As filed with the Securities and Exchange Commission on August 12, 1996
Registration Nos. 33-84450
811-8782
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 3
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
THE MONTGOMERY FUNDS III
(Exact Name of Registrant as Specified in its Charter)
101 California Street
San Francisco, California 94111
(Address of Principal Executive Office)
1-800-232-2197
(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 the filing will become effective:
___ immediately upon filing pursuant to Rule 485(b)
X on August 12, 1996, pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)(1)
___ 75 days after filing pursuant to Rule 485(a)(2)
___ on ________________, pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933. Pursuant to paragraph (b)(2) of Rule 24f-2, the
Registrant is not required to file a Rule 24f-2 Notice for the Registrant's
fiscal year ended December 31, 1995, because it sold no securities in reliance
on the rule during such fiscal year.
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Please Send Copy of Communications to:
JULIE ALLECTA, ESQ. JOAN E. BOROS, ESQ.
MATTHEW A. ANDERSON, ESQ. Katten Muchin & Zavis
Heller, Ehrman, White & McAuliffe 1025 Thomas Jefferson Street, N.W.
333 Bush Street East Lobby - Suite 700
San Francisco, CA 94104 Washington, D.C. 20007-5201
(415) 772-6000 (202) 625-3500
Total number of pages _____. Exhibit Index appears at _____.
<PAGE>
THE MONTGOMERY FUNDS III
CONTENTS OF POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the Registrant
contains the following documents:*
Facing Sheet
Contents of Post-Effective Amendment
Cross-Reference Sheet for The Montgomery Funds III
Part B - Combined Statement of Additional Information for
Montgomery Variable Series: Growth Fund, Montgomery Variable
Series: Emerging Markets Fund and Montgomery Variable Series:
International Small Cap Fund
Part C - Other Information
Signature Page
- --------------------------------------------------------------------------------
* This Amendment does not relate to the following documents: prospectuses
for Montgomery Variable Series: Growth Fund, Montgomery Variable
Series: Emerging Markets Fund, and Montgomery Variable Series:
International Small Cap Fund.
<PAGE>
THE MONTGOMERY FUNDS III
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
Part A: Information Required in Prospectus
(Prospectuses for Montgomery Variable Series: Growth Fund,
Montgomery Variable Series: Emerging Markets Fund and Montgomery
Variable Series: International Small Cap Fund)
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Cover Page
3. Condensed Financial Not applicable (because Registrant commenced
Information operations on February 1, 1996)
4. General Description Cover Page,
of Registrant "The Fund's Investment Objective and Policies,"
"Portfolio Securities," "Other Investment Practices,"
"Risk Considerations" and "General Information"
5. Management of "The Fund's Investment Objective and Policies,"
the Fund "Management of the Fund" and
"How to Invest in the Fund"
5A. Management's Discussion Not Applicable (to be contained in the Funds' Annual
of Fund Performance Report)
6. Capital Stock and "Dividends and Distributions,"
Other Securities "Taxation" and "General Information"
7. Purchase of Securities "How to Invest in the Fund,"
Being Offered "How Net Asset Value is Determined" and
"General Information"
8. Redemption or "How to Redeem an Investment in the Fund" and
Repurchase "General Information"
9. Pending Legal Not Applicable
Proceedings
</TABLE>
<PAGE>
<TABLE>
PART B: Information Required in
Statement of Additional Information
(Combined Statement of Additional Information
for Montgomery Variable Series: Growth Fund,
Montgomery Variable Series: Emerging Markets Fund and
Montgomery Variable Series: International Small Cap Fund)
<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 Trust" 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 Trust" 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 Not applicable
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
------------------------------------------------------------
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
MONTGOMERY VARIABLE SERIES: INTERNATIONAL SMALL CAP FUND
THE MONTGOMERY FUNDS III
101 California Street
San Francisco, California 94111
1-800-232-2197
STATEMENT OF ADDITIONAL INFORMATION
April 29, 1996
The Montgomery Funds III (the "Trust") is an open-end
management investment company organized as a Delaware business trust, having
three series of shares of beneficial interest. Each of the funds named above
(each a "Fund" and, collectively, the "Funds") is a separate series of the
Trust. The Funds are managed by Montgomery Asset Management, L.P. (the
"Manager"). Shares of the Funds may be purchased only by insurance company
separate accounts ("Accounts") to fund the benefits of variable life insurance
policies or variable annuity contracts ("Variable Contracts") and by qualified
pension and retirement plans. This Statement of Additional Information contains
information in addition to that set forth in the Prospectuses for the Montgomery
Variable Series: Growth Fund, Montgomery Variable Series: Emerging Markets Fund
and Montgomery Variable Series: International Small Cap Fund, each dated April
29, 1996, 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 investing in an
Account or sub-account of an Account that invests in the Funds, or in the case
of qualified pension and retirement plans, investing directly in the Funds.
References to shareholders and investors in the Prospectuses and this Statement
of Additional Information are to Accounts or qualified pension and retirement
plans. This Statement of Additional Information is not a prospectus and should
be read in conjunction with the appropriate Prospectuses, into which this
Statement of Additional Information is incorporated by reference.
TABLE OF CONTENTS
Page
The Trust............................................................. B- 2
Investment Objectives and Policies of the Funds....................... B- 2
Risk Factors.......................................................... B-15
Investment Restrictions............................................... B-17
Distributions and Tax Information..................................... B-20
Trustees and Officers................................................. B-26
Investment Management and Other Services.............................. B-30
Execution of Portfolio Transactions................................... B-33
Additional Purchase and Redemption Information........................ B-37
Determination of Net Asset Value...................................... B-37
Performance Information............................................... B-40
General Information................................................... B-43
Financial Statements.................................................. B-44
Appendix A............................................................ B-46
B-1
<PAGE>
THE TRUST
The Montgomery Funds III is an open-end management investment
company organized as a Delaware business trust on August 24, 1994. The Trust is
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). The Trust currently offers shares of beneficial interest, $.01
par value per share, in three series. This Statement of Additional Information
pertains to Montgomery Variable Series: Growth Fund (the "Growth Fund"),
Montgomery Variable Series: Emerging Markets Fund (the "Emerging Markets Fund"),
and Montgomery Variable Series: International Small Cap Fund (the "International
Small Cap Fund").
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.
The Funds are diversified series of The Montgomery Funds III.
The achievement of each Fund's investment objective will depend upon market
conditions generally and on the Manager's analytical and portfolio management
skills.
Portfolio Securities
Depositary Receipts. The 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 the Fund's investment policies, the Funds'
investments in ADRs, EDRs, and similar instruments will be deemed to be
investments in the equity securities of foreign issuers into which they may be
converted.
Other Investment Companies. Each of the 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 invest provided that such
investment companies invest in portfolio securities in a manner consistent with
a Fund's investment objective and policies. Applicable provisions of the
Investment Company Act require that each of the Funds limits its investments so
that, as determined immediately after a securities purchase is made: (a) not
more than 10% of the value of the Fund's total assets will be invested in the
aggregate in securities of investment companies as a group; and (b) either (i)
the Fund and affiliated persons of the Fund not own together more than 3% of the
total outstanding shares of any one investment company at the time of
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<PAGE>
purchase (and that all shares of the investment company held by the Fund in
excess of 1% of the company's total outstanding shares be deemed illiquid); or
(ii) the Fund not invest more than 5% of its total assets in any one investment
company and the investment not represent more than 3% of the total outstanding
voting stock of the investment company at the time of purchase. 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 the 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. 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 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, the Funds 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 Funds.
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.
B-3
<PAGE>
Government is pledged to the payment of all amounts that may be required to be
paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate
interest in one or more pools of the following types of mortgage loans: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment
mortgage loans; (3) fixed-rate growing equity mortgage loans; (4) fixed-rate
mortgage loans secured by manufactured (mobile) homes; (5) mortgage loans on
multifamily residential properties under construction; (6) mortgage loans on
completed multifamily projects; (7) fixed-rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (8) mortgage loans
that provide for adjustments on payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes.
Mortgage-Related Securities: Federal National Mortgage
Association. FNMA is a federally chartered and privately owned corporation
established under the Federal National Mortgage Association Charter Act. FNMA
was originally organized in 1938 as a U.S. Government agency to add greater
liquidity to the mortgage market. FNMA was transformed into a private sector
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
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.
B-4
<PAGE>
The mortgage loans underlying FHLMC securities typically
consist of fixed-rate or adjustable-rate mortgage loans with original terms to
maturity of between 10 and 30 years, substantially all of which are secured by
first liens on one-to-four-family residential properties or multifamily
projects. Each FHLMC security must include whole loans, participation interests
in whole loans and undivided interests in whole loans and participation in
another FHLMC security.
Risk Factors/Special Considerations Relating to Debt Securities
The Emerging Markets Fund and the International Small Cap Fund
may invest in debt securities which are rated below Baa by Moody's Investors
Service, Inc. ("Moody's"), BBB by Standard & Poor's Corporation ("S&P") 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 lowrated 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
B-5
<PAGE>
their investment objectives may, to the extent they invest in low-rated debt
securities, be more dependent upon such credit analysis 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 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 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 Foreign Currency Exchange Contracts. The 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.
The Funds may enter into a forward contract, for example, when
they enter into contracts for the purchase or sale of a security denominated in
a foreign currency or are expecting a dividend or interest payment in order to
"lock in" the U.S. dollar price of the security or dividend or interest payment.
In addition, 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 that Fund's portfolio securities denominated in such foreign
currency, or when a Fund believes that the U.S. dollar may suffer a substantial
decline
B-6
<PAGE>
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 that Fund's commitment will
be held aside or segregated to be used to pay for the commitment. Accordingly, a
Fund always will have cash, cash equivalents or high-quality liquid 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 forward contracts. In
such event, the Fund's ability to utilize forward contracts in the manner set
forth above may be restricted. Forward contracts may limit potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance by the Fund than if it had not engaged in such contracts.
The Fund generally will not enter into a forward foreign currency exchange
contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge
against movements in interest rates, securities prices or currency exchange
rates, the Funds may purchase and sell various kinds of futures contracts and
options on futures contracts. The 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.
The Trust, on behalf of the Funds, has filed a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the CFTC and the National Futures Association, which regulate
trading in the futures markets, 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 the Funds will use futures contracts and
related options for bona fide hedging purposes within the meaning of CFTC
regulations, provided that the Funds 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 a 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%.
The Funds will attempt to determine whether the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price
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fluctuations in securities held by the Funds or which they expect to purchase.
The 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 the Funds are traded on U.S. exchanges or boards of
trade that are licensed and regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held
to maturity but are instead liquidated through offsetting or "closing" purchase
or sale transactions, which may result in a profit or a loss. While the Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may instead make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, the 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 the Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, the Funds can seek,
through the sale of futures contracts, to offset a decline in the value of their
current portfolio securities. When rates are falling or prices are rising, the
Funds, 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 the 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 that Fund's
portfolio securities and such futures contracts. Although under some
circumstances prices of securities in a Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns and to compensate for it by having that Fund enter into a greater or
lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting that Fund's securities portfolio. When
hedging of this character is successful, any depreciation in the value of the
portfolio
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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, respectively, 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 will be subject to the development and maintenance
of a liquid market.
Loss from investing in futures transactions by the Funds is
potentially unlimited.
A Fund will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
its qualification as a regulated investment company for federal income tax
purposes.
Options on Securities, Securities Indices and Currencies. The
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 the Funds may
invest. The 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 foreign 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 the Funds will generally purchase only those options
for which there appears to be an active secondary market, there can be no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that a Fund
would have to exercise those options in order to
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realize any profit and would incur transaction costs upon the purchase or sale
of the underlying securities.
Secondary markets on an exchange may not exist or may not be
liquid for a variety of reasons including: (i) insufficient trading interest in
certain options; (ii) restrictions on opening transactions or closing
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances which interrupt normal
operations on an exchange; (v) inadequate facilities of an exchange or the
Options Clearing Corporation to handle current trading volume at all times; or
(vi) discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although the 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 the Funds 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 that 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 of the underlying security declining. 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 in the underlying
security above the option exercise price. In addition, a Fund's ability to sell
the underlying security will be limited while the option is in effect unless the
Fund effects a closing purchase transaction.
