FUND SMALL CAP
OPPORTUNITIES FUND
<CAPTION>
PERIOD ENDING
PERIOD ENDING FISCAL YEAR ENDED DECEMBER 31, FISCAL YEAR ENDED
DECEMBER 31, 1996 JUNE 30 1996 JUNE 30 Period Ending FYE
(UNAUDITED) --------------------- (UNAUDITED) ------------------------------- December 31, 1996 June 30
1996(c) 1995(c)R 1996(d) 1995R 1994(d)R (Unaudited)(e) 1996(e)#R
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$16.09 $15.66 $12.00 $21.94 $19.22 $15.27 $12.00 $14.37 $12.00
0.21 0.08 0.31 0.04 0.03 0.12 0.04 (0.08) 0.02
1.51 0.35 1.38 1.06 2.69 3.91 3.31++ 2.18 3.78++
1.72 0.43 1.69 1.10 2.72 4.03 3.35 2.10 3.80
(0.21) -- (0.31) (0.10) -- (0.07) (0.01) (0.00)## --
(1.56) -- -- (2.77) -- (0.07) -- -- --
-- -- -- -- -- -- (0.07) -- --
(1.77) -- (0.31) (2.87) -- (0.14) (0.08) (0.00)## --
$16.04 $16.09 $13.38 $20.17 $21.94 $19.16 $15.27 $16.47 $15.80
11.22% 2.75% 14.26% 5.04% 14.15% 26.53% 27.98% 14.64% 31.67%
$ 136 $ 2 $6,383 $ 139 $ 82 $878,776 $149,103 $ 6 $136,140
2.85%+ 2.78%+ 4.06%+ 0.44%+ 0.53%+ 0.98% 1.09%+ (1.19)%+ 0.23%+
1.10%+ 1.10%+ 0.84%+ 1.58%+ 1.60%+ 1.50% 1.49%+ 1.76%+ 1.50%+
26.46% 89.77% 29.46% 43.75% 118.14% 128.36% 110.65% 86.20% 81.29%
$0.0595 $0.0423 N/A $0.0594 $0.0596 N/A N/A $0.0556 $0.0578
$0.07 $0.06 $0.13
-- -- -- $0.03 ($0.10) ($0.04)
1.70%+ 1.70%+ 3.16%+ -- -- -- 1.79%+ 2.11%+ 2.16%+
-- -- -- -- -- -- -- -- --
- ----------------
<FN>
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Per share numbers have been calculated using the average shares method,
which more appropriately represents the per share data for the period since
the use of the undistributed income method did not accord with the results
of operations.
## Amount represents less than $0.01 per share.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
GOVERNMENT RESERVE FUND
<CAPTION>
Period Ending Fiscal Year Ended June 30
December 31, 1996 ------------------------------------------------------------
Selected Per Share Data for the Year or (Unaudited) 1996(a) 1995R 1994R 1993(a)R
Period Ended:
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income 0.024 0.014 0.049 0.029 0.024
Net realized and unrealized gain (loss) on investments 0.000## 0.000## 0.000## 0.000## 0.000##
Net increase in net assets resulting
from investment operations 0.024 0.014 0.049 0.029 0.024
Distributions:
Dividends from net investment income (0.024) (0.014) (0.049) (0.029) (0.024)
Distributions in excess of net investment income -- -- -- -- --
Distributions from net realized capital gains -- -- -- -- --
Distribution in excess of net realized capital gains -- -- -- -- --
Distributions from capital -- -- -- -- --
Total distributions (0.024) (0.014) (0.049) (0.029) (0.024)
Net asset value--end of year $1.00 $1.00 $1.00 $1.00 $1.00
Total return** 2.48% 1.38% 4.97% 2.96% 2.41%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $ 1 $ 1 $258,956 $211,129 $124,795
Ratio of net investment income 4.66%+ 4.91%+ 4.92% 2.99% 2.96%+
to average net assets
Ratio of expenses to average net assets, 0.85%+ 0.85%+ 0.60% 0.60% 0.38%+
excluding interest expense
Portfolio turnover rate -- -- -- -- --
Net investment income before deferral of fees and
absorption of expenses by Manager $0.023 $0.013 $0.047 $0.028 $0.013
Expense rate before deferral of fees and absorption of
expenses by manager, including interest expense 0.97%+ 0.99%+ 0.79% 0.71% 0.77%+
Expense ratios including interest expense -- -- 0.63% -- --
- -----------------
<FN>
(a) The Government Reserve Fund's Class R and Class P Shares commenced
operations on September 14, 1992 and March 12, 1996, respectively.
(b) The Short Duration Government Bond Fund's Class R and Class P Shares
commenced operations on December 18, 1992 and March 12, 1996, respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized
# Amount represents less than $0.01 per share.
## Amount represents less than $0.001 per share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
SHORT DURATION GOVERNMENT BOND FUND
<CAPTION>
Period Ending FISCAL YEAR ENDED JUNE 30
December 31, 1996 --------------------------------------------------------------------------------------------------------
(Unaudited) 1996(b) 1995 1994R 1993(b)R
<S> <C> <C> <C> <C> <C>
$9.92 $9.98 $9.80 $10.23 $10.00
0.28 0.16 0.62 0.61 0.33
0.11 (0.05) 0.16 (0.34) 0.23
0.39 0.11 0.78 0.27 0.56
(0.30) (0.17) (0.62) (0.56) (0.33)
-- -- (0.07) --
-- -- -- -- --
-- -- -- (0.07) --
-- -- (0.01) -- (0.00)#
(0.30) (0.17) (0.63) (0.70) (0.33)
$10.01 $9.92 $9.95 $9.80 $10.23
3.95% 1.12% 8.28% 2.49% 5.66%
$ 1 $ 1 $17,093 $21,937 $22,254
5.59%+ 5.63%+ 6.41% 5.93% 6.02%+
0.86%+ 0.85%+ 0.47% 0.25% 0.22%+
202.74% 349.62% 284.23% 603.07% 213.22%
$0.25 $0.14 $0.54 $0.51 $0.27
2.10%+ 2.56%+ 2.23% 1.75% 2.07%+
1.60%+ 1.80%+ 1.38% 0.71% --
</TABLE>
11
<PAGE>
The Funds' Investment Objectives And Policies
The investment objective and general investment policies of each Fund are
described below. Specific portfolio securities that may be purchased by the
Funds are described in "Portfolio Securities" beginning on page 16. Specific
investment practices that may be employed by the Funds are described in "Other
Investment Practices" beginning on page 20. Certain risks associated with
investments in the Funds are described in those sections as well as in "Risk
Considerations" beginning on page 22. Certain Terms Used in the Prospectus Are
Defined in the Glossary Found at the End of this Prospectus.
<TABLE>
SUMMARY COMPARISON OF FUNDS
<CAPTION>
Anticipated Maximum Typical Market
Equity Debt Capitalization of
Fund Name Exposure Exposure Focus Portfolio Companies
<S> <C> <C> <C> <C>
The Emerging/International Market Funds
Emerging Markets Fund 65-100% 35% Foreign Emerging Growth Any size
International Growth Fund 65-100% 35% Foreign Growth Over $1 Billion
International Small Cap Fund 65-100% 35% Foreign Small-Cap Less than $1 Billion
The Multi-Strategy Funds
Asset Allocation Fund 20-80% 20-80% Balanced Any size
Select 50 Fund 65-100% 35% Worldwide Growth Any size
The U.S. Equity Funds
Equity Income Fund 65-100% 35% Large-Cap Dividend Over $1 Billion
Growth Fund 65-100% 35% Growth Over $1 Billion
Small Cap Opportunities Fund 65-100% 35% Small-Cap Less than $1 Billion
The Fixed-Income and Money Market Funds
Government Reserve Fund 0% 100% Income N/A
Short Duration Government Bond Fund 0% 100% Income N/A
</TABLE>
The Emerging/International Markets Funds
Montgomery Emerging Markets Fund (the "Emerging Markets Fund")
The investment objective of the Emerging Markets Fund is capital appreciation
which, under normal conditions it seeks by investing at least 65% of its total
assets in equity securities of Emerging Market Companies. Under normal
conditions, the Emerging Markets Fund maintains investments in at least six
emerging market countries at all times and invests no more than 35% of its total
assets in any one emerging market country. The Manager currently regards the
following to be emerging market countries: Latin America (Argentina, Brazil,
Chile, Colombia, Costa Rica, Jamaica, Mexico, Peru, Trinidad and Tobago,
Uruguay, Venezuela); Asia (Bangladesh, China, India, Indonesia, Korea, Malaysia,
Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam);
southern and eastern Europe (Czech Republic, Greece, Hungary, Poland, Portugal,
Russia, Turkey); the Middle East (Israel, Jordan); and Africa (Egypt, Ghana,
Ivory Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia, Zimbabwe). In the
future, the Fund may invest in other emerging market countries.
This Fund uses a proprietary, quantitative asset allocation model created by the
Manager. This model employs mean- variance optimization, a process used in
developed markets based on modern portfolio theory and statistics. Mean-variance
optimization helps determine the percent of assets to invest in each country to
maximize expected returns for a given risk level. The Fund's aims are to invest
in those countries that are expected to have the highest risk/reward trade-off
when
12
<PAGE>
incorporated into a total portfolio context. This "top-down" country selection
is combined with "bottom-up" fundamental industry analysis and stock selection
based on original research and publicly available information and company
visits.
This Fund invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Portfolio Securities," "Risk Considerations" and the
Appendix in the Statement of Additional Information.
This Fund may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in Emerging Market Companies under debt conversion programs
sponsored by such governments. The Fund deems securities that are convertible to
equity investments to be equity derivative securities.
Montgomery International Growth Fund (the "International Growth Fund")
The investment objective of the International Growth Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations over $1 billion. This Fund generally invests
the remaining 35% of its total assets in a similar manner but may invest those
assets in equity securities of U.S. companies, in lower-capitalization companies
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth, return on
capital, balance sheet, financial and accounting policies, overall financial
strength, industry sector, competitive advantages and disadvantages, research,
product development and marketing, new technologies or services, pricing
flexibility, quality of management, and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. The Fund also will use a strategic allocation of assets among
countries based on fundamental and quantitative research. See "Risk
Considerations."
Montgomery International Small Cap Fund (the "International Small Cap Fund")
The investment objective of the International Small Cap Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of companies outside the United States
having total market capitalizations of less than $1 billion. The Fund generally
invests the remaining 35% of its total assets in a similar manner but may invest
those assets in companies having market capitalizations of $1 billion or more,
or in debt securities, including up to 5% of its total assets in debt securities
rated below investment grade. See "Portfolio Securities" and "Risk
Considerations."
This Fund targets companies with potential for above average, long-term growth
in sales and earnings on a sustained basis with securities reasonably priced at
the time of purchase, in the Manager's opinion, compared to the potential for
capital appreciation. In evaluating investments, the Fund considers a number of
factors, including a company's per-share sales and earnings growth; return on
capital; balance sheet; financial and accounting policies; overall financial
strength; industry sector; competitive advantages and disadvantages; research,
product development and marketing; new technologies or services; pricing
flexibility; quality of management; and general operating characteristics.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries outside the U.S., but no country may represent more than 40%
of its total assets. The Manager uses its financial expertise and research
capabilities in markets throughout the world in attempting to identify those
countries, currencies and companies providing the greatest potential for
long-term growth. See "Risk Considerations."
The Multi-Strategy Funds
Montgomery Asset Allocation Fund (the "Asset Allocation Fund")
The investment objective of the Asset Allocation Fund is to seek high total
return, while also seeking to reduce risk, through a strategic or active
allocation of assets among domestic stocks, debt instruments and cash or cash
equivalents. The Fund is a "fund of funds" which means the Fund will not invest
directly in securities but will instead invest in a diversified group of three
Funds from The Montgomery Funds family (each, an "Underlying Fund") the Manager
considers to be
13
<PAGE>
<TABLE>
appropriate investments for achieving the Asset Allocation Fund's investment
objective. The Asset Allocation Fund adjusts the proportion of its investments
in each of these categories as needed to respond to current market conditions,
primarily by changing its allocation percentage among the different Underlying
Funds. The following table illustrates the anticipated allocation methodology:
<CAPTION>
Asset Allocation Fund Allocation
- --------------------------------------------- ------------------------------- -----------------------------------------------------
Investment Anticipated Range of Underlying
Focus Asset Allocation Fund
- --------------------------------------------- ------------------------------- -----------------------------------------------------
<S> <C> <C>
Domestic stocks 20% to 80% Growth Fund
- --------------------------------------------- ------------------------------- -----------------------------------------------------
Debt instruments 20% to 80% Total Return Bond Fund or other investment grade bond
funds advised by the Manager
- --------------------------------------------- ------------------------------- -----------------------------------------------------
Cash and cash equivalents 0% to 50% Government Reserve Fund
- --------------------------------------------- ------------------------------- -----------------------------------------------------
</TABLE>
The Manager will implement its allocation strategy with the use of a
quantitative risk model and computer optimization program. The Manager may
temporarily increase the Fund's cash allocation from its set strategy in order
to meet anticipated redemptions.
Characteristics of the Underlying Funds
<TABLE>
The characteristics of the Growth Fund and the Government Reserve Fund are
discussed elsewhere in this prospectus. The following summarizes the
characteristics of the Total Return Bond Fund and its investment objective and
policies.
<CAPTION>
Maximum Debt Typical Market Capitalization
Fund Name Anticipated Equity Exposure Exposure Focus of Portfolio Companies
- ----------------------------------------- --------------------------- --------------- ----------- --------------------------------
<S> <C> <C> <C> <C>
Total Return Bond Fund 0% 100% Income N/A
- ----------------------------------------- --------------------------- --------------- ----------- --------------------------------
</TABLE>
The investment objective of the Total Return Bond Fund is to seek maximum total
return (which consists of both income and capital appreciation), consistent with
preservation of capital and prudent investment management. Under normal
conditions, the Fund seeks to achieve its investment objective by investing at
least 65% (and typically more than 90%) of its total assets in a broad range of
investment-grade bonds, including marketable corporate bonds, U.S. government
securities, mortgage-related securities, other asset-backed securities and cash
or money market instruments. The Fund may also invest up to 20% of its assets in
securities denominated in foreign currencies, and may invest beyond this limit
in U.S. dollar-denominated securities of foreign issuers. See "Portfolio
Securities."
Duration of the Total Return Bond Fund. The Total Return Bond Fund expects that,
under normal circumstances, the dollar-weighted average maturity (or period
until the next interest rate reset date) of its portfolio securities may be
longer than three years, but the Fund does not restrict its investments only to
individual securities that are below a specific maturity. The Fund, however,
seeks to maintain an average portfolio effective duration of between four to
five and a half years.
Montgomery Select 50 Fund (the "Select 50 Fund")
The investment objective of the Select 50 Fund is capital appreciation which,
under normal conditions, it seeks by investing at least 65% of its total assets
in at least 50 different equity securities of companies of all sizes throughout
the world.
This Fund invests primarily in 10 equity securities from each of the Manager's
five different equity disciplines. These five disciplines, which may be adjusted
from time to time, include U.S. Growth Equity, U.S. Smaller Capitalization
Companies, U.S. Equity Income, International and Emerging Markets. See
"Management of the Funds." The Manager's equity teams select those securities
based on the potential for capital appreciation.
This Fund generally invests the remaining 35% of its total assets in equity
securities with the potential for capital appreciation but may invest those
assets in other equity securities or in debt securities, including up to 5% of
its total assets in debt securities rated below investment-grade. See "Portfolio
Securities," "Risk Considerations" and the Appendix in the Statement of
Additional Information.
This Fund may invest substantially in securities denominated in one or more
foreign currencies. Under normal conditions, it invests in at least three
different countries which may include the U.S., but no country, other than the
U.S., may represent more than 40% of its total assets. The Manager uses its
financial expertise and research capabilities in markets throughout the world in
attempting to identify those countries, currencies and companies in which this
Fund may invest. See "Risk Considerations."
14
<PAGE>
The U.S. Equity Funds
Montgomery Equity Income Fund (the "Equity Income Fund")
The investment objective of the Equity Income Fund is to provide current income
and capital appreciation primarily through investments in equity securities of
domestic companies, with the goal that the Fund provide a significantly greater
yield than the average yield offered by the stocks of the S&P 500 and a low
level of price volatility. Under normal market conditions, the Equity Income
Fund will invest at least 65% of the value of its total assets in
income-producing equity securities of domestic companies, which include common
stocks, preferred stocks and other securities, and debt securities convertible
into common stocks.
The Fund's equity investments emphasize common stock of U.S. corporations that
regularly pay dividends. The Fund normally invests in companies having a total
market capitalization of more than $1 billion, targeting companies with
favorable long-term fundamental characteristics with current relative yields at
the upper end of their historical ranges. The Fund initially identifies a
universe of investment candidates by screening companies based on relative yield
and targeting companies with a minimum yield of 140% of the average yield of the
S&P 500. The Fund uses this relative yield strategy to assist in identifying
undervalued securities. The companies are usually in the maturing stages of
development or operating in slower growth areas of the economy, and have
conservative accounting, strong cash flows to maintain dividends, low financial
leverage and market leadership. The Fund usually holds companies for a period of
two to four years, resulting in relatively low turnover. The Fund will usually
begin to reduce its position in a company as the price moves up and yield drops
to the lower end of its historical range. In addition, the Fund will usually
reduce or sell its holdings in a company that reduces or eliminates its
dividend, or upon a significant fundamental change impairing a company's ability
to pay dividends. See "Portfolio Securities."
Although the Fund normally invests more than 65% of its assets in
income-producing equity securities as described above, under normal market
conditions it may invest up to 35% of its total assets in debt instruments,
emphasizing cash equivalents in an effort to provide income at money market
rates while minimizing the risk of decline in value. The Fund attempts to
achieve low price volatility through its investment in mature companies and by
investing in cash and cash equivalents. In addition, the Fund may invest up to
20% of its total assets in the equity or debt securities of foreign issuers. See
"Portfolio Securities."
Montgomery Growth Fund (the "Growth Fund")
The investment objective of the Growth Fund is capital appreciation which, under
normal conditions it seeks by investing at least 65% of its total assets in
equity securities of domestic companies. Although such companies may be of any
size, the Fund targets companies having total market capitalizations of $1
billion or more. The Fund emphasizes investments in common stock but also
invests in other types of equity securities and equity derivative securities.
Current income from dividends, interest and other sources is only incidental.
The Fund also may invest up to 35% of its total assets in investment grade debt
securities. See "Portfolio Securities." The Manager does not expect the Growth
Fund to be consistently fully invested in equity securities. During periods that
the Manager deems appropriate, the Fund may take a more defensive position and
be significantly invested in cash and cash equivalents.
The Growth Fund seeks growth at a reasonable value, identifying companies with
sound fundamental value and potential for substantial growth. The Fund selects
its investments based on a combination of quantitative screening techniques and
fundamental analysis. The Fund initially identifies a universe of investment
candidates by screening companies based on changes in rates of growth and
valuation ratios such as price to sales, price to earnings and price to cash
flows. Through this process the Fund seeks to identify rapidly growing companies
with reasonable valuations and accelerating growth rates, or having low
valuations and initial signs of growth. The Fund then subjects these companies
to a rigorous fundamental analysis focusing on balance sheets and income
statements; company visits and discussions with management; contact with
industry specialists and industry analysts; and review of the competitive
environments.
Montgomery Small Cap Opportunities Fund (the "Small Cap Opportunities Fund")
The investment objective of the Small Cap Opportunities Fund is capital
appreciation which, under normal conditions it seeks by investing at least 65%
of its total assets in equity securities of small-capitalization domestic
companies, which the Fund currently considers to be companies having total
market capitalizations of less than $1 billion. The Small Cap Opportunities Fund
generally invests the remaining 35% of its total assets in a similar manner but
may invest those assets in domestic and foreign companies having total market
capitalizations of $1 billion or more. This Fund invests primarily in common
stock. It also may invest in other types of equity securities and equity
derivative securities. Any debt securities purchased by the Fund must be
investment grade debt securities. See "Portfolio Securities." Current income
from dividends, interest and other sources is only incidental.
This Fund seeks to identify potential growth companies at an early stage or a
transitional point of their developments, such as the introduction of new
products, favorable management changes, new marketing opportunities or increased
market share
15
<PAGE>
for existing product lines. Using fundamental research, the Fund targets
businesses having positive internal dynamics that can outweigh unpredictable
macro-economic factors, such as interest rates, commodity prices, foreign
currency rates and overall stock market volatility. The Fund searches for
companies with potential to gain market share within their respective
industries; achieve and maintain high and consistent profitability; produce
increases in quarterly earnings; and provide solutions to current or impending
problems in their respective industries or society at large. Early
identification of potential investments is a key to the Fund's investment style.
Heavy emphasis is placed on in-house research, which includes discussions with
company management. The Fund also draws on the expertise of brokerage firms,
including Montgomery Securities and regional firms that closely follow smaller
capitalization companies within their geographic regions.
The Fixed-Income and Money Market Funds
Montgomery Government Reserve Fund (the "Reserve Fund")
The investment objective of the Reserve Fund is current income consistent with
liquidity and preservation of capital, which under normal conditions it seeks by
investing exclusively in U.S. government securities, repurchase agreements for
U.S. government securities and other money market funds investing in U.S.
government securities and those repurchase agreements. This Fund seeks to
maintain a stable net asset value per share of $1.00 in compliance with Rule
2a-7 under the Investment Company Act, and pursuant to procedures adopted under
such Rule, the Reserve Fund limits its investments to those U.S. government
securities that the Board of Trustees determines present minimal credit risks
and have remaining maturities, as determined under the Rule, of 397 calendar
days or less. The Fund also maintains a dollar-weighted average maturity of the
securities in its portfolio of 90 days or less.
Montgomery Short Duration Government Bond Fund (formerly called the Short
Government Bond Fund) (the "Short Bond Fund")
The investment objective of the Short Bond Fund is to provide maximum total
return consistent with preservation of capital and prudent investment
management. Total return consists of interest and dividends from underlying
securities, capital appreciation realized from the purchase and sale of
securities, and income from futures and options. Under normal conditions, the
Fund seeks to achieve its objective by investing at least 65% of the value of
its total assets in U.S. government securities. The Fund seeks to maintain an
average portfolio effective duration comparable to or less than that of
three-year U.S. Treasury notes. Because the Manager seeks to manage interest
rate risk by limiting effective duration, the Fund may invest in securities of
any maturity.
This Fund is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the Fund's shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Fund is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which this
Fund invests generally change with interest rates, the value of its shares will
fluctuate, unlike the value of the shares of a money market fund seeking to
maintain a stable net asset value of $1.00 per share.
The Fund also may invest up to 35% of its total assets in cash, commercial paper
and investment-grade debt securities, including corporate debt instruments and
privately issued mortgage-related and asset-backed securities. The Fund also may
invest in other investment companies investing primarily in U.S. government
securities of appropriate duration. See "Portfolio Securities."
Duration of the Short Bond Fund. The Short Bond Fund expects that, under normal
circumstances, the dollar-weighted average maturity (or period until the next
interest rate reset date) of its portfolio securities may be longer than three
years but the maturity of individual securities may be up to 30 years. The Short
Bond Fund also seeks to maintain an average portfolio effective duration
comparable to or less than that of three-year U.S. Treasury notes.
Portfolio Securities
The following describes portfolio securities the Funds may invest. Investors in
the Asset Allocation Fund should note the portfolio securities of the Asset
Allocation Fund consists of the portfolio securities of each of the Underlying
Funds.
Equity Securities
The International/Emerging Markets Funds, the Select 50 Fund and the U.S. Equity
Funds emphasize investments in common stock. These Funds may also invest in
other types of equity securities (such as preferred stocks or convertible
securities) and equity derivative securities.
16
<PAGE>
Depositary Receipts, Convertible Securities and Securities Warrants
The International/Emerging Markets Funds, the Select 50 Fund and the U.S. Equity
Funds may invest in ADRs, EDRs and GDRs and convertible securities which the
Manager regards as a form of equity security. Each such Fund may also invest up
to 5% of its net assets in warrants, including up to 2% of net assets for those
not listed on a securities exchange.
Privatizations
The Select 50 Fund and the International/Emerging Markets Funds believe that
foreign governmental programs of selling interests in government-owned or
controlled enterprises ("privatizations") may represent opportunities for
significant capital appreciation, and these Funds may invest in privatizations.
The ability of U.S. entities, such as these Funds, 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 Select 50 Fund, International/Emerging Markets Funds believe that carefully
selected investments in joint ventures, cooperatives, partnerships, private
placements, unlisted securities and similar vehicles (collectively, "special
situations") could enhance their capital appreciation potential. These Funds
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 Funds to invest directly. Investments in special
situations may be illiquid, as determined by the Manager based on criteria
reviewed by the Board. These Funds do not invest more than 15% of their net
assets in illiquid investments, including special situations.
Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other investment
companies investing exclusively in securities in which it may otherwise invest.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the International/Emerging Markets Funds to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act. The International/Emerging Markets
Funds also may incur tax liability to the extent they invest 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
Funds. See the Statement of Additional Information.
The Select 50 Fund, the International/Emerging Markets Funds, the Equity Funds
and Fixed Income Funds do not intend to invest in other investment companies
unless, in the Manager's judgment, the potential benefits exceed associated
costs. As a shareholder in an investment company, these Funds bear their ratable
share of that investment company's expenses, including advisory and
administration fees. The Manager has agreed to waive its own management fee with
respect to the portion of these Funds' assets invested in other open-end (but
not closed-end) investment companies.
Debt Securities
The Select 50 Fund and the International/Emerging Markets Funds may purchase
debt securities that complement their 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 Equity Income 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, each Fund will not invest more than 5%
of its total assets in debt securities rated lower than investment grade.
Subject to this limitation, each of these Funds may invest in any debt security,
including securities in default. After its purchase by a 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 to be in the best interests
of the Fund. See "Risk Considerations."
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 each Fund and will be limited to 5%
of a Fund's total assets.
In addition to traditional corporate, government and supranational debt
securities, each of the International/Emerging Markets Fund and the Equity
Income Fund may invest in external (i.e., to foreign lenders) debt obligations
issued by the governments, governmental entities and companies of emerging
market countries. The percentage distribution between equity and debt will vary
from country to country 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.
17
<PAGE>
U.S. Government securities
All Funds may invest in fixed rate and floating or variable rate U.S. government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. Government. Other securities issued by U.S. Government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, for example those issued by the Federal Home Loan Bank, while
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. However, the U.S. Government does not guarantee
the net asset value of the Funds' shares. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.
Mortgage-Related Securities and Derivative Securities
The Fixed-Income Funds may invest in mortgage-related securities. A
mortgage-related security is an interest in a pool of mortgage loans and is
considered a derivative security. Most mortgage-related securities are
pass-through securities, which means that investors receive payments consisting
of a pro rata share of both principal and interest (less servicing and other
fees), as well as unscheduled prepayments, as mortgages in the underlying
mortgage pool are paid off by the borrowers. Certain mortgage-related securities
are subject to high volatility. These funds use these derivative securities in
an effort to enhance return and as a means to make certain investments not
otherwise available to the Funds. See "Hedging and Risk-Management Practices"
for a discussion of other reasons why these Funds invest in derivative
securities.
Agency Mortgage-Related Securities.
Investors in the Reserve, Short Bond and Asset Allocation Funds should note that
the dominant issuers or guarantors of mortgage-related securities today are
GNMA, FNMA and the FHLMC. GNMA creates pass-through securities from pools of
government guaranteed or insured (Federal Housing Authority or Veterans
Administration) mortgages. FNMA and FHLMC issue pass-through securities from
pools of conventional and federally insured and/or guaranteed residential
mortgages. The principal and interest on GNMA pass-through securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Securities from FNMA and
FHLMC are not backed by the full faith and credit of the U.S. Government but are
generally considered to offer minimal credit risks. The yields provided by these
mortgage-related securities have historically exceeded the yields on other types
of U.S. government securities with comparable "lives" largely due to the risks
associated with prepayment. See "Risk Considerations."
Adjustable rate mortgage securities ("ARMs") are pass-through securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined interest rate index and which may
be subject to certain limits. The adjustment feature of ARMs tends to lessen
their interest rate sensitivity.
The Fixed Income Funds consider GNMA, FNMA and FHLMC-issued pass-through
certificates, CMOs and other mortgage-related securities to be U.S. government
securities for purposes of their investment policies. However, the Government
Reserve Fund does not invest in stripped mortgage securities, and the Short Bond
Fund limits its stripped mortgage securities investments to 10% of total assets.
The liquidity of IOs and POs issued by the U.S. Government or its agencies and
instrumentalities and backed by fixed-rate mortgage-related securities will be
determined by the Manager under the direct supervision of the Trust's Pricing
Committee and reviewed by the Board, and all other IOs and POs will be deemed
illiquid for purposes of the Fixed Income Funds' limitation on illiquid
securities. The Short Bond and Total Return Bond Funds may invest in derivative
securities known as "floaters" and "inverse floaters," the values of which vary
in response to interest rates. These securities may be illiquid and their values
may be very volatile.
Privately Issued Mortgage-Related Securities/Derivatives. The Short Bond Fund
and Total Return Bond Fund may invest in mortgage-related securities offered by
private issuers, including pass-through securities for pools of conventional
residential mortgage loans; mortgage pay-through obligations and mortgage-backed
bonds, which are considered to be obligations of the institution issuing the
bonds and are collateralized by mortgage loans; and bonds and CMOs
collateralized by mortgage-related securities issued by GNMA, FNMA, FHLMC or by
pools of conventional mortgages, multi-family or commercial mortgage loans.
Private issuer mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than U.S. Government and
agency mortgage-related securities because they offer no direct or indirect
governmental guarantees. However, many issuers or servicers of mortgage-related
securities guarantee or provide insurance for timely payment of interest and
principal. The Short Bond Fund may purchase some mortgage-related securities
through private
18
<PAGE>
placements that are restricted as to further sale. See "Illiquid Securities."
The value of these securities may be very volatile.
Structured Notes and Indexed Securities. The Funds may invest in structured
notes and indexed securities. Structured notes are debt securities, the interest
rate or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a 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.
Variable Rate Demand Notes
The Fixed Income Fund may invest in variable rate demand notes ("VRDNs").
Zero Coupon Bonds
The Fixed Income Funds may invest in zero coupon bonds. Zero coupon bond prices
are highly sensitive to changes in market interest rates. The original issue
discount on the zero coupon bonds must be included ratably in the income of the
Fixed Income Funds as the income accrues even though payment has not been
received. These Funds nevertheless intend to distribute an amount of cash equal
to the currently accrued original issue discount, and this may require
liquidating securities at times they might not otherwise do so and may result in
capital loss. See "Tax Information" in the Statement of Additional Information.
Asset-Backed Securities
Each Fund may invest up to 5% (25% in the case of the Short Bond Fund) of its
total assets in asset-backed securities. Like mortgage-related securities, these
securities are subject to the risk of prepayment. See "Risk Considerations."
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<PAGE>
Other Investment Practices
<TABLE>
The table below and the following sections summarize certain investment
practices of the Funds, each of which may involve certain special risks. The
Glossary section at the end of this Prospectus briefly describes each of the
investment techniques summarized below. The Statement of Additional Information,
under the heading "Investment Objectives and Policies of the Funds," contains
more detailed information about certain of these practices, including
limitations designed to reduce risks.
<CAPTION>
====================================================================================================================================
Short
Small Duration
Inter- Inter- Asset Cap Govern- Govern-
Emerging national national Alloca- Select Equity Oppor- ment ment
Markets Growth Small Cap tion 50 Income Growth tunities Reserve Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase agreements(1) X X X * X X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse dollar roll transactions * X(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowing not to exceed one- X X X * X X X X X X
third of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
Reverse repurchase agreement X X * X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Dollar roll transactions * X
- ------------------------------------------------------------------------------------------------------------------------------------
Leverage X X X * X X X(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Securities lending not to exceed X X X * X X X X X X
30% of total fund assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and forward X X X * X X X X X X(3)
commitment securities
- ------------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts(6) X X X * X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities X X X * X X X X X
and currencies(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase options on securities X X X * X X X X
indices(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered call options(4) X X X * X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Write covered put options(4) X X X * X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate futures contracts(5) X X X * X X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Futures and swaps and options on X X X * X X X X X
futures
- ------------------------------------------------------------------------------------------------------------------------------------
Equity swaps X X X * X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 10% * X
of Fund's net assets)
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid securities (limited to 15% X X X * X X X X X
of Fund's net assets)
====================================================================================================================================
20
<PAGE>
<FN>
- ------------------
1 Under the Investment Company Act, repurchase agreements and reverse dollar
roll transactions are considered to be loans by a Fund and must be fully
collateralized by collateral assets. If the seller defaults on its
obligations to repurchase the underlying security, a Fund may experience
delay or difficulty in exercising its rights to realize upon the security,
may incur a loss if the value of the security declines and may incur
disposition costs in liquidating the security.
2 The Manager will not use leverage for the Short Bond Fund if, as a result,
the Fund's portfolio duration would not be comparable to or less than that
of three-year U.S. Treasury notes.
3 The Fund also may enter into forward commitments to sell high-grade liquid
debt securities it does not own at the time of entering such commitments.
4 A Fund will not enter into any options on securities, securities indices or
currencies or related options (including options on futures) if the sum of
the initial margin deposits and premiums paid for any such option or
options would exceed 5% of its total assets, and it will not enter into
options with respect to more than 25% of its total assets.
5 A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indices and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
6 A Fund that may invest in forward currency contracts may not invest more
than one-third of its assets in such contracts.
* To the extent allowed in each Underlying Fund.
</FN>
</TABLE>
Borrowing
Subject to the limits set forth in the Prospectus, the Funds may pledge their
assets in connection with borrowings. A Fund will not purchase any securities
while any borrowings exceed 10% of its total assets.
Defensive Investments and Portfolio Turnover
Notwithstanding its investment objective, each Fund may adopt up to a 100% cash
or cash equivalent position for temporary defensive purposes to protect against
erosion of its capital base. Depending upon the Manager's analysis of the
various markets and other considerations, all or part of the assets of a Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies), such as U.S. government securities or obligations issued or
guaranteed by the government of a foreign country or by an international
organization designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development, high-quality commercial paper,
time deposits, savings accounts, certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary purposes pending investment in other securities
and following substantial new investment in a Fund.
Portfolio securities are sold whenever the Manager believes it appropriate to
further the Fund's investment objective or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expense to a Fund, including brokerage commissions, dealer markups and
other transaction costs, and may result in the recognition of capital gains that
may be distributed to shareholders. See "Financial Highlights" for portfolio
turnover information. Even when portfolio turnover exceeds 100% for a Fund, that
Fund does not regard portfolio turnover as a limiting factor. Portfolio turnover
in excess of 100% is considered high, increases brokerage costs incurred by a
Fund and may cause recognition of gain by shareholders.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in financial markets
or against currency exchange rate or interest rate changes that are adverse to
the present or prospective positions of the Funds, each of the Funds (except the
Government Reserve Fund) may employ certain risk management practices using
certain derivative securities and techniques (known as "derivatives"). Markets
in some countries currently do not have instruments available for hedging
transactions. To the extent that such instruments do not exist, the Manager may
not be able to hedge its investment effectively in such countries. Furthermore,
a Fund engages in hedging activities only when the Manager deems it to be
appropriate, and does not necessarily engage in hedging transactions with
respect to each investment.
Hedging transactions involve certain risks. Although a Fund may benefit from the
use of hedging positions, unanticipated changes in interest rates or securities
prices may result in poorer overall performance for a Fund than if it had not
entered into a hedging position. If the correlation between a hedging position
and a portfolio position is not properly protected, the desired protection may
not be obtained and the Fund may be exposed to risk of financial loss. In
addition, a Fund pays commissions and other costs in connection with such
investments.
21
<PAGE>
Investment Restrictions
The investment objective of each Fund is fundamental and may not be changed
without shareholder approval but, unless otherwise stated, each Fund's other
investment policies may be changed by its Trust's Board. If there is a change in
the investment objective or policies of any Fund, shareholders should consider
whether that Fund remains an appropriate investment in light of their
then-current financial positions and needs. The Funds are subject to additional
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental.
Each Fund has reserved the right, if approved by the Board, to convert in the
future to a "feeder" Fund that would invest all of its assets in a "master" Fund
having substantially the same investment objective, policies and restrictions.
At least 30-days prior written notice of any such action would be given to all
shareholders if and when such a proposal is approved, although no such action
has been proposed as of the date of this Prospectus.
Risk Considerations
The following describes certain risks involved with investing in the Funds.
Investors in the Asset Allocation Fund should note the risks involved with each
Underlying Fund, because the Asset Allocation Fund is a "Fund-of-Funds."
Small Companies
The Small Cap Opportunities and International Small Cap Funds emphasize, and the
Select 50, International Growth, Emerging Markets and Growth Funds may make
investments in, smaller companies that may benefit from the development of new
products and services. Such smaller companies may present greater opportunities
for capital appreciation but may involve greater risk than larger, more mature
issuers. Such smaller companies may have limited product lines, markets or
financial resources, and their securities may trade less frequently and in more
limited volume than those of larger, more mature companies. As a result, the
prices of their securities may fluctuate more than those of larger issuers.
Foreign Securities
The U.S. Equity Funds, the Select 50 Fund and International and Emerging Markets
Funds have the right to purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks of loss inherent in domestic
investments. The Select 50 and International Funds, and particularly the
Emerging Markets Fund, may invest in securities of companies domiciled in, and
in markets of, so-called "emerging markets countries." These investments may be
subject to higher risks than investments in more-developed countries.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations; foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments); default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts. Additional risk factors,
including use of domestic and foreign custodian banks and depositories, are
described elsewhere in the Prospectus and in the Statement of Additional
Information.
