As filed with the Securities and Exchange Commission on April 15, 1999
File 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. 9
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
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)
(415) 572-3863
(Registrant's Telephone Number, Including Area Code)
Greg M. Siemons, Assistant Secretary
101 California Street
San Francisco, California 94111
(Name and Address of Agent for Service)
-------------------------
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to Rule 485(b)
_X_ on April 30, 1999 pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)(1)
___ 75 days after filing pursuant to Rule 485(a)(2)
___ on ___________ pursuant to Rule 485(a)(1)
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
DAVID A. HEARTH, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
(415) 835-1600
<PAGE>
THE MONTGOMERY FUNDS III
CONTENTS OF THE POST-EFFECTIVE AMENDMENT
This Post-Effective Amendment to the registration statement of the Registrant
contains the following documents:
Facing Sheet
Contents of the Post-Effective Amendment
Part A - Prospectus for Montgomery Variable Series: Growth Fund
Part A - Prospectus for Montgomery Variable Series: Emerging Markets
Fund
Part A - Prospectus for Montgomery Variable Series: Small Cap
Opportunities Fund
Part B - Combined Statement of Additional Information for Montgomery
Variable Series: Growth Fund, Montgomery Variable Series:
Emerging Markets Fund and Montgomery Variable Series: Small
Cap Opportunities Fund
Part C - Other Information
Signature Page
Exhibits
<PAGE>
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PART A
PROSPECTUS FOR
MONTGOMERY VARIABLE SERIES: GROWTH FUND
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<PAGE>
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Prospectus
April 30, 1999
The Montgomery Funds III(SM)
MONTGOMERY VARIABLE SERIES: Growth Fund
The Montgomery Funds III has registered the mutual fund offered in this
prospectus with the U.S. Securities and Exchange Commission (SEC). That
registration does not imply, however, that the SEC endorses the Fund.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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<PAGE>
Montgomery Variable Series: Growth Fund
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- -------------------------
How to Contact Us
- -------------------------
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 5 A.M. to 5 P.M.
Pacific time
Montgomery Web Site
www.montgomeryfunds.com
Address General
Correspondence to:
The Montgomery Funds III
101 California Street
San Francisco, CA 94111-9361
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2
<PAGE>
Montgomery Variable Series: Growth Fund
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TABLE OF CONTENTS
Objective.....................................................................5
Strategy......................................................................5
Risks.........................................................................5
Past Fund Performance.........................................................6
Fees and Expenses.............................................................6
Portfolio Management..........................................................7
Additional Investment Strategies and Related Risks............................7
Mixed and Shared Funding.................................................7
The Euro: Single European Currency.......................................7
Defensive Investments....................................................8
Portfolio Turnover.......................................................8
The Year 2000............................................................8
Financial Highlights....................................................10
Account Information..........................................................11
How to Invest in the Fund...............................................11
How to Redeem an Investment in the Fund.................................11
Exchange Privileges and Restrictions....................................11
How Net Asset Value Is Determined.......................................11
Dividends and Distributions.............................................12
Effect of Distributions on the Fund's Net Asset Value...................12
Taxation................................................................12
Our Partners............................................................13
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3
<PAGE>
Montgomery Variable Series: Growth Fund
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This prospectus contains important information about the investment objectives,
strategies and risks of the Montgomery Variable Series: Growth Fund (the
"Fund"), a series of The Montgomery Funds III (the "Trust"), that you should
know before you invest in the Fund. Please read it carefully and keep it on hand
for future reference.
Please be aware that the Fund:
[ ] Is not a bank deposit
[ ] Is not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Fund.
Shares of the Fund are sold only to insurance company separate accounts
("Accounts") to fund the benefits of variable life insurance policies or
variable annuity contracts ("Variable Contracts") owned by their respective
policy or contract holders, and to qualified pension and retirement plans.
References to shareholders or investors in this prospectus are to the Accounts
or qualified pension and retirement plans. The variable annuity and variable
life insurance contracts involve fees and expenses not described in this
prospectus. Please refer to the prospectuses related to those contracts.
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4
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Montgomery Variable Series: Growth Fund
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Montgomery Variable Series: Growth Fund
Objective
[ ] Seeks long-term capital appreciation by investing in growth-oriented U.S.
companies
Strategy
The Fund may invest in U.S. companies of any size, but invests at least 65% of
its total assets in those companies whose shares have a total stock market value
(market capitalization) of at least $1 billion.
The Fund's strategy is to identify well-managed U.S. companies whose share
prices appear to be undervalued relative to the firms' growth potential. The
managers rigorously analyze all prospective holdings by subjecting them to the
following three steps of their investment process:
[ ] Identify companies with improving business fundamentals
[ ] In-depth analysis of each company's current business and future prospects
[ ] Analyze each company's price to determine whether its growth prospects have
been discovered by the market
Risks
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. To the extent that the Fund is overweighted in certain market sectors
compared with the Standard and Poor's 500 Composite Price Index, the Fund may be
more volatile than the S&P 500.
When the Fund's portfolio managers think that the market conditions are not
favorable or when they are unable to locate attractive investments, they may
temporarily increase the Fund's cash position. Larger cash positions can be a
defensive measure in adverse market conditions. Should the market advance,
however, the Fund may not participate as much as it might have if more of its
assets were invested in stocks.
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5
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Montgomery Variable Series: Growth Fund
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Past Fund Performance The bar chart below shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The table
immediately below the bar chart shows the risks of investing in the Fund by
comparing the Fund's performance with a commonly used index for its market
segment. Fees and expenses involved with variable annuity and variable life
insurance contracts are not included in the Fund's total return. The Fund's
total return would be lower if those fees and expenses were included. Of course,
past performance is no guarantee of future results.
1997 1998
- ---------------------
28.57% 2.93% During the two-year period described in the
bar chart on the left, the Fund's best
quarter was Q4 1998 (+18.65%) and its worst
quarter was Q3 1998 (-20.04%).
Average Annual Returns Through 12/31/98.
Montgomery Variable Series: Growth Fund 2.93% 19.73%
S&P 500 Index 28.60% 27.63%*
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* Since 1/31/96 1 Year Inception (2/9/96)
Fees and Expenses
<TABLE>
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management Fee 1.00%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.40%
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Total Annual Fund Operating Expenses 1.40%
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Fee Reduction and/or Expense Reimbursement 0.15%
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Net Expenses 1.25%
<FN>
* Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expense) to 1.25%. This contract has a one-year
term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Years 3 Years 5 Years 10 Years
- -----------------------------------------------------
$127 $428 $750 $1,661
PORTFOLIO MANAGEMENT
Roger Honour, Kathryn Peters and Andrew Pratt For financial highlights,
For more detail see Page 7. see page 10.
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6
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Montgomery Variable Series: Growth Fund
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PORTFOLIO MANAGEMENT
The investment manager of the Montgomery Variable Series: Growth Fund is
Montgomery Asset Management, LLC. Founded in 1990, Montgomery Asset Management
is a subsidiary of Commerzbank AG, one of the largest publicly held commercial
banks in Germany. As of December 31, 1998, Montgomery Asset Management managed
approximately $4.5 billion on behalf of some 300,000 investors in The Montgomery
Funds.
ROGER HONOUR, senior portfolio manager of the Fund (since 1996). Prior to
joining Montgomery in June 1993, Mr. Honour was a vice president and portfolio
manager at Twentieth Century Investors in Kansas City, Missouri. From 1990 to
1992, he served as vice president and portfolio manager at Alliance Capital
Management.
KATHRYN PETERS, portfolio manager of the Fund (since 1996). Ms. Peters joined
Montgomery in 1995. From 1993 to 1995, she was an associate in the investment
banking division of Donaldson, Lufkin & Jenrette in New York. Prior to that she
analyzed mezzanine investments for Barclays de Zoete Wedd.
ANDREW PRATT, CFA, portfolio manager of the Fund (since 1996) and director of
research. Mr. Pratt joined Montgomery in 1993 from Hewlett-Packard Company,
where, as an equity analyst, he managed a portfolio of small-cap technology
companies and researched private placement and venture capital investments.
Management Fees
The management fee rate paid by the Fund to Montgomery Asset Management over the
past fiscal year was 1.00% and is calculated based upon average daily net
assets.
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS
Mixed and Shared Funding
Shares of the Fund are sold to insurance company separate accounts that fund
both variable life insurance contracts and variable annuity contracts (as well
as to qualified pension and retirement plans). This is referred to as "mixed
funding." In addition, shares of the Fund are sold to separate accounts of more
than one insurance company. This is referred to as "shared funding." At this
time, the Fund does not foresee any disadvantage to any of the Fund's
shareholders resulting from either mixed or shared funding. The Board of
Trustees, however, will continue to review the Fund's mixed and shared funding
to determine whether disadvantages to any shareholders could develop.
The Euro: Single European Currency
On January 1, 1999, the European Union (EU) introduced a single European
currency called the euro. The 11 of the 15 members EU members that have begun to
convert their currencies to the euro are Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain
(leaving out Britain, Sweden, Denmark and Greece). For the first three years,
the euro will be a phantom currency (only an accounting entry).
Euro notes and coins will begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
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7
<PAGE>
Montgomery Variable Series: Growth Fund
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[ ] Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
[ ] The applicable conversion rate for contracts stated in the national
currency of an EU member
[ ] The ability of clearing and settlement systems to process transactions
reliably
[ ] The effects of the euro on European financial and commercial markets
[ ] The effect of new legislation and regulations to address euro-related
issues
These and other factors could cause market disruptions and affect the value of
your shares if the Fund invests in companies that conduct business in Europe.
Montgomery and its key service providers have taken steps to address
euro-related issues, but there can be no assurance that these efforts will be
sufficient.
Defensive Investments
At the discretion of its portfolio managers, the Fund may invest up to 100% of
its assets in cash for temporary defensive purposes. Such a stance may help the
Fund minimize or avoid losses during adverse market, economic or political
conditions. During such a period, the Fund may not achieve its investment
objective. For example, should the market advance during this period, the Fund
may not participate as much as it would have if it had been more fully invested.
Portfolio Turnover
The Fund's portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long the Fund has owned that security.
Buying and selling securities generally involves some expense to the Fund, such
as commission paid to brokers and other transaction costs. By selling a
security, the Fund may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the Fund's annual
portfolio turnover, the greater its brokerage costs and the greater the
likelihood that it will realize taxable capital gains. Increased brokerage costs
may adversely affect the Fund's performance. Also, unless you are a tax-exempt
investor or you purchase shares through a tax-exempt investor or a tax-deferred
account, the distribution of capital gains may affect your after-tax return.
Annual portfolio turnover of 100% or more is considered high. See "Financial
Highlights," beginning on page 10, for the Fund's historical portfolio turnover.
The Year 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect the Fund's operations,
including pricing, securities trading and the servicing of shareholder accounts.
Montgomery is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during and after 2000. We are now renovating
and testing our internal systems. Montgomery is diligently working with external
partners, suppliers, vendors and other service providers to ensure that the
systems with which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, Montgomery is further developing contingency plans
intended to ensure that unexpected systems failures will not adversely affect
the Fund's operations. Montgomery intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternative solutions if
necessary.
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8
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Montgomery Variable Series: Growth Fund
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Despite Montgomery's efforts and contingency plans, noncompliant computer
systems could have a material adverse effect on the Fund's business, operations
or financial condition. Additionally, the Fund's performance could be hurt if a
computer system failure at a company or governmental unit affects the prices of
securities the Fund owns. Issuers in countries outside of the United States,
particularly in emerging markets, may not be required to make the same level of
disclosure about year 2000 readiness as required in the United States. The
Manager, of course, cannot audit any company and its major suppliers to verify
their year 2000 readiness. Montgomery understands that many foreign countries
and companies are well behind their U.S. counterparts in preparing for 2000.
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9
<PAGE>
Montgomery Variable Series: Growth Fund
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FINANCIAL HIGHLIGHTS
<TABLE>
The following financial information for the period ended December 31, 1998, was
audited by PricewaterhouseCoopers LLP, whose report, dated February 12, 1999,
appears in the 1998 Annual Report of the Fund. The information for the period
ended December 31, 1997, was also audited by PricewaterhouseCoopers LLP, whose
report is also included here. Information for the period ended December 31,
1996, was audited by other independent accountants, whose report is not included
here.
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
MONTGOMERY VARIABLE SERIES:
GROWTH FUND
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1998 1997 1996(a)
THE YEAR ENDED DECEMBER 31:
<S> <C> <C> <C>
Net Asset-Value Beginning of Year $ 15.09 $ 12.33 $ 10.08
Net investment income/(loss) 0.09 0.16 0.15
Net realized and unrealized gain/(loss) on
investments 0.35 3.35 2.59
Net increase/(decrease) in net assets
resulting from investment operations 0.44 3.51 2.74
Distributions to shareholders:
Dividends from net investment income (0.06) (0.16) (0.15)
Distributions in excess of net investment -- --
income (0.08) (0.59) (0.34)
Distributions from net realized capital
gains -- --
Distributions in excess of net capitalized
gains -- --
Distributions from capital -- --
Total distributions: (0.14) (0.75) (0.49)
Net Asset Value-End of Year $ 15.39 $ 15.09 $ 12.33
Total Return* 2.93% 28.57% 27.22%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $ 13,452 $ 12,597 $ 2,127
Ratio of net investment income/(loss) to
average net assets 0.57% 1.74% 2.55%+
Net investment income/(loss) before deferral of
fees by Manager $ 0.07 $ 0.01 $ (0.27)
Portfolio turnover rate 57% 53% 78%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 1.40% 1.97% 6.98%+
Expense ratio including interest and tax expenses 1.25% 0.35% 0.01%+
Expense ratio excluding interest and tax expenses -- 0.34% --
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<FN>
(a) The Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.
* Total return represents aggregate total return for the periods indicated.
+ Annualized.
</FN>
</TABLE>
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10
<PAGE>
Montgomery Variable Series: Growth Fund
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ACCOUNT INFORMATION
How to Invest in the Fund
The Trust offers shares of the Fund, without sales charge, at their
next-determined net asset value after receipt of an order with payment only by
one of the insurance companies for the Accounts (to fund benefits under variable
life insurance contracts and variable annuity contracts), or by a qualified
pension or retirement plan.
How to Redeem an Investment in the Fund
The Trust redeems shares of the Fund on any day that the New York Stock Exchange
(NYSE) is open for trading. The redemption price is the net asset value per
share next determined after the shares are validly tendered for redemption by
the Accounts, or by the trustee in the case of qualified pension and retirement
plans.
Exchange Privileges and Restrictions
Shares of the Fund may be exchanged for shares of another series of the Trust on
the basis of their relative net asset values (with no sales charge or exchange
fee) next determined after the time of the request by an Account or by a
qualified pension or retirement plan, subject to the terms of the Account or
plan. Holders of Variable Contracts should refer to the prospectuses related to
their contracts with regard to their exchange privileges.
How Net Asset Value Is Determined
How and when we calculate the Fund's price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate the Fund's NAV by
dividing the total value of its assets by the number of outstanding shares. We
base the value of the Fund's investments on their market value, usually the last
price reported for each security before the close of market that day. A market
price may not be available for securities that trade infrequently. Occasionally,
an event that affects a security's value may occur after the market closes. This
is more likely to happen with foreign securities traded in foreign markets that
have different time zones than in the United States. Major developments
affecting the prices of those securities may occur after the foreign markets in
which such securities trade have closed but before the Fund calculates its NAV.
In this case, Montgomery, in consultation with the Fund's Board of Trustees or
Pricing Committee, will make a good-faith estimate of the security's
"fair-value," which may be higher or lower than the security's closing price in
its relevant market. Short-term obligations with maturities of 60 days or less
are valued at amortized cost as reflecting fair value.
We calculate the NAV of the Fund after the close of trading on the NYSE every
day that the NYSE is open. We do not calculate NAVs on the days that the NYSE is
closed for trading. Certain exceptions apply as described below. If we receive
your order by the close of trading on the NYSE, you can purchase shares at the
price calculated for that day. The NYSE usually closes at 4 P.M. on weekdays,
except for holidays. If your order and payment are received after the NYSE has
closed, your shares will be priced at the next NAV we determine after receipt of
your order.
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. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares
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11
<PAGE>
Montgomery Variable Series: Growth Fund
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even without any change in the foreign-currency denominated values of such
securities. In addition, some foreign exchanges are open for trading when the
U.S. market is closed. As a result, the Fund's foreign securities--and its
price--may fluctuate during periods when you can't buy, sell or exchange shares
in the Fund. More details about how we calculate the Fund's NAV are in the
Statement of Additional Information.
Dividends and Distributions
<TABLE>
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Fund intends to distribute according to the following schedule:
<CAPTION>
Income Dividends Capital Gains
---------------- -------------
<S> <C> <C>
Montgomery Variable Series: Declared and paid in the last Declared and paid in the
Growth Fund quarter of each year* last quarter of each year*
<FN>
*Additional distributions, if necessary, may be made following the Fund's fiscal
year end (December 31) in order to avoid the imposition of tax on the Fund.
</FN>
</TABLE>
Unless the Fund is otherwise instructed, all dividends and other distributions
will be reinvested automatically in additional shares of the Fund and credited
to the shareholder's account at the closing net asset value on the reinvestment
date.
Effect of Distributions on the Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of the
Fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in the Fund's daily net asset value.
The share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31 the
Growth Fund declared a dividend in the amount of $0.50 per share. If the Growth
Fund's share price was $10.00 on December 30, the Fund's share price on December
31 would be $9.50, barring market fluctuations.
Taxation
The Fund has elected and intends to continue to qualify to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. Accordingly, the Fund's
policy is to distribute to its shareholders all of its investment company
taxable income and any net realized capital gains for each fiscal year in a
manner that would not subject the Fund to any federal income tax or excise taxes
based on net income. The Fund is also required to satisfy diversification
requirements of the Investment Company Act and Section 817(h) of the Code, which
allows only Accounts and qualified pension and retirement plans to be
shareholders of the Fund. Failure to comply with 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. See
the Statement of Additional Information for more information.
Holders of Variable Contracts should refer to the prospectuses relating to their
contracts regarding the federal income tax-treatment of ownership of such
contracts.
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12
<PAGE>
Montgomery Variable Series: Growth Fund
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Our Partners
As a Montgomery shareholder, you may see the names of our partners on a regular
basis. We all work together to ensure that your investments are handled
accurately and efficiently.
DST Systems, located in Kansas City, Missouri, provides transfer agent services
and performs certain record keeping and accounting functions for the Fund.
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13
<PAGE>
Montgomery Variable Series: Growth Fund
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You can find more information about the investment policies of the Montgomery
Variable Series: Growth Fund in the Statement of Additional Information (SAI),
incorporated by reference in this prospectus.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about the Montgomery Variable Series: Growth
Fund, including the SAI, at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. To obtain information on the operation of the
Public Reference Room please call 800.SEC.0330. Reports and other information
about the Montgomery Variable Series: Growth Fund are available at the SEC's Web
site at www.sec.gov. You can also obtain copies of this information, upon
payment of a duplicating fee, by writing the Public Reference Section of the
SEC, Washington, D.C., 20549-6009.
You can find further information about the Montgomery Variable Series: Growth
Fund in our annual and semiannual shareholder reports, which discuss the market
conditions and investment strategies that significantly affected the Fund's
performance during its most recent fiscal period. To request a copy of the most
recent annual or semiannual report, please call us at 800.572.FUND [3863],
option 3.
Corporate Headquarters:
The Montgomery Funds III
101 California Street
San Francisco, CA 94111-9361
800.572.FUND [3863]
www.montgomeryfunds.com
SEC File No.: The Montgomery Funds III 811-8782
Funds Distributor, Inc. 4/99
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14
<PAGE>
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PART A
PROSPECTUS FOR
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
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<PAGE>
- --------------------------------------------------------------------------------
Prospectus
April 30, 1999
The Montgomery Funds III(SM)
MONTGOMERY VARIABLE SERIES: Emerging Markets Fund
The Montgomery Funds III has registered the mutual fund offered in this
prospectus with the U.S. Securities and Exchange Commission (SEC). That
registration does not imply, however, that the SEC endorses the Fund.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
- -------------------------
How to Contact Us
- -------------------------
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 5 A.M. to 5 P.M.
Pacific time
Montgomery Web Site
www.montgomeryfunds.com
Address General
Correspondence to:
The Montgomery Funds III
101 California Street
San Francisco, CA 94111-9361
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2
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Objective.....................................................................5
Strategy......................................................................5
Risks.........................................................................5
Past Fund Performance.........................................................6
Fees and Expenses.............................................................6
Portfolio Management..........................................................7
Additional Investment Strategies and Related Risks............................7
Mixed and Shared Funding.................................................7
The Euro: Single European Currency.......................................8
Defensive Investments....................................................8
Portfolio Turnover.......................................................8
The Year 2000............................................................8
Financial Highlights....................................................10
Account Information..........................................................11
How to Invest in the Fund...............................................11
How to Redeem an Investment in the Fund.................................11
Exchange Privileges and Restrictions....................................11
How Net Asset Value Is Determined.......................................11
Dividends and Distributions.............................................12
Effect of Distributions on the Fund's Net Asset Value...................12
Taxation................................................................12
Our Partners............................................................13
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3
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
This prospectus contains important information about the investment objectives,
strategies and risks of the Montgomery Variable Series: Emerging Markets Fund
(the "Fund"), a series of The Montgomery Funds III (the "Trust"), that you
should know before you invest in the Fund. Please read it carefully and keep it
on hand for future reference.
Please be aware that the Fund:
[ ] Is not a bank deposit
[ ] Is not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Fund.
Shares of the Fund are sold only to insurance company separate accounts
("Accounts") to fund the benefits of variable life insurance policies or
variable annuity contracts ("Variable Contracts") owned by their respective
policy or contract holders, and to qualified pension and retirement plans.
References to shareholders or investors in this prospectus are to the Accounts
or qualified pension and retirement plans. The variable annuity and variable
life insurance contracts involve fees and expenses not described in this
prospectus. Please refer to the prospectuses related to those contracts.
- --------------------------------------------------------------------------------
4
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
Montgomery Variable Series: Emerging Markets Fund
Objective
[ ] Seeks long-term capital appreciation by investing in companies based or
operating primarily in developing economies throughout the world
Strategy
The Fund invests at least 65% of its total assets in the stocks of companies
based in the world's developing economies. The Fund typically maintains
investments in at least six of these countries at all times, with no more than
25% of its assets in any single one of them. These may include:
[ ] Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Jamaica,
Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela
[ ] Asia: Bangladesh, China/Hong Kong, India, Indonesia, Malaysia, Pakistan,
the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and
Vietnam
[ ] Europe: Czech Republic, Greece, Hungary, Kazakhstan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine
[ ] The Middle East: Israel and Jordan
[ ] Africa: Egypt, Ghana, Ivory Coast, Kenya, Morocco, Nigeria, South Africa,
Tunisia and Zimbabwe
The Fund's strategy combines computer-based screening techniques with in-depth
financial review and on-site analysis of companies, countries and regions to
identify potential investments. The Fund's portfolio managers and analysts
frequently travel to the emerging markets to gain firsthand insight into the
economic, political and social trends that affect investments in those
countries. These techniques help determine in which stocks and countries the
Fund will invest. The portfolio managers strive to keep the Fund well
diversified across individual stocks, industries and countries to reduce its
overall risk.
Risks
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. In addition, the risks of
investing in emerging markets are considerable. Emerging stock markets tend to
be much more volatile than the U.S. market due to the relative immaturity, and
occasional instability, of their political and economic systems. In the past
many emerging markets restricted the flow of money into or out of their stock
markets, and some continue to impose restrictions on foreign investors. These
markets tend to be less liquid and offer less regulatory protection for
investors. The economies of emerging countries may be predominantly based on
only a few industries or on revenue from particular commodities, international
aid or other assistance. In addition, most of the foreign securities in which
the Fund invests are denominated in foreign currencies, whose value may decline
against the U.S. dollar.
- --------------------------------------------------------------------------------
5
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
Past Fund Performance The bar chart below shows the risks of investing in the
Fund and how the Fund's total return has varied from year-to-year. The table
immediately below the bar chart shows the risks of investing in the Fund by
comparing the Fund's performance with a commonly used index for its market
segment. Fees and expenses involved with variable annuity and variable life
insurance contracts are not included in the Fund's total return. The Fund's
total return would be lower if those fees and expenses were included. Of course,
past performance is no guarantee of future results.
1997 1998
- ---------------------
(0.58%) (37.53%) During the two-year period described in the
bar chart on the left, the Fund's best
quarter was Q2 1997 (+11.42%) and its worst
quarter was Q3 1998 (-23.02%).
<TABLE>
Average Annual Returns Through 12/31/98.
<CAPTION>
<S> <C> <C>
Montgomery Variable Series: Emerging Markets Fund (37.53%) (13.15%)
MSCI Emerging Markets Free Index (25.34%) (13.57%)*
IFC Global Composite Index (21.07%) (11.85%)*
- -------------------------------------------------------------------------------------------------------------
<FN>
* Since 1/31/96. 1 Year Inception (2/2/96)
</FN>
</TABLE>
Fees and Expenses
<TABLE>
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management Fee 1.25%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.55%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.80%
Fee Reduction and/or Expense Reimbursement 0.00%
- --------------------------------------------------------------------------------------------------------
Net Expenses (including interest and tax expense) 1.80%
<FN>
* Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expense) to 1.75%. This contract has a one-year
term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Years 3 Years 5 Years 10 Years
- ----------------------------------------------------
$177 $560 $968 $2,103
PORTFOLIO MANAGEMENT
Josephine Jimenez, Bryan Sudweeks, Frank Chiang For financial highlights,
Jesus Isidoro Duarte, Jose Fiuza. see page 10.
For more details see page 7.
- --------------------------------------------------------------------------------
6
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
The investment manager of the Montgomery Variable Series: Emerging Markets Fund
is Montgomery Asset Management, LLC. Founded in 1990, Montgomery Asset
Management is a subsidiary of Commerzbank AG, one of the largest publicly held
commercial banks in Germany. As of December 31, 1998, Montgomery Asset
Management managed approximately $4.5 billion on behalf of some 300,000
investors in The Montgomery Funds.
JOSEPHINE JIMENEZ, CFA, senior portfolio manager of the Fund (since 1996).
Before joining Montgomery in 1991, Ms. Jimenez worked at Emerging Markets
Investors Corp./Emerging Markets Management in Washington, D.C., as a senior
analyst and portfolio manager. The research and analysis methods she helped
develop, including a proprietary stock valuation model for hyperinflationary
economies, are the foundation of her investment strategy.
BRYAN SUDWEEKS, PH.D., CFA, senior portfolio manager of the Fund (since 1996).
Before joining Montgomery in 1991, Mr. Sudweeks was a senior analyst and
portfolio manager at Emerging Markets Investors Corp./Emerging Markets
Management in Washington, D.C. Prior to that he was a professor of international
finance and investments at George Washington University.
FRANK CHIANG, portfolio manager of the Fund (since 1996). Mr. Chiang joined
Montgomery in 1996. From 1993 to 1996, he was a portfolio manager and managing
director at TCW Asia Ltd. in Hong Kong. Prior to that he was associate director
and portfolio manager at Wardley Investment Services, Hong Kong.
JESUS ISIDORO DUARTE, regional portfolio manager of the Fund (since 1994). Prior
to joining Montgomery in 1994, Mr. Duarte was a director and vice president at
Latinvest, where he was responsible for research and portfolio management for
the firm's Latin American funds. Previous to Latinvest, Mr. Duarte worked at
W.I. Carr in Tokyo as a securities analyst of Japanese equities.
JOSE DE GUSMAO FIUZA, regional portfolio manager of the Fund (since 1996). Mr.
Fiuza joined Montgomery in 1995. He began his investment career in 1987 covering
the Portuguese market at Banco Portugues do Atlantico. He then moved to Banco
Espirito Santo and Schroder Securities (as managing director).
Management Fees
The management fee rate paid by the Fund to Montgomery Asset Management over the
past fiscal year was 1.25% and is calculated based upon average daily net
assets.
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS
Mixed and Shared Funding
Shares of the Fund are sold to insurance company separate accounts that fund
both variable life insurance contracts and variable annuity contracts (as well
as to qualified pension and retirement plans). This is referred to as "mixed
funding." In addition, shares of the Fund are sold to separate accounts of more
than one insurance company. This is referred to as "shared funding." At this
time, the Fund does not foresee any disadvantage to any of the Fund's
shareholders resulting from either mixed or shared funding. The Board of
Trustees, however, will continue to review the Fund's mixed and shared funding
to determine whether disadvantages to any shareholders could develop.
- --------------------------------------------------------------------------------
7
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
The Euro: Single European Currency
On January 1, 1999, the European Union (EU) introduced a single European
currency called the euro. The 11 of the 15 EU members that have begun to convert
their currencies to the euro are Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain (leaving out
Britain, Sweden, Denmark and Greece). For the first three years, the euro will
be a phantom currency (only an accounting entry). Euro notes and coins will
begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
[ ] Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
[ ] The applicable conversion rate for contracts stated in the national
currency of an EU member
[ ] The ability of clearing and settlement systems to process transactions
reliably
[ ] The effects of the euro on European financial and commercial markets
[ ] The effect of new legislation and regulations to address euro-related
issues
These and other factors could cause market disruptions and affect the value of
your shares if the Fund invests in companies that conduct business in Europe.
Montgomery and its key service providers have taken steps to address
euro-related issues, but there can be no assurance that these efforts will be
sufficient.
Defensive Investments
At the discretion of its portfolio managers, the Fund may invest up to 100% of
its assets in cash for temporary defensive purposes. Such a stance may help the
Fund minimize or avoid losses during adverse market, economic or political
conditions. During such a period, the Fund may not achieve its investment
objective. For example, should the market advance during this period, the Fund
may not participate as much as it would have if it had been more fully invested.