The Funds also may write covered put options that give the
holder of the option the right to sell the underlying security to the Funds 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" the put
options it has written, a Fund will cause its custodian to segregate cash, cash
equivalents, U.S. Government securities or other high-grade liquid debt
securities with a value equal to or greater than the exercise price of the
underlying securities. In segregating such assets, a Fund's custodian either
deposits such assets in a segregated account or separately identifies such
assets and renders them unavailable for investment by the Fund.
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 thereby result in
the institution by an
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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 Board of Trustees, 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 Board of Trustees.
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. Neither Fund may invest
more than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
For purposes of the Investment Company Act, a repurchase
agreement is deemed to be a collateralized loan from a 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 that Fund to
the seller. If bankruptcy or insolvency proceedings are commenced with respect
to the seller of the security before its repurchase under a repurchase
agreement, a Fund may encounter delays and incur costs before being able to sell
the security. Delays may involve loss of interest or a decline in price of the
security. If a court characterizes such a transaction as a loan and a Fund has
not perfected a security interest in the security, that Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, 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
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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 a Fund 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 their
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
other funds of the Trust that invest in repurchase agreements collateralized,
subject to their investment policies, either by (i) obligations issued or
guaranteed as to principal and interest by the U.S. Government or by one of its
agencies or instrumentalities, or (ii) privately issued mortgage-related
securities that are in turn collateralized by securities issued by GNMA, FNMA or
FHLMC, and are rated in the highest rating category by a nationally recognized
statistical rating organization, or, if unrated, are deemed by the Manager to be
of comparable quality using objective criteria. Any such repurchase agreement
will have, with rare exceptions, an overnight, over-the-weekend or
over-the-holiday duration, and will in no event have a duration of more than
seven days.
Reverse Repurchase Agreements. The Funds may enter into
reverse repurchase agreements, as set forth in the Prospectus. The 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. A Fund will enter into a reverse repurchase agreement for leverage
purposes only when the Manager believes that the interest income to be earned
from the investment of the proceeds would be greater than the interest expense
of the transaction. A Fund also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when the sale of the
Fund's securities is disadvantageous.
The Funds cause their custodian to segregate liquid assets,
such as cash, U.S. Government securities or other high-grade liquid debt
securities equal in value to their obligations (including accrued interest) with
respect to reverse repurchase agreements. In segregating such assets, the Funds'
custodian either places such securities in a segregated account or separately
identifies such assets and renders them unavailable for investment.
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Such assets are marked to market daily to ensure that full collateralization is
maintained.
Lending of Portfolio Securities. Although the Funds do not
currently intend to do so, each may lend its portfolio securities having a value
of up to 10% 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. The Funds may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. Loans are subject
to termination at the option of the Fund or the borrower at any time. Upon such
termination, the Funds are entitled to obtain the return of the securities
loaned within five business days.
For the duration of the loan, a Fund will continue to receive
the equivalent of the interest or dividends paid by the issuer on the securities
loaned, will receive proceeds from the investment of the collateral and will
continue to retain any voting rights with respect to those securities. As with
other extensions of credit, there are risks of delay in recovery or even losses
of rights in the securities loaned should the borrower of the securities fail
financially. However, the loans will be made only to borrowers deemed by the
Manager to be creditworthy, and when, in the judgment of the Manager, the income
which can be earned currently from such loans justifies the attendant risk.
When-Issued and Forward Commitment Securities. 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 whenissued 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 high-grade
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liquid debt securities with a value equal in value to commitments for
when-issued or delayed delivery securities. The segregated securities will
either 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.
Illiquid Securities. A Fund may invest up to 15% of its net
assets in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which 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 a Fund may include those that are
subject to restrictions on transferability contained in the securities laws of
other countries. Securities that are freely marketable in the country where they
are principally traded, but that would not be freely marketable in the United
States, will not be considered illiquid. Where registration is required, 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, that Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities sold pursuant to Rule 144A in many cases provide both readily
ascertainable values for restricted securities and the ability to liquidate an
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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 held by a Fund, however, could adversely affect the marketability of
such portfolio securities and result in that Fund's inability to dispose of such
securities promptly or at favorable prices.
The Board of Trustees has delegated the function of making
day-to-day determinations of liquidity to the Manager pursuant to guidelines
approved by the Board. 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 Board of Trustees.
RISK FACTORS
Foreign Securities
Shareholders in the 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 are often not comparable to those applicable
to U.S. companies. Many foreign markets have substantially less volume than
either the established domestic securities exchanges or the OTC markets.
Securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commission rates in foreign countries,
which may be fixed rather than subject to negotiation as in the U.S., are likely
to be higher. In many foreign countries there is less government supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S., and capital requirements for brokerage firms are generally lower.
Settlement of transactions in foreign securities may, in some instances, be
subject to delays and related administrative uncertainties.
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<PAGE>
Emerging Market Countries
The Emerging Markets Fund and the International Small Cap Fund
invest in securities of companies domiciled in, and in markets of, so-called
"emerging market countries." These investments may be subject to 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 that may restrict the Fund's 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 Emerging Markets Fund and the International Small Cap Fund
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 that
would prevent these Funds from repatriating invested capital and dividends,
withhold portions of interest and dividends at the source, or impose other
taxes, with respect to these Funds' investments in securities of issuers of that
country. There also is the possibility of expropriation, nationalization,
confiscatory or other taxation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Board of Trustees considers 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
Board also considers the degree of risk attendant to holding portfolio
securities in
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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 the
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 the Emerging Markets Fund's
hedging positions and its 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.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been
adopted by the Funds 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. Each Fund may not:
1. With respect to 75% 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 the Fund would be invested in such issuer.
There are no limitations with respect to the remaining 25% of the Fund's total
assets, except to the extent other investment restrictions may be applicable.
2. 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 10% 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.
3. (a) Borrow money, except temporarily for temporary or
emergency purposes from a bank and then not in excess of 10% 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
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an asset coverage of at least 300% of all borrowings, and no additional
investments may be made while any such borrowings are in excess of 10% (5% in
the case of the Emerging Markets Fund) 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.
4. Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite securities. (This does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
5. Buy or sell real estate (including interests in real estate
limited partnerships or issuers that qualify as real estate investment trusts
under federal income tax law) or commodities or commodity contracts; however,
the Fund, to the extent not otherwise prohibited in the Prospectus or this
Statement of Additional Information, may invest in securities secured by real
estate or interests therein or issued by companies which invest in real estate
or interests therein, including real estate investment trusts, and may purchase
or sell currencies (including forward currency exchange contracts), futures
contracts and related options generally as described in the Prospectus and this
Statement of Additional Information. As an operating policy which may be changed
without shareholder approval, consistent with the laws of the State of Texas,
the Fund may invest in real estate investment trusts only up to 10% of its total
assets.
6. Buy or sell interests in oil, gas or mineral exploration or
development leases and programs. (This does not preclude permissible investments
in marketable securities of issuers engaged in such activities.)
7. Invest more than 5% of the value of its total assets in
securities of any issuer which has not had a record, together with its
predecessors, of at least three years of continuous operation. (This is an
operating policy which may be changed without shareholder approval, consistent
with the regulations of the State of Arkansas.)
8. (a) 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.
(b) Invest in securities of other investment
companies except by purchase in the open market where no commission or profit to
a sponsor or dealer results from the purchase other than the customary broker's
commission, or except when the purchase is part of a plan of merger,
consolidation, reorganization or
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acquisition. (This is an operating policy which may be changed without
shareholder approval, consistent with the regulations of the State of Ohio.)
9. Invest, in the aggregate, more than 15% of its net assets
in illiquid securities, including (under current SEC interpretations) restricted
securities (excluding liquid Rule 144A- eligible restricted securities),
securities which are not otherwise readily marketable, repurchase agreements
that mature in more than seven days and over-the-counter options (and securities
underlying such options) purchased by the Fund. (This is an operating policy
which may be changed without shareholder approval, consistent with the
Investment Company Act and changes in relevant SEC interpretations.)
10. 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.)
11. Invest more than 25% of the market value of its total
assets in the securities of companies engaged in any one industry. (This does
not apply to investment in the securities of the U.S. Government, its agencies
or instrumentalities.) For purposes of this restriction, the Fund generally
relies on the U.S. Office of Management and Budget's Standard Industrial
Classifications.
12. Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to prohibit the
Fund from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase and dollar roll transactions.
13. 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:
(A) such options are written by other persons, and
(B) the aggregate premiums paid on all such options
that 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,
consistent with state regulations.)
14. 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.)
15. Invest in warrants, valued at the lower of cost or market,
in excess of 5% of the value of the Fund's net assets. Included in such amount,
but not to exceed 2% of the value of the
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Fund's net assets, may be warrants which are not listed on the New York Stock
Exchange or American Stock Exchange. Warrants acquired by the Fund in units or
attached to securities may be deemed to be without value. (This is an operating
policy which may be changed without shareholder approval, consistent with the
regulations of the State of Texas.)
16. (a) Purchase or retain in the Fund's portfolio any
security if any officer, trustee or shareholder of the issuer is at the same
time an officer, trustee or employee of the Trust or of its investment adviser
and such person owns beneficially more than 1/2 of 1% of the securities and all
such persons owning more than 1/2 of 1% own more than 5% of the outstanding
securities of the issuer.
(b) Purchase more than 10% of the outstanding voting
securities of any one issuer. (This is an operating policy which may be changed
without shareholder approval, consistent with the regulations of the State of
Ohio.)
17. Invest in commodities, except for futures contracts or
options on futures contracts if, as a result thereof, 5% or less of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to initial deposits and premiums on open futures contracts
and options on such contracts.
To the extent these restrictions reflect matters of operating
policy that may be changed without shareholder vote, they may be amended upon
approval by the Board of Trustees and notice to shareholders.
If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage resulting from a
change in the values of assets will not constitute a violation of that
restriction, except as otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions. The Funds will receive income in the form of
dividends and interest earned on their investments in securities. This income,
less the expenses incurred in their operations, is the Funds' net investment
income, substantially all of which will be declared as dividends to the Funds'
shareholders.
The amount of income dividend payments by the Funds is
dependent upon the amount of net investment income received by the Funds from
their portfolio holdings, is not guaranteed and is subject to the discretion of
the Funds' Board. These Funds do not pay "interest" or guarantee any fixed rate
of return on an investment in their shares.
The Funds also may derive capital gains or losses in
connection with sales or other dispositions of their portfolio
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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),
although technically 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 the Fund's shares
may have been held.
Any per-share dividend or distribution 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.
As stated in the Prospectus, dividends and other distributions
will generally be made in the form of additional shares of the Funds.
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'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 a
Fund will not be subject to any federal income tax or excise taxes based on net
income. However, the Board of Trustees may elect to pay such excise taxes if it
determines that payment is, under the circumstances, in the best interests of a
Fund.
In order to qualify as a regulated investment company, a 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
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(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 the Fund's assets or 10% of the voting securities of the
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, 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.
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.
The Emerging Markets Fund and the International Small Cap Fund
may be subject to foreign withholding taxes on dividends and interest earned
with respect to securities of foreign corporations. The Emerging Markets Fund
and the International Small Cap Fund may each invest up to 10% of its total
assets in the stock of foreign investment companies that may 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 each of the
Funds derives from PFIC stock may be subject to a non-deductible federal income
tax at the Fund level. In some cases, each Fund may be able to avoid this tax by
electing to be taxed currently on its share of the PFIC's income, whether or not
such income is actually distributed by the PFIC. 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 Trust and the Funds intend to comply with the requirements
of Section 817(h) of the Code and related regulations, including certain
diversification requirements that are in addition to the diversification
requirements of Subchapter M and the
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<PAGE>
Investment Company Act. Failure to comply with the requirements of Section
817(h) could result in taxation of the insurance company and immediate taxation
of the owners of Variable Contracts to the full extent of appreciation under the
contracts.