Brokerage commissions, fees for custodial services and other costs relating to
investments in other countries are generally greater than in the U.S.. Foreign
markets have different clearance and settlement procedures from those in the
U.S., and certain markets have experienced times when settlements did not keep
pace with the volume of securities transactions. The inability of a Fund to make
intended security purchases due to settlement difficulties could cause it to
miss attractive investment opportunities. Inability to sell a portfolio security
due to settlement problems could result in loss to the Fund if the value of the
portfolio security declined, or result in claims against the Fund. In certain
countries, there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
U.S. The securities markets of many of the countries in which these Funds may
invest may also be smaller, less liquid and subject to greater price volatility
than those in the U.S.
Because certain foreign securities may be denominated in foreign currencies, the
value of such securities will be affected by changes in currency exchange rates
and in exchange control regulations, and costs will be incurred in connection
with conversions between currencies. A change in the value of a foreign currency
against the U.S. dollar results in a corresponding change in the U.S. dollar
value of a Fund's securities denominated in the currency. Such changes also
affect the Fund's income and distributions to shareholders. A Fund may be
affected either favorably or unfavorably by changes in the relative rates of
exchange between the currencies of different nations, and a Fund may therefore
engage in foreign
22
<PAGE>
currency hedging strategies. Such strategies, however, involve certain
transaction costs and investment risks, including dependence upon the Manager's
ability to predict movements in exchange rates.
Some countries in which one of these Funds may invest also may have fixed or
managed currencies that are not freely convertible at market rates into the U.S.
dollar. Certain currencies may not be internationally traded. A number of these
currencies have experienced steady devaluation relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.
Many countries in which a Fund may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuation in inflation rates may have negative effects on certain
economies and securities markets. Moreover, the economies of some countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Fund. The Fund may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Lower-Quality Debt
The Select 50, International and Emerging Markets Funds are authorized to invest
in medium-quality (rated or equivalent to BBB by S&P or Fitch's, or Baa by
Moody's) and in limited amounts of high-risk debt securities below
investment-grade quality. Medium-quality debt securities have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than with higher-grade debt securities.
As an operating policy, which may be changed by the Board without shareholder
approval, these Funds do not invest more than 5% of their total assets in debt
securities below investment grade, also known as "junk bonds." The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a higher level of investment in high-risk,
lower-quality debt securities would be consistent with the interests of these
Funds and their shareholders. Unrated debt securities are not necessarily of
lower quality than rated securities but may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) are analyzed by the Manager to determine, to the
extent reasonably possible, that the planned investment is sound. From time to
time, these Funds may purchase defaulted debt securities if, in the opinion of
the Manager, the issuer may resume interest payments in the near future.
Diversification
Diversifying a Fund's portfolio can reduce the risks of investing by limiting
the portion of your investment in any one issuer or industry. Less diversified
Funds may be more sensitive to changes in the market value of a single issuer or
industry. The Select 50 Fund may present greater risk than is usually associated
with widely diversified mutual Funds, because it may invest in the securities of
as few as 50 issuers. Therefore, the Select 50 Fund is not appropriate as your
sole investment.
Interest Rates
The market value of debt securities that are interest rate sensitive is
inversely related to changes in interest rates. That is, an interest rate
decline produces an increase in a security's market value and an interest rate
increase produces a decrease in value. The longer the remaining maturity of a
security, the greater the effect of interest rate change. Changes in the ability
of an issuer to make payments of interest and principal and in the market's
perception of its creditworthiness also affect the market value of that issuer's
debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fixed-Income Fund to the extent it retains the
same percentage of debt securities, may have to reinvest the proceeds of
prepayments at lower interest rates than those of their previous investments. If
this occurs, a Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates than other fixed-income securities of comparable
duration, although they may have a comparable risk of decline in market value in
periods of rising interest rates. To the extent that the Fixed-Income Funds
purchase mortgage-related securities at a premium, unscheduled prepayments,
which are made at par, result in a loss equal to any unamortized premium.
Duration is
23
<PAGE>
one of the fundamental tools used by the Manager in managing interest rate risks
including prepayment risks. See Duration in the Glossary.
Management of the Funds
The Montgomery Funds and The Montgomery Funds II (the "Trusts") each has a Board
of Trustees that establishes its Funds' policies and supervises and reviews
their management. Day-to-day operations of the Funds are administered by the
officers of the Trusts and by the Manager pursuant to the terms of an investment
management agreement with each Fund.
Montgomery Asset Management, LLC is the Funds' Manager. The Manager, a Delaware
limited liability company, is a subsidiary of Commerzbank AG. The Manager was
formed in February 1997 as an investment adviser registered as such with the
SEC under the Investment Advisers Act of 1940, as amended. It advises private
accounts as well as the Funds. Commerzbank, the third largest publicly held
commercial bank in Germany, has total assets of approximately $268 billion.
Commerzbank and its affiliates had over $79 billion in assets under management
as of June 30, 1997. Commerzbank's asset management operations involve more than
1,000 employees in 13 countries worldwide.
On July 31, 1997, Montgomery Asset Management, L.P., the former manager to the
Funds, completed the sale of substantially all of its assets to the Manager. At
a special meeting of shareholders on June 23, 1997, the shareholders of each
Fund approved a new Investment Management Agreement with the Manager, effective
July 31, 1997 for an initial two-year period.
Portfolio Managers
Montgomery Emerging Markets Fund
Josephine S. Jimenez, CFA, is a managing director and senior portfolio manager.
From 1988 through 1991, Ms. Jimenez worked at Emerging Markets Investors
Corporation/Emerging Markets Management in Washington, D.C., as senior analyst
and portfolio manager.
Bryan L. Sudweeks, Ph.D., CFA, is a managing director and senior portfolio
manager. Before joining the Manager, he was a senior analyst and portfolio
manager at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of International Finance and
Investments at George Washington University and served as Adjunct Professor of
International Investments from 1988 until May 1991.
Angeline Ee is a portfolio manager. From 1990 until joining the Manager in July
1994, Ms. Ee was an Investment Manager with AIG Investment Corp. in Hong Kong.
From June 1989 until September 1990, Ms. Ee was a co-manager of a portfolio of
Asian equities and bonds at Chase Manhattan Bank in Singapore.
Frank Chiang is a portfolio manager. From 1993 until joining the Manager in
1996, Mr. Chiang was managing director and portfolio manager at TCW Asia Ltd. in
Hong Kong.
Jesus Isidoro Duarte is a regional portfolio manager for the Manager responsible
for the Latin American markets. Mr. Duarte began his investment career in 1980.
He joined the Manager from Latinvest Management Co. in Brazil, where he was
Director and Vice President responsible for research and portfolio management
for the firm's Latin American Funds. Prior to Latinvest, Mr. Duarte worked at
W.I. Carr in Tokyo as a securities analyst of Japanese equities. He is fluent in
Spanish and Japanese, and conversant in French and Portuguese. Mr. Duarte has a
Bachelor of Arts Degree in International Relations and a minor in Business
Administration from the University of Redlands in California and has
successfully completed the Japanese Language Institute's two-year program at the
Sophia University in Tokyo.
Montgomery International Growth Fund
Montgomery International Small Cap Fund
John D. Boich, CFA, is a managing director and senior portfolio manager. From
1990 to 1993, he was vice president and portfolio manager at The Boston Company
Institutional Investors Inc. From 1989 to 1990, he was the founder and co-
manager of The Common Goal World Fund, a global equity partnership. From 1987 to
1989, Mr. Boich worked as a financial advisor with Prudential-Bache Securities
and E.F. Hutton & Company.
Oscar A. Castro, CFA, is a managing director and senior portfolio manager.
Before joining the Manager, he was vice president/portfolio manager at G.T.
Capital Management, Inc. from 1991 to 1993. From 1989 to 1990, he was co-founder
and co-manager of The Common Goal World Fund, a global equity partnership. From
1987 to 1989, he was deputy portfolio manager/analyst at Templeton
International.
24
<PAGE>
For the background and business experience of Bryan L. Sudweeks, PhD., CFA, who
is a Portfolio Strategist for the International Growth Fund, see the discussion
under the Montgomery Emerging Markets Fund, above.
Montgomery Asset Allocation Fund
The Asset Allocation Fund invests its assets in three separate Funds,
representing three different investment disciplines. Kevin T. Hamilton, CFA, is
responsible for selecting the Funds to be included in the Fund-of-Funds
structure, and also for coordinating and implementing the investment decisions
of the Asset Allocation Fund. For the background and business experience of
Kevin T. Hamilton, see the discussion under the Montgomery Select 50 Fund,
below.
Montgomery Select 50 Fund
The Manager currently divides its equity portfolio management into a number of
specific disciplines. Five of those disciplines are represented in the Select 50
Fund. These five disciplines, which may be adjusted from time to time, include
U.S. Growth Equity, U.S. Smaller-Capitalization Companies, U.S. Equity Income,
International and Emerging Markets. The portfolio management teams responsible
for these disciplines are described throughout this "Portfolio Managers"
section.
Kevin T. Hamilton, CFA, Chairman of the Manager's Investment Oversight Committee
and a managing director, is responsible for coordinating and implementing the
investment decisions of the Manager's Equity teams and making investment
decisions relating to the allocation of assets among the Underlying Funds of the
Asset Allocation Fund. From 1985 until joining the Manager in February 1991, Mr.
Hamilton was a senior vice president responsible for investment oversight at
Analytic Investment Management in Irvine, California. The portfolio management
teams responsible for the different disciplines used in the Select 50 Fund are
described throughout this "Portfolio Managers" section.
Montgomery Equity Income Fund
John H. Brown, CFA, is a managing director and senior portfolio manager.
Preceding his arrival at the Manager in May 1994, Mr. Brown was an analyst and
portfolio manager at Merus Capital Management in San Francisco from June 1986.
Montgomery Growth Fund
Montgomery Small Cap Opportunities Fund
Roger W. Honour is a managing director and senior portfolio manager. Prior to
joining Montgomery Asset Management in June 1993, Mr. Honour spent one year as
vice president and portfolio manager at Twentieth Century Investors in Kansas
City, Missouri. From 1990 to 1992, he served as vice president and portfolio
manager at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a vice
president with Merrill Lynch Capital Markets.
Kathryn M. Peters is a portfolio manager. From 1993 to 1995, Ms. Peters was an
associate in the investment banking division of Donaldson, Lufkin & Jenrette in
New York, where she evaluated prospective equity investments for the merchant
banking Fund and processed investment banking transactions, including equity and
high-yield offerings. Prior to that, she analyzed mezzanine investments for
Barclays de Zoete Wedd in New York. From 1988 to 1990, Ms. Peters worked in the
leveraged buy-out group of Marine Midland Bank.
Andrew G. Pratt, CFA, is a portfolio manager. He joined Montgomery Asset
Management from Hewlett-Packard Company, where he was an equity analyst, managed
a portfolio of small-capitalization technology companies and researched private
placement and venture capital investments. From 1983 through 1988, he worked in
the Capital Markets Group at Fidelity Investments in Boston.
Montgomery Government Reserve Fund
Montgomery Short Duration Government Bond Fund
Montgomery Total Return Bond Fund (an underlying Fund for the Asset Allocation
Fund)
William C. Stevens is a managing director and a senior portfolio manager. At
Barclays de Zoete Wedd Securities from 1991 to 1992, he started its CMO and
asset-backed securities trading. Mr. Stevens traded stripped mortgage securities
and mortgage-related interest rate swaps for the First Boston Corporation from
1990 to 1991; and while with Drexel Burnham Lambert from 1984 to 1990, he was
responsible for the origination and trading of all derivative mortgage-related
securities.
Peter D. Wilson is a portfolio manager. Mr. Wilson joined the Manager's
Fixed-Income team in April 1994. From 1992 to 1994, he was an associate in the
Fixed Income Client Services Department of BARRA in Berkeley, California. At
BARRA, Mr. Wilson directed research and development teams on mortgage, CMO and
other fixed-income projects. Prior to that he
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was an associate in the structured finance department at Security Pacific
Merchant Bank as well as on the mortgage trading desk at Chemical Bank.
Management Fees and Other Expenses
The Manager provides the Funds with advice on buying and selling securities,
manages the Funds' investments, including the placement of orders for portfolio
transactions, furnishes the Funds with office space and certain administrative
services and provides personnel needed by the Funds with respect to the
Manager's responsibilities under the Manager's Investment Management Agreement
with each Fund. The Manager also compensates the members of the Trusts' Boards
of Trustees who are interested persons of the Manager, and assumes the cost of
printing prospectuses and shareholder reports for dissemination to prospective
investors. As compensation, each Fund pays the Manager a management fee (accrued
daily but paid when requested by the Manager) based upon the value of the
average daily net assets of that Fund, according to the following table.
The management fees for the Domestic Equity, Select 50, International and
Emerging Markets Funds are higher than for most mutual Funds.
Average Daily Net Assets Management Fee
(Annual Rate)
Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
International Growth Fund First $500 million 1.10%
Next $500 million 1.00%
Over $1 billion 0.90%
International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
Over $500 million 1.00%
Asset Allocation Fund All amounts 0.00%*
Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Government Reserve Fund First $250 million 0.40%
Next $250 million 0.30%
Over $500 million 0.20%
Short Duration Government Bond Fund First $500 million 0.50%
Over $500 million 0.40%
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* This amount represents only the management fee of the Asset Allocation Fund
and does not include management fees attributable to the Underlying Funds
which ultimately are to be borne by shareholders of the Asset Allocation
Fund.
The Manager also serves as the Funds' Administrator (the "Administrator"). The
Administrator performs services with regard to various aspects of each Fund's
administrative operations. As compensation, the Funds pay the Administrator a
monthly fee at the following annual rates: Each of the Growth and Equity Income
Funds pays seven one-hundredths of one percent (0.07%) of average daily net
assets (0.06% of average daily net assets over $500 million); each of the Small
Cap Opportunities, Select 50, Emerging Markets, International Small Cap and
International Growth Funds pays seven one-hundredths of one percent (0.07%) of
average daily net assets (0.06% of daily net assets over $250 million); each of
the Short and Reserve Funds pays five one-hundredths of one percent (0.05%) of
average daily net assets (0.04% of average daily net assets over $500 million
and the Reserve Fund over $250 million). In the case of the Asset Allocation
Fund, the Administrator does not charge a fee for performing administrative
services for the Fund, although it charges a fee for such services performed for
the Underlying Funds, which ultimately are borne indirectly by shareholders of
the Asset Allocation Fund.
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Each Fund is responsible for its own operating expenses including, but not
limited to: the Manager's fees; taxes, if any; brokerage and commission
expenses, if any; interest charges on any borrowings; transfer agent,
administrator, custodian, legal and auditing fees; shareholder servicing fees
including fees to third-party servicing agents; fees and expenses of Trustees
who are not interested persons of the Manager; salaries of certain personnel;
costs and expenses of calculating its daily net asset value; costs and expenses
of accounting, bookkeeping and record keeping required under the Investment
Company Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under federal
and applicable state securities laws; all costs associated with shareholders
meetings and the preparation and dissemination of proxy materials, except for
meetings called solely for the benefit of the Manager or its affiliates;
printing and mailing prospectuses, statements of additional information and
reports to shareholders; and other expenses relating to that Fund's operations,
plus any extraordinary and nonrecurring expenses that are not expressly assumed
by the Manager.
Rule 12b-1 adopted by the Securities and Exchange Commission (the "SEC") under
the Investment Company Act permits an investment company directly or indirectly
to pay expenses associated with the distribution of its shares ("distribution
expenses") in accordance with a plan adopted by the investment company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial shareholder of the Class P shares of each Fund
have approved, and each Fund has entered into, a Share Marketing Plan (the
"Plan") with the Distributor, as the distribution coordinator, for the Class P
shares. Under the Plan, each Fund will pay distribution fees to the Distributor
at an annual rate of up to 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P shares, to reimburse the Distributor for its
distribution costs with respect to that Class.
The Plan provides that the Distributor may use the distribution fees received
from the Class to pay for the distribution expenses of that Class, including,
but not limited to (i) incentive compensation paid to the directors, officers
and employees of, agents for and consultants to, the Distributor or any other
broker-dealer or financial institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers, financial institutions or other
persons for providing distribution assistance with respect to that Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses, statements of additional information
and reports of the Funds to prospective investors in that Class; (iii) costs
involved in preparing, printing and distributing sales literature pertaining to
the Funds and that Class; and (iv) costs involved obtaining whatever
information, analysis and reports with respect to marketing and promotional
activities that the Funds may, from time to time, deem advisable with respect to
the distribution of that Class. Distribution fees are accrued daily and paid
monthly, and are charged as expenses of the Class P shares as accrued.
In adopting the Plan, the Board of Trustees determined that there was a
reasonable likelihood that the Plan would benefit the Funds and the shareholders
of Class P shares. Information with respect to distribution revenues and
expenses is presented to the Board of Trustees quarterly for their consideration
in connection with their deliberations as to the continuance of the Plan. In
their review of the Plan, the Board of Trustees are asked to take into
consideration expenses incurred in connection with the separate distribution of
the Class P shares. The Class P shares are not obligated under the Plan to pay
any distribution expenses in excess of the distribution fee. Thus, if the Plan
was terminated or otherwise not continued, no amounts (other than current
amounts accrued but not yet paid) would be owed by the Class to the Distributor.
The distribution fee attributable to the Class P shares is designed to permit an
investor to purchase Class P shares through financial planners, retirement and
pension plan administrators, broker-dealers and other financial intermediaries
without the assessment of a front-end sales charge and at the same time to
permit the Distributor to compensate those persons on an ongoing basis in
connection with the sale of the Class P shares.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Trustees of the Trusts, including a majority of
the Trustees who are not "interested persons" of the Trusts (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"), vote annually to continue the Plan. The Plan may be terminated at
any time by vote of a majority of the independent Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.
All distribution fees paid by the Funds under the Plan will be paid in
accordance with Rule 2830 of the NASD Rules of Conduct.
For certain Funds, the Manager has agreed to reduce its management fee if
necessary to keep total annual operating expenses (excluding the Rule 12b-1 fee)
at or below the following percentages of each Fund's average net assets: the
Growth Fund, one and five-tenths of one percent (1.50%); the Equity Income Fund,
eighty-five one-hundredths of one percent (0.85%); the Small Cap Opportunities
Fund, one and five-tenths of one percent (1.50%); the International Growth Fund,
one and sixty-five one-hundredths of one percent (1.65%); the Select 50 Fund,
one and eight-tenths of one percent
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(1.80%); the Emerging Markets and International Small Cap Funds, one and
nine-tenths of one percent (1.90%); the Asset Allocation Fund, one and
three-tenths of one percent (1.30%) through limits in the Underlying Funds; the
Short Government Bond Fund, seven-tenths of one percent (0.70%); and the
Government Reserve Fund, six-tenths of one percent (0.60%). The Manager also may
voluntarily reduce additional amounts to increase the return to a Fund's
investors. The Manager may terminate these voluntary reductions at any time. Any
reductions made by the Manager in its fees are subject to reimbursement by that
Fund within the following three years, provided that the Fund is able to effect
such reimbursement and remain in compliance with applicable expense limitations.
The Manager generally seeks reimbursement for the oldest reductions and waivers
before payment by the Funds for fees and expenses for the current year.
In addition, the Manager may elect to absorb operating expenses that a Fund is
obligated to pay to increase the return to that Fund's investors. If the Manager
performs a service or assumes an operating expense for which a Fund is obligated
to pay and the performance of such service or payment of such expense is not an
obligation of the Manager under the Investment Management Agreement, the Manager
is entitled to seek reimbursement from that Fund for the Manager's costs
incurred in rendering such service or assuming such expense. The Manager also
may compensate broker-dealers and other intermediaries that distribute a Fund's
shares as well as other service providers of shareholder and administrative
services. The Manager may also sponsor seminars and educational programs on the
Funds for financial intermediaries and shareholders.
The Manager considers a number of factors in determining which brokers or
dealers to use for each Fund's portfolio transactions. While these factors are
more fully discussed in the Statement of Additional Information, they include,
but are not limited to: reasonableness of commissions, quality of services and
execution and availability of research that the Manager may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Funds receive prompt execution at competitive prices, the Manager also may
consider sale of a Fund's shares as a factor in selecting broker-dealers for
that Fund's portfolio transactions. See "Execution of Portfolio Transactions" in
the Statement of Additional Information for further information regarding Fund
policies concerning execution of portfolio transactions.
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, serves as the master transfer agent for the Funds (the "Master Transfer
Agent") and performs certain record keeping and accounting functions. The Master
Transfer Agent delegates certain transfer agent functions to DST Systems, Inc.,
P.O. Box 419073, Kansas City, Missouri 64141-6073, the Funds' transfer agent
(the "Transfer Agent"). Morgan Stanley Trust Company, located at One Pierrepont
Plaza, Brooklyn, New York 11201, serves as the Funds' principal custodian (the
"Custodian").
How To Contact The Funds
For information on the Funds or your account, call a Montgomery Shareholder
Service Representative at:
(800) 572-FUND (3863)
Mail your completed application, any checks, investment or redemption
instructions and correspondence to:
Regular Mail Express Mail or Overnight Service
- ------------ ---------------------------------
The Montgomery Funds The Montgomery Funds
c/o DST Systems, Inc. c/o DST Systems, Inc.
P.O. Box 419073 1004 Baltimore St.
Kansas City, MO 64141-6073 Kansas City, MO 64105
Visit the Montgomery World Wide Web Site at:
www.xperts.montgomery.com/1
How To Invest In The Funds
The Funds' shares are offered only through financial intermediaries and
financial professionals, with no sales load, at their next-determined net asset
value after receipt of an order with payment. The Funds' shares are offered for
sale by Fund Distributor, Inc., the Funds' Distributor, 101 California Street,
San Francisco, California 94111, (800) 572-3863, and through selected securities
brokers and dealers.
If an order, together with payment in proper form, is received by the Transfer
Agent, the Distributor, or certain administrators of 401(k) and other retirement
plans by 4:00 p.m., New York time, on any day that the New York Stock
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<PAGE>
Exchange ("NYSE") is open for trading, Fund shares will be purchased at the
Fund's next-determined net asset value. Orders and payment for the Government
Reserve Fund must be received by 12:00 noon, New York time. Orders for Fund
shares received after the Funds' cutoff times will be purchased at the
next-determined net asset value after receipt of the order. Shares of the Fixed
Income Funds will not be priced on a national bank holiday.
The minimum initial investment in each Fund is $1,000 (including IRAs) and $100
for subsequent investments. The Manager or the Distributor, in its discretion,
may waive these minimums. If you buy shares through a broker or investment
adviser instead of directly from the Distributor, different minimum investment
requirements may apply. The Funds do not accept third party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on banks located in the U.S. Purchases may also be made in certain
circumstances by payment of securities. See the Statement of Additional
Information for further details.
Initial Investments
Minimum Initial Investment (including IRAs):..............................$1,000
Initial Investments by Check
o Complete the Account Application. Tell us in which Fund(s) you want to
invest and make your check payable to The Montgomery Funds.
o A charge may be imposed on checks that do not clear.
o Dividends do not begin to accrue on the Fixed Income Funds until your check
has cleared.
Initial Investments by Wire
o Call the Transfer Agent to tell them you intend to make your initial
investment by wire. Provide the Transfer Agent with your name, dollar
amount to be invested and Fund(s) in which you want to invest. They will
provide you with further instructions to complete your purchase. Complete
information regarding your account must be included in all wire
instructions to ensure accurate handling of your investment.
o A completed Account Application must be sent to the Transfer Agent by
facsimile. The Transfer Agent will provide you with its FAX number over the
phone.
o Request your bank to transmit immediately available funds by wire for
purchase of shares in your name to the following:
Investors Fiduciary Trust Company
ABA #101003621
For: DST Systems, Inc.
Account #7526601
Attention: The Montgomery Funds
For Credit to: (shareholder(s) name)
Shareholder Account Number: (shareholder(s) account number)
Name of Fund: (Montgomery Fund name)
o Your bank may charge a fee for any wire transfers.
o The Funds and the Distributor each reserve the right to reject any purchase
order in whole or in part.
Initial Investments by Telephone
You are eligible to make an initial investment into a new Fund by telephone
under the following conditions:
o You must be a shareholder in another Montgomery Fund.
o You must have been a shareholder for at least 30 days.
o Your existing account registration will be duplicated in the new Fund.
o Your initial telephone purchase into the new Fund must meet initial
investment minimums and is limited to the combined aggregate net asset
value of your existing accounts or $10,000, whichever is less.
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o The Fund must receive your check or wire transfer within three business
days of the telephone purchase.
o The Fund reserves the right to collect any losses to the Fund from the
shareholder's existing account(s) that result from a telephone purchase not
funded within three business days.
Subsequent Investments
Minimum Subsequent Investment (including IRAs):.............................$100
Subsequent Investments by Check
o Make your check payable to The Montgomery Funds. Enclose an investment stub
with your check. If you do not have an investment stub, mail your check
with written instructions indicating the Fund name and account number to
which your investment should be credited.
o A charge may be imposed on checks that do not clear.
Subsequent Investments by Wire
o You do not need to contact the Transfer Agent prior to making subsequent
investments by wire. Instruct your bank to wire funds to the Transfer
Agent's affiliated bank by using the bank wire information under "Initial
Investments by Wire."
Subsequent Investments by Telephone
o Shareholders are automatically eligible to make telephone purchases. To
make a purchase, call the Transfer Agent at (800) 572-FUND (3863) before
the Fund cutoff time.
o Shares for IRAs may not be purchased by phone.
o The maximum telephone purchase is an amount up to five times your account
value on the previous day.
o Payments for shares purchased must be received by the Transfer Agent within
three business days after the purchase request. Write your confirmed
purchase number on your check or include it in your wire instructions.
o You should do one of the following to ensure payment is received in time:
o Transfer funds directly from your bank account by sending a letter and a
voided check or deposit slip (for a savings account) to the Transfer Agent.
o Send a check by overnight or second day courier service.
o Instruct your bank to wire funds to the Transfer Agent's affiliated bank by
using the bank wire information under the section titled "Initial
Investments by Wire."
Automatic Account Builder ("AAB")
o AAB will be established on existing accounts only. You may not use an AAB
investment to open a new account. The minimum automatic investment amount
is each Fund's subsequent investment minimum.
o Your bank must be a member of the Automated Clearing House.
o To establish AAB, attach a voided check (checking account) or preprinted
deposit slip (savings account) from your bank account to your Montgomery
account application or your letter of instruction. Investments will
automatically be transferred into your Montgomery account from your
checking or savings account.
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o Investments may be transferred either monthly or quarterly on or up to two
business days before the 5th or 20th day of the month. If no day is
specified on your account application or your letter of instruction, the
20th of each month will be selected.
o You should allow 20 business days for this service to become effective.
o You may cancel your AAB at any time by sending a letter to the Transfer
Agent. Your request will be processed upon receipt.
Payroll Deduction
o Investments through payroll deduction will be established on existing
accounts only. You may not use payroll deduction to open a new account. The
minimum payroll deduction amount for each Fund is $100 per payroll
deduction period.
o You may automatically deposit a designated amount of your paycheck directly
into a Montgomery Fund account.
o Please call the Transfer Agent to receive instructions to establish this
service.
Telephone Transactions
You agree to reimburse the Funds for any expenses or losses incurred in
connection with transfers from your accounts, including any caused by your
bank's failure to act in accordance with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf, any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued by the
Funds at any time upon 30-days' written notice, or by you at any time by written
notice to the Funds. Your request will be processed upon receipt.
Although Fund shares are priced at the net asset value next determined after
receipt of a purchase request, shares are not purchased until payment is
received. Should payment not be received when required, the Transfer Agent will
cancel the telephone purchase request and you may be responsible for any losses
incurred by a Fund. The Funds and the Transfer Agent will not be liable for
following instructions communicated by telephone reasonably believed to be
genuine. The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special authorization number or other personal information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone transactions only if such reasonable
procedures are not followed.
Retirement Plans
Shares of the Funds are available for purchase by any retirement plan, including
Keogh plans, 401(k) plans, 403(b) plans and IRAs. Certain of the Funds are
available for purchase through administrators for retirement plans. Investors
who purchase shares as part of a retirement plan should address inquiries and
seek investment servicing from their plan administrators. Plan administrators
may receive compensation from the Funds for performing shareholder services.
Share Certificates
Share certificates will not be issued by the Funds. All shares are held in
non-certificated form registered on the books of the Funds and the Transfer
Agent for the account of the shareholder.
How to Redeem an Investment in the Funds
The Funds will redeem all or any portion of an investor's outstanding shares
upon request. Redemptions can be made on any day that the NYSE is open for
trading (except national bank holidays for the Fixed-Income Funds). The
redemption price is the net asset value per share next determined after the
shares are validly tendered for redemption and such request is received by the
Transfer Agent or, in the case of repurchase orders, the securities dealer.
Payment of redemption proceeds
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is made promptly regardless of when redemption occurs and normally within three
days after receipt of all documents in proper form, including a written
redemption order with appropriate signature guarantee. Redemption proceeds will
be mailed or wired in accordance with the shareholder's instructions. The Funds
may suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the Securities and Exchange Commission (SEC). In
the case of shares purchased by check and redeemed shortly after the purchase,
the Transfer Agent will not mail redemption proceeds until 15 days from the
purchase date. Shares tendered for redemptions through brokers or dealers (other
than the Distributor) may be subject to a service charge by such brokers or
dealers. Procedures for requesting a redemption are set forth below.
Redeeming by Written Instruction
o Write a letter giving your name, account number, the name of the Fund from
which you wish to redeem and the dollar amount or number of shares you wish
to redeem.
o The letter must be signed the same way your account is registered. If you
have a joint account, all holders of the account must sign.
o Signature guarantee your letter if you want the redemption proceeds to go
to a party other than the account owner(s), your predesignated bank account
or if the dollar amount of the redemption exceeds $50,000. Signature
guarantees may be provided by an eligible guarantor institution such as a
commercial bank, an NASD member firm such as a stock broker, a savings
association or national securities exchange. Contact the Transfer Agent for
more information.
o If you do not have a predesignated bank account and want to wire your
redemption proceeds, include a voided check or deposit slip with your
letter. The minimum amount that may be wired is $500 (wire charges, if any,
will be deducted from redemption proceeds). The Fund reserves the right to
permit lesser wire amounts or fees in the Manager's discretion.
Redeeming by Check
o Check writing is available on the Government Reserve and Short Government
Bond Funds.
o Check writing is not available for IRA accounts.
o The minimum amount per check is $250. A check for less may be returned to
you.
o All checks will require only one signature unless otherwise indicated.
o You should not write a check to close your Fixed Income Fund account.
o Checks will be returned to you at the end of each month.
o A charge may be imposed for any stop payments requested.
o Federal banking law requires us to tell you that, technically, the Funds'
checks are "drafts" payable through the Master Transfer Agent. This
difference should not affect you.
Redeeming by Telephone
o Unless you have declined telephone redemption privileges on your New
Account application, you may redeem shares up to $50,000 by calling the
Transfer Agent before the Fund cutoff time. This service is not available
for IRA accounts.
o If you included bank wire information on your application or made
subsequent arrangements to accommodate bank wire redemptions, you may
request that the Transfer Agent wire your redemption proceeds to your bank
account. Allow at
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least two business days for redemption proceeds to be credited to your bank
account. If you want to wire your redemption proceeds to arrive at your
bank on the same business day (subject to bank cutoff times), there is a
$10 fee.
o Telephone redemption privileges will be suspended 30 days after an address
change. All redemption requests during this period must be in writing with
a guaranteed signature.
o Telephone redemption privileges may be canceled after an account is opened
by instructing the Transfer Agent in writing. Your request will be
processed upon receipt.
By establishing telephone redemption privileges, a shareholder authorizes the
Funds and the Transfer Agent to act upon the instruction of the shareholder or
his or her designee by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the authorization. When a shareholder appoints a designee on the
New Account application or by other written authorization, the shareholder
agrees to be bound by the telephone redemption instructions given by the
shareholder's designee. The Funds may change, modify or terminate these
privileges at any time upon 60-days' notice to shareholders. The Funds will not
be responsible for any loss, damage, cost or expense arising out of any
transaction that appears on the shareholder's confirmation after 30 days
following mailing of such confirmation. See the discussion of Fund telephone
procedures and liability under "Telephone Transactions."
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal marketactivity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.
Systematic Withdrawal Plan
Under a Systematic Withdrawal Plan, a shareholder with an account value of
$1,000 or more in a Fund may receive (or have sent to a third party) periodic
payments (by check or wire). The minimum payment amount is $100 from each Fund
account. Payments may be made either monthly or quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the redemption proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.
Small Accounts
Due to the relatively high cost of maintaining smaller accounts, each Fund will
redeem shares from any account if at any time, because of redemptions by the
shareholder, the total value of a shareholder's account is less than $1,000. If
a Fund decides to make an involuntary redemption, the shareholder will first be
notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional investment to bring the
value of that account at least to the minimum investment required to open an
account before the Fund takes any action.
Exchange Privileges And Restrictions
You may exchange shares from another Fund with the same registration, Taxpayer
Identification number and address. An exchange may result in a recognized gain
or loss for income tax purposes. See the discussion of telephone procedures and
limitations of liability under "Telephone Transactions."
Purchasing and Redeeming Shares by Exchange
o You are automatically eligible to make telephone exchanges with your
Montgomery account.
o Exchange purchases and redemptions will be processed using the
next-determined net asset value (with no sales charge or exchange fee)
after your request is received. Your request is subject to the Funds'
cutoff times.
o Exchange purchases must meet the minimum investment requirements of the
Fund you intend to purchase.
o You may exchange for shares of a Fund only in states where that Fund's
shares are qualified for sale and only for Funds offered by this
Prospectus.
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o You may not exchange for shares of a Fund that is not open to new
shareholders unless you have an existing account with that Fund.
o Because excessive exchanges can harm a Fund's performance, the Trusts
reserve the right to terminate your exchange privileges if you make more
than four exchanges out of any one Fund during a 12-month period. The Fund
may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days (accounts under common control and accounts
with the same Taxpayer Identification number will be counted together).
Exchanges out of the Fixed-Income Funds are exempt. A shareholder's
exchanges may be restricted or refused if a Fund receives, or the Manager
anticipates, simultaneous orders affecting significant portions of that
Fund's assets and, in particular, a pattern of exchanges coinciding with a
"market timing" strategy. The Trusts reserve the right to refuse exchanges
by any person or group if, in the Manager's judgment, a Fund would be
unable to effectively invest the money in accordance with its investment
objective and policies, or would otherwise be potentially adversely
affected. Although the Trusts attempt to provide prior notice to affected
shareholders when it is reasonable to do so, they may impose these
restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and U.S. Department of Labor regulations (for those limits, see plan
materials). The Trusts reserve the right to terminate or modify the
exchange privileges of Fund shareholders in the future.
Automatic Transfer Service ("ATS")
You may elect systematic exchanges out of the Fixed-Income Funds into any other
Fund. The minimum exchange is $100. Periodically investing a set dollar amount
into a Fund is also referred to as dollar-cost averaging, because the number of
shares purchased will vary depending on the price per share. Your account with
the recipient Fund must meet the applicable minimum of $1,000. Exchanges out of
the Fixed-Income Funds are exempt from the four-exchanges limit policy.
Directed Dividend Service
If you own shares of the Fixed-Income Funds, you may elect to use your monthly
dividends to automatically purchase additional shares of another Fund. Your
account with the recipient Fund must meet the applicable minimum of $1,000.
Brokers and Other Intermediaries
Investing Through Securities Brokers, Dealers and Financial Intermediaries
Investors may purchase shares of a Fund from selected securities brokers,
dealers or through financial intermediaries such as benefit plan administrators.
Investors should contact these agents directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged by these agents. Purchase orders through securities brokers,
dealers and other financial intermediaries are effected at the next-determined
net asset value after receipt of the order by such agent, provided the agent
transmits such order on a timely basis to the Transfer Agent so that it is
received by 4 p.m. (1 p.m. for the Government Reserve Fund), New York time, on
days that the Fund issues shares. Orders received after that time will be
purchased at the next-determined net asset value. To the extent that these
agents perform shareholder servicing activities for the Fund, they may receive
fees from the Fund for such services.
Redemption Orders Through Brokerage Accounts
Shareholders also may sell shares back to the Funds by wire or telephone through
the Distributor or selected securities brokers or dealers. Shareholders should
contact their securities broker or dealer for appropriate instructions and for
information concerning any transaction or service fee that may be imposed by the
broker or dealer. Shareholders are entitled to the net asset value next
determined after receipt of a redemption order by such broker-dealer, provided
the broker-dealer transmits such order on a timely basis to the Transfer Agent
so that it is received by 4 p.m., New York time (12 noon for the Government
Reserve Fund), on a day that the Fund redeems shares. Orders received after that
time are entitled to the net asset value next determined after receipt.
34
<PAGE>
How Net Asset Value Is Determined
The net asset value of each Fund is determined once daily as of 4 p.m. (12 noon
for the Government Reserve Fund), New York time, on each day that the NYSE is
open for trading (except for bank holidays for the Fixed Income Funds).
Per-share net asset value is calculated by dividing the value of each Fund's
total net assets by the total number of that Fund's shares then outstanding.
As more fully described in the Statement of Additional Information, portfolio
securities are valued using current market valuations: either the last reported
sales price or, in the case of securities for which there is no reported last
sale and fixed-income securities, the mean between the closing bid and asked
price. Securities for which market quotations are not readily available or that
are illiquid are valued at their fair values as determined in good faith under
the supervision of the Trusts' officers, and by the Manager and the Pricing
Committee of the Boards, respectively, in accordance with methods that are
specifically authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.
The value of securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major bank or, if no such quotation is available, at the rate of exchange
determined in accordance with policies established in good faith by the Board.