Portfolio Turnover
The Fund's portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long the Fund has owned that security.
Buying and selling securities generally involves some expense to the Fund, such
as commission paid to brokers and other transaction costs. By selling a
security, the Fund may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the Fund's annual
portfolio turnover, the greater its brokerage costs and the greater the
likelihood that it will realize taxable capital gains. Increased brokerage costs
may adversely affect the Fund's performance. Also, unless you are a tax-exempt
investor or you purchase shares through a tax-exempt investor or a tax-deferred
account, the distribution of capital gains may affect your after-tax return.
Annual portfolio turnover of 100% or more is considered high. See "Financial
Highlights," beginning on page 10, for the Fund's historical portfolio turnover.
The Year 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect the Fund's operations,
including pricing, securities trading, and the servicing of shareholder
accounts.
- --------------------------------------------------------------------------------
8
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
Montgomery is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during and after 2000. We are now renovating
and testing our internal systems. Montgomery is diligently working with external
partners, suppliers, vendors and other service providers, to ensure that the
systems with which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, Montgomery is further developing contingency plans
intended to ensure that unexpected systems failures will not adversely affect
the Fund's operations. Montgomery intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternative solutions if
necessary.
Despite Montgomery's efforts and contingency plans, noncompliant computer
systems could have a material adverse effect on the Fund's business, operations,
or financial condition. Additionally, the Fund's performance could be hurt if a
computer system failure at a company or governmental unit affects the prices of
securities the Fund owns. Issuers in countries outside of the United States,
particularly in emerging markets, may not be required to make the same level of
disclosure about year 2000 readiness as required in the United States. The
Manager, of course, cannot audit any company and its major suppliers to verify
their year 2000 readiness. Montgomery understands that many foreign countries
and companies are well behind their U.S. counterparts in preparing for 2000.
- --------------------------------------------------------------------------------
9
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
The following financial information for the period ended December 31, 1998, was
audited by PricewaterhouseCoopers LLP, whose report, dated February 12, 1999
appears in the 1998 Annual Report of the Fund. The information for the period
ended December 31, 1997, was also audited by PricewaterhouseCoopers LLP and
whose report is also included here. Information for the period ended December
31, 1996, was audited by other independent accountants, whose report is not
included here.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MONTGOMERY VARIABLE SERIES:
EMERGING MARKETS FUND
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1998 1997 1996(a)
THE YEAR ENDED DECEMBER 31:
<S> <C> <C> <C>
Net Asset-Value Beginning of Year $ 10.57 $ 10.65 $ 10.00
Net investment income/(loss) 0.01 0.02 0.03
Net realized and unrealized gain/(loss) on
investments (3.98) (0.08) 0.65
Net increase/(decrease) in net assets
resulting from investment operations (3.97) (0.06) 0.68
Distributions to shareholders:
Dividends from net investment income (0.01) (0.02) (0.03)
Distributions in excess of net investment
income
Distributions from net realized capital
gains
Distributions in excess of net capitalized
gains
Distributions from capital
Total distributions: (0.01) (0.02) (0.03)
Net Asset Value-End of Year $ 6.59 $ 10.57 $ 10.65
Total Return* (37.53)% (0.58)% 6.79%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $ 72,323 $ 114,837 $ 26,966
Ratio of net investment income/(loss) to
average net assets 0.67% 0.63% 0.81%+
Net investment income/(loss) before deferral of
fees by Manager $ 0.01 $ 0.05 $ (0.01)
Portfolio turnover rate 112% 71% 43%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses N/A 1.81% 2.47%+
Expense ratio including interest and tax expenses 1.80% 1.76% 1.45%+
Expense ratio excluding interest and tax expenses 1.75% 1.75% 1.44%+
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The Montgomery Variable Series: Emerging Markets Fund commenced operations
on February 2, 1996.
* Total return represents aggregate total return for the periods indicated.
+ Annualized.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
How to Invest in the Fund
The Trust offers shares of the Fund, without sales charge, at their
next-determined net asset value after receipt of an order with payment only by
one of the insurance companies for the Accounts (to fund benefits under variable
life insurance contracts and variable annuity contracts), or by a qualified
pension or retirement plan.
How to Redeem an Investment in the Fund
The Trust redeems shares of the Fund on any day that the New York Stock Exchange
(NYSE) is open for trading. The redemption price is the net asset value per
share next determined after the shares are validly tendered for redemption by
the Accounts, or by the trustee in the case of qualified pension and retirement
plans.
Exchange Privileges and Restrictions
Shares of the Fund may be exchanged for shares of another series of the Trust on
the basis of their relative net asset values (with no sales charge or exchange
fee) next determined after the time of the request by an Account or by a
qualified pension or retirement plan, subject to the terms of the Account or
plan. Holders of Variable Contracts should refer to the prospectuses related to
their contracts with regard to their exchange privileges.
How Net Asset Value Is Determined
How and when we calculate the Fund's price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate the Fund's NAV by
dividing the total value of its assets by the number of outstanding shares. We
base the value of the Fund's investments on their market value, usually the last
price reported for each security before the close of market that day. A market
price may not be available for securities that trade infrequently. Occasionally,
an event that affects a security's value may occur after the market closes. This
is more likely to happen with foreign securities traded in foreign markets that
have different time zones than in the United States. Major developments
affecting the prices of those securities may occur after the foreign markets in
which such securities trade have closed but before the Fund calculates its NAV.
In this case, Montgomery, in consultation with the Fund's Board of Trustees or
Pricing Committee, will make a good-faith estimate of the security's
"fair-value," which may be higher or lower than the security's closing price in
its relevant market. Short-term obligations with maturities of 60 days or less
are valued at amortized cost as reflecting fair value.
We calculate the NAV of the Fund after the close of trading on the NYSE every
day that the NYSE is open. We do not calculate NAVs on the days that the NYSE is
closed for trading. Certain exceptions apply as described below. If we receive
your order by the close of trading on the NYSE, you can purchase shares at the
price calculated for that day. The NYSE usually closes at 4 P.M. on weekdays,
except for holidays. If your order and payment are received after the NYSE has
closed, your shares will be priced at the next NAV we determine after receipt of
your order.
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. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares
- --------------------------------------------------------------------------------
11
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
even without any change in the foreign-currency denominated values of such
securities. In addition, some foreign exchanges are open for trading when the
U.S. market is closed. As a result, the Fund's foreign securities--and its
price--may fluctuate during periods when you can't buy, sell or exchange shares
in the Fund. More details about how we calculate the Fund's NAV are in the
Statement of Additional Information.
Dividends and Distributions
<TABLE>
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Fund intends to distribute according to the following schedule:
<CAPTION>
Income Dividends Capital Gains
---------------- -------------
<S> <C> <C>
Montgomery Variable Series: Declared and paid in the last Declared and paid in the
Emerging Markets Fund quarter of each year* last quarter of each year*
<FN>
- -------------------------------------
*Additional distributions, if necessary, may be made following the Fund's fiscal
year end (December 31) in order to avoid the imposition of tax on the Fund.
</FN>
</TABLE>
Unless the Fund is otherwise instructed, all dividends and other distributions
will be reinvested automatically in additional shares of the Fund and credited
to the shareholder's account at the closing net asset value on the reinvestment
date.
Effect of Distributions on the Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of the
Fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in the Fund's daily net asset value.
The share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31, the
Emerging Markets Fund declared a dividend in the amount of $0.50 per share. If
the Emerging Markets Fund's share price was $10.00 on December 30, the Fund's
share price on December 31 would be $9.50, barring market fluctuations.
Taxation
The Fund has elected and intends to continue to qualify to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. Accordingly, the Fund's
policy is to distribute to its shareholders all of its investment company
taxable income and any net realized capital gains for each fiscal year in a
manner that would not subject the Fund to any federal income tax or excise taxes
based on net income. The Fund is also required to satisfy diversification
requirements of the Investment Company Act and Section 817(h) of the Code, which
allows only Accounts and qualified pension and retirement plans to be
shareholders of the Fund. Failure to comply with 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. See
the Statement of Additional Information for more information.
Holders of Variable Contracts should refer to the prospectuses relating to their
contracts regarding the federal income tax-treatment of ownership of such
contracts.
- --------------------------------------------------------------------------------
12
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
Our Partners
As a Montgomery shareholder, you may see the names of our partners on a regular
basis. We all work together to ensure that your investments are handled
accurately and efficiently.
DST Systems, located in Kansas City, Missouri, provides transfer agent services
and performs certain record keeping and accounting functions for the Fund.
- --------------------------------------------------------------------------------
13
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
You can find more information about the investment policies of the Montgomery
Variable Series: Emerging Markets Fund in the Statement of Additional
Information (SAI), incorporated by reference in this prospectus.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about the Montgomery Variable Series:
Emerging Markets Fund, including the SAI, at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. To obtain information on
the operation of the Public Reference Room please call 800.SEC.0330. Reports and
other information about the Montgomery Variable Series: Emerging Markets Fund
are available at the SEC's Web site at www.sec.gov. You can also obtain copies
of this information, upon payment of a duplicating fee, by writing the Public
Reference Section of the SEC, Washington, D.C., 20549-6009.
You can find further information about the Montgomery Variable Series: Emerging
Markets Fund in our annual and semiannual shareholder reports, which discuss the
market conditions and investment strategies that significantly affected the
Fund's performance during its most recent fiscal period. To request a copy of
the most recent annual or semiannual report, please call us at 800.572.FUND
[3863], option 3.
Corporate Headquarters:
The Montgomery Funds III
101 California Street
San Francisco, CA 94111-9361
800.572.FUND [3863]
www.montgomeryfunds.com
SEC File No.: The Montgomery Funds III 811-8782
Funds Distributor, Inc. 4/99
- --------------------------------------------------------------------------------
14
<PAGE>
---------------------------------------------------------------------
PART A
PROSPECTUS FOR
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
---------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Prospectus
April 30, 1999
The Montgomery Funds III(SM)
MONTGOMERY VARIABLE SERIES: Small Cap Opportunities Fund
The Montgomery Funds III has registered the mutual fund offered in this
prospectus with the U.S. Securities and Exchange Commission (SEC). That
registration does not imply, however, that the SEC endorses the Fund.
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
- -------------------------
How to Contact Us
- -------------------------
Montgomery Shareholder
Service Representatives
800.572.FUND [3863]
Available 5 A.M. to 5 P.M.
Pacific time
Montgomery Web Site
www.montgomeryfunds.com
Address General
Correspondence to:
The Montgomery Funds III
101 California Street
San Francisco, CA 94111-9361
- --------------------------------------------------------------------------------
2
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Objective.....................................................................5
Strategy......................................................................5
Risks.........................................................................5
Past Fund Performance.........................................................6
Fees and Expenses.............................................................6
Portfolio Management..........................................................7
Additional Investment Strategies and Related Risks............................7
Mixed and Shared Funding.................................................7
The Euro: Single European Currency.......................................7
Defensive Investments....................................................8
Portfolio Turnover.......................................................8
The Year 2000............................................................8
Financial Highlights....................................................10
Account Information..........................................................11
How to Invest in the Fund...............................................11
How to Redeem an Investment in the Fund.................................11
Exchange Privileges and Restrictions....................................11
How Net Asset Value Is Determined.......................................11
Dividends and Distributions.............................................12
Effect of Distributions on the Fund's Net Asset Value...................12
Taxation................................................................12
Our Partners............................................................13
- --------------------------------------------------------------------------------
3
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
This prospectus contains important information about the investment objectives,
strategies and risks of the Montgomery Variable Series: Small Cap Opportunities
Fund (the "Fund"), a series of The Montgomery Funds III (the "Trust"), that you
should know before you invest in the Fund. Please read it carefully and keep it
on hand for future reference.
Please be aware that the Fund:
[ ] Is not a bank deposit
[ ] Is not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC)
You should also know that you could lose money by investing in the Fund.
Shares of the Fund are sold only to insurance company separate accounts
("Accounts") to fund the benefits of variable life insurance policies or
variable annuity contracts ("Variable Contracts") owned by their respective
policy or contract holders, and to qualified pension and retirement plans.
References to shareholders or investors in this prospectus are to the Accounts
or qualified pension and retirement plans. The variable annuity and variable
life insurance contracts involve fees and expenses not described in this
prospectus. Please refer to the prospectuses related to those contracts.
- --------------------------------------------------------------------------------
4
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
Montgomery Variable Series: Small Cap Opportunities Fund
Objective
[ ] Seeks long-term capital appreciation by investing in growth-oriented U.S.
small-cap companies
Strategy
Under normal conditions, the Fund invests at least 65% of its total assets in
the stocks of U.S. companies whose shares have a total stock market value
(market capitalization) of $1 billion or less. The Fund's strategy is to
identify well-managed U.S. companies whose share prices are undervalued relative
to their growth potential. The managers rigorously analyze all prospective
holdings by subjecting them to the following three steps of their investment
process:
[ ] Identify companies with improving business fundamentals
[ ] In-depth analysis of each company's current business and future prospects
[ ] Analyze each company's price to determine whether its growth prospects have
been discovered by the market
Risks
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a sudden decline in a holding's share
price or an overall decline in the stock market. As with any stock fund, the
value of your investment will fluctuate on a day-to-day basis with movements in
the stock market, as well as in response to the activities of individual
companies. To the extent that the Fund is overweighted in certain market sectors
compared with the Russell 2000 Index, the Fund may be more volatile than the
Russell 2000.
The Fund's focus on small-cap stocks may expose shareholders to additional
risks. Smaller companies typically have more-limited product lines, markets and
financial resources than larger companies, and their securities may trade less
frequently and in more-limited volume than those of larger, more mature
companies. As a result, small-cap stocks--and therefore the Fund--may fluctuate
significantly more in value than larger-cap stocks and funds that focus on them.
- --------------------------------------------------------------------------------
5
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
Past Fund Performance The Montgomery Variable Series: Small Cap Opportunities
Fund was launched on May 1, 1998. Fund performance results have not been
provided because the Fund has not been in existence for a full calendar year.
Fees and Expenses
<TABLE>
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. Montgomery does not impose any front-end or deferred sales
loads and does not charge shareholders for exchanging shares or reinvesting
dividends.
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Redemption Fee 0.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management Fee 1.20%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 2.51%
- --------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.71%
Fee Reduction and/or Expense Reimbursement 2.21%
- --------------------------------------------------------------------------------------------------------
Net Expenses 1.50%
<FN>
* Montgomery Asset Management has contractually agreed to reduce its fees
and/or absorb expenses to limit the Fund's total annual operating expenses
(excluding interest and tax expense) to 1.50%. This contract has a one-year
term, renewable at the end of each fiscal year.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Years 3 Years 5 Years 10 Years
- ----------------------------------------------------
$152 $928 $1,723 $3,793
PORTFOLIO MANAGEMENT
Roger Honour, Kathryn Peters, and Andrew Pratt For financial highlights,
For more details see page 7. see page 10.
- --------------------------------------------------------------------------------
6
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
The investment manager of the Montgomery Variable Series: Small Cap
Opportunities Fund is Montgomery Asset Management, LLC. Founded in 1990,
Montgomery Asset Management is a subsidiary of Commerzbank AG, one of the
largest publicly held commercial banks in Germany. As of December 31, 1998,
Montgomery Asset Management managed approximately $4.5 billion on behalf of some
300,000 investors in The Montgomery Funds.
ROGER HONOUR, senior portfolio manager of the Fund (since 1998). Prior to
joining Montgomery in June 1993, Mr. Honour was a vice president and portfolio
manager at Twentieth Century Investors in Kansas City, Missouri. From 1990 to
1992, he served as vice president and portfolio manager at Alliance Capital
Management.
KATHRYN PETERS, portfolio manager of the Fund (since 1998). Ms. Peters joined
Montgomery in 1995. From 1993 to 1995, she was an associate in the investment
banking division of Donaldson, Lufkin & Jenrette in New York. Prior to that she
analyzed mezzanine investments for Barclays de Zoete Wedd.
ANDREW PRATT, CFA, portfolio manager of the Fund (since 1998) and director of
research. Mr. Pratt joined Montgomery in 1993 from Hewlett-Packard Company,
where, as an equity analyst, he managed a portfolio of small-cap technology
companies and researched private placement and venture capital investments.
Management Fees
The management fee rate paid by the Fund to Montgomery Asset Management over the
past fiscal year was 1.20% and is calculated based upon average daily net
assets.
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS
Mixed and Shared Funding
Shares of the Fund are sold to insurance company separate accounts that fund
both variable life insurance contracts and variable annuity contracts (as well
as to qualified pension and retirement plans). This is referred to as "mixed
funding." In addition, shares of the Fund are sold to separate accounts of more
than one insurance company. This is referred to as "shared funding." At this
time, the Fund does not foresee any disadvantage to any of the Fund's
shareholders resulting from either mixed or shared funding. The Board of
Trustees, however, will continue to review the Fund's mixed and shared funding
to determine whether disadvantages to any shareholders could develop.
The Euro: Single European Currency
On January 1, 1999, the European Union (EU) introduced a single European
currency called the euro. The 11 of the 15 EU members that have begun to convert
their currencies to the euro are Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain (leaving out
Britain, Sweden, Denmark and Greece). For the first three years, the euro will
be a phantom currency (only an accounting entry). Euro notes and coins will
begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
- --------------------------------------------------------------------------------
7
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
[ ] Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
[ ] The applicable conversion rate for contracts stated in the national
currency of an EU member
[ ] The ability of clearing and settlement systems to process transactions
reliably
[ ] The effects of the euro on European financial and commercial markets
[ ] The effect of new legislation and regulations to address euro-related
issues
These and other factors could cause market disruptions and affect the value of
your shares in the Fund. Montgomery and its key service providers have taken
steps to address euro-related issues, but there can be no assurance that these
efforts will be sufficient.
Defensive Investments
At the discretion of its portfolio managers, the Fund may invest up to 100% of
its assets in cash for temporary defensive purposes. Such a stance may help the
Fund minimize or avoid losses during adverse market, economic or political
conditions. During such a period, the Fund may not achieve its investment
objective. For example, should the market advance during this period, the Fund
may not participate as much as it would have if it had been more fully invested.
Portfolio Turnover
The Fund's portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long the Fund has owned that security.
Buying and selling securities generally involves some expense to the Fund, such
as commission paid to brokers and other transaction costs. By selling a
security, the Fund may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the Fund's annual
portfolio turnover, the greater its brokerage costs and the greater the
likelihood that it will realize taxable capital gains. Increased brokerage costs
may adversely affect the Fund's performance. Also, unless you are a tax-exempt
investor or you purchase shares through a tax-exempt investor or a tax-deferred
account, the distribution of capital gains may affect your after-tax return.
Annual portfolio turnover of 100% or more is considered high. See "Financial
Highlights," beginning on page 10, for the Fund's historical portfolio turnover.
The Year 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect the Fund's operations,
including pricing, securities trading and the servicing of shareholder accounts.
Montgomery is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during and after 2000. We are now renovating
and testing our internal systems. Montgomery is diligently working with external
partners, suppliers, vendors and other service providers to ensure that the
systems with which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, Montgomery is further developing contingency plans
intended to ensure that unexpected systems failures will not adversely affect
the Fund's operations. Montgomery intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternative solutions if
necessary.
- --------------------------------------------------------------------------------
8
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
Despite Montgomery's efforts and contingency plans, noncompliant computer
systems could have a material adverse effect on the Fund's business, operations,
or financial condition. Additionally, the Fund's performance could be hurt if a
computer system failure at a company or governmental unit affects the prices of
securities the Fund owns. Issuers in countries outside of the United States,
particularly in emerging markets, may not be required to make the same level of
disclosure about year 2000 readiness as required in the United States. The
Manager, of course, cannot audit any company and its major suppliers to verify
their year 2000 readiness. Montgomery understands that many foreign countries
and companies are well behind their U.S. counterparts in preparing for 2000.
- --------------------------------------------------------------------------------
9
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial information for the period ended December 31, 1998, was
audited by PricewaterCoopers LLP, whose report, dated February 12, 1999 appears
in the 1998 Annual Report of the Fund.
- --------------------------------------------------------------------------------
MONTGOMERY VARIABLE SERIES:
SMALL CAP OPPORTUNITIES FUND
- --------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1998(a)
THE YEAR ENDED DECEMBER 31:
Net Asset-Value Beginning of Year $ 10.00
Net investment income/(loss) (0.04)
Net realized and unrealized gain/(loss) on
investments (0.68)
Net increase/(decrease) in net assets
resulting from investment operations (0.72)
Distributions to shareholders:
Distributions from net investment income
Distributions in excess of net investment
income
Distributions from net realized capital
gains
Distributions in excess of net capitalized
gains
Distributions from capital
Total Distributions:
Net Asset Value-End of Year $ 9.28
Total Return* (7.20%)
- --------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (in 000's) $ 1,946
Ratio of net investment income/(loss) to
average net assets (0.64)%+
Net investment income/(loss) before deferral of
fees by Manager $ (0.16)
Portfolio turnover rate 82%
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 3.71%+
Expense ratio including interest and tax expenses 1.50%+
Expense ratio excluding interest and tax expenses --
- --------------------------------------------------------------------------------
(a) The Montgomery Variable Series: Small Cap Opportunities Fund commenced
operations on May 1, 1998.
* Total return represents aggregate total return for the period indicated.
+ Annualized
- --------------------------------------------------------------------------------
10
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
How to Invest in the Fund
The Trust offers shares of the Fund, without sales charge, at their
next-determined net asset value after receipt of an order with payment only by
one of the insurance companies for the Accounts (to fund benefits under variable
life insurance contracts and variable annuity contracts), or by a qualified
pension or retirement plan.
How to Redeem an Investment in the Fund
The Trust redeems shares of the Fund on any day that the New York Stock Exchange
(NYSE) is open for trading. The redemption price is the net asset value per
share next determined after the shares are validly tendered for redemption by
the Accounts, or by the trustee in the case of qualified pension and retirement
plans.
Exchange Privileges and Restrictions
Shares of the Fund may be exchanged for shares of another series of the Trust on
the basis of their relative net asset values (with no sales charge or exchange
fee) next determined after the time of the request by an Account or by a
qualified pension or retirement plan, subject to the terms of the Account or
plan. Holders of Variable Contracts should refer to the prospectuses related to
their contracts with regard to their exchange privileges.
How Net Asset Value Is Determined
How and when we calculate the Fund's price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate the Fund's NAV by
dividing the total value of its assets by the number of outstanding shares. We
base the value of the Fund's investments on their market value, usually the last
price reported for each security before the close of market that day. A market
price may not be available for securities that trade infrequently. Occasionally,
an event that affects a security's value may occur after the market closes. This
is more likely to happen with foreign securities traded in foreign markets that
have different time zones than in the United States. Major developments
affecting the prices of those securities may occur after the foreign markets in
which such securities trade have closed but before the Fund calculates its NAV.
In this case, Montgomery, in consultation with the Fund's Board of Trustees or
Pricing Committee, will make a good-faith estimate of the security's
"fair-value," which may be higher or lower than the security's closing price in
its relevant market. Short-term obligations with maturities of 60 days or less
are valued at amortized cost as reflecting fair value.
We calculate the NAV of the Fund after the close of trading on the NYSE every
day that the NYSE is open. We do not calculate NAVs on the days that the NYSE is
closed for trading. Certain exceptions apply as described below. If we receive
your order by the close of trading on the NYSE, you can purchase shares at the
price calculated for that day. The NYSE usually closes at 4 P.M. on weekdays,
except for holidays. If your order and payment are received after the NYSE has
closed, your shares will be priced at the next NAV we determine after receipt of
your order.
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. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of Fund shares
- --------------------------------------------------------------------------------
11
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
even without any change in the foreign-currency denominated values of such
securities. In addition, some foreign exchanges are open for trading when the
U.S. market is closed. As a result, the Fund's foreign securities--and its
price--may fluctuate during periods when you can't buy, sell or exchange shares
in the Fund. More details about how we calculate the Fund's NAV are in the
Statement of Additional Information.
Dividends and Distributions
<TABLE>
The Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.
Currently, the Fund intends to distribute according to the following schedule:
<CAPTION>
Income Dividends Capital Gains
---------------- -------------
<S> <C> <C>
Montgomery Variable Series: Small Declared and paid in the last Declared and paid in the
Cap Opportunities Fund quarter of each year* last quarter of each year*
<FN>
- -------------------------------------
*Additional distributions, if necessary, may be made following the Fund's fiscal
year end (December 31) in order to avoid the imposition of tax on the Fund.
</FN>
</TABLE>
Unless the Fund is otherwise instructed, all dividends and other distributions
will be reinvested automatically in additional shares of the Fund and credited
to the shareholder's account at the closing net asset value on the reinvestment
date.
Effect of Distributions on the Fund's Net Asset Value
Distributions are paid to you as of the record date of a distribution of the
Fund, regardless of how long you have held the shares. Dividends and capital
gains awaiting distribution are included in the Fund's daily net asset value.
The share price of a Fund drops by the amount of the distribution, net of any
subsequent market fluctuations. For example, assume that on December 31 the
Small Cap Opportunities Fund declared a dividend in the amount of $0.50 per
share. If the Small Cap Opportunities Fund's share price was $10.00 on December
30, the Fund's share price on December 31 would be $9.50, barring market
fluctuations.
Taxation
The Fund has elected and intends to continue to qualify to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. Accordingly, the Fund's
policy is to distribute to its shareholders all of its investment company
taxable income and any net realized capital gains for each fiscal year in a
manner that would not subject the Fund to any federal income tax or excise taxes
based on net income. The Fund is also required to satisfy diversification
requirements of the Investment Company Act and Section 817(h) of the Code, which
allows only Accounts and qualified pension and retirement plans to be
shareholders of the Fund. Failure to comply with 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. See
the Statement of Additional Information for more information.
Holders of Variable Contracts should refer to the prospectuses relating to their
contracts regarding the federal income tax treatment of ownership of such
contracts.
- --------------------------------------------------------------------------------
12
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
Our Partners
As a Montgomery shareholder, you may see the names of our partners on a regular
basis. We all work together to ensure that your investments are handled
accurately and efficiently.
DST Systems, located in Kansas City, Missouri, provides transfer agent services
and performs certain record keeping and accounting functions for the Fund.
- --------------------------------------------------------------------------------
13
<PAGE>
Montgomery Variable Series: Small Cap Opportunities Fund
- --------------------------------------------------------------------------------
You can find more information about the investment policies of the Montgomery
Variable Series: Small Cap Opportunities Fund in the Statement of Additional
Information (SAI), incorporated by reference in this prospectus.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about the Montgomery Variable Series: Small
Cap Opportunities Fund, including the SAI, at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. To obtain information on
the operation of the Public Reference Room please call 800.SEC.0330. Reports and
other information about the Montgomery Variable Series: Small Cap Opportunities
Fund are available at the SEC's Web site at www.sec.gov. You can also obtain
copies of this information, upon payment of a duplicating fee, by writing the
Public Reference Section of the SEC, Washington, D.C., 20549-6009.
You can find further information about the Montgomery Variable Series: Small Cap
Opportunities Fund in our annual and semiannual shareholder reports, which
discuss the market conditions and investment strategies that significantly
affected the Fund's performance during its most recent fiscal period. To request
a copy of the most recent annual or semiannual report, please call us at
800.572.FUND [3863], option 3.
Corporate Headquarters:
The Montgomery Funds III
101 California Street
San Francisco, CA 94111-9361
800.572.FUND [3863]
www.montgomeryfunds.com
- -----------------------
SEC File No.: The Montgomery Funds III 811-8782
Funds Distributor, Inc. 4/99
- --------------------------------------------------------------------------------
14
<PAGE>
---------------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
MONTGOMERY VARIABLE SERIES: GROWTH FUND
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
---------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
THE MONTGOMERY FUNDS III
- --------------------------------------------------------------------------------
MONTGOMERY VARIABLE SERIES: GROWTH FUND
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
MONTGOMERY VARIABLE SERIES: SMALL CAP OPPORTUNITIES FUND
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
April 30, 1999
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 above-named funds is a separate
series of the Trust (each a "Fund" and, collectively, the "Funds"). 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 Montgomery Variable
Series: Growth Fund, Montgomery Variable Series: Emerging Markets Fund and
Montgomery Variable Series: Small Cap Opportunities Fund, each dated April 30,
1999, as those prospectuses may be revised from time to time (in reference to
the appropriate Fund or Funds, the "Prospectuses"). The Prospectuses may be
obtained without charge at the address or telephone number provided above. This
Statement of Additional Information is not a prospectus and should be read in
conjunction with the appropriate Prospectuses. The Annual Report to Shareholders
for each Fund for the fiscal year ended December 31, 1998, containing financial
statements for each Fund for that fiscal year, is incorporated by reference to
this Statement of Additional Information and also may be obtained without charge
as noted above.
B-1
<PAGE>
TABLE OF CONTENTS
THE TRUST......................................................................3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS................................3
RISK FACTORS..................................................................17
INVESTMENT RESTRICTIONS.......................................................20
DISTRIBUTIONS AND TAX INFORMATION.............................................22
TRUSTEES AND OFFICERS.........................................................28
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................31
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................33
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................36
DETERMINATION OF NET ASSET VALUE..............................................37
PERFORMANCE INFORMATION.......................................................39
GENERAL INFORMATION...........................................................42
FINANCIAL STATEMENTS..........................................................43
APPENDIX......................................................................44
B-2
<PAGE>
THE TRUST
The Montgomery Funds III (the "Trust") 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, $0.01 par value per share, in three series. This Statement of
Additional Information pertains to The Montgomery Variable Series: Growth Fund
(the "Growth Fund"), The Montgomery Variable Series: Emerging Markets Fund (the
"Emerging Markets Fund") and The Montgomery Variable Series: Small Cap
Opportunities Fund (the "Small Cap Opportunities Fund").