Shares of a Fund underlying Variable Contracts that comply
with the requirements of Section 817(h) and related regulations will generally
be treated as owned by the insurance company and not by the owners of Variable
Contracts. In that case, income derived from, and appreciation in, shares of the
Fund would not be currently taxable to the owners of Variable Contracts. Owners
of Variable Contracts that do not comply with the requirements of Section 817(h)
would generally be subject to immediate taxation on the appreciation under the
contracts.
Section 817(h) requires that the investment portfolios
underlying variable life insurance and variable annuity contracts be "adequately
diversified". Section 817(h) contains a safe harbor provision which provides
that a variable life insurance or variable annuity contract will meet the
diversification requirements if, as of the close of each calendar quarter, (i)
the assets underlying the contract meet the diversification standards for a
regulated investment company under Subchapter M of the Code, and (ii) no more
than 55% of the total assets of the account consist of cash, cash items, U.S.
government securities and securities of regulated investment companies.
Treasury Department regulations provide an alternative test to
the safe harbor provision to meet the diversification requirements. Under these
regulations, an investment portfolio will be adequately diversified if (i) not
more than 55% of the value of its total assets is represented by any one
investment; (2) not more than 70% of the value of its total assets is
represented by any two investments; (3) not more than 80% of the value of its
total assets is represented by any three investments; and (4) not more than 90%
of the value of its total assets is represented by any four investments. These
limitations are increased for investment portfolios which are invested in whole
or in part in U.S. Treasury securities.
Stock of a regulated investment company, such as a Fund, held
in an insurance company's separate accounts underlying variable life insurance
or variable annuity contracts may be treated as a single investment for purposes
of the diversification rules of Section 817(h). A special rule in Section
817(h), however, allows a shareholder of a regulated investment company to
"look-through" the company and treat a pro rata share of the company's assets as
owned directly by the shareholder. This special "look-through" rule may make it
easier to comply with the diversification requirements of Section 817(h). To
qualify for "look-through" treatment, public access to the regulated investment
company must generally be limited to (i) the purchase of a variable contract,
(ii) life insurance companies' general accounts, and (iii) qualified pension or
retirement plans. Interests in the Funds are sold only to insurance company
separate accounts to fund
B-23
<PAGE>
the benefits of Variable Contracts, and to qualified pension and retirement
plans.
The investment objectives and strategies of the Funds are very
similar to those of other regulated investment companies that are managed by the
Manager and that are, unlike the Funds, available for purchase by the general
public. The Internal Revenue Service ("IRS") might assert that shares of a Fund
do not qualify for "look-through treatment" because shares of those other,
similar regulated investment companies are publicly available. The IRS recently
issued two private letter rulings that reserve this issue. The legislative
history of Section 817(h) indicates that the fact that a "similar" fund is
available to the public will not disqualify a fund that is available only
through the purchase of a variable life insurance or variable annuity contract
from "lookthrough" treatment.
Even if the diversification requirements of Section 817(h) are
met, the owner of a variable life insurance contract or the owner of a variable
annuity contract might be subject to current federal income taxation if the
owner has excessive control over the investments underlying the contract. The
Treasury Department has indicated that guidelines might be forthcoming that
address this issue. At this time, it is impossible to predict what the
guidelines will include and the extent, if any, to which they may be
retroactive.
In order to maintain the Variable Contracts' status as
annuities or insurance contracts, the Trust may in the future find it necessary,
and reserves the right, to take certain actions, including, without limitation,
amending a Fund's investment objective (upon SEC or shareholder approval) or
substituting shares of one Fund for another.
Hedging. The use of hedging strategies, such as entering into
futures contracts and forward contracts and purchasing options, involves complex
rules that will determine the character and timing of recognition of the income
received in connection therewith by a Fund. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations) and
income from transactions in options, futures contracts and forward contracts
derived by a Fund with respect to its business of investing in securities or
foreign currencies will qualify as permissible income under Subchapter M of the
Code.
For accounting purposes, when a Fund purchases an option, the
premium paid by the Fund is recorded as an asset and is subsequently adjusted to
the current market value of the option. Any gain or loss realized by the Funds
upon the expiration or sale of such options held by the Funds generally will be
capital gain or loss.
Any security, option or other position entered into or held by
the Fund that substantially diminishes a Fund's risk of loss from any other
position held by the Fund may constitute a
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<PAGE>
"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 the
Fund's holding period in certain straddle positions not begin until the straddle
is terminated (possibly resulting in the gain being treated as short-term
capital gain rather than long-term capital gain); and that losses recognized
with respect to certain straddle positions, which would otherwise constitute
short-term capital losses, be treated as long-term capital losses. Different
elections are available to 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 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.
Distributions and redemptions may be subject to state and
local income taxes, and the treatment thereof may differ from the federal income
tax treatment.
The above discussion and the related discussion in the
Prospectus are not intended to be complete discussions of all applicable tax
consequences of an investment in the Funds. The law firm of Heller, Ehrman,
White & McAuliffe has expressed no opinion in respect thereof. Shareholders are
advised to consult with their own tax advisers concerning the application of
foreign, federal, state and local taxes to the ownership of a Variable Contract
and to an investment in the Fund.
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<PAGE>
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the overall
management of the Funds, including general supervision and review of their
investment activities. The officers who administer the Funds' daily operations
are appointed by the Board of Trustees. The current Trustees and officers of the
Trust performing a policy-making function and their affiliations and principal
occupations for the past five years are set forth below (note that, except for
Jerome S. Markowitz who is a Trustee of The Montgomery Funds II, each of the
below Trustees and officers fill the same positions for The Montgomery Funds and
The Montgomery Funds II, two other investment companies advised by the Manager):
R. Stephen Doyle, Chairman of the Board, Chief Executive
Officer, Treasurer, Principal Financial and Accounting Officer
and Trustee (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, and has been employed by Montgomery Securities
since October 1983.
Mark B. Geist, President (Age 43)
101 California Street, San Francisco, California 94111. Geist
has been the President and a Director of Montgomery Asset
Management, Inc. and President of the Manager since April
1990. From October 1988 until March 1990, Mr. Geist was a
Senior Vice President of Analytic Investment Management. From
January 1986 until October 1988, Mr. Geist was a Vice
President with RCB Trust Co. Prior to January 1986, Mr. Geist
was the Pension Fund Administrator for St. Regis Co., a
manufacturing concern.
Jack G. Levin, Secretary (Age 48)
600 Montgomery Street, San Francisco, California 94111. Mr.
Levin has been Director of Legal and Regulatory Affairs for
Montgomery Securities since January 1983.
John E. Story, Executive Vice President (Age 55)
101 California Street, San Francisco, California 94111. Mr.
Story has been the Managing Director of Mutual Funds and
Executive Vice President of Montgomery Asset Management, L.P.
since January 1994. From December 1978
- --------
* Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
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<PAGE>
to January 1994, he was Managing Director - Senior Vice President of Alliance
Capital Management.
David E. Demarest, Chief Administrative Officer (Age 42)
101 California Street, San Francisco, California 94111. Mr.
Demarest has been the Chief Administrative Officer since 1994.
From 1991 until 1994, he was Vice President of Copeland
Financial Services. Prior to joining Copeland, Mr. Demarest
was Vice President/Manager for the Overland Express Funds
Division for Wells Fargo Bank.
Mary Jane Fross, Treasurer (Age 44)
101 California Street, San Francisco, California 94111. Ms.
Fross is Manager of Mutual Fund Administration and Finance for
the Manager. From November 1990 to her arrival at the Manager
in 1993, Ms. Fross was Financial Analyst/Senior Accountant
with Charles Schwab, San Francisco, California. From 1989 to
November 1990, Ms. Fross was Assistant Controller of Bay Bank
of Commerce, San Leandro, California.
Roger W. Honour, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Honour is a Managing Director and Senior Portfolio Manager for
the Manager. Roger Honour joined the Manager in June 1993 as
Managing Director and Portfolio Manager responsible for mid
and large capitalization growth stock investing. Prior to
joining Montgomery Asset Management, he was Vice President and
Portfolio Manager at Twentieth Century Investors from 1992 to
1993. Mr. Honour was a Vice President and Portfolio Manager at
Alliance Capital Management from 1990 to 1992. Mr. Honour was
a Vice President of Institutional Equity Research and Sales at
Merrill Lynch Capital Markets from 1980 to 1990.
Oscar A. Castro, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Mr.
Castro, CFA, is a Managing Director and Portfolio Manager for
the 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, Mr. Castro was deputy
portfolio manager/analyst at Templeton International.
John D. Boich, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Mr.
Boich, CFA, is a Managing Director and Portfolio Manager.
Prior to joining the Manager, Mr. Boich was
B-27
<PAGE>
vice president and portfolio manager at The Boston Company
Institutional Investors Inc. from 1990 to 1993. From 1989 to
1990, Mr. Boich was the founder and comanager of The Common
Goal World Fund, a global equity partnership. From 1987 to
1989, Mr. Boich worked as a financial adviser with
Prudential-Bache Securities and E.F. Hutton & Company.
Josephine S. Jimenez, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Ms.
Jimenez, CFA, is a Managing Director and Portfolio Manager for
the 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, Vice President (Age 41)
101 California Street, San Francisco, California 94111. Dr.
Sudweeks, Ph.D., CFA, is a Managing Director and Portfolio
Manager for the Manager. Prior to joining the Manager, he was
a senior analyst and portfolio manager at Emerging Markets
Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, Dr. Sudweeks was a Professor of
International Finance and Investments at George Washington
University and also served as an Adjunct Professor of
International Investments from 1988 until May 1991.
Thomas R. Haslett, Vice President (Age 34)
101 California Street, San Francisco, California 94111. Mr.
Haslett is a Vice President and Senior Portfolio Manager for
the Manager. From September 1987 until joining the Manager in
April 1992, Mr. Haslett was a Portfolio Manager with Gannett,
Welsh and Kotler in Boston, Massachusetts.
Angeline Ee, Vice President (Age 35)
101 California Street, San Francisco, California 94111. Ms. Ee
is a Vice President and Portfolio Manager for the 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.
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
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<PAGE>
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 52)
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 47)
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.
Jerome S. Markowitz, Trustee* (Age 56)
600 Montgomery Street, San Francisco, California 94111. Mr.
Markowitz was elected as a trustee of The Montgomery Funds
III, effective November 16, 1995. Mr. Markowitz has been the
Senior Managing Director of Montgomery Securities since
January 1991. Mr. Markowitz joined Montgomery Securities in
December 1987.
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from the
Trust for performing the duties of their offices, except for the Funds' payment
of part of the compensation for the Trust's Treasurer. However, those officers
and Trustees who are officers or partners of the Manager or Montgomery
Securities may receive remuneration indirectly because the Manager will receive
a management fee from the Funds and Montgomery Securities will receive
commissions for executing portfolio transactions for the Funds. The Trustees who
are not affiliated with the Manager receive an annual retainer and fees and
expenses for each regular Board meeting attended. The aggregate compensation
paid by the Trust to each of the Trustees during the fiscal year ended December
31, 1995, and the aggregate compensation
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<PAGE>
<TABLE>
paid to each of the Trustees during the fiscal year ended December 31, 1995 by
all of the registered investment companies to which the Manager provides
investment advisory services, are set forth below.
<CAPTION>
Total
Pension or Compensation
Retirement From the
Aggregate Benefits Trust and
Compensation Accrued as Fund Complex
from The Part of Fund (2 additional
Name of Trustee Montgomery Funds III* Expenses** Trusts)
- --------------- --------------------- ------------ -------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
Jerome S. Markowitz None -- None
John A. Farnsworth $5,000 -- $25,000
Andrew Cox $5,000 -- $25,000
Cecilia H. Herbert $5,000 -- $25,000
<FN>
* This fee represents compensation for service as Trustees to both
The Montgomery Funds III and The Montgomery Funds II, another
Trust advised by the Manager.