Because the value of securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares even
without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before the Funds determine their
net asset values, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Funds calculate their
net asset values may not be reflected unless the Manager, under supervision of
the Board, determines that a particular event would materially affect a Fund's
net asset value.
Dividends And Distributions
<TABLE>
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Funds intend to distribute according to the following schedule:
<CAPTION>
Income Dividends Capital Gains
<S> <C> <C>
Equity Funds (except Equity Declared and paid in the last quarter of Declared and paid in the last
Income Fund) each year* quarter of each year*
Equity Income Fund Declared and paid on or about the last Declared and paid in the last
business day of each quarter. quarter of each year*
Multi-Strategy Funds Declared and paid in the last quarter of Declared and paid in the last
each year* quarter of each year*
Fixed-Income Funds Declared daily and paid monthly on or Declared and paid in the last
about the last business day of each month quarter of each year*
- -------------
<FN>
* Additional distributions, if necessary, may be made following each Fund's
fiscal year end (June 30) in order to avoid the imposition of tax on a Fund.
</FN>
</TABLE>
Unless investors request cash distributions in writing at least seven business
days before a distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional Class P
shares of the applicable Fund and credited to the shareholder's account at the
closing net asset value on the reinvestment date.
35
<PAGE>
Distributions Affect a Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of a Fund,
regardless of how long you have held the shares. Dividends and capital gains
awaiting distribution are included in each Fund's daily net asset value. The
share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
"Buying a Dividend"
If you buy shares of a Fund just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." In the example above,
if you bought shares on December 30, you would have paid $10.00 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend, and your
shares would now be worth $9.50 per share. Unless your account is a tax-deferred
account, dividends paid to you would be included in your gross income for tax
purposes even though you may not have participated in the increase of net asset
value of the Fund, regardless whether you reinvested the dividends.
Taxation
Each 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"), by distributing substantially all of its net
investment income and net capital gains to its shareholders and meeting other
requirements of the Code relating to the sources of its income and
diversification of assets. Accordingly, the Funds generally will not be liable
for federal income tax or excise tax based on net income except to the extent
their earnings are not distributed or are distributed in a manner that does not
satisfy the requirements of the Code. If a Fund is unable to meet certain Code
requirements, it may be subject to taxation as a corporation. Funds investing in
foreign securities also may incur tax liability to the extent they invest in
"passive foreign investment companies." See "Portfolio Securities" and the
Statement of Additional Information.
For federal income tax purposes, any dividends derived from net investment
income and any excess of net short-term capital gain over net long-term capital
loss that investors (other than certain tax-exempt organizations that have not
borrowed to purchase Fund shares) receive from the Funds are considered ordinary
income. Part of the distributions paid by the Funds may be eligible for the
dividends-received deduction allowed to corporate shareholders under the Code.
Distributions of the excess of net long-term capital gain over net short-term
capital loss from transactions of a Fund are treated by shareholders as
long-term capital gains regardless of the length of time the Fund's shares have
been owned. Distributions of income and capital gains are taxed in the manner
described above, whether they are taken in cash or are reinvested in additional
shares of the Funds.
Each Fund will inform its investors of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisors regarding the particular tax consequences to them
of an investment in shares of the Funds. Additional information on tax matters
relating to the Funds and their shareholders is included in the Statement of
Additional Information.
General Information
The Trusts
All of the Funds with the exception of the Asset Allocation Fund are series of
The Montgomery Funds, a Massachusetts business trust organized on May 10, 1990.
The Asset Allocation Fund is a series of The Montgomery Funds II, a Delaware
business trust organized on September 10, 1993. The Agreement and Declarations
of Trust of both Trusts permit their Boards to issue an unlimited number of full
and fractional shares of beneficial interest, $.01 par value, in any number of
series. The assets and liabilities of each series within either of the two
Trusts are separate and distinct from each other series.
36
<PAGE>
This Prospectus relates only to the Class P shares of the Funds. The Funds offer
other classes of shares to eligible investors and may in the future designate
other classes of shares for specific purposes.
Shareholder Rights
Shares issued by the Funds have no preemptive, conversion or subscription
rights. Each whole share is entitled to one vote as to any matter on which it is
entitled to vote and each fractional share is entitled to a proportionate
fractional vote. Shareholders have equal and exclusive rights as to dividends
and distributions as declared by each Fund and to the net assets of each Fund
upon liquidation or dissolution. Each Fund, as a separate series of its Trust,
votes separately on matters affecting only that Fund (e.g., approval of the
Investment Management Agreement); all series of each Trust vote as a single
class on matters affecting all series of that Trust jointly or that Trust as a
whole (e.g., election or removal of trustees). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the trustees of that Trust.
Although the Trusts are not required and do not intend to hold annual meetings
of shareholders, such meetings may be called by each Trust's Board at its
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of the Trust for the purpose of electing or removing trustees.
Shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of trustees pursuant to the provisions
of Section 16(c) of the Investment Company Act.
Performance Information
From time to time, the Funds may publish their total return, and, in the case of
certain Funds, current yield and tax equivalent yield in advertisements and
communications to investors. Performance data may be quoted separately for the
Class P shares as for the other classes. Total return information generally will
include a Fund's average annual compounded rate of return over the most recent
four calendar quarters and over the period from the Fund's inception of
operations. A Fund may also advertise aggregate and average total return
information over different periods of time. Each Fund's average annual
compounded rate of return is determined by reference to a hypothetical $1,000
investment that includes capital appreciation and depreciation for the stated
period according to a specific formula. Aggregate total return is calculated in
a similar manner, except that the results are not annualized. Total return
figures will reflect all recurring charges against each Fund's income.
Current yield as prescribed by the SEC is an annualized percentage rate that
reflects the change in value of a hypothetical account based on the income
received from the Fund during a 30-day period. It is computed by determining the
net change, excluding capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period, and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. See "Performance
Information" in the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any presentation
of the Funds' total return or current yield for any prior period should not be
considered as a representation of what an investor's total return or current
yield may be in any future period. The Funds' Annual Report contains additional
performance information and is available upon request and without charge by
calling (800) 572-FUND (3863).
Legal Opinion
The validity of shares offered by this Prospectus will be passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shareholder Reports and Inquiries
During the year, the Funds will send you the following information:
o Confirmation statements are mailed after every transaction that affects
your account balance, except for most money market transactions (monthly)
and preauthorized automatic investment, exchange and redemption services
(quarterly).
37
<PAGE>
o Account statements are mailed after the close of each calendar quarter.
(Retain your fourth-quarter statement for your tax records.)
o Annual and semiannual reports are mailed approximately 60 days after June
30 and December 31.
o 1099 tax form(s) are mailed by January 31.
o Annual updated Prospectus is mailed to existing shareholders in October or
November.
Unless otherwise requested, only one copy of each shareholder report or other
material sent to shareholders will be mailed to each household with accounts
under common ownership and the same address regardless of the number of
shareholders or accounts at that household or address. Any questions should be
directed to The Montgomery Funds at (800) 572-FUND (3863).
Backup Withholding
Taxpayer Identification Number
Be sure to complete the Taxpayer Identification number (TIN) section of the New
Account application when you open an account. Federal tax law requires the Fund
to withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or Taxpayer Identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required.
A shareholder who does not have a TIN should apply for one immediately by
contacting the local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting receipt of a TIN. Special rules apply for certain entities. For
example, for an account established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished. If a shareholder has been notified by the
IRS that he or she is subject to backup withholding because he or she failed to
report all interest and dividend income on his or her tax return and the
shareholder has not been notified by the IRS that such withholding will cease,
the shareholder should cross out the appropriate item on the New Account
application. Dividends paid to a foreign shareholder's account by a Fund may be
subject to up to 30% withholding instead of backup withholding.
A shareholder that is an exempt recipient should furnish a TIN and check the
appropriate box. Exempt recipients include certain corporations, certain
tax-exempt entities, tax-exempt pension plans and IRAs, governmental agencies,
financial institutions, registered securities and commodities dealers and
others. For further information, see Section 3406 of the Code and consult a tax
advisor.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesperson, dealer or other
person is authorized to give any information or make any representation other
than those contained in this Prospectus, the Statement of Additional Information
or in the Funds' official sales literature.
38
<PAGE>
GLOSSARY
Asset-backed securities. Asset backed securities 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.
Cash equivalents. Cash equivalents are short-term, interest-bearing instruments
or deposits and may include, for example, commercial paper, certificates of
deposit, repurchase agreements, bankers' acceptances, U.S. Treasury bills, bank
money market deposit accounts, master demand notes and money market mutual
Funds. These consist of high-quality debt obligations, certificates of deposit
and bankers' acceptances rated at least A-1 by S&P or Prime-1 by Moody's, or the
issuer has an outstanding issue of debt securities rated at least A by S&P or
Moody's, or are of comparable quality in the opinion of the Manager.
Collateral assets. These include cash, letters of credit, U.S. government
securities or other high-grade liquid debt or equity securities (except that
instruments collateralizing loans by the Money Market Funds must be debt
securities rated in the highest grade). Collateral assets are separately
identified and rendered unavailable for investment or sale.
Collateralized Mortgage Obligations (CMOs). These are derivative
mortgage-related securities that separate the cash flows of mortgage pools into
different classes or tranches. Stripped mortgage securities are CMOs that
allocate different proportions of interest and principal payments on a pool of
mortgages. One class may receive all of the interest (the interest only, or IO
class) whereas another may receive all of the principal (principal only, or PO
class). The yield to maturity on any IO or PO class is extremely sensitive not
only to changes in interest rates but also to the rate of principal payments and
prepayments on underlying mortgages. In the most extreme cases, an IO class may
become worthless.
Convertible security. This is a fixed-income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
The price of a convertible security is influenced by the market value of the
underlying common stock.
Covered call option. A call option is "covered" if the Fund owns the underlying
securities, has the right to acquire such securities without additional
consideration, has collateral assets sufficient to meet its obligations under
the option or owns an offsetting call option.
Covered put option. A put option is "covered" if the Fund has collateral assets
with a value not less than the exercise price of the option or holds a put
option on the underlying security.
Depositary receipts include American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other similar
instruments. Depositary receipts are receipts typically issued in connection
with a U.S. or foreign bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation.
Derivatives include forward currency exchange contracts, stock options, currency
options, stock and stock index options, futures contracts, swaps and options on
futures contracts on U.S. government and foreign government securities and
currencies.
Dollar roll transaction. A dollar roll transaction is similar to a reverse
repurchase agreement except that it requires a Fund to repurchase a similar
rather than the same security.
Duration. Traditionally, a debt security's "term to maturity" characterizes a
security's sensitivity to changes in interest rates. However, "term to maturity"
measures only the time until a debt security provides its final payment, taking
no account of prematurity payments. Most debt securities provide interest
("coupon") payments in addition to a final ("par") payment at maturity, and some
securities have call provisions allowing the issuer to repay the instrument in
full before maturity date, each of which affect the security's response to
interest rate changes. "Duration" is considered a more precise measure of
interest rate risk than "term to maturity." Determining duration may involve the
Manager's estimates of future
39
<PAGE>
economic parameters, which may vary from actual future values. Fixed-income
securities with effective durations of three years are more responsive to
interest rate fluctuations than those with effective durations of one year. For
example, if interest rates rise by 1%, the value of securities having an
effective duration of three years will generally decrease by approximately 3%.
Emerging markets companies. A company is considered to be an emerging markets
company if its securities are principally traded in the capital market of an
emerging markets country; it derives at least 50% of its total revenue from
either goods produced or services rendered in emerging markets countries or from
sales made in such emerging markets countries, regardless of where the
securities of such companies are principally traded; or it is organized under
the laws of, and with a principal office in, an emerging markets country. An
emerging markets country is one having an economy and market that are or would
be considered by the World Bank or the United Nations to be emerging or
developing.
Equity derivative securities include, among other things, options on equity
securities, warrants and futures contracts on equity securities.
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 transitions may be volatile and may present the
Fund with counterparty risks.
FHLMC. The Federal Home Loan Mortgage Corporation.
FNMA. The Federal National Mortgage Association.
Forward currency contracts. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency for
an agreed-upon price at a future date. The Funds generally do not enter into
forward contracts with terms greater than one year. A Fund generally enters into
forward contracts only under two circumstances. First, if a Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency needed
to settle the transaction. Second, if the Manager believes that the currency of
a particular foreign country will substantially rise or fall against the U.S.
dollar, it may enter into a forward contract to buy or sell the currency
approximating the value of some or all of a Fund's portfolio securities
denominated in such currency. A Fund will not enter into a forward contract if,
as a result, it would have more than one-third of total assets committed to such
contracts (unless it owns the currency that it is obligated to deliver or has
caused its custodian to segregate Segregable Assets having a value sufficient to
cover its obligations). Although forward contracts are used primarily to protect
a Fund from adverse currency movements, they involve the risk that currency
movements will not be accurately predicted.
Futures and options on futures. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, a Fund may sell interest
rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated increase
in interest rates and a corresponding decline in debt securities it owns. Each
Fund will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
GNMA. The Government National Mortgage Association.
Illiquid securities. The Funds treat any securities subject to restrictions on
repatriation for more than seven days and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit as illiquid. The Funds also treat repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on formal
markets for some period of time but for which an active informal market exists,
or securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board and guidelines adopted by
the Board, the Manager has determined to be liquid.
Investment grade. Investment-grade debt securities are those rated within the
four highest grades by S&P (at least BBB), Moody's (at least Baa) or Fitch (at
least Baa) or in unrated debt securities deemed to be of comparable quality by
the Manager using guidelines approved by the Board of Trustees.
40
<PAGE>
Leverage. Some Funds may use leverage in an effort to increase return. Although
leverage creates an opportunity for increased income and gain, it also creates
special risk considerations. Leveraging also creates interest expenses that can
exceed the income from the assets retained.
Options on securities, securities indices and currencies. A Fund may purchase
call options on securities that it intends to purchase (or on currencies in
which those securities are denominated) in order to limit the risk of a
substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A Fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A Fund
may purchase put and call options on stock indices in order to hedge against
risks of stock market or industry wide stock price fluctuations.
Repurchase agreement. With a repurchase agreement, a Fund acquires a U.S.
government security or other high-grade liquid debt instrument (for the Money
Market Funds, the instrument must be rated in the highest grade) from a
financial institution that simultaneously agrees to repurchase the same security
at a specified time and price.
Reverse dollar roll transactions. When a Fund engages in a reverse dollar roll,
it purchases a security from a financial institution and concurrently agrees to
resell a similar security to that institution at a later date at an agreed-upon
price.
Reverse repurchase agreement. In a reverse repurchase agreement, a Fund sells to
a financial institution a security that it holds and agrees to repurchase at an
agreed-upon price and date.
S&P 500. Standard & Poor's 500 Composite Price Index.
Securities lending. A Fund may lend securities to brokers, dealers and other
financial organizations. Each securities loan is collateralized with collateral
assets in an amount at least equal to the current market value of the loaned
securities, plus accrued interest. There is a risk of delay in receiving
collateral or in recovering the securities loaned or even a loss of rights in
collateral should the borrower fail financially.
U.S. government securities. These include U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Variable-rate demand notes (VRDNs). Variable-rate demand notes are instruments
with rates of interest adjusted periodically or that "float" continuously
according to specific formulae and often have a demand feature entitling the
purchaser to resell the securities.
A warrant. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
When-issued and forward commitment securities. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed delivery" basis. The price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but a Fund will enter into
when-issued and forward commitments only with the intention of actually
receiving or delivering the securities. No income accrues on securities that
have been purchased pursuant to a forward commitment or on a when-issued basis
prior to delivery to a Fund. At the time a Fund enters into a transaction on a
when-issued or forward commitment basis, it supports its obligation with
collateral assets equal to the value of the when-issued or forward commitment
securities and causes the collateral assets to be marked to market daily. There
is a risk that the securities may not be delivered and that the Fund may incur a
loss.
Zero coupon bonds. Zero coupon bonds are debt obligations that do not pay
current interest and are consequently issued at a significant discount from face
value. The discount approximates the total interest the bonds will accrue and
compound
41
<PAGE>
over the period to maturity or the first interest-payment date at a rate of
interest reflecting the market rate of interest at the time of issuance.
42
<PAGE>
Investment Manager
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
1-800-572-FUND
Distributor
Funds Distributor, Inc.
101 California Street
San Francisco, California 94111
1-800-572-FUND
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Transfer Agent
DST Systems, Inc.
P.O. Box 419073
Kansas City, Missouri 64141-6073
1-800-572-3863
Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Legal Counsel
Paul, Hastings, Janofsky & Walker, LLP
345 California Street
San Francisco, California 94104
<PAGE>
---------------------------------------------------------------------
PART A
SUPPLEMENT TO PROSPECTUS FOR CLASS R SHARES
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
Additional Supplement dated July 31, 1997 to
Prospectus dated November 12, 1996
For the Montgomery Institutional Series: Emerging Markets Portfolio
On July 31, 1997, Montgomery Asset Management, L.P. completed the sale of
substantially all of its assets to Montgomery Asset Management, LLC, a
subsidiary of Commerzbank AG (the "New Manager"). At a special meeting of
shareholders on June 23, 1997, the shareholders of the Fund approved a new
Investment Management Agreement with the New Manager, effective July 31, 1997
for an initial two-year period.
Commerzbank, the third largest publicly held commercial bank in Germany, has
total assets of approximately $268 billion. Commerzbank and its affiliates had
over $79 billion in assets under management as of June 30, 1997. Commerzbank's
asset management operations involve more than 1,000 employees in 13 countries
worldwide.
Funds Distributor, Inc., which is not affiliated with the New Manager, has
replaced Montgomery Securities as the distributor for the Fund. The New Manager
has also become the administrator for the Fund.
The New Manager has not changed how the Fund is managed or the services offered
to shareholders.
<PAGE>
---------------------------------------------------------------------
PART A
SUPPLEMENT TO PROSPECTUS FOR CLASS R SHARES
MONTGOMERY ASSET ALLOCATION FUND
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
Additional Supplemental dated July 31, 1997 to
Prospectus dated June 30, 1997
For all Funds
On July 31, 1997, Montgomery Asset Management, L.P. completed the sale of
substantially all of its assets to Montgomery Assets Management, LLC, a
subsidiary of Commerzbank AG (the "New Management"). At a special meeting of
shareholders on June 23, 1997, the shareholders of each Fund approved a new
Investment Management Agreement with the New Manager, effective July 31, 1997
for an initial two-year period.
Commerzbank, the third largest publicly held commercial bank in Germany, has
total assets of approximately $268 billion. Commerzbank and its affiliates had
over $79 billion in assets under management as of June 30, 1997. Commerzbank's
assets management operations involve more than 1,000 employees in 13 countries
worldwide.
Funds Distributor, Inc., which is not affiliated with the New Manager, has
replaced Montgomery Securities as the distributor for the Funds. The New Manager
has also become the administrator for the Funds.
The New Manager has not claimed how the Funds are managed or the services
offered to shareholders.
<PAGE>
---------------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS
---------------
MONTGOMERY GROWTH FUND
MONTGOMERY EQUITY INCOME FUND
MONTGOMERY SMALL CAP FUND
MONTGOMERY SMALL CAP OPPORTUNITIES FUND
MONTGOMERY MICRO CAP FUND
MONTGOMERY GLOBAL OPPORTUNITIES FUND
MONTGOMERY GLOBAL COMMUNICATIONS FUND
MONTGOMERY INTERNATIONAL GROWTH FUND
MONTGOMERY INTERNATIONAL SMALL CAP FUND
MONTGOMERY EMERGING ASIA FUND
MONTGOMERY EMERGING MARKETS FUND
MONTGOMERY LATIN AMERICA FUND
MONTGOMERY SELECT 50 FUND
MONTGOMERY ASSET ALLOCATION FUND
MONTGOMERY GLOBAL ASSET ALLOCATION FUND
MONTGOMERY SHORT DURATION GOVERNMENT BOND FUND
MONTGOMERY TOTAL RETURN BOND FUND
MONTGOMERY GOVERNMENT RESERVE FUND
MONTGOMERY FEDERAL TAX-FREE MONEY FUND
MONTGOMERY CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
MONTGOMERY CALIFORNIA TAX-FREE MONEY FUND
101 California Street
San Francisco, California 94111
1-800-572-FUND
--------------
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1997,
AS SUPPLEMENTED JULY 31, 1997
The Montgomery Funds and The Montgomery Funds II are open-end
management investment companies organized, respectively, as a Massachusetts and
a Delaware business trust (together, the "Trusts"), each having different series
of shares of beneficial interest. Each of the above-named funds is a series of
The Montgomery Funds, with the exception of the Montgomery Asset Allocation
Fund, which is a series of The Montgomery Funds II (each a "Fund" and,
collectively, the "Funds"). Prior to July 31, 1997, the Funds were managed by
Montgomery Asset Management, L.P. (the "Former Manager") and their shares were
distributed by Montgomery Securities (the "Former Distributor"). On July 31,
1997, Montgomery Asset Management, L.P. completed the sale of substantially all
of its assets to Montgomery Asset Management, LLC, a subsidiary of Commerzbank
AG (the "Manager"). At a special meeting of shareholders on June 23, 1997, the
shareholders of each Fund approved a new Investment Management Agreement with
the Manager, effective July 31, 1997 for an initial two-year period. Funds
Distributor, Inc. ("FDI"), which is not affiliated with Montgomery Asset
Management, LLC, has replaced Montgomery Securities as the distributor for the
Funds. Montgomery Asset Management, LLC, has also become the administrator for
the Funds.
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This Statement of Additional Information contains information in addition to
that set forth in the combined prospectuses for all Funds dated June 30, 1997
(with respect to the Class R shares), dated July 31, 1997 (with respect to the
Class P shares for various series) and dated November 12, 1996 (with respect to
the Class L shares for various series), and as each prospectus may be revised
from time to time (in reference to the appropriate Fund or Funds, the
"Prospectuses"). The Prospectuses provide the basic information a prospective
investor should know before purchasing shares of any Fund and may be obtained
without charge at the address or telephone number provided above. This Statement
of Additional Information is not a prospectus and should be read in conjunction
with the appropriate Prospectuses.
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TABLE OF CONTENTS
Page
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THE TRUSTS...................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS..............................B-4
RISK FACTORS................................................................B-26
INVESTMENT RESTRICTIONS.....................................................B-33
DISTRIBUTIONS AND TAX INFORMATION...........................................B-36
TRUSTEES AND OFFICERS.......................................................B-43
INVESTMENT MANAGEMENT AND OTHER SERVICES....................................B-48
EXECUTION OF PORTFOLIO TRANSACTIONS.........................................B-55
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................B-58
DETERMINATION OF NET ASSET VALUE............................................B-60
PRINCIPAL UNDERWRITER.......................................................B-63
PERFORMANCE INFORMATION.....................................................B-64
GENERAL INFORMATION.........................................................B-72
FINANCIAL STATEMENTS........................................................B-81
Appendix A..................................................................B-90
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THE TRUSTS
The Montgomery Funds is an open-end management investment
company organized as a Massachusetts business trust on May 10, 1990, and The
Montgomery Funds II is an open-end management investment company organized as a
Delaware business trust on September 10, 1993. Both are registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Trusts currently offer shares of beneficial interest, $.01 par value per share,
in various series. Each series offers three classes of shares (Class R, Class P
and Class L).
This Statement of Additional Information pertains to twenty
series of The Montgomery Funds: Montgomery Growth Fund (the "Growth Fund"),
Montgomery Equity Income Fund (the "Equity Income Fund"), Montgomery Small Cap
Fund (the "Small Cap Fund"), Montgomery Small Cap Opportunities Fund (the "Small
Cap Opportunities Fund"), Montgomery Micro Cap Fund (the "Micro Cap Fund"),
Montgomery Global Opportunities Fund (the "Opportunities Fund"), Montgomery
Global Communications Fund (the "Communications Fund"), Montgomery International
Growth Fund (the "International Growth Fund"), Montgomery International Small
Cap Fund (the "International Small Cap Fund"), Montgomery Emerging Asia Fund
(the "Emerging Asia Fund"), Montgomery Emerging Markets Fund (the "Emerging
Markets Fund"), Montgomery Latin America Fund (the "Latin America Fund"),
Montgomery Select 50 Fund (the "Select 50 Fund"), Montgomery Global Asset
Allocation Fund (the "Global Asset Allocation Fund"), Montgomery Short Duration
Government Bond Fund (formerly called the "Montgomery Short Government Bond
Fund") (the "Short Fund"), Montgomery Government Reserve Fund (the "Reserve
Fund"), Montgomery Total Return Bond Fund (the "Total Return Bond Fund")
Montgomery Federal Tax-Free Money Fund (the "Federal Money Fund"), Montgomery
California Tax-Free Intermediate Bond Fund (the "California Intermediate Bond
Fund") and Montgomery California Tax- Free Money Fund (the "California Money
Fund"); as well as one series of The Montgomery Funds II, Montgomery Asset
Allocation Fund (the "Allocation Fund").
Throughout this Statement of Additional Information, certain
Funds may be referred to together using the following terms: the Small Cap,
Small Cap Opportunities, Micro Cap, Equity Income and Growth Funds as the
"Domestic Equity Funds"; the Emerging Asia, Emerging Markets, Latin America
International Small Cap and International Growth Funds as the "International
Funds"; the Opportunities and Communications Funds as the "Global Funds"; the
Select 50, Allocation and Global Asset Allocation Funds as the "Multi-Strategy
Funds";the Short, Reserve Total Return Bond, Federal Money, California
Intermediate Bond and California Money Funds as the "Fixed Income Funds"; the
Federal Money, California Intermediate Bond and California Money Funds as the
"Tax-Free Funds"; the Reserve, Federal Money and California Money Funds as the
"Money Market Funds"; and all of the Funds other than the Tax- Free Funds as the
"Taxable Funds."
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Note that the two Trusts share responsibility for the accuracy
of the Prospectuses and this Statement of Additional Information, and that each
Trust may be liable for misstatements in the Prospectuses and the Statement of
Additional Information that relate solely to the other Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The investment objectives and policies of the Funds are
described in detail in the Prospectus. The following discussion supplements the
discussion in the Prospectus.
Each Fund is a diversified series, except for the Tax-Free
Funds, which are nondiversified series, of either the Montgomery Funds or The
Montgomery Funds II. The achievement of each Fund's investment objective will
depend upon market conditions generally and on the Manager's analytical and
portfolio management skills.
The Asset Allocation Fund and the Global Asset Allocation Fund
are fund-of-funds. Other than U.S. government securities, neither the Asset
Allocation Fund nor the Global Asset Allocation Fund owns securities of their
own. Instead, each of Asset Allocation Fund and the Global Asset Allocation Fund
invests its assets in a number of funds of The Montgomery Funds family (each, an
"Underlying Fund"). Investors of the Asset Allocation Fund and the Global Asset
Allocation Fund should therefore review the discussion in this Statement of
Additional Information that relates to each Underlying Fund of the Asset
Allocation Fund and the Global Asset Allocation Fund.
Portfolio Securities
Depositary Receipts. The Domestic Equity, Select 50,
International and Global Funds may hold securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and other similar global instruments available in emerging markets, or
other securities convertible into securities of eligible issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. Generally, ADRs in registered form
are designed for use in U.S. securities markets, and EDRs and other similar
global instruments in bearer form are designed for use in European securities
markets. For purposes of these Funds' investment policies, these Funds'
investments in ADRs, EDRs and similar instruments will be deemed to be
investments in the equity securities representing the securities of foreign
issuers into which they may be converted.
Other Investment Companies. Each of the Equity Income, Select
50, International, Global, and Fixed Income Funds may invest up to 10% of its
total assets in securities issued by other investment companies investing in
securities in which the Fund can
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invest provided that such investment companies invest in portfolio securities in
a manner consistent with the Fund's investment objective and policies, except
for the Money Market Funds, which may so invest up to 35% of their total assets
(and, except for the Money Market Funds, not in money market funds). Applicable
provisions of the Investment Company Act require that a Fund limit its
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 10% (or 35% for the Money Market Funds) of the value of
a Fund's total assets will be invested in the aggregate in securities of
investment companies as a group; and (b) either (i) a Fund and affiliated
persons of that Fund not own together more than 3% of the total outstanding
shares of any one investment company at the time of purchase (and that all
shares of the investment company held by that Fund in excess of 1% of the
company's total outstanding shares be deemed illiquid), or (ii) a Fund not
invest more than 5% of its total assets in any one investment company and the
investment not represent more than 3% of the total outstanding voting stock of
the investment company at the time of purchase. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that Fund bears directly in connection with its own operations.
In accordance with applicable regulatory provisions of the
State of California, the Manager has agreed to waive its management fee with
respect to assets of the Funds that are invested in other open-end investment
companies.
U.S. Government Securities. Because the Short and Reserve
Funds invest a substantial portion, if not all, of their net assets, and the
Equity Income Fund may invest a substantial portion of its net assets, in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities"), these Funds generally will
have a lower yield than if they purchased higher yielding commercial paper or
other securities with correspondingly greater risk instead of U.S. Government
securities.
Generally, the value of U.S. Government securities held by the
Funds will fluctuate inversely with interest rates. U.S. Government securities
in which the Funds may invest include debt obligations of varying maturities
issued by the U.S. Treasury or issued or guaranteed by an agency or
instrumentality of the U.S. Government, including the Federal Housing
Administration ("FHA"), Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Bank, Farm Credit System Financial Assistance
Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Financing
Corporation, Federal
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Financing Bank, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, Resolution Funding Corporation,
Student Loan Marketing Association and Washington Metropolitan Area Transit
Authority. Direct obligations of the U.S. Treasury include a variety of
securities that differ primarily in their interest rates, maturities and dates
of issuance. Because the U.S. Government is not obligated by law to provide
support to an instrumentality that it sponsors, a Fund will not invest in
obligations issued by an instrumentality of the U.S. Government unless the
Manager determines that the instrumentality's credit risk makes its securities
suitable for investment by the Fund.
Mortgage-Related Securities: Government National Mortgage
Association. GNMA is a wholly owned corporate instrumentality of the U.S.
Government within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of, and interest on, securities
that are based on and backed by a pool of specified mortgage loans. For these
types of securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V of the
Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate
interest in one or more pools of the following types of mortgage loans: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment
mortgage loans; (3) fixed-rate growing equity mortgage loans; (4) fixed-rate
mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on
multifamily residential properties under construction; (6) mortgage loans on
completed multifamily projects; (7) fixed-rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans
that provide for adjustments on payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes.
Mortgage-Related Securities: Federal National Mortgage
Association. FNMA is a federally chartered and privately owned corporation
established under the Federal National Mortgage Association Charter Act. FNMA
was originally organized in 1938 as a U.S. Government agency to add greater
liquidity to the mortgage market. FNMA was transformed into a private sector
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local
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lenders, thereby providing them with funds for additional lending. FNMA acquires
funds to purchase loans from investors that may not ordinarily invest in
mortgage loans directly, thereby expanding the total amount of funds available
for housing.
Each FNMA pass-through security represents a proportionate
interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (that is, mortgage loans that are not insured or guaranteed by any U.S.
Government agency). The loans contained in those pools consist of one or more of
the following: (1) fixed-rate level payment mortgage loans; (2) fixed-rate
growing equity mortgage loans; (3) fixed-rate graduated payment mortgage loans;
(4) variable-rate mortgage loans; (5) other adjustable-rate mortgage loans; and
(6) fixed-rate mortgage loans secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage
Corporation. FHLMC is a corporate instrumentality of the United States
established by the Emergency Home Finance Act of 1970, as amended. FHLMC was
organized primarily for the purpose of increasing the availability of mortgage
credit to finance needed housing. The operations of FHLMC currently consist
primarily of the purchase of first lien, conventional, residential mortgage
loans and participation interests in mortgage loans and the resale of the
mortgage loans in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically
consist of fixed-rate or adjustable-rate mortgage loans with original terms to
maturity of between ten and 30 years, substantially all of which are secured by
first liens on one-to-four-family residential properties or multifamily
projects. Each mortgage loan must include whole loans, participation interests
in whole loans and undivided interests in whole loans and participation in
another FHLMC security.
Privately Issued Mortgage-Related Securities. As set forth in
the Prospectus, the Short Fund may invest in mortgage-related securities offered
by private issuers, including pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on the collateral pool may cause the various classes of a CMO to be
retired substantially earlier than their stated maturities or final distribution
dates. The principal of and interest on the collateral pool may be allocated
among the several classes of a CMO in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more
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predictable cash flow to some of the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.
These Funds may invest in, among other things, "parallel pay"
CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class which, like the
other CMO structures, must be retired by its stated maturity date or final
distribution date, but may be retired earlier. PAC Bonds are parallel pay CMOs
that generally require payments of a specified amount of principal on each
payment date; the required principal payment on PAC Bonds have the highest
priority after interest has been paid to all classes.
Adjustable-Rate Mortgage-Related Securities. Because the
interest rates on the mortgages underlying adjustable-rate mortgage-related
securities ("ARMS") reset periodically, yields of such portfolio securities will
gradually align themselves to reflect changes in market rates. Unlike fixed-rate
mortgages, which generally decline in value during periods of rising interest
rates, ARMS allow the Allocation and Short Funds to participate in increases in
interest rates through periodic adjustments in the coupons of the underlying
mortgages, resulting in both higher current yields and low price fluctuations.
Furthermore, if prepayments of principal are made on the underlying mortgages
during periods of rising interest rates, these Funds may be able to reinvest
such amounts in securities with a higher current rate of return. During periods
of declining interest rates, of course, the coupon rates may readjust downward,
resulting in lower yields to these Funds. Further, because of this feature, the
value of ARMS is unlikely to rise during periods of declining interest rates to
the same extent as fixed rate instruments. For further discussion of the risks
associated with mortgage-related securities generally, see "Risk Considerations"
in the Prospectus.
Variable Rate Demand Notes. Variable rate demand notes
("VRDNs") are tax-exempt obligations that contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30-, 60-, 90-, 180-, or
365-day intervals. The interest rates are adjustable at intervals ranging from
daily to six months. Adjustment formulas are designed to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments typically are based upon
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the prime rate of a bank or some other appropriate interest rate adjustment
index.
The Tax-Free Funds also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the institution. A Fund has an
undivided interest in the underlying obligation and thus participates on the
same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their
creditworthiness may be a function of the creditworthiness of the issuer, the
institution furnishing the irrevocable letter of credit, or both. Accordingly,
the Tax-Free Funds may invest in such VRDNs, the issuers or underlying
institutions of which the Manager believes are creditworthy and satisfy the
quality requirements of the Funds. The Manager periodically monitors the
creditworthiness of the issuer of such securities and the underlying
institution.
During periods of high inflation and periods of economic
slowdown, together with the fiscal measures adopted by governmental authorities
to attempt to deal with them, interest rates have varied widely. While the value
of the underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Funds may invest in VRDNs on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
Municipal Securities. Because the Tax-Free Funds invest at
least 80% of their total assets in obligations either issued by
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or on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. Government,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal income tax ("Municipal Securities"), or exempt from federal and
California personal income tax ("California Municipal Securities"), and the
California Money Fund invests at least 65% of its total assets in California
Municipal Securities, and may invest in Municipal Securities, these Funds
generally will have a lower yield than if they primarily purchased higher
yielding taxable securities, commercial paper or other securities with
correspondingly greater risk. Generally, the value of the Municipal Securities
and California Municipal Securities held by these Funds will fluctuate inversely
with interest rates.
General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts. The proceeds of
these obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the principal security for
a revenue bond is generally the net revenue derived from a particular facility,
group of facilities or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds,
which may pay tax-exempt interest, are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money to finance various
privately operated facilities for business manufacturing, housing, sports, and
pollution control.
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These bonds also are used to finance public facilities, such as airports, mass
transit systems, ports and parking. The payment of the principal and interest on
such bonds is dependent solely on the ability of the facility's user to meet its
financial obligations and the pledge, if any, of the real and personal property
so financed as security for such payment. As a result of 1986 federal tax
legislation, industrial revenue bonds may no longer be issued on a tax-exempt
basis for certain previously permissible purposes, including sports and
pollution control facilities.
Participation Interests. The Tax-Free Funds may purchase from
financial institutions participation interests in Municipal Securities, such as
industrial development bonds and municipal lease/purchase agreements. A
participation interest gives a Fund an undivided interest in a Municipal
Security in the proportion that the Fund's participation interest bears to the
total principal amount of the Municipal Security. These instruments may have
fixed, floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Board of Trustees has approved as meeting the Board's standards,
or, alternatively, the payment obligation will be collateralized by U.S.
Government securities.
For certain participation interests, these Funds will have the
right to demand payment, on not more than seven days' notice, for all or any
part of their participation interest in a Municipal Security, plus accrued
interest. As to these instruments, these Funds intend to exercise their right to
demand payment only upon a default under the terms of the Municipal Securities,
as needed to provide liquidity to meet redemptions, or to maintain or improve
the quality of their investment portfolios. The California Intermediate Bond
Fund will not invest more than 15% of its total assets and the California Money
Fund will not invest more than 10% of its total assets in participation
interests that do not have this demand feature, and in other illiquid
securities.
Some participation interests are subject to a
"nonappropriation" or "abatement" feature by which, under certain conditions,
the issuer of the underlying Municipal Security may, without penalty, terminate
its obligation to make payment. In such event, the holder of such security must
look to the underlying collateral, which is often a municipal facility used by
the issuer.