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The Funds are managed by Montgomery Asset Management, LLC (the
"Manager"). The investment objectives and policies of the Funds are described in
detail in its Prospectus. The following discussion supplements the discussion in
the Prospectus.
Each Fund is a diversified series of the Trust. The achievement of each
Fund's investment objective will depend upon market conditions generally and on
the Manager's analytical and portfolio management skills.
Special Investment Strategies and Risks
Certain of the Funds have investment policies, strategies and risks in addition
to those discussed in the prospectus, as described below.
Emerging Markets Fund. The Emerging Growth Fund (for this section, the "Fund")
may invest in special situations. The Fund believes that carefully selected
investments in joint ventures, cooperatives, partnerships, private placements,
unlisted securities and similar vehicles (collectively, "special situations")
could enhance its capital appreciation potential. The Fund may also invest in
certain types of vehicles or derivative securities that represent indirect
investments in foreign markets or securities in which it is impractical for the
Fund to invest directly. Investments in special situations may be illiquid, as
determined by the Manager based on criteria approved by the Board of Trustees
(the "Board"). The Fund does not invest more than 15% of its net assets in
illiquid investments, including special situations.
Portfolio Securities
Depositary Receipts. Each Fund may hold securities of foreign issuers
in the form of sponsored and unsponsored American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depository Receipts ("GDRs"), and
other similar global instruments available in emerging markets or other
securities convertible into securities of eligible issuers. These securities may
not necessarily be denominated in the same currency as the securities for which
they may be exchanged. Generally, ADRs in registered form are designed for use
in U.S. securities markets, and EDRs and other similar global instruments in
bearer form are designed for use in European securities markets. Unsponsored ADR
and EDR programs are organized without the cooperation of the issuer of the
underlying securities. As a result, available information concerning the issuer
may not be as current as for sponsored ADRs and EDRs, and the prices of
unsponsored ADRs and EDRs may be more volatile. For purposes of a Fund's
investment policies, a Funds' investments in ADRs, EDRs and
B-3
<PAGE>
similar instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Convertible Securities. Each Fund may invest in convertible securities.
A convertible security is a fixed-income security (a bond or preferred stock)
that may be converted at a stated price within a specified period of time into a
certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure but are usually subordinated to similar non-convertible securities.
Through their conversion feature, they provide an opportunity to participate in
capital appreciation resulting from a market price advance in the underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the common stock's
value rises and decrease as the common stock's value declines. For purposes of
allocating the Fund's investments, the Manager regards convertible securities as
a form of equity security.
Securities Warrants. Each Fund may invest up to 5% of its net assets in
warrants. Typically, a warrant is a long-term option that permits the holder to
buy a specified number of shares of the issuer's underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
Other Investment Companies. Each Fund may invest in securities issued
by other investment companies. Those investment companies must invest in
securities in which the Fund can invest in a manner consistent with the Fund's
investment objective and policies. Applicable provisions of the Investment
Company Act require that a Fund limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 10% of the
value of a Fund's total assets will be invested in the aggregate in securities
of investment companies as a group; and (b) either (i) a Fund and affiliated
persons of that Fund not own together more than 3% of the total outstanding
shares of any one investment company at the time of purchase (and that all
shares of the investment company held by that Fund in excess of 1% of the
company's total outstanding shares be deemed illiquid), or (ii) a Fund not
invest more than 5% of its total assets in any one investment company and the
investment not represent more than 3% of the total outstanding voting stock of
the investment company at the time of purchase.
Because of restrictions on direct investment by U.S. entities in
certain countries, other investment companies may provide the most practical or
only way for the Funds to invest in certain markets. Such investments may
involve the payment of substantial premiums above the net asset value of those
investment companies' portfolio securities and are subject to limitations under
the Investment Company Act. The Funds may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company" regardless of whether such "passive foreign investment company" makes
distribution to the Funds.
The Funds do not intend to invest in other investment companies unless,
in the Manager's judgment, the potential benefits exceed associated costs. As a
shareholder in an investment company, a Fund bears its ratable share of that
investment company's expenses, including its advisory and administrative fees.
Debt Securities. Each Fund may invest in traditional corporate,
government debt securities rated within the four highest grades by Standard and
Poor's Corporation ("S&P") (at least BBB), Moody's Investors Service, Inc.
("Moody's") (at least Baa) or Fitch Investors Service ("Fitch") (at least Baa),
or unrated debt securities deemed to be of comparable quality by the Manager
using guidelines approved by the Board of Trustees. In
B-4
<PAGE>
selecting debt securities, the Manager seeks out good credits and analyzes
interest rate trends and specific developments that may affect individual
issuers.
Debt securities may also consist of participation in large loans made
by financial institutions to various borrowers, typically in the form of large
unsecured corporate loans. These certificates must otherwise comply with the
maturity and credit-quality standards of each Fund and will be limited to 5% of
a Fund's total assets.
As an operating policy, which may be changed by the Board, the Emerging
Markets Fund may invest up to 5% of its total assets in debt securities rated
lower than investment grade. Subject to this limitation, the Emerging Markets
Fund may invest in any debt security, including securities in default. After its
purchase, a debt security may cease to be rated or its rating may be reduced
below that required for purchase by the Emerging Markets Fund. A security
downgraded below the minimum level may be retained if determined by the Manager
and the Board to be in the best interests of the Emerging Markets Fund.
In addition to traditional corporate, government and supranational debt
securities, the Emerging Markets Fund may invest in external (i.e., to foreign
lenders) debt obligations issued by the governments, government entities and
companies of emerging markets countries. The percentage distribution between
equity and debt will vary from country to country, based on anticipated trends
in inflation and interest rates; expected rates of economic and corporate
profits growth; changes in government policy; stability, solvency and expected
trends of government finances; and conditions of the balance of payments and
terms of trade.
U.S. Government Securities. Each Fund may invest a substantial portion,
if not all, of its net assets in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, including repurchase agreements
backed by such securities ("U.S. government securities"). These Funds generally
will have a lower yield than if they purchased higher yielding commercial paper
or other securities with correspondingly greater risk instead of U.S. government
securities.
Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related securities of the GNMA, are issued or guaranteed by
the U.S. government. Other securities issued by U.S. government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality, such as those issued by the Federal Home Loan Bank, whereas
others, such as those issued by the FNMA, Farm Credit System and Student Loan
Marketing Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among the
safest short-term investments. The U.S. government does not guarantee the net
asset value of the Funds' shares, however. With respect to U.S. government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. government will provide support to such agencies or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest. The securities issued by these agencies are
discussed in more detail later.
Structured Notes and Indexed Securities. The Funds may invest in
structured noted and indexed securities. Structured notes are debt securities,
the interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Index securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, the Manager analyzes these
B-5
<PAGE>
securities in its overall assessment of the effective duration of the Fund's
portfolio in an effort to monitor the Fund's interest rate risk.
Asset-Backed Securities. Each Fund may invest up to 5% of its total
assets in asset-backed securities, which represent a direct or indirect
participation in, or are secured by and payable from, pools of assets, such as
motor vehicle installment sales contracts, installment from loan contracts,
leases of various types of real or personal property, and receivables from
revolving credit (e.g., credit card) agreements. Payments or distributions of
principal and interest on asset-backed securities may be supported by credit
enhancements, such as various forms of cash collateral accounts or letters of
credit. Like mortgage-related securities, these securities are subject to the
risk of prepayment.
Mortgage-Related Securities: Government National Mortgage Association.
GNMA is a wholly-owned corporate instrumentality of the U.S. government within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of, and interest on, securities that are based on and
backed by a pool of specified mortgage loans. For these types of securities to
qualify for a GNMA guarantee, the underlying collateral must be mortgages
insured by the FHA under the Housing Act or Title V of the Housing Act of 1949,
as amended ("VA Loans"), or be pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the U.S. government is
pledged to the payment of all amounts that may be required to be paid under any
guarantee. In order to meet its obligations under a guarantee, GNMA is
authorized to borrow from the U.S. Treasury with no limitations as to amount.
GNMA pass-through securities may represent a proportionate interest in
one or more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans; (3)
fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured
by manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
Mortgage-Related Securities: Federal National Mortgage Association.
FNMA is a federally chartered and privately owned corporation established under
the Federal National Mortgage Association Charter Act. FNMA was originally
organized in 1938 as a U.S. government agency to add greater liquidity to the
mortgage market. FNMA was transformed into a private sector corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local 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
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graduated payment mortgage loans; (4) variable-rate mortgage loans; (5) other
adjustable-rate mortgage loans; and (6) fixed-rate mortgage loans secured by
multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage Corporation.
FHLMC is a corporate instrumentality of the United States established by the
Emergency Home Finance Act of 1970, as amended. FHLMC was organized primarily
for the purpose of increasing the availability of mortgage credit to finance
needed housing. The operations of FHLMC currently consist primarily of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in mortgage loans and the resale of the mortgage loans
in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of
fixed-rate or adjustable-rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one-to-four-family residential properties or multifamily projects. Each
mortgage loan must include whole loans, participation interests in whole loans,
and undivided interests in whole loans and participation in another FHLMC
security.
Risk Factors/Special Considerations Relating to Debt Securities
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 longer the remaining maturity of a
security, the greater the effect of interest rate changes. Changes in the
ability of an issuer to make payments of interest and principal and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities. The net asset value of a Fund will reflect these
changes in market value.
Prepayments of principal of mortgage-related securities by mortgagors
or mortgage foreclosures affect the average life of the mortgage-related
securities remaining in the Fund's portfolio. Mortgage prepayments are affected
by the level of interest rates and other factors, including general economic
conditions of the underlying location and age of the mortgage. In periods of
rising interest rates, the prepayment rate tends to decrease, lengthening the
average life of a pool of mortgage-related securities. In periods of falling
interest rates, the prepayment tends to increase, shortening the average life of
such a pool. Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, affecting the Fund's yield.
Bonds rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."
Although such bonds may offer higher yields than higher-rated
securities, low-rated debt securities generally involve greater price volatility
and risk of principal and income loss, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low-rated debt securities are traded are more limited than those for
higher-rated securities. The existence of limited markets for particular
securities may diminish the ability of a Fund to sell the securities at fair
value either to meet
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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 that Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low-rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low-rated debt securities may be more complex
than for issuers of higher-rated securities, and the ability of a Fund to
achieve its investment objectives may, to the extent it invests in low-rated
debt securities, be more dependent upon such credit analysis than would be the
case if that Fund invested in higher-rated debt securities.
Low-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low-rated debt securities have been found to be less
sensitive to interest rate changes than higher-rated debt securities but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a sharper decline in the prices of low-rated debt
securities because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If the issuer of low-rated debt securities defaults, a Fund may
incur additional expenses to seek financial recovery. The low-rated bond market
is relatively new, and many of the outstanding low-rated bonds have not endured
a major business downturn.
Hedging and Risk Management Practices
In seeking to protect against the effect of adverse changes in
financial markets or against currency exchange-rate or interest rate changes
that are adverse to the present or prospective positions of the Funds, the Funds
may employ certain risk management practices using the following derivative
securities and techniques (known as "derivatives"): stock options, currency
options, stock index options, futures contracts, swaps and options on futures
contracts on U.S. government and foreign government securities and currencies.
Each Fund will not commit more than 10% of its total assets to such derivatives.
The Board has adopted derivatives guidelines that require the Board to review
each new type of derivative security that may be used by a Fund. Markets in some
countries currently do not have instruments available for hedging transactions.
To the extent that such instruments do not exist, the Manager may not be able to
hedge Fund investments effectively in such countries. Furthermore, the Fund
engages in hedging activities only when the Manager deems it to be appropriate,
and does not necessarily engage in hedging transactions with respect to each
investment.
Forward Contracts. Each Fund may enter into a forward contract. A
forward contract, which is individually negotiated and privately traded by
currency traders and their customers, involves an obligation to purchase or sell
a specific currency for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When a Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of that Fund's portfolio
securities denominated in such currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.
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In connection with a Fund's forward contract transactions, an amount of
the Fund's assets equal to the amount of its commitments will be held aside or
segregated to be used to pay for the commitments. Accordingly, a Fund always
will have cash, cash equivalents or liquid equity or debt securities denominated
in the appropriate currency available in an amount sufficient to cover any
commitments under these contracts. Segregated assets used to cover forward
contracts will be marked to market on a daily basis. While these contracts are
not presently regulated by the Commodity Futures Trading Commission ("CFTC"),
the CFTC may in the future regulate them, and the ability of a Fund to utilize
forward contracts may be restricted. Forward contracts may limit potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance by a Fund than if it had not entered into such contracts. A
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 Fund also may enter into closing purchase and sale
transactions with respect to any such contracts and options. Futures contracts
may be based on various securities (such as U.S. government securities),
securities indices, foreign currencies and other financial instruments and
indices.
These Funds have filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant to Section 4.5 of the regulations under the Commodity
Exchange Act, the notice of eligibility included the representation that these
Funds will use futures contracts and related options for bona fide hedging
purposes within the meaning of CFTC regulations, provided that a Fund may hold
positions in futures contracts and related options that do not fall within the
definition of bona fide hedging transactions if the aggregate initial margin and
premiums required to establish such positions will not exceed 5% of that Fund's
net assets (after taking into account unrealized profits and unrealized losses
on any such positions), and that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount may be excluded from such 5%.
These Funds will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by these Funds or
which they expect to purchase. These Funds' futures transactions generally will
be entered into only for traditional hedging purposes--i.e., futures contracts
will be sold to protect against a decline in the price of securities or
currencies and will be purchased to protect a Fund against an increase in the
price of securities it intends to purchase (or the currencies in which they are
denominated). All futures contracts entered into by these Funds are traded on
U.S. exchanges or boards of trade licensed and regulated by the CFTC or on
foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
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<PAGE>
By using futures contracts to hedge their positions, these Funds seek
to establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that these Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that 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 portfolio securities can be substantially
offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of a Fund's portfolio securities could
be offset substantially by a decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives a
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives a Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
A Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. A Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by a Fund 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 ("Internal Revenue
Code"), for maintaining its qualification as a regulated investment company for
federal income tax purposes.
Options on Securities, Securities Indices and Currencies. Each Fund may
purchase put and call options on securities in which it has invested, on foreign
currencies represented in its portfolios and on any securities index based in
whole or in part on securities in which that Fund may invest. A Fund also may
enter into closing sales transactions in order to realize gains or minimize
losses on options it has purchased.
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A Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign
exchanges. Although a Fund will generally purchase only those options for which
there appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that a Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although 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 they may invest. A covered call
option involves a Fund's giving another party, in return for a premium, the
right to buy specified securities owned by 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 a price decline of the underlying security. However, by
writing a covered call option, a Fund gives up the opportunity, while the option
is in effect, to realize gain from any price increase (above the option exercise
price) in the underlying security. In addition, a Fund's ability to sell the
underlying security is limited while the option is in effect unless that Fund
effects a closing purchase transaction.
Each Fund also may write covered put options that give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. A Fund will receive a premium for writing a put option but will
be obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, a Fund
will cause its custodian to segregate cash, cash equivalents, U.S. government
securities or other liquid equity or debt securities with at least the value of
the exercise price of the put options. A Fund will not write put options if the
aggregate value of the obligations underlying the put options exceeds 25% of
that Fund's total assets.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and result in the
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institution by an exchange of special procedures that may interfere with the
timely execution of the Funds' orders.
Privatizations. A Fund may believe that foreign governmental programs
of selling interests in government-owned or -controlled enterprises
("privatizations") may represent opportunities for significant capital
appreciation. Accordingly, a Fund may invest in privatizations. The ability of
U.S. entities, such as a Fund, to participate in privatizations may be limited
by local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
successful.
Other Investment Practices
Repurchase Agreements. Each Fund 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 that 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,
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.
The Funds generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Funds regard repurchase agreements with
maturities in excess of seven days as illiquid. A Fund may not invest more than
15% 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, 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. As such, a Fund would be at risk
of losing some or all of the principal and income involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the Manager seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a Fund
also runs the risk that the seller may fail to repurchase the security. However,
each Fund always requires
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collateral for any repurchase agreement to which it is a party in the form of
securities acceptable to it, the market value of which is equal to at least 100%
of the amount invested by the Fund plus accrued interest, and each Fund makes
payment against such securities only upon physical delivery or evidence of book
entry transfer to the account of its custodian bank. If the market value of the
security subject to the repurchase agreement becomes less than the repurchase
price (including interest), a Fund, pursuant to its repurchase agreement, may
require the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price (including interest) at all times.
The Funds may participate in one or more joint accounts with each other
and other series of the Trust that invest in repurchase agreements
collateralized, subject to their investment policies, either by (i) obligations
issued or guaranteed as to principal and interest by the U.S. government or by
one of its agencies or instrumentalities, or (ii) privately issued
mortgage-related securities that are in turn collateralized by securities issued
by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally recognized statistical rating organization, or, if unrated, are
deemed by the Manager to be of comparable quality using objective criteria. Any
such repurchase agreement will have, with rare exceptions, an overnight,
over-the-weekend or over-the-holiday duration, and in no event have a duration
of more than seven days.
Reverse Repurchase Agreements. Each Fund may enter into reverse
repurchase agreements. A Fund typically will invest the proceeds of a reverse
repurchase agreement in money market instruments or repurchase agreements
maturing not later than the expiration of the reverse repurchase agreement. This
use of proceeds involves leverage and a Fund will enter into a reverse
repurchase agreement for leverage purposes only when the Manager believes that
the interest income to be earned from the investment of the proceeds would be
greater than the interest expense of the transaction. A Fund also may use the
proceeds of reverse repurchase agreements to provide liquidity to meet
redemption requests when sale of the Fund's securities is disadvantageous.
A Fund causes its custodian to segregate liquid assets, such as cash,
U.S. government securities or other liquid equity or debt securities equal in
value to its obligations (including accrued interest) with respect to reverse
repurchase agreements. Such assets are marked to market daily to ensure that
full collateralization is maintained.
Borrowing. Each Fund may borrow money from banks, in an aggregate
amount not to exceed one-third of the value of the Fund's total assets, for
temporary or emergency purposes. The Fund may pledge its assets in connection
with such borrowings. The Fund will not purchase any security while any such
borrowings exceed 10% of the value of its total assets.
Lending Portfolio Securities. Each Fund may lend securities to brokers,
dealers and other financial organizations. Such loans may be made to
broker-dealers or other financial institutions whose creditworthiness is
acceptable to the Manager. These loans may not exceed 30% of the value of the
Fund's total assets. These loans would be required to be secured continuously by
collateral, including cash, cash equivalents, irrevocable letters of credit,
U.S. government securities or other high-grade liquid debt securities,
maintained on a current basis (i.e., marked to market daily) at an amount at
least equal to 100% of the market value of the securities loaned plus accrued
interest. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the income earned on
the cash to the borrower or placing broker. Loans are subject to termination at
the option of a Fund or the borrower at any time. Upon such termination, that
Fund is entitled to obtain the return of these securities loaned within five
business days.
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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 failed
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.
Such loans of securities are collateralized with collateral assets in
an amount at least equal to the current market value of the loaned securities,
plus accrued interest. There is a risk of delay in receiving collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower failed financially.
Leverage. Each Fund may leverage its portfolio in an effort to increase
the total return. Although leverage creates an opportunity for increased income
and gain, it also creates special risk considerations. For example, leveraging
may magnify changes in the net asset value of a Fund's shares and in the yield
on its portfolio. Although the principal of such borrowings will be fixed, the
Fund's assets may change in value while the borrowing is outstanding. Leveraging
creates interest expenses that can exceed the income from the assets retained.
Dollar Roll Transactions. A Fund may enter into dollar roll
transactions. A dollar roll transaction involves a sale by a Fund of a security
to a financial institution concurrently with an agreement by that Fund to
purchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
At the time a Fund enters into a dollar roll transaction, it causes its
custodian to segregate liquid assets such as cash, U.S. government securities or
other liquid equity or debt securities having a value equal to the purchase
price for the similar security (including accrued interest) and subsequently
marks the assets to market daily to ensure that full collateralization is
maintained.
When-Issued and Forward Commitment Securities. The Funds may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on
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a when-issued or delayed delivery basis. The Funds cause their custodian to
segregate cash, U.S. government securities or other liquid equity or debt
securities with a value equal in value to commitments for when-issued or delayed
delivery securities. The segregated securities either will mature or, if
necessary, be sold on or before the settlement date. To the extent that assets
of a Fund are held in cash pending the settlement of a purchase of securities,
that Fund will earn no income on these assets.
The Funds may seek to hedge investments or to realize additional gains
through forward commitments to sell high-grade liquid debt securities they do
not own at the time they enter into the commitments. Such forward commitments
effectively constitute a form of short sale. To complete such a transaction, the
Fund must obtain the security which it has made a commitment to deliver. If the
Fund does not have cash available to purchase the security it is obligated to
deliver, it may be required to liquidate securities in its portfolio at either a
gain or a loss, or borrow cash under a reverse repurchase or other short-term
arrangement, thus incurring an additional expense. In addition, the Fund may
incur a loss as a result of this type of forward commitment if the price of the
security increases between the date the Fund enters into the forward commitment
and the date on which it must purchase the security it is committed to deliver.
The Fund will realize a gain from this type of forward commitment if the
security declines in price between those dates. The amount of any gain will be
reduced, and the amount of any loss increased, by the amount of the interest or
other transaction expenses the Fund may be required to pay in connection with
this type of forward commitment. Whenever this Fund engages in this type of
transaction, it will segregate assets as discussed above.
Illiquid Securities. Each Fund may invest up to 15% of its 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, securities subject to restrictions on repatriation for more
than seven days, securities issued in connection with foreign debt conversion
programs that are restricted as to remittance of invested or profit, 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. Also, illiquid securities do not
include securities that are restricted from trading on formal markets for some
period of time but for which an active informal market exists, or securities
that meet the requirement of Rule 144A under the 1933 Act (see below) and that,
subject to review by the Board and guidelines adopted by the Board, the Manager
has determined to be liquid.
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 that 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 price less
favorable than the prevailing price when it decides to sell.
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<PAGE>
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments often are restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
resold readily or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A-eligible restricted securities,
however, could adversely affect the marketability of such portfolio securities
and result in a Fund's inability to dispose of such securities promptly or at
favorable prices.
The Board has delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board. The Manager takes into account a number of factors in reaching
liquidity decisions, including, but not limited to: (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers and (v) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Manager
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Board.
Defensive Investments and Portfolio Turnover. Notwithstanding its
investment objective, each Fund may adopt up 100% cash or cash equivalent
position for temporary defensive purposes to protect against the erosion of its
capital base. Depending on the Manager's analysis of the various markets and
other considerations, all or part of the assets of a Fund may be held in cash
and cash equivalents (denominated in U.S. dollars or foreign currencies), such
as U.S. government securities or obligations issued or guaranteed by the
government of a foreign country or by an international organization designed or
supported by multiple foreign governmental entities to promote economic
reconstruction or development, high-quality commercial paper, time deposits,
savings accounts, certificates of deposit, bankers' acceptances, and repurchase
agreements with respect to all of the foregoing. Such investments also may be
made for temporary purposes pending investment in other securities and following
substantial new investment of the Fund.
Portfolio securities are sold whenever the Manager believes it
appropriate, regardless of how long the securities have been held. The Manager
therefore changes the Fund's investments whenever it believes doing so will
further the Fund's investment objectives or when it appears that a position of
the desired size cannot be accumulated. Portfolio turnover generally involves
some expenses to the Fund, including brokerage commissions, dealer markups, and
other transaction costs and may result in the recognition of gains that may be
distributed to shareholders. Portfolio turnover in excess of 100% is considered
high and increases such costs.
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<PAGE>
Even when portfolio turnover exceeds 100%, however, the Fund does not regard
portfolio turnover as a limiting factor.
RISK FACTORS
The following describes certain risks involved with investing in the
Funds in addition to those described in the prospectuses or elsewhere in this
Statement of Additional Information.
Foreign Securities
The Funds may purchase securities in foreign countries. Accordingly,
shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments.
Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation; taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations; foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments); default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the United States. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards. Further, these Funds may encounter difficulties in pursuing
legal remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs
relating to investments by the Funds in other countries are generally greater
than in the United States. Foreign markets have different clearance and
settlement procedures from those in the United States, and certain markets have
experienced times when settlements did not keep pace with the volume of
securities transactions which resulted in settlement difficulty. The inability
of a Fund to make intended security purchases due to settlement difficulties
could cause it to miss attractive investment opportunities. Inability to sell a
portfolio security due to settlement problems could result in loss to the Fund
if the value of the portfolio security declined, or result in claims against the
Fund if it had entered into a contract to sell the security. In certain
countries there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
United States. The securities markets of many of the countries in which these
Funds may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States.
Because certain securities may be denominated in foreign currencies,
the value of such securities will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. A Fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange among the currencies of different nations, and a Fund may therefore
engage in foreign currency hedging strategies. Such strategies, however, involve
certain transaction costs and investment risks, including dependence upon the
Manager's ability to predict movements in exchange rates.
B-17
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Some countries in which one of these Funds may invest may also have
fixed or managed currencies that are not freely convertible at market rates into
the U.S. dollar. Certain currencies may not be internationally traded. A number
of these currencies have experienced steady devaluation relative to the U.S.
dollar, and such devaluations in the currencies may have a detrimental impact on
the Fund. Many countries in which a Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuation in inflation rates may have negative
effects on certain economies and securities markets. Moreover, the economies of
some countries may differ favorably or unfavorably from the U.S. economy in such
respects as the rate of growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments. Certain
countries also limit the amount of foreign capital that can be invested in their
markets and local companies, creating a "foreign premium" on capital investments
available to foreign investors such as the Funds. The Funds may pay a "foreign
premium" to establish an investment position which it cannot later recoup
because of changes in that country's foreign investment laws.
Emerging Market Countries
The Funds, particularly the Emerging Markets Fund, may invest in
securities of companies domiciled in, and in markets of, so-called "emerging
market countries." The Funds may also invest in certain debt securities issued
by the governments of emerging markets countries that are, or may be eligible
for, conversion into investments in emerging markets companies under debt
conversion programs sponsored by such governments. The Funds deem securities
that are convertible to equity investments to be equity-derivative securities.
The Funds consider a company to be an emerging markets company if its
securities are principally traded in the capital market of an emerging markets
country, it derives 50% of its total revenue from either goods produced or
services rendered in emerging markets countries or from sales made in such
emerging markets countries, regardless of where the securities of such companies
are principally traded; or it is organized under the laws of, and with a
principal office in, an emerging markets country. An emerging markets country is
one having an economy that is or would be considered by the World Bank or the
United Nations to be emerging or developing.
Investments in companies and markets of emerging market countries may
be subject to potentially higher risks than investments in developed countries.
These risks include (i) volatile social, political and economic conditions; (ii)
the small current size of the markets for such securities and the currently low
or nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) the existence of national policies which may
restrict these Funds' investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests; (iv)
foreign taxation; (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain emerging market countries,
of a capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in certain emerging
market countries may be slowed or reversed by unanticipated political or social
events in such countries.
Exchange Rates and Policies
Funds that buy and sell foreign currencies endeavor to do so 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
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<PAGE>
the purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent these Funds from repatriating invested capital and
dividends, withhold portions of interest and dividends at the source or impose
other taxes, with respect to these Funds' investments in securities of issuers
of that country. There also is the possibility of expropriation,
nationalization, confiscatory or other taxation, foreign exchange controls
(which may include suspension of the ability to transfer currency from a given
country), default in foreign government securities, political or social
instability or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
These Funds may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Board 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 domestic and foreign securities
depositories (see "Investment Management and Other Services").
Small Companies
The Funds may make investments in smaller companies that may benefit
from the development of new products and services. Such smaller companies may
present greater opportunities for capital appreciation but may involve greater
risk than larger, more mature issuers. Such smaller companies may have limited
product lines, markets or financial resources, and their securities may trade
less frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
Equity Swaps
The Funds may invest in equity swaps. Equity swaps are derivatives that
allow the parties to exchange the dividend income or other components of return
on an equity investment (e.g., a group of equity securities or an index) for a
component of return on another non-equity or equity investment. The value of
equity swaps can be very volatile. To the extent the Manager does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, the Fund may suffer a loss. The value of some components of
an equity swap (like the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults.
Hedging Transactions
While transactions in forward contracts, options, futures contracts and
options on futures (i.e., "hedging positions") may reduce certain risks, such
transactions themselves entail certain other risks. Thus, while a Fund may
benefit from the use of hedging positions, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in a poorer
overall performance for that Fund than if it had not entered into any hedging
positions. If the correlation between a hedging position and portfolio position
which is intended to
B-19
<PAGE>
be protected is imperfect, the desired protection may not be obtained, and a
Fund may be exposed to risk of financial loss.
Perfect correlation between a Fund's hedging positions and portfolio
positions may be difficult to achieve because hedging instruments in many
foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
each Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of a Fund's outstanding voting
securities as defined in the Investment Company Act. 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 that Fund would be invested in such issuer. There
are no limitations with respect to the remaining 25% of that
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, 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 for temporary or emergency
purposes from a bank and then not in excess of 10%
(one third in the case of the Small Cap Opportunities
Fund) of its total assets (at the lower of cost or
fair market value). Any such borrowing will be made
only if immediately thereafter there is an asset
coverage of at least 300% of all borrowings, 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 and one third in the case
of the Small Cap Opportunities 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 a 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 or commodities or commodity contracts;
however, each Fund, to the extent not otherwise prohibited in
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
B-20
<PAGE>
(including forward currency exchange contracts), futures
contracts, and related options generally as described in this
Statement of Additional Information. As an operating policy
which may be changed without shareholder approval, each 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 in securities of other investment companies, except to
the extent permitted by the Investment Company Act and
discussed in this Statement of Additional Information or as
such securities may be acquired as part of a merger,
consolidation or acquisition of assets.