** The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
As stated in each Prospectus, investment management services
are provided to the Funds by Montgomery Asset Management, L.P., the Manager,
pursuant to an Investment Management Agreement initially dated April 24, 1995
(the "Agreement"). The Agreement is in effect with respect to the Funds for two
years after each Fund's inclusion in the Agreement (on or around its beginning
of public operations) and then continues for periods not exceeding one year so
long as such continuation is approved at least annually by (i) the Board of
Trustees or the vote of a majority of the outstanding shares of a Fund, and (ii)
a majority of the Trustees who are not interested persons of any party to the
Agreement, in each case by a vote cast in person at a meeting called for the
purpose of voting on such approval. The Agreement may be terminated at any time,
without penalty, by a Fund or the Manager upon 60 days' written notice, and is
automatically terminated in the event of its assignment as defined in the
Investment Company Act.
For services performed under the Agreement, the Funds pay the
Manager a monthly management fee (accrued daily) based upon the average daily
net assets of the Funds at the following annual rates:
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<PAGE>
Fund Average Daily Net Annual
- ---- Assets Rate
----------------- ------
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion .80%
Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
International Small Cap Fund First $250 million 1.25%
Over $250 million 1.00%
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 one and twenty-five one hundredths
of one percent (1.25%) of the Growth Fund's average net assets, one and
seventy-five one hundredths of one percent (1.75%) of the Emerging Markets
Fund's and one and fifty one hundredths of one percent (1.50%) of the
International Small Cap Fund's average net assets. Currently, the most
restrictive state limitation is two and one-half percent (2 1/2%) of the first
$30,000,000 of average net assets of a Fund, two percent (2%) of the next
$70,000,000, and one and one-half percent (1 1/2%) of the value of the remaining
average net assets. The Manager also may voluntarily reduce additional amounts
to increase the return to the Funds' shareholders. Any reductions made by the
Manager in its fees are subject to reimbursement by the Funds 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 will
generally seek 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 Agreement include the
Manager's management fee but do not include any taxes, interest, brokerage
commissions, if any, expenses incurred in connection with any merger or
reorganization, extraordinary expenses such as litigation and any other expenses
as may be deemed excludable with the prior written approval of any state
securities commission imposing an expense limitation. The Manager may also at
its discretion from time to time pay for other Fund expenses from its own funds
or reduce the management fee of the Funds in excess of that required.
The Agreement was approved with respect to the Funds by the
Board of Trustees at duly called meetings. In considering the Agreement, the
Trustees specifically considered and approved the provision which permits the
Manager to seek reimbursement of any reductions made to its management fee
within the three-year period
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<PAGE>
following such reduction subject to the Funds' ability to effect such
reimbursement and remain in compliance with applicable expense limitations. The
Board of Trustees also considered that any such management fee reimbursement
will be accounted for on the financial statements of the Funds as a contingent
liability of the Funds and will appear as a footnote to the Funds' financial
statements until such time as it appears that the Funds will be able to effect
such reimbursement. At such time as it appears probable that the Funds are able
to effect such reimbursement, the amount of reimbursement that the Funds are
able to effect will be accrued as an expense of the Funds 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 December 31,
- ----
1995
----
Growth Fund* $0.00
Emerging Markets Fund* NA
International Small Cap NA
Fund*
* The Funds did not commence operations during fiscal year 1995.
The Growth Fund had only an initial shareholder, and the
Emerging Markets Fund and the International Small Cap Fund had
no shares outstanding, during that year. The Emerging Markets
Fund commenced operations on February 1, 1996, while the
Growth Fund commenced operations on February 9, 1996.
The Manager also may act as an investment adviser or
administrator to other persons, entities, and corporations, including other
investment companies. Please refer to the table above, which indicates officers
and trustees who are affiliated persons of the Trust and who are also affiliated
persons of the Manager.
The use of the name "Montgomery" by the Trust and by the Funds
is pursuant to the consent of the Manager, which may be withdrawn if the Manager
ceases to be the Manager of the Funds.
Montgomery Securities may provide certain administrative
services to the Funds on behalf of the Manager. Montgomery Securities will also
perform investment banking, investment advisory and brokerage services for
persons other than the Funds,
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<PAGE>
including issuers of securities in which the Funds may invest. These activities
from time to time may result in a conflict of interests of Montgomery Securities
with those of the Funds, and may restrict the ability of Montgomery Securities
to provide services to the Funds.
Morgan Stanley Trust Company (the "Custodian") 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 Board of Trustees pursuant to Rule 17f-5 under
the Investment Company Act. The Custodian, its branches and sub-custodians
generally hold certificates for the securities in their custody, but may, in
certain cases, have book records with domestic and foreign securities
depositories, which in turn have book records with the transfer agents of the
issuers of the securities. Compensation for the services of the Custodian is
based on a schedule of charges agreed upon 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 Agreement, the Manager determines which securities
are to be purchased and sold by a Fund and which broker-dealers are eligible to
execute the Fund's portfolio transactions, subject to the instructions of, and
review by, that Fund and the Board of Trustees. Purchases and sales of
securities within the U.S. other than on a securities exchange will generally be
executed directly with a "market-maker" unless, in the opinion of the Manager or
a Fund, a better price and execution can otherwise be obtained by using a broker
for the transaction.
The 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
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<PAGE>
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
In placing portfolio transactions, the Manager will use its
best efforts to choose a broker-dealer capable of providing the services
necessary generally to obtain the most favorable price and execution available.
The full range and quality of services available will be considered in making
these determinations, such as the firm's ability to execute trades in a specific
market required by the Funds, 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.
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 a 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 a Fund or
assist the Manager in carrying out its responsibilities to a Fund. The standard
of reasonableness is to be measured in light of the Manager's overall
responsibilities to a Fund. The Board of Trustees reviews all brokerage
allocations where services other than best price and execution capabilities are
a factor to ensure that the other services provided meet the criteria outlined
above and produce a benefit to the Funds.
Investment decisions for the Fund are made independently from
those of other client accounts of the Manager or its affiliates. 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 in one or more of those client accounts, either
through direct investment or because of management fees based on gains in the
account. To the extent any of these client accounts and a Fund seek to acquire
the same security at the same time, 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, the Funds may not be
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<PAGE>
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 will be
allocated between such 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. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as a Fund is
concerned. In other cases, however, it is believed that the ability of a Fund to
participate in volume transactions may produce better executions for that Fund.
In addition, on occasion, situations may arise in which legal
and regulatory considerations will preclude trading for the Funds' accounts by
reason of activities of Montgomery Securities or its affiliates. It is the
judgment of the Board of Trustees that the Funds will not be materially
disadvantaged by any such trading preclusion and that the desirability of
continuing its advisory arrangements with the Manager and the Manager's
affiliation with Montgomery Securities and other affiliates of Montgomery
Securities outweigh any disadvantages that may result from the foregoing.
The Manager's sell discipline for 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. The Funds will limit investments in illiquid securities to
15% of their net assets.
Sell decisions at the country level are dependent on the
results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a
number of factors including current stock valuation relative to the estimated
fair value range, or a high P/E relative to expected growth. Negative changes in
the relevant industry sector, or a reduction in international competitiveness
and a declining financial flexibility may also signal a sell.
Subject to the foregoing policies, the Funds may use
Montgomery Securities as a broker to execute portfolio transactions. In
accordance with the provisions of Section 17(e) of the Investment Company Act
and Rule 17e-1 promulgated thereunder, the Trust has adopted certain procedures
designed to provide that commissions payable to Montgomery Securities are
B-35
<PAGE>
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on securities or options exchanges during a comparable period
of time. In determining the commissions to be paid to Montgomery Securities, it
is the policy of the Funds that such commissions will be, in the judgment of the
Manager, (i) at least as favorable as those which would be charged the Funds by
other qualified brokers having comparable execution capability, and (ii) at
least as favorable as commissions contemporaneously charged by Montgomery
Securities on comparable transactions for its most favored unaffiliated
customers, except for (a) accounts for which Montgomery Securities acts as a
clearing broker for another brokerage firm, and (b) any customers of Montgomery
Securities considered by a majority of the Trustees who are not interested
persons to be not comparable to the Funds. The Funds do not deem it practicable
and in their best interests to solicit competitive bids for commission rates on
each transaction. However, consideration is regularly given to information
concerning the prevailing level of commissions charged on comparable
transactions by other qualified brokers. The Board of Trustees reviews the
procedures adopted by the Trust with respect to the payment of brokerage
commissions at least annually to ensure their continuing appropriateness, and
determines, on at least a quarterly basis, that all such transactions during the
preceding quarter were effected in compliance with such procedures.
The Trust has also adopted certain procedures, pursuant to
Rule 10f-3 under the Investment Company Act, which must be followed any time a
Fund purchases or otherwise acquires, during the existence of an underwriting or
selling syndicate, a security of which Montgomery Securities is an underwriter
or member of the underwriting syndicate. The Board of Trustees will review such
procedures at least annually for their continuing appropriateness and determine,
on at least a quarterly basis, that any such purchases made during the preceding
quarter were effected in compliance with such procedures.
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 a Fund. 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, a Fund
may or may not purchase securities with the expectation of holding them to
maturity, although its general policy is to hold securities to maturity. A Fund
may, however, sell securities prior to maturity to meet redemptions or as a
result of a revised management evaluation of the issuer.
B-36
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i)
suspend the continued offering of the Funds' shares, and (ii) reject purchase
orders in whole or in part when in the judgment of the Manager such rejection is
in the best interests of the Funds.
The Funds may suspend the right of redemption or postpone the
date of payment during any period when (a) 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; (b) 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 (c) for such other period as the SEC
may permit for the protection of a Fund's shareholders.
The value of shares on redemption or repurchase may be more or
less than the shareholder's cost, depending upon the market value of a Fund's
portfolio securities at the time of redemption or repurchase.
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 the Fund outstanding at the time
of the valuation and the result (adjusted to the nearest cent) is the net asset
value per share.
As noted in the Prospectus, the net asset value of shares of
the Funds generally will be determined at least once daily as of 4:00 p.m., New
York City time, on each day the NYSE is open for trading. It is expected that
the Exchange 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 Funds may, but do not expect to, determine
the net asset value 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
B-37
<PAGE>
are valued and the close of the NYSE which will not be reflected in the
computation of that Fund's net asset value unless the Board of Trustees or its
delegates deem that such events would materially affect the net asset value, in
which case an adjustment would be made.
Generally, the 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 of Trustees.
The Funds' securities, including ADRs and EDRs, 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. In cases where securities are traded on
more than one exchange, the securities are valued on the exchange determined by
the Manager to be the primary market. Securities traded in the over-the-counter
market are valued at the mean between the last available bid and asked price
prior to the time of valuation. Securities and assets for which market
quotations are not readily available (including restricted securities which are
subject to limitations as to their sale) are valued at fair value as determined
in good faith by or under the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in
excess of 60 days are valued at current market prices, as discussed above.
Short-term securities with 60 days or less remaining to maturity are, unless
conditions indicate otherwise, amortized to maturity based on their cost to 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.
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 Board of Trustees, or at fair value as determined in good faith
by procedures approved by the Board of Trustees. Any such pricing service, in
determining value, will use information with respect to transactions in the
securities being valued, quotations from dealers, market transactions in
comparable securities, analyses and evaluations of various relationships between
securities and yield-to-maturity information.
An option that is written by 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
B-38
<PAGE>
for a like contract on the valuation date of the futures contract if the
securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a settlement
price cannot be used, futures contracts will be valued at their fair market
value as determined by or under the direction of the Board of Trustees.
If any securities held by a Fund are restricted as to resale
or do not have readily available market quotations, the Manager and the Trust's
Pricing Committee determine their fair value, following procedures approved by
the Board of Trustees. The Board of Trustees periodically reviews such
valuations and valuation procedures. The fair value of such securities is
generally determined as the amount which a Fund could reasonably expect to
realize from an orderly disposition of such securities over a reasonable period
of time. The valuation procedures applied in any specific instance are likely to
vary from case to case. However, consideration is generally given to the
financial position of the issuer and other fundamental analytical data relating
to the investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by a Fund in
connection with such disposition). In addition, specific factors are also
generally considered, such as the cost of the investment, the market value of
any unrestricted securities of the same class (both at the time of purchase and
at the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
Any assets or liabilities initially expressed in terms of
foreign currencies are translated into U.S. dollars at the official exchange
rate or, alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board of Trustees in good faith will establish a conversion rate for such
currency.