Custodial Receipts. The Tax-Free Funds may purchase custodial
receipts representing the right to receive certain future principal and interest
payments on Municipal Securities that underlie the custodial receipts. A number
of different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are
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based on payments received on the underlying Municipal Securities. One class has
the characteristics of a typical auction-rate security, having its interest rate
adjusted at specified intervals, and its ownership changes based on an auction
mechanism. The interest rate of this class generally is expected to be below the
coupon rate of the underlying Municipal Securities and generally is at a level
comparable to that of a Municipal Security of similar quality and having a
maturity equal to the period between interest rate adjustments. The second class
bears interest at a rate that exceeds the interest rate typically borne by a
security of comparable quality and maturity; this rate also is adjusted,
although inversely to changes in the rate of interest of the first class. If the
interest rate on the first class exceeds the coupon rate of the underlying
Municipal Securities, its interest rate will exceed the rate paid on the second
class. In no event will the aggregate interest paid with respect to the two
classes exceed the interest paid by the underlying Municipal Securities. The
value of the second class and similar securities should be expected to fluctuate
more than the value of a Municipal Security of comparable quality and maturity
and their purchase by one of these Funds should increase the volatility of its
net asset value and, thus, its price per share. These custodial receipts are
sold in private placements and are subject to these Funds' limitation with
respect to illiquid investments. The Tax-Free Funds also may purchase directly
from issuers, and not in a private placement, Municipal Securities having the
same characteristics as the custodial receipts.
Tender Option Bonds. The Tax-Free Funds may purchase tender
option bonds and similar securities. A tender option bond is a Municipal
Security, generally held pursuant to a custodial arrangement, having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term tax-exempt rates, coupled with an agreement of
a third party, such as a bank, broker-dealer or other financial institution,
granting the security holders the option, at periodic intervals, to tender their
securities to the institution and receive their face value. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the Municipal Security's fixed coupon rate and the rate,
as determined by a remarketing or similar agent at or near the commencement of
such period, that would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after payment of this fee,
the security holder effectively holds a demand obligation that bears interest at
the prevailing short-term tax-exempt rate. The Manager, on behalf of a Tax-Free
Fund, considers on a periodic basis the creditworthiness of the issuer of the
underlying Municipal Security, of any custodian and of the third party provider
of the tender option. In certain instances and for certain tender option bonds,
the option may be terminable in the event of a default in payment of principal
or interest on the underlying Municipal Obligations and for other reasons. The
California Intermediate
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Bond Fund will not invest more than 15% of its total assets and the California
Money Market Fund more than 10% of its total assets in securities that are
illiquid (including tender option bonds with a tender feature that cannot be
exercised on not more than seven days' notice if there is no secondary market
available for these obligations).
Obligations with Puts Attached. The Tax-Free Funds may
purchase Municipal Securities together with the right to resell the securities
to the seller at an agreed-upon price or yield within a specified period prior
to the securities' maturity date. Although an obligation with a put attached is
not a put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." These Funds will use such puts in
accordance with regulations issued by the Securities and Exchange Commission
("SEC"). In 1982, the Internal Revenue Service (the "IRS") issued a revenue
ruling to the effect that, under specified circumstances, a regulated investment
company would be the owner of tax-exempt municipal obligations acquired with a
put option. The IRS also has issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The last such
ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Funds intend to take the position that they are the owners
of any municipal obligations acquired subject to a stand-by commitment or a
similar put right and that tax-exempt interest earned with respect to such
municipal obligations will be tax exempt in its hands. There is no assurance
that stand-by commitments will be available to these Funds nor have they assumed
that such commitments would continue to be available under all market
conditions. There may be other types of municipal securities that become
available and are similar to the foregoing described Municipal Securities in
which these Funds may invest.
Zero Coupon Bonds. The Fixed Income Funds may invest in zero
coupon securities, which are debt securities issued or sold at a discount from
their face value and do not entitle the holder to any periodic payment of
interest prior to maturity, a specified redemption date or a cash payment date.
The amount of the discount varies depending on the time remaining until maturity
or cash payment date, prevailing interest rates, liquidity of the security and
perceived credit quality of the issuer. Zero coupon securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves and receipts or certificates representing
interests in such stripped
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debt obligations and coupons. The market prices of zero coupon securities are
generally more volatile than the market prices of interest-bearing securities
and respond more to changes in interest rates than interest-bearing securities
with similar maturities and credit qualities.
Risk Factors/Special Considerations Relating to Debt Securities
The Select 50, International and the Global Funds may invest
in debt securities that are rated below BBB by Standard & Poor's Corporation
("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Fitch
Investor Services ("Fitch"), or, if unrated, are deemed to be of equivalent
investment quality by the Manager. As an operating policy, which may be changed
by the Board of Trustees without shareholder approval, these Funds will invest
no more than 5% of their 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 these Funds 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 these Funds 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 these Funds.
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 these Funds to
achieve their investment objectives may, to the extent they invest in low-rated
debt securities, be more dependent upon such credit analysis
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than would be the case if these Funds 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, these
Funds 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
In order to hedge against foreign currency exchange rate
risks, the Select 50, International, Global and Equity Income Funds 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. These Funds also may conduct their
foreign currency exchange transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market.
The Funds (except the Money Market Funds) also may purchase
other types of options and futures and may, in the future, write covered
options, as described below and in the Prospectus.
Forward Contracts. The Select 50, International and Global
Funds may enter into forward contracts to attempt to minimize the risk from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract, which is individually negotiated and privately
traded by currency traders and their customers, involves an obligation to
purchase or sell a specific currency for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency or is expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of a security, dividend or interest payment.
When a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency, or when a Fund believes that
the U.S. dollar may suffer
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a substantial decline against a foreign currency, it may enter into a forward
contract to buy that currency for a fixed dollar amount.
In connection with a Fund's forward contract transactions, an
amount of the Fund's assets equal to the amount of its commitments will be held
aside or segregated to be used to pay for the commitments. Accordingly, a Fund
always will have cash, cash equivalents or liquid equity or debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of these Funds to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by a Fund than if it had not entered into
such contracts. The Funds generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates, the Funds (except the Money Market Funds) may purchase and sell various
kinds of futures contracts and options on futures contracts. These Funds also
may enter into closing purchase and sale transactions with respect to any such
contracts and options. Futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices.
These Funds have filed a notice of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets,
before engaging in any purchases or sales of futures contracts or options on
futures contracts. Pursuant to Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility included the representation
that these Funds will use futures contracts and related options for bona fide
hedging purposes within the meaning of CFTC regulations, provided that a Fund
may hold positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
that Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
These Funds will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used
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for hedging purposes are substantially related to price fluctuations in
securities held by these Funds or which they expect to purchase. These Funds'
futures transactions generally will be entered into only for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a decline in
the price of securities or currencies and will be purchased to protect a Fund
against an increase in the price of securities it intends to purchase (or the
currencies in which they are denominated). All futures contracts entered into by
these Funds are traded on U.S. exchanges or boards of trade licensed and
regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these
Funds seek to establish more certainty than would otherwise be possible with
respect to the effective price, rate of return or currency exchange rate on
portfolio securities or securities that these Funds propose to acquire. For
example, when interest rates are rising or securities prices are falling, a Fund
can seek, through the sale of futures contracts, to offset a decline in the
value of its current portfolio securities. When rates are falling or prices are
rising, a Fund, through the purchase of futures contracts, can attempt to secure
better rates or prices than might later be available in the market with respect
to anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
As part of its hedging strategy, a Fund also may enter into
other types of financial futures contracts if, in the opinion of the Manager,
there is a sufficient degree of correlation between price trends for the Fund's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in a Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having that Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting that
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Fund's securities portfolio. When hedging of this character is successful, any
depreciation in the value of portfolio securities can be substantially offset by
appreciation in the value of the futures position. However, any unanticipated
appreciation in the value of a Fund's portfolio securities could be offset
substantially by a decline in the value of the futures position.
The acquisition of put and call options on futures contracts
gives a Fund the right (but not the obligation), for a specified price, to sell
or purchase the underlying futures contract at any time during the option
period. Purchasing an option on a futures contract gives a Fund the benefit of
the futures position if prices move in a favorable direction, and limits its
risk of loss, in the event of an unfavorable price movement, to the loss of the
premium and transaction costs.
A Fund may terminate its position in an option contract by
selling an offsetting option on the same series. There is no guarantee that such
a closing transaction can be effected. A Fund's ability to establish and close
out positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts
and related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies.
These Funds may purchase put and call options on securities in which they have
invested, on foreign currencies represented in their portfolios and on any
securities index based in whole or in part on securities in which these Funds
may invest. These Funds also may enter into closing sales transactions in order
to realize gains or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of
an increase in the market value of securities of the type in which it may invest
or a positive change in the currency in which such securities are denominated.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or a specified amount of a foreign
currency at a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and
foreign exchanges. Although these Funds will generally purchase only those
options for which there appears to be an active secondary market, there can be
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an
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exchange may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that a Fund would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be
liquid for a variety of reasons including: (i) insufficient trading interest in
certain options; (ii) restrictions on opening transactions or closing
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances which interrupt normal
operations on an exchange; (v) inadequate facilities of an exchange or the
Options Clearing Corporation to handle current trading volume at all times; or
(vi) discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although these Funds do not currently intend to do so, they
may, in the future, write (i.e., sell) covered put and call options on
securities, securities indices and currencies in which they may invest. A
covered call option involves a Fund's giving another party, in return for a
premium, the right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. A covered call option
serves as a partial hedge against the price decline of the underlying security.
However, by writing a covered call option, a Fund gives up the opportunity,
while the option is in effect, to realize gain from any price increase (above
the option exercise price) in the underlying security. In addition, a Fund's
ability to sell the underlying security is limited while the option is in effect
unless the Fund effects a closing purchase transaction.
These Funds also may write covered put options that give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. A Fund will receive a premium for writing a put
option but will be obligated for as long as the option is outstanding to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise. In order to "cover" put options
it has written, a Fund will cause its custodian to segregate cash, cash
equivalents, U.S. Government securities or other liquid equity or debt
securities with at least the value of the exercise price of the put options. A
Fund will not write put options if the aggregate value of the obligations
underlying the put options exceeds 25% of the Fund's total assets.
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There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and result in the
institution by an exchange of special procedures that may interfere with the
timely execution of the Funds' orders.
Other Investment Practices
Repurchase Agreements. As noted in the Prospectus, the Funds
may enter into repurchase agreements. A Fund's repurchase agreements will
generally involve a short-term investment in a U.S. Government security or other
high-grade liquid debt security, with the seller of the underlying security
agreeing to repurchase it at a mutually agreed-upon time and price. The
repurchase price is generally higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to a Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. The Manager, acting under the supervision of
the Boards, reviews on a periodic basis the suitability and creditworthiness,
and the value of the collateral, of those sellers with whom the Funds enter into
repurchase agreements to evaluate potential risk. All repurchase agreements will
be made pursuant to procedures adopted and regularly reviewed by the Boards.
The Funds generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Funds regard repurchase agreements
with maturities in excess of seven days as illiquid. A Fund may not invest more
than 15% (10% in the case of the Money Market Funds) of the value of its net
assets in illiquid securities, including repurchase agreements with maturities
greater than seven days.
For purposes of the Investment Company Act, a repurchase
agreement is deemed to be a collateralized loan from a Fund to the seller of the
security subject to the repurchase agreement. It is not clear whether a court
would consider the security acquired by a Fund subject to a repurchase agreement
as being owned by that Fund or as being collateral for a loan by the Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve loss
of interest or a decline in price of the security. If a court characterizes such
a transaction as a loan and a Fund has not perfected a security interest in the
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security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor. As such, a Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a
Fund also runs the risk that the seller may fail to repurchase the security.
However, the Funds always require collateral for any repurchase agreement to
which they are a party in the form of securities acceptable to them, the market
value of which is equal to at least 100% of the amount invested by the Funds
plus accrued interest, and the Funds make payment against such securities only
upon physical delivery or evidence of book entry transfer to the account of its
custodian bank. If the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including interest), a Fund,
pursuant to its repurchase agreement, may require the seller of the security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement equals or exceeds the repurchase price (including
interest) at all times.
The Funds may participate in one or more joint accounts with
each other and other series of the Trusts that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. Government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event have a duration
of more than seven days.
Reverse Repurchase Agreements. The Domestic Equity, Select 50,
International, Opportunities, Short, Reserve and Tax-Free Funds may enter into
reverse repurchase agreements, as set forth in the Prospectus. These Funds
typically will invest the proceeds of a reverse repurchase agreement in money
market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. This use of proceeds involves
leverage, and a Fund will enter into a reverse repurchase agreement for leverage
purposes only when the Manager believes that the interest income to be earned
from the investment of the proceeds would be greater than the interest expense
of the transaction. These Funds 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.
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These Funds cause their custodian to segregate liquid assets,
such as cash, U.S. Government securities or other liquid equity or debt
securities equal in value to their obligations (including accrued interest) with
respect to reverse repurchase agreements. Such assets are marked to market daily
to ensure that full collateralization is maintained.
Dollar Roll Transactions. The Short and California
Intermediate Bond Funds may enter into dollar roll transactions, as discussed in
the Prospectus. A dollar roll transaction involves a sale by a Fund of a
security to a financial institution concurrently with an agreement by that Fund
to purchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
At the time a Fund enters into a dollar roll transaction, it
causes its custodian to segregate liquid assets such as cash, U.S. Government
securities or other liquid equity or debt securities having a value equal to the
purchase price for the similar security (including accrued interest) and
subsequently marks the assets to market daily to ensure that full
collateralization is maintained.
Lending of Portfolio Securities. Although the Funds currently
do not intend to do so, a Fund may lend its portfolio securities having a value
of up to 30% of its total assets in order to generate additional income. Such
loans may be made to broker-dealers or other financial institutions whose
creditworthiness is acceptable to the Manager. These loans would be required to
be secured continuously by collateral, including cash, cash equivalents,
irrevocable letters of credit, U.S. Government securities, or other high-grade
liquid debt securities, maintained on a current basis (i.e., marked to market
daily) at an amount at least equal to 100% of the market value of the securities
loaned plus accrued interest. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. Loans are subject
to termination at the option of a Fund or the borrower at any time. Upon such
termination, a Fund is entitled to obtain the return of the securities loaned
within five business days.
For the duration of the loan, a Fund will continue to receive
the equivalent of the interest or dividends paid by the
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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 Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" or "delayed delivery" basis. The price of such
securities is fixed at the time the commitment to purchase or sell is made, but
delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their custodian to segregate cash, U.S.
Government securities or other liquid equity or debt securities with a value
equal in value to commitments for when-issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of a Fund are held in cash
pending the settlement of a purchase of securities, that Fund will earn no
income on these assets.
The Short 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, this Fund must obtain the security which it has made a
commitment to deliver. If this 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, this Fund may incur a loss as a result of this type of
forward commitment if the price of the security increases between the date this
Fund enters into the forward commitment and the date on which it must purchase
the security it is committed to deliver. This
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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 this Fund may be required to pay in connection with this
type of forward commitment. Whenever this Fund engages in this type of
transaction, it will segregate assets as discussed above.
Illiquid Securities. A Fund may invest up to 15% (10% for the
Money Market Funds) of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a Fund has valued the securities and includes, among others, repurchase
agreements maturing in more than seven days, certain restricted securities and
securities that are otherwise not freely transferable. Illiquid securities also
include shares of an investment company held by a Fund in excess of 1% of the
total outstanding shares of that investment company. Restricted securities may
be sold only in privately negotiated transactions or in public offerings with
respect to which a registration statement is in effect under the Securities Act
of 1933, as amended ("1933 Act"). Illiquid securities acquired by the Funds may
include those that are subject to restrictions on transferability contained in
the securities laws of other countries. Securities that are freely marketable in
the country where they are principally traded, but that would not be freely
marketable in the United States, will not be considered illiquid. Where
registration is required, a Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of
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certain securities to qualified institutional buyers. Institutional markets for
restricted securities sold pursuant to Rule 144A in many cases provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment to satisfy share redemption orders. Such markets might
include automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. An
insufficient number of qualified buyers interested in purchasing Rule
144A-eligible restricted securities, however, could adversely affect the
marketability of such portfolio securities and result in a Fund's inability to
dispose of such securities promptly or at favorable prices.
The Boards of Trustees have delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Boards. The Manager takes into account a number of factors in
reaching liquidity decisions, including, but not limited to: (i) the frequency
of trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Boards.
RISK FACTORS
Foreign Securities
Investors in the Select 50, International and Global and Funds
should consider carefully the substantial risks involved in securities of
companies located or doing business in, and governments of, foreign nations,
which are in addition to the usual risks inherent in domestic investments. There
may be less publicly available information about foreign companies comparable to
the reports and ratings published regarding companies in the U.S. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements often may not be
comparable to those applicable to U.S. companies. Many foreign markets have
substantially less volume than either the established domestic securities
exchanges or the OTC markets. Securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which may be fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S., and capital requirements for
brokerage firms are generally lower. Settlement of transactions in
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foreign securities may, in some instances, be subject to delays and related
administrative uncertainties.
Emerging Market Countries
The Select 50, International and Global Funds, particularly
the Latin America, Emerging Asia and Emerging Markets Funds, may invest in
securities of companies domiciled in, and in markets of, so-called "emerging
market countries." These investments may be subject to potentially higher risks
than investments in developed countries. These risks include (i) volatile
social, political and economic conditions; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price volatility;
(iii) the existence of national policies which may restrict these Funds'
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain emerging market countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in certain emerging market countries may be
slowed or reversed by unanticipated political or social events in such
countries.
Exchange Rates and Polices
The Select 50, International and Global Funds endeavor to buy
and sell foreign currencies on favorable terms. Some price spreads on currency
exchange (to cover service charges) may be incurred, particularly when these
Funds change investments from one country to another or when proceeds from the
sale of shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would prevent
these Funds from repatriating invested capital and dividends, withhold portions
of interest and dividends at the source, or impose other taxes, with respect to
these Funds' investments in securities of issuers of that country. There also is
the possibility of expropriation, nationalization, confiscatory or other
taxation, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
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The Boards of both Trusts consider at least annually the
likelihood of the imposition by any foreign government of exchange control
restrictions that would affect the liquidity of the Funds' assets maintained
with custodians in foreign countries, as well as the degree of risk from
political acts of foreign governments to which such assets may be exposed. The
Boards also consider the degree of risk attendant to holding portfolio
securities in domestic and foreign securities depositories (see "Investment
Management and Other Services").
Hedging Transactions
While transactions in forward contracts, options, futures
contracts and options on futures (i.e., "hedging positions") may reduce certain
risks, such transactions themselves entail certain other risks. Thus, while a
Fund may benefit from the use of hedging positions, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for that Fund than if it had not entered into any
hedging positions. If the correlation between a hedging position and portfolio
position which is intended to be protected is imperfect, the desired protection
may not be obtained, and a Fund may be exposed to risk of financial loss.
Perfect correlation between a Fund's hedging positions and
portfolio positions may be difficult to achieve because hedging instruments in
many foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
California Municipal Securities
The information set forth below is a general summary intended
to give a recent historical description. It is not a discussion of any specific
factors that may affect any particular issuer of California Municipal
Securities. The information is not intended to indicate continuing or future
trends in the condition, financial or otherwise, of California. Such information
is derived from official statements utilized in connection with securities
offerings of the State of California that have come to the attention of the
Trusts and were available prior to the date of this Statement of Additional
Information. Such information has not been independently verified by the
California Intermediate Bond and California Money Funds.
Because the California Intermediate Bond and California Money
Funds expect to invest substantially all of their assets in California Municipal
Securities, they will be susceptible to a number of complex factors affecting
the issuers of California Municipal Securities, including national and local
political,
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economic, social, environmental and regulatory policies and conditions. These
Funds cannot predict whether or to what extent such factors or other factors may
affect the issuers of California Municipal Securities, the market value or
marketability of such securities or the ability of the respective issuers of
such securities acquired by these Funds to pay interest on, or principal of,
such securities. The creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and there is no responsibility on the part of the State of
California to make payments on such local obligations. There may be specific
factors that are applicable in connection with investment in the obligations of
particular issuers located within California, and it is possible these Funds
will invest in obligations of particular issuers as to which such specific
factors are applicable.
From mid-1990 to late 1993, California suffered the most
severe recession in the State since the 1930s. Construction, manufacturing
(especially aerospace), exports and financial services, among other industries,
have been severely affected. Since the start of 1994, however, California's
economy has been on a steady recovery. Employment grew significantly during 1994
and 1995, especially in export-related industries, business services,
electronics, entertainment and tourism.
The recession severely affected State revenues while the
State's health and welfare costs were increasing. Consequently, the State had a
lengthy period of budget imbalance; the State's accumulated budget deficit
approached $2.8 billion at its peak at June 30, 1993. The 1993-94 Budget Act
proposed to repay the $2.8 billion deficit over two fiscal years, but as a
result of the recession the projected excess of revenues over expenditures did
not materialize. The accumulated budget deficit at June 30, 1994 was about $1.8
billion, and a second two-year plan was implemented in 1994-95 to eliminate the
budget deficit. An additional consequence of the large budget deficits has been
that the State depleted its available cash resources and has had to use a series
of external borrowings to meet its cash needs, including borrowings extending
into the next fiscal year. The State anticipates that it will not have to resort
to such "cross-year" borrowing during the 1995-96 fiscal year.
The 1994-95 Budget Act recognized that the accumulated $2
billion budget deficit could not be repaid in one year, and proposed a two-year
solution to eliminate the deficit with operating surpluses for 1994-95 and
1995-96. The 1994-95 Budget Act projected revenues and transfers of $41.9
billion (up $2.1 billion from 1993-94, and reflecting the Governor's forecast of
an improving economy), and expenditures of $40.9 billion (up $1.6 billion from
1993-94). Principal features of the 1994-95 Budget Act included:
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1. Receipt of about $760 million of federal aid for certain
costs related to refugees and undocumented immigrants. Only about $33
million of this amount was received, with another approximately $98
million scheduled to be received during 1995-96.
2. Reductions of about $1.1 billion in health and welfare
costs. A 2.3 percent reduction in Aid to Families with Dependent
Children has been enjoined pending further litigation, however.
3. An increase in Proposition 98 funding for K-14 schools of
$526 million.
4. Additional miscellaneous cuts and fund transfers of $755
million.
5. A further one-year suspension (for 1995) of the renter's
personal income tax credit.
The 1994-95 Budget Act contained no tax increases other than
the suspension of the renter's credit. As a result of the improving economy, the
California Department of Finance's final estimates for 1994-95 showed revenues
and transfers of $42.7 billion and expenditures of $42 billion.
The 1995-96 Budget Act was enacted on August 3, 1995, 34 days
after the start of the fiscal year.
The 1995-96 Budget Act projects General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from 1994-95, and General
Fund expenditures of $43.4 billion, a 4 percent increase from 1994-95. Special
Fund revenues are estimated at $12.7 billion, and Special Fund expenditures of
$13 billion have been appropriated. The 1995-96 Budget Act projects that the
General Fund will end the 1995-96 fiscal year with a slight surplus at June 30,
1996, and that all of the accumulated budget deficits will have been repaid.
Principal features of the 1995-96 Budget Act include:
1. An increase in Proposition 98 funding for K-14 schools of
about $1.2 billion.
2. Reductions in health and welfare costs of about $900
million (about $500 million of which depends upon federal legislative
approval).
3. A 3.5 percent increase for the University of California and
the California State University system.
4. Receipt of an additional $278 million in federal aid for
costs of illegal immigrants, above commitments already made by the
federal government.
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5. An increase of about 8 percent in General Fund support for
the Department of Corrections, reflecting estimates of an increased
prison population.
The Governor's proposed budget for 1996-97, released on
January 10, 1996, updated the projections for 1995-96; revenues and transfers
are estimated to be $45 billion and expenditures to be $44.2 billion. As a
result, the budget reserve was projected to have a positive balance of about $50
million on June 30, 1996, with available cash (after payment of all obligations
due) of about $2.2 billion.
The Governor's proposed budget for 1996-97 projected General
Fund revenues and transfers of about $45.6 billion and requested total General
Fund appropriations of about $45.2 billion, which would leave a budget reserve
of about $400 million on June 30, 1997. The Governor's proposed budget renewed a
proposal, which had been rejected by the Legislature in 1995, for a 15 percent
cut in personal and corporate tax rates, phased in over a three-year period. On
the assumption that the proposed tax rate cut would be enacted, the Governor's
proposed budget shows a reduction in revenues of about $600 million for 1996-97.
The Governor's proposed budget also projects external cash flow borrowing of up
to $3.2 billion, to mature by June 30, 1997.
The foregoing discussion of the 1994-95, 1995-96 and 1996-97
fiscal year budgets is based on the Budget Acts for those years, which include
estimates and projections of revenues and expenditures, and should not be
construed as a statement of fact. The assumptions used to construct a budget may
be affected by numerous factors, including future economic conditions in
California and the nation. There can be no assurance that the estimates will be
achieved.
Certain issuers of California Municipal Securities receive
subventions from the State which are eligible to be used to make payments on
such Securities. No prediction can be made as to what effect any decrease in
subventions may have on the ability of some issuers to make such payments.
Because of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since late 1991, all
three major nationally recognized statistical rating organizations have lowered
their ratings for general obligation bonds of the State from the highest ranking
of "AAA" to "A" by S&P, "A1" by Moody's and "A+" by Fitch Investors Service,
Inc. It is not presently possible to determine whether, or the extent to which,
Moody's, S&P or Fitch will change such ratings in the future. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State, and
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
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Constitutional and Statutory Limitations. Article XIII A of
the California Constitution (which resulted from the voter approved Proposition
13 in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum ad valorem tax on real property cannot exceed one
percent of the "full cash value" of the property; Article XIII A also
effectively prohibits the levying of any other ad valorem property tax for
general purposes. One exception to Article XIII A permits an increase in ad
valorem taxes on real property in excess of one percent for certain bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash value" of property may be adjusted annually to
reflect increases (not to exceed two percent) or decreases, in the consumer
price index or comparable local data, or to reflect reductions in property value
caused by substantial damage, destruction or other factors, or when there is a
"change in ownership" or "new construction".
Constitutional challenges to Article XIII A to date have been
unsuccessful. In 1992, the United States Supreme Court ruled that
notwithstanding the disparate property tax burdens that Proposition 13 might
place on otherwise comparable properties, those provisions of Proposition 13 do
not violate the Equal Protection Clause of the United States Constitution.
In response to the significant reduction in local property tax
revenue caused by the passage of Proposition 13, the State enacted legislation
to provide local governments with increased expenditures from the General Fund.
This fiscal relief has ended, however.
Article XIII B of the California Constitution generally limits
the amount of appropriations of the State and of local governments to the amount
of appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute
known as Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional. The California Supreme Court recently
upheld Proposition 62's requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This recent
decision may invalidate other taxes that have been
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imposed by local governments in California and make it more difficult for local
governments to raise taxes.
In 1988 and 1990, California voters approved initiatives known
as Proposition 98 and Proposition 111, respectively. These initiatives changed
the State's appropriations limit under Article XIII B to (i) require that the
State set aside a prudent reserve fund for public education, and (ii) guarantee
a minimum level of State funding for public elementary and secondary schools and
community colleges.
The effect of constitutional and statutory changes and of
budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected). There is no assurance that any
California issuer will make full or timely payments of principal or interest or
remain solvent. For example, in December 1994, Orange County filed for
bankruptcy.
In addition, it is impossible to predict the time, magnitude,
or location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck the Los Angeles area, causing
significant damage in a four-county area. The possibility exists that another
such earthquake could create a major dislocation of the California economy.
The Tax-Free Funds' (other than the Federal Money Fund)
concentration in California Municipal Securities provides a greater level of
risk than a fund that is diversified across numerous states and municipal
entities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by each Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of a Fund's outstanding
voting securities as defined in the Investment Company Act. A Fund may not:
1. In the case of each Fixed Income Fund, purchase any common
stocks or other equity securities, except that a Fund may invest in securities
of other investment companies as described above and consistent with restriction
number 9 below.
2. With respect to 75% (100% for the Federal Money Fund) of
its total assets, invest in the securities of any one issuer (other than the
U.S. Government and its agencies and instrumentalities) if immediately after and
as a result of such investment more than 5% of the total assets of a Fund would
be invested in such issuer. There are no limitations with respect to
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the remaining 25% of its total assets, except to the extent other investment
restrictions may be applicable (not applicable to the Federal Money Fund). This
investment restriction does not apply to the Asset Allocation, the Global Asset
Allocation Fund nor the California Intermediate Bond Fund.
3. Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and policies, (b)
through the lending of up to 30% of its portfolio securities as described above
and in its Prospectus, or (c) to the extent the entry into a repurchase
agreement or a reverse dollar roll transaction is deemed to be a loan.
4. (a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse repurchase agreements or dollar
roll transactions for a Fund that uses such investment techniques and then not
in excess of one-third of the value of its total assets (at the lower of cost or
fair market value). Any such borrowing will be made only if immediately
thereafter there is an asset coverage of at least 300% of all borrowings
(excluding any fully collateralized reverse repurchase agreements and dollar
roll transactions the Fund may enter into), and no additional investments may be
made while any such borrowings are in excess of 10% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other hedging transactions.
5. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude a Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
6. Buy or sell real estate or commodities or commodity
contracts; however, a Fund, to the extent not otherwise prohibited in the
Prospectus or this Statement of Additional Information, may invest in securities
secured by real estate or interests therein or issued by companies which invest
in real estate or interests therein, including real estate investment trusts,
and may purchase or sell currencies (including forward currency exchange
contracts), futures contracts and related options generally as described in the
Prospectus and this Statement of Additional Information.
7. Invest in securities of other investment companies, except
to the extent permitted by the Investment Company Act and discussed in the
Prospectus or this Statement of Additional Information, or as such securities
may be acquired as part of a merger, consolidation or acquisition of assets.
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8. Invest, in the aggregate, more than 15% (10% for the Money
Market Funds) of its net assets in illiquid securities, including (under current
SEC interpretations) restricted securities (excluding liquid Rule 144A-eligible
restricted securities), securities which are not otherwise readily marketable,
repurchase agreements that mature in more than seven days and over-the-counter
options (and securities underlying such options) purchased by a Fund. (This is
an operating policy which may be changed without shareholder approval,
consistent with the Investment Company Act, changes in relevant SEC
interpretations).
9. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the Investment Company Act.)
10. Except with respect to communications companies for the
Communications Fund, as described in the Prospectus, invest more than 25% of the
market value of its total assets in the securities of companies engaged in any
one industry. (This does not apply to investment in the securities of the U.S.
Government, its agencies or instrumentalities or California Municipal
Obligations or Municipal Obligations for the Tax-Free Funds.) For purposes of
this restriction, the Funds generally rely on the U.S. Office of Management and
Budget's Standard Industrial Classifications.
11. Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to prohibit a Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b) entering
into permissible repurchase and dollar roll transactions.
12. Except as described in the Prospectus and this Statement
of Additional Information, acquire or dispose of put, call, straddle or spread
options subject to the following conditions (for other than the Short Fund and
California Intermediate Bond Fund):
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which
are held at any time do not exceed 5% of the Fund's total assets.
(This is an operating policy which may be changed without shareholder approval.)
13. Except as described in the Prospectus and this Statement
of Additional Information, engage in short sales of securities. (This is an
operating policy which may be changed without shareholder approval, consistent
with applicable regulations.)
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14. Purchase more than 10% of the outstanding voting
securities of any one issuer. This investment restriction does not relate to the
Fixed Income Funds. (This is an operating policy which may be changed without
shareholder approval.)
15. Invest in commodities, except for futures contracts or
options on futures contracts if, as a result thereof, more than 5% of a Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to initial deposits and premiums on open futures contracts
and options on such contracts. The Money Market Funds may not enter into a
futures contract or option on a futures contract regardless of the amount of the
initial deposit or premium.
To the extent these restrictions reflect matters of operating
policy which may be changed without shareholder vote, these restrictions may be
amended upon approval by the appropriate Board and notice to shareholders.
If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage resulting from a
change in the values of assets will not constitute a violation of that
restriction, except as otherwise noted.
The Board of Trustees of The Montgomery Funds has elected to
value the assets of the Money Market Funds in accordance with Rule 2a-7 under
the Investment Company Act. This Rule also imposes various restrictions on these
Funds' portfolios which are, in some cases, more restrictive than these Funds'
stated fundamental policies and investment restrictions. Due to amendments to
Rule 2a-7 adopted by the SEC in 1991, any fund which holds itself out as a money
market fund must also follow certain portfolio provisions of Rule 2a-7 regarding
the maturity and quality of each portfolio investment, and the diversity of such
investments. Thus, although the restrictions imposed by Rule 2a-7 are not
fundamental policies of these Funds, these Funds must comply with these
provisions unless their shareholders vote to change their policies of being
money market funds.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds receive income in the form of
dividends and interest earned on their investments in securities. This income,
less the expenses incurred in their operations, is the Funds' net investment
income, substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not
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pay "interest" or guarantee any fixed rate of return on an investment in their
shares.
The Funds also may derive capital gains or losses in
connection with sales or other dispositions of their portfolio securities. Any
net gain a Fund may realize from transactions involving investments held less
than the period required for long-term capital gain or loss recognition or
otherwise producing short-term capital gains and losses (taking into account any
carryover of capital losses from previous years), while a distribution from
capital gains, will be distributed to shareholders with and as a part of income
dividends. If during any year a Fund realizes a net gain on transactions
involving investments held for the period required for long-term capital gain or
loss recognition or otherwise producing long-term capital gains and losses, the
Fund will have a net long-term capital gain. After deduction of the amount of
any net short-term capital loss, the balance (to the extent not offset by any
capital losses carried over from previous years) will be distributed and treated
as long-term capital gains in the hands of the shareholders regardless of the
length of time that Fund's shares may have been held.
Any dividend or distribution per share paid by a Fund reduces
that Fund's net asset value per share on the date paid by the amount of the
dividend or distribution per share. Accordingly, a dividend or distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes (except for
distributions from the Tax-Free Funds to the extent not subject to income
taxes).
Dividends and other distributions will be reinvested in
additional shares of the applicable Fund unless the shareholder has otherwise
indicated. Investors have the right to change their election with respect to the
reinvestment of dividends and distributions by notifying the Transfer Agent in
writing, but any such change will be effective only as to dividends and other
distributions for which the record date is seven or more business days after the
Transfer Agent has received the written request.
Tax Information. Each Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for each taxable year by
complying with all applicable requirements regarding the source of its income,
the diversification of its assets, and the timing of its distributions. Each
Fund that has filed a tax return has so qualified and elected in prior tax
years. Each Fund's policy is to distribute to its shareholders all of its
investment company taxable income and any net realized capital gains for each
fiscal year in a manner that complies with the distribution requirements of the
Code, so that Fund will not be subject to any federal income tax or excise taxes
based on net
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income. However, the Board of Trustees may elect to pay such excise taxes if it
determines that payment is, under the circumstances, in the best interests of a
Fund.
In order to qualify as a regulated investment company, each
Fund must, among other things, (a) derive at least 90% of its gross income each
year from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock or securities or
foreign currency gains related to investments in stocks or other securities, or
other income (generally including gains from options, futures or forward
contracts) derived with respect to the business of investing in stock,
securities or currency, (b) derive less than 30% of its gross income each year
from the sale or other disposition of stock or securities (or options thereon)
held less than three months (excluding some amounts otherwise included in income
as a result of certain hedging transactions), and (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the market value of
its assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
for purposes of this calculation, in the case of other securities of any one
issuer to an amount not greater than 5% of that Fund's assets or 10% of the
voting securities of the issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment companies). As
such, and by complying with the applicable provisions of the Code, a Fund will
not be subject to federal income tax on taxable income (including realized
capital gains) that is distributed to shareholders in accordance with the timing
requirements of the Code. If a Fund is unable to meet certain requirements of
the Code, it may be subject to taxation as a corporation.
Distributions of net investment income and net realized
capital gains by a Fund will be taxable to shareholders whether made in cash or
reinvested in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of a Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Funds or any securities dealer effecting a redemption of
the Funds' shares by a shareholder will be required to file information reports
with the IRS with respect to distributions and payments made to the shareholder.
In addition, the Funds will be required to withhold federal income tax at the
rate of 31% on taxable dividends, redemptions and other payments made to
accounts of individual or other non-exempt shareholders who have not
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furnished their correct taxpayer identification numbers and made certain
required certifications on the Account Application Form or with respect to which
a Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Funds intend to declare and pay dividends and other
distributions, as stated in the Prospectus. In order to avoid the payment of any
federal excise tax based on net income, each Fund must declare on or before
December 31 of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
A Fund may receive dividend distributions from U.S.
corporations. To the extent that a Fund receives such dividends and distributes
them to its shareholders, and meets certain other requirements of the Code,
corporate shareholders of the Fund may be entitled to the "dividends received"
deduction. Availability of the deduction is subject to certain holding period
and debt- financing limitations.
In the case of the Select 50, International and Global Funds,
if more than 50% in value of the total assets of a Fund at the end of its fiscal
year is invested in stock or other securities of foreign corporations, that Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by that Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of any
foreign income taxes paid by that Fund, and (ii) entitled either to deduct their
share of such foreign taxes in computing their taxable income or to claim a
credit for such taxes against their U.S. income tax, subject to certain
limitations under the Code. In this case, shareholders will be informed by that
Fund at the end of each calendar year regarding the availability of any credits
on and the amount of foreign source income (including or excluding foreign
income taxes paid by that Fund) to be included in their income tax returns. If
50% or less in value of that Fund's total assets at the end of its fiscal year
are invested in stock or other securities, securities of foreign corporations,
that Fund will not be entitled under the Code to pass through to its
shareholders their pro rata share of the foreign income taxes paid by that Fund.
In this case, these taxes will be taken as a deduction by that Fund.
The Select 50, International and Global Funds may be subject
to foreign withholding taxes on dividends and interest earned with respect to
securities of foreign corporations. These Funds may invest up to 10% of their
total assets in the stock of
B-39
<PAGE>
foreign investment companies. Such companies are likely to be treated as
"passive foreign investment companies" ("PFICs") under the Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that these Funds
derive from PFIC stock may be subject to a non-deductible federal income tax at
the Fund level. In some cases, these Funds may be able to avoid this tax by
electing to be taxed currently on their share of the PFIC's income, whether or
not such income is actually distributed by the PFIC. These Funds will endeavor
to limit their 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,
these Funds may incur the PFIC tax in some instances.