8. 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 that
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.)
9. Invest in any issuer for purposes of exercising control or
management of the issuer. (This is an operating policy which
may be changed without shareholder approval, consistent with
the Investment Company Act.)
10. 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, each Fund generally relies on
the U.S. Office of Management and Budget's Standard Industrial
Classifications.
11. Issue senior securities, as defined in the Investment Company
Act, except that this restriction shall not be deemed to
prohibit each Fund from (a) making any permitted borrowings,
mortgages or pledges, or (b) entering into permissible
repurchase and dollar roll transactions.
12. Except as described in 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 each Fund's
total assets. (This is an operating policy which may
be changed without shareholder approval.)
B-21
<PAGE>
13. Except as described in 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.)
14. Invest in warrants, valued at the lower of cost or market, in
excess of 5% of the value of that Fund's net assets. Included
in such amount, but not to exceed 2% of the value of that
Fund's net assets, may be warrants which are not listed on the
New York Stock Exchange or American Stock Exchange. Warrants
acquired by that 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.)
15. (a) Purchase or retain in that 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. (These are operating
policies that may be changed without shareholder
approval.)
16. Invest in commodities, except for futures contracts or options
on futures contracts if, as a result thereof, 5% or less of
that 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
which may be changed without shareholder vote, these restrictions may be amended
upon approval by the Board and notice to shareholders. If there is a change in
the investment objective or policies of the Fund, a shareholder should consider
whether the Fund remains an appropriate investment in light of its then-current
financial positions and needs.
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 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.
B-22
<PAGE>
The Funds also may derive capital gains or losses in connection with
sales or other dispositions of their portfolio securities. Any net gain a Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year a Fund realizes a
net gain on transactions involving investments held for the period required for
long-term capital gain or loss recognition or otherwise producing long-term
capital gains and losses, the Fund will have a net long-term capital gain. After
deduction of the amount of any net short-term capital loss, the balance (to the
extent not offset by any capital losses carried over from the eight previous
taxable years) will be distributed and treated as long-term capital gains in the
hands of the shareholders regardless of the length of time that Fund's shares
may have been held by the shareholders.
The maximum long-term capital gains rate for individuals is 20% with
respect to capital assets held for more than 12 months. The maximum capital
gains rate for corporate shareholders is the same as the maximum tax rate for
ordinary income.
Any dividend or distribution per share paid by a 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.
Dividends and other distributions will be reinvested in additional
shares of the applicable Fund unless the shareholder has otherwise indicated.
Investors have the right to change their elections with respect to the
reinvestment of dividends and distributions by notifying the Transfer Agent in
writing, but any such change will be effective only as to dividends and other
distributions for which the record date is seven or more business days after the
Transfer Agent has received the written request.
Tax Information. Each Fund has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. Each Fund that has filed a tax
return has so qualified and elected in prior tax years. Each Fund's policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Internal Revenue Code, so that 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, each Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stocks or other securities, or other
income (generally including gains from options, futures or forward contracts)
derived with respect to the business of investing in stock, securities or
currency and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the market value of its assets is represented by
cash, cash items, U.S. government securities, securities of other regulated
investment companies and other securities limited, for purposes of this
calculation, in the case of other securities of any one issuer to an amount not
greater than 5% of that Fund's assets or 10% of the voting securities of the
issuer, and (ii) not
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<PAGE>
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 Internal Revenue 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
Internal Revenue Code. If a Fund is unable to meet certain requirements of the
Internal Revenue Code, it may be subject to taxation as a corporation.
Distributions of net investment income and net realized capital gains
by a Fund will be taxable to shareholders whether made in cash or reinvested in
shares. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from the eight prior taxable years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of a Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Funds or any securities dealer effecting a redemption of the Funds'
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, the Funds will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required certifications on the
Account Application Form or with respect to which a Fund or the securities
dealer has been notified by the IRS that the number furnished is incorrect or
that the account is otherwise subject to withholding.
The Funds intend to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, each Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
A Fund may receive dividend distributions from U.S. corporations. To
the extent that a Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Internal Revenue Code,
corporate shareholders of the Fund may be entitled to the "dividends received"
deduction. Availability of the deduction is subject to certain holding period
and debt-financing limitations.
If more than 50% in value of the total assets of a Fund at the end of
its fiscal year is invested in stock or other securities of foreign
corporations, that Fund may elect to pass through to its shareholders the pro
rata share of all foreign income taxes paid by that Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro rata share of any foreign income taxes paid by that Fund, and (ii) entitled
either to deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Internal Revenue Code, including
certain holding period requirements. In this case, shareholders will be informed
in writing by that Fund at the end of each calendar year regarding the
availability of any credits on and the amount of foreign source income
(including or excluding foreign income taxes paid by that Fund) to be included
in their income tax returns. If 50% or less in value of that Fund's total assets
at the end of its fiscal year are invested in stock or other securities of
foreign corporations, that Fund will not be entitled under the Internal Revenue
Code to pass
B-24
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through to its shareholders their pro rata share of the foreign income taxes
paid by that Fund. In this case, these taxes will be taken as a deduction by
that Fund.
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. A Fund may
invest up to 10% of its total assets in the stock of foreign investment
companies. Such companies are likely to be treated as "passive foreign
investment companies" ("PFICs") under the Internal Revenue Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that these Funds
derive from PFIC stock may be subject to a non-deductible federal income tax at
the Fund level. In some cases, a 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. A Fund will endeavor to limit its
exposure to the PFIC tax by investing in PFICs only where the election to be
taxed currently will be made. Because it is not always possible to identify a
foreign issuer as a PFIC in advance of making the investment, a Fund 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 Internal Revenue Code and related regulations, including
certain diversification requirements that are in addition to the diversification
requirements of Subchapter M and the 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 a 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 Internal Revenue 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.
B-25
<PAGE>
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 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 "look-through"
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
Internal Revenue Code.
For accounting purposes, when a Fund purchases an option, the premium
paid by that Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by a Fund upon the
expiration or sale of such options held by that Fund generally will be capital
gain or loss.
Any security, option or other position entered into or held by a Fund
that substantially diminishes that Fund's risk of loss from any other position
held by that Fund may constitute a "straddle" for federal income tax purposes.
In general, straddles are subject to certain rules that may affect the amount,
character, and timing of a
B-26
<PAGE>
Fund's gains and losses with respect to straddle positions by requiring, among
other things, that the loss realized on disposition of one position of a
straddle be deferred until gain is realized on disposition of the offsetting
position; that a Fund's holding period in certain straddle positions not begin
until the straddle is terminated (possibly resulting in the gain being treated
as short-term capital gain rather than long-term capital gain); and that losses
recognized with respect to certain straddle positions, which would otherwise
constitute short-term capital losses, be treated as long-term capital losses.
Different elections are available to a Fund that may mitigate the effects of the
straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Internal Revenue Code ("Section 1256 Contracts")
and that are held by a Fund at the end of its taxable year generally will be
required to be "marked to market" for federal income tax purposes, that is,
deemed to have been sold at market value. Sixty percent of any net gain or loss
recognized on these deemed sales and 60% of any net gain or loss realized from
any actual sales of Section 1256 Contracts will be treated as long-term capital
gain or loss, and the balance will be treated as short-term capital gain or
loss.
Section 988 of the Internal Revenue 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 Internal
Revenue 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
Internal Revenue Code, rather than as capital gain or loss.
Redemptions and exchanges of shares of a Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. All or a portion of a loss realized upon the redemption of
shares of a Fund may be disallowed to the extent shares of that Fund are
purchased (including shares acquired by means of reinvested dividends) within 30
days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Funds. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
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 Funds.
B-27
<PAGE>
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for the overall management of
the Funds, including general supervision and review of their investment
activities. The officers (the Trust as well as two affiliated Trusts, The
Montgomery Funds and The Montgomery Funds II, have the same 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:
George A. Rio, President and Treasurer (born 1955)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. (FDI)
(since April 1998). From June 1995 to March 1998, he was Senior Vice President,
Senior Key Account Manager for Putnam Mutual Funds. From May 1994 to June 1995,
he was Director of business development for First Data Corporation. From
September 1993 to May 1994, he was Senior Vice President and Manager of Client
Services, and Director of Internal Audit at the Boston Company.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (born 1966)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Assistant Vice President of FDI and an officer of certain investment
companies advised or administered by Morgan, Waterhouse, RCM and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a Senior Paralegal at The Boston Company Advisers, Inc.
(TBCA).
Margaret W. Chambers, Secretary (born 1959)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of FDI (since April 1998). From August 1996
to March 1998, Ms. Chambers was Vice President and Assistant General Counsel for
Loomis, Sayles & Company, L.P. From January 1986 to July 1996, she was an
associate with the law firm of Ropes & Gray.
Christopher J. Kelley, Vice President and Assistant Secretary (born 1964)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies advised or administered by Morgan,
Waterhouse and Harris or their respective affiliates. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From 1992 to
1994, Mr. Kelley was employed by Putnam Investments in legal and compliance
capacities. Prior to 1992, Mr. Kelley attended Boston College Law School, from
which he graduated in May 1992.
B-28
<PAGE>
Mary A. Nelson, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus, Waterhouse, RCM and Harris or their respective affiliates.
From 1989 to 1994, Ms. Nelson was Assistant Vice President and Client Manager
for The Boston Company, Inc.
Gary S. MacDonald, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald is the
Vice President of FDI with which he has been associated since November 1996. He
also is an officer of certain investment companies advised or administered by
RCM. From September 1992 to November 1996, he was Vice President of Bay Banks
Investment Management/Bay Bank Financial Services; and from April 1989 to
September 1992, he was an Analyst at Wellington Management Company.
Marie E. Connolly, Vice President and Assistant Treasurer (born 1957)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies advised or
administered by Morgan and Dreyfus or their respective affiliates. From December
1991 to July 1994, Ms. Connolly was President and Chief Compliance Officer of
FDI. Prior to December 1991, Ms. Connolly served as Vice President and
Controller, and later Senior Vice President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (born 1969)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Conroy is the
Assistant Vice President and Manager of Treasury Services and Administration of
FDI and an officer of certain investment companies advised or administered by
Morgan and Dreyfus or their respective affiliates. Prior to April 1997, Mr.
Conroy was Supervisor of Treasury Services and Administration of FDI. From April
1993 to January 1995, Mr. Conroy was a Senior Fund Accountant for Investors Bank
& Trust Company. From December 1991 to March 1993, Mr. Conroy was employed as a
Fund Accountant at The Boston Company, Inc.
Joseph F. Tower, III, Vice President and Assistant Treasurer (born 1962)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual; and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
B-29
<PAGE>
John A. Farnsworth, Trustee (born 1941)
One California Street, Suite 1950, San Francisco, California 94111. Mr.
Farnsworth is a partner of Pearson, Caldwell & Farnsworth, Inc., an executive
search consulting firm. From May 1988 to September 1991, Mr. Farnsworth was the
Managing Partner of the San Francisco office of Ward Howell International, Inc.,
an executive recruiting firm. From May 1987 until May 1988, Mr. Farnsworth was
Managing Director of Jeffrey Casdin & Company, an investment management firm
specializing in biotechnology companies. From May 1984 until May 1987, Mr.
Farnsworth served as a Senior Vice President of Bank of America and head of the
U.S. Private Banking Division.
Andrew Cox, Trustee (born 1944)
750 Vine Street, Denver, Colorado 80206. Since June 1988, Mr. Cox has been
engaged as an independent investment consultant. From September 1976 until June
1988, Mr. Cox was a Vice President of the Founders Group of Mutual Funds,
Denver, Colorado, and Portfolio Manager or Co-Portfolio Manager of several of
the mutual funds in the Founders Group.
Cecilia H. Herbert, Trustee (born 1949)
2636 Vallejo Street, San Francisco, California 94123. Ms. Herbert was Managing
Director of Morgan Guaranty Trust Company. From 1983 to 1991 she was General
Manager of the bank's San Francisco office, with responsibility for lending,
corporate finance and investment banking. Ms. Herbert is a member of the Boards
of Groton School and Catholic Charities of San Francisco. Ms. Herbert is also a
member of the Archdiocese of San Francisco Finance Council, where she chairs the
Investment Committee.
R. Stephen Doyle, Chairman of the Board of Trustees (born 1939).+
101 California Street, San Francisco, California 94111. R. Stephen Doyle, the
founder of Montgomery Asset Management, began his career in the financial
services industry in 1974. Before starting Montgomery Asset Management in 1990,
Mr. Doyle was a General Partner and member of the Management Committee at
Montgomery Securities with specific responsibility for private placements and
venture capital. Prior to joining Montgomery Securities, Mr. Doyle was at E. F.
Hutton & Co. as a Vice President with responsibility for both retail and
institutional accounts. Mr. Doyle was also with Connecticut General Insurance,
where he served as a Consultant to New York Stock Exchange Member Firms in the
area of financial planning.
<TABLE>
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from the
Trust for performing the duties of their offices. However, those officers and
Trustees who are officers or partners of the Manager may receive remuneration
indirectly because the Manager will receive a management fee from 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 each Trust to each of the Trustees during the fiscal year
ended December 31, 1998, and the aggregate
- --------------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-30
<PAGE>
compensation paid to each of the Trustees during the fiscal year ended December
31, 1998, by all of the registered investment companies to which the Manager
provides investment advisory services, are set forth below:
<CAPTION>
-----------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1998
- --------------------------------------------------------------------------------------------------------------------------------
Pension or Retirement Benefits Total Compensation From the Trust and
Aggregate Compensation from Accrued as Part of Fund Fund Complex
Name of Trustee The Montgomery Funds III Expenses* (2 Additional Trusts)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- --------------------------------------------------------------------------------------------------------------------------------
John A. Farnsworth $5,000 -- $45,000
- --------------------------------------------------------------------------------------------------------------------------------
Andrew Cox $5,000 -- $45,000
- --------------------------------------------------------------------------------------------------------------------------------
Cecilia H. Herbert $5,000 -- $45,000
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* The Trust does not maintain pension or retirement plans.
</FN>
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Services. As stated in each Prospectus,
investment management services are provided to the Funds by Montgomery Asset
Management, LLC (the "Manager"), pursuant to an Investment Management Agreement
between the Manager and The Montgomery Funds dated July 31, 1997 (the
"Agreement").
The Agreement is in effect with respect to each Fund for two years
after the Fund's inclusion in the Trust's Agreement (on or around its beginning
of public operations) and then continue for each Fund for periods not exceeding
one year so long as such continuation is approved at least annually by (1) the
Board or the vote of a majority of the outstanding shares of that Fund, and (2)
a majority of the Trustees who are not interested persons of any party to the
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, each Fund pays the Manager
a management fee (accrued daily but paid when requested by the Manager) based
upon the average daily net assets of the Fund at the following annual rates:
- --------------------------------------------------------------------------------
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
- --------------------------------------------------------------------------------
Growth Fund First $500 million 1.00%
Next $500 million 0.90%
Over $1 billion 0.80%
- --------------------------------------------------------------------------------
Emerging Markets Fund First $250 million 1.25%
Over $250 million 1.00%
- --------------------------------------------------------------------------------
Small Cap Opportunities Fund First $200 million 1.20%
Next $300 million 1.10%
B-31
<PAGE>
- --------------------------------------------------------------------------------
FUND AVERAGE DAILY NET ASSETS ANNUAL RATE
- --------------------------------------------------------------------------------
Over $500 million 1.00%
- --------------------------------------------------------------------------------
As noted in the Prospectuses, 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 (1.50%) of the Small Cap Opportunities
Fund's 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,
expenses incurred in connection with any merger or reorganization or
extraordinary expenses such as litigation.
The Agreement was approved with respect to the Funds by the Board 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. The Manager's ability to request reimbursement is subject to various
conditions. First, any reimbursement is subject to a Fund's ability to effect
such reimbursement and remain in compliance with applicable expense limitations
in place at that time. Second, the Manager must specifically request the
reimbursement from the Board. Third, the Board must approve such reimbursement
as appropriate and not inconsistent with the best interests of the Fund and the
shareholders at the time such reimbursement is requested. Because of these
substantial contingencies, the potential reimbursements will be accounted for as
contingent liabilities that are not recordable on the balance sheet of a Fund
until collection is probable; but the full amount of the potential liability
will appear footnote to each Fund's financial statements. At such time as it
appears probable that a Fund is able to effect such reimbursement, that the
Manager intends to seek such reimbursement and that the Board has or is likely
to approve the payment of such reimbursement, the amount of the reimbursement
will be accrued as an expense of that Fund for that current period.
<TABLE>
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 Agreement
may have instead been waived by the Manager, but may be subject to reimbursement
by the respective Funds as discussed previously.
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR OR PERIOD ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
FUND 1998 1997 1996
- --------------------------------------------------------- --------------------- ---------------
<S> <C> <C> <C>
Growth Fund* $ 143,412 $ 71,499 $ 10,449
- --------------------------------------------------------- --------------------- ---------------
Emerging Markets Fund* $ 1,146,101 $ 1,201,496 $ 105,768
- --------------------------------------------------------- --------------------- ---------------
Small Cap Opportunities Fund* $ 14,153 $ 0 $ 0
- --------------------------------------------------------- --------------------- ---------------
B-32
<PAGE>
<FN>
* The Emerging Markets Fund commenced operations on February 2, 1996; the
Growth Fund commenced operations on February 9, 1996; and the Small Cap
Opportunities Fund commenced operations on May 1, 1998.
</FN>
</TABLE>
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.
The Custodian. The Chase Manhattan Bank, as the successor to the
custody business of Morgan Stanley Trust Company, serves as principal Custodian
of the Funds' assets, which are maintained at the Custodian's principal office,
270 Park Avenue, New York, New York 10017-2070, and at the offices of its
branches and agencies throughout the world. The Board has delegated various
foreign custody responsibilities to the Custodian, as the "Foreign Custody
Manager" for the Funds to the extent permitted by Rule 17f-5. The Custodian has
entered into agreements with foreign sub-custodians in accordance with
delegation instructions approved by the Board pursuant to Rule 17f-5 under the
Investment Company Act. The Custodian, its branches and sub-custodians generally
hold certificates for the securities in their custody, but may, in certain
cases, have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is based on a
schedule of charges agreed on from time to time.
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 the Funds and which broker-dealers are eligible to execute
the Fund's portfolio transactions, subject to the instructions of, and review
by, that Fund and its Board. Purchases and sales of securities within the U.S.
other than on a securities exchange will generally be executed directly with a
"market-maker" unless, in the opinion of the Manager or a Fund, a better price
and execution can otherwise be obtained by using a broker for the transaction.
The Emerging Markets Fund contemplates 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
B-33
<PAGE>
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter that has
provided research or other services as discussed below.
In placing portfolio transactions, the Manager will use its best
efforts to choose a broker-dealer capable of providing the services necessary
generally to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the firm's ability to execute trades in a specific
market required by a 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.
Provided the Trust's officers are satisfied that the Funds are
receiving the most favorable price and execution available, the Manager may also
consider the sale of the Funds' shares as a factor in the selection of
broker-dealers to execute portfolio transactions. The placement of portfolio
transactions with broker-dealers who sell shares of the Funds is subject to
rules adopted by the NASD Regulation, Inc.
While the Funds' general policy is to seek first to obtain the most
favorable price and execution available, in selecting a broker-dealer to execute
portfolio transactions, weight may also be given to the ability of a
broker-dealer to furnish brokerage, research, and statistical services to the
Funds or to the Manager, even if the specific services were not imputed just to
the Funds and may be lawfully and appropriately used by the Manager in advising
other clients. The Manager considers such information, which is in addition to,
and not in lieu of, the services required to be performed by it under the
Agreement, to be useful in varying degrees, but of indeterminable value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, a Fund may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by that Fund and the Manager to be reasonable in
relation to the value of the brokerage and/or research services provided by such
broker-dealer, which services either produce a direct benefit to that Fund or
assist the Manager in carrying out its responsibilities to that Fund. The
standard of reasonableness is to be measured in light of the Manager's overall
responsibilities to the Funds. The Board reviews all brokerage allocations where
services other than best price and execution capabilities are a factor to ensure
that the other services provided meet the criteria outlined above and produce a
benefit to the Funds.
Investment decisions for a Fund are made independently from those of
other client accounts of the Manager or its affiliates, and suitability is
always a paramount consideration. Nevertheless, it is possible that at times the
same securities will be acceptable for one or more 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. The Manager has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Funds and the Manager's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Manager's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and provide portfolio managers with
B-34
<PAGE>
reasonable flexibility to use allocation methodologies that are appropriate to
their investment discipline on client accounts.
To the extent any of the Manager's client accounts and a Fund seek to
acquire the same security at the same general time (especially if that security
is thinly traded or is a small-cap stock), that Fund may not be able to acquire
as large a portion of such security as it desires or it may have to pay a higher
price or obtain a lower yield for such security. Similarly, a Fund may not be
able to obtain as high a price for, or as large an execution of, an order to
sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Manager, taking into account the respective sizes of the
accounts, the amount being purchased or sold, and other factors deemed relevant
by the Manager. In many cases, a Fund's transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that 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.
The Manager's sell discipline for investments in issuers is based on
the premise of a long-term investment horizon; however, sudden changes in
valuation levels arising from, for example, new macroeconomic policies,
political developments, and industry conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon.
For each Fund, sell decisions at the country level are dependent on the
results of the Manager's asset allocation model. Some countries impose
restrictions on repatriation of capital and/or dividends which would lengthen
the Manager's assumed time horizon in those countries. In addition, the rapid
pace of privatization and initial public offerings creates a flood of new
opportunities which must continually be assessed against current holdings.
At the company level, sell decisions are influenced by a number of
factors including current stock valuation relative to the estimated fair value
range, or a high P/E relative to expected growth. Negative changes in the
relevant industry sector, or a reduction in international competitiveness and a
declining financial flexibility may also signal a sell.
<TABLE>
For the year ended December 31, 1998, the Funds' total securities
transactions generated commissions of $806,413.29, of which $2,181.50 was paid
to Nationsbanc Montgomery Securities. For the year ended December 31, 1997, the
Funds' total securities transactions generated commissions of $1,051,583.29 of
which $301 was paid to Nationsbanc Montgomery Securities. Throughout 1996 and
through July 31, 1997, Nationsbanc Montgomery Securities, formerly Montgomery
Securities, was affiliated with the Funds through its ownership of Montgomery
Asset Management L.P., the former Manager of the Funds. For the three fiscal
years ended December 31, 1998, the Funds securities transactions generated
commissions of:
B-35
<PAGE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Commissions for the fiscal year ended:
- ----------------------------------------------------------------------------------------------------
Fund December 31, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $ 51,175.30 $ 59,348.80 $ 5,361.79
- ----------------------------------------------------------------------------------------------------
Emerging Markets Fund $ 15,071.89 $992,234.49 $135,971.75
- ----------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund $740,166.10 N/A N/A
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Funds do not effect securities transactions through brokers in
accordance with any formula, nor do they effect securities transactions through
such brokers solely for selling shares of the Funds. However, 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to (i) suspend the
continued offering of its Funds' shares, and (ii) reject purchase orders in
whole or in part when, in the judgment of the Manager, such suspension or
rejection is in the best interest of a Fund.
When in the judgment of the Manager it is in the best interests of a
Fund, an investor may purchase shares of that Fund by tendering payment in kind
in the form of securities, provided that any such tendered securities are
readily marketable (e.g., the Fund will not acquire restricted securities),
their acquisition is consistent with that Fund's investment objective and
policies, and the tendered securities are otherwise acceptable to that Fund's
Manager. Such securities are acquired by that Fund only for the purpose of
investment and not for resale. For the purposes of sales of shares of that Fund
for such securities, the tendered securities shall be valued at the identical
time and in the identical manner that the portfolio securities of that Fund are
valued for the purpose of calculating the net asset value of that Fund's shares.
A shareholder who purchases shares of a Fund by tendering payment for the shares
in the form of other securities may be required to recognize gain or loss for
income tax purposes on the difference, if any, between the adjusted basis of the
securities tendered to the Fund and the purchase price of the Fund's shares
acquired by the shareholder.
Payments to shareholders for shares of a Fund redeemed directly from
that Fund will be made as promptly as possible but no later than three days
after receipt by the Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Fund's Prospectus, except that a
Fund may suspend the right of redemption or postpone the date of payment during
any period when (i) trading on the New York Stock Exchange (NYSE) is restricted
as determined by the SEC, or the NYSE is closed for other than weekends and
holidays; (ii) an emergency exists as determined by the SEC (upon application by
a Fund pursuant to Section 22(e) of the Investment Company Act) making disposal
of portfolio securities or valuation of net assets of a Fund not reasonably
practicable; or (iii) for such other period as the SEC may permit for the
protection of the Fund's shareholders.
B-36
<PAGE>
The Funds intend to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Funds may
make payment partly in their portfolio securities with a current amortized cost
or market value, as appropriate, equal to the redemption price. Although the
Funds do not anticipate that they will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Funds pay in cash all requests for redemption by any shareholder of record
limited in amount, however, during any 90-day period to the lesser of $250,000
or 1% of the value of the Trust's net assets at the beginning of such period.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of a Fund's portfolio
securities at the time of redemption or repurchase.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of a Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of that Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As noted in the Prospectuses, the net asset value of shares of the
Funds generally will be determined at least once daily as of 4:00 P.M., Eastern
time, (or earlier when trading closes earlier) on each day the NYSE is open for
trading. It is expected that the NYSE will be closed on Saturdays and Sundays
and for New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The
national bank holidays, in addition to New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas, include Columbus Day and Veterans Day. The Funds
may, but do not expect to, determine the net asset values of their shares on any
day when the NYSE is not open for trading if there is sufficient trading in
their portfolio securities on such days to affect materially per-share net asset
value.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Board.
The Funds' securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid
B-37
<PAGE>
and asked price. Securities that are traded on more than one exchange are valued
on the exchange determined by the Manager to be the primary market. Securities
traded in the over-the-counter market are valued at the mean between the last
available bid and asked price prior to the time of valuation. Securities and
assets for which market quotations are not readily available (including
restricted securities which are subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the direction of
the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to a 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, or at fair value as determined in good faith by procedures approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities, and yield-to-maturity information.
An option that is written by a Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Board.
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. The Board 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
B-38
<PAGE>
converting a foreign currency into U.S. dollars, the Board in good faith will
establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
PERFORMANCE INFORMATION
As noted in the Prospectuses, 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. A Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
1-, 5- or 10-year period at the end of each
respective period (or fractional 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 $1,000.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of a
l-, 5- or 10-year period at the end of a l-,
5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions and complete
redemption of the hypothetical investment at
the end of the measuring period.
B-39
<PAGE>
Each Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The average annual total return for each Fund for the periods indicated
was as follows:
YEAR INCEPTION*
ENDED THROUGH
DECEMBER 31, DECEMBER 31,
FUND 1998 1998
------------ ------------
Growth Fund 2.93% 19.73%
Emerging Markets Fund (37.53)% (13.15)%
Small Cap Opportunities Fund (7.20)% (7.20)%
* 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 are as follows: February 9, 1996 for the
Growth Fund; February 2, 1996 for the Emerging Markets Fund; and May 1,
1998 for the Small Cap Opportunities Fund.
Comparisons. To help investors better evaluate how an investment in the
Funds might satisfy their investment objectives, advertisements and other
materials regarding the Funds may discuss various financial publications.
Materials may also compare performance (as calculated above) to performance as
reported by other investments, indices, and averages. Publications, indices and
averages, including but not limited to the following, may be used in a
discussion of a Fund's performance or the investment opportunities it may offer:
a) Standard & Poor's 500 Composite Stock Index, one or more of the
Morgan Stanley Capital International Indices, and one or more of the
International Finance Corporation Indices.
b) 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.
c) Other indices--including Consumer Price Index, Ibbotson, Micropal,
CNBC/Financial News Composite Index, MSCI EAFE Index (Morgan Stanley Capital
International, Europe, Australasia, Far East Index -- a capitalization-weighted
index that includes all developed world markets except for those in North
America), Datastream, Worldscope, NASDAQ, Russell 2000, and IFC Emerging Markets
Database.
In addition, one or more portfolio managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Funds.
B-40
<PAGE>
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formulae used by the Funds to calculate
their figures.
The Funds may also publish their relative rankings as determined by
independent mutual fund ranking services like Lipper Analytical Services, Inc.,
VARDS, and Morningstar, Inc.
Investors should note that the investment results of the Funds will
fluctuate over time, and any presentation of a Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what a investor's total return may be in any future period.
Reasons to Invest in the Funds. From time to time the Funds may publish
or distribute information and reasons supporting the Manager's belief that a
particular Fund may be appropriate for investors at a particular time. The
information will generally be based on internally generated estimates resulting
from the Manager's research activities and projections from independent sources.
These sources may include, but are not limited to, Bloomberg, Morningstar,
Barings, WEFA, consensus estimates, Datastream, Micropal, I/B/E/S Consensus
Forecast, Worldscope, and Reuters as well as both local and international
brokerage firms. For example, the Funds may suggest that certain countries or
areas may be particularly appealing to investors because of interest rate
movements, increasing exports, and/or economic growth. The Funds may, by way of
further example, present a region as possessing the fastest growing economies
and may also present projected gross domestic product (GDP) for selected
economies.
Research. The Manager has developed its own tradition of intensive
research and has made intensive research one of the important characteristics of
The Montgomery Funds style.
The portfolio managers for the Funds work extensively on developing an
in-depth understanding of particular foreign markets and particular companies.
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 countries.
Extensive research into companies that are not well known--discovering
new opportunities for investment--is a theme that may be used for the Funds.
In-depth research, however, goes beyond gaining an understanding of
unknown opportunities. The portfolio analysts have also developed new ways of
gaining information about well-known parts of the domestic market. The growth
equity team, for example, has developed its own strategy for analyzing the
growth potential of U.S. companies, often large, well-known companies.