All other assets of the Funds are valued in such manner as the
Board of Trustees in good faith deems appropriate to reflect their fair value.
B-39
<PAGE>
PERFORMANCE INFORMATION
As noted in the Prospectus, the Funds may, from time to time
and in accordance with applicable law, quote various performance figures in
advertisements and other communications to illustrate their past performance.
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. Each Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC, expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5- or 10-year period at the end of
each respective period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions and
complete redemption of the hypothetical
investment at the end of the measuring
period.
Aggregate Total Return. 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
B-40
<PAGE>
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.
Shareholders 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:
Inception*
Through
Fund December 31, 1995
---- ------------------
Growth Fund NA
International Small Cap NA
Fund
Emerging Markets Fund NA
- ----------------
* Total return for periods of less than one year are aggregate, not
annualized, return figures. The dates of inception (i.e., start of operations)
for the Funds were: Growth Fund, February 9, 1996; Emerging Markets Fund,
February 1, 1996; International Small Cap Fund, NA.
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.
The following publications, indices and averages (as well as similar
publications, indices and averages) may be used:
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) Lipper - Mutual 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.
B-41
<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, a shareholder
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 ranking services like Lipper Analytical Services,
Inc., VARDS and Morningstar, Inc.
The investment results of the Funds will fluctuate over time,
and any presentation of the Funds' total returns for any period should not be
considered as a representation of what an investment may earn or what a
shareholder'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 why the Manager believes
shareholders should invest in the Funds. For example, the Funds may refer to the
belief that over two-thirds of the world's investment opportunities are to be
found outside of the United States, compared to approximately 30 percent 20
years ago. The Manager may also state that the Funds are "performance oriented
portfolios."
Research. Largely inspired by its affiliate, Montgomery
Securities -- which has established a tradition for specialized research in
emerging growth companies -- the portfolio management of the Funds has developed
its own tradition of intensive research. The Manager has made intensive research
one of the important characteristics of the Montgomery style.
The portfolio managers for the 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 generally
applies to the Manager and the Trust.
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
B-42
<PAGE>
example, has developed its own strategy for analyzing the growth potential of
U.S. companies, often large, well-known companies.
GENERAL INFORMATION
Shareholders 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 Trust have been assumed by the Emerging Markets Fund and the
Growth Fund. The Manager has agreed, to the extent necessary, to advance the
organizational expenses incurred by the Funds and will be reimbursed for such
expenses after commencement of the Funds' operations. Shareholders purchasing
shares of the Funds bear such expenses only as they are amortized daily against
the Funds' investment income.
As noted above, the Custodian acts as custodian of the
securities and other assets of the Funds, and provides accounting and pricing
services to the Funds. The Custodian does not participate in decisions relating
to the purchase and sale of securities by the Funds.
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
Heller, Ehrman, White & McAuliffe, 333 Bush Street, San
Francisco, California 94104.
Among the Board of Trustees' powers enumerated in the
Declaration of Trust is the authority to terminate the Trust or any series of
the Trust, or to merge or consolidate the Trust or one or more of its series
with another trust or company without the need to seek shareholder approval of
any such action.
As of June 30, 1996, to the knowledge of the Funds, Montgomery
Securities owned of record 49.4% of the outstanding shares of the Growth Fund.
As of June 30, 1996, to the knowledge of the Funds, the
following shareholders owned of record 5% or more of the outstanding shares of
the respective Funds indicated:
B-43
<PAGE>
Name of Fund/Name and Number of Percent
Address of Record Owner Shares Owned of Shares
- ------------------------ ------------ ---------
Growth Fund
Montgomery Securities 51,329.918 49.4
600 Montgomery Street
San Francisco, CA 94111-2702
Providian Corporation 7,100.839 6.8
400 West Market Street
Louisville, Kentucky 40202
Fortis Benefits Insurance Company 45,456.671 43.8
500 Bielenberg Drive
Woodbury, Minnesota 55125
Emerging Markets Fund
American Skandia Life Assurance 522,645.486 84.6
Corporation
1 Corporate Drive
P.O. Box 883
Shelton, Connecticut 08484-0883
Providian Corporation 61,028.156 9.9
400 West Market
Louisville, Kentucky 40202
As of June 30, 1996, the Trustees and Officers of the Trust,
as a group, owned less than 1% of the outstanding shares of each Fund.
The Trust is registered with the SEC as a non-diversified
management investment company. 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 Statement filed with the SEC. Copies of the Registration Statement
may be obtained from the SEC upon payment of the prescribed fee.
FINANCIAL STATEMENTS
The Independent Auditor's Report for the Montgomery Variable
Series: Growth Fund, dated as of April 11, 1995, the accompanying Statement of
Assets and Liabilities as of April 7, 1995 and the Notes to Financial Statement
are incorporated by reference to Pre-effective Amendment No. 1 to the
Registrant's Registration Statement as filed with the Commission on April 17,
1995. Audited financial statements for the fiscal year ended December 31, 1995
have not been filed because the Registrant did not commence operations, and had
only its initial shareholder, until February 1, 1996.
B-44
<PAGE>
Attached to this Statement of Additional Information is
certain unaudited financial information for the Growth Fund and the Emerging
Markets Fund as of or for the period ended June 30, 1996.
B-45
<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.
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.
B-46
<PAGE>
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 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
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<PAGE>
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.
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-48
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
Portfolio Investments
June 30, 1996 - (Unaudited)
Value
Shares (Note 1)
- --------- -------------
COMMON STOCKS - 73.0%
Banks/Savings and Loan - 3.5%
150 BankAmerica Corporation ................ $11,362
550 Golden West Financial Corporation....... 30,800
------------
42,162
------------
Broadcasting/Advertising - 0.5%
200 Grupo Televisa S.A., GDR................ 6,150
------------
Building Materials - 2.9%
1,150 Masco Corporation ...................... 34,788
------------
Business Services - 7.6%
700 AccuStaff Inc.+ ........................ 19,163
160 Computer Sciences Corporation+.......... 11,960
1,000 Outdoor Systems Inc.+ ................. 34,750
700 Whittman-Hart Inc.+ .................... 25,550
------------
91,423
------------
Conglomerates - 0.7%
200 Tyco International Ltd. ................ 8,150
------------
Diversified Financial Services - 2.1%
150 American Express Company................ 6,694
300 Associates First Capital Corporation+ .. 11,287
200 Norwest Corporation .................... 6,975
------------
24,956
------------
Health Care - 2.1%
700 Healthsource Inc.+ ..................... 12,250
300 Oxford Health Plans, Inc.+ ............. 12,319
------------
24,569
------------
Leisure Time - 1.3%
525 GTECH Holdings Corporation+............. 15,553
------------
Lodging - 7.8%
1,150 HFS Inc.+ ............................. 80,500
600 Interstate Hotels Company+.............. 13,350
------------
93,850
------------
Machinery and Tools - 2.1%
850 Measurex Corporation ................... 24,863
------------
Metal and Mining - 0.9%
350 Freeport-McMoRan Copper, Series B ...... 11,156
------------
Oil - 1.5%
500 Belco Oil & Gas Corporation+ ........... 17,750
------------
Oilfield Equipment - 3.6%
350 Schlumberger Ltd. ...................... 29,487
300 Tidewater Inc. ......................... 13,162
------------
42,649
------------
Pharmacy/Drugs - 2.5%
300 Dura Pharmaceuticals Inc.+ ............. 16,818
300 Pharmacia and Upjohn Inc. .............. 13,312
------------
30,130
------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
Portfolio Investments - (Continued)
June 30, 1996 - (Unaudited)
Value
Shares (Note 1)
- ---------- -----------
COMMON STOCKS - (Continued)
Pipelines - 1.0%
300 Enron Corporation ...................... $12,263
-----------
Pulp and Paper - 2.9%
950 International Paper Company............. 35,031
-----------
Railroad - 0.8%
550 Canadian National Railway Company ...... 10,106
-----------
Real Estate - 0.6%
200 Starwood Lodging Trust ................. 7,275
-----------
Retail Trade - 8.8%
350 Dayton Hudson Corporation .............. 36,094
150 Gucci Group............................. 9,675
700 Nordstrom, Inc. ....................... 31,063
500 Saks Holdings Inc.+ .................... 17,062
600 Staples, Inc.+ ......................... 11,662
-----------
105,556
-----------
Semiconductors - 1.9%
500 Analog Devices Inc.+ ................... 12,750
600 International Rectifier Corporation+ ... 9,675
-----------
22,425
-----------
Software Systems - 1.8%
100 HBO & Company .......................... 6,763
600 Prism Solutions Inc.+ .................. 14,250
-----------
21,013
-----------
Technology - Miscellaneous - 3.4%
1,800 Avid Technology Inc.+ .................. 33,188
200 Compuware Corporation+ ................. 7,875
-----------
41,063
-----------
Telecommunications - 2.8%
875 Lucent Technologies Inc.+............... 33,141
-----------
Telecommunications Equipment - 8.4%
600 Ericsson (L.M.) Telephone Company,
Class B, ADR ......................... 12,863
700 General Instruments Corporation New+ ... 20,213
350 Northern Telecom Ltd. ................. 19,031
1,800 Octel Communications Corporation+....... 35,325
350 PictureTel Corporation+ ................ 13,803
-----------
101,235
-----------
Tobacco - 1.5%
175 Philip Morris Companies, Inc. .......... 18,200
-----------
TOTAL COMMON STOCKS
(Cost $811,027)..................... 875,457
-----------
The accompanying notes are an integral part of these financial statements.
<PAGE>
MONTGOMERY VARIABLE SERIES: GROWTH FUND
Portfolio Investments - (Continued)
June 30, 1996 - (Unaudited)
Principal Value
Amounts (Note 1)
- ---------- -----------
REPURCHASE AGREEMENTS - 32.0%
$192,000 Agreement with Barclays Zoete Webb Tri-Party,
5.600% dated 06/28/96, to be repurchased at
$192,090, on 07/01/96, collateralized by
$195,840 market value of U.S. Government
securities, having various maturities and
various interest rates................. $192,000
192,000 Agreement with Bear Stearns Tri-Party, 5.600%
dated 06/28/96, to be repurchased at
$192,090, on 07/01/96, collateralized
by $214,700 value of U.S. Government
securities, having various maturities
and various interest rates ........... 192,000
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $384,000)..................... 384,000
--------
TOTAL INVESTMENTS (Cost $1,195,027*)................. 105.0 % 1,259,457
OTHER ASSETS AND LIABILITIES (Net)................... (5.0) (60,631)
------- ---------
NET ASSETS.......................................... 100.0 % $1,198,826
======= ==========
- -------------
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
ABBREVIATION:
ADR American Depositary Receipt
GDR Global Depositary Receipt
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
Portfolio Investments
June 30, 1996 - (Unaudited)
Value
Shares (Note 1)
- ---------- -------
COMMON STOCKS - 74.2%
Argentina - 3.8%
2,630 Banco Frances, ADR (Banks)................. $75,612
15,000 Perez Companc, "B" Shares (Oil)............ 98,287
32,500 Siderar S.A.I.C.+ (Steel).................. 83,556
--------
257,455
--------
Brazil - 7.6%
3,800 Cemig Compania New, ADS (Electric Utilities) 108,300
4,000 Telebras, ADR (Telephone/Networks)......... 278,500
12,000 Usiminas, ADR*** (Steel)................... 129,780
--------
516,580
--------
Chile - 2.7%
1,850 Compania de Telefonos de Chile, ADR
(Telecommunications/Wireless) ............ 181,531
--------
China - 3.0%
118,000 Guangdong Investment Holdings Ltd.