The Tax-Free Funds. Provided that, as anticipated, each
Tax-Free Fund qualifies as a regulated investment company under the Code, and,
at the close of each quarter of its taxable years, at least 50% of the value of
the total assets of each of the California Intermediate Bond and California
Money Funds consist of obligations (including California Municipal Securities)
the interest on which is exempt from California personal income taxation under
the Constitution or laws of California or of the United States, such Fund will
be qualified to pay exempt-interest dividends to its shareholders that, to the
extent attributable to interest received by the Fund on such obligations, are
exempt from California personal income tax. If at the close of each quarter of
its taxable years, at least 50% of the value of the total assets of the Federal
Money Fund consists of obligations (including Municipal Securities) the interest
on which is exempt from federal personal income taxation under the Constitution
or laws of the United States, the Federal Money Fund will be qualified to pay
exempt-interest dividends to its shareholders that, to the extent attributable
to interest received by the Fund on such obligations, are exempt from federal
personal income tax. The total amount of exempt-interest dividends paid by these
Funds to their shareholders with respect to any taxable year cannot exceed the
amount of interest received by these Funds during such year on tax-exempt
obligations less any expenses attributable to such interest. Income from other
transactions engaged in by these Funds, such as income from options, repurchase
agreements and market discount on tax-exempt securities purchased by these
Funds, will be taxable distributions to its shareholders.
The Code may also subject interest received on certain
otherwise tax-exempt securities to an alternative minimum tax. In addition,
certain corporations which are subject to the alternative minimum tax may have
to include a portion of exempt-interest dividends in calculating their
alternative minimum taxable income.
Exempt-interest dividends paid to shareholders that are
corporations subject to California franchise tax will be taxed as ordinary
income to such shareholders. Moreover, no dividends paid
B-40
<PAGE>
by these Funds will qualify for the corporate dividends-received deduction for
federal income tax purposes.
Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of these Funds is not deductible for
federal income tax purposes. Under regulations used by the IRS for determining
when borrowed funds are considered used for the purposes of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares of these Funds. California personal income
tax law restricts the deductibility of interest on indebtedness incurred by a
shareholder to purchase or carry shares of a fund paying dividends exempt from
California personal income tax, as well as the allowance of losses realized upon
a sale or redemption of shares, in substantially the same manner as federal tax
law. Further, these Funds may not be appropriate investments for persons who are
"substantial users" of facilities financed by industrial revenue bonds or are
"related persons" to such users. Such persons should consult their tax advisers
before investing in these Funds.
Up to 85% of social security or railroad retirement benefits
may be included in federal (but not California) taxable income for benefit
recipients whose adjusted gross income (including income from tax-exempt sources
such as tax-exempt bonds and these Funds) plus 50% of their benefits exceeding
certain base amounts. Income from these Funds, and other funds like them, is
included in the calculation of whether a recipient's income exceeds these base
amounts, but is not taxable directly.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. It can be expected that similar
proposals may be introduced in the future. Proposals by members of state
legislatures may also be introduced which could affect the state tax treatment
of these Funds' distributions. If such proposals were enacted, the availability
of Municipal Securities for investment by these Funds and the value of these
Funds' portfolios would be affected. In such event, these Funds would reevaluate
their investment objectives and policies.
Hedging. The use of hedging strategies, such as entering into
futures contracts and forward contracts and purchasing options, involves complex
rules that will determine the character and timing of recognition of the income
received in connection therewith by a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
B-41
<PAGE>
For accounting purposes, when a Fund purchases an option, the
premium paid by the Fund is recorded as an asset and is subsequently adjusted to
the current market value of the option. Any gain or loss realized by a Fund upon
the expiration or sale of such options held by a Fund generally will be capital
gain or loss.
Any security, option, or other position entered into or held
by a Fund that substantially diminishes a Fund's risk of loss from any other
position held by that Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of a Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that a Fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in
gains or losses for tax purposes to the extent of the difference
B-42
<PAGE>
between the proceeds and the shareholder's adjusted tax basis for the shares.
Any loss realized upon the redemption or exchange of shares within six months
from their date of purchase will be treated as a long-term capital loss to the
extent of distributions of long-term capital gain dividends with respect to such
shares during such six-month period. Any loss realized upon the redemption or
exchange of shares of a Tax-Free Fund within six months from their date of
purchase will be disallowed to the extent of distributions of exempt-interest
dividends with respect to such shares during such six-month period. All or a
portion of a loss realized upon the redemption of shares of a Fund may be
disallowed to the extent shares of the same Fund are purchased (including shares
acquired by means of reinvested dividends) within 30 days before or after such
redemption.
Distributions and redemptions may be subject to state and
local income taxes, and the treatment thereof may differ from the federal income
tax treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the
Prospectus are not intended to be complete discussions of all applicable federal
tax consequences of an investment in the Funds. The law firm of Paul, Hastings,
Janofsky & Walker has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
TRUSTEES AND OFFICERS
The Trustees of the Trusts (the two Trusts, as well as an
affiliated Trust, The Montgomery Funds III, have the same members on their
Boards) are responsible for the overall management of the Funds, including
general supervision and review of their investment activities. The officers (the
two Trusts, as well as an affiliated Trust, The Montgomery Funds III, have the
same officers), who administer the Funds' daily operations, are appointed by the
Boards of Trustees. The current Trustees and officers of the Trusts performing a
policy-making function and their affiliations and principal occupations for the
past five years are set forth below:
Trustees
Jerome S. Markowitz, a Senior Managing Director of Montgomery
Securities, has resigned as a Trustee of The Montgomery Funds II and an
affiliated Trust, The Montgomery Trust III. Mr. Markowitz has also resigned as a
Trustee-designate of The Montgomery Funds, all effective July 31, 1997. The
current Trustees of the Trusts are as follows:
B-43
<PAGE>
R. Stephen Doyle, Chairman of the Board of Trustees (Age 56).*
101 California Street, San Francisco, California 94111. Mr.
Doyle has been the Chairman and a Director of Montgomery Asset
Management, Inc., the general partner of the Manager, and
Chairman of the Manager since April 1990. Mr. Doyle is a
managing director of the investment banking firm of Montgomery
Securities, the Fund's Distributor, and has been employed by
Montgomery Securities since October 1983.
John A. Farnsworth, Trustee (Age 55)
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 (Age 53)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr.
Cox has been engaged as an independent investment consultant.
From September 1976 until June 1988, Mr. Cox was a Vice
President of the Founders Group of Mutual Funds, Denver,
Colorado, and Portfolio Manager or Co-Portfolio Manager of
several of the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (Age 48)
2636 Vallejo Street, San Francisco, California 94123. Ms.
Herbert was Managing Director of Morgan Guaranty Trust
Company. From 1983 to 1991 she was General Manager of the
bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a
member of the Board of Schools of the Sacred Heart, and is a
member of the Archdiocese of San Francisco Finance Council,
where she chairs the Investment Committee.
- --------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-44
<PAGE>
Officers
Federal banking laws require that, because of the Manager's affiliation
with Commerzbank, no officer or employee of the Manager may serve as a senior
officer of the Funds or the Trusts and only a limited number of employees of the
Manager may serve as junior officers. Effective July 31, 1997, the following
persons have been elected as officers by the Boards of Trustees to replace the
former officers in order to comply with that requirement:
Richard W. Ingram, President and Treasurer (Age 41)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr.
Ingram is the Executive Vice President and Director of Client
Services and Treasury Administration of FDI; Senior Vice
President of Premier Mutual Fund Services, Inc., an affiliate
of FDI ("Premier Mutual") and an officer of certain investment
companies advised or administered by JP Morgan ("Morgan"),
Dreyfus Corporation ("Dreyfus"), Waterhouse Asset Management,
Inc. ("Waterhouse"), RCM Capital Management L.L.C. ("RCM") and
Harris Trust and Savings Bank ("Harris") or their respective
affiliates. Prior to April 1997, Mr. Ingram was Senior Vice
President and Director of Client Services and Treasury
Administration of FDI. From March 1994 to November 1995, Mr.
Ingram was Vice President and Division Manager of First Data
Investor Services Group, Inc. From 1989 to 1994, Mr. Ingram
was Vice President, Assistant Treasurer and Tax Director -
Mutual Funds of The Boston Company, Inc.
Karen Jacoppo-Wood, Vice President and Assistant Secretary
(Age 30)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms.
Jacoppo-Wood is the Assistant Vice President of FDI and an
officer of certain investment companies advised or
administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager, SEC Registration, Scudder, Stevens
& Clark, Inc. From 1988 to May 1994, Ms. Jacoppo-Wood was a
Senior Paralegal at The Boston Company Advisers, Inc.
("TBCA").
Elizabeth A. Keeley, Vice President and Assistant Secretary
(Age 27)
200 Park Avenue, New York, New York 10166. Ms. Keeley is the
Vice President and Senior Counsel of FDI and Premier Mutual,
and an officer of certain investment companies advised or
administered by Morgan, Dreyfus, RCM, Waterhouse and Harris or
their respective affiliates. Prior to August 1996, Ms. Keeley
was Assistant Vice
B-45
<PAGE>
President and Counsel of FDI and Premier Mutual. Prior to
September 1995, Ms. Keeley was enrolled at Fordham University
School of Law and received her J.D. in May 1995. Prior to
September 1992, Ms. Keeley was an Assistant at the National
Association for Public Interest Law.
Christopher J. Kelley, Vice President and Assistant Secretary
(Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 002109. Mr.
Kelley is the Vice President and Associate General Counsel of
FDI and Premier Mutual, and an officer of certain investment
companies advised or administered by Morgan, Waterhouse and
Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. From 1992 to 1994, Mr. Kelley was employed by Putnam
Investments in Legal and Compliance capacities. Prior to 1992,
Mr. Kelley attended Boston College Law School, from which he
graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age
33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms.
Nelson is the Vice President and Manager of Treasury Services
and Administration of FDI and Premier Mutual, and an officer
of certain investment companies advised or administered by
Morgan, Dreyfus, Waterhouse, RCM and Harris or their
respective affiliates. From 1989 to 1994 Ms. Nelson was
Assistant Vice President and Client Manager for The Boston
Company, Inc.
John E. Pelletier, Vice President and Secretary (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr.
Pelletier is the Senior Vice President, General Counsel,
Secretary and Clerk of FDI and Premier Mutual, and an officer
of certain investment companies advised or administered by
Morgan, Dreyfus, Waterhouse, RCM and Harris or their
respective affiliates. From February 1992 to April 1994, Mr.
Pelletier served as Counsel for TBCA. From August 1990 to
February 1992, Mr. Pelletier was employed as an Associate at
Ropes & Gray (a Boston law firm).
Gary S. MacDonald, Vice President and Assistant Treasurer (Age
32)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr.
MacDonald is the Vice President of FDI with which he has been
associated since November 1996. He also is an
B-46
<PAGE>
officer of certain investment companies advised or
administered by RCM. From September 1992 to November 1996 he
was Vice President of BayBanks Investment Management/Bay Bank
Financial Services; and from April 1989 to September 1992 he
was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age
40)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms.
Connolly is the President, Chief Executive Officer, Chief
Compliance Officer and Director of FDI and Premier Mutual, and
an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective
affiliates. From December 1991 to July 1994, Ms. Connolly was
President and Chief Compliance Officer of FDI. Prior to
December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age
28)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr.
Conroy is the Assistant Vice President and Manager of Treasury
Services and Administration of FDI and an officer of certain
investment companies advised or administered by Morgan and
Dreyfus or their respective affiliates. Prior to April 1997,
Mr. Conroy was Supervisor of Treasury Services and
Administration of FDI. From April 1993 to January 1995, Mr.
Conroy was a Senior Fund Accountant for Investors Bank & Trust
Company. From December 1991 to March 1993, Mr. Conroy was
employed as a Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer
(Age 35)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr.
Tower is the Executive Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director
of FDI; Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised
or administered by Morgan, Dreyfus and Waterhouse or their
respective affiliates. Prior to April 1997, Mr. Tower was
Senior Vice President, Treasurer and Chief Financial Officer,
Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The
Boston Company, Inc.
B-47
<PAGE>
<TABLE>
The officers of the Trusts, and the Trustees who are
considered "interested persons" of the Trusts, receive no compensation directly
from the Trusts for performing the duties of their offices. However, those
officers and Trustees who are officers of the Manager or the Distributor may
receive remuneration indirectly because the Manager will receive a management
fee from the Funds. The Trustees who are not affiliated with the Manager or the
Distributor receive an annual retainer and fees and expenses for each regular
Board meeting attended. The aggregate compensation paid by each Trust to each of
the Trustees during the fiscal year ended June 30, 1996, and the aggregate
compensation paid to each of the Trustees during the fiscal year ended June 30,
1996 by all of the registered investment companies to which the Manager provides
investment advisory services, are set forth below.
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement From the
Aggregate Compensation Benefits Trusts and
Compensation from The Accrued as Fund Complex
from The Montgomery Part of Fund (1 additional
Name of Trustee Montgomery Funds Funds II Expenses* Trust)
- --------------- ---------------- ------------ ------------ ------
<S> <C> <C> <C> <C>
R. Stephen Doyle None None -- None
Jerome S. Markowitz None None -- None
John A. Farnsworth $25,000 $5,000 -- $32,500
Andrew Cox $25,000 $5,000 -- $32,500
Cecilia H. Herbert $25,000 $5,000 -- $32,500
<FN>
- --------------
* The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in the Prospectus,
investment management services are provided to the Funds by Montgomery Asset
Management, LLC, the Manager, pursuant to an Investment Management Agreement
with each Fund effective as of July 31, 1997 (each, an "Agreement" and
collectively, the "Agreements"). For the existing Funds, the Agreements are in
effect for an initial two-year period and for Funds that commenced operation
after July 31, 1997, the Agreements are in effect with respect to each such Fund
for two years after the Fund's inclusion in its Trust's Agreement (on or around
its beginning of public operations) and then continue for each Fund for periods
not exceeding one year so long as such continuation is approved at least
annually by (1) the Board of the appropriate Trust or the vote of a majority of
the outstanding shares of that Fund, and (2) a majority of the Trustees who are
not interested persons of any party to the relevant Agreement, in each case by a
vote cast in person at a meeting called for the purpose of voting on such
B-48
<PAGE>
approval. The Agreements may be terminated at any time, without penalty, by a
Fund or the Manager upon 60 days' written notice, and are automatically
terminated in the event of its assignment as defined in the Investment Company
Act.
For services performed under the Agreements, each Fund pays
the Manager a management fee (accrued daily but paid when requested by the
Manager) based upon the average daily net assets of the Fund at the following
annual rates:
Average Daily Net Annual
Fund Assets Rate
- ---- ------------------ ------
Montgomery Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
Montgomery Equity Income Fund First $500 million 0.60%
Over $500 million 0.50%
Montgomery Small Cap Fund First $250 million 1.00%
Over $250 million 0.80%
Montgomery Small Cap First $200 million 1.20%
Opportunities Fund Next $300 million 1.10%
Over $500 million 1.00%
Montgomery Micro Cap Fund First $200 million 1.40%
Over $200 million 1.25%
Montgomery Global First $500 million 1.25%
Opportunities Fund Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Global First $250 million 1.25%
Communications Fund Over $250 million 1.00%
Montgomery International First $250 million 1.25%
Small Cap Fund Over $250 million 1.00%
Montgomery International First $500 million 1.10%
Growth Fund Next $500 million 1.00%
Over $1 billion 0.90%
Montgomery Emerging Asia Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Latin America Fund First $500 million 1.25%
Next $500 million 1.10%
Over $1 billion 1.00%
Montgomery Emerging Markets First $250 million 1.25%
Fund Over $250 million 1.00%
B-49
<PAGE>
Montgomery Select 50 Fund First $250 million 1.25%
Next $250 million 1.00%
Over $500 million 0.90%
Montgomery Asset Allocation All Amounts None
Fund
Montgomery Global Asset All Amounts 0.20%*
Allocation Fund
Montgomery Short Duration First $500 million 0.50%
Government Bond Fund Over $500 million 0.40%
Montgomery Government Reserve First $250 million 0.40%
Fund Next $250 million 0.30%
Over $500 million 0.20%
Montgomery Federal Tax-Free First $500 million 0.40%
Money Fund Over $500 million 0.30%
Montgomery California Tax- First $500 million 0.50%
Free Intermediate Bond Fund Over $500 million 0.40%
Montgomery California Tax- First $500 million 0.40%
Free Money Fund Over $500 million 0.30%
- -------------
* This amount represents only the management fee of the Asset
Allocation Fund and does not include management fees attributable to
the Underlying Funds which ultimately are to be borne by shareholders
of the Global Asset Allocation Fund.
** This amount represents only the management fee of the
Global Asset Allocation Fund and does not include management fees
attributable to the Underlying Funds which ultimately are to be borne
by shareholders of the Global Asset Allocation Fund.
As noted in the Prospectus, the Manager has agreed to reduce
some or all of its management fee if necessary to keep total operating expenses,
expressed on an annualized basis, at or below the following percentages of each
Fund's average net assets (excluding Rule 12b-1 fees): Emerging Asia, Emerging
Markets, Latin America, International Small Cap, Opportunities and
Communications Funds, one and nine-tenths of one percent (1.90%) each; Select 50
Fund, one and eight-tenths of one percent (1.80%); Micro Cap Fund, one and
three-fourths percent (1.75%); International Growth Fund, one and sixty-five
one-hundredths of one percent (1.65%); Growth and Small Cap Opportunities Fund,
one and five-tenths of one percent (1.50%); Small Cap Fund, one and four-tenths
of one percent (1.40%); Allocation Fund, one and three-tenths percent (1.30%);
Global Asset Allocation Fund, five-tenths of one percent (0.50%) of the Global
Asset Allocation Fund's average net assets (excluding expenses related to the
Underlying Funds) or one and seventy-five one-hundredths of one percent (1.75%)
(including total expenses of the Underlying Funds), the Short and California
Intermediate Bond Funds, seven-tenths of one percent (0.70%) each; the Equity
Income Fund, eighty-five-one-
B-50
<PAGE>
hundredths of one percent (0.85%); and the Money Market Funds, six-tenths of one
percent (0.60%), each. The Manager also may voluntarily reduce additional
amounts to increase the return to a Fund's investors. Any reductions made by the
Manager in its fees are subject to reimbursement by that Fund within the
following three years provided the Fund is able to effect such reimbursement and
remain in compliance with the foregoing expense limitations. The Manager
generally seeks reimbursement for the oldest reductions and waivers before
payment by the Funds for fees and expenses for the current year.
Operating expenses for purposes of the Agreements include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, expenses incurred in connection with any merger or reorganization
or extraordinary expenses such as litigation.
The Agreements were approved with respect to each Fund by the
Board of the Trust at duly called meetings. In considering the Agreements, the
Trustees specifically considered and approved the provision which permits the
Manager to seek reimbursement of any reduction made to its management fee within
the three-year period. The Manager's ability to request reimbursement is subject
to various conditions. First, any reimbursement is subject to a Fund's ability
to effect such reimbursement and remain in compliance with applicable expense
limitations in place at that time. Second, the Manager must specifically request
the reimbursement from the Board of Trustees. Third, the Board of Trustees must
approve such reimbursement as appropriate and not inconsistent with the best
interests of the Fund and the shareholders at the time such reimbursement is
requested. Because of these substantial contingencies, the potential
reimbursements will be accounted for as contingent liabilities that are not
recordable on the balance sheet of a Fund until collection is probable; but the
full amount of the potential liability will appear footnote to each Fund's
financial statements. At such time as it appears probable that a Fund is able to
effect such reimbursement, that the Manager intends to seek such reimbursement
and that the Board of Trustees has or is likely to approve the payment of such
reimbursement, the amount of the reimbursement will be accrued as an expense of
that Fund for that current period.
As compensation for its investment management services, each
of the following Funds paid the Manager investment advisory fees in the amounts
specified below. Additional investment advisory fees payable under the
Agreements may have instead been waived by the Manager, but may be subject to
reimbursement by the respective Funds as discussed previously.
Fund Year or Period Ended June 30,
- ----
1996 1995 1994
---- ---- ----
Montgomery Growth Fund $ 8,336,529 $ 5,566,892 $ 290,908
B-51
<PAGE>
Montgomery Equity Income $ 101,709 $ 12,589 NA
Fund
Montgomery Small Cap Fund $ 2,364,834 $ 2,095,945 $ 2,368,563
Montgomery Small Cap $ 217,603 NA NA
Opportunities Fund
Montgomery Micro Cap Fund $ 3,732,720 $ 703,124 NA
Montgomery Global $ 381,316 $ 226,283 $ 99,102
Opportunities Fund
Montgomery Global $ 3,186,649 $ 2,952,058 $ 2,261,713
Communications Fund
Montgomery International $ 611,587 $ 473,200 $ 300,614
Small Cap Fund
Montgomery International $ 97,137 NA NA
Growth Fund
Montgomery Latin America NA NA NA
Fund
Montgomery Emerging Asia NA NA NA
Fund
Montgomery Emerging $10,262,601 $ 9,290,178 $ 5,678,053
Markets Fund
Montgomery Select 50 Fund $ 359,453 NA NA
Montgomery Asset $ 998,198 $ 150,882 $ 2,232
Allocation Fund
Montgomery Short Duration $ 93,531 $ 99,249 $ 117,470
Government Bond Fund
Montgomery Government $ 1,703,723 $ 1,440,964 $ 633,266
Reserve Fund
Montgomery Federal Tax- NA NA NA
Free Money Fund
Montgomery California Tax- $ 48,596 $ 43,889 $ 49,676
Free Intermediate Bond Fund
Montgomery California Tax- $ 538,030 $ 149,574 NA
Free Money Fund
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trusts and who are also
affiliated persons of the Manager.
B-52
<PAGE>
The use of the name "Montgomery" by the Trusts and by the
Funds is pursuant to the consent of the Manager, which may be withdrawn if the
Manager ceases to be the Manager of the Funds.
Share Marketing Plan. The Trusts have adopted a Share
Marketing Plan (or Rule 12b-1 Plan) (the "12b-1 Plan") with respect to the Funds
pursuant to Rule 12b-1 under the Investment Company Act. The Distributor serves
as the distribution coordinator under the 12b-1 Plan and, as such, receives any
fees paid by the Funds pursuant to the 12b-1 Plan.
Prior to August 24, 1995, the Funds offered only one class of
shares. On that date, the Board of Trustees of the Trusts, including a majority
of the Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the 12b-1 Plan or in
any agreement related to the 12b-1 Plan (the "Independent Trustees"), at their
regular quarterly meeting, adopted the 12b-1 Plan for the newly designated Class
P and Class L shares of each Fund. The initial shareholder of the Class P and
Class L shares, if any, of each Fund approved the 12b-1 Plan covering each
Class. The single class of shares existing before that date was redesignated the
Class R shares. Class R shares are not covered by the 12b-1 Plan. On May 29,
1997, the Board of Trustees, including all the Independent Trustees, approved
the appointment of the Distributor as the distribution Coordinator to replace
the Former Manager in that role.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Distributor at an annual rate of up to 0.25% of the Fund's aggregate average
daily net assets attributable to its Class P shares and at an annual rate of up
to 0.75% of the Fund's aggregate average daily net assets attributable to its
Class L shares, respectively, to reimburse the Distributor for its expenses in
connection with the promotion and distribution of those Classes.
The 12b-1 Plan provides that the Distributor may use the
distribution fees received from the Class of the Fund covered by the 12b-1 Plan
only to pay for the distribution expenses of that Class. Distribution fees are
accrued daily and paid monthly, and are charged as expenses of the Class P and
Class L shares as accrued.
Class P and Class L shares are not obligated under the 12b-1
Plan to pay any distribution expense in excess of the distribution fee. Thus, if
the 12b-1 Plan were terminated or otherwise not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Class to the
Manager.
The 12b-1 Plan provides that it shall continue in effect from
year to year provided that a majority of the Board of Trustees of the Trust,
including a majority of the Independent Trustees, vote annually to continue the
12b-1 Plan. The 12b-1 Plan (and any distribution agreement between the Fund, the
Distributor or the Manager and a selling agent with respect to the Class P or
Class L shares) may be terminated without penalty upon at least 60-days'
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notice by the Distributor or the Manager, or by the Fund by vote of a majority
of the Independent Trustees, or by vote of a majority of the outstanding shares
(as defined in the Investment Company Act) of the Class to which the 12b-1 Plan
applies.
All distribution fees paid by the Funds under the 12b-1 Plan
will be paid in accordance with rule 2830 of the NASD Rules of Conduct, as such
rule may change from time to time. Pursuant to the 12b-1 Plan, the Boards of
Trustees will review at least quarterly a written report of the distribution
expenses incurred by the Manager on behalf of the Class P and Class L shares of
each Fund. In addition, as long as the 12b-1 Plan remains in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the Investment Company Act) of the Trust shall be made by the Trustees then
in office who are not interested persons of the Trust.
Shareholder Services Plan. The Trusts have adopted a
Shareholder Services Plan (the "Services Plan") with respect to the Funds. The
Manager (or its affiliate) serves as the service provider under the Services
Plan and, as such, receives any fees paid by the Funds pursuant to the Services
Plan. The Trusts have not yet implemented the Services Plan for any Fund and
have not set a date for implementation. Affected shareholders will be notified
at least 60 days before implementation of the Services Plan.
On August 24, 1995, the Board of Trustees of the Trusts,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Services Plan or in any agreement related to the Services Plan (the "Independent
Trustees"), at their regular quarterly meeting, adopted the Services Plan for
the newly designated Class P and Class L shares of each Fund. The initial
shareholder of the Class P and Class L shares, if any, of each Fund approved the
Services Plan covering each Class. Class R shares are not covered by the
Services Plan.
Under the Services Plan, when implemented, Class P and Class L
of each Fund will pay a continuing service fee to the Manager, the Distributor
or other service providers, in an amount, computed and prorated on a daily
basis, equal to 0.25% per annum of the average daily net assets of Class P and
Class L shares of each Fund. Such amounts are compensation for providing certain
services to clients owning shares of Class P or Class L of the Funds, including
personal services such as processing purchase and redemption transactions,
assisting in change of address requests and similar administrative details, and
providing other information and assistance with respect to a Fund, including
responding to shareholder inquiries.
The Distributor. The Distributor may provide certain
administrative services to the Funds on behalf of the Manager. The Distributor
will also perform distribution services for persons other than the Funds.
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The Custodian. Morgan Stanley Trust Company serves as
principal Custodian of the Funds' assets, which are maintained at the
Custodian's principal office and at the offices of its branches and agencies
throughout the world. The Custodian has entered into agreements with foreign
sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the
Investment Company Act. The Custodian, its branches and sub-custodians generally
hold certificates for the securities in their custody, but may, in certain
cases, have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Funds, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Agreements, the Manager determines which securities
are to be purchased and sold by the Funds and which broker-dealers are eligible
to execute the Funds' portfolio transactions, subject to the instructions of,
and review by, the Funds and the Boards. Purchases and sales of securities
within the U.S. other than on a securities exchange will generally be executed
directly with a "market-maker" unless, in the opinion of the Manager or a Fund,
a better price and execution can otherwise be obtained by using a broker for the
transaction.
The International and Global Funds contemplate purchasing most
equity securities directly in the securities markets located in emerging or
developing countries or in the over-the-counter markets. A Fund purchasing ADRs
and EDRs may purchase those listed on stock exchanges, or traded in the
over-the-counter markets in the U.S. or Europe, as the case may be. ADRs, like
other securities traded in the U.S., will be subject to negotiated commission
rates. The foreign and domestic debt securities and money market instruments in
which a Fund may invest may be traded in the over-the-counter markets.
Purchases of portfolio securities for the Funds also may be
made directly from issuers or from underwriters. Where possible, purchase and
sale transactions will be effected through dealers (including banks) which
specialize in the types of securities which the Funds will be holding, unless
better executions are available elsewhere. Dealers and underwriters usually act
as principals for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the
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order may be allocated to a dealer or underwriter that has provided research or
other services as discussed below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such as the firm's ability to execute trades in a specific
market required by a Fund, such as in an emerging market, the size of the order,
the difficulty of execution, the operational facilities of the firm involved,
the firm's risk in positioning a block of securities, and other factors.
Provided the Trusts' officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute their portfolio transactions. The placement of
portfolio transactions with broker-dealers who sell shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
While the Funds' general policy is to seek first to obtain the
most favorable price and execution available, in selecting a broker-dealer to
execute portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by that Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to that Fund or
assist the Manager in carrying out its responsibilities to that Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Funds. The Boards review all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Funds.
Investment decisions for the Funds are made independently from
those of other client accounts of the Manager or its affiliates, and suitability
is always a paramount consideration. Nevertheless, it is possible that at times
the same securities will be acceptable for one or more Funds and for one or more
of such client accounts. The Manager and its personnel may have interests
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in one or more of those client accounts, either through direct investment or
because of management fees based on gains in the account. The Manager has
adopted allocation procedures to ensure the fair allocation of securities and
prices between the Funds and the Manager's various other accounts. These
procedures emphasize the desirability of bunching trades and price averaging
(see below) to achieve objective fairness among clients advised by the same
portfolio manager or portfolio team. Where trades cannot be bunched, the
procedures specify alternatives designed to ensure that buy and sell
opportunities are allocated fairly and that, over time, all clients are treated
equitably. The Manager's trade allocation procedures also seek to ensure
reasonable efficiency in client transactions, and they provide portfolio
managers with reasonable flexibility to use allocation methodologies that are
appropriate to their investment discipline on client accounts.
To the extent any of the Manager's client accounts and a Fund
seek to acquire the same security at the same general time (especially if the
security is thinly traded or is a small cap stock), that Fund may not be able to
acquire as large a portion of such security as it desires, or it may have to pay
a higher price or obtain a lower yield for such security. Similarly, a Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Manager. In many cases, the Funds' transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that Fund is concerned. In other cases, however, it is believed that
the ability of the Fund to participate in volume transactions may produce better
executions for the Fund.
The Manager's sell discipline for the Domestic Equity, Select
50, International and Global Funds' investment in issuers is based on the
premise of a long-term investment horizon; however, sudden changes in valuation
levels arising from, for example, new macroeconomic policies, political
developments, and industry conditions could change the assumed time horizon.
Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon.
These Funds will limit investments in illiquid securities to 15% of net assets.
For the Select 50, International and Global Funds, 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
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initial public offerings creates a flood of new opportunities which must
continually be assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
For the year ended June 30, 1996, the Funds' total securities
transactions generated commissions of $14,874,777, of which $164,056 was paid to
Montgomery Securities, the Former Distributor of the Funds. For the year ended
June 30, 1995, the Funds' total securities transactions generated commissions of
$11,840,329, of which $74,850 was paid to Montgomery Securities. For the year
ended June 30, 1994, the Funds' total securities transactions generated
commissions of $586,092, of which $168 was paid to Montgomery Securities. During
those years, Montgomery Securities was an affiliate of the Former Manager.
The Funds do not effect securities transactions through
brokers in accordance with any formula, nor do they effect securities
transactions through such brokers solely for selling shares of the Funds.
However, as stated above, Montgomery Securities may act as one of the Funds'
brokers in the purchase and sale of portfolio securities, and other brokers who
execute brokerage transactions as described above may from time to time effect
purchases of shares of the Funds for their customers.
Depending on the Manager's view of market conditions, the
Funds may or may not purchase securities with the expectation of holding them to
maturity, although their general policy is to hold securities to maturity. The
Funds may, however, sell securities prior to maturity to meet redemptions or as
a result of a revised management evaluation of the issuer.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Trust reserves the right in its sole discretion to (i)
suspend the continued offering of its Funds' shares, and (ii) reject purchase
orders in whole or in part when in the judgment of the Manager or the
Distributor such suspension or rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best
interests of a Fund, an investor may purchase shares of that Fund by tendering
payment in kind in the form of securities, provided that any such tendered
securities are readily marketable (e.g., the Funds will not acquire restricted
securities), their acquisition is consistent with that Fund's investment
objective and policies, and the tendered securities are otherwise acceptable to
that Fund's Manager. Such securities are acquired by that Fund only for the
purpose of investment and not for resale. For the purposes of sales of shares of
that Fund for such securities, the tendered
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securities shall be valued at the identical time and in the identical manner
that the portfolio securities of that Fund are valued for the purpose of
calculating the net asset value of that Fund's shares. A shareholder who
purchases shares of a Fund by tendering payment for the shares in the form of
other securities may be required to recognize gain or loss for income tax
purposes on the difference, if any, between the adjusted basis of the securities
tendered to the Fund and the purchase price of the Fund's shares acquired by the
shareholder.
Payments to shareholders for shares of a Fund redeemed
directly from that Fund will be made as promptly as possible but no later than
three days after receipt by the Transfer Agent of the written request in proper
form, with the appropriate documentation as stated in the Prospectus, except
that a Fund may suspend the right of redemption or postpone the date of payment
during any period when (i) trading on the New York Stock Exchange ("NYSE") is
restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (ii) an emergency exists as determined by the SEC (upon
application by a Fund pursuant to Section 22(e) of the Investment Company Act)
making disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable; or (iii) for such other period as the SEC may permit for
the protection of the Fund's shareholders.
The Funds intend to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions that make payment in cash unwise, the
Funds may make payment partly in their portfolio securities with a current
amortized cost or market value, as appropriate, equal to the redemption price.
Although the Funds do not anticipate that they will make any part of a
redemption payment in securities, if such payment were made, an investor may
incur brokerage costs in converting such securities to cash. The Trusts have
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, which require that the Funds pay in cash all requests for
redemption by any shareholder of record limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Trust's net
assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of a Fund's
portfolio securities at the time of redemption or repurchase.
Retirement Plans. Shares of the Taxable Funds are available
for purchase by any retirement plan, including Keogh plans, 401(k) plans, 403(b)
plans and individual retirement accounts ("IRAs").
For individuals who wish to purchase shares of the Taxable
Funds through an IRA, there is available through these Funds a prototype
individual retirement account and custody agreement. The custody agreement
provides that DST Systems, Inc. will act as custodian under the plan, and will
furnish custodial services for an annual maintenance fee per participating
account of
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$10. (These fees are in addition to the normal custodian charges paid by these
Funds and will be deducted automatically from each Participant's account.) For
further details, including the right to appoint a successor custodian, see the
plan and custody agreements and the IRA Disclosure Statement as provided by
these Funds. An IRA that invests in shares of these Funds may also be used by
employers who have adopted a Simplified Employee Pension Plan. Individuals or
employers who wish to invest in shares of a Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
The IRA Disclosure Statement available from the Taxable Funds
contains more information on the amount investors may contribute and the
deductibility of IRA contributions. In summary, an individual may make
deductible contributions to the IRA of up to 100% of earned compensation, not to
exceed $2,000 annually (or $4,000 to two IRAs if there is a non-working spouse).
An IRA may be established whether or not the amount of the contribution is
deductible. Generally, a full deduction for federal income tax purposes will
only be allowed to taxpayers who meet one of the following two additional tests:
(A) the individual and the individual's spouse are each not an
active participant in an employer's qualified retirement plan, or
(B) the individual's adjusted gross income (with some
modifications) before the IRA deduction is (i) $40,000 or less for married
couples filing jointly, or (ii) $25,000 or less for single individuals. The
maximum deduction is reduced for a married couple filing jointly with a combined
adjusted gross income (before the IRA deduction) between $40,000 and $50,000,
and for a single individual with an adjusted gross income (before the IRA
deduction) between $25,000 and $35,000.
It is advisable for an investor considering the funding of any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan consultant with respect to the requirements of such plans and
the tax aspects thereof.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is calculated as
follows: all liabilities incurred or accrued are deducted from the valuation of
total assets, which includes accrued but undistributed income; the resulting net
assets are divided by the number of shares of that Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of
the Funds generally will be determined at least once daily as of 4:00 p.m.
(12:00 noon for the Money Market Funds), New York City time, on each day the
NYSE is open for trading (except national
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bank holidays for the Fixed Income Funds). It is expected that the NYSE will be
closed on Saturdays and Sundays and on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The national bank holidays, in addition to New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas, include January 2, Martin Luther King Day, Good
Friday, Columbus Day, Veteran's Day and December 26. The Funds may, but do not
expect to, determine the net asset values of their shares on any day when the
NYSE is not open for trading if there is sufficient trading in their portfolio
securities on such days to affect materially per-share net asset value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value
or, in the absence of a market value, at fair value as determined in good faith
by the Manager and the Trust's Pricing Committee pursuant to procedures approved
by or under the direction of the Board.
The Funds' securities, including ADRs, EDRs and GDRs, which
are traded on securities exchanges are valued at the last sale price on the
exchange on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any reported sales, at the mean
between the last available bid and asked price. Securities that are traded on
more than one exchange are valued on the exchange determined by the Manager to
be the primary market. Securities traded in the over-the-counter market are
valued at the mean between the last available bid and asked price prior to the
time of valuation. Securities and assets for which market quotations are not
readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Boards.
Short-term debt obligations with remaining maturities in
excess of 60 days are valued at current market prices, as discussed above.
Short-term securities with 60 days or less remaining to maturity are, unless
conditions indicate otherwise, amortized to maturity based on their cost to a
Fund if acquired within 60 days of maturity or, if already held by a Fund on the
60th day, based on the value determined on the 61st day.
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Corporate debt securities, mortgage-related securities and
asset-backed securities held by the Funds are valued on the basis of valuations
provided by dealers in those instruments, by an independent pricing service,
approved by the appropriate Board, or at fair value as determined in good faith
by procedures approved by the Boards. Any such pricing service, in determining
value, will use information with respect to transactions in the securities being
valued, quotations from dealers, market transactions in comparable securities,
analyses and evaluations of various relationships between securities and yield
to maturity information.