From time to time, advertising and sales materials for the Montgomery
Funds may include biographical information about portfolio managers as well as
commentary by portfolio managers regarding investment strategy, asset growth,
current or past economic, political or financial conditions that may be of
interest to investors.
B-41
<PAGE>
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (as of December 31,
1998, over $4.5 billion for retail and institutional investors) and total
shareholders invested in the Funds (as of December 31, 1998, around 300,000).
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress through
periodic reports. Financial statements will be submitted to shareholders
semi-annually, at least one of which will be certified by independent public
accountants. All expenses incurred in connection with the organization of the
Trust have been assumed by the Emerging Markets Fund and the Growth Fund.
Expenses incurred in connection with the establishment and registration of
shares of each Fund constituting the Trust as separate series of the Trust have
been assumed by each respective Fund, and are being amortized over a period of
five years commencing with their respective dates of inception. The Manager has
agreed, to the extent necessary, to advance the organizational expenses incurred
by certain Funds and to be reimbursed for such expenses after commencement of
those Funds' operations. Investors purchasing shares of a Fund bear such
expenses only as they are amortized daily against that Funds' investment income.
As noted above, The Chase Manhattan Bank (the "Custodian") acts as
custodian of the securities and other assets of the Funds. The Custodian does
not participate in decisions relating to the purchase and sale of securities by
the Funds.
DST Systems, Inc. (DST), P.O. Box 419073, Kansas City, Missouri
64141-6073, is the Funds' Transfer and Dividend Disbursing Agent. DST provides
transfer agent services and performs certain recordkeeping and accounting
functions for the Funds.
PricewaterhouseCoopers, LLP is the independent auditor for the Funds.
The validity of shares offered hereby has been passed on by Paul,
Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Among the Board's powers enumerated in the Agreement and 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.
<TABLE>
As of January 31, 1999, to the knowledge of the Funds, the following
shareholders owned of record 5% or more of the outstanding shares of the
respective Funds as indicated below:
B-42
<PAGE>
<CAPTION>
- ------------------------------------------------------------ ---------------------------- ----------------------------
NAME OF FUND/NAME AND ADDRESS OF RECORD OWNER NUMBER OF SHARES OWNED PERCENT OF SHARES
- ------------------------------------------------------------ ---------------------------- ----------------------------
Montgomery Variable Series:
Growth Fund
<S> <C> <C>
Canada Life Assurance Co. (Class 1) 74,665.9250 9.36%
300 University Avenue
Toronto, Ontario M5G 1R8
- ------------------------------------------------------------ ---------------------------- ----------------------------
BenefitsCorp Equities, Inc. (Class 1) 444,277.5450 55.68%
8515 East Orchard Road
Englewood, Colorado 80111
- ------------------------------------------------------------ ---------------------------- ----------------------------
Travelers Life Annuity 114,650.2270 14.37%
One Tower Square
Hartford, Connecticut 06183
- ------------------------------------------------------------ ---------------------------- ----------------------------
Peoples Benefit Life Insurance Co. 69,015.3640 8.65%
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499
- ------------------------------------------------------------ ---------------------------- ----------------------------
Montgomery Variable Series:
Emerging Markets Fund
American Skandia Life Assurance Corp. 9,568,166.8610 89.98%
1 Corporate Drive, 10th Floor
Shelton, Connecticut 06484
- ------------------------------------------------------------ ---------------------------- ----------------------------
Montgomery Variable Series:
Small Cap Opportunities Fund
Ohio National Financial 212,688.0760 100.00%
One Financial Way
Cincinnati, Ohio 45242
- ------------------------------------------------------------ ---------------------------- ----------------------------
</TABLE>
As of January 31, 1999, 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, although each Fund is a diversified series of the Trust.
Such a registration does not involve supervision of the management or policies
of the Funds. The Prospectuses 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
Audited financial statements for the relevant periods ended December
31, 1998, for The Montgomery Variable Series: Growth Fund, The Montgomery
Variable Series: Emerging Markets Fund and The Montgomery Variable Series: Small
Cap Opportunities Fund, as contained in the Annual Report to Shareholders of
such Funds for the fiscal year ended December 31, 1998 (the "Report"), are
incorporated herein by reference to the Reports.
B-43
<PAGE>
Appendix
Description ratings for Standard & Poor's Ratings Group ("S&P");
Moody's Investors Service, Inc., ("Moody's"), Fitch Investors Service, L.P.
("Fitch") and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
Standard & Poor's Rating Group
Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB Bonds rated BB have less near-term vulnerability to default
than other speculative grade debt. However, they face major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B Bonds rated B have a greater vulnerability to default but
presently have the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would likely impair capacity or willingness to pay
interest and repay principal.
CCC Bonds rated CCC have a current identifiable vulnerability to
default and are dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating.
D Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
B-44
<PAGE>
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the AAA (Prime Grade)
category.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Issues assigned an A rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues carrying this designation are regarded as having only
speculative capacity for timely payment.
C This designation is assigned to short-term obligations with
doubtful capacity for payment.
D Issues carrying this designation are in default, and payment
of interest and/or repayment of principal is in arrears.
Moody's Investors Service, Inc.
Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
generally are known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
B-45
<PAGE>
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and, therefore, not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack the characteristics of
a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category
and in the categories below B. The modifier 1 indicates a ranking for
the security in the higher end of a rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.
Commercial Paper Ratings
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity
for repayment of short-term promissory obligations, and ordinarily will
be evidenced by leading market positions in well established
industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate
liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations.
This ordinarily will be evidenced by many of the characteristics cited
B-46
<PAGE>
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Prime-3 (P-3) have
an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirements for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers (or related supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Investors Service, L.P.
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
B-47
<PAGE>
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1
categories.
B-48
<PAGE>
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
Duff & Phelps Credit Rating Co.
Bond Ratings
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
B-49
<PAGE>
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
Commercial Paper Ratings
Duff-1 The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having
very high certainty of timely payment with excellent liquidity
factors which are supported by ample asset protection. Risk
factors are minor.
Duff-2 Paper rated Duff-2 is regarded as having good certainty of
timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are
small.
Duff-3 Paper rated Duff-3 is regarded as having satisfactory
liquidity and other protection factors. Risk factors are
larger and subject to more variation. Nevertheless, timely
payment is expected.
Duff-4 Paper rated Duff-4 is regarded as having speculative
investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of
variation.
Duff-5 Paper rated Duff-5 is in default. The issuer has failed to
meet scheduled principal and/or interest payment.
B-50
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
THE MONTGOMERY FUNDS III
--------------
FORM N-1A
--------------
PART C
--------------
Item 23. Exhibits
(a) Agreement and Declaration of Trust dated August 16, 1994.
(b) By-Laws dated August 16, 1994.
(c) Instruments Defining Rights of Security Holder--Not
applicable.
(d) Investment Advisory Contract dated July 31, 1997.
(e) Form of Underwriting Agreement - Not applicable.
(f) Bonus or Profit Sharing Contracts - Not applicable.
(g) Form of Custody Agreement.
(h) Other Material Contracts:
(1) Form of Administrative Services Agreement.
(2) Form of Participation Agreement.
(i) Opinion of Counsel as to legality of shares
(j) Other Opinions - Independent Auditors' Consent.
(k) Omitted Financial Statements - Not applicable.
(l) Initial Capital Agreement - Letter of Understanding Regarding
Initial Shares dated April 7, 1995.
(m) Rule 12b-1 Plan - Not applicable.
(n) Financial Data Schedule - Financial Data Schedule is
incorporated by reference to Form N-SAR A filed on August 28,
1998.
(o) Rule 18f-3 Plan - Not applicable.
Item 24. Persons Controlled by or Under Common Control with the Fund
Montgomery Asset Management, LLC, a Delaware limited liability
company, is the manager of each series of the Registrant; of The Montgomery
Funds, a Massachusetts business trust; and of The Montgomery Funds II, a
Delaware business trust. Montgomery Asset Management, LLC is a subsidiary of
Commerzbank AG based in Frankfurt, Germany. The Registrant, The Montgomery Funds
and The Montgomery Funds II are deemed to be under the common control of each of
those two entities.
<PAGE>
Item 25. 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 or was an agent of
the Trust, against expenses, judgments, fines, settlement and other amounts
actually and reasonable incurred in connection with such proceeding if that
person acted in good faith and reasonably believed his or her conduct to be in
the best interests of the Trust. Indemnification will not be provided in certain
circumstances, however, including instances of willful misfeasance, bad faith,
gross negligence, and reckless disregard of the duties involved in the conduct
of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to the
Trustees, officers and controlling persons of the Registrant pursuant to the
foregoing provisions or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable in the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
Effective July 31, 1997, Montgomery Asset Management, L.P. completed
the sale of substantially all of its assets to the current investment manager,
Montgomery Asset Management, LLC ("MAM, LLC"), a subsidiary of Commerzbank A.G.
Information about the officers and directors of MAM, LLC is provided below. The
address for the following persons is 101 California Street, San Francisco,
California 94111.
R. Stephen Doyle Chairman of the Board of Directors and Chief
Executive Officer of MAM, LLC
Mark B. Geist President and Director of MAM, LLC
F. Scott Tuck Executive Vice President of MAM, LLC
David E. Demarest Chief Administrative Officer and Managing
Director of MAM, LLC
The following directors of MAM, LLC also are officers of Commerzbank
AG. The address for the following persons is Neue Mainzer Strasse 32-36,
Frankfurt am Main, Germany.
Heinz Josef Hockmann Director of MAM, LLC
Dietrich-Kurt Frowein Director of MAM, LLC
Andreas Kleffel Director of MAM, LLC
Before July 31, 1997, Montgomery Securities, which is a broker-dealer
and the prior principal underwriter of The Montgomery Funds and The Montgomery
Funds II, was the sole limited partner of the prior investment manager,
Montgomery Asset Management, L.P. ("MAM, L.P."). The general partner of MAM,
L.P. was a corporation, Montgomery Asset Management, Inc. ("MAM, Inc."), certain
of the officers and directors of which now serve in similar capacities for MAM,
LLC.
Item 27. Principal Underwriter
(a) Not Applicable.
(b) Not Applicable.
(c) Not Applicable.
C-2
<PAGE>
Item 28. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "Investment
Company Act") will be kept by the Registrant's Transfer Agent, DST Systems,
Inc., P.O. Box 1004 Baltimore, Kansas City, Missouri 64105, except those records
relating to portfolio transactions and the basic organizational and Trust
documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9),
(10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at 101
California Street, San Francisco, California 94111.
Item 29. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 30. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last
annual report to Shareholders, upon request and without
charge.
(c) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act which requires the prompt convening of
a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event
that less than a majority of the trustees have been elected to
such position by shareholders. Registrant has also undertaken
promptly to call a meeting of shareholders for the purpose of
voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of
not less than 10 percent of the Registrant's outstanding
shares and to assist its shareholders in communicating with
other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Amendment pursuant to Rule 485(b) under the 1933 Act, and that the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Francisco, the State of California, on this 12th day of April, 1999.
THE MONTGOMERY FUNDS III
By: George A. Rio*
--------------
George A. Rio
President and Principal Executive Officer;
Treasurer and Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
George A. Rio* President and April 12, 1999
- -------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the April 12, 1999
- ------------------ Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee April 12, 1999
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee April 12, 1999
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee April 12, 1999
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-----------------
Julie Allecta, Attorney-in-Fact pursuant to Powers of Attorney
previously filed.
C-4
- --------------------------------------------------------------------------------
Exhibit 23(a)
Agreement and Declaration of Trust
- --------------------------------------------------------------------------------
C-5
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
of
THE MONTGOMERY FUNDS III
a Delaware Business Trust
Principal Place of Business:
600 Montgomery Street
San Francisco, California 94111
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I Name and Definitions .................................... 1
1. Name .......................................................... 1
2. Definitions ................................................... 1
(a) Trust ................................................... 1
(b) Trust Property .......................................... 1
(c) Trustees ................................................ 1
(d) Shares .................................................. 2
(e) Shareholder ............................................. 2
(f) Person .................................................. 2
(g) Investment Company Act .................................. 2
(h) Commission and Principal Underwriter .................... 2
(i) Declaration of Trust .................................... 2
(j) By-Laws ................................................. 2
(k) Interested Person ....................................... 2
(l) Investment Adviser ...................................... 2
(m) Series .................................................. 2
(n) Certificate of Trust .................................... 2
(o) Class ................................................... 2
i
<PAGE>
Page
----
(p) Delaware Act ............................................ 3
ARTICLE II Purpose of Trust ........................................ 3
ARTICLE III Shares .................................................. 3
1. Division of Beneficial Interest ............................... 3
2. Ownership of Shares ........................................... 4
3. Transfer of Shares ............................................ 4
4. Investments in the Trust ...................................... 5
5. Status of Shares and Limitation of Personal Liability ......... 5
6. Power of Board of Trustees to Change Provisions
Relating to Shares ............................................ 5
7. Establishment and Designation of Series ....................... 6
(a) Assets Held with Respect to a Particular Series ......... 6
(b) Liabilities Held With Respect to a Particular Series .... 7
(c) Dividends, Distributions, Redemptions and Repurchases ... 7
(d) Voting .................................................. 7
(e) Equality ................................................ 8
(f) Fractions ............................................... 8
(g) Exchange Privilege ...................................... 8
(h) Combination of Series ................................... 8
(i) Elimination of Series ................................... 8
ii
<PAGE>
Page
----
8. Indemnification of Shareholders ............................... 8
ARTICLE IV The Board of Trustees ................................... 8
1. Number, Election and Tenure ................................... 8
2. Effect of Death, Resignation, etc. of a Trustee ............... 9
3. Powers ........................................................ 9
4. Payment of Expenses by the Trust .............................. 13
5. Payment of Expenses by Shareholders ........................... 13
6. Ownership of Assets of the Trust .............................. 13
7. Service Contracts ............................................. 13
8. Trustees and Officers as Shareholders ......................... 15
ARTICLE V Shareholders' Voting Powers and Meetings ................ 15
1. Voting Powers ................................................. 15
2. Voting Power and Meetings ..................................... 16
3. Quorum and Required Vote ...................................... 16
4. Action by Written Consent ..................................... 17
5. Record Dates .................................................. 17
6. Additional Provisions ......................................... 18
ARTICLE VI Net Asset Value, Distributions and Redemptions .......... 18
1. Determination of Net Asset Value, Net Income
and Distributions ............................................. 18
iii
<PAGE>
Page
----
2. Redemptions and Repurchases ................................... 18
3. Redemptions at the Option of the Trust ........................ 19
ARTICLE VII Compensation and Limitation of Liability of Trustees .... 19
1. Compensation .................................................. 19
2. Indemnification and Limitation of Liability ................... 19
3. Trustee's Good Faith Action, Expert Advice, No Bond
or Surety ................................................... 20
4. Insurance ..................................................... 20
ARTICLE VIII Miscellaneous ........................................... 20
1. Liability of Third Persons Dealing with Trustees .............. 20
2. Termination of Trust or Series ................................ 21
3. Merger and Consolidation ...................................... 21
4. Amendments .................................................... 22
5. Filing of Copies, References, Headings ........................ 23
6. Applicable Law ................................................ 23
7. Provisions in Conflict with Law or Regulations ................ 24
8. Business Trust Only ........................................... 24
9. Use of the Identifying Words "Montgomery" and
"The Montgomery Funds III" .................................. 24
iv
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
OF
THE MONTGOMERY FUNDS III
WHEREAS, THIS AGREEMENT AND DECLARATION OF TRUST is made and entered
into as of the date set forth below by the Trustees named hereunder for the
purpose of forming a Delaware business trust in accordance with the provisions
hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that a Certificate of Trust
be filed with Office of the Secretary of State of the State of Delaware and do
hereby declare that the Trustees will hold IN TRUST all cash, securities and
other assets which the Trust now possesses or may hereafter acquire from time to
time in any manner and manage and dispose of the same upon the following terms
and conditions for the pro rata benefit of the holders of Shares in this Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as THE MONTGOMERY FUNDS III,
and the Trustees shall conduct the business of the Trust under that name or any
other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required
by the context or specifically provided:
(a) The "Trust" refers to the Delaware business trust
established under the Delaware Act by this Agreement and Declaration of Trust,
as amended from time to time and the filing of the Certificate of Trust in the
Office of the Secretary of State of the State of Delaware;
(b) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is from time to time owned or held by or
for the account of the Trust, including without limitation the rights referenced
in Article VIII, Section 9 hereof;
(c) "Trustees" refers to the persons who have signed this
Agreement and Declaration of Trust, so long as they continue in office in
accordance with the terms hereof, and all other persons who may from time to
time be duly elected or appointed to serve on the Board of Trustees in
accordance with the provisions hereof, in each case so long as such Person shall
1
<PAGE>
continue in office in accordance with the terms of this Declaration of Trust,
and reference herein to a Trustee or the Trustees shall refer to such Person or
Persons in their capacity as trustees hereunder;
(d) "Shares" means the shares of beneficial interest into
which the beneficial interest in the Trust shall be divided from time to time
and includes fractions of Shares as well as whole Shares;
(e) "Shareholder" means a record owner of outstanding Shares;
(f) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof, whether domestic or foreign;
(g) The "Investment Company Act" refers to the Investment
Company Act of 1940 and the Rules and Regulations thereunder, all as amended
from time to time;
(h) The terms "Commission" and "Principal Underwriter" shall
have the meanings given them in the Investment Company Act;
(i) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;
(j) "By-Laws" shall mean the By-Laws of the Trust, as amended
from time to time, which By-Laws are expressly incorporated herein by reference
as part of the governing instruments within the meaning of the Delaware Act;
(k) The term "Interested Person" has the meaning given it in
Section 2(a)(19) of the Investment Company Act;
(l) "Investment Adviser" or "Manager" means a party furnishing
services to the Trust pursuant to any contract described in Article IV, Section
7(a) hereof;
(m) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article III hereof;
(n) "Certificate of Trust" means the certificate of trust, as
amended or restated from time to time, filed by the Trustees in the Office of
the Secretary of State of the State of Delaware in accordance with the Delaware
Act;
(o) "Class" means a class of Shares of a Series of the Trust
established in accordance with the provisions of Article III hereof; and
2
<PAGE>
(p) "Delaware Act" means the Delaware Business Trust Act 12
Del. C. ss ss 3801 et seq., as amended from time to time.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on
the business of a management investment company registered under the Investment
Company Act through one or more Series investing primarily in securities, and to
carry on such other business as the Trustees may from time to time determine
pursuant to their authority under the Declaration of Trust.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall at all times be divided into an unlimited number of
Shares, with a par value of $ .01 per Share. The Trustees may authorize the
division of Shares into separate Series and the division of Series into separate
classes of Shares. Subject to the further provisions of the Article III and any
applicable requirements of the Investment Company Act, the different Series
shall be established and designated, and the variations in the relative rights
and preferences as between the different Series shall be fixed and determined,
by the Trustees, in their sole discretion, and without obtaining any
authorization or vote of the shareholders of any Series or Class thereof. If
only one or no Series (or classes) shall be established, the Shares shall have
the rights and preferences provided for herein and in Article III, Section 6
hereof to the extent relevant and not otherwise provided for herein, and all
references to Series (and Classes thereof) shall be construed (as the context
may require) to refer to the Trust. All provisions herein relating to the Trust
shall apply equally to each Series of the Trust and each Class thereof, except
as the context otherwise requires.
Subject to the further provisions of this Article III and any
applicable requirements of the 1940 Act, the Trustees shall have full power and
authority, in their sole discretion, and without obtaining any authorization or
vote of the Shareholders of any Series or Class thereof, (i) to issue shares
without limitation as to number (including fractional Shares) to such persons
and for such amount and type of consideration, subject to any restriction set
forth in the By-Laws, including cash or securities, at such time or times and on
such terms as the Trustees may deem appropriate, (ii) to establish and designate
and to change in any manner any Series or Class thereof and to fix such
preferences, voting powers, rights, duties and privileges and business purpose
of each Series or Class thereof as the Trustees may from time to time determine,
which preferences, voting powers, rights, duties and privileges may be senior or
subordinate to (or in the case of business purpose, different from) any existing
Series or Class
3
<PAGE>
thereof and may be limited to specified property or obligations of the Trust or
profits and losses associated with specified property or obligations of the
Trust, (iii) to divide or combine the Shares of any particular Series or Class
thereof into a greater or lesser number of shares of that Series or Class
without thereby materially changing the proportionate beneficial interest of the
Shares of that Series or Class in the assets held with respect to that Series or
materially affecting the rights of Shares of any other Series, (iv) to classify
or reclassify any issued Shares of any Series or Class thereof into shares of
one or more Series or Classes thereof, and (v) to take such other action with
respect to the Shares as the Trustees may deem desirable.
Subject to the provisions of Section 7 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any series or Class thereof shall be entitled to receive
dividends when, if and as declared with respect thereto in the manner provided
in Article VI, Section 1 hereof. Subject to the distinctions permitted among
Classes of the same Series as established by the Trustees, consistent with the
requirements of the Investment Company Act, each Share of a Series of the Trust
shall represent an equal beneficial interest in the net assets of such Series,
and no Shares shall have any priority or preference over any other Share of the
same Series with respect to dividends or distributions upon termination of the
Trust or of such Series made pursuant to Article VIII, Section 4 hereof. All
dividends and distributions shall be made ratably among all Shareholders of a
particular Class of a particular Series and, if no Classes, of a particular
Series from the assets held with respect to such Series according to the number
of Shares of such Class of such Series or of such Series held of record by such
Shareholder on the record date for any dividend or distribution or on the date
of termination, as the case may be. Upon redemption of the Shares of any Series,
the applicable Shareholder shall be paid solely out of the funds and property of
such Series of the Trust. All Shares issued hereunder, including, without
limitation, Shares issued in connection with a dividend in Shares or a split or
reverse split of Shares, shall be fully paid and non-assessable. Except as
otherwise provided by the Trustees, Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued by
the Trust or any Series.
Section 2. Ownership of Shares. The ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent for the Trust,
which books shall be maintained separately for the Shares of each Series (or
class of each Series) of the Trust. No certificates certifying the ownership of
Shares shall be issued except as the Board of Trustees may otherwise determine
from time to time. The Trustees may make such rules as they consider appropriate
for the transfer of Shares of each Series (or class of each Series) of the Trust
and similar matters. The record books of the Trust as kept by the Trust or any
transfer or similar agent, as the case may be, shall be conclusive as to the
identity of the Shareholders of each Series (or class of each Series) of the
Trust and as to the number of Shares of each Series (or class) of the Trust held
from time to time by each.
Section 3. Transfer of Shares. Except as otherwise provided by the
Trustees, Shares shall be transferable on the books of the Trust only by the
record holder thereof or by his or her
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duly authorized agent upon delivery to the Trustees or the Trust's transfer
agent of a duly executed instrument of transfer, together with a Share
certificate if one is outstanding, and such evidence of the genuineness of each
such execution and authorization and of such other matters as may be required by
the Trustees. Upon such delivery, and subject to any further requirements
specified by the Trustees or contained in the By-Laws, the transfer shall be
recorded on the books of the Trust. Until a transfer is so recorded, the
Shareholder of record of Shares shall be deemed to be the holder of such Shares
for all purposes hereunder and neither the Trustees nor the Trust, nor any
transfer agent or registrar or any officer, employee, or agent of the Trust,
shall be affected by any notice of a proposed transfer.
Section 4. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize.
Section 5. Status of Shares and Limitation of Personal Liability.
Shares shall be deemed to be personal property giving only the rights provided
in this instrument. Every Shareholder, by virtue of having become a Shareholder,
shall be held to have expressly assented and agreed to the terms hereof and to
have become a party hereto. The death, incapacity, dissolution, termination, or
bankruptcy of a Shareholder during the existence of the Trust shall not operate
to terminate the Trust, nor entitle the representative of any deceased
Shareholder to an accounting or to take any action in court or elsewhere against
the Trust or the Trustees, but entitles such representative only to the rights
of said deceased Shareholder under this Trust. Ownership of Shares shall not
entitle the Shareholder to any title in or to the whole or any part of the Trust
Property or right to call for a partition or division of the same or for an
accounting, nor shall the ownership of Shares constitute the Shareholders as
partners. Neither the Trust nor the Trustees, nor any officer, employee or agent
of the Trust shall have any power to bind personally any Shareholder, nor,
except as specifically provided herein, to call upon any Shareholder for the
payment of any sum of money or assessment whatsoever other than such as the
Shareholder may at any time personally agree to pay.
Section 6. Power of Board of Trustees to Change Provisions Relating to
Shares. Notwithstanding any other provision of this Declaration of Trust and
without limiting the power of the Board of Trustees to amend the Declaration of
Trust as provided elsewhere herein, the Board of Trustees shall have the power
to amend this Declaration of Trust, at any time and from time to time, in such
manner as the Board of Trustees may determine in their sole discretion, without
the need for Shareholder action, so as to add to, delete, replace or otherwise
modify any provisions relating to the Shares contained in this Declaration of
Trust, provided that before adopting any such amendment without Shareholder
approval the Board of Trustees shall determine that it is consistent with the
fair and equitable treatment of all Shareholders or that Shareholder approval is
not otherwise required by the Investment Company Act or other applicable law. If
Shares have been issued, Shareholder approval shall be required to adopt any
amendments to this Declaration of Trust that would adversely affect to a
material degree the
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rights and preferences of the Shares of any Series (or class of any Series) or
to increase or decrease the par value of the Shares of any Series (or class of
any Series).
Subject to the foregoing Paragraph, the Board of Trustees may
amend the Declaration of Trust to amend any of the provisions set forth in
paragraphs (a) through (i) of Section 7 of this Article III.
Section 7. Establishment and Designation of Series. The
establishment and designation of any Series (or Class) of Shares of the Trust
shall be effective upon the resolution by a majority of the then Trustees,
adopting a resolution that sets forth such establishment and designation and the
relative rights and preferences of such Series (or Class) of the Trust, whether
directly in such resolution or by reference to another document, including,
without limitation, any registration of Trust. Each such resolution shall be
incorporated herein by reference upon adoption.
Shares of each Series (or class) established pursuant to this
Section 7, unless otherwise provided in the resolution establishing such Series,
shall have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series.
All consideration received by the Trust for the issue or sale of Shares of a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably be held with respect to that Series for all purposes, subject
only to the rights of creditors of such Series, and shall be so recorded upon
the books of account of the Trust. Such consideration, assets, income, earnings,
profits and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
held with respect to" that Series. In the event that there are any assets,
income, earnings, profits and proceeds thereof, funds or payments which are not
readily identifiable as assets held with respect to any particular Series
(collectively "General Assets"), the Trustees shall allocate such General Assets
to, between or among any one or more of the Series in such manner and on such
basis as the Trustees, in their sole discretion, deem fair and equitable, and
any General Asset so allocated to a particular Series shall be held with respect
to that Series. Each such allocation by the Trustees shall be conclusive and
binding upon the Shareholders of all Series for all purposes. Separate and
distinct records shall be maintained for each Series and the assets held with
respect to each Series shall be held and accounted for separately from the
assets held in respect to all other Series and the General Assets of the Trust
not allocated to such Series.
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(b) Liabilities Held With Respect to a Particular
Series. The assets of the Trust held with respect to each particular Series
shall be charged against the liabilities of the Trust held with respect to that
Series and all expenses, costs, charges and reserves attributable to that
Series, and any general liabilities of the Trust which are not readily
identifiable as being held with respect to any particular Series shall be
allocated and charged by the Trustees to and among any one or more of the Series
in such manner and on such basis as the Trustees in their sole discretion deem
fair and equitable. The liabilities, expenses, costs, charges, and reserves so
charged to a series are herein referred to as "liabilities held with respect to"
that Series. Each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the holders of all
Series for all purposes. All Persons who have extended credit which has been
allocated to a particular Series, or who have a claim or contract which has been
allocated to any particular Series, shall look exclusively to the assets of that
particular Series for payment of such credit, claim, or contract, and not
against the assets of the Trust generally or against the assets held with
respect to any other Series. Notice of this contractual limitation on the
liability of' each Series shall be set forth in the Certificate of Trust or in
an amendment thereto prior to the issuance of any Shares of a Series.
(c) Dividends, Distributions, Redemptions and
Repurchases. Notwithstanding any other provisions of this Declaration of Trust,
including, without limitation, Article VI, no dividend or distribution
including, without limitation, any distribution paid upon termination of the
Trust or of any Series (or class) with respect to, nor any redemption or
repurchase of, the Shares of any Series (or class) shall be effected by the
Trust other than from the assets held with respect to such Series, nor, except
as specifically provided in section 8 of this Article III, shall any Shareholder
of any particular Series otherwise have any right or claim against the assets
held with respect to any other Series except to the extent that such Shareholder
has such a right or claim hereunder as a Shareholder of such other Series. The
Trustees shall have full discretion, to the extent not inconsistent with the
Investment Company Act, to determine which items shall be treated as income and
which items as capital; and each such determination and allocation shall be
conclusive and binding upon the Shareholders.
(d) Voting. All Shares of the Trust entitled to vote
on a matter shall vote separately by Series (and, if applicable, by class): that
is, the Shareholders of each Series (or class) shall have the right to approve
or disapprove matters affecting the Trust and each respective Series (or class)
as if the Series (or classes) were separate companies. There are, however, two
exceptions to voting by separate Series (or classes). First, if the Investment
Company Act requires all Shares of the Trust to be voted in the aggregate
without differentiation between the separate Series (or classes), then all the
Trust's Shares shall be entitled to vote on a dollar-weighted basis by which
each shareholder shall vote his or her shares multiplied by the per Share net
asset value of these shares on the record date. Second, if any matter affects
only the interests of some but not all Series (or classes), then only the
Shareholders of such affected Series (or classes) shall be entitled to vote on
the matter on the same dollar-weighted basis.