(Real Estate) ............................ 74,696
3,600 Huaneng Power International, ADS+
(Electric Utilities)...................... 64,350
29,200 Johnson Electric Holdings Ltd., ORD
(Electronics) ............................ 65,637
--------
204,683
Czech Republic - 2.4%
600 SPT Telecom A.S. (Telephone/Networks)...... 73,274
9,200 The Czech Value Fund (Mutual Funds) ........ 87,400
--------
160,674
--------
Greece - 0.3%
2,620 The Greek Progress Fund (Mutual Funds) .... 23,143
--------
Hong Kong - 1.6%
7,400 IISBC Holdings (Banks)..................... 111,850
--------
India - 3.6%
1,300 Bajaj Auto Ltd., GDR (Auto/Auto Parts)..... 49,725
800 Bajaj Auto Ltd., GDS*** (Auto/Auto Parts).. 30,600
7,200 Tata Engineering & Locomotive Company, Ltd.,
GDR*** (Auto/Auto Parts) ................. 129,600
1,900 Tata Engineering & Locomotive Company, Ltd.,
GDR (Auto/Auto Parts) .................... 34,200
--------
244,125
--------
Indonesia - 2.8%
22,000 Ciputra Development** (Heavy Construction). 44,662
3,000 Hanjaya Mandala Sampoerna (F) (Tobacco).... 34,157
1,900 Tambang Timah, GDR*** (Metals and Mining).. 34,485
2,700 Telekomunikas Indonesia, ADR
(Telephone/Regional - Local) ............. 80,325
--------
193,629
--------
Israel - 0.6%
1,100 Teva Pharmaceuticals, ADR (Pharmacy/Drugs). 41,731
--------
Korea - 7.6%
7,000 Korea Electric Power Corporation, ADR
(Electric Utilities) ..................... 169,750
6,000 Korea Mobile Telecommunications, ADR+
(Telecommunications/Wireless) ............ 102,750
1,800 Korea Mobile Telecommunications, ADS+
(Telecommunications/Wireless) ............ 30,825
7,200 Pohang Iron & Steel Company, ADR (Steel)... 175,500
1,600 Samsung Electronics Ltd., GDS***
(Electronics) ............................ 38,800
--------
517,625
--------
Malaysia - 5.5%
12,000 Arab Malaysian Corporation (Diversified
Financial Services) ...................... 47,144
8,000 Edaran Otomobil Nasional Berhad**
(Auto/Auto Parts) ........................ 76,649
14,000 IJM Corporation Berhad (Heavy Construction) 24,245
17,000 IOI Industrial Oxygen Inc.** (Chemicals).... 23,580
10,000 Metacorp Berhad (Chemicals)................. 28,864
7,000 Petronas Gas (Oil) ......................... 30,026
20,000 Resorts World Berhad** (Leisure Time)...... 114,652
The accompanying notes are an integral part of these financial statements.
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
Portfolio Investments - (Continued)
June 30, 1996 - (Unaudited)
Value
Shares (Note 1)
- --------- --------
COMMON STOCKS - (Continued)
Malaysia - (Continued)
3,000 Telekom Malaysia** (Telecommunications/Other) $26,699
--------
371,859
--------
Mexico - 7.1%
6,700 Bufete Industrial S.A. (Heavy Construction) 116,413
16,000 Cementos Mexicanos S.A. (Building Materials) 56,744
2,775 Empresas La Moderna S.A. de C.V., ADR
(Tobacco)............................... 49,950
13,000 Empresas La Moderna S.A. de C.V., Series A
(Tobacco) ................................ 58,016
96,000 Grupo Financiero Banamex, Class B (Banks).. 199,467
--------
480,590
--------
Peru - 1.6%
1,492 Credicorp Ltd. (Banks) ..................... 29,653
37,500 Telefonica del Peru, Series B
(Telephone/Networks) ................... 76,136
--------
105,789
--------
Philippines - 3.5%
162,000 Aboitiz Equity Ventures+ (Conglomerates).... 30,298
61,000 DMCI Holdings (Building Materials)......... 43,655
119,000 Filinvest Land Inc. (Real Estate).......... 48,826
120,000 Metro Pacific Inc. (Conglomerates) ........ 35,725
1,400 Philippine Long Distance Telephone, ADR
(Telephone/Long Distance).............. 81,375
--------
239,879
--------
Portugal - 2.4%
600 Capital Portugal Fund (Mutual Funds) ...... 59,214
4,000 Sonse Investmentos (Conglomerates)......... 103,992
--------
163,206
--------
Singapore - 0.3%
4,000 Far East Levingston (Heavy Construction).... 22,112
--------
South Africa - 6.0%
1,500 Anglo American Gold Investment Company
(Metals and Mining) ................... 130,164
3,000 Barlow Ltd. (Building Materials)............ 31,329
55,700 Lonrho (Conglomerates)..................... 157,472
8,000 Sasol Ltd. (Metals and Mining) ............ 86,776
--------
405,741
--------
Taiwan - 5.1%
7,600 ASE Ltd., GDR (Semiconductors)............. 65,550
3,900 China Steel Corporation, GDR*** (Steel) ... 99,450
5,500 Taiwan Fund Inc. (Mutual Funds)............ 132,000
6,000 Yageo Corporation, GDR+*** (Electronics)... 46,890
--------
343,890
--------
Thailand - 4.9%
18,600 Bangkok Bank Public Company, Ltd. (F) (Banks) 175,770
4,100 Phatra Thanakit Company Ltd. (F)
(Diversified Financial Services) ....... 28,584
19,600 Phatra Thanakit Company Ltd.
(Diversified Financial Services) ....... ` 132,104
--------
336,458
--------
Turkey - 1.8%
317,000 Koc Holding (Holding)...................... 77,204
882,000 Trakya Cam Sanayil (Glass)................. 48,331
--------
125,535
--------
TOTAL COMMON STOCKS
(Cost $5,005,645)....................... 5,048,085
--------
PREFERRED STOCKS - 8.2%
Brazil - 8.2%
32,200,000 Banco Bradesco (Banks)..................... 262,949
800,000 Petroleo Brasileiros (Oil)................. 98,392
5,400,000 Uniao de Bancos Brasileiros (Banks)........ 146,219
46,500,000 Usiminas (Steel)........................... 49,086
--------
TOTAL PREFERRED STOCKS (Cost $542,825)...... 556,646
--------
The accompanying notes are an integral part of these financial statements.
<PAGE>
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
Portfolio Investments - (Continued)
June 30, 1996 - (Unaudited)
Principal Value
Amount (Note 1)
- --------- --------
CONVERTIBLE BONDS - 3.1%
Mexico - 2.4%
$150,000 Alfa S.A. de C.V.,
8.000% due 09/15/2000*** (Steel)......... $162,000
--------
Thailand - 0.7%
50,000 Ban Pu Public Company,
2.750% due 04/10/2003 (Coal)............. 51,775
--------
TOTAL CONVERTIBLE BONDS
(Cost $214,895)......................... 213,775
--------
Shares
- --------
WARRANTS - 0.5% (Cost $28,571)
Malaysia - 0.5%
24,000 Development and Commercial Bank Holdings, Warrants,
Expire 12/27/99+ (Banks)................. 31,557
--------
Principal
Amount
- ---------
REPURCHASE AGREEMENTS - 26.3%
$896,000 Agreement with Barclays Zoete Webb Tri-Party, 5.600%
dated 06/28/96, to be repurchased at $896,418,
on 07/01/96, collateralized $913,920
market value of U.S. Government
securities, having various maturities
and various interest rates ............... 896,000
896,000 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96 to be repurchased at
$896,418, on 07/01/96, collateralized by
$1,001,931 market value of U.S. Government
securities, having various maturities and
various interest rates .................. 896,000
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $1,792,000)....................... 1,792,000
---------
TOTAL INVESTMENTS (Cost $7,583,936*)..................... 112.3% 7,642,063
----------
OTHER ASSETS AND LIABILITIES (Net)....................... (12.3) (836,682)
------ ----------
NET ASSETS.............................................. 100.0% $6,805,381
====== ==========
* Aggregate cost for Federal tax purposes.
** Special Situation Security (See Note 6 to Financial Statements).
*** Security exempt from registration under Rule 144A of the
Securities Act of 1933.
These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
ABBREVIATION:
ADR American Depositary Receipt
ADS American Depositary Share
(F) Foreign or alien shares
GDR Global Depositary Receipt
GDS Global Depositary Share
ORD Ordinary
The accompanying notes are an integral part of these financial statements.
<PAGE>
MONTGOMERY FUNDS III
Statements of Assets and Liabilities
June 30, 1996 (Unaudited)
Montgomery
Montgomery Variable
Variable Series:
Series: Emerging
Growth Fund Markets Fund
----------- ------------
ASSETS:
Investments in securities, at value (Note 1)
Securities ................................... $ 875,457 $ 5,850,063
Repurchase agreements ....................... 384,000 1,792,000
---------- -----------
Total investments ................................ 1,259,457 7,642,063
Cash ............................................. 464 966
Foreign currency (Cost $211,894) ................. -- 212,134
Forward foreign currency exchange contracts:
Forward foreign currency exchange contracts to
buy, at value (Contract cost $250,187)
(Note 3) ..................................... -- 249,856
Receivables:
Expenses absorbed by Manager (Note 2) ........ 10,000 5,450
Dividends .................................... 310 4,573
Interest ..................................... 179 4,746
Investment securities sold ................... -- 274,849
Other Assets:
Organization costs (Note 1) .................. 54,357 53,149
---------- -----------
Total Assets ..................................... 1,324,767 8,447,786
---------- -----------
LIABILITIES:
Forward foreign currency exchange contracts:
Payable for forward foreign currency
exchange contracts to buy (Note 3) ......... -- 250,187
Payables:
Investment securities purchased .............. 47,572 1,324,072
Organizational Cost .......................... 55,687 56,847
Shares of beneficial interest redeem ......... 6,082 36
Custodian fees ............................... 686 3,598
Trustees' fees and expenses .................. 1,600 1,600
Organizational cost .......................... 39,340 56,847
Other accrued liabilities and expens ......... 14,314 6,065
---------- -----------
Total Liabilities ................................ 125,941 1,642,405
---------- -----------
NET ASSETS ....................................... $1,198,826 $6,805,381
========== ==========
Investments, at Identified Cost .................. $1,195,027 $7,583,936
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
MONTGOMERY FUNDS III
Statements of Assets and Liabilities (continued) June 30, 1996 (Unaudited)
Montgomery
Montgomery Variable
Variable Series:
Series: Emerging
Growth Fund Markets Fund
----------- ------------
NET ASSETS consist of:
Undistributed net investment income ........... $ 9,033 $ 21,957
---------- -----------
Accumulated net realized gain/(loss)
on securities sold, forward
foreign currency exchange contracts
and foreign currency transactions ........ 19,908 (2,674)
Net unrealized appreciation of investments,
forward foreign currency contracts,
foreign currency transactions and net
other assets ............................. 64,430 57,651
Shares of beneficial interest ................. 1,034 6,443
Additional paid-in capital .................... 1,104,421 6,722,004
----------- -----------
NET ASSETS .................................... $ 1,198,826 $ 6,805,381
=========== ===========
Net Asset Value, offering and redemption
price per share outstanding .............. $ 11.60 $ 10.56
----------- -----------
Number of Fund shares outstanding ............. 103,363 644,276
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
MONTGOMERY FUNDS III
Statements of Operations
For the Period Ended June 30, 1996 (Unaudited)
Montgomery
Montgomery Variable
Variable Series:
Series: Emerging
Growth Fund* Markets Fund*
------------ -------------
NET INVESTMENT INCOME:
Interest ......................................... $ 7,036 $ 13,798
Dividends (Net of foreign withholding
taxes of $19 and $497, respectively) ............. 1,269 8,159
------------ -------------
Total Investment Income .......................... 8,305 21,957
------------ -------------
EXPENSES:
Management fee (Note 2) .......................... 2,766 9,371
Transfer agency fees ............................. 21 --
Custodian fees (Note 2) .......................... 1,171 4,844
Legal and audit fees ............................. 21,154 23,525
Trustees' fees and expenses (Note 2) ............. 6,253 6,253
Printing fees .................................... 6,500 500
Amortization of organization expenses
(Note 1) .................................... 3,165 4,373
Other ............................................ 2,485 2,050
Fees deferred and expenses absorbed by
Manager (Note 2) ............................ (43,515) (50,916)
------------ -------------
Total Expenses ................................... 0 0
------------ -------------
NET INVESTMENT INCOME ............................ 8,305 21,957
============ =============
NET REALIZED AND UNREALIZED GAIN/
(LOSS) ON INVESTMENTS (Notes 1 and 3):
Net realized gain/(loss) on:
Security transactions ....................... 19,908 214
Forward foreign currency exchange contracts . -- (3,461)
Foreign currency transactions and
net other assets ....................... -- 573
------------ -------------
Net realized gain/(loss) on investments .......... 19,908 (2,674)
------------ -------------
Change in unrealized appreciation/
(depreciation) of:
Securities .................................. 64,430 58,127
Forward foreign currency exchange contracts.. -- (331)
Foreign currency transactions and
other assets ........................... -- (145)
------------ -------------
Net unrealized appreciation of investments
during the period ........................... 64,430 57,651
------------ -------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS ................................. 84,338 54,977
------------ -------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ................................ $ 92,643 $ 76,934
============ =============
* Montgomery Variable Series: Growth Fund and
Montgomery Variable Series: Emerging Markets Fund commenced
operations on February 9, 1996 and February 1, 1996, respectively.