An option that is written by a Fund is generally valued at the
last sale price or, in the absence of the last sale price, the last offer price.
An option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Boards.
If any securities held by a Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trusts'
Pricing Committees determine their fair value, following procedures approved by
the Boards. The Trustees periodically review such valuations and valuation
procedures. The fair value of such securities is generally determined as the
amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any recent transactions or offers with
respect to such securities and any available analysts' reports regarding the
issuer.
Any assets or liabilities initially expressed in terms of
foreign currencies are translated into U.S. dollars at the official exchange
rate or, alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign
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currency into U.S. dollars, the Boards in good faith will establish a conversion
rate for such currency.
All other assets of the Funds are valued in such manner as the
Boards in good faith deem appropriate to reflect their fair value.
The Money Market Funds value their portfolio instruments at
amortized cost, which means that securities are valued at their acquisition
cost, as adjusted for amortization of premium or discount, rather than at
current market value. Calculations are made at least weekly to compare the value
of these Funds' investments valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the instruments. The amortized cost method
of valuation seeks to maintain a stable $1.00 per-share net asset value even
where there are fluctuations in interest rates that affect the value of
portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of shareholders' interest. If a deviation of
0.50% or more were to occur between the net asset value per share calculated by
reference to market values and these Fund's $1.00 per-share net asset value, or
if there were any other deviation which the Board of Trustees believed would
result in a material dilution to shareholders or purchasers, the Board would
promptly consider what action, if any, should be initiated. If these Funds'
per-share net asset values (computed using market values) declined, or were
expected to decline, below $1.00 (computed using amortized cost), the Board
might temporarily reduce or suspend dividend payments or take other action in an
effort to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board, an investor
would receive less income during a given period than if such a reduction or
suspension had not taken place. Such action could result in investors receiving
no dividend for the period during which they hold their shares and receiving,
upon redemption, a price per share lower than that which they paid. On the other
hand, if these Funds' per-share net asset values (computed using market values)
were to increase, or were anticipated to increase, above $1.00 (computed using
amortized cost), the Board might supplement dividends in an effort to maintain
the net asset value at $1.00 per share.
PRINCIPAL UNDERWRITER
The Distributor acts as the Funds' principal underwriter in a
continuous public offering of the Funds' shares. The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, is a member of
most of the principal securities exchanges in the U.S., and is a member of the
National Association of Securities Dealers, Inc. The Underwriting Agreement
between each Fund and the Distributor is in effect for each Fund for the same
periods as the Agreements, and shall continue in
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effect thereafter for periods not exceeding one year if approved at least
annually by (i) the appropriate Board of Trustees or the vote of a majority of
the outstanding securities of that Fund (as defined in the Investment Company
Act), and (ii) a majority of the Trustees who are not interested persons of any
such party, in each case by a vote cast in person at a meeting called for the
purpose of voting on such approval. The Underwriting Agreement with respect to
each Fund may be terminated without penalty by the parties thereto upon 60 days'
written notice and is automatically terminated in the event of its assignment as
defined in the Investment Company Act. There are no underwriting commissions
paid with respect to sales of the Funds' shares.
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time,
quote various performance figures in advertisements and investor communications
to illustrate their past performance. Performance figures will be calculated
separately for the Class R, Class P and Class L shares.
The Money Market Funds. Current yield reflects the interest
income per share earned by these Funds' investments. Current yield is computed
by determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a seven-day period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then annualizing the result by multiplying the base period return by
(365/7).
Effective yield is computed in the same manner except that the
annualization of the return for the seven-day period reflects the results of
compounding by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. This figure is
obtained using the Securities and Exchange Commission formula:
Effective Yield = [(Base Period Return + 1)365/7] -1
The Short Fund and California Intermediate Bond Fund. These
Funds' 30-day yield figure described in the Prospectus is calculated according
to a formula prescribed by the SEC, expressed as follows:
YIELD=2[(a-b +1)6-1]
cd
Where: a = dividends and interest earned during
the period.
b = expenses accrued for the period (net
of reimbursement).
B-64
<PAGE>
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share
on the last day of the period.
For the purpose of determining the interest earned (variable
"a" in the formula) on debt obligations that were purchased by these Funds at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
Investors should recognize that, in periods of declining
interest rates, these Funds' yields will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, will tend to
be somewhat lower. In addition, when interest rates are falling, monies received
by these Funds from the continuous sale of their shares will likely be invested
in instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Funds. A tax equivalent yield demonstrates the
taxable yield necessary to produce an after-tax yield equivalent to that of a
fund that invests in tax-exempt obligations. The tax equivalent yield for one of
the Tax-Free Funds is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Fund (computed for the Fund as indicated above)
that is tax exempt by one minus a stated income tax rate and adding the quotient
to that portion (if any) of the yield of the Fund that is not tax exempt. In
calculating tax equivalent yields for the California Intermediate Bond and
California Money Funds, these Funds assume an effective tax rate (combining
federal and California tax rates) of 46.24% (45.22% beginning 1996). The Federal
Money Fund assumes a federal tax rate of 39.6% The effective rate used in
determining such yield does not reflect the tax costs resulting from the loss of
the benefit of personal exemptions and itemized deductions that may result from
the receipt of additional taxable income by taxpayers with adjusted gross
incomes exceeding certain levels. The tax equivalent yield may be higher than
the rate stated for taxpayers subject to the loss of these benefits.
Yields. The yields for the indicated periods ended June 30,
1996, were as follows:
B-65
<PAGE>
<TABLE>
<CAPTION>
Tax-
Equiv. Tax-
Yield Effective Effective Current Equiv.
(7- Yield Yield* Yield Yield*
Fund day) (7-day) (7-Day) (30-day) (30-day)
- ---- ---- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Montgomery Short NA NA NA 6.03% NA
Duration
Government Bond
Fund
Montgomery 4.97% 5.11% NA NA NA
Government
Reserve Fund
Montgomery NA NA NA NA NA
Federal Tax-Free
Money Fund
Montgomery NA NA NA 4.40% 8.18%
California Tax-
Free
Intermediate
Bond Fund
Montgomery 2.89% 2.94% 5.47% NA NA
California Tax-
Free Money Fund
<FN>
- --------------
*Calculated using a combined federal and California income tax rate of 46.24%
for the California Funds and a federal rate of 39.6% for the Federal Money Fund.
</FN>
</TABLE>
Average Annual Total Return. Total return may be stated for
any relevant period as specified in the advertisement or communication. Any
statements of total return for a Fund will be accompanied by information on that
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from that Fund's inception of operations. The
Funds may also advertise aggregate and average total return information over
different periods of time. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
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
B-66
<PAGE>
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
Aggregate Total Return. A Fund's "aggregate total return"
figures represent the cumulative change in the value of an investment in that
Fund for the specified period and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of
a l-, 5- or 10-year period at the end of a
l-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
Each Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The average annual total return for each Fund for the periods
indicated was as follows:
Year Inception*
Ended Through
Fund June 30, 1996 June 30, 1996
---- ------------- -------------
Montgomery Growth Fund 24.85% 29.17%
Montgomery Equity Income 24.56% 22.34%
Fund
Montgomery Small Cap Fund 39.28% 22.92%
B-67
<PAGE>
Montgomery Small Cap NA 31.67%
Opportunities Fund
Montgomery Micro Cap Fund 30.95% 31.00%
Montgomery Select 50 Fund NA 37.75%
Montgomery Global
Opportunities Fund 28.64% 15.15%
Montgomery Global
Communications Fund 17.06% 14.25%
Montgomery International
Small Cap Fund 26.68% 8.16%
Montgomery Latin America NA NA
Fund
Montgomery International 27.58% 27.58%
Growth Fund
Montgomery Emerging Asia NA NA
Fund
Montgomery Emerging
Markets Fund 7.74% 10.26%
Montgomery Asset
Allocation Fund 23.92% 27.22%
Montgomery Short Duration
Government Bond Fund 5.74% 6.27%
Montgomery Government
Reserve Fund 5.28% 4.12%
Montgomery Federal Tax-
Free Money Fund NA NA
Montgomery California Tax-
Free Intermediate Bond Fund 6.11% 4.60%
Montgomery California Tax- 3.03% 3.27%
Free Money Fund
- ----------------
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception for the Funds were: Growth
Fund, September 30, 1993; Small Cap Fund, July 13, 1990; Opportunities Fund,
September 30, 1993; Global Communications Fund, June 1, 1993; International
Small Cap Fund, September 30, 1993; Latin America Fund, June 30, 1997; Emerging
Asia Fund, September 30, 1996; Emerging Markets Fund, March 1, 1992; Allocation
Fund, March 31, 1994; Short Duration Government Bond Fund, December 18, 1992;
Government Reserve Fund, September 14, 1992; California Intermediate Bond Fund,
July 1, 1993; Equity
B-68
<PAGE>
Income and California Money Funds, September 30, 1994; Micro Cap Fund, December
30, 1994; International Growth Fund, June 30, 1995; Select 50 Fund, October 27,
1995; Small Cap Opportunities Fund, December 29, 1995 and Federal Tax-Free Money
Fund, June 30, 1996.
Presentation of Other Performance Information Regarding the Opportunities Fund
John Boich and Oscar Castro jointly managed a limited partnership
called the Common Goal World Fund Limited Partnership (the "Partnership") before
joining the Manager. John Boich has served as the Partnership's General Partner
since its inception on January 7, 1990 until April 1993, when Mr. Castro and Mr.
Boich joined the Manager as Managing Directors and Portfolio Managers. On
September 30, 1993, the Montgomery Global Opportunities Fund, which has a
similar investment strategy as the partnership, was launched. On October 1,
1993, the Partnership was dissolved and the assets were transferred in-kind into
the Opportunities Fund. Consistent with applicable law, the Managers may
advertise the performance of the Partnership as part of materials concerning the
Opportunity Fund.
The annual total return for the Partnership for the periods indicated
was as follows:
Period Partnership Annual Total Return
------ -------------------------------
(Net of fees)
-------------
Year ended Dec. 31, 1990* 2.04%
Year ended Dec. 31, 1991 25.32%
Year ended Dec. 31, 1992 4.53%
9-month Period ended Sept. 30, 1993 17.29%
*The Partnership commenced operations on January 7, 1990.
Presentation of Other Performance Information Regarding the Emerging Asia Fund
From time to time, the Manager may advertise the performance of a
related mutual fund sold only in Canada and advised by the Manager that has a
substantially similar investment objective as the Emerging Asia Fund. The
related mutual fund, called the "Navigator Asia Pacific Fund" commenced
operations on May 19, 1995. The performance information of the Navigator Asia
Pacific Fund (net of fees) was as follows:
Period Aggregate Total Return
------ ----------------------
(Net of fees)
-------------
3-months ended Sept. 30, 1996 -4.55%
Year to date ended Sept. 30, 1996 10.85%
B-69
<PAGE>
One year ended Sept. 30, 1996 7.76%
Since inception 2.70%
Comparisons. To help investors better evaluate how an
investment in the Funds might satisfy their investment objectives,
advertisements and other materials regarding the Funds may discuss various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Publications, indices and averages, including but not limited to, the following
may be used in discussion of a Fund's performance or the investment
opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.
c) Lipper - Mutual Fund Performance Analysis and Lipper Fixed Income
Fund Performance Analysis -- A ranking service that measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Donoghue's Money Fund Report -- Industry averages for 7-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
e) Salomon Brothers Bond Market Roundup -- A weekly publication which
reviews yield spread changes in the major sectors of the money, government
agency, futures, options, mortgage, corporate, Yankee, Eurodollar, municipal,
and preferred stock markets. This publication also summarizes changes in banking
statistics and reserve aggregates.
f) Lehman Brothers indices -- Lehman Brothers fixed-income indices may
be used for appropriate comparisons.
g) other indices - including Consumer Price Index, Ibbotson, Micropal,
CNBC/Financial News Composite Index, MSCI EAFE Index (Morgan Stanley Capital
International, Europe, Australasia, Far East Index - a capitalization-weighted
index that includes all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000 and IFC Emerging Markets
Database.
B-70
<PAGE>
In addition, one or more portfolio managers or other employees
of the Manager may be interviewed by print media, such as by the Wall Street
Journal or Business Week, or electronic news media, and such interviews may be
reprinted or excerpted for the purpose of advertising regarding the Funds.
In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments in the reported
indices and averages is not identical to the Funds' portfolios, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formulae used by the
Funds to calculate their figures.
The Funds may also publish their relative rankings as
determined by independent mutual fund ranking services like Lipper Analytical
Services, Inc. and Morningstar, Inc.
Investors should note that the investment results of the Funds
will fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
Reasons to Invest in the Funds. From time to time, the Funds
may publish or distribute information and reasons supporting the Manager's
belief that a particular Fund may be appropriate for investors at a particular
time. The information will generally be based on internally generated estimates
resulting from the Manager's research activities and projections from
independent sources. These sources may include, but are not limited to,
Bloomberg, Morningstar, Barings, WEFA, Consensus Estimates, Datastream,
Micropal, I/B/E/S Consensus Forecast, Worldscope and Reuters as well as both
local and international brokerage firms. For example, the Funds may suggest that
certain countries or areas may be particularly appealing to investors because of
interest rate movements, increasing exports and/or economic growth. The Funds
may, by way of further example, present a region as possessing the fastest
growing economies and may also present projected gross domestic product (GDP)
for selected economies. In using this information, the Montgomery Emerging Asia
Fund also may claim that certain Asian countries are regarded as having high
rates of growth for their economies (GDP), international trade and corporate
earnings; thus producing what the Manager believes to be a favorable investment
climate.
Research. Largely inspired by its former affiliate, Montgomery
Securities -- which has established a tradition for specialized research in
emerging growth companies -- the Manager has developed its own tradition of
intensive research. The Manager has made intensive research one of the important
characteristics of the Montgomery Funds style.
B-71
<PAGE>
The portfolio managers for Montgomery's global and
international Funds work extensively on developing an in-depth understanding of
particular foreign markets and particular companies. And they very often
discover that they are the first analysts from the United States to meet with
representatives of foreign companies, especially those in emerging markets
nations.
Extensive research into companies that are not well known --
discovering new opportunities for investment -- is a theme that crosses a number
of the Funds and is reflected in the number of Funds oriented towards lower
capitalization businesses.
In-depth research, however, goes beyond gaining an
understanding of unknown opportunities. The portfolio analysts have also
developed new ways of gaining information about well-known parts of the domestic
market. The growth equity team, for example, has developed its own strategy and
proprietary database for analyzing the growth potential of U.S. companies, often
large, well-known companies.
From time to time, advertising and sales materials for the Montgomery
Funds may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (currently $7 billion
for retail and institutional investors) and total shareholders invested in the
Funds (currently around 225,000).
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress
through periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of The
Montgomery Funds and the registration of shares of the Small Cap Fund as the
initial series of the Trust have been assumed by the Small Cap Fund; all
expenses incurred in connection with the organization of The Montgomery Funds II
have been assumed by Montgomery Institutional Series: Emerging Markets Portfolio
and the Manager. Expenses incurred in connection with the establishment and
registration of shares of each of the other funds constituting Trusts as
separate series of the Trusts have been assumed by each respective Fund. The
expenses incurred in connection with the establishment and registration of
shares of the Funds as separate series of the Trusts have been assumed by the
respective Funds and are being amortized over a period of five years commencing
with
B-72
<PAGE>
their respective dates of inception. The Manager has agreed, to the extent
necessary, to advance the organizational expenses incurred by certain Funds and
will be reimbursed for such expenses after commencement of those Funds'
operations. Investors purchasing shares of a Fund bear such expenses only as
they are amortized daily against that Fund's investment income.
As noted above, Morgan Stanley Trust Company (the "Custodian")
acts as custodian of the securities and other assets of the Funds. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Funds.
Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, is the Funds' Master Transfer Agent. The Master
Transfer Agent has delegated certain transfer agent functions to DST Systems,
Inc., P.O. Box 419958, Kansas City, Missouri 64141, the Funds' Transfer and
Dividend Disbursing Agent.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco,
California 94105, are the independent auditors for the Funds.
The validity of shares offered hereby will be passed on by
Paul, Hastings, Janofsky & Walker, 345 California Street, San Francisco,
California 94104.
The shareholders of The Montgomery Funds (but not The
Montgomery Funds II) as shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Agreement and Declaration of Trust
("Declaration of Trust") contains an express disclaimer of shareholder liability
for acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses out of the Funds' assets for any
shareholder held personally liable for obligations of the Funds or Trust. The
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Funds or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Funds. The Declaration of Trust further provides that the
Trust may maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Trust as an investment
company as distinguished from an operating company would not likely give rise to
liabilities in excess of the Funds' total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
extremely remote because it is limited to the unlikely circumstances in which
both inadequate insurance exists and a Fund itself is unable to meet its
obligations.
B-73
<PAGE>
Among the Boards' powers enumerated in the Agreements and
Declaration of Trust is the authority to terminate the Trusts or any of their
series, or to merge or consolidate the Trusts or one or more of their series
with another trust or company without the need to seek shareholder approval of
any such action.
As of June 30, 1997 to the knowledge of the Funds, the
following shareholders owned of record 5 percent or more of the outstanding
Class R Shares of the respective Funds indicated:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Growth Fund
Charles Schwab & Co., Inc. 17,893,564 36.29
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 3,829,962 7.77
For The Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Fund
The Trust Company of Knoxville 776,240 7.64
620 Market Street, #300
Knoxville, TN 37902-2232
Charles Schwab & Co., Inc. 1,589,099 15.64
101 Montgomery Street
San Francisco, CA 94104-4122
Global Opportunities Fund
Charles Schwab & Co., Inc. 594,219 35.19
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 114,262 6.77
For The Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Wayne Boich 133,435 7.90
155 East Broad, No. 23
Columbus, OH 43215-3609
B-74
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Global Communications Fund
Charles Schwab & Co., Inc. 3,262,931 41.58
101 Montgomery Street
San Francisco, CA 94104-4122
International Small Cap Fund
Charles Schwab & Co., Inc. 1,258,990 40.31
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 233,710 7.49
For the Exclusive Use of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
International Growth Fund
Charles Schwab & Co., Inc. 347,233 16.64
101 Montgomery Street
San Francisco, CA 94104-4122
Stanley S. Schwartz TR 191,630 9.18
U/A December 20, 1988 Stanley S.
Schwartz Rev Living Trust/Arista
Foundation
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
Emerging Markets Fund
Charles Schwab & Co., Inc. 33,102,319 44.35
101 Montgomery Street
San Francisco, CA 94014-4122
National Financial Services Corp. 6,404,863 8.58
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Asset Allocation Fund
Charles Schwab & Co., Inc. 2,108,525 32.97
101 Montgomery St.
San Francisco, CA 94104-4122
B-75
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
National Financial Services Corp. 854,890 13.37
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Short Duration Government Bond Fund
Charles Schwab & Co., Inc. 1,249,074 26.47
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson, Lufkin & Jenrette 376,408 7.98
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
KONIAG Inc. 433,729 9.19
c/o Montgomery Asset Management
Attn: Carl Obeck
600 Montgomery Street
San Francisco, CA 94111-2702
Prudential Securities Inc. 454,285 9.63
Special Custody Account for the
Exclusive Benefit of Customers-PC
1 New York Plaza
Attn: Mutual Funds
New York, NY 10004-1902
California Tax-Free Intermediate Bond Fund
Charles Schwab & Co., Inc. 557,179 32.19
101 Montgomery Street
San Francisco, CA 94104-4122
Collier Kimball 115,005 6.65
Montgomery Asset Management
Attn: S. Wang
101 California Street
San Francisco, CA 94111-2702
Montgomery Securities 141,880 8.20
110-02832-15
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2777
B-76
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
California Tax-Free Money Market Fund
First Broadcasting Co. 6,815,227 5.74
Attn: Ron Unkefer
300 Broadway
San Francisco, CA 94133
Government Reserve Fund
Mary Miner, Trustee for Robert 36,732,686 7.76
Miner and Mary Miner Trust
U/A dated 3/14/94
1832 Baker Street
San Francisco, CA 94115-2011
Equity Income Fund
Charles Schwab & Co., Inc. 1,038,614 48.20
101 Montgomery Street
San Francisco, CA 94104-4122
Micro Cap Fund
Charles Schwab & Co., Inc. 6,038,961 36.09
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 961,677 5.75
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Select 50 Fund
Charles Schwab & Co., Inc. 2,421,033 28.12
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 932,296 10.83
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Small Cap Opportunities Fund
Charles Schwab & Co., Inc. 4,719,614 36.56
101 Montgomery Street
San Francisco, CA 94104-4122
B-77
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
National Financial Services Corp. 985,515 7.63
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Federal Tax-Free Money Fund
Jeff Adler & Rita Adler JTWROS 10,513,817 9.21
3125 Hassi Point
Longwood, FL 32779-3125
Emerging Asia Fund
Charles Schwab & Co., Inc. 1,126,496 31.60
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 618,090 17.34
For the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
P.O. Box 3730
Church Street Station
New York, NY 10008-3730
Donaldson, Lufkin & Jenrette 222,299 6.24
Securities Corp.
Mutual Funds Department, 5th Floor
P. O. Box 2052
Jersey City, NJ 07383-2052
Global Asset Allocation
Charles Schwab & Co. Inc. 6,403 5.18
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Servieces Corp. 11,144 9.01
For The Exclusive benefit Of Our
Customers
200 Luberty St., 1 World Financial
Ctr.
Attn Mutual Funds, 5th floor
New York, NY 10281
B-78
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Montgomery Securities 18,027 14.58
401K Deferred Compensation Pln
for The Exclusive benefit Of
Clients
Attn Jeanette Harrison
600 Montgomery Street
San Francisco, CA 94111-2777
As of June 30, 1997, to the knowledge of the Funds, the
following shareholders owned of record 5 percent or more of the outstanding
Class P Shares of the respective Funds indicated:
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Growth Fund
Dreyfus Investment Services Corp. 1,014 15.92
FBO 649772181
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Dreyfus Investment Services Corp. 2,774 43.52
FBO 659049551
2 Mellon Bank Center, Room 177
Pittsburg, PA 15259-0001
Gruntal & Co. 356,905 5.60
FBO 210-08164-18
14 Wall Street
New York, NY 10005-2101
Equity-Income Fund
State Street Bank & Trust Co. Tr. 47,671 99.97
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
North Quincy, MA 02171-2126
Asset Allocation Fund
Gruntal & Co., LLC 316 26.59
FBO 886-09482-18
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 316 26.59
FBO 886-09481-19
14 Wall Street
New York, NY 10005-2101
B-79
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
Gruntal & Co., LLC 290 24.36
FBO 880-12981-11
14 Wall Street
New York, NY 10005-2101
Gruntal & Co., LLC 267 22.46
FBO 886-09483-17
14 Wall Street
New York, NY 10005-2101
Small Cap Fund
State Street Bank & Trust Co. 159,389 46.64
U/A July 01, 1996
McClaren/Hart Employee Ret. Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank & Trust Co. 76,252 22.31
U/A Jan. 02, 1996
Waretek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
State Street Bank Trust 38,199 11.18
GE 401k Trac Plans
C/O Defined Contributions Bfds
P.O. Box 8705
Boston, MA 02266-8705
State Street Bank & Trust Co. 67,939 19.88
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
North Quincy, MA 02171-2126
Select 50 Fund
Gruntal & Co., LLC 59 82.51
FBO 884-04563-16
14 Wall Street
New York, NY 10005-2101
State Street Bank & Trust Co. Tr. 63,846 18.78
U/A Dec. 01, 1993
Ameridata Tech Employee Svgs. Plan
Attn: Steven Shipman Master Tr. W6C
One Enterprise Drive
North Quincy, MA 02171-2126
B-80
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ----------------------- ------------ ---------
State Street Bank & Trust Co. 75,936 22.34
U/A Jan. 2, 1996
Wavetek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02171
State Street Bank TR 38,875 11.44
GE 401K Trac Plans
c/o Defined Contributions Bfds
P.O. Box 8705
Boston, MA 02266-8705
International Growth Fund
Gruntal & Co., LLC 272 81.35
FBO 875-94764-12
14 Wall Street
New York, NY 10005-2101
US Clearing Corp. 62 18.65
FBO 780-16541-17
26 Broadway
New York, NY 10004-1798
Small Cap Opportunities Fund
E*Trade Securities, Inc. 348,025 71.58
A/C 7880-1618
Thomas S. Smogolski C/F
Four Embarcadero Place
2400 Geng Road
Palo Alto, CA 94303-3317
US Clearing Corp. 138 28.42
FB0 720-90531-10
26 Broadway
New York, NY 10004-1798
Emerging Markets Fund
State Street Bank & Trust Co. 28,625 79.33
U/A Jan. 2, 1996
Waretek US Inc. Employee Savings &
Investment Plan
P.O. Box 1992
Boston, MA 02105-1992
B-81
<PAGE>
US Clearing Corp. 2,199 6.10
FB0 720-90531-10
26 Broadway
New York, NY 10004-1798
As of June 25, 1997, the Trustees and officers of the Trusts, as a group,
owned less than 1% of the outstanding shares of each Fund except the Short
Duration Government Bond Fund, California Tax-Free Intermediate Bond, the Global
Opportunities Funds, International Growth Fund, Emerging Asia Fund, Global Asset
Allocation Fund, Latin America Fund and the Japan Small Cap Fund. As of June 25,
1997, the Trustees and officers of the Trusts, as a group, owned approximately
1.8% of the Short Duration Government Bond Fund, 6.0% of the CA Tax-Free
Intermediate Bond Fund, 1.4% of the Global Opportunities Fund, 1.3% of the
International Growth Fund, 1.1% of the Emerging Asia Fund, 5.0% of the Global
Asset Allocation Fund, 4.6% of the Latin America Fund and 57.7% of the Japan
Small Cap Fund.
The Trusts are registered with the Securities and Exchange Commission as
non-diversified management investment companies, although each Fund, except for
the Tax-Free Funds, is a diversified series of the Trust. Such a registration
does not involve supervision of the management or policies of the Funds. The
Prospectus and this Statement of Additional Information omit certain of the
information contained in the Registration Statements filed with the SEC. Copies
of the Registration Statements may be obtained from the SEC upon payment of the
prescribed fee.
FINANCIAL STATEMENTS
Audited financial statements for the relevant periods ending June 30, 1996,
for the Growth, Micro Cap, Small Cap, Small Cap Opportunities, Equity Income,
Opportunities, Communications, International Growth, International Small Cap,
Emerging Markets, Select 50, Asset Allocation, Short, Reserve, California
Intermediate Bond and California Money Funds, as contained in the Annual Report
to Shareholders of such Funds for the fiscal year ended June 30, 1996 (the
"Report"), are incorporated herein by reference to the Report.
Unaudited financial statements for the period ending December 31, 1996, for
the Growth, Micro Cap, Small Cap, Small Cap Opportunities, Equity Income,
Opportunities, Communications, International Growth, International Small Cap,
Emerging Asia, Emerging Markets, Select 50, Asset Allocation, Short, Reserve,
California Intermediate Bond, California Money and Federal Money Funds, as
contained in the Semi-Annual Report to Shareholders of such Funds for the
six-month period ended December 31, 1996 (the "Semi-Annual Report"), are
incorporated herein by reference to the Semi-Annual Report.
Unaudited financial statements for the period ended April 30, 1998 for the
Global Asset Allocation Fund are set forth below.
B-82
<PAGE>
<TABLE>
MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Portfolio Investments
April 30, 1997 (unaudited)
<CAPTION>
Value
Shares (Note 1)
- --------------- --------------
MUTUAL FUNDS - 98.1%
<S> <C> <C> <C> <C>
International - 33.3%
33,457 Montgomery International Growth Fund ..................... $ 491,148
--------------
Fixed-Income - 25.6%
37,907 Montgomery Short Duration Government Bond Fund ........... 376,796
--------------
Large-Cap Growth - 14.9%
10,583 Montgomery Growth Fund ................................... 219,801
--------------
Money Market - 12.7%
187,646 Montgomery Government Reserve Fund ....................... 187,645
--------------
Emerging Markets - 11.6%
11,381 Montgomery Emerging Markets Fund ......................... 171,622
--------------
TOTAL MUTUAL FUNDS
(Cost $1,437,323) ..................................... 1,447,012
--------------
TOTAL INVESTMENTS (Cost $1,437,323*) ..................... 98.1% 1,447,012
OTHER ASSETS AND LIABILITIES (Net) ....................... 1.9 28,365
--------- --------------
NET ASSETS ............................................... 100.0% $ 1,475,377
========= ==============
<FN>
- --------------
* Aggregate cost for Federal tax purposes.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
B-83
<PAGE>
Montgomery Global Asset Allocation Fund
Financial Highlights
For a share of beneficial interest outstanding throughout the period.
Period
Ended
April 30, 1997*
(Unaudited)
-----------
Net asset value - beginning of period ............................ $12.00
-----------
Net investment income ............................................ 0.04
Net realized and unrealized gain on investments .................. 0.35
-----------
Net increase in net assets resulting from
investment operations ......................................... 0.39
-----------
Net asset value - end of period .................................. $12.39
-----------
Total return + ................................................... 3.25%
-----------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) .............................. $1,475
-----------
Ratio of net investment income to average net assets ............. 1.35%**
-----------
Ratio of expenses to average net assets .......................... 0.46%**
-----------
Portfolio turnover rate .......................................... 62%
-----------
Net investment loss before deferral of fees by Manager ........... ($0.10)
-----------
Expense ratio before deferral of fees by Manager ................. 5.04%**
-----------
- --------------
* The Montgomery Global Asset Allocation Fund commenced operations on January
2, 1997.
** Annualized.
+ Total return represents aggregate total return for the period indicated.
The accompanying notes are an integral part of these financial statements.
B-84
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------
Montgomery Global Asset Allocation Fund
Statement of Assets and Liabilities
April 30, 1997 (Unaudited)
- -----------------------------------------
<S> <C> <C>
Assets:
Investments in securities, at value (Cost $1,437,323)(Note 1) .. $ 1,447,012
Cash ........................................................... 9
Receivables:
Shares of beneficial interest sold ........................ 2,378
Dividends ...................................................... 2,334
Other Assets:
Organization costs (Note 1) ............................... 24,078
Expenses absorbed by Manager .............................. 7,701
--------------
Total Assets ................................................... 1,483,512
--------------
Liabilities:
Payables:
Investment securities purchased ........................... $ 2,378
Trustees' fees and expenses ............................... 1,569
Accrued liabilities and expenses ......................... 4,188
---------------
Total Liabilities .............................................. 8,135
---------------
Net Assets ..................................................... $ 1,475,377
===============
Net Assets Consist of:
Undistributed net investment income ............................ $ 4,767
Accumulated net realized gain on securities sold ............... 5,099
Net unrealized appreciation of investments ..................... 9,689
Shares of beneficial interest .................................. 1,191
Additional paid-in capital ..................................... 1,454,631
---------------
Net Assets $ 1,475,377
===============
NET ASSET VALUE, offering and redemption price per share
($1,475,377 - 119,087 shares of beneficial interest outstanding) $ 12.39
===============
<FN>
The accompanying notes are an integral part of these financial statements.
- -------------------------
</FN>
</TABLE>
B-85
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Montgomery Global Asset Allocation Fund
Statement of Operations
Period Ended April 30, 1997 (Unaudited)*
- ----------------------------------------------------------
<S> <C> <C>
Net Investment Income:
Investment Income:
Dividends ..................................................... $ 6,372
--------------
Expenses:
Legal and audit fees .......................................... $ 6,466
Amortization of organization expenses (Note 1) ................ 5,923
Trustees' fees ................................................ 1,616
Mangement fee (Note 2) ........................................ 705
Other ......................................................... 3,068
---------------
Total Expenses ................................................ 17,778
Fees deferred and expenses absorbed by Manager (Note 2) ....... (16,173)
---------------
Net Expenses .................................................. 1,605
--------------
Net Investment Income ......................................... 4,767
--------------
Net Realized and Unrealized Gain on Investments:
Net realized gain from investments during the period .......... 5,099
Net change in unrealized appreciation of investments during
the period .................................................. 9,689
---------------
Net Realized and Unrealized Gain on Investments ............... 14,788
--------------
Net Increase in Net Assets Resulting from Operations .......... $ 19,555
==============
<FN>
- --------------
* The Montgomery Global Asset Allocation Fund commenced operations on January 2,
1997.
The accompanying notes are an integral part of these financial statements.
July 23, 1997
</FN>
</TABLE>
B-86
<PAGE>
<TABLE>
- -------------------------------------------
Montgomery Global Asset Allocation Fund
Statement of Changes in Net Assets
- -------------------------------------------
<CAPTION>
Period Ended
April 30, 1997*
(Unaudited)
---------------
<S> <C>
Increase in Net Assets from Operations:
Net investment income ......................................................... $ 4,767
Net realized gain on securities during the period ............................. 5,099
Net unrealized appreciation of securities during the period ................... 9,689
---------------
Net Increase in Net Assets Resulting from Operations .......................... 19,555
Beneficial Interest Transactions:
Net increase from beneficial interest transactions (Note 3) ................... 1,455,822
---------------
Net Increase in Net Assets .................................................... 1,475,377
Net Assets:
Beginning of Period ........................................................... --
---------------
End of Period (including undistributed net investment income of $4,767)........ $ 1,475,377
===============
<FN>
- --------------
* The Montgomery Global Asset Allocation Fund commenced operations on January 2,
1997.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
THE MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Notes to Financial Statements(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Montgomery Global Asset Allocation Fund (the "Fund", a series of The
Montgomery Funds, the "Trust") is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as a diversified, open-end management
investment company. The Trust was organized as a Massachusetts business trust on
May 10, 1990. The Fund will allocate its assets among a diversified group of
five funds from The Montgomery Funds family: Montgomery Growth Fund, Montgomery
International Growth Fund, Montgomery Short Duration Government Bond Fund,
Montgomery Government Reserve Fund and Montgomery Emerging Markets Fund,
(collectively, the "Underlying Funds").
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosure in the financial statements. Actual
results could differ from those estimates.
The following is a summary of significant accounting policies.
a. PORTFOLIO VALUATION - The Underlying Funds are valued according to their
stated net asset value. Portfolio securities are valued using current market
valuations: either the last reported sales price, or, in the case of securities
for which there is no reported last sale and in the case of fixed income
securities, the mean of the closing bid and asked prices.
B-87
<PAGE>
THE MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Notes to Financial Statements (Continued)(Unaudited)
Portfolio securities which are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sales price on the respective exchanges or markets; except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market are valued at the mean between the last available bid and ask price prior
to the time of valuation.
Securities for which market quotations are not readily available are valued at
fair market value as determined in good faith by or under the supervision of the
Trusts' officers in accordance with methods which are authorized by the Trusts'
Board of Trustees. Short-term securities with maturities of 60 days or less are
carried at amortized cost, which approximates market value.
b. DIVIDENDS AND DISTRIBUTIONS - Dividends, if any, from net investment income
of the Fund will be declared and paid at least annually.
Distributions of any short-term capital gains earned by the Fund are distributed
no less frequently than annually. Additional distributions of net investment
income and capital gains for the Fund may be made in order to avoid the
application of a 4% non-deductible excise tax on certain undistributed amounts
of ordinary income and capital gains. Income distributions and capital gain
distributions are determined in accordance with income tax regulations, which
may differ from generally accepted accounting principles. These differences are
primarily due to differing treatments of income and gains on various investment
securities held by the Fund, timing differences and differing characterization
of distributions made by the Fund.
c. SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
recorded on a trade-date basis. Realized gain and loss from securities
transactions are recorded on the specific identified cost basis. Dividend income
is recognized on the ex-dividend date.
d. FEDERAL INCOME TAXES - The Fund has qualified and it is the intention of the
Fund to continue to qualify and elect treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Code, and to make
distributions of taxable income to shareholders sufficient to relieve the Fund
from all or substantially all federal income taxes.
e. EXPENSES - General expenses of the Trust are allocated to the Fund based upon
net assets. Operating expenses directly attributable to the Fund are charged to
the Fund's operations.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH
AFFILIATES AND OTHER CONTRACTUAL COMMITMENTS:
a. Montgomery Asset Management, L.P. is the Fund's Manager (the "Manager"). The
Manager, a California limited partnership, is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers Act of
1940, as amended (the "Advisers Act"). The general partner of the Manager is
Montgomery Asset Management, Inc. Montgomery Securities, the Funds' principal
underwriter and distributor, and certain of its
B-88
<PAGE>
THE MONTGOMERY GLOBAL ASSET ALLOCATION FUND
Notes to Financial Statements (Continued)(Unaudited)
principals are affiliates of the Manager. Under the Advisers Act, both
Montgomery Asset Management, Inc. and Montgomery Securities may be deemed
controlling persons of the Manager. Although the operations and management of
the Manager are independent from those of Montgomery Securities, it is expected
that the Manager may draw upon the research and administrative resources of
Montgomery Securities at its discretion in a manner consistent with applicable
regulations.
Pursuant to an investment management agreement ("Investment Management
Agreement"), the Manager provides the Fund with advice on buying and selling
securities, manages the investments of the Fund including the placement of
orders for portfolio transactions, furnishes the Fund with office space and
certain administrative services, and provides the personnel needed by the Trust
with respect to the Manager's responsibilities under such agreement. As
compensation, the Fund pays the Manager a monthly management fee (accrued daily)
based upon the average daily net assets of the Fund, at an annual rate of 0.20%
of the average daily net assets of the Fund. The Manager has agreed to reduce
some or all of its management fee or absorb fund expenses if necessary to keep
the Fund's annual operating expenses, exclusive of interest and taxes, at or
below 0.50% of the Fund's average net assets. Any reductions or absorptions made
to the Fund by the Manager are subject to recovery within the following two
years, provided the Fund is able to affect such reimbursement and remain in
compliance with applicable expense limitations. The Manager may terminate these
reductions or absorptions at any time. For the period ended April 30, 1997, the
Manager has deferred fees of $705 and reimbursed expenses of $15,468.