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(e) Equality. All the Shares of each particular
Series shall represent an equal proportionate interest in the assets held with
respect to that Series (subject to the liabilities held with respect to that
Series and such rights and preferences as may have been established and
designated with respect to classes of Shares within such Series), and each Share
of any particular Series shall be equal to each other Share of that Series.
(f) Fractions. Any fractional Share of a Series shall
carry proportionately all the rights and obligations of a whole share of that
Series, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the
authority to provide that the holders of Shares of any Series shall have the
right to exchange said Shares for Shares of one or more other Series of Shares
in accordance with such requirements and procedures as may be established by the
Trustees.
(h) Combination of Series. The Trustees shall have
the authority, without the approval of the Shareholders of any Series unless
otherwise required by applicable law, to combine the assets and liabilities held
with respect to any two or more Series into assets and liabilities held with
respect to a single Series.
(i) Elimination of Series. At any time that there are
no Shares outstanding of any particular Series (or class) previously established
and designated, the Trustees may by resolution of a majority of the then
Trustees abolish that Series (or class) and rescind the establishment and
designation thereof.
Section 8. Indemnification of Shareholders. If any Shareholder
or former Shareholder shall be exposed to liability by reason of a claim or
demand relating to his or her being or having been a Shareholder, and not
because of his or her acts or omissions, the Shareholder or former Shareholder
(or his or her heirs, executors, administrators, or other legal representatives
or in the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the applicable series of Shares of the Trust of which such Person is
or was a Shareholder and from or in violation to which such liability arose
against all loss and expense arising from such claim or demand.
ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees
constituting the Board of Trustees shall be fixed from time to time by a written
instrument
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signed, or by resolution approved at a duly constituted meeting, by a majority
of the Board of Trustees, provided, however, that the number of Trustees shall
in no event be less than one (1) nor more than fifteen (15). The Board of
Trustees, by action of a majority of the then Trustees at a duly constituted
meeting, may fill vacancies in the Board of Trustees or remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he or she dies, resigns, is declared bankrupt or incompetent by a
court of appropriate jurisdiction, or is removed, or, if sooner, until the next
meeting of Shareholders called for the purpose of electing Trustees and until
the election and qualification of his or her successor. Any Trustee may resign
at any time by written instrument signed by him or her and delivered to any
officer of the Trust or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Except to the extent expressly provided in a written agreement with the Trust,
no Trustee resigning and no Trustee removed shall have any right to any
compensation for any period following his or her resignation or removal, or any
right to damages on account of such removal. The Shareholders may fix the number
of Trustees and elect Trustees at any meeting of Shareholders called by the
Trustees for that purpose. Any Trustee may be removed at any meeting of
Shareholders by a vote of two-thirds of the outstanding Shares of the Trust. A
meeting of Shareholders, for the purpose of electing or removing one or more
Trustees may be called (i) by the Trustees upon their own vote, or (ii) upon the
demand of Shareholders owning (i) 10% or more of the Shares, of the Trust in the
aggregate, or (ii) 10% or more of the Shares on a dollar-weighted basis.
Section 2. Effect of Death, Resignation, etc. of a Trustee.
The death, declination to serve, resignation, retirement, removal, or incapacity
of one or more Trustees, or all of them, shall not operate to annul the Trust or
to revoke any existing agency created pursuant to the terms of this Declaration
of Trust. Whenever a vacancy in the Board of Trustees shall occur, until such
vacancy is filled as provided in Article IV, Section 1, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust. As conclusive evidence of such vacancy, a written instrument
certifying the existence of such vacancy may be executed by an officer of the
Trust or by a majority of the Board of Trustees. In the event of the death,
declination, resignation, retirement, removal, or incapacity of all the then
Trustees within a short period of time and without the opportunity for at least
one Trustee being able to appoint additional Trustees to fill vacancies, the
Trust's Investment Adviser(s) are empowered to appoint new Trustees subject to
the provisions of section 16(a) of the Investment Company Act.
Section 3. Powers. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed by the Board of
Trustees, and such Board shall have all powers necessary or convenient to carry
out that responsibility, including the power to engage in securities
transactions of all kinds on behalf of the Trust. Without limiting the
foregoing, the Trustees may: adopt By-Laws not inconsistent with this
Declaration of Trust providing for the regulation and management of the affairs
of the Trust and may amend and repeal them to the extent that such By-Laws do
not reserve that right to the Shareholders; remove any Trustee with
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or without cause at any time by written instrument signed by at least two-thirds
of the number of Trustees prior to such removal, specifying the date when such
removal shall become effective, and fill vacancies caused by enlargement of
their number or by the death, resignation or removal of a Trustee; fill
vacancies in or remove from their number, and may elect and remove such officers
and appoint and terminate such agents as they consider appropriate appoint from
their own number and establish and terminate one or more committees consisting
of one or more Trustees, which may exercise the powers and authority of the
Board of Trustees to the extent that the Trustees determine; employ one or more
custodians of the assets of the Trust and may authorize such custodians to
employ subcustodians and to deposit all or any part of such assets in a system
or systems for the central handling of securities or with a Federal Reserve
Bank; retain a transfer agent or a shareholder servicing agent, or both; provide
for the issuance and distribution of Shares by the Trust directly or through one
or more Principal Underwriters or otherwise; redeem, repurchase and transfer
Shares pursuant to applicable law; set record dates for the determination of
Shareholders with respect to various matters; declare and pay dividends and
distributions to Shareholders of each Series from the assets of such Series;
and, in general, delegate such authority as they consider desirable to any
officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian, transfer or shareholder
servicing agent, or Principal Underwriter. Any determination as to what is in
the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of this Declaration of Trust, the
presumption shall be in favor of a grant of power to the Trustees. Unless
otherwise specified or required by law, any action by the Board of Trustees
shall be deemed effective if approved or taken by a majority of the Trustees
then in office.
Without limiting the foregoing, the Trust shall have power and
authority to cause the Trust (or to act on behalf of the Trust):
(a) To invest and reinvest cash, to hold cash
uninvested, and to subscribe for, invest in, reinvest in, purchase or otherwise
acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, write
options on, lend or otherwise deal in or dispose of contracts. for the future
acquisition or delivery of fixed income or other securities, and securities of
every nature and kind, including, without limitation, all types of bonds,
debentures, stocks, negotiable or non-negotiable instruments, obligations,
evidences of indebtedness, certificates of deposit or indebtedness, commercial
paper, repurchase agreements, bankers' acceptances, and other securities of any
kind, issued, created guaranteed, or sponsored by any and all Persons,
including, without limitation, states, territories, and possessions of the
United States and the District of Columbia and any political subdivision,
agency, or instrumentality thereof, any foreign government or any political
subdivision of the U.S. Government or any foreign government, or any
international instrumentality, or by any bank or savings institution, or by any
corporation or organization organized under the laws of the United States or of
any state, territory, or possession thereof, or by any corporation or
organization organized under any foreign law, or in "when issued" contracts for
any such securities, to change the investments of the assets of the Trust; and
to exercise any and all rights, powers, and privileges of ownership or
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interest in respect of any and all such investments of every kind and
description, including, without limitation, the right to consent and otherwise
act with respect thereto, with power to designate one or more Persons, to
exercise any of said rights, powers, and privileges in respect of any of said
instruments;
(b) To sell, exchange, lend, Pledge, mortgage,
hypothecate, lease, or write options, including options on futures contracts,
with respect to or otherwise deal in any property rights relating to any or all
of the assets of the Trust or any Series;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;
(d) To exercise powers and right of subscription or
otherwise which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not
indicating any trust, whether in bearer, unregistered or other negotiable form,
or in its own name or in the name of a custodian or subcustodian or a nominee or
nominees or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting
through a committee, depositary, voting trustee or otherwise, and in that
connection to deposit any security with, or transfer any security to, any such
committee, depositary or trustee, and to delegate to them such power and
authority with relation to any security (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and to pay,
such portion of the expenses and compensation of such committee, depositary or
trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust
claims in favor of or against the Trust or any matter in controversy, including
but not limited to claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property in the name of
the Trust exclusively for Trust purposes and in connection therewith issue notes
or other evidence of
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indebtedness; and to mortgage and pledge the Trust Property or any part thereof
to secure any or all of such indebtedness;
(k) To endorse or guarantee the payment of any notes
or other obligations of any Person; to make contracts of guaranty or suretyship,
or otherwise assume liability for payment thereof and to mortgage and pledge the
Trust Property or any part thereof to secure any or all such obligations;
(l) To purchase and pay for entirely out of Trust
Property such insurance as the Trustees may deem necessary or appropriate for
the conduct of the business, including, without limitation, insurance policies
insuring the assets of the Trust or payment of distributions and principal on
its portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers, principal
underwriters, or independent contractors of the Trust, individually against all
claims and liabilities of every nature arising by reason of holding Shares,
holding, being or having held any such office or position, or by reason of any
action alleged to have been taken or omitted by any such Person as Trustee,
officer, employee, agent, investment adviser, principal underwriter, or
independent contractor, including any action taken or omitted that may be
determined to constitute negligence, whether or not the Trust would have the
power to indemnify such Person against liability;
(m) To adopt, establish and carry out pension,
profitsharing, share bonus, share purchase, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions, including the
purchasing of life insurance and annuity contracts as a means of providing such
retirement and other benefits, for any or all of the Trustees, officers,
employees and agents of the Trust;
(n) To operate as and carry out the business of an
investment company, and exercise all the powers necessary or appropriate to the
conduct of such operations;
(o) To enter into contracts of any kind and
description;
(p) To employ one or more banks, trust companies or
companies that are members of a national securities exchange or such other
entities as the Commission may permit as custodians of any assets of the Trust
subject to any conditions set forth in this Declaration or Trust or in the
By-Laws;
(q) To interpret the investment policies, practices,
or limitations of any Series or Class; and
(r) Subject to the Investment Company Act, to engage
in any other lawful act or activity in which a business trust organized under
the Delaware Act may engage.
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The Trust shall not be limited to investing in obligations maturing before the
possible termination of the Trust or one or more of its Series. The Trust shall
not in any way be bound or limited by any present or future law or custom in
regard to investment by fiduciaries. The Trust shall not be required to obtain
any court order to deal with any assets of the Trust or take any other action
hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust, or partly out of the principal and partly out of income, as they deem
fair, all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, or in connection with the management thereof,
including, but not limited to, the Trustees' compensation and such expenses and
charges for the services of the Trust's officers, employees, investment adviser
or manager, principal underwriter, auditors, counsel, custodian, transfer agent,
Shareholder servicing agent, and such other agents or independent contractors
and such other expenses and charges as the Trustees may deem necessary or proper
to incur, which expenses, fees, charges, taxes and liabilities shall be
allocated in accordance with Article III, Section 7 hereof.
Section 5. Payment of Expenses by Shareholders. The Trustees
shall have the power, as frequently as they may determine, to cause each
Shareholder, or each Shareholder of any particular Series, to pay directly in
advance or arrears, for charges of the Trust's custodian or transfer,
Shareholder servicing or similar agent, an amount fixed from time to time by the
Trustees, by setting off such charges due from such Shareholder from declared
but unpaid dividends owed such Shareholder and/or by reducing the number of
shares in the account of such Shareholder by that number of full and/or
fractional Shares which represents the outstanding amount of such charges due
from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of
the assets of the Trust shall at all times be considered as vested in the Trust,
except that the Trustees shall have power to cause legal title to any Trust
Property to be held by or in the name of one or more of the Trustees, or in the
name of the Trust, or in the name of any other Person as nominee, on such terms
as the Trustees may determine. The right, title and interest of the Trustees in
the Trust Property shall vest automatically in each Person who may hereafter
become a Trustee. Upon the resignation, removal or death of a Trustee, he or she
shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents has
been executed and delivered.
Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as
may be set forth under federal and/or state law in the By-Laws, including,
without limitation, the requirements of the Investment Company Act, the Trustees
may, at any time and from time to time, contract for
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exclusive or nonexclusive advisory, management and/or administrative services
for the Trust or for any Series (or Class thereof) with any corporation, trust,
association or other organization; and any such contract may contain such other
terms as the Trustees may determine, including without limitation, authority for
the Investment Adviser or administrator to delegate certain or all of its duties
under such contract to qualified investment advisers and administrators and to
determine from time to time without prior consultation with the Trustees what
investments shall be purchased, held, sold or exchanged and what portion, if
any, of the assets of the Trust shall be held uninvested and to make changes in
the Trust's investments, or such other activities as may specifically be
delegated to such party.
(b) The Trustees may also, at any time and from time
to time, contract with any corporation, trust, association or other
organization, appointing it exclusive or nonexclusive distributor or Principal
Underwriter for the Shares of one or more of the Series (or classes) or other
securities to be issued by the Trust. Every such contract shall comply with such
requirements and restrictions as may be set forth under federal and/or state law
and in the By-Laws, including, without limitation the requirements of Section 15
of the Investment Company Act; and any such contract may contain such other
terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and
from time to time, to contract with any corporations, trusts, associations or
other organizations, appointing it or them custodian, transfer agent and/or
shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be set
forth under federal and/or state law and in the By-Laws or stipulated by
resolution of the Trustees.
(d) Subject to applicable law, the Trustees are
further empowered, at any time and from time to time, to contract with any
entity to provide such other services to the Trust or one or more of the Series,
as the Trustees determine to be consistent with the best interests of the Trust
and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or
officers of the Trust is a shareholder, director, officer,
partner, trustee, employee, investment adviser, manager,
principal underwriter, distributor, or affiliate or agent of
or for any corporation, trust, association, or other
organization, or for any parent or affiliate of any
organization with which an advisory, management or
administration contract, or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter
be made, or that any such
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organization, or any parent or affiliate thereof, is a
Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or
other organization with which an advisory, management or
administration contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter
be made also has an advisory, management or administration
contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service
contract with one or more other corporations, trusts,
associations, or other organizations, or has other business or
interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the Investment Company Act.
Section 8. Trustees and Officers as Shareholders. Any Trustee,
officer or agent of the Trust may acquire, own and dispose of Shares to the same
extent as if he were not a Trustee, officer or agent; and the Trustees may issue
and sell and cause to be issued and sold Shares to, and redeem such Shares from,
any such person or any firm or company in which such person is interested,
subject only to the general limitations contained herein or in the By-Laws
relating to the sale and redemption of such Shares.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. Subject to the provisions of Article
III, Section 7(d), the Shareholders shall have power to vote only (i) for the
election or removal of Trustees as provided in Article IV, Section 1 hereof, and
(ii) with respect to such additional matters relating to the Trust as may be
required by this Declaration of Trust, the By-Laws or any registration of the
Trust with the Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. As appropriate, voting may be by
Series (or class). Each whole Share shall be entitled to one vote multiplied by
the per-Share net asset value on the record date for the vote as to any matter
on which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. Notwithstanding any other provision of this
Declaration of Trust, on any matters submitted to a vote of the Shareholders,
all Shares of the Trust then entitled to vote shall be voted in aggregate,
except: (i) when required by the Investment Company Act, Shares shall be voted
by individual Series; (ii) when the matter
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<PAGE>
involves the termination of a series or any other action that the Trustees have
determined will affect only the interests of one or more Series, then only
Shareholders of such Series shall be entitled to vote thereon; and (iii) when
the matter involves any action that the Trustees have determined will affect
only the interests of one or more Classes, then only the Shareholder of such
Class or Classes shall be entitled to vote thereon. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. Notwithstanding anything else
contained herein or in the By-Laws, in the event a proposal by anyone other than
the officers or Trustees of the Trust is submitted to a vote of the Shareholders
of one or more series or Classes thereof or of the Trust, or in the event of any
proxy contest or proxy solicitation or proposal in opposition to any proposal by
the officers or Trustees of the Trust, Shares may be voted only by written proxy
or in person at a meeting. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law, this
Declaration of Trust or the By-Laws to be taken by the Shareholders. Meetings of
the Shareholders shall be called and notice thereof and record dates therefor
shall be given and set as provided in the By-Laws.
Section 2. Voting Power and Meetings. Meetings of the
Shareholders may be called by the Trustees for the purpose of electing Trustees
as provided in Article IV, Section 1 and for such other purposes as may be
prescribed by law, by this Declaration of Trust or by the By-Laws. Meetings of
the Shareholders may also be called by the Trustees from time to time for the
purpose of taking action upon any other matter deemed by the Trustees to be
necessary or desirable. A meeting of Shareholders may be held at any place
designated by the Trustees. Written notice of any meeting of Shareholders shall
be given or caused to be given by the Trustees by mailing such notice at least
seven (7) days before such meeting, postage prepaid, stating the time and place
of the meeting, to each Shareholder at the Shareholder's address as it appears
on the records of the Trust. Whenever notice of a meeting is required to be
given to a Shareholder under this Declaration of Trust or the By-Laws, a written
waiver thereof, executed before or after the meeting by such Shareholder or his
or her attorney thereunto authorized and filed with the records of the meeting,
shall be deemed equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger
quorum is required by applicable law, by the By-Laws or by this Declaration of
Trust, forty percent (40%) of the dollar-weighted voting power of the Shares
entitled to vote shall constitute a quorum at a Shareholders' meeting. When any
one or more Series (or Classes) is to vote as a single class separate from any
other Shares, forty percent (40%) of the Shares of each such Series (or Classes)
entitled to vote shall constitute a quorum at a Shareholder's meeting of that
Series (or Class), except when a larger quorum is required by any provision of
this Declaration of Trust or by the By-Laws or by applicable law. Any meeting of
Shareholders may be adjourned from time to time by a majority
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<PAGE>
of the dollar-weighted votes properly cast upon the question of adjourning a
meeting to another date and time, whether or not a quorum is present, and the
meeting may be held as adjourned within a reasonable time after the date set for
the original meeting without further notice. Subject to the provisions of
Article III, Section 7(d), when a quorum is present at any meeting, a majority
of the Shares voted shall decide any questions and a plurality of the Shares
voted shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by applicable law,
provided that where any provision of law or of this Declaration of Trust
requires that the holders of any Series shall vote as a Series (or that holders
of a Class shall vote as a Class), then a majority of the Shares of that Series
(or Class) voted on the matter (or a plurality with respect to the election of a
Trustee) shall decide that matter insofar as that Series (or Class) is
concerned.
Section 4. Action by Written Consent. Any action taken by
shareholders may be taken without a meeting if Shareholders holding a majority
(on a dollar-weighted basis) of the Shares entitled to vote on the matter (or
such larger proportion thereof as shall be required by any express provision of
this Declaration of Trust or by the By-Laws or by applicable law) and holding a
majority (or such larger proportion as aforesaid) of the Shares of any Series
(or Class) entitled to vote separately on the matter consent to the action in
writing and such written consents are filed with the records of the meetings of
Shareholders. Such consent shall be treated for all purposes as a vote taken at
a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the
Shareholders of any Series (or Class) who are entitled to vote or act at any
meeting or any adjournment thereof, the Trustees may from time to time fix a
time, which shall be not more than ninety (90) days before the date of any
meeting of Shareholders, as the record date for determining the Shareholders of
such Series (or Class) having the right to notice of and to vote at such meeting
and any adjournment thereof, and in such case only Shareholders of record on
such record date shall have such right, notwithstanding any transfer of shares
on the books of the Trust after the record date. For the purpose of determining
the Shareholders of any-Series (or Class) who are entitled to receive payment of
any dividend or of any other distribution, the Trustees may from time to time
fix a date, which shall be before the date for the payment of such dividend or
such other payment, as the record date for determining the Shareholders of such
series (or Class) having the right to receive such dividend or distribution.
Without fixing a record date the Trustees may for voting and/or distribution
purposes close the register or transfer books for one or more Series (or
Classes) for all or any part of the period between a record date and a meeting
of Shareholders or the payment of a distribution. Nothing in this Section shall
be construed as precluding the Trustees from setting different record dates for
different Series (or Classes). For the purpose of determining the
dollar-weighting, such weighting shall be based on the per-Share net asset value
determined on the record date, and if none is determined on such date, the last
determined per-Share net asset value.
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Section 6. Additional Provisions. The By-Laws may include
further provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions and Redemptions
Section 1. Determination of Net Asset Value, Net Income and
Distributions. Subject to Article III, Section 7 hereof, the Trustees, in their
absolute discretion, may prescribe and shall set forth in the By-laws or in a
duly adopted vote of the Trustees such bases and time for determining the
per-Share net asset value of the Shares of any Series or net income attributable
to the Shares of any Series, or the declaration and payment of dividends and
distributions on the Shares of any Series, as they may deem necessary or
desirable.
Section 2. Redemptions and Repurchases. The Trust shall
purchase such Shares as are offered by any Shareholder for redemption, upon the
presentation of a proper instrument of transfer together with a request directed
to the Trust or a Person designated by the Trust that the Trust purchase such
Shares or in accordance with such other procedures for redemption as the
Trustees may from time to time authorize; and the Trust will pay therefor the
net asset value thereof, in accordance with the By-Laws and applicable law.
Unless extraordinary circumstances exist, payment for said Shares shall be made
by the Trust to the Shareholder within seven days after the date on which the
request is made in proper form. The obligation set forth in this Section 2 is
subject to the provision that in the event that any time the New York Stock
Exchange (the "Exchange") is closed for other than weekends or holidays, or if
permitted by the Rules of the Commission during periods when trading on the
Exchange is restricted or during any emergency which makes it impracticable for
the Trust to dispose of the investments of the applicable Series or to determine
fairly the value of the net assets held with respect to such Series or during
any other period permitted by order of the Commission for the protection of
investors, such obligations may be suspended or postponed by the Trustees. In
the case of a suspension of the right of redemption as provided therein, a
Shareholder may either withdraw the request for redemption or receive payment
based on the net asset value per share next determined after the termination of
such suspension.
The redemption price may in any case or cases be paid wholly
or partly in kind if the Trustees determine that such payment is advisable in
the interest of the remaining Shareholders of the Series for which the Shares
are being redeemed. Subject to the foregoing, the fair value, selection and
quantity of securities or other property so paid or delivered as all or part of
the redemption price may be determined by or under authority of the Trustees. In
no case shall the Trust be liable for any delay of any corporation or other
Person in transferring securities selected for delivery as all or part of any
payment in kind.
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Section 3. Redemptions at the Option of the Trust. The Trust
shall have the right, at its option and at any time and in good faith, determine
that direct or indirect ownership of Shares of any Series has or may become
concentrated in any Person to an extent that would disqualify any Series as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(or any successor statute thereto), to redeem Shares of any Shareholder at the
net asset value thereof as described in Section 1 of this Article VI, and to
refuse to transfer or issue Shares to any Person whose acquisition of the Shares
in question would result in such disqualification: (i) if at such time such
Shareholder owns Shares of any Series having an aggregate net asset value of
less than an amount determined from time to time by the Trustees prior to the
acquisition of said Shares; or (ii) to the extent that such Shareholder owns
Shares of a particular Series equal to or in excess of a percentage of the
outstanding Shares of that Series determined from time to time by the Trustees;
or (iii) to the extent that such Shareholder owns Shares equal to or in excess
of a percentage, determined from time to time by the Trustees, of the
outstanding Shares of the Trust or of any Series.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be
entitled to reasonable compensation from the Trust, and they may fix the amount
of such compensation. Nothing herein shall in any way prevent the employment of
any Trustee for advisory, management, legal, accounting, investment banking or
other services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. The
Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, Investment Adviser or Principal
Underwriter of the Trust, nor shall any Trustee be responsible for the act or
omission of any other Trustee, and the Trust out of its assets shall indemnify
and hold harmless each and every Trustee, or each Person who is serving or has
served at the Trust's request as a director, officer, trustee, employee, or
agent of another organization in which the Trust has any interest as a
shareholder, creditor, or otherwise to the extent and in the manner provided in
the By-Laws, from and against any and all claims and demands whatsoever arising
out of or related to each Trustee's performance of his or her duties as a
Trustee of the Trust; provided that nothing herein contained shall indemnify,
hold harmless or protect any Trustee, from or against any liability to the Trust
or any Shareholder to which he or she would otherwise be subject by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
All persons extending credit to, contracting with or having
any claim against the Trust of the Trustees shall look only to the assets of the
appropriate Series of the Trust for payment under such credit, contract, or
claim; and neither the Trustees nor the Shareholders, nor
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any of the Trust's officers, employees or agents, whether past, present, or
future, shall be personally liable therefor.
Every note, bond, contract, instrument, certificate or undertaking and every
other act or thing whatsoever issued, executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon. At the Trustees'
discretion, any note, bond, contract, instrument, certificate or undertaking
made or issued by the Trustees or by any officer or officers may give notice
that the Certificate of Trust is on file in the Office of the Secretary of State
of the State of Delaware and that a limitation on liability of Series exists and
such note, bond, contract, instrument, certificate or undertaking may, if the
Trustees so determine, recite that the same was executed or made on behalf of
the Trust by a Trustee or Trustees in such capacity and not individually and
that the obligations of such instrument are not binding upon any of them or the
Shareholders individually but are binding only on the assets and property of the
Trust or a Series thereof, and may contain such further recital as such Person
or Persons may deem appropriate. The omission of any such notice or recital
shall in no way operate to bind any Trustees, officer, or Shareholders
individually.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond
or Surety. The exercise by the Trustees of their powers and discretion hereunder
shall be binding upon everyone interested. A Trustee shall be liable to the
Trust and to any Shareholder solely for his or her own wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and shall be under no liability for any act or omission in accordance with such
advice nor for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and
empowered to the fullest extent permitted by law to purchase with Trust assets
insurance for liability and 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 VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees.
No Person dealing with the Trustees shall be bound to make any inquiry
concerning the validity of any transaction made
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<PAGE>
or to be made by the Trustees or to see to the application of any payments made
or property transferred to the Trust or upon its order.
Section 2. Termination of Trust or Series. Unless terminated
as provided herein, the Trust shall continue without limitation of time. The
Trust may be terminated at any time by vote of a majority of the Shares of each
Series entitled to vote, voting separately by Series, or by the Trustees by
written notice to the Shareholders. Any Series or Class thereof may be
terminated at any time by vote of a majority of the Shares of that Series or
Class entitled to vote or by the Trustees by written notice to the Shareholders
of that Series or Class.
Upon termination of the Trust (or any one or more Series or
any Class thereof, as the case may be)'by the requisite Shareholder vote or
action by the Trustees, after paying or otherwise providing for all charges,
taxes, expenses and liabilities held, severally, with respect to each Series (or
the applicable Series, as the case may be), whether due or accrued or
anticipated as may be determined by the Trustees, the Trust shall, in accordance
with such procedures as the Trustees consider appropriate, reduce the remaining
assets held, severally, with respect to each Series (or the applicable Series or
any Class thereof if any Series or Class remains, as the case may be), to
distributable form in cash or shares or other securities, or any combination
thereof, and distribute the proceeds held with respect to each Series or Class
(or the applicable Series, as the case may be), to the Shareholders of that
Series, as a Series or Class, ratably according to the number of Shares of that
Series or Class held by the several Shareholders on the date of termination.
Thereupon, the Trust or any affected Series or Class shall terminate and the
Trustees and the Trust shall be discharged of any and all further liabilities
and duties relating thereto or arising therefrom, and the right, title, and
interest of all parties with respect to the Trust or such Series or Class shall
be canceled and discharged.
Upon termination of the Trust, following completion of winding
up of its business, the Trustees shall cause a certificate of cancellation of
the Trust's Certificate of Trust to be filed in accordance with the Delaware
Act, which certificate of cancellation may be signed by any one Trustee.
Section 3. Merger and Consolidation. Notwithstanding anything
else herein, the Trustees may cause (i) the Trust or one or more of its Series
to the extent consistent with applicable law to be merged into or consolidated
with another trust or company (including trusts, partnerships, associations,
corporations or other business entities created by the Trustees to accomplish
such merger or consolidation) so long as the surviving or resulting entity is a
management investment company under the Investment Company Act, or is a series
thereof, that will succeed to or assume the Trust's registration under the
Investment Company Act and that is formed, organized, or existing under the laws
of the United States or of a state, commonwealth, possession or colony of the
United States, (ii) the Shares of the Trust or any Series to be converted into
beneficial interests in another business trust (or series thereof) created
pursuant to this Section 3 of Article VIII, (iii) the Shares to be exchanged
under or pursuant to any state or
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<PAGE>
federal statute to the extent permitted by law, or (iv) cause the Trust to
incorporate under the laws of Delaware or any other state or jurisdiction. such
merger or consolidation, Share conversion or Share exchange must be authorized
by vote of a majority of the outstanding Shares of the Trust, as a whole, or any
affected Series, as may be applicable; provided that in all respects not
governed by statute or applicable law, the Trustees shall have the power to
prescribe the procedure necessary or appropriate to accomplish a sale of assets,
merger or consolidation including the power to create one or more separate
business trusts to which all or any part of the assets, liabilities, profits or
losses of the Trust or any Series or Class thereof may be transferred and to
provide for the conversion of Shares of the Trust or any Series or Class thereof
into beneficial interests in such separate business trust or trusts (or series
or classes thereof).
Pursuant to and in accordance with the provisions of Section
3815(f) of the Delaware Act, and notwithstanding anything to the contrary
contained in this Declaration of Trust, an agreement of merger or consolidation
approved by the Trustees in accordance with this Section 3 may (i) effect any
amendment to the governing instrument of the Trust or (ii) effect the adoption
of a new governing instrument of the Trust if the Trust is the surviving or
resulting trust in the merger or consolidation.
Section 4. Amendments. Except as specifically provided in this
Section, this Declaration of Trust may be restated and/or amended or otherwise
supplemented at any time by an instrument in writing signed by a majority of the
then Trustees and, if required, by approval of such amendment by Shareholders in
accordance with Article V, Section 3 hereof. Any such restatement and/or
amendment hereto shall be effective immediately upon execution and approval.