The accompanying notes are an integral part of these financial statements.
<PAGE>
MONTGOMERY FUNDS III
Statements of Changes in Net Assets
For the Period Ended June 30, 1996 (Unaudited)
Montgomery
Montgomery Variable
Variable Series:
Series: Emerging
Growth Fund* Markets Fund*
------------ -------------
Net Increase/(Decrease) in Net Assets
from Operations:
Net investment income ......................... $ 8,305 $ 21,957
Net realized gain/(loss) on securities,
forward foreign currency exchange
contracts and foreign currency
transactions during the period ........... 19,908 (2,674)
Net unrealized appreciation of
securities, forward foreign currency
exchange contracts, foreign currency
transactions and net other
assets during the period ................. 64,430 57,651
----------- -----------
Net increase in net assets resulting from
operations ............................... 92,643 76,934
BENEFICIAL INTEREST TRANSACTIONS:
Net increase from beneficial interest
transactions (Note 4) .................... 986,794 6,228,447
----------- -----------
Net increase in net assets .................... 1,079,437 6,305,381
NET ASSETS:
Beginning of period ........................... 119,389 500,000
----------- -----------
End of period ................................. $ 1,198,826 $ 6,805,381
=========== ===========
Undistributed net investment income ........... $ 9,033 $ 21,957
=========== ===========
* Montgomery Variable Series: Growth Fund and
Montgomery Variable Series: Emerging Markets Fund
commenced operations on February 9, 1996 and February 1, 1996, respectively.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights
Selected Per Share Data for the Period Ended:
- --------------------------------------------------------------------------------
Montgomery Variable Series: Growth Fund
06/30/96
(Unaudited)*
-------------
Net asset value - beginning of period ....................... $ 10.08
----------
Net investment income ....................................... 0.09
Net realized and unrealized gain on investment............... 1.43
----------
Net increase in net assets resulting from
investment operations .................................... 1.52
----------
Net asset value - end of period ............................. $ 11.60
==========
Total return ** ............................................. 15.08%
==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........................ $ 1,199
Ratio of net investment income to average net assets......... 3.00%+
Ratio of operating expenses to average net assets............ 0.00%+
Portfolio turnover rate ..................................... 23%
Average commission rate paid (a) ............................ $0.0431
Net investment loss before deferral of fees and
absorption of expenses by Manager ...................... $0.37
Operating expense ratio before deferral
of fees and absorption of expenses by Manager .......... 15.73%+
* The Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.
** Total return represents aggregate total return for the period indicated.
+ Annualized.
(a) Average commission rate paid per share of securities purchased and
sold by the Fund.
Montgomery Variable Series: Emerging Markets Fund
06/30/96
(Unaudited)*
------------
Net asset value - beginning of period ......................... $ 10.00
---------
Net investment income ......................................... 0.03
Net realized and unrealized gain on investments ............... 0.53
---------
Net increase in net assets resulting from investment
operations ............................................... 0.56
---------
Net asset value - end of period ............................... $ 10.56
=========
Total return ** ............................................... 5.60%
=========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .......................... $ 6,805
Ratio of net investment income to average net assets........... 2.93%+
Ratio of operating expenses to average net assets.............. 0.00%+
Portfolio turnover rate ....................................... 16%
Average commission rate paid (a) .............................. $ 0.0002
Net investment loss before deferral of fees and
absorption of expenses by Manager ........................ ($ 0.04)
Operating expense ratio before deferral of fees and
absorption of expenses by Manager ........................ 6.79%+
* The Montgomery Variable Series: Emerging Markets Fund commenced
operations on February 1, 1996.
** Total return represents aggregate total return for the period indicated.
+ Annualized.
(a) Average commission rate paid per share of securities purchased and
sold by the Fund.
The accompanying notes are an integral part of these financial statements.
<PAGE>
The Montgomery Funds III
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Montgomery Fund III (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end
management investment company. As of June 30, 1996, the Trust had two series,
the Montgomery Variable Series: Growth Fund and the Montgomery Variable Series:
Emerging Markets Fund (the "Funds").
The Montgomery Funds III was organized as a Delaware business trust on
August 24, 1994. Prior to the public offerings of shares of the Fund, a limited
number of shares were sold to Montgomery Asset Management, L.P. and/or
affiliated persons of Montgomery Asset Management in private placement
offerings. Otherwise, the Funds had no significant operations prior to February
1, 1996, the date on which the Montgomery Variable Series: Emerging Markets Fund
commenced operations (i.e., commenced selling shares to the public).
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies.
a. PORTFOLIO VALUATION - The Funds' securities are valued using current
market valuations: either the last reported sales price or, lacking any reported
sales, and in the case of fixed income securities, the mean between the closing
bid and asked prices. 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 of Trustees. Securities 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 supervision of the Trust in accordance with methods which
are authorized by the Trust's Board of Trustees.
Short term debt obligations with remaining maturities in excess of 60 days
are valued at current market prices, as discussed above. Short-term securities
with maturities of 60 days or less carried at amortized cost, which approximates
market value.
b. DIVIDENDS AND DISTRIBUTIONS - Dividends, if any, from net investment
income of each Fund are declared and paid at least annually.
Distributions of any short-term capital gains earned by each Fund are
distributed no less frequently than annually. Additional distributions of net
investment income and capital gains for each Fund may be made in order to avoid
the application of a 4% non-deductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
-17-
<PAGE>
The Montgomery Funds III
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
differences are primarily due to differing treatments of income and gains on
various investment securities held by a Fund, timing differences and differing
characterizations of distributions made by a Fund.
c. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The Funds may engage in
forward foreign currency exchange contracts with off balance sheet risk in the
normal course of investing activities in order to manage exposure to market
risks. Forward foreign currency exchange contracts are valued at the forward
rate and are marked-to-market daily. The change in market value is recorded by
the Fund as an unrealized gain or loss.
When the contract is closed, a Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed. Forward foreign currency exchange
contracts have been used solely to establish a rate of exchange for settlement
of transactions. Although forward foreign currency exchange contracts limit the
risk of loss due to a decline in the value of the hedged currency, they also
limit any potential gain that might result should the value of the currency
increase. In addition, a Fund could be exposed to risks if the counterparties to
the contracts are unable to meet the terms of their contracts.
d. FOREIGN CURRENCY - Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates prevailing at
the end of the period, and purchases and sales of investment securities and
income and expenses are translated on the respective dates of such transactions.
Unrealized gains and losses which result from changes in foreign currency
exchange rates on investments have been included in the unrealized
appreciation/(depreciation) of securities. Net realized foreign currency gains
and losses resulting from movement in exchange rates include foreign currency
gains and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of a Fund and the amount
actually received and the portion of foreign currency gains and losses related
to fluctuations in exchange rates between the initial purchase trade date and
subsequent sale trade date.
e. REPURCHASE AGREEMENTS - The Funds may engage in repurchase agreement
transactions individually or jointly through a joint repurchase account with
other series of the Trusts pursuant to a joint repurchase agreement. Under the
terms of a typical repurchase agreement, a Fund writes a financial contract with
a counterparty and takes possession of a government debt obligation as
collateral. The Fund also agrees with the counterparty to allow the counterparty
to repurchase the financial contract at a specified date and price, thereby
determining the yield during the Fund's holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the collateral is at least equal at all
times to the total amount of the repurchase obligations, including interest. In
the event of counterparty default, a Fund has the right to use the collateral to
offset losses incurred. There could be potential loss to the Fund in the event a
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period while a Fund seeks to assert its
rights. The Fund's investment manager, acting under the supervision of the Board
of Trustees, reviews the value of the collateral and the creditworthiness of
those banks and dealers with which a Fund enters into repurchase agreements to
evaluate potential risks. The Funds may also participate on an individual or
joint basis in tri-party repurchase agreements which involves a counterparty and
a custodian bank.
-18-
<PAGE>
The Montgomery Funds III
NOTES TO FINANCIAL STATEMENTS (Continued)
f. 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 and interest income, including, where
applicable, amortization of discount on short-term investments, is recognized on
an accrual basis. Dividend income on foreign securities is recognized as soon as
each Fund is informed of the ex-dividend date.
g. FEDERAL INCOME TAXES - It is the intention of each Fund 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 each Fund from all or substantially all
federal income taxes.
h. ORGANIZATION COSTS - Expenses incurred in connection with the
organization of the Funds, including the fees and expenses of registering and
qualifying its shares for distribution under federal and state securities
regulations, are amortized on a straight-line basis over a period of five years
from commencement of operations.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
a. Montgomery Asset Management, L.P. is the Funds' 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. The sole limited partner of the
Manager is Montgomery Securities. Under the Advisers Act, both Montgomery Asset
Management, Inc. and Montgomery Securities may be deemed controlling persons of
the Manager. Although the operations and management of the Manager are
independent from those of Montgomery Securities, it is expected that the Manager
may draw upon the research and administrative resources of Montgomery Securities
at its discretion in a manner consistent with applicable regulations.
Pursuant to investment management agreements ("Investment Management
Agreements"), the Manager provides each Fund with advice on buying and selling
securities, manages the investments of each Fund including the placement of
orders for portfolio transactions, furnishes each Fund with office space and
certain administrative services, and provides the personnel needed by the Trust
with respect to the Manager's responsibilities under such Agreement. As
compensation, each Fund pays the Manager a monthly management fee (accrued
daily) at the following annual rates based upon the average daily net assets of
each Fund:
-19-
<PAGE>
<TABLE>
The Montgomery Funds III
NOTES TO FINANCIAL STATEMENTS (Continued)
<CAPTION>
First $500 Million Next $500 Million Over $1 Billion
------------------ ----------------- ---------------
<S> <C> <C> <C>
Montgomery Variable Series:
Growth Fund.................................. 1.00% 0.50% 0.80%
First $250 Million Over $250 Million
------------------ -----------------
Montgomery Variable Series:
Emerging Markets Fund........................ 1.25% 1.00%
</TABLE>
The Manager has agreed to reduce some or all of its management fee or
absorb each Funds expenses if necessary to keep the Funds' annual operating
expenses, exclusive of interest or taxes, at or below the average daily net
assets or the maximum allowed by applicable state expense limitations for each
Fund as follows:
Annual Rate
-----------
Montgomery Variable Series:
Growth Fund.................................. 1.75%
Montgomery Variable Series:
Emerging Markets Fund........................ 1.50%
Any reductions or absorptions made for each Fund by the Manager in its
fees are subject to recovery within the following three years provided each Fund
is able to affect such reimbursement and remain in compliance with applicable
expense limitations. Any of the Manager's voluntary absorptions are also subject
to recovery.