Montgomery Asset Management, L.P. serves as the Funds' administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of the Fund's administrative operations. The Administrator does not
charge a fee for performing administrative services to the Fund.
b. Certain officers and Trustees of the Trust are, with respect to the Trusts'
Manager and/or principal underwriter, "affiliated persons" as defined in the
1940 Act. Each Trustee who is not an "affiliated person" will receive an annual
retainer and quarterly meeting fee totaling $35,000 per annum, as well as
reimbursement for expenses, for service as a Trustee of all three Trusts advised
by the Manager ($25,000 of which will be allocated to the Montgomery Funds).
c. For the period ended April 30, 1997, the Fund's securities transactions
generated no commissions.
d. The Shares of the Fund have no sales load.
3. TRANSACTIONS IN SHARES OF A BENEFICIAL INTEREST:
The Trust has authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01.
Transactions in shares of beneficial interest for the period indicated below:
Period Ended
April 30, 1997*
---------------
B-89
<PAGE>
Shares Amount
------- -----------
Shares sold.............................. 159,863 $1,957,094
Shares redeemed.......................... (40,776) (501,272)
------- ----------
Net Increase............................. 119,087 $1,455,822
------- ----------
- -----------------
* The Montgomery Global Asset Allocation Fund commenced operations on January 2,
1997.
4. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. Government securities, during the period ended April
30, 1997 was $2,031,104 and $598,880, respectively.
b. At April 30, 1997, aggregate gross unrealized appreciation and aggregate
gross unrealized depreciation for all Underlying Funds in which there is an
excess of value over tax cost was $11,062 and $1,373, respectively.
5. RISK FACTORS OF THE FUND:
Investing in the Underlying Funds through the Fund involves certain
additional expenses and tax results that would not be present in a direct
investment in the Underlying Funds. Certain of the Underlying Funds may invest
in debt obligations of foreign issuers and stocks of foreign corporations,
securities in foreign investment funds or trusts, derivative securites including
futures contracts. These Underlying Funds may also engage in reverse repurchase
agreements and dollar roll transactions.
B-90
<PAGE>
Appendix A
Description of Moody's corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to a
"gilt-edged." 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 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 are generally 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 Aaa securities.
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 predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the 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.
B-91
<PAGE>
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Nonrated - where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened
B-92
<PAGE>
capacity to pay principal and interest for bonds in this capacity than for bonds
in the A category.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, and C are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1 - The rating C1 is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-) - The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR - indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fitch Investor's Service
AAA - Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA - Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA- rated securities, and more subject to possible
change over the term of the issue.
A - Bonds and notes rated A are regarded as being of good quality. The obligor's
ability to pay interest and repay principal is strong but may be more vulnerable
to adverse changes in economic conditions and circumstances than bonds and notes
with higher ratings.
BBB - Bonds and notes rated BBB are regarded as being of satisfactory 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 weaken this ability than bonds with higher ratings.
B-93
<PAGE>
Note: Fitch ratings may be modified by the addition of a plus (+) or a minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
B-94
<PAGE>
Commercial Paper Ratings
Moody's commercial paper ratings are assessments of the issuer's ability
to repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--higher
quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, 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. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-95
<PAGE>
---------------------------------------------------------------------
PART B
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION
MONTGOMERY INSTITUTIONAL SERIES: EMERGING MARKETS PORTFOLIO
---------------------------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
Supplement dated July 31, 1997 to
Statement of Additional Information dated November 12, 1996
For the Montgomery Institutional Series: Emerging Markets Portfolio
On July 31, 1997, Montgomery Asset Management, L.P. completed the sale of
substantially all of its assets to Montgomery Asset Management, LLC, a
subsidiary of Commerzbank AG (the "New Manager"). At a special meeting of
shareholders on June 23, 1997, the shareholders of the Fund approved a new
Investment Management Agreement with the New Manager, effective July 31, 1997
for an initial two-year period.
Funds Distributor, Inc. ("FDI"), which is not affiliated with New Montgomery,
has replaced Montgomery Securities as the distributor for the Fund. New
Montgomery has also become the administrator for the Fund.
Officers
Federal banking laws require that, because of the New Manager's affiliation with
Commerzbank, no officer or employee of the New Manager may serve as a senior
officer of the Fund or the Trust and only a limited number of employees of the
New Manager may serve as junior officers. Effective July 31, 1997, the following
persons have been elected as officers by the Board of Trustees to replace the
former officers in order to comply with that requirement:
Richard W. Ingram, President and Treasurer (Age 41)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Ingram is the
Executive Vice President and Director of Client Services and Treasury
Administration of FDI; Senior Vice President of Premier Mutual Fund Services,
Inc., an affiliate of FDI ("Premier Mutual") and an officer of certain
investment companies advised or administered by JP Morgan ("Morgan"), Dreyfus
Corporation ("Dreyfus"), Waterhouse Asset Management, Inc. ("Waterhouse"), RCM
Capital Management L.L.C. ("RCM") and Harris Trust and Savings Bank ("Harris")
or their respective affiliates. Prior to April 1997, Mr. Ingram was Senior Vice
President and Director of Client Services and Treasury Administration of FDI.
From March 1994 to November 1995, Mr. Ingram was Vice President and Division
Manager of First Data Investor Services Group, Inc. From
1
<PAGE>
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director - Mutual Funds of The Boston Company, Inc.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 30)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
("TBCA").
Elizabeth A. Keeley, Vice President and Assistant Secretary (Age 27)
200 Park Avenue, New York, New York 10166. Ms. Keeley is the Vice President and
Senior Counsel of FDI and Premier Mutual, and an officer of certain investment
companies advised or administered by Morgan, Dreyfus, RCM, Waterhouse and Harris
or their respective affiliates. Prior to August 1996, Ms. Keeley was Assistant
Vice President and Counsel of FDI and Premier Mutual. Prior to September 1995,
Ms. Keeley was enrolled at Fordham University School of Law and received her
J.D. in May 1995. Prior to September 1992, Ms. Keeley was an Assistant at the
National Association for Public Interest Law.
Christopher J. Kelley, Vice President and Assistant Secretary (Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 002109. Mr. Kelley is the
Vice President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in Legal and Compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
Mary A. Nelson, Vice President and Assistant Treasurer (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client Manager for
The Boston Company, Inc.
2
<PAGE>
John E. Pelletier, Vice President and Secretary (Age 33)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Pelletier is the
Senior Vice President, General Counsel, Secretary and Clerk of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From February 1992 to April 1994, Mr. Pelletier served as Counsel for TBCA. From
August 1990 to February 1992, Mr. Pelletier was employed as an Associate at
Ropes & Gray (a Boston law firm).
Gary S. MacDonald, Vice President and Assistant Treasurer (Age 32)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996 he was Vice President of BayBanks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992 he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (Age 28)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
3
<PAGE>
Joseph F. Tower, III, Vice President and Assistant Treasurer (Age 35)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
Trustees
Jerome S. Markowitz, a Senior Managing Director of Montgomery Securities, has
resigned as a Trustee of TMF II and TMF III and as a Trustee-designate of TMF,
effective July 31, 1997. R. Stephen Doyle, Andrew Cox, John A. Farnsworth and
Cecilia H. Herbert will continue their service as Trustees of the Trusts.
4
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS II
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) For Montgomery Institutional Series: Emerging Markets
Portfolio:
(1) Portfolio Investments as of June 30, 1996; Statement of
Assets and Liabilities as of June 30, 1996; Statement of
Operations for the Year Ended June 30, 1996; Statement of
Changes in Net Assets for the year ended June 30, 1996;
Financial Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1996; Notes to
Financial Statements; Independent Auditor's Report on the
foregoing, all incorporated by reference to the Annual Report
to Shareholders of Montgomery Institutional Series: Emerging
Markets Portfolio for the year ended June 30, 1996.
(2) Portfolio Investments as of December 31, 1996; Statement
of Assets and Liabilities as of December 31, 1996; Statement
of Operations for the Period Ended December 31, 1996;
Statement of Changes in Net Assets for the period ended
December 31, 1996; Financial Highlights for a Fund share
outstanding throughout each period, including the period ended
December 31, 1996; and Notes to Financial Statements (all
unaudited); all incorporated by reference to the Semi-Annual
Report to Shareholders of the above-named Fund.
(b) For Montgomery Asset Allocation Fund:
(1) Portfolio Investments as of June 30, 1996; Statement of
Assets and Liabilities as of June 30, 1996; Statement of
Operations for the Year Ended June 30, 1996; Statement of
Changes in Net Assets for the year ended June 30, 1996;
Financial Highlights for a Fund share outstanding throughout
each year, including the year ended June 30, 1996; Notes to
Financial Statements; Independent Auditors' Report on the
foregoing, all incorporated by reference to the Annual Report
to Shareholders of Montgomery Asset Allocation Fund for the
year ended June 30, 1996.
(2) Portfolio Investments as of December 31, 1996; Statement
of Assets and Liabilities as of December 31, 1996; Statement
of Operations for the Period Ended December 31, 1996;
Statement of Changes in Net Assets for the period ended
December 31, 1996; Financial Highlights for a Fund share
outstanding throughout each period, including the period ended
December 31, 1996; and Notes to Financial Statements (all
unaudited); all incorporated by reference to the Semi-Annual
Report to Shareholders of the above-named Fund.
C-1
<PAGE>
<TABLE>
<CAPTION>
(b) Exhibits:
<S> <C> <C>
(1) Amended and Restated Agreement and Declaration of Trust.(D)
(2) Amended and Restated By-Laws.(D)
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement.
(6) Form of Underwriting Agreement.
(7) Benefit Plan(s) - Not applicable.
(8) Custodian Agreement.(E)
(9)(A) Administrative Services Agreement.(A)
(9)(B) Form of Multiple Class Plan.(F)
(9)(C) Form of Shareholder Services Plan.
(10) Consent and Opinion of Counsel as to legality of shares.(C)
(11) Consent of Independent Auditors
(12) Financial Statements omitted from Item 23 - Not applicable.
(13) Form of Subscription Agreement for initial shares.(C)
(14) Model Retirement Plan Documents - Not applicable.
(15) Form of Share Marketing Plan (Rule 12b-1 Plan)
(16)(A) Performance Computation for Montgomery Institutional Series: Emerging
Markets Portfolio.(E)
(16)(B) Performance Computation for Montgomery Asset Allocation Fund.(E)
(27) Financial Data Schedule is incorporated by reference
to Form N-SAR filed for the period ended December 31,
1996.
<FN>
- ------------------
(A) Previously filed as part of Pre-Effective Amendment No. 2 to the
Registration Statement, filed on November 24, 1993.
(B) Previously filed as part of Pre-Effective Amendment No. 1 to the
Registration Statement, filed on November 15, 1993.
(C) Previously filed as part of Post-Effective Amendment No. 9 to the
Registration Statement, filed on November 1, 1994.
(D) Previously filed as part of Post-Effective Amendment No. 11 to the
Registration Statement, filed on March 31, 1995.
(E) Previously filed as part of Post-Effective Amendment No. 14 to the
Registration Statement, filed on September 13, 1995.
</FN>
</TABLE>
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Montgomery Asset Management, L.P., a California limited
partnership, is the manager of each series of the Registrant, of The Montgomery
Funds, a Massachusetts business trust, and of The Montgomery Funds III, a
Delaware business trust. Montgomery Asset Management, Inc., a California
corporation is the general partner of Montgomery Asset Management, L.P., and
Montgomery Securities is its sole limited partner. The Registrant, The
Montgomery Funds and The Montgomery Funds III are deemed to be under the common
control of each of those three entities.
<TABLE>
Item 26. Number of Holders of Securities
<CAPTION>
Number of Record Holders
Title of Class as of June 30, 1997
-------------- ------------------------
<S> <C>
Montgomery Institutional Series: Emerging Markets Portfolio 38
Montgomery Asset Allocation Fund 10,369
</TABLE>
Item 27. 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 may be permitted to the Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser.
Montgomery Securities, which is a broker-dealer and the
principal underwriter of The Montgomery Funds II, is the sole limited partner of
the investment manager, Montgomery Asset Management, L.P. ("MAM, L.P."). The
general partner of MAM, L.P. is a corporation, Montgomery Asset Management, Inc.
("MAM, Inc."), certain of the officers and directors of which serve in similar
capacities for MAM, L.P. One of these officers and directors, Mr. R. Stephen
Doyle, also is a capital limited partner of Montgomery Securities, and Mr. Jack
G. Levin, Secretary of The Montgomery Funds II, is a Managing Director of
Montgomery Securities. R. Stephen Doyle
C-3
<PAGE>
is the Chairman and Chief Executive Officer of MAM, L.P.; Mark B. Geist is the
President; John T. Story is the Managing Director of Mutual Funds and Executive
Vice President; David E. Demarest is Chief Administrative Officer; Mary Jane
Fross is Manager of Mutual Fund Administration and Finance; and Josephine
Jimenez, Bryan L. Sudweeks, Stuart O. Roberts, John H. Brown, William C.
Stevens, Roger Honour, Oscar Castro, John Boich and Rhoda Rossman are Managing
Directors of MAM, L.P. Information about the individuals who function as
officers of MAM, L.P. (namely, R. Stephen Doyle, Mark B. Geist, John T. Story,
David E. Demarest, Mary Jane Fross and the eight Managing Directors) is set
forth in Part B.
Item 29. Principal Underwriter.
(a) Montgomery Securities is the principal underwriter of The
Montgomery Funds II, the Montgomery Funds and the Montgomery
Funds III. Montgomery Securities acts as the principal
underwriter, depositor and/or investment adviser and/or
trustee for The Montgomery Funds, an investment company
registered under the Investment Company Act of 1940, as
amended, and for the following private investment partnerships
or trusts:
Montgomery Bridge Fund Liquidating Trust
Montgomery Bridge Fund II, Liquidating Trust
Montgomery Bridge Investments Limited, Liquidating Trust
Montgomery Private Investments Partnership, Liquidating Trust
Pathfinder Montgomery Fund I, L.P., Liquidating Trust
Montgomery Growth Partners, L.P.
Montgomery Small Cap Partners II, L.P.
Montgomery Small Cap Partners III, L.P.
Montgomery Capital Partners, L.P.
Montgomery Capital Partners II, L.P.
Montgomery Emerging Markets Fund Limited
Montgomery Emerging World Partners, L.P.
<TABLE>
(b) The following information is furnished with respect to the
officers and general partners of Montgomery Securities:
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ----------------
<S> <C> <C>
Lewis W. Coleman Senior Managing Director None
J. Richard Fredericks Senior Managing Director None
Robert L. Kahan Senior Managing Director None
Kent A. Logan Senior Managing Director None
Jerome S. Markowitz Senior Managing Director Trustee
Karl L. Matthies Senior Managing Director None
J. Sanford Miller Senior Managing Director None
Joseph M. Schell Senior Managing Director None
John K. Skeen Senior Managing Director None
Thomas W. Weisel Chairman and Chief Executive None
Officer
Stephen T. Aiello Managing Director None
C-4
<PAGE>
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ----------------
<S> <C> <C>
John A. Berg Managing Director None
Howard S. Berl Managing Director None
Charles R. Brama Managing Director None
Robert V. Cheadle Managing Director None
Jeffrey B. Child Managing Director None
M. Allen Chozen Managing Director None
Frank J. Connelly Managing Director None
David K. Crossen Managing Director None
Glen C. Dailey Managing Director None
Michael G. Dorey Managing Director None
Dennis Dugan Managing Director None
Frank M. Dunlevy Managing Director None
William A. Falk Managing Director None
Paul G. Fox Managing Director None
Clark L. Gerhardt, Jr. Managing Director None
Seth J. Gersch Managing Director None
Robert G. Goddard Managing Director None
P. Joseph Grasso Managing Director None
James C. Hale, III Managing Director None
Wilson T. Hileman, Jr. Managing Director None
Brett A. Hodess Managing Director None
Ben Howe Managing Director None
Craig R. Johnson Managing Director None
Joseph A. Jolson Managing Director None
Scott C. Kovalik Managing Director None
Kurt H. Kruger Managing Director None
Guy A. Lampard Managing Director None
David S. Lehmann Managing Director None
Derek Lemke-von Ammon Managing Director None
Jack G. Levin, Esq. Managing Director Secretary
Merrill S. Lichtenfeld Managing Director None
James F. McMahon Managing Director None
Michael G. Mueller Managing Director None
Bernard M. Notas Managing Director None
Bruce G. Potter Managing Director None
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices Positions and Offices
Business Address* with Montgomery Securities with Registrant
- ----------------- -------------------------- ----------------
<S> <C> <C>
David B. Readerman Managing Director None
Rand Rosenberg Managing Director None
Alice S. Ruth Managing Director None
Richard A. Smith Managing Director None
Kathleen Smythe-de Urquieta Managing Director None
Peter B. Stoneberg Managing Director None
Thomas Tashjian Managing Director None
Thomas A. Thornhill, III Managing Director None
John Tinker Managing Director None
Otto V. Tschudi Managing Director None
Stephan P. Vermut Managing Director None
John W. Weiss Managing Director None
George W. Yandell, III Managing Director None
Ross Investments, Inc. General Partner None
LWC Investments, Inc. General Partner None
RLK Investments, Inc. General Partner None
Logan Investments, Inc. General Partner None
SEWEL Investments, Inc. General Partner None
MMJ Investments, Inc. General Partner None
Skeen Investments, Inc. General Partner None
<FN>
* The principal business address of persons and entities listed is 600
Montgomery Street, San Francisco, California 94111.
The above list does not include limited partners or special limited
partners who are not Managing Directors of Montgomery Securities.
</FN>
</TABLE>
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will be kept
by the Registrant's Transfer Agent, DST Systems, Inc., 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 600 Montgomery Street, San
Francisco, California 94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
C-6
<PAGE>
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to file a post-effective
amendment including financial statements of Montgomery Japan Small Cap Fund and
Montgomery Latin America Fund, which need not be certified, within four to six
months from effective date of registrant's: 1933 Act registration statement as
to those series.
(c) Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's last annual
report to Shareholders, upon request and without charge.
(d) Registrant has undertaken to comply with Section 16(a) of
the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment pursuant to Rule 485(b)
under the Securities Act of 1933, as amended, and that registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Francisco and
State of California on this 28th day of July, 1997.
THE MONTGOMERY FUNDS II
By: R. Stephen Doyle*
--------------------------------
R. Stephen Doyle
Chairman and Principal Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
R. Stephen Doyle * Principal Executive July 28, 1997
- ---------------------- Officer; Principal
R. Stephen Doyle Financial and Accounting
Officer; and Trustee
Andrew Cox * Trustee July 28, 1997
- ----------------
Andrew Cox
Cecilia H. Herbert * Trustee July 28, 1997
- ------------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee July 28, 1997
- ------------------------
John A. Farnsworth
Jerome S. Markowitz * Trustee July 28, 1997
- -------------------------
Jerome S. Markowitz
* By: /s/ Julie Allecta
----------------------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
<PAGE>
THE MONTGOMERY FUNDS II
EXHIBIT INDEX
No. Exhibit
---- -------
5(A) Investment Management Agreement
6 Underwriting Agreement
9(A) Administrative Services Agreement
11 Consent of Independent Auditors
15 Share Marketing Plan (Rule 12b-1 Plan)
EXHIBIT NO. 5(A)
INVESTMENT MANAGEMENT AGREEMENT
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT made as of the 31st day of July,
1997, by and between THE MONTGOMERY FUNDS II, a Delaware business trust
(hereinafter called the "Trust"), on behalf of each series of the Trust listed
in Appendix A hereto, as may be amended from time to time (hereinafter referred
to individually as a "Fund" and collectively as the "Funds") and MONTGOMERY
ASSET MANAGEMENT, LLC, a limited liability company organized and existing under
the laws of the State of Delaware (hereinafter called the "Manager").
WITNESSETH:
WHEREAS, the Trust is an open-end management investment company,
registered as such under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and is engaged in the business of
supplying investment advice, investment management and administrative services,
as an independent contractor; and
WHEREAS, the Trust desires to retain the Manager to render advice and
services to the Funds pursuant to the terms and provisions of this Agreement,
and the Manager is interested in furnishing said advice and services;
1
<PAGE>
NOW, THEREFORE, in consideration of the covenants and the mutual
promises hereinafter set forth, the parties hereto, intending to be legally
bound hereby, mutually agree as follows:
1. Appointment of Manager. The Trust hereby employs the Manager and the
Manager hereby accepts such employment, to render investment advice and
management services with respect to the assets of the Funds for the period and
on the terms set forth in this Agreement, subject to the supervision and
direction of the Trust's Board of Trustees.
2. Duties of Manager.
(a) General Duties. The Manager shall act as investment
manager to the Funds and shall supervise investments of the Funds on behalf of
the Funds in accordance with the investment objectives, programs and
restrictions of the Funds as provided in the Trust's governing documents,
including, without limitation, the Trust's Agreement and Declaration of Trust
and By-Laws, or otherwise and such other limitations as the Trustees may impose
from time to time in writing to the Manager. Without limiting the generality of
the foregoing, the Manager shall: (i) furnish the Funds with advice and
recommendations with respect to the investment of each Fund's assets and the
purchase and sale of portfolio securities for the Funds, including the taking of
such other steps as may be necessary to implement such advice and
recommendations; (ii) furnish the Funds with reports, statements and other data
on securities, economic conditions and other pertinent subjects which the
Trust's Board of Trustees may reasonably request; (iii) manage the investments
of the Funds, subject to the ultimate supervision and direction of the Trust's
Board of Trustees; (iv) provide persons satisfactory to the Trust's
2
<PAGE>
Board of Trustees to act as officers and employees of the Trust and the Funds
(such officers and employees, as well as certain trustees, may be trustees,
directors, officers, partners, or employees of the Manager or its affiliates)
but not including personnel to provide administrative service or distribution
services to the Fund; and (v) render to the Trust's Board of Trustees such
periodic and special reports with respect to each Fund's investment activities
as the Board may reasonably request.
(b) Brokerage. The Manager shall place orders for the purchase
and sale of securities either directly with the issuer or with a broker or
dealer selected by the Manager. In placing each Fund's securities trades, it is
recognized that the Manager will give primary consideration to securing the most
favorable price and efficient execution, so that each Fund's total cost or
proceeds in each transaction will be the most favorable under all the
circumstances. Within the framework of this policy, the Manager may consider the
financial responsibility, research and investment information, and other
services provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may be a
party.
It is also understood that it is desirable for the Funds that the
Manager have access to investment and market research and securities and
economic analyses provided by brokers and others. It is also understood that
brokers providing such services may execute brokerage transactions at a higher
cost to the Funds than might result from the allocation of brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the purchase and sale of securities for the Funds may be
made with brokers who provide such research and analysis, subject to review by
the Trust's Board of Trustees from time to time with
3
<PAGE>
respect to the extent and continuation of this practice to determine whether
each Fund benefits, directly or indirectly, from such practice. It is understood
by both parties that the Manager may select broker-dealers for the execution of
the Funds' portfolio transactions who provide research and analysis as the
Manager may lawfully and appropriately use in its investment management and
advisory capacities, whether or not such research and analysis may also be
useful to the Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of one or more of the Funds as well as of other
clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be so purchased or sold in order to
obtain the most favorable price or lower brokerage commissions and the most
efficient execution. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Manager in the manner it considers to be the most equitable and consistent with
its fiduciary obligations to the Funds and to such other clients.
(c) Administrative Services. The Manager shall oversee the
administration of the Funds' business and affairs although the provision of
administrative services, to the extent not covered by subparagraphs (a) or (b)
above, is not the obligation of the Manager under this Agreement.
Notwithstanding any other provisions of this Agreement, the Manager shall be
entitled to reimbursement from the Funds for all or a portion of the reasonable
costs and expenses, including salary, associated with the provision by Manager
of personnel to render administrative services to the Funds.
4
<PAGE>
3. Best Efforts and Judgment. The Manager shall use its best judgment
and efforts in rendering the advice and services to the Funds as contemplated by
this Agreement.
4. Independent Contractor. The Manager shall, for all purposes herein,
be deemed to be an independent contractor, and shall, unless otherwise expressly
provided and authorized to do so, have no authority to act for or represent the
Trust or the Funds in any way, or in any way be deemed an agent for the Trust or
for the Funds. It is expressly understood and agreed that the services to be
rendered by the Manager to the Funds under the provisions of this Agreement are
not to be deemed exclusive, and the Manager shall be free to render similar or
different services to others so long as its ability to render the services
provided for in this Agreement shall not be impaired thereby.
5. Manager's Personnel. The Manager shall, at its own expense, maintain
such staff and employ or retain such personnel and consult with such other
persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of the Manager shall be
deemed to include persons employed or retained by the Manager to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Manager or the Trust's Board of Trustees may desire and reasonably request.
6. Reports by Funds to Manager. Each Fund will from time to time
furnish to the Manager detailed statements of its investments and assets, and
information as to its investment
5
<PAGE>
objective and needs, and will make available to the Manager such financial
reports, proxy statements, legal and other information relating to each Fund's
investments as may be in its possession or available to it, together with such
other information as the Manager may reasonably request.
7. Expenses.
(a) With respect to the operation of each Fund, the Manager is
responsible for (i) the compensation of any of the Trust's trustees, officers,
and employees who are affiliates of the Manager (but not the compensation of
employees performing services in connection with expenses which are the Fund's
responsibility under Subparagraph 7(b) below), (ii) the expenses of printing and
distributing the Funds' prospectuses, statements of additional information, and
sales and advertising materials (but not the legal, auditing or accounting fees
attendant thereto) to prospective investors (but not to existing shareholders),
and (iii) providing office space and equipment reasonably necessary for the
operation of the Funds.
(b) Each Fund is responsible for and has assumed the
obligation for payment of all of its expenses, other than as stated in
Subparagraph 7(a) above, including but not limited to: fees and expenses
incurred in connection with the issuance, registration and transfer of its
shares; brokerage and commission expenses; all expenses of transfer, receipt,
safekeeping, servicing and accounting for the cash, securities and other
property of the Trust for the benefit of the Funds including all fees and
expenses of its custodian, shareholder services agent and accounting services
agent; interest charges on any borrowings; costs and expenses of pricing and
calculating its daily net asset value and of maintaining its books of account
required under the
6
<PAGE>
1940 Act; taxes, if any; expenditures in connection with meetings of each Fund's
Shareholders and Board of Trustees that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Manager; insurance
premiums on property or personnel of each Fund which inure to its benefit,
including liability and fidelity bond insurance; the cost of preparing and
printing reports, proxy statements, prospectuses and statements of additional
information of the Fund or other communications for distribution to existing
shareholders; legal, auditing and accounting fees; trade association dues; fees
and expenses (including legal fees) of obtaining and maintaining any required
registration or notification for its shares for sale under federal and
applicable state and foreign securities laws; all expenses of maintaining and
servicing shareholder accounts, including all charges for transfer, shareholder
recordkeeping, dividend disbursing, redemption, and other agents for the benefit
of the Funds, if any; and all other charges and costs of its operation plus any
extraordinary and non-recurring expenses, except as herein otherwise prescribed.
(c) To the extent the Manager incurs any costs by assuming
expenses which are an obligation of a Fund as set forth herein, such Fund shall
promptly reimburse the Manager for such costs and expenses, except to the extent
the Manager has otherwise agreed to bear such expenses. To the extent the
services for which a Fund is obligated to pay are performed by the Manager, the
Manager shall be entitled to recover from such Fund to the extent of the
Manager's actual costs for providing such services.
7
<PAGE>
8. Investment Advisory and Management Fee.
(a) Each Fund shall pay to the Manager, and the Manager agrees
to accept, as full compensation for all administrative and investment management
and advisory services furnished or provided to such Fund pursuant to this
Agreement, a management fee as set forth in the Fee Schedule attached hereto as
Appendix B, as may be amended in writing from time to time by the Trust and the
Manager.
(b) The management fee shall be accrued daily by each Fund and
paid to the Manager upon its request.
(c) The initial fee under this Agreement shall be payable on
the first business day of the first month following the effective date of this
Agreement and shall be prorated as set forth below. If this Agreement is
terminated prior to the end of any month, the fee to the Manager shall be
prorated for the portion of any month in which this Agreement is in effect which
is not a complete month according to the proportion which the number of calendar
days in the month during which the Agreement is in effect bears to the number of
calendar days in the month, and shall be payable within ten (10) days after the
date of termination.
(d) The Manager may reduce any portion of the compensation or
reimbursement of expenses due to it pursuant to this Agreement and may agree to
make payments to limit the expenses which are the responsibility of a Fund under
this Agreement. Any such reduction or payment shall be applicable only to such
specific reduction or payment and shall not constitute an agreement to reduce
any future compensation or reimbursement due to the Manager hereunder or to
continue future payments. Any such reduction will be agreed to
8
<PAGE>
prior to accrual of the related expense or fee and will be estimated daily and
reconciled and paid on a monthly basis. To the extent such an expense limitation
has been agreed to by the Manager and such limit has been disclosed to
shareholders of a Fund in a prospectus, the Manager may not change the
limitation without first disclosing the change in an updated prospectus. Any fee
withheld pursuant to this paragraph from the Manager shall be reimbursed by the
appropriate Fund to the Manager in the first, second or third (or any
combination thereof) fiscal year next succeeding the fiscal year of the
withholding if the aggregate expenses for the next succeeding fiscal year or
second succeeding fiscal year or third succeeding fiscal year do not exceed any
more restrictive limitation to which the Manager has agreed. The Manager
generally may request and receive reimbursement for the oldest reductions and
waivers before payment for fees and expenses for the current year.
(e) The Manager may agree not to require payment of any
portion of the compensation or reimbursement of expenses otherwise due to it
pursuant to this Agreement prior to the time such compensation or reimbursement
has accrued as a liability of the Fund. Any such agreement shall be applicable
only with respect to the specific items covered thereby and shall not constitute
an agreement not to require payment of any future compensation or reimbursement
due to the Manager hereunder.
9. Fund Share Activities of Managers Partners, Officers and Employees.
The Manager agrees that neither it nor any of its partners, officers or
employees shall take any short position in the shares of the Funds. This
prohibition shall not prevent the purchase of such shares by any of the officers
and partners or bona fide employees of the Manager or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof, at
a price not
9
<PAGE>
less than the net asset value thereof at the time of purchase, as allowed
pursuant to rules promulgated under the 1940 Act.
10. Conflicts with Trust's Governing Documents and Applicable Laws.
Nothing herein contained shall be deemed to require the Trust or the Funds to
take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and Funds.
11. Manager's Liabilities.
(a) In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the obligations or duties hereunder on the
part of the Manager, the Manager shall not be subject to liability to the Trust
or the Funds or to any shareholder of the Funds for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by the
Funds.
(b) The Funds shall indemnify and hold harmless the Manager,
its general partner and the shareholders, directors, officers and employees of
each of them (any such person, an "Indemnified Party") against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating and defending any alleged loss, liability, claim, damage or
expenses and reasonable counsel fees incurred in connection therewith) arising
out of the Indemnified Party's performance or non-performance of any duties
under this Agreement provided, however, that nothing herein shall be deemed to
protect any Indemnified Party against any liability to which such Indemnified
Party would otherwise be subject by reason of willful
10
<PAGE>
misfeasance, bad faith or negligence in the performance of duties hereunder or
by reason of reckless disregard of obligations and duties under this Agreement.
(c) No provision of this Agreement shall be construed to
protect any Trustee or officer of the Trust, or partner or officer of the
Manager, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
12. Non-Exclusivity. The Trust's employment of the Manager is not an
exclusive arrangement, and the Trust may from time to time employ other
individuals or entities to furnish it with the services provided for herein. In
the event this Agreement is terminated with respect to any Fund, this Agreement
shall remain in full force and effect with respect to all other Funds listed on
Appendix A hereto, as the same may be amended.
13. Term. This Agreement shall become effective on the date that is the
latest of (1) the execution of this Agreement, (2) the approval of this
Agreement by the Board of Trustees of the Trust and (3) the approval of this
Agreement by the shareholders of each Fund in a special meeting of shareholders
of the Fund. This Agreement shall remain in effect for a period of two (2)
years, unless sooner terminated as hereinafter provided. This Agreement shall
continue in effect thereafter for additional periods not exceeding one (l) year
so long as such continuation is approved for each Fund at least annually by (i)
the Board of Trustees of the Trust or by the vote of a majority of the
outstanding voting securities of each Fund and (ii) the vote of a majority of
the Trustees of the Trust who are not parties to this Agreement nor interested
persons thereof, cast in person at a meeting called for the purpose of voting on
such approval.
11
<PAGE>
14. Termination. This Agreement may be terminated by the Trust on
behalf of any one or more of the Funds at any time without payment of any
penalty, by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund, upon sixty (60) days' written notice to
the Manager, and by the Manager upon sixty (60) days' written notice to a Fund.
15. Termination by Assignment. This Agreement shall terminate
automatically in the event of any transfer or assignment thereof, as defined in
the 1940 Act.
16. Transfer, Assignment. This Agreement may not be transferred,
assigned, sold or in any manner hypothecated or pledged without the affirmative
vote or written consent of the holders of a majority of the outstanding voting
securities of each Fund.
17. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
18. Definitions. The terms "majority of the outstanding voting
securities" and "interested persons" shall have the meanings as set forth in the
1940 Act.
19. Notice of Declaration of Trust. The Manager agrees that the Trust's
obligations under this Agreement shall be limited to the Funds and to their
assets, and that the Manager shall not seek satisfaction of any such obligation
from the shareholders of the Funds nor from any trustee, officer, employee or
agent of the Trust or the Funds.
12
<PAGE>
20. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
21. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California without giving effect to
the conflict of laws principles thereof; provided that nothing herein shall be
construed to preempt, or to be inconsistent with, any federal law, regulation or
rule, including the 1940 Act and the Investment Advisors Act of 1940 and any
rules and regulations promulgated thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers, all on the day and
year first above written.
THE MONTGOMERY FUNDS II MONTGOMERY ASSET MANAGEMENT, LLC
By: ____________________________ By: __________________________________
Title: ___________________________ Title: ________________________________
13
<PAGE>
Appendix A
Fund Schedule
o Montgomery Asset Allocation Fun o Montgomery Institutional Series:
Portfolio Emerging Markets
14
<PAGE>
Appendix B
Fee Schedule
1. Montgomery Asset Allocation Fund No management fee (reorganized as a
fund-of funds on June 30, 1997;
management fees apply to underlying
funds only).
2. Montgomery Institutional Series: 1.25% of the first $50 million of net
Emerging Markets Portfolio assets; plus 1.00% of the next $50
million of net assets; plus 0.90% of net
assets over $100 million.
15
EXHIBIT NO. 6
UNDERWRITING AGREEMENT
<PAGE>
DISTRIBUTION AGREEMENT
THE MONTGOMERY FUNDS II
101 California Street
San Francisco, California 94111
July 31, 1997
Funds Distributor, Inc.
60 State Street
Suite 1300
Boston, Massachusetts 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements hereinafter
contained, the, above-normal investment company (the "Fund") has agreed that you
shall be, for the period of this agreement the distributor of (a) shares of each
Series of the Fund set forth on Exhibit A hereto, as such Exhibit my be revised
from time to time (each, a 'Series") or (b) if no Series are set forth on such
Exhibit, shares of the Fund. For purposes of this amendment the term "Shares"
shall mean the authorized shares of the relevant Series, if any, and otherwise
shall mean the Fund's authorized share.
1. Services as Distributor
1.1 You will act as agent for the distribution of Shares
covered by, and in accordance with, the registration statement and
prospectus then in effect under the Securities Act of 1933, as amended,
and will transmit promptly any orders received by you for purchase or
redemption of Shares to the Transfer and Dividend Disbursing Agent for
the Fund of which the Fund has notified you in writing. You will
undertake and discharge your obligations hereunder as an independent
contractor and shall have no authority or power to obligate or bind us
by your actions, conduct or contracts except that you are authorized to
accept orders for the purchase or repurchase of the Shares as our
agent. You may appoint sub-agents or distribute through dealers, your
own sales representatives or otherwise as you may determine from time
to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase of
Shares of the Fund on our behalf or otherwise act as our agent for any
purpose.
<PAGE>
1.2 You agree to use your best efforts to solicit orders for
the sale of Shares. It is contemplated that you may enter into sales or
servicing agreements with securities dealers, financial institutions and other
industry professionals, such as investment advisors, accountants and estate
planning firms, and in so doing you will act only on your own behalf as
principal.
1.3 You shall act as distributor of Shares in compliance with
all applicable laws, rules and regulations, including, without limitations, the
Investment Company Act of 1940, as amended, the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended and the National
Association of Securities Dealers, Inc.'s (the "NASD") Conduct Rules,
Constitution and By-Laws. You represent and warrant that you are a broker-dealer
registered with the Securities and Exchange Commission and that you are
registered with the relevant securities regulatory agencies in all fifty states,
the District of Columbia and Puerto Rico. You also represent and warrant that
you are a member of the NASD.
1.4 You shall file Fund advertisements, sales literature and
other marketing and sales related materials with the appropriate regulatory
agencies and shall obtain such approvals for their use as may be required by the
Securities and Exchange Commission. the National Association of Securities
Dealers, Inc. and/or state securities administrators. You shall not disseminate
to the public any such materials without prior approval by Montgomery Asset
Management, LLC.
1.5 Whenever in their judgment such action is warranted by
unusual market, economic or political conditions, or by abnormal circumstances
of any kind deemed by the parties hereto to render sales of a Fund's Shares not
in the best interest of the Fund, the parties hereto may decline to accept any
orders for, or make any sales of, any Shares until such time as those parties
deem it advisable to accept such orders and to make such sales and each party
shall advise promptly advise other party of any such determination.
1.6 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the Securities Act of 1933, as
amended, and all expenses in connection with facilities for the issue and
transfer of Shares and for supplying information, prices and other data to be
furnished by the Fund hereunder, and all expenses in connection with the
preparation and printing of the Fund's prospectuses and statements of additional
information for regulatory purposes and for distribution to shareholders;
provided however, that the Fund shall not pay any of the costs of advertising or
promotion for the sale of Shares except for the payment of Rule 12b-I fees under
the terms of a written agreement.
1.7 The Fund agrees to execute any and all documents and to
furnish any and all information and otherwise to take all actions which may be
reasonably necessary in the discretion of the Fund's officers in connection with
the qualification of Shares for sale in such states as you may designate to the
Fund and the Fund may approve, and the Fund agrees to pay all expenses which may
be incurred in connection with your own qualification. You shall pay all
<PAGE>
expenses connected with your own qualification as a dealer wider state or
Federal laws and, except as otherwise specifically provided in this agreement,
all other expenses incurred by you in connection with the sale of Shares as
contemplated in this agreement.
1.8 The Fund shall furnish you from time to time, for use in
connection with the sale of Shares, such information with respect to the Fund or
any relevant Series and the Shares as you may reasonably request, all of which
shall be signed by one or more of the Fund's duly authorized officers; and the
Fund warrants that the statements contained in any such information, when so
signed by the Fund's officers, shall be true and correct. The Fund also shall
furnish you upon request with: (a) semi-annual reports and annual audited
reports of the Fund's books and accounts made by independent public accountants
regularly retained by the Fund. (b) quarterly earnings statements prepared by
the Fund, (c) a monthly itemized list of the securities in the Fund's or, if
applicable, each Series' portfolio, (d) monthly balance sheets as soon as
practicable after the end of each month, and (e) from time to time such
additional information regarding the Fund's financial condition as you may
reasonably request.
1.9 The Fund represents to you that all registration
statements and prospectuses filed by the Fund with the Securities Act Exchange
Commission under the Securities Act of 1933, as amended, and under the
Investment Company Act of 1940, as amended, with respect to the Shares have been
carefully prepared in conformity with the requirements of said Acts and rules
and regulations of the Securities and Exchange Commission thereunder. As used in
this agreement the terms "registration statement" and "prospectus" shall mean
any registration statement and prospectus, including the statement of additional
information incorporated by reference therein, filed with the Securities and
Exchange Commission and any amendments and supplements thereto which at any time
shall have been filed with said Commission. The Fund represents and warrants to
you that any registration statement and prospectus, when such registration
statement becomes effective, will contain all statements required to be stated
therein in conformity with said Acts and the rules and regulations of said
Commission; that all statements of fact contained in any such registration
statement and prospectus will be true and correct when such registration
statement becomes effective; and that neither any registration statement nor my
prospectus when such registration statement becomes effective will include an
untrue statement of a material fact or omit to state a material fact required to
be dated therein or necessary to make the statements therein not misleading. The
Fund may, but shall not be obligated to, propose from time to time such
amendment or amendments to any registration statement and such supplement or
supplements to any prospectus as, in the light of future developments, may, in
the opinion of the Fund's counsel, be necessary or advisable. If The Fund shall
not propose such amendment or amendments and/or supplement or supplements within
fifteen days after receipt by The Fund of a written request from you to do so
stating that your internal or external legal counsel believes such amendments or
supplements to be legally required, you may, at your option, terminate this
agreement or decline to make offers of the Fund's securities until such
amendments are made. The Fund shall not file any material amendment to any
registration statement or material supplement to any prospectus without giving
you reasonable notice thereof in advance, provided, however, that
<PAGE>
nothing contained in this agreement shall in any way limit the Fund's right to
file at any time such amendments to any registration statement and/or
supplements to any prospectus, of whatever character, as the Fund may deem
advisable, such right being in all respects absolute and unconditional.
1.10 Nothing herein shall be deemed to protect you against any
liability o us or to our securities holders to which you would otherwise be
subject by reason of your willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your reckless
disregard of your obligations and duties hereunder.
1.11 We agree to indemnify and hold you harmless from and
against any and all losses, claims, damages or liabilities to which you may
become subject under the 1933 Act, the 1940 Act or any state securities statute,
and to reimburse you for any legal or other expenses reasonably incurred by you
in with any claim or litigation, whether or not resulting in any liability,
insofar as such losses, claims, damages, liabilities, or litigation arise out of
or are based upon any untrue statement or omission or alleged untrue statement
or omission of a material fact contained in the Registration Statement of the
Trust; provided, however, that this indemnity shall not apply to any such
losses, claims, damages, liabilities, or litigation arising out of or based upon
any untrue statement or omission or alleged untrue statement or omission of a
material fact contained in the Registration Statement, which statement or
omission was made in reliance upon information furnished to us by you for
inclusion in the Registration Statement.
You agree to indemnify and hold us harmless from and against any and all losses,
claims, damage or liabilities to which we may become subject under the 1933 Act,
the 1940 Act or any state securities statute, and reimburse us for any legal or
other expenses reasonably incurred by us in connection with any claim or
litigation, whether or not resulting in any liability, insofar as such losses,
claims, damages, liabilities, or litigation arise out of or are based upon any
untrue statement or omission or alleged untrue Statement or omission of a
material fact contained in the Registration Statement; provided, however, that
this indemnity shall not apply to any such losses, claims, damages, liabilities,
or litigation arising out of or based upon any untrue statement or omission of a
material fact contained in the Registration Statement, where such statement or
omission was not made in reliance upon information furnished to us by you for
inclusion in the Registration Statement.
1.12. You acknowledge that you have received notice of and
accept the limitations the Trust's liability set forth in its Agreement and
Declaration of Trust, as amended from time to time. In accordance therewith, you
agree that the Trust's obligations hereunder shall be limited to each Fund and
the assets of each Fund, and no party shall seek satisfaction of any such
obligation from any shareholder of the Trust nor from any employee or agent of
the Trust.
1.13 No Shares shall be offered by either you or the Fund
under any of the provisions of this agreement and no orders for the purchase or
sale of such Shares hereunder shall be accepted by the Fund if and so long as
the effectiveness of the registration statement then
<PAGE>
in effect or any necessary amendments thereto shall be suspended under any of
the provisions of the Securities Act of 1933, as amended or if and so long as a
current prospectus as required by Section 10 of said Act, as amended, is not on
file with the Securities and Exchange Commission; provided, however, that
nothing contained in this paragraph 1.12 shall in any way restrict or have an
application to or bearing upon the Fund's obligation to repurchase any Shares
from any shareholder in accordance with the provisions of the Fund's prospectus
or charter documents.
1.14 The Fund agrees to advise you immediately in writing:
(a) of any request by the Securities and Exchange
Commission for amendments to the registration statement or
prospectus then in effect or for additional information;
(b) in the event of the issuance by the Securities
and Exchange Commission of any stop order suspending the
effectiveness of the registration statement or prospectus then
in effect or the initiation of any proceeding for that
purpose;
(c) of the happening of any event which makes untrue
any statement of a material fact made in the rcgistm6on
statement or prospectus then in effect or which requires the
making of a change in such registration statement or
prospectus in order to make the statements therein not
misleading; and
(d) of all material actions of the Securities and
Exchange Commission with respect to any material amendments to
any registration statement or prospectus which may from time
to time be filed with the Securities and Exchange Commission.
2. Offering Price
Shares of any class of the Fund offered for sale by you shall be
offered at a price per share (the "offering price") equal to (a) the net asset
value (determined in the manner set forth in the Fund's charter documents) plus
(b) a sales charge, if any and except to those persons set forth in the
then-current prospectus, which shall be the percentage of the offering price of
such Shares as set forth in the Fund's then-current prospectus. The offering
price, if not an exact multiple of one cent, shall be adjusted to the nearest
cent. In addition, Shares of any class of the Fund offered for sale by you may
be subject to a contingent deferred sales charge as set forth in the Fund's
then-current prospectus. You shall be entitled to receive any sales charge or
contingent deferred sales charge in respect of the Shams. Any payments to
dealers shall be governed by a separate agreement between you and such dealer
and the Fund's then-current prospectus.
3. Term
<PAGE>
This Agreement shall become effective with respect to the Fund as of
the date hereof and will continue for an initial two-year term and will continue
thereafter so long as such continuance is specifically approved at least
annually (i) by the Fund's Board or (ii) by a vote of a majority of the Shares
of the Fund or the relevant Series, as the case may be, provided that in either
event its continuance also is approved by a majority of the Board members who am
not "interested persons" of any party to this Agreement by vote cast in person
at a meeting called for the purpose of voting on such approval. This agreement
is terminable with respect to the Fund or a Series, without penalty, on not less
than sixty days' notice, by the Fund's Board of Trustees, by vote of a majority
of the outstanding voting securities of such Fund or Series, or by you. This
Agreement will automatically and immediately terminate in the event of its
"assignment' (As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested person" and "assignment" shall have the same
meanings as such terms have in the investment Company Act of 1940). You agree to
notify the Fund immediately upon the event of your expulsion or suspension by
the NASD. This Agreement will automatically and immediately terminate in the
event of your expulsion or suspension by the NASD.
4. Miscellaneous
4.1 The Fund recognizes that, except to the extent otherwise
agreed to by the parties hereto, your directors, officers and employees may from
time to time serve as directors, trustees, officers and employees of
corporations and business trusts (including other investment companies), and
that you or your affiliates may enter into distribution or other agreements with
such other corporations and trusts.
4.1 You shall not purchase the Shares for your own account for
purposes of resale to the public, but you may purchase shares for your own
investment account upon written assurance that the purchase is for investment
purposes only and that the Shares will not be resold except through redemption
by us.
4.3 No provision of this Agreement may be changed, waived,
discharged or terminated, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
4.4 This Agreement shall be governed by the internal laws of
the of Massachusetts without giving effect to principles of conflicts of laws.
4.5 If any provision of this Agreement shall be held or made
invalid by a court decision. statute, rule, or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors.
Please confirm that the foregoing is in accordance with your
understanding and indicate your acceptance hereof by signing below, whereupon it
shall become a binding
<PAGE>
Agreement between us.
Very truly yours,
THE MONTGOMERY FUNDS II
By: _______________________
Name: _____________________
Title: ____________________
Accepted:
FUNDS DISTRIBUTOR, INC.
By: _______________________
Name: _____________________
Title: ____________________
<PAGE>
EXHIBIT A
Series of Funds
THE MONTGOMERY FUNDS II
Montgomery Asset Allocation Fund
Montgomery Institutional Series:
Emerging Markets Portfolio
EXHIBIT NO. 9(A)
ADMINISTRATIVE SERVICES AGREEMENT
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement") is made as of
July 31, 1997, by and among Montgomery Asset Management, LLC, a Delaware limited
liability company (the "Administrator"), and The Montgomery Funds, a
Massachusetts business trust, and the Montgomery Funds II, a Delaware business
trust (together, the "Trusts").
W I T N E S E T H:
WHEREAS, the Trusts wish to retain the Administrator to provide certain
administrative services with respect to each investment company portfolio
managed by the Administrator (collectively, the "Series"), and the Administrator
is willing to furnish those services;
WHEREAS, this Agreement is entered into by the parties in connection
with the transaction that closed on July 31, 1997 by which substantially all of
the assets of Montgomery Asset Management, L.P. ("MAM, LP") were assigned to the
Administrator, including that certain Administration Agreement dated September
1, 1993 by and among MAM, LP and the Trusts (the "Assignment");
WHEREAS, the Trustees of the Trusts approved the Assignment at a
regular meeting of the Boards of Trustees on May 29, 1997 and, for convenience,
rather than executing a separate consent with respect to the assignment of that
Administration Agreement with MAM, LP, the Trusts have entered into this new
Agreement with the Administrator on substantially the same terms;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trusts hereby appoint the Administrator to provide
certain administrative services required by the Trusts for each Series for the
period and on the terms set forth in this Agreement; provided that this
Agreement shall not be effective until approved by the Board of Trustees of each
Trust. The Administrator accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Paragraph 3 of this Agreement. If a Trust decides to modify the Administrator's
duties hereunder with respect to one or more Series, the Trust shall notify the
Administrator in writing.
2. Services and Duties. Subject to the control of each respective Trust
and the oversight of each Trust's Board of Trustees, the Administrator
undertakes to perform the following types of services:
(a) Performance measurement and analysis, including furnishing
performance data, statistical data and research data;
-1-
<PAGE>
(b) Tax and treasury services, including preparing and filing
various reports (including tax returns) or other documents required by federal,
state and other applicable laws and regulations other than those required to be
filed by each Trust's custodian, investment manager or transfer agent;
(c) Management of printing, including assisting in the
preparation and printing of all documents, prospectuses and reports sent to
shareholders;
(d) Financial reporting and assisting in the preparation of
financial statements;
(e) At the request of each Trust, assisting in the preparation
of all agendas, notices and minutes for meetings of each Trust's Board of
Trustees or shareholders; assisting in the preparation of all resolutions to be
voted upon by each Board of Trustees; assisting in the preparation of supporting
information for such meetings with regard to the duties of the Administrator
under this Agreement, and collection and distribution of supporting information
for such meetings with respect to the duties performed by other persons who
provide services to the Trusts;
(f) At the request of each Trust, developing and monitoring
compliance procedures for each Series concerning, among other matters, adherence
of each series to its investment objectives, policies, restrictions, tax matters
and applicable laws and regulations;
(g) Blue sky monitoring; and
(h) Management of legal services.
The Administrator's duties shall not include acting as Trust
accountant, pricing any Series' portfolio, acting as transfer agent or
shareholder servicing agent, or performing blue sky registration services. To
the extent any of these services are performed by the Administrator, the
Administrator shall be entitled to separate compensation therefor.
In performing its duties under this Agreement, the Administrator will
(i) act in accordance with each Trust's Agreement and Declaration of Trust and
all amendments thereto (the "Declaration of Trust"), each Trust's By-Laws, the
effective prospectuses and statements of additional information of the Series
and with the instructions and directions of each Trust, (ii) conform to and
comply with the requirements of the Investment Company Act of 1940, as amended
(the "Investment Company Act"), and all other applicable federal or state laws
and regulations, and (iii) consult with legal counsel to and the independent
public accountants for each Trust, as necessary and appropriate, on whose advice
the Administrator shall be entitled to rely. Each Trust will furnish the
Administrator from time to time with copies of any documents that the
Administrator may reasonably request and that are necessary for it to perform
its obligations and duties under this Agreement and will notify the
Administrator as soon as possible of any matter materially affecting the
performance by the Administrator of its services under this Agreement.
-2-
<PAGE>
3. Compensation and Allocation of Expenses.
(a) Each Trust shall compensate the Administrator for its
services rendered pursuant to this Agreement in accordance with the fees set
forth in Schedule A hereto. Such fees do not include out-of-pocket disbursements
of the Administrator, for which the Administrator shall be entitled to bill
separately. Out-of-pocket disbursements shall include, but shall not be limited
to, the items specified in Schedule A hereto. Fees shall be payable monthly in
arrears on the first business day of each month.
(b) The Administrator shall not be required to pay any Trust
or Series expenses except those that it has agreed to pay in connection with
performing the duties described herein or which it has agreed to pay in another
written agreement between the parties hereto.
(c) Upon any termination of this Agreement before the end of
any month, the fee for such period shall be prorated according to the proportion
that such period bears to the full month period. For purposes of determining
fees payable to the Administrator, the value of the net assets of each Series
shall be computed at the time and in the manner specified in the then-current
prospectus and statement of additional information for the Series.
(d) The Administrator will, from time to time, employ or
associate itself with such person or persons as the Administrator may believe to
be particularly suited to assist it in performing services under this Agreement.
Such person or persons may be officers and employees who are employed by both
the Administrator and a Trust. The compensation of such person or persons shall
be paid by the Administrator, and no obligation shall be incurred on behalf of
either Trust in such respect.
4. Administrator's Liability.
(a) In the absence of willful misfeasance, bad faith, reckless
disregard or negligence of the obligations or duties hereunder on the part of
the Administrator, the Administrator shall not be subject to liability to either
Trust or any Series or to any shareholder of any Series for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security by
a Series.
(b) Each Trust shall indemnify and hold harmless the
Administrator, its partners and the shareholders, partners, directors, officers
and employees of each of them (any such person, an "Indemnified Party") against
any loss, liability, claim, damage or expense (including the reasonable cost of
investigating and defending any alleged loss, liability, claim, damage or
expenses and reasonable counsel fees incurred in connection therewith) arising
out of the Indemnified Party's performance or non-performance of any duties
under this Agreement; provided, however, that nothing herein shall be deemed to
protect any Indemnified Party against any liability to which such Indemnified
Party would otherwise be subject by reason of willful
-3-
<PAGE>
misfeasance, bad faith or negligence in the performance of duties hereunder or
by reason of reckless disregard of obligations and duties under this Agreement.
(c) No provision of this Agreement shall be construed to
protect any Trustee or officer of either Trust, or partner or officer of the
Administrator, from liability in violation of Sections 17(h) and (i) of the
Investment Company Act.
5. Termination of Agreement.
(a) This Agreement shall become effective on the date first
set forth above and shall remain in force unless terminated pursuant to the
provisions of subparagraph (b) of this Paragraph.
(b) This Agreement may be terminated at any time without
payment of any penalty, upon thirty (30) days' written notice by the Trust or by
the Administrator.
6. Amendment to this Agreement. No provision of this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, discharge or
termination is sought.
7. Assignment. This Agreement shall extend to, and shall be binding
upon, the parties hereto and their respective successors and assigns. This
Agreement may be assigned by the Administrator; provided, however, that each
Trust has consented in writing to such assignment. The Administrator may
delegate any duty hereunder, and no consent by either Trust shall be needed
therefore; provided, however, that any such delegation does not effect a release
of the Administrator from guaranty of the fulfillment of any duty delegated by
the Administrator.
8. Notice. Any notice or other instrument authorized or required by this
Agreement to be given in writing to each Trust or the Administrator shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Trusts:
The Montgomery Funds
The Montgomery Funds II
101 California Street
San Francisco, California 94111
Attention: President
-4-
<PAGE>
To the Administrator:
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
Attention: President
9. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without giving effect to
the conflict of laws principles thereof; provided that nothing herein shall be
construed to preempt, or to be inconsistent with, any federal law, regulation or
rule, including the Investment Company Act and the Investment Advisers Act of
1940, as amended, and any rules and regulations promulgated thereunder.
10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and which
collectively shall be deemed to constitute only one instrument.
11. Captions. The captions of this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
12. Non-Exclusivity. The Trusts' employment of the Administrator is not
an exclusive arrangement, and the Trust may, from time to time, employ other
individuals or entities to furnish it with the services provided for herein. If
this Agreement is terminated or modified with respect to any Series, this
Agreement shall remain in full force and effect with respect to all other
Series.
13. Independent Contractor. The Administrator shall, for all purposes
herein, be deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act for or
represent the Trusts or the Series in any way, or in any way be deemed an agent
for the Trusts or for the Series. It is expressly understood and agreed that the
services to be rendered by the Administrator to the Series under the provisions
of this Agreement are not to be deemed exclusive, and the Administrator shall be
free to render similar or different services to others so long as its ability to
render the services provided for in this Agreement shall not be impaired
thereby.
14. Administrator's Office Facilities and Personnel. The Administrator
shall, at its own expense, maintain adequate office facilities and staff and
employ or retain such personnel and consult with such other persons as it shall
from time to time determine to be necessary to the performance of its
obligations under this Agreement. Without limiting the generality of the
foregoing, the staff and personnel of the Administrator shall be deemed to
include persons employed or retained by the Administrator to furnish statistical
information, research, and other factual information, advice regarding economic
factors and trends, information with respect to
-5-
<PAGE>
technical and scientific developments, and such other information, advice and
assistance as the Administrator or either Trust's Board of Trustees may desire
and reasonably request.
15. Notice of Declaration of Trust. The Administrator acknowledges that
it has received notice of and accepts the limitations of each Trust's liability
as set forth in their respective Declaration of Trust. The Administrator agrees
that each Trust's obligations under this Agreement shall be limited to its
respective Series and to their assets, and that the Administrator shall not seek
satisfaction of any such obligation from the shareholders of another Series or
Trust nor from any Trustee, officer, employee or agent of a Trust or a Series.
16. Conflicts with Trusts' Governing Documents and Applicable Laws.
Nothing herein shall be deemed to require a Trust or the Series to take any
action contrary to that Trust's Declaration of Trust, By-Laws or any applicable
statute or regulation, or to relieve or deprive the Board of Trustees of each
Trust of its responsibility for and control of the conduct of the affairs of the
Trust and its Series.
[Remainder of Page Intentionally Left Blank]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed and delivered by their duly authorized officers as of the date
first written above.
MONTGOMERY ASSET MANAGEMENT, LLC
By: ________________________________
Name: ______________________________
Title: _____________________________
THE MONTGOMERY FUNDS
By: ________________________________
Name: ______________________________
Title: _____________________________
THE MONTGOMERY FUNDS II
By: ________________________________
Name: ______________________________
Title: _____________________________
-7-
<PAGE>
<TABLE>
SCHEDULE A (July 31, 1997)
ADMINISTRATIVE SERVICES AGREEMENT
The Montgomery Funds
<CAPTION>
==========================================================================================================
Average Daily Net Assets Annual
Rate
==========================================================================================================
<S> <C> <C>
Montgomery Emerging Asia Fund First $500 million 0.07%
Over $500 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Emerging Markets Fund First $250 million 0.07%
Over $250 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Global Communications Fund First $250 million 0.07%
Over $250 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Global Opportunities Fund First $500 million 0.07%
Over $500 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery International Growth Fund First $250 million 0.07%
Over $250 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery International Small Cap Fund First $250 million 0.07%
Over $250 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Latin America Fund First $500 million 0.07%
Over $500 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Global Asset Allocation Fund All amounts No fee
- ----------------------------------------------------------------------------------------------------------
Montgomery Select 50 Fund First $250 million 0.07%
Over $250 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Equity Income Fund First $500 million 0.07%
Over $500 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Growth Fund First $500 million 0.07%
Over $500 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Micro Cap Fund First $250 million 0.07%
Over $250 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Small Cap Fund First $250 million 0.07%
Over $250 million 0.06%
- ----------------------------------------------------------------------------------------------------------
Montgomery Small Cap Opportunities Fund First $250 million 0.07%
Over $250 million 0.06%
- ----------------------------------------------------------------------------------------------------------
-8-
<PAGE>
==========================================================================================================
Average Daily Net Assets Annual
Rate
==========================================================================================================
Montgomery California Tax-Free Intermediate First $500 million 0.05%
Bond Fund Over $500 million 0.04%
- ----------------------------------------------------------------------------------------------------------
Montgomery California Tax-Free Money Fund First $500 million 0.05%
Over $500 million 0.04%
- ----------------------------------------------------------------------------------------------------------
Montgomery Federal Tax-Free Money Fund First $500 million 0.05%
Over $500 million 0.04%
- ----------------------------------------------------------------------------------------------------------
Montgomery Government Reserve Fund First $250 million 0.05%
Over $250 million 0.04%
- ----------------------------------------------------------------------------------------------------------
Montgomery Short Duration Government Bond First $500 million 0.05%
Fund Over $500 million 0.04%
- ----------------------------------------------------------------------------------------------------------
Montgomery Total Return Bond Fund First $500 million 0.05%
Over $500 million 0.04%
==========================================================================================================
The Montgomery Funds II
==========================================================================================================
Montgomery Institutional Series: Emerging All amounts 0.05%
Markets Portfolio
- ----------------------------------------------------------------------------------------------------------
Asset Allocation Fund All amounts No fee
==========================================================================================================
</TABLE>
o overnight delivery and courier services; postage
o telephone and telecommunication charges
o pricing services
o terminals, transmitting lines and expenses in connection
therewith
o travel outside of San Francisco area on Fund business
o costs of preparing Board books, presentations and other
materials for the Board of Trustees
o printing and related costs
o extraordinary expenses
-9-
Deloitte &
Touche LLP [logo]
- ------------------ --------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California Facsimile: (415) 247-4329
94105-2230
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
The Montgomery Funds II:
We consent to (a) the incorporation by reference in this Post-Effective
Amendment No. 22 to Registration Statement No. 33-69686 of The Montgomery Funds
II on Form N-1A of our reports dated August 16, 1997 incorporated by reference
in the Combined Statement of Additional Information and (b) the reference to us
under the caption "Financial Highlights" appearing in the Combined Prospectus
which also is part of such Registration Statement.
/s/ Deloitte & Touche LLP
- -------------------------
July 30, 1997
- -------------
Deloitte Touche
Tohmatsu
International
EXHIBIT NO.15
Share Marketing Plan (Rule 12b-1 Plan)
<PAGE>
THE MONTGOMERY FUNDS
THE MONTGOMERY FUNDS II
SHARE MARKETING PLAN
(Rule 12b-1 Plan)
This Share Marketing Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "Act"), by THE MONTGOMERY FUNDS and THE MONTGOMERY FUNDS
II, business trusts organized respectively under the laws of the Commonwealth of
Massachusetts and the State of Delaware (together, the "Trusts" and each, a
"Trust") with respect to certain classes of each series of its shares (each such
class covered by this Plan, a "Class" and each such series, a "Fund"). The Plan
has been approved by a majority of each Trust's Board of Trustees, 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 Plan (the
"independent Trustees"), cast in person at a meeting called for the purpose of
voting on the Plan and by a majority of the shareholders of each Class of each
Fund as required by the Act.
In reviewing the Plan, the Board of Trustees considered the
proposed range and nature of payments and terms of the Investment Management
Agreement between each Trust on behalf of each Fund and Montgomery Asset
Management, L.L.C. (the "Adviser") and the nature and amount of other payments
and fees that may be paid to the Adviser, its affiliates and other agents of the
Trusts. The Board of Trustees, including the independent Trustees, concluded
that the proposed overall compensation of the Adviser and its affiliates was
fair and not excessive.
The Board of Trustees also may adopt a services plan that is
intended to cover shareholder servicing that is not primarily intended to result
in the sale of a Class's shares. In its considerations, the Board of Trustees
also recognized that uncertainty may exist from time to time with respect to
whether payments to be made by the Trusts to Funds Distributor, Inc. (the
"Distributor"), as the initial "distribution coordinator," or other firms under
agreements with respect to a Fund may be deemed to constitute impermissible
distribution expenses. As a general rule, an investment company may not finance
any activity primarily intended to result in the sale of its shares, except
pursuant to the Rule. Accordingly, the Board of Trustees determined that the
Plan also should provide that payments by Trusts and expenditures made by others
out of monies received from the Trusts which are later deemed to be for the
financing of any activity primarily intended to result in the sale of Class
shares shall be deemed to have been made pursuant to the Plan.
The approval of the Boards of Trustees included a
determination that in the exercise of the Trustees' reasonable business judgment
and in light of their fiduciary duties, there is a reasonable likelihood that
the Plan will benefit the Trusts, each Class of each Fund to which the Plan
applies and its shareholders. The Plan also has been approved by a vote of at
<PAGE>
least a majority of the outstanding voting securities of each Class of each
Fund, as defined in the Act.
The provisions of the Plan are:
1. Annual Fee. The Trusts will pay to the Distributor, as the
Funds' distribution coordinator, an annual fee for the Distributor's services in
such capacity including its expenses in connection with the promotion and
distribution of the Classes' shares and related shareholder servicing
(collectively, "Distribution Expenses"). The annual fee paid to Distributor
under the Plan will be calculated daily and paid monthly by each Class of each
Fund on the first day of each month based on the average daily net assets of
each specified Class of each Fund, as follows:
Class P at an annual rate of up to 0.25%; and
Class L at an annual rate of up to 0.75%.
2. Distribution Expenses in Excess of or Less Than Amount of
Fee. All Distribution Expenses in excess of the fee rates provided for in this
Plan may be carried forward and resubmitted in a subsequent fiscal year provided
that (i) Distribution Expenses cannot be carried forward for more than 3 years
following initial submission; and (ii) the Trusts' Boards of Trustees have made
a determination at the time of initial submission that the Distribution Expenses
are appropriate to be reimbursed. The fees paid by the Trusts on behalf of each
Class of each Fund shall be refundable in the event that in any given year the
fees are greater than the Distribution Expenses for that year. Distribution
expenses will be paid on a first-in, first-out basis.
3. Expenses Covered by the Plan. The fee paid under Section 1
of the Plan may be used to pay for any expenses primarily intended to result in
the sale of a Class's shares ("distribution services"), including, but not
limited to: (a) costs of payments, including incentive compensation, made to
agents for and consultants to the Distributor, any affiliate of the Distributor
or the Trusts, including pension administration firms that provide distribution
and shareholder related services and broker-dealers that engage in the
distribution of the Class's shares; (b) payments made to, and expenses of,
persons who provide support services in connection with the distribution of a
Class's shares and servicing of a Class's shareholders, including, but not
limited to, personnel of the Distributor, office space and equipment, telephone
facilities, answering routine inquiries regarding the Classes, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Trusts' transfer agency or other servicing
arrangements; (c) all payments made pursuant to the form of Distribution
Agreement attached hereto as an exhibit; (d) costs relating to the formulation
and implementation of marketing and promotional activities, including, but not
limited to, direct mail promotions and television, radio, newspaper, magazine
and other mass media advertising; (e) costs of printing and distributing
prospectuses, statements of additional information and reports of the Fund to
prospective shareholders of the Classes; (f) costs involved in preparing,
printing and distributing sales literature pertaining to the Class; and (g)
costs involved in obtaining whatever information, analyses and reports with
respect to
-2-
<PAGE>
marketing and promotional activities that the Trusts may, from time to time,
deem advisable. Such expenses shall be deemed incurred whether paid directly by
the Distributor as distribution coordinator or by a third party to the extent
reimbursed therefor by the Distributor.
4. Written Reports. The Distributor shall furnish to the
Boards of Trustees of the Trusts, for their review, on a quarterly basis, a
written report of the monies paid to it under the Plan with respect to each
Class of each Fund, and shall furnish the Boards of Trustees of the Trusts with
such other information as the Boards of Trustees may reasonably request in
connection with the payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan should be
continued as to each Class of each Fund.
5. Termination. The Plan may be terminated as to any Class of
any Fund at any time, without penalty, by vote of a majority of the outstanding
voting securities of the Class of a Fund, and any Distribution Agreement under
the Plan may be likewise terminated on not more than sixty (60) days' written
notice. Once terminated, no further payments shall be made under the Plan
notwithstanding the existence of any unreimbursed current or carried forward
Distribution Expenses.
6. Amendments. The Plan and any Distribution Agreement may not
be amended to increase materially the amount to be spent for distribution and
servicing of Class shares pursuant to Section 1 hereof without approval by a
majority of the outstanding voting securities of the Class of a Fund. All
material amendments to the Plan and any Distribution Agreement entered into with
third parties shall be approved by the independent Trustees cast in person at a
meeting called for the purpose of voting on any such amendment. The Distributor
may assign its responsibilities and liabilities under the Plan to another party
who agrees to act as "distribution coordinator" for the Trust with the consent
of a majority of the independent Trustees.
7. Selection of Independent Trustees. So long as the Plan is
in effect, the selection and nomination of the Trusts' independent Trustees
shall be committed to the discretion of such independent Boards of Trustees.
8. Effective Date of Plan. The Plan shall take effect at such
time as it has received requisite Trustee and shareholder approval and, unless
sooner terminated, shall continue in effect for a period of more than one year
from the date of its execution only so long as such continuance is specifically
approved at least annually by the Boards of Trustees of the Trusts, including
the independent Trustees, cast in person at a meeting called for the purpose of
voting on such continuance.
9. Preservation of Materials. The Trusts will preserve copies
of the Plan, any agreements relating to the Plan and any report made pursuant to
Section 5 above, for a period of not less than six years (the first two years in
an easily accessible place) from the date of the Plan, agreement or report.
-3-
<PAGE>
10. Meanings of Certain Terms. As used in the Plan, the terms
"interested person" and "majority of the outstanding voting securities" will be
deemed to have the same meaning that those terms have under the Act and the
rules and regulations under the Act, subject to any exemption that may be
granted to the Trusts under the Act by the Securities and Exchange Commission.
11. Notice of Declaration of Trusts. The Distributor
acknowledges that it has received notice of and accepts the limitations of each
Trust's liability as set forth in their respective Declaration of Trust. The
Distributor agrees that each Trust's obligations under this Agreement shall be
limited to its respective Series and to their assets, and that the Distributor
shall not seek satisfaction of any such obligation from the shareholders of
another Series or Trust nor from any Trustee, officer, employee or agent of a
Trust or a Series.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trusts and the Distributor, as distribution
coordinator, as evidenced by their execution hereof, as of this ______ day of
_______________________, 1997.
THE MONTGOMERY FUNDS
THE MONTGOMERY FUNDS II
By:_________________________________________
Title:______________________________________
FUNDS DISTRIBUTOR, INC.,
as Distribution Coordinator
By:_________________________________________
Title:______________________________________
-4-
<PAGE>
THE MONTGOMERY FUNDS
THE MONTGOMERY FUNDS II
Share Marketing Agreement
EXHIBIT ONLY
- -----------------------------------
- -----------------------------------
- -----------------------------------
- -----------------------------------
Ladies and Gentlemen:
This Share Marketing Agreement has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Company
Act"), by THE MONTGOMERY FUNDS and THE MONTGOMERY FUNDS II, each a business
trust (together, the "Trusts"), on behalf of various classes of the series of
the Trusts (each series, a "Fund"), as governed by the terms of a Share
Marketing Plan (Rule 12b-1 Plan) (the "Plan").
The Plan has been approved by a majority of the Trustees who
are not interested persons of the Trusts or the Funds and who have no direct or
indirect financial interest in the operation of the Plan (the "independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
Plan. Such approval included a determination that in the exercise of the
reasonable business judgment of the Board of Trustees and in light of the
Trustees' fiduciary duties, there is a reasonable likelihood that the Plan will
benefit each class of each Fund and its shareholders. The Plan also has been
approved by a vote of at least a majority of the outstanding voting securities
of each class of each Fund, as defined in the Company Act.
1. To the extent you provide eligible shareholder services of the type
identified in the Plan to the Funds and the class (the "Class") of those Funds
identified in the attached Schedule (the "Schedule"), we shall pay you a monthly
fee based on the average net asset value of Class shares during any month which
are attributable to customers of your firm, at the rate set forth on the
Schedule.
2. In no event may the aggregate annual fee paid to you
pursuant to the Schedule exceed ____ percent of the value of the net assets of
the Class of each Fund held in your customers' accounts which are eligible for
payment pursuant to this Agreement (determined in the same manner as the Class
uses to compute its net assets as set forth in its
-5-
<PAGE>
then effective Prospectus), without approval by a majority of the outstanding
shares of the Class of each Fund.
3. You shall furnish us and the Trusts with such information
as shall reasonably be requested by the Trusts' Board of Trustees with respect
to the services performed by you and the fees paid to you pursuant to the
Schedule.
4. We shall furnish to the Board of Trustees of the Trusts,
for their review, on a quarterly basis, a written report of the amounts expended
under the Plan by us with respect to the Class of each Fund and the purposes for
which such expenditures were made.
5. You agree to make shares of the Class of the Funds
available only (a) to your customers or entities that you service at the net
asset value per share next determined after receipt of the relevant purchase
instruction or (b) to each such Fund itself at the redemption price for shares
of the Class, as described in each Fund's then-effective Prospectus.
6. No person is authorized to make any representations
concerning a Fund or shares of a Fund except those contained in each Fund's
then-effective Prospectus or Statement of Additional Information and any such
information as may be released by a Fund as information supplemental to such
Prospectus or Statement of Additional Information.
7. Additional copies of each such Prospectus or Statement of
Additional Information and any printed information issued as supplemental to
each such Prospectus or Statement of Additional Information will be supplied by
each Fund to you in reasonable quantities upon request.
8. In no transaction shall you have any authority whatever to
act as agent of the Funds and nothing in this Agreement shall constitute you or
the Fund the agent of the other. You are not authorized to act as an underwriter
of shares of the Funds or as a dealer in shares of the Funds.
9. All communications to the Funds shall be sent to: Funds
Distributor, Inc., as Distribution Coordinator for the Funds,
________________________________. Any notice to you shall be duly given if
mailed or telegraphed you at your address as indicated in this Agreement.
10. This Agreement may be terminated by us or by you, by the
vote of a majority of the Trustees of the Trusts who are independent Trustees,
or by a vote of a majority of the outstanding shares of the Class of a Fund, on
sixty (60) days' written notice, all without payment of any penalty. It shall
also be terminated automatically by any act that terminates the Plan.
11. The provisions of the Plan between the Trusts and us,
insofar as they relate to you, are incorporated herein by reference.
-6-
<PAGE>
This Agreement shall take effect on the date indicated below,
and the terms and provisions thereof are hereby accepted and agreed to by us as
evidenced by our execution hereof.
FUNDS DISTRIBUTOR, INC.
Distribution Coordinator
By: EXHIBIT ONLY
------------------
Authorized Officer
Dated: ________________________
Agreed and Accepted:
- ----------------------------
(Name)
By: ________________________
(Authorized Officer)
-7-
<PAGE>
THE MONTGOMERY FUNDS
THE MONTGOMERY FUND II
-------------------------
SCHEDULE TO SHARE MARKETING AGREEMENT
BETWEEN FUNDS DISTRIBUTOR, INC.
AS DISTRIBUTION COORDINATOR
AND
-------------------------
(Name)
Pursuant to the provisions of the Share Marketing Agreement
between the above parties with respect to The Montgomery Funds and The
Montgomery Funds II, Funds Distributor, Inc., as Distribution Coordinator, shall
pay a monthly fee to the above-named party based on the average net asset value
of shares of the Class of each Fund during the previous calendar month the sales
of which are attributable to the above-named party, as follows:
Fund Class Fee
---- ----- ---
San Francisco\8698
-8-