For the period ended June 30, 1996, the Manager has deferred fees and
absorbed expenses as follows:
Fees Expenses
Deferred Absorbed
-------- --------
Montgomery Variable Series:
Growth Fund...................... $ 2,766 $40,749
Montgomery Variable Series:
Emerging Markets Fund............ 9,371 41,545
As of June 30, 1996, the deferred management fees and and absorbed expenses
subject to recoupement are $43,515 and $50,916 for the Montgomery Variable
Series: Growth Fund and the Montgomery Variable Series: Emerging Markets Fund,
respectively.
b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager and/or Montgomery Securities, "affiliated persons" as defined in
the 1940 Act. Each Trustee who is not an "affiliated person" receives an annual
retainer and quarterly meeting fees totalling $35,000 per annum, as well as
reimbursement for expenses ($5,000 of which will be allocated to the Montgomery
Funds III).
c. The Fund has no sales load and does not pay distribution (Rule 12b-1)
fees.
-20-
<PAGE>
The Montgomery Funds III
NOTES TO FINANCIAL STATEMENTS (Continued)
3. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of investment securities,
other than short-term securities, for the period ended June 30, 1996, was as
follows:
Purchases Sales
---------- ---------
Montgomery Variable Series:
Growth Fund .......................... $ 870,052 $ 78,933
Montgomery Variable Series:
Emerging Markets Fund ................ 6,058,942 267,160
b. At June 30, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value for federal income tax purposes were as follows:
Tax Basis Tax Basis
Unrealized Unrealized
Appreciation Depreciation
------------ ------------
Montgomery Variable Series:
Growth Fund .............................. $ 94,829 $ 30,399
Montgomery Variable Series:
Emerging Markets Fund .................... 181,479 123,352
The schedule of forward foreign currency exchange contracts at June 30,
1996 was as follows:
Montgomery Variable Series:
Emerging Markets Fund:
Contract
Value Value
Date (Note 1)
Forward Foreign Currency Exchange Contracts to Buy: -------- --------
90,404 Brazilian Real .............................. 07/01/96 $ 90,030
1,319,128 Philippine Pesos ......................... 07/02/96 50,345
474,494 South African Commercial Rand .............. 07/02/96 109,481
--------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS TO BUY
(Contract Cost $250,187) ....................... $249,856
--------
4. TRANSACTIONS IN SHARES OF 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 were:
-21-
<PAGE>
The Montgomery Funds III
NOTES TO FINANCIAL STATEMENTS (Continued)
Period Ended
June 30, 1996*
--------------------------
Shares Amount
------ ------
Montgomery Variable Series:
Growth Fund:
Shares Sold.......................... 94,675 $ 1,023,858
Issued as Reinvestment
of Dividends...................... - -
Shares Redeemed...................... (3,155) (37,064)
------ -----------
Net Increase......................... 91,520 $ 986,794
------ -----------
Period Ended
June 30, 1996**
--------------------------
Shares Amount
------ ------
Montgomery Variable Series:
Emerging Markets Fund:
Shares Sold.......................... 651,218 $6,827,388
Shares Redeemed...................... (56,942) (598,941)
------- ----------
Net Increase......................... 594,276 $6,228,447
------- ----------
- ---------------
* Montgomery Variable Series: Growth Fund commenced operations on February 9,
1996.
** Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 1, 1996.
5. FOREIGN SECURITIES
The Montgomery Variable Series: Emerging Markets Fund purchases securities
in emerging market countries. Securities of foreign companies and foreign
governments involve special risks and considerations not typically associated
with investing in U.S. companies and the U.S. government. These risks include
re-evaluation of currencies, less reliable information about issuers,
differences in the clearance and settlement of securities transactions
practices, and future adverse political and economic developments. These risks
are heightened for investments in emerging market countries. Moreover,
securities of many foreign companies and foreign governments and their markets
may be less liquid and their prices more volatile than those securities of
comparable U.S. companies and U.S. government.
6. SPECIAL SITUATION SECURITIES
Each Fund may not invest more than 15% of its net assets in illiquid
securities. The following securities held by the Montgomery Variable Series:
Emerging Markets Fund on June 30, 1996, are generally unrestricted securities
for which reliable market prices can be established. These securities are valued
at their market prices. However, because the process of re-registering foreign
securities in the Montgomery Variable Series: Emerging Markets Fund's name can
take more than seven days, the following shares of each of these securities were
deemed restricted or illiquid in the hands of the Montgomery Variable Series:
Emerging Markets Fund at June 30,1996. The Montgomery Variable Series: Emerging
Markets Fund bears the cost of re-registering these securities:
-22-
<PAGE>
The Montgomery Funds III
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
06/30/96
Acquisition Market Value % of Total
Security Date Shares Value Per Share Cost Net Assets
- -------- ----------- ------ -------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Ciputra Development................. 6/12/96 22,000 $ 44,662 $ 2.03 $ 45,690 0.66%
Edaran Otomobil Nasional Berhad..... 5/21/96 8,000 76,649 9.58 73,376 1.13
IOI Industrial Oxygen Inc. ......... 5/21/96 17,000 23,580 1.39 25,410 0.35
Resorts World Berhad................ 6/19/96 20,000 114,652 5.73 114,692 1.68
Telekom Malaysia.................... 5/14/96 3,000 26,699 8.90 28,996 0.39
-------- ----
$286,242 4.21%
-------- ----
</TABLE>
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS III
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Independent Auditors' Report for the Montgomery
Variable Series: Growth Fund, dated as of April 11,
1995, the accompanying Statement of Assets and
Liabilities as of April 7, 1995 and the Notes to
Financial Statement, all incorporated by reference to
Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement as filed with the Commission
on April 17, 1995 ("Pre-Effective Amendment No. 1").
Audited financial statements have not been filed for
the period ending December 31, 1995 because the
Registrant had only its initial shareholder, and did
not commence operations, until February 1, 1996.
(2) Portfolio Investments as of June 30, 1996; Statements
of Assets and Liabilities as of June 30, 1996;
Statements of Operations for the Period Ended June
30, 1996; Statements of Changes in Net Assets for the
Period Ended June 30, 1996; Financial Highlights for
a Fund share outstanding throughout the period ended
June 30, 1996, for each of Montgomery Variable
Series: Growth Fund and Montgomery Variable Series:
Emerging Markets Fund; and Notes to Financial
Statements (all unaudited); all included with and
incorporated by reference to Part B.
(b) Exhibits:
(1) Agreement and Declaration of Trust is incorporated by
reference to the Registrant's Registration Statement
as filed with the Commission on September 27, 1994
("Registration Statement").
(2) By-Laws are incorporated by reference to the
Registration Statement.
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement is
incorporated by reference to Pre-Effective Amendment
No. 1.
(6) Form of Underwriting Agreement - Not applicable.
(7) Benefit Plan(s) - Not applicable.
(8) Custody Agreement is incorporated by reference to
Pre-Effective Amendment No. 1.
(9)(A) Form of Administrative Services Agreement is
incorporated by reference to Pre-Effective Amendment
No. 1.
(B) Form of Participation Agreement is incorporated by
reference to Pre-Effective Amendment No. 1.
C-1
<PAGE>
(10) Consent and Opinion of Counsel as to legality of
shares is incorporated by reference to Pre-Effective
Amendment No. 1.
(11) Consent of Independent Public Accountants.
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Letter of Understanding re: Initial Capital is
incorporated by reference to Pre-Effective Amendment
No. 1.
(14) Model Retirement Plan Documents - Not applicable.
(15) Rule 12b-1 Plan - Not applicable.
(16) Performance Computation Schedule for Montgomery
Variable Series: International Small Cap Fund is
incorporated by reference to Post-Effective Amendment
Number 2 to the Registrant's Registration Statement
as filed with the Commission on April 26, 1996
("Post-Effective Amendment No. 2"). Performance
Computation Schedule for Montgomery Variable Series:
Growth Fund and Montgomery Variable Series: Emerging
Markets Fund is incorporated by reference to
Pre-Effective Amendment No. 1.
(17) Power of Attorney is incorporated by reference to
Post-Effective Amendment Number 1 to the Registrant's
Registration Statement as filed with the Commission
on January 16, 1996 ("Post-Effective Amendment No.
1").
(18) Specimen Price-Make-Up Sheets (Item 19(b)5 of N-1A)
for Montgomery Variable Series: Growth Fund and
Montgomery Variable Series: Emerging Markets Fund are
incorporated by reference to Pre-Effective Amendment
No. 1.
(19) Financial Data Schedule - Not applicable.
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, The Montgomery
Funds (a Massachusetts business trust) and The Montgomery Funds II (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 II are deemed to be under the common control of each of
those three entities.
Item 26. Number of Holders of Securities
Number of
Record Holders
Title of Class as of June 30, 1996
--------------
Shares of Beneficial
Interest, $0.01 par value
Montgomery Variable Series: Growth Fund 3
Montgomery Variable Series: Emerging Markets Fund 4
Montgomery Variable Series: International Small Cap Fund 0
C-2
<PAGE>
Item 27. Indemnification
Article VII, Section 3 of the Agreement and Declaration of
Trust empowers the Trustees of the Trust, to the full extent permitted by law,
to purchase with Trust assets insurance for indemnification from liability and
to pay for all expenses reasonably incurred or paid or expected to be paid by a
Trustee or officer in connection with any claim, action, suit or proceeding in
which he or she becomes involved by virtue of his or her 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 principal
underwriter of The Montgomery Funds I and 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 III, is a Managing Director of
Montgomery Securities. R. Stephen Doyle 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 A.
Castro and John D. Boich are Managing Directors of MAM, L.P. Information about
the individuals who function as officers of the Registrant (namely, Messrs.
Doyle, Geist, Story and Demarest, Mary Jane Fross and five of the eight Managing
Directors, Josephine Jimenez and Messrs. Sudweeks, Honour, Castro and Boich) is
set forth in Part B. Mr. Roberts is a Portfolio Manager for MAM, L.P., and has
been employed there since 1990. Mr. Brown is a Senior Portfolio Manager for MAM,
L.P. Prior to joining MAM, L.P. in May 1994, Mr. Brown was an analyst and
portfolio manager at Merus Capital Management in San Francisco, California. Mr.
Stevens is a Portfolio Manager for MAM, L.P.
Item 29. Principal Underwriter - Not applicable.
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will be kept
by the Registrant's Transfer Agent, DST Systems, Inc., 1004 Baltimore, Kansas
City, Missouri 64105, except those records relating to
C-3
<PAGE>
portfolio transactions and the basic organizational and Trust documents of the
Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and (11) of
Rule 31a-1(b)), which will be kept by the Registrant at 101 California Street,
San Francisco, California 94111.
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to file a post-effective
amendment including financial statements of Montgomery Variable Series:
International Small Cap Fund, which need not be certified, within four to six
months from the later of the effective date of that series of the Registrant or
the commencement of operations of that series.
(c) Not applicable.
(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.
<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 the effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933, as amended,
and that the Registrant has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, and the State of California, on this
12th day of August, 1996.
THE MONTGOMERY FUNDS III
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
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
R. Stephen Doyle* Principal Executive August 12, 1996
- ----------------- Officer; Principal
R. Stephen Doyle Financial and Accounting
Officer; and Trustee
Andrew Cox * Trustee August 12, 1996
- --------------
Andrew Cox
Cecilia H. Herbert * Trustee August 12, 1996
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee August 12, 1996
- --------------------
John A. Farnsworth
Jerome S. Markowitz * Trustee August 12, 1996
- ---------------------
Jerome S. Markowitz
* By: /s/ JULIE ALLECTA
-----------------------------------------------
Julie Allecta, Attorney-in-Fact
pursuant to Power of Attorney previously filed
<PAGE>
Exhibit(s) Index
Exhibit No. Document Page No.
- ----------- -------- --------
(11) Consent of Independent Public Accountants
EXHIBIT 11
Consent of Independent Public Accountant
<PAGE>
Deloitte &
Touche LLP
- ------------ ------------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
The Montgomery Funds III:
We consent to the reference to us in this Post-Effective Amendment No. 3 to
Registration Statement No. 33-84450 of The Montgomery Funds III on Form N-1A
under the caption "General Information" appearing in the Combined Statement of
Additional Information which also is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
August 2, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ----------------