Shareholders shall have the right to vote (i) on any amendment that would affect
their right to vote granted in Article V, Section 1 hereof, (ii) on any
amendment to this Section 4 of Article VIII, (iii) on any amendment that may be
required by applicable law or by the Trust's registration statement, as filed
with the Commission, and (iv) on any amendment submitted to them by the
Trustees. Any amendment required or permitted to be submitted to the
Shareholders that, as the Trustees determine, shall affect the Shareholders of
one or more Series shall be authorized by a vote of the Shareholders of each
Series affected and no vote of Shareholders of a Series not affected shall be
required. Notwithstanding anything else herein, no amendment hereof shall limit
the rights to insurance provided by Article VII, Section 4 with respect to any
acts or omissions of Persons covered thereby prior to such amendment nor shall
any such amendment limit the rights to indemnification referenced in Article
VII, Section 2 hereof as provided in the By-Laws with respect to any actions or
omissions of Persons covered thereby prior to such amendment. The Certificate of
Trust of the Trust may be restated and/or amended by a similar procedure
(however, only one Trustee need sign an Amendment to the Certificate of Trust,
and other Trustees need not approve such Amendment in writing when it directly
reflects provisions in, or approved amendments to, the Declaration of Trust),
and any such restatement and/or amendment shall be effective immediately upon
filing with the Office of the Secretary of State of the State of Delaware or
upon such future date as may be stated therein.
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Section 5. Filing of Copies, References, Headings. The
original or a copy of this instrument and of each restatement and/or amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such restatements and/or
amendments have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such restatements and/or amendments. In this instrument and in any such
restatements and/or amendment, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to
this instrument as amended or affected by any such restatements and/or
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. Whenever the singular number is used
herein, the same shall include the plural; and the neuter, masculine and
feminine genders shall include each other, as applicable. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
Section 6. Applicable Law. This Agreement and Declaration of
Trust is created under and is to-be governed by and construed and administered
according to the laws of the State of Delaware and the Delaware Act. The Trust
shall be a Delaware business trust pursuant to such Act, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a business trust, and the absence of a specific reference
herein to any such power, privilege, or action shall not imply that the Trust
may not exercise such power or privilege or take such actions.
Notwithstanding the first sentence of Section 6 of this
Article VIII, there shall not be applicable to the Trust, the Trustees, or this
Declaration of Trust either the provisions of Section 3540 of Title 12 of the
Delaware Code or any provisions of the laws (statutory or common) of the State
of Delaware (other than the Delaware Act) pertaining to trusts that relate to or
regulate; (i) the filing with any court or governmental body or agency of
trustee accounts or schedules of trustee fees and charges, (ii) affirmative
requirements to post bonds for trustees, officers, agents, or employees of a
trust, (iii) the necessity for obtaining a court or other governmental approval
concerning the acquisition, holding or disposition of real or personal property,
(iv) fees or other sums applicable to trustees, officers, agents or employees of
a trust, (v) the allocation of receipts and expenditures to income or principal,
(vi) restrictions or limitations on the permissible nature, amount, or
concentration of trust investments or requirements. relating to the titling,
storage, or other manner of holding of trust assets, or (vii) the establishment
of fiduciary or other standards or responsibilities or limitations on the acts
or powers or liabilities or authorities and powers of trustees that are
inconsistent with the limitations or liabilities or authorities and powers of
the Trustees set forth or referenced in this Declaration of Trust.
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Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are
severable, and if the Trustees shall determine, with the advice of counsel, that
any of such provisions is in conflict with the Investment Company Act, the
regulated investment company provisions of the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be deemed
never-to have constituted a part of the Declaration of Trust; provided, however,
that such determination shall not affect any of the remaining provisions of the
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination.
(b) If any provision of the Declaration of Trust
shall be held invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the
Trustees to create a business trust pursuant to the Delaware Act and thereby to
create only the relationship of trustee and beneficial owners within the meaning
of such Act between the Trustees and each Shareholder. It is not the intention
of the Trustees to create a general partnership, limited partnership, joint
stock association, corporation, bailment, or any form of legal relationship
other than a business trust pursuant to the Delaware Act. Nothing in this
Declaration of Trust shall be construed to make the Shareholders, either by
themselves or with the Trustees, partners or members of a joint stock
association.
Section 9. Use of the Identifying Words "Montgomery" and "The
Montgomery Funds III." The identifying words "Montgomery" and "The Montgomery
Funds III" and all rights to the use of such identifying words belong to
Montgomery Asset Management, L.P., the proposed Investment Adviser of the
Trust's Shares. Montgomery Asset Management, L.P. has licensed the Trust to use
the identifying words "The Montgomery Funds III" in the Trust's name and to use
the identifying word "Montgomery" in the name of any series of the Trust. In the
event that Montgomery Asset Management, L.P. or an affiliate of Montgomery Asset
Management, L.P. is not appointed or ceases to be the Investment Adviser of the
Trust, the non-exclusive license may be revoked by Montgomery Asset Management,
L.P., and the Trust and any series thereof shall respectively cease using the
identifying words "The Montgomery Funds III" and "Montgomery," unless otherwise
consented to by Montgomery Asset Management, L.P. or any successor to Montgomery
Asset Management, L.P.'s interest.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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IN WITNESS WHEREOF, the Trustees named below do hereby make
and enter into this Agreement and Declaration of Trust as of this 16th day of
August, 1994.
/s/ Andrew Cox
- ----------------------
Andrew Cox
750 Vine Street
Denver, Colorado 80206
/s/ R. Stephen Doyle
- ----------------------
R. Stephen Doyle
600 Montgomery Street
San Francisco, California 94111
/s/ John A. Farnsworth
- ----------------------
John A. Farnsworth
23-F Main Street
Tiburon, California 94920
/s/ Cecilia H. Herbert
- ----------------------
Cecilia H. Herbert
2636 Vallejo Street
San Francisco, California 94123
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 600 MONTGOMERY STREET, SAN
FRANCISCO, CALIFORNIA 94111
25
- --------------------------------------------------------------------------------
Exhibit 23(b)
By-Laws
- --------------------------------------------------------------------------------
C-6
<PAGE>
BY-LAWS
for the regulation, except as
otherwise provided by statute or
the Agreement and Declaration of Trust of
THE MONTGOMERY FUNDS III
a Delaware Business Trust
(as of August 16, 1994)
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I OFFICES ................................................... 1
Section 1. PRINCIPAL OFFICE ..................................... 1
Section 2. DELAWARE OFFICE ...................................... 1
Section 3. OTHER OFFICES ........................................ 1
ARTICLE II MEETINGS OF SHAREHOLDERS .................................. 1
Section 1. PLACE OF MEETINGS .................................... 1
Section 2. CALL OF MEETING ...................................... 1
Section 3. NOTICE OF SHAREHOLDERS' MEETING ...................... 1
Section 4. MANNER OF GIVING NOTICE: AFFIDAVIT OF NOTICE ......... 2
Section 5. ADJOURNED MEETING; NOTICE ............................ 2
Section 6. VOTING ............................................... 3
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS ... 3
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT
A MEETING ............................................ 3
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND
GIVING CONSENTS ...................................... 4
Section 10. PROXIES .............................................. 4
Section 11. INSPECTORS OF ELECTION ............................... 5
ARTICLE III TRUSTEES .................................................. 5
Section 1. POWERS ............................................... 5
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Page
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Section 2. NUMBER OF TRUSTEES ................................... 5
Section 3. VACANCIES ............................................ 6
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE .......... 6
Section 5. REGULAR MEETINGS ..................................... 6
Section 6. SPECIAL MEETINGS ..................................... 6
Section 7. QUORUM ............................................... 7
Section 8. WAIVER OF NOTICE ..................................... 7
Section 9. ADJOURNMENT .......................................... 7
Section 10. NOTICE OF ADJOURNMENT ................................ 7
Section 11. ACTION WITHOUT A MEETING ............................. 7
Section 12. FEES AND COMPENSATION OF TRUSTEES .................... 7
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES ................ 8
ARTICLE IV COMMITTEES ................................................ 8
Section 1. COMMITTEES OF TRUSTEES ............................... 8
Section 2. MEETINGS AND ACTION OF COMMITTEES .................... 8
ARTICLE V OFFICERS .................................................. 9
Section 1. OFFICERS ............................................. 9
Section 2. ELECTION OF OFFICERS ................................. 9
Section 3. SUBORDINATE OFFICERS ................................. 9
ii
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Page
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Section 4. REMOVAL AND RESIGNATION OF OFFICERS .................. 9
Section 5. VACANCIES IN OFFICES ................................. 10
Section 6. CHAIRMAN OF THE BOARD ................................ 10
Section 7. PRESIDENT ............................................ 10
Section 8. VICE PRESIDENTS ...................................... 10
Section 9. SECRETARY ............................................ 10
Section 10. TREASURER ............................................ 11
ARTICLE VI INDEMNIFICATION OF TRUSTEES OFFICERS EMPLOYEES AND OTHER
AGENTS .................................................... 11
Section 1. AGENTS, PROCEEDINGS AND EXPENSES ..................... 11
Section 2. ACTIONS OTHER THAN BY TRUST .......................... 11
Section 3. ACTIONS BY THE TRUST ................................. 12
Section 4. EXCLUSION OF INDEMNIFICATION ......................... 12
Section 5. SUCCESSFUL DEFENSE BY AGENT .......................... 13
Section 6. REQUIRED APPROVAL .................................... 13
Section 7. ADVANCE OF EXPENSES .................................. 13
Section 8. OTHER CONTRACTUAL RIGHTS ............................. 13
Section 9. LIMITATIONS .......................................... 14
Section 10. INSURANCE ............................................ 14
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Page
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Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN ................. 14
ARTICLE VII RECORDS AND REPORTS ....................................... 14
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER ......... 14
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS ................ 14
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS .......... 15
Section 4. INSPECTION BY TRUSTEES ............................... 15
ARTICLE VIII GENERAL MATTERS ........................................... 15
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS ............. 15
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED .............. 16
Section 3. CERTIFICATES FOR SHARES .............................. 16
Section 4. LOST CERTIFICATES .................................... 16
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD
BY TRUST ............................................. 16
Section 6. FISCAL YEAR .......................................... 17
ARTICLE IX AMENDMENTS ................................................ 17
Section 1. AMENDMENT BY SHAREHOLDERS ............................ 17
Section 2. AMENDMENT BY TRUSTEES ................................ 17
Section 3. INCORPORATION BY REFERENCE INTO AGREEMENT AND
DECLARATION OF TRUST OF THE TRUST .................... 17
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BY-LAWS
OF
THE MONTGOMERY FUNDS III
A Delaware Business Trust
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The Board of Trustees shall fix and, from
time to time, may change the location of the principal executive office of The
Montgomery Funds III (the "Trust") at any place within or outside the State of
Delaware.
Section 2. DELAWARE OFFICE. The Board of Trustees shall establish a
registered office in the State of Delaware and shall appoint as the Trust's
registered agent for service of process in the State of Delaware an individual
resident of the State of Delaware or a Delaware corporation or a corporation
authorized to transact business in the State of Delaware; in each case the
business office of such registered agent for service of process shall be
identical with the registered Delaware office of the Trust.
Section 3. OTHER OFFICES. The Board of Trustees may at any time
establish branch or subordinate offices at any place or places where the Trust
intends to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place designated by the Board of Trustees. In the absence of any such
designation, shareholders' meetings shall be held at the principal executive
office of the Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders may be called
at any time by the Board of Trustees or by the Chairman of the Board or by the
President.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than seven (7) nor more than seventy-five (75) days
before the date of the meeting. The notice shall specify (i) the place, date and
hour of the meeting, and (ii) the general nature of the business to be
transacted. The notice of any meeting at which Trustees are to be elected also
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shall include the name of any nominee or nominees whom at the time of the notice
are intended to be presented for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a Trustee has a direct or indirect financial
interest, (ii) an amendment of the Trust's Agreement and Declaration of Trust,
(iii) a reorganization of the Trust, or (iv) a voluntary dissolution of the
Trust, the notice shall also state the general nature of that proposal.
Section 4. MANNER OF GIVING NOTICE: AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing oh the books of the
Trust or its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the Trust is returned to the Trust by the
United States Postal Service marked to indicate that the Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if these shall be available to the shareholder on written demand of the
shareholder at the principal executive office of the Trust for a period of one
year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholder's meeting shall be executed by the Secretary, Assistant Secretary or
any transfer agent of the Trust giving the notice and shall be filed and
maintained in the minute book of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's meeting,
whether or not a quorum is present, may be adjourned from time to time by the
vote of the majority (on a dollar-weighted basis) of the shares represented at
that meeting, either in person or by proxy.
When any meeting of shareholders is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than sixty (60) days from the date set for the original
meeting, in which case the Board of Trustees shall set a new record date. Notice
of any such adjourned meeting shall be given to each shareholder of
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record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 3 and 4 of this Article II. At any adjourned meeting, the
Trust may transact any business which might have been transacted at the original
meeting.
Section 6. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of the
Agreement and Declaration of Trust of the Trust, as in effect at such time. The
shareholders' vote may be by voice vote or by ballot, provided, however, that
any election for Trustees must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of Trustees, any
shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to the total shares that the shareholder is
entitled to vote on such proposal.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of the meeting of shareholders, however called and noticed and
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy and
if either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of shareholders.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing setting forth the
action so taken is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all shares entitled to vote on that action
were present and voted. All such consents shall be filed with the Secretary of
the Trust and shall be maintained in the Trust's records. Any shareholder giving
a written consent or the shareholder's proxy holder or a transferee of' the
shares or a personal representative of the shareholder or their respective proxy
holders may revoke the consent by a writing received by the Secretary of the
Trust before written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary.
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If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the shareholders without a meeting. This notice
shall be given in the manner specified in section 4 of this Article II. In the
case of approval of (i) contracts or transactions in which a Trustee has a
direct or indirect financial interest, (ii) indemnification of agents of the
Trust, and (iii) a reorganization of the Trust, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote or entitled to give consent to action without a meeting, the
Board of Trustees may fix in advance a record date which shall not be more than
ninety (90) days nor less than seven (7) days before the date of any such
meeting as provided in the Agreement and Declaration of Trust of the Trust.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining shareholders entitled to
give consent to action in writing without a meeting, (i) when no prior action by
the Board of Trustees has been taken, shall be the day on which the first
written consent is given, or (ii) when prior action of the Board of Trustees has
been taken, shall be at the close of business on the day on which the Board of
Trustees adopt the resolution relating to that action or the seventy-fifth day
before the date of such other action, whichever is later.
Section 10. PROXIES. Every person entitled to vote for Trustees or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the Secretary of the Trust. A proxy shall be deemed signed if the shareholder's
name is placed on the proxy (whether by manual signature, typewriting,
telegraphic transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
person executing it before the vote pursuant to that proxy by a writing
delivered to the Trust stating that the proxy is revoked or by a subsequent
proxy executed by or attendance at the meeting and voting in person by the
person executing that proxy; or (ii) written notice of the death or incapacity
of the maker of that proxy is received by the Trust before the vote pursuant to
that proxy is counted; provided however, that
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no proxy shall be valid after the expiration of eleven (11) months from the date
of the proxy unless otherwise provided in the proxy.
Section 11. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Trustees may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may and on the
request of any shareholder or a shareholder's proxy, shall appoint a person to
fill the vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the
voting power of each, the shares represented at the
meeting, the existence of a quorum and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in
any way arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
TRUSTEES
Section 1. POWERS. Subject to the applicable provisions of the
Agreement and Declaration of Trust of the Trust and these By-Laws relating to
action required to be approved by the shareholders or by the outstanding shares,
the business and affairs of the Trust shall be managed and all powers shall be
exercised by or under the direction of the Board of Trustees.
Section 2. NUMBER OF TRUSTEES. The exact number of Trustees within the
limits specified in the Agreement and Declaration of Trust of the Trust shall be
fixed from time to time by a written instrument signed or a resolution approved
at a duly constituted meeting by a majority of the Board of Trustees.
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Section 3. VACANCIES. Vacancies in the Board of Trustees may be filled
by a majority of the remaining Trustees, though less than a quorum, or by a sole
remaining Trustee, unless the Board of Trustees calls a meeting of shareholders
for the purposes of electing Trustees. In the event that at any time less than a
majority of the Trustees holding office at that time were so elected by the
holders of the outstanding voting securities of the Trust, the Board of Trustees
shall forthwith cause to be held as promptly as possible, and in any event
within sixty (60) days, a meeting of such holders for the purpose of electing
Trustees to fill any existing vacancies in the Board of Trustees, unless such
period is extended by order of the United States Securities and Exchange
Commission.
Notwithstanding the above, whenever and for so long as the Trust is a
participant in or otherwise has in effect a Plan under which the Trust may be
deemed to bear expenses of distributing its shares as that practice is described
in Rule 12b-1 under the Investment Company Act of 1940, then the selection and
nomination of the Trustees who are not interested persons of the Trust (as that
term is defined in the Investment Company Act of 1940) shall be, and is,
committed to the discretion of such disinterested Trustees.
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of
the Board of Trustees may be held at any place that has been agreed to by the
Board. In the absence of such a designation, regular meetings shall be held at
the principal executive office of the Trust. With the exception of meetings at
which an Investment Management Agreement, Portfolio Advisory Agreement or any
Distribution Plan adopted pursuant to Rule 12b-1 is approved by the Board, any
meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all Trustees participating in the meeting
can hear one another, and all such Trustees shall be deemed to be present in
person at the meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Trustees
shall be held without call at such time as shall from time to time be fixed by
the Board of Trustees. Such regular meetings may be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of' Trustees
for any purpose or purposes may be called at any time by the Chairman of the
Board or the President or any Vice President or the Secretary or any two (2)
Trustees.
Notice of the time and place of special meetings shall be delivered personally
or by telephone to each Trustee or sent by first-class mail or telegram, charges
prepaid, addressed to each Trustee at that Trustee's address as it is shown on
the records of the Trust. In case the notice is mailed, it shall be deposited in
the United States mail at least seven (7) calendar days before the time of the
holding of the meeting. In case the notice is delivered personally or by
telephone or to the telegraph company or by express mail or similar service, it
shall be given at least forty-eight (48) hours before the time of the holding of
the meeting. Any oral notice given personally or by
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telephone may be communicated either to the Trustee or to a person at the office
of the Trustee whom the person giving the notice has reason to believe will
promptly communicate it to the Trustee. The notice need not specify the purpose
of the meeting or the place if the meeting is to be held at the principal
executive office of the Trust.
Section 7. QUORUM. A majority of the authorized number of Trustees
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 10 of this Article III. Every act or decision done or made
by a majority of the Trustees present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Trustees, subject to the
provisions of the Trust's Agreement and Declaration of Trust. A meeting at which
a quorum is initially present may continue to transact business notwithstanding
the withdrawal of Trustees if any action taken is approved by a least a majority
of the required quorum for that meeting.
Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given to
any Trustee who either before or after the meeting signs a written waiver of
notice, a consent to holding the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents, and approvals shall be filed with the records of the
Trust or made a part of the minutes of the meeting. Notice of a meeting shall
also be deemed given to any Trustee who attends the meeting without protesting
before or at its commencement the lack of notice to that Trustee.
Section 9. ADJOURNMENT. A majority of the Trustees present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than forty-eight (48) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting in the manner specified
in Section 7 of this Article III to the Trustees who were present at the time of
the adjournment.
Section 11. ACTION WITHOUT A MEETING. With the exception of the
approval of an investment management agreement, portfolio advisory agreement, or
any distribution plan adopted pursuant to Rule 12b-1, any action required or
permitted to be taken by the Board of Trustees may be taken without a meeting if
a majority of the members of the Board of Trustees shall individually or
collectively consent in writing to that action. Such action by written consent
shall have the same force and effect as a majority vote of the Board of
Trustees. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board of Trustees.
Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Trustees. This Section
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12 shall not be construed to preclude any Trustee from serving the Trust in any
other capacity as an officer, agent, employee or otherwise and receiving
compensation for those services.
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate his or her power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two (2) Trustees personally exercise the powers granted to
the Trustees under the Trust's Agreement and Declaration of Trust except as
otherwise expressly provided herein or by resolution of the Board of Trustees.
Except where applicable law may require a Trustee to be present in person, a
Trustee represented by another Trustee pursuant to such power of attorney shall
be deemed to be present for purposes-of establishing a quorum and satisfying the
required majority vote.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees may by
resolution adopted by a majority of the authorized number of Trustees designate
one or more committees, each consisting of one (1) or more Trustees, to serve at
the pleasure of the Board. The Board may designate one or more Trustees as
alternate members of any committee who may replace any absent member at any
meeting of the committee. Any committee to the extent provided in the resolution
of the Board, shall have the authority of the Board, except with respect to:
(a) the approval of any action which under applicable law
also requires shareholders' approval or approval of
the outstanding shares, or requires approval by a
majority of the entire Board or certain members of
said Board;
(b) the filling of vacancies on the Board of Trustees or
in any committee;
(c) the fixing of compensation of the Trustees for
serving on the Board of Trustees or on any committee;
(d) the amendment or repeal of the Trust's Agreement and
Declaration of Trust or of the By-Laws or the
adoption of new By-Laws;
(e) the amendment or repeal of any resolution of the
Board of Trustees which by its express terms is not
so amendable or repealable;
(f) a distribution to the shareholders of the Trust,
except at a rate or in a periodic amount or within a
designated range determined by the Board of Trustees;
or
(g) the appointment of any other committees of the Board
of Trustees or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by and held and taken in accordance with the
provisions of Article
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III of these By-Laws, with such changes in the context thereof as are necessary
to substitute the committee and its members for the Board of Trustees and its
members, except that the time of regular meetings of committees may be
determined either by resolution of the Board of Trustees or by resolution of the
committee. Special meetings of committees may also be called by resolution of
the Board of Trustees. Alternate members shall be given notice of meetings of
committees and shall have the right to attend all meetings of committees. The
Board of Trustees may adopt rules for the government of any committee not
inconsistent with the provisions of these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a President, a
Secretary and a Treasurer. The Trust may also have, at the discretion of the
Board of Trustees, a Chairman of the Board, one or more Vice Presidents, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the Trust, except such
officers as may appointed in accordance with the provisions of Section 3 or
Sections of this Article V, shall be chosen by the Board of Trustees, and each
shall serve at the pleasure of the Board of Trustees, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board of Trustees may appoint and
may empower the President to appoint such other officers as the business of the
Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the Board of Trustees at any regular
or special meeting of the Board of Trustees or by the principal executive
officer or by such other officer upon whom such power of removal may be
conferred by the Board of Trustees.
Any officer may resign at any time by giving written notice to the
Trust. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice; and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Trust under any contract to which the officer is a party.
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Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or other cause shall be filled in
the manner prescribed in these By-Laws for regular appointment to that office.
The President (or the Chairman of the Board if one is appointed) may make
temporary appointments to a vacant office pending action by the Board of
Trustees.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer is elected, shall, if present, preside at meetings of the Board of
Trustees, subject to the control of the Board of Trustees, have general
supervision, direction and control of the business and the officers of the Trust
and exercise and perform such other powers and duties as may be from time to
time assigned to him or her by the Board of Trustees or prescribed by the
By-Laws. The Chairman of the Board may serve as principal executive officer if
the Trustees so appoint him or her.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Trustees to the Chairman of the Board, if there be
such an officer, the President shall, subject to the control of the Board of
Trustees and the Chairman, have general supervision, direction and control of
the business and the officers of the Trust. He or she shall preside at all
meetings of the shareholders and, in the absence of the Chairman of the Board or
if there be none, at all meetings of the Board of Trustees. Subject to Section 6
of this Article V, he or she shall have the general powers and duties of
management usually vested in the offices of president, principal executive
officer and chief operating officer of a corporation and shall have such other
powers and duties as may be prescribed by the Board of Trustees or these
By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Trustees or if not ranked, the Executive Vice President (who shall be
considered first ranked) and such other Vice Presidents as shall be designated
by the Board of Trustees, shall perform all the duties of the President and,
when so acting, shall have all powers of and be subject to all the restrictions
upon the President. The Vice Presidents shall have such other powers and perform
such other duties as from time to time may be prescribed for them respectively
by the Board of Trustees or the President or the Chairman of the Board or by
these By-Laws.
Section 9. SECRETARY. The Secretary shall keep or cause to be kept at
the principal executive office of the Trust or such other place as the Board of
Trustees may direct a book of minutes of all meetings and actions of Trustees,
committees of Trustees and shareholders with the time and place of holding,
whether regular or special, and if special, how authorized, the notice given,
the names of those present at Trustees' meetings or committee meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings.
The Secretary shall keep or cause to be kept at the principal
executive office of the Trust or at the office of the Trust's transfer agent or
registrar, a share register or a duplicate share
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register showing the names of all shareholders and their addresses, the number
and classes of shares held by each, the number and date of certificates issued
for the same and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give or cause to be given notice of all
meetings of the shareholders and of the Board of Trustees required to be given
by these By-Laws or by applicable law and shall have such other powers and
perform such other duties as may be prescribed by the Board of Trustees or by
these By-Laws.
Section 10. TREASURER. The Treasurer shall be the chief financial
officer and chief accounting officer of the Trust and shall keep and maintain or
cause to be kept and maintained adequate and correct books and records of
accounts of the properties and business transactions of the Trust, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any Trustee.
The Treasurer shall deposit all monies and other valuables in
the name and to the credit of the Trust with such depositories as may be
designated by the Board of Trustees. The Treasurer shall disburse the funds of
the Trust as may be ordered by the Board of Trustees, shall render to the
President and Trustees, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the Trust and shall have other powers and perform such other duties as may be
prescribed by the Board of Trustees or these By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES OFFICERS
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a Trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
Trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
Trustee, director, officer, employee or agent of a foreign or domestic
corporation that was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes, without limitation, attorney's fees and any expenses of
establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an
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action by or in the right of this Trust) by reason of the fact that such person
is or was an agent of this Trust, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with such proceeding, if it is determined that person acted in good faith and
reasonably believed: (a) in the case of conduct in his or her official capacity
as a Trustee of the Trust, that his or her conduct was in the Trust's best
interests and (b), in all other cases, that his or her conduct was at least not
opposed to the Trust's best interests and (c) in the case of a criminal
proceeding, that he or she had no reasonable cause to believe the conduct of
that person was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contenders or its equivalent shall
not of itself create a presumption that the person did not act in good faith and
in a manner which the person reasonably believed to be in the best interests of
this Trust or that the person had reasonable cause to believe that the person's
conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action by or in the right of this Trust to procure a
judgment in its favor by reason of the fact that that person is or was an agent
of this Trust, against expenses actually and reasonably incurred by that person
in connection with the defense or settlement of that action if that person acted
in good faith, in a manner that person believed to be in the best interests of
this Trust and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision
to the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this
Article:
(a) In respect of any claim, issue or matter as to which
that person shall have been adjudged to be liable on
the basis that personal benefit was improperly
received by him or her, whether or not the benefit
resulted from an action taken in the person's
official capacity; or
(b) In respect of any claim, issue or matter as to which
that person shall have been adjudged to be liable in
the performance of that person's duty to this Trust,
unless and only to the extent that the court in which
that action was brought shall determine upon
application that in view of all the circumstances of
the case, that person was not liable by reason of the
disabling conduct set forth in the preceding
paragraph and is fairly and reasonably entitled to
indemnity for the expenses which the court shall
determine; or
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(c) Of amounts paid in settling or otherwise disposing of
a threatened or pending action, with or without court
approval, or of expenses incurred in defending a
threatened or pending action that is settled or
otherwise disposed of without court approval, unless
the required approval set forth in Section 6 of this
Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
this Trust has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article or in defense of any claim, issue
or matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith, provided that the Board of
Trustees, including a majority who are disinterested, non-party Trustees, also
determines that, based upon a review of the facts, the agent was not liable by
reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) a majority vote of a quorum consisting of Trustees
who are not parties to the proceeding and are not
interested persons of the Trust (as defined in the
Investment Company Act of 1940); or
(b) a written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding upon (a) receipt of a written affirmation by the Trustee of his or
her good faith belief that he or she has met the standard of conduct necessary
for indemnification under this Article and a written undertaking by or on behalf
of the agent, such undertaking being an unlimited general obligation to repay
the amount of the advance if it is ultimately determined that he has not met
those requirements, and (b) a determination that the facts then known to those
making the determination would not preclude indemnification under this Article.
Determinations and authorizations of payments under this Section must be made in
the manner specified in Section 6 of this Article for determining that the
indemnification is permissible.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
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Section 9. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Sections 5 or 6 in any circumstances
where it appears:
(a) that it would be inconsistent with a provision of the
Trust's Agreement and Declaration of Trust, a
resolution of the shareholders of the Trust, or an
agreement in effect at the time of accrual of the
alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts
were paid which prohibits or otherwise limits
indemnification; or
(b) that it would be inconsistent with any condition
expressly imposed by a court in approving a
settlement.
Section 10. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article and the Trust's Agreement and Declaration of Trust.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article VI does
not apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article VI. Nothing contained in this Article VI shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contractor, otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article VI.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. This Trust
shall keep at its principal executive office or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the Board of Trustees, a record of its shareholders, giving the names and
addresses of all shareholders and the number, series and, where applicable,
class of shares held by each shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall keep
at its principal executive office the original or a copy of these By-Laws as
amended from time to time, which shall be open to inspection by the shareholders
at all reasonable times during office hours.
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Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting
books and records and minutes of proceedings of the shareholders and the Board
of Trustees and any committee or committees of the Board of Trustees shall be
kept at such place or places designated by the Board of Trustees or in the
absence of such designation, at the principal executive office of the Trust. The
minutes shall be kept in written form, and the accounting books and records
shall be kept either in written form or in any other form capable of being
converted into written form. The minutes and accounting books and records shall
be open to inspection upon the written demand of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours of
the Trust for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney and shall include the right to copy
and make extracts.
Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind as well as the physical properties of the Trust. This
inspection by a Trustee may be made in person or by an agent or attorney, and
the right of inspection includes the right to copy and make extracts of
documents.
Section 5. FINANCIAL STATEMENTS. A copy of any financial statements and
any income statement of the Trust for each quarterly period of each fiscal year
and accompanying balance sheet of the Trust as of the end of each such period
that has been prepared by the Trust shall be kept on file in the principal
executive office of the Trust for at least twelve (12) months, and each such
statement shall be exhibited at all reasonable times to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
The quarterly income statements and balance sheets referred to
in this section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.
ARTICLE VIII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts
or other orders for payment of money, notes or other evidences of indebtedness
issued in the name of or payable to the Trust shall be signed or endorsed in
such manner and by such person or persons as shall be designated from time to
time in accordance with the resolution of the Board of Trustees.
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Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of
Trustees, except as otherwise provided in these By-Laws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Trust and this authority may be
general or confined to specific instances; and unless so authorized or ratified
by the Board of Trustees or within the agency power of an officer, no officer,
agent or employee shall have any power or authority to bind the Trust by any
contract or engagement, to pledge its credit or to render it liable for any
purpose or for any amount.
Section 3. CERTIFICATES FOR SHARES. Upon resolution of the Board to
issue certificated shares, a certificate or certificates for shares of
beneficial interest in any series of the Trust may be issued to a shareholder
upon the shareholder's request when such shares are fully paid. All certificates
shall be signed in the name of the Trust by the Chairman of the Board or the
President or Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or any Assistant Secretary, certifying the number of shares and
the series of shares owned by the shareholders. Any or all of the signatures on
the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed on a
certificate shall have ceased to be that officer, transfer agent or registrar
before that certificate is issued, it may be issued by the Trust with the same
effect as if that person were an officer, transfer agent or registrar at the
date of issue. Notwithstanding the foregoing, the Trust may adopt and use a
system of issuance, recordation and transfer of its shares by electronic or
other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no
new certificate for shares shall be issued to replace an old certificate unless
the latter is surrendered to the Trust and canceled at the same time. The Board
of Trustees may in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Board of Trustees may require,
including a provision for indemnification of the Trust secured by a bond or
other adequate security sufficient to protect the Trust against any claim that
may be made against it, including any expense or liability on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST.
The Chairman of the Board, the President, any Vice President or any other person
authorized by resolution of the Board of Trustees or by any of the foregoing
designated officers, is authorized to vote or represent on behalf of the Trust
any and all shares of any corporation, partnership, trusts or other entities,
foreign or domestic, standing in the name of the Trust. The authority granted
may be exercised in person or by a proxy duly executed by such designated
person.
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Section 6. FISCAL YEAR. The fiscal year of the Trust shall be fixed and
refixed or changed from time to time by resolution of the Trustees. The fiscal
year of the Trust shall be the taxable year of each Series of the Trust.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended or
repealed by the affirmative vote or written consent of a majority (on a
dollar-weighted basis) of the outstanding shares entitled to vote, except as
otherwise provided by applicable law or by the Trust's Agreement and Declaration
of Trust or these By-Laws.
Section 2. AMENDMENT BY TRUSTEES. Subject to the right of shareholders
as provided in Section 1 of this Article IX to adopt, amend or repeal By-Laws,
and except as otherwise provided by applicable law or by the Trust's Agreement
and Declaration of Trust, these By-Laws may be adopted, amended or repealed by
the Board of Trustees.
Section 3. INCORPORATION BY REFERENCE INTO AGREEMENT AND DECLARATION OF
TRUST OF THE TRUST. These By-Laws and any amendments thereto shall be
incorporated by reference into the Trust's Agreement and Declaration of Trust.
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Exhibit 23(d)
Investment Advisory Contracts
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C-7
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INVESTMENT MANAGEMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT made as of the 31st day of July,
1997, by and between THE MONTGOMERY FUNDS III, a Delaware business trust
(hereinafter called the "Trust"), on behalf of each series of the Trust listed
in Appendix A hereto, as may be amended from time to time (hereinafter referred
to individually as a "Fund" and collectively as the "Funds") and MONTGOMERY
ASSET MANAGEMENT, LLC, a limited liability company organized and existing under
the laws of the State of Delaware (hereinafter called the "Manager").
WITNESSETH:
WHEREAS, the Trust is an open-end management investment company,
registered as such under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and is engaged in the business of
supplying investment advice, investment management and administrative services,
as an independent contractor; and
WHEREAS, the Trust desires to retain the Manager to render advice and
services to the Funds pursuant to the terms and provisions of this Agreement,
and the Manager is interested in furnishing said advice and services;
NOW, THEREFORE, in consideration of the covenants and the mutual
promises hereinafter set forth, the parties hereto, intending to be legally
bound hereby, mutually agree as
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follows:
1. Appointment of Manager. The Trust hereby employs the Manager and the
Manager hereby accepts such employment, to render investment advice and
management services with respect to the assets of the Funds for the period and
on the terms set forth in this Agreement, subject to the supervision and
direction of the Trust's Board of Trustees.
2. Duties of Manager.
(a) General Duties. The Manager shall act as investment
manager to the Funds and shall supervise investments of the Funds on behalf of
the Funds in accordance with the investment objectives, programs and
restrictions of the Funds as provided in the Trust's governing documents,
including, without limitation, the Trust's Agreement and Declaration of Trust
and By-Laws, or otherwise and such other limitations as the Trustees may impose
from time to time in writing to the Manager. Without limiting the generality of
the foregoing, the Manager shall: (i) furnish the Funds with advice and
recommendations with respect to the investment of each Fund's assets and the
purchase and sale of portfolio securities for the Funds, including the taking of
such other steps as may be necessary to implement such advice and
recommendations; (ii) furnish the Funds with reports, statements and other data
on securities, economic conditions and other pertinent subjects which the
Trust's Board of Trustees may reasonably request; (iii) manage the investments
of the Funds, subject to the ultimate supervision and direction of the Trust's
Board of Trustees; (iv) provide persons satisfactory to the Trust's Board of
Trustees to act as officers and employees of the Trust and the Funds (such
officers and employees, as well as certain trustees, may be trustees, directors,
officers, partners, or employees
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of the Manager or its affiliates) but not including personnel to provide
administrative service or distribution services to the Fund; and (v) render to
the Trust's Board of Trustees such periodic and special reports with respect to
each Fund's investment activities as the Board may reasonably request.
(b) Brokerage. The Manager shall place orders for the purchase
and sale of securities either directly with the issuer or with a broker or
dealer selected by the Manager. In placing each Fund's securities trades, it is
recognized that the Manager will give primary consideration to securing the most
favorable price and efficient execution, so that each Fund's total cost or
proceeds in each transaction will be the most favorable under all the
circumstances. Within the framework of this policy, the Manager may consider the
financial responsibility, research and investment information, and other
services provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may be a
party.
It is also understood that it is desirable for the Funds that
the Manager have access to investment and market research and securities and
economic analyses provided by brokers and others. It is also understood that
brokers providing such services may execute brokerage transactions at a higher
cost to the Funds than might result from the allocation of brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the purchase and sale of securities for the Funds may be
made with brokers who provide such research and analysis, subject to review by
the Trust's Board of Trustees from time to time with respect to the extent and
continuation of this practice to determine whether each Fund benefits,
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directly or indirectly, from such practice. It is understood by both parties
that the Manager may select broker-dealers for the execution of the Funds'
portfolio transactions who provide research and analysis as the Manager may
lawfully and appropriately use in its investment management and advisory
capacities, whether or not such research and analysis may also be useful to the
Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of one or more of the Funds as well as of
other clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be so purchased or sold in order to
obtain the most favorable price or lower brokerage commissions and the most
efficient execution. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Manager in the manner it considers to be the most equitable and consistent with
its fiduciary obligations to the Funds and to such other clients.
(c) Administrative Services. The Manager shall oversee the
administration of the Funds' business and affairs although the provision of
administrative services, to the extent not covered by subparagraphs (a) or (b)
above, is not the obligation of the Manager under this Agreement.
Notwithstanding any other provisions of this Agreement, the Manager shall be
entitled to reimbursement from the Funds for all or a portion of the reasonable
costs and expenses, including salary, associated with the provision by Manager
of personnel to render administrative services to the Funds.
3. Best Efforts and Judgment. The Manager shall use its best judgment
and efforts
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in rendering the advice and services to the Funds as contemplated by this
Agreement.
4. Independent Contractor. The Manager shall, for all purposes herein,
be deemed to be an independent contractor, and shall, unless otherwise expressly
provided and authorized to do so, have no authority to act for or represent the
Trust or the Funds in any way, or in any way be deemed an agent for the Trust or
for the Funds. It is expressly understood and agreed that the services to be
rendered by the Manager to the Funds under the provisions of this Agreement are
not to be deemed exclusive, and the Manager shall be free to render similar or
different services to others so long as its ability to render the services
provided for in this Agreement shall not be impaired thereby.
5. Manager's Personnel. The Manager shall, at its own expense, maintain
such staff and employ or retain such personnel and consult with such other
persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of the Manager shall be
deemed to include persons employed or retained by the Manager to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Manager or the Trust's Board of Trustees may desire and reasonably request.
6. Reports by Funds to Manager. Each Fund will from time to time
furnish to the Manager detailed statements of its investments and assets, and
information as to its investment objective and needs, and will make available to
the Manager such financial reports, proxy
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statements, legal and other information relating to each Fund's investments as
may be in its possession or available to it, together with such other
information as the Manager may reasonably request.
7. Expenses.
(a) With respect to the operation of each Fund, the Manager is
responsible for (i) the compensation of any of the Trust's trustees, officers,
and employees who are affiliates of the Manager (but not the compensation of
employees performing services in connection with expenses which are the Fund's
responsibility under Subparagraph 7(b) below), (ii) the expenses of printing and
distributing the Funds' prospectuses, statements of additional information, and
sales and advertising materials (but not the legal, auditing or accounting fees
attendant thereto) to prospective investors (but not to existing shareholders),
and (iii) providing office space and equipment reasonably necessary for the
operation of the Funds.
(b) Each Fund is responsible for and has assumed the
obligation for payment of all of its expenses, other than as stated in
Subparagraph 7(a) above, including but not limited to: fees and expenses
incurred in connection with the issuance, registration and transfer of its
shares; brokerage and commission expenses; all expenses of transfer, receipt,
safekeeping, servicing and accounting for the cash, securities and other
property of the Trust for the benefit of the Funds including all fees and
expenses of its custodian, shareholder services agent and accounting services
agent; interest charges on any borrowings; costs and expenses of pricing and
calculating its daily net asset value and of maintaining its books of account
required under the 1940 Act; taxes, if any; expenditures in connection with
meetings of each Fund's Shareholders
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and Board of Trustees that are properly payable by the Fund; salaries and
expenses of officers and fees and expenses of members of the Trust's Board of
Trustees or members of any advisory board or committee who are not members of,
affiliated with or interested persons of the Manager; insurance premiums on
property or personnel of each Fund which inure to its benefit, including
liability and fidelity bond insurance; the cost of preparing and printing
reports, proxy statements, prospectuses and statements of additional information
of the Fund or other communications for distribution to existing shareholders;
legal, auditing and accounting fees; trade association dues; fees and expenses
(including legal fees) of obtaining and maintaining any required registration or
notification for its shares for sale under federal and applicable state and
foreign securities laws; all expenses of maintaining and servicing shareholder
accounts, including all charges for transfer, shareholder recordkeeping,
dividend disbursing, redemption, and other agents for the benefit of the Funds,
if any; and all other charges and costs of its operation plus any extraordinary
and non-recurring expenses, except as herein otherwise prescribed.
(c) To the extent the Manager incurs any costs by assuming expenses
which are an obligation of a Fund as set forth herein, such Fund shall promptly
reimburse the Manager for such costs and expenses, except to the extent the
Manager has otherwise agreed to bear such expenses. To the extent the services
for which a Fund is obligated to pay are performed by the Manager, the Manager
shall be entitled to recover from such Fund to the extent of the Manager's
actual costs for providing such services.
8. Investment Advisory and Management Fee.
(a) Each Fund shall pay to the Manager, and the Manager agrees
to accept, as
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full compensation for all administrative and investment management and advisory
services furnished or provided to such Fund pursuant to this Agreement, a
management fee as set forth in the Fee Schedule attached hereto as Appendix B,
as may be amended in writing from time to time by the Trust and the Manager.
(b) The management fee shall be accrued daily by each Fund and
paid to the Manager upon its request.
(c) The initial fee under this Agreement shall be payable on
the first business day of the first month following the effective date of this
Agreement and shall be prorated as set forth below. If this Agreement is
terminated prior to the end of any month, the fee to the Manager shall be
prorated for the portion of any month in which this Agreement is in effect which
is not a complete month according to the proportion which the number of calendar
days in the month during which the Agreement is in effect bears to the number of
calendar days in the month, and shall be payable within ten (10) days after the
date of termination.
(d) The Manager may reduce any portion of the compensation or
reimbursement of expenses due to it pursuant to this Agreement and may agree to
make payments to limit the expenses which are the responsibility of a Fund under
this Agreement. Any such reduction or payment shall be applicable only to such
specific reduction or payment and shall not constitute an agreement to reduce
any future compensation or reimbursement due to the Manager hereunder or to
continue future payments. Any such reduction will be agreed to prior to accrual
of the related expense or fee and will be estimated daily and reconciled and
paid on a monthly basis. To the extent such an expense limitation has been
agreed to by the Manager
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and such limit has been disclosed to shareholders of a Fund in a prospectus, the
Manager may not change the limitation without first disclosing the change in an
updated prospectus. Any fee withheld pursuant to this paragraph from the Manager
shall be reimbursed by the appropriate Fund to the Manager in the first, second
or third (or any combination thereof) fiscal year next succeeding the fiscal
year of the withholding if the aggregate expenses for the next succeeding fiscal
year or second succeeding fiscal year or third succeeding fiscal year do not
exceed any more restrictive limitation to which the Manager has agreed. The
Manager generally may request and receive reimbursement for the oldest
reductions and waivers before payment for fees and expenses for the current
year.
(e) The Manager may agree not to require payment of any
portion of the compensation or reimbursement of expenses otherwise due to it
pursuant to this Agreement prior to the time such compensation or reimbursement
has accrued as a liability of the Fund. Any such agreement shall be applicable
only with respect to the specific items covered thereby and shall not constitute
an agreement not to require payment of any future compensation or reimbursement
due to the Manager hereunder.
9. Fund Share Activities of Managers Partners, Officers and Employees.
The Manager agrees that neither it nor any of its partners, officers or
employees shall take any short position in the shares of the Funds. This
prohibition shall not prevent the purchase of such shares by any of the officers
and partners or bona fide employees of the Manager or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof, at
a price not less than the net asset value thereof at the time of purchase, as
allowed pursuant to rules
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promulgated under the 1940 Act.
10. Conflicts with Trust's Governing Documents and Applicable Laws.
Nothing herein contained shall be deemed to require the Trust or the Funds to
take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and Funds.
11. Manager's Liabilities.
(a) In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the obligations or duties hereunder on the
part of the Manager, the Manager shall not be subject to liability to the Trust
or the Funds or to any shareholder of the Funds for an), act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by the
Funds.
(b) The Funds shall indemnify and hold harmless the Manager,
its general partner and the shareholders, directors, officers and employees of
each of them (any such person, an "Indemnified Party") against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating and defending any alleged loss, liability, claim, damage or
expenses and reasonable counsel fees incurred in connection therewith) arising
out of the Indemnified Party's performance or non-performance of any duties
under this Agreement provided, however, that nothing herein shall be deemed to
protect any Indemnified Party against any liability to which such Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith or
negligence in the performance of duties hereunder or by reason of
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reckless disregard of obligations and duties under this Agreement.
(c) No provision of this Agreement shall be construed to
protect any Trustee or officer of the Trust, or partner or officer of the
Manager, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
12. Non-Exclusivity. The Trust's employment of the Manager is not an
exclusive arrangement, and the Trust may from time to time employ other
individuals or entities to furnish it with the services provided for herein. In
the event this Agreement is terminated with respect to any Fund, this Agreement
shall remain in full force and effect with respect to all other Funds listed on
Appendix A hereto, as the same may be amended.
13. Termination. This Agreement shall become effective on the date that
is the latest of (1) the execution of this Agreement, (2) the approval of this
Agreement by the Board of Trustees of the Trust and (3) the approval of this
Agreement by the shareholders of each Fund in a special meeting of shareholders
of the Fund. This Agreement shall remain in effect for a period of two (2)
years, unless sooner terminated as hereinafter provided. This Agreement shall
continue in effect thereafter for additional periods not exceeding one (1) year
so long as such continuation is approved for each Fund at least annually by (i)
the Board of Trustees of the Trust or by the vote of a majority of the
outstanding voting securities of each Fund and (ii) the vote of a majority of
the Trustees of the Trust who are not parties to this Agreement nor interested
persons thereof, cast in person at a meeting called for the purpose of voting on
such approval.
14. Termination. This Agreement may be terminated by the Trust on
behalf of any one or more of the Funds at any time without payment of any
penalty, by the Board of Trustees
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of the Trust or by vote of a majority of the outstanding voting securities of a
Fund, upon sixty (60) days' written notice to the Manager, and by the Manager
upon sixty (60) days' written notice to a Fund.
15. Termination by Assignment. This Agreement shall terminate
automatically in the event of any transfer or assignment thereof, as defined in
the 1940 Act.
16. Transfer, Assignment. This Agreement may not be transferred,
assigned, sold or in any manner hypothecated or pledged without the affirmative
vote or written consent of the holders of a majority of the outstanding voting
securities of each Fund.
17. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
18. Definitions. The terms "majority of the outstanding voting
securities" and "interested persons" shall have the meanings as set forth in the
1940 Act.
19. Notice of Declaration of Trust. The Manager agrees that the Trust's
obligations under this Agreement shall be limited to the Funds and to their
assets, and that the Manager shall not seek satisfaction of any such obligation
from the shareholders of the Funds nor from any trustee, officer, employee or
agent of the Trust or the Funds.
20. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
21. Governing Law. This Agreement shall be governed by, and construed
in
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accordance with, the laws of the State of California without giving effect to
the conflict of laws principles thereof; provided that nothing herein shall be
construed to preempt, or to be inconsistent with, any federal law, regulation or
rule, including the 1940 Act and the Investment Advisors Act of 1940 and any
rules and regulations promulgated thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and attested by their duly authorized officers,
all on the day and year first above written.
THE MONTGOMERY FUNDS III MONTGOMERY ASSET MANAGEMENT, LLC
By: /s/ Richard W. Ingram By: /s/ Dana Schmidt
------------------------------- -----------------------------
Title: President Title: Principal
------------------------------ -----------------------------
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Appendix A
Fund Schedule
o Montgomery Variable Series: Growth o Montgomery Variable Series:
Fund Emerging Markets Fund
o Montgomery Variable Series: o Montgomery Variable Series: Small
International Small Cap Fund Cap Opportunities Fund
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Appendix B
Fee Schedule
Montgomery Variable Series: 1.00% of the first $500 million of net assets;
Growth Fund plus .90% of the next $500 million of net
assets; plus 0.80% of net assets over $1
billion.
Montgomery Variable Series: 1.25% of the first $250 million of net assets;
Emerging Markets Fund plus 1.00% of net assets over $250 million.
Montgomery Variable Series: 1.25% of the first $250 million of net sets;
International Small Cap Fund plus 1.00% of net assets over $250 million.
Montgomery Variable Series: 1.20% of the first $200 million of net assets;
Small Cap Opportunities Fund plus 1.10% of the next $300 million of net
assets; plus 1.00% of net assets over $500
million.
15
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Exhibit 23(g)
Form of Custody Agreement
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C-8
<PAGE>
CUSTODY AGREEMENT
This Custody Agreement is dated March 31, 1995 between MORGAN STANLEY
TRUST COMPANY, a New York State Chartered trust company (the "Custodian") and
THE MONTGOMERY FUNDS III, a Delaware business trust (the "Client"), on behalf of
each investment portfolio of the Client listed in Appendix 2 (each hereinafter
referred to as "the Accounts"), as such appendix may be amended from time to
time.
1. Appointment and Acceptance: Accounts. (1) The Client hereby appoints
the Custodian as a custodian of Property (as defined below) owned or under the
control of the Client that are delivered to the Custodian, or any Subcustodian
as appointed below, from time to time to be held in custody for the benefit of
the Client.
(b) Prior to the delivery of any Property by the Client to the
Custodian, the Client shall deliver to the Custodian each document and other
item listed in Appendix 1. In addition, the Client shall deliver to the
Custodian any additional documents or items as the Custodian may deem necessary
for the performance of its duties under this Agreement.
(c) The Client instructs the Custodian to establish on the books and
records of the Custodian the accounts listed in Appendix 2 (the "Accounts') in
the name of the Client. Upon receipt of Authorized Instructions (as defined
below) and appropriate documentation, the Custodian shall open additional
Accounts for the Client. Upon the Custodian's confirmation to the Client of the
opening of such additional Accounts, or of the closing of Accounts, Appendix 2
shall be deemed automatically amended or supplemented accordingly. The Custodian
shall record in the Accounts and shall have general responsibility for the
safekeeping of all securities ("Securities"), cash, cash equivalents and other
property (all such Securities, cash, cash equivalents and other property being
collectively the "Property") of the Client that are delivered to the Custodian
for custody.
(d) The procedures the Custodian and the Client will use in performing
activities in connection with this Agreement are set forth in a client services
guide provided to the Client by the Custodian, as such guide may be amended from
time to time by the Custodian by written notice to the Client (the "Client
Services Guide").
2. Subcustodians. The Property may be held in custody and deposit
accounts that have been established by the Custodian with one or more domestic
or foreign banks or other institutions as listed on Exhibit A (the
"Subcustodians"), as such Exhibit may be amended from time to time by the
Custodian by written notice to the Client, or through the facilities of one or
more securities depositories or clearing agencies. The Custodian shall hold
Property through a Subcustodian, securities depository or clearing agency only
if (a) such Subcustodian and any securities depository or clearing agency in
which such Subcustodian or the Custodian holds
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Property, or any of their creditors, may not assert any right, charge, security
interest, lien, encumbrance or other claim of any kind to such Property except a
claim of payment for its safe custody or administration and (b) beneficial
ownership of such Property may be freely transferred without the payment of
money or value other than for safe custody or administration. Any Subcustodian
may hold Property in a securities depository and may utilize a clearing agency.
3. Records. With respect to Property held by a Subcustodian:
(a) The Custodian may hold Property for all of its customers with a
Subcustodian in a single account identified as belonging to the Custodian for
the benefit of its customers;
(b) The Custodian shall identify on its books as belonging to the
Client any Property held by a Subcustodian for the Custodian's account;
(c) The Custodian shall require that Property held by the Subcustodian
for the Custodian's account be identified on the Subcustodian's books as
separate from any other property held by the Subcustodian other than property of
the Custodian's customers held solely for the benefit of customers of the
Custodian; and
(d) In the event the Subcustodian holds Property in a securities
depository or clearing agency, such Subcustodian shall be required by its
agreement with the Custodian to identify on its books such Property as being
held for the account of the Custodian as custodian for its customers or in such
other manner as is required by local law or market practice.
4. Access to Records. The Custodian shall allow the Client's
accountants reasonable access to the Custodian's records relating to the
Property held by the Custodian as such accountants may reasonably require in
connection with their examination of the Client's affairs. The Custodian shall
also obtain from any Subcustodian (and shall require each Subcustodian to use
reasonable efforts to obtain from any securities depository or clearing agency
in which it deposits Property) an undertaking, to the extent consistent with
local practice and the laws of the jurisdiction or jurisdictions to which such
Subcustodian, securities depository or clearing agency is subject, to permit
independent public accountants such reasonable access to the records of such
Subcustodian, securities depository or clearing agency as may be reasonably
required in connection with the examination of the Client's affairs or to take
such other action as the Custodian in its judgment may deem sufficient to ensure
such reasonable access.
5. Reports. The Custodian shall provide such reports and other
information to the Client and to such persons as the Client directs as the
Custodian and the Client may agree from time to time.
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6. Payment of Monies. The Custodian shall make, or cause any
Subcustodian to make, payments from monies being held in the Accounts only in
accordance with Authorized Instructions or as provided in Sections 9, 13 and 17.
The Custodian may act as the Client's agent or act as a principal in
foreign exchange transactions at such rates as are agreed from time to time
between the Client and the Custodian.
7. Transfer of Securities. The Custodian shall make, or cause any
Subcustodian to make, transfers, exchanges or deliveries of Securities only in
accordance with Authorized Instructions or as provided in Sections 9, 13 and 17.
8. Corporate Action. (a) The Custodian shall notify the Client of
details of all corporate actions affecting the Client's Securities promptly upon
its receipt of such information.
(b) The Custodian shall take, or cause any Subcustodian to take, such
corporate action only in accordance with Authorized Instructions or as provided
in this Section 8 or Section 9.
(c) In the event the Client does not provide timely Authorized
Instructions to the Custodian, the Custodian shall act in accordance with the
default option provided by local market practice and/or the issuer of the
Securities.
(d) Fractional shares resulting from corporate action activity shall be
treated in accordance with local market practices.
9. General Authority. In the absence of Authorized Instructions to the
contrary, the Custodian may, and may authorize any Subcustodian to:
(a) make payments to itself or others for expenses of handling Property
or other similar items relating to its duties under this Agreement, provided
that all such payments shall be accounted for to the Client;
(b) receive and collect all income and principal with respect to
Securities and to credit cash receipts to the Accounts;
(c) exchange Securities when the exchange is purely ministerial
(including, without limitation, the exchange of interim receipts or temporary
securities for securities in definitive form and the exchange of warrants, or
other documents of entitlement to securities, for the securities themselves);
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(d) surrender Securities at maturity or when called for redemption upon
receiving payment therefor;
(e) execute in the Client's name such ownership and other certificates
as may be required to obtain the payment of income from Securities;
(f) pay or cause to be paid, from the Accounts, any and all taxes and
levies in the nature of taxes imposed on Property by any governmental authority
in connection with custody of and transactions in such Property;
(g) endorse for collection, in the name of the Client, checks, drafts
and other negotiable instruments;
(h) take non-discretionary action on mandatory corporate actions; and
(i) in general, attend to all nondiscretionary details in connection
with the custody, sale, purchase, transfer and other dealings with the Property.
10. Authorized Instructions; Authorized Persons. (a) Except as
otherwise provided in Sections 6 through 9, 13 and 17, all payments of monies,
all transfers, exchanges or deliveries of Property and all responses to
corporate actions shall be made or taken only upon receipt by the Custodian of
Authorized Instructions; provided that such Authorized Instructions are timely
received by the Custodian. "Authorized Instructions" of the Client means
instructions from an Authorized Person received by telecopy, tested telex,
electronic link or other electronic means or by such other means as may be
agreed in writing between the Client and the Custodian.
(b) "Authorized Person" means each of the persons or entities
identified on Appendix 3 as amended from time to time by written notice from the
Client to the Custodian. The Client represents and warrants to the Custodian
that each Authorized Person listed in Appendix 3, as amended from time to time,
is authorized to issue Authorized Instructions on behalf of the Client. Prior to
the delivery of the Property to the Custodian, the Custodian shall provide a
list of designated system user ID numbers and passwords that the Client shall be
responsible for assigning to Authorized Persons. The Custodian shall assume that
an electronic transmission received and identified by a system user ID number
and password was sent by an Authorized Person. The Custodian agrees to provide
additional designated system user ID numbers and passwords as needed by the
Client. The Client authorizes the Custodian to issue new system user ID numbers
upon the request of a previously existing Authorized Person. Upon the issuance
of additional system user ID numbers by the Custodian to the Client, Appendix 3
shall be deemed automatically amended accordingly. The Client authorizes the
Custodian to receive, act and rely upon any Authorized Instructions received by
the Custodian which have been issued, or purport to have been issued, by an
Authorized Person.
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(c) Any Authorized Person may cancel/correct or otherwise amend any
Authorized Instruction received by the Custodian, but the Client agrees to
indemnify the Custodian for any liability, loss or expense incurred by the
Custodian and its Subcustodians as a result of their having relied upon or acted
on any prior Authorized Instruction. An amendment or cancellation of an
Authorized Instruction to deliver or receive any security or funds in connection
with a trade will not be processed once the trade has settled.
11. Registration of Securities. (a) In the absence of Authorized
Instructions to the contrary, Securities which must be held in registered form
shall be registered in the name of the Custodian or the Custodian's nominee or,
in the case of Securities in the custody of an entity other than the Custodian,
in the name of the Custodian, its Subcustodian or any such entity's nominee. The
Custodian may, without notice to the Client, cause any Securities to be
registered or re-registered in the name of the Client.
(b) Where the Custodian has been instructed by the Client to hold any
Securities in the name of any person or entity other than the Custodian, its
Subcustodian or any such entity's nominee, the Custodian shall not be
responsible for any failure to collect such dividends or other income or
participate in any such corporate action with respect to such Securities.
12. Deposit Accounts. All cash received by the Custodian for the
Accounts shall be held by the Custodian as a short-term credit balance in favor
of the Client and, if the Custodian and the Client have agreed in writing in
advance that such credit balances shall bear interest, the Client shall earn
interest at the rates and times as agreed between the Custodian and the Client.
The Client acknowledges that any such credit balances shall not be accompanied
by the benefit of any governmental insurance.
13. Short-term Credit Extensions. (a) From time to time, the Custodian
may extend or arrange short-ten-n credit for the Client which is (i) necessary
in connection with payment and clearance of securities and foreign exchange
transactions or (ii) pursuant to an agreed schedule, as and if set forth in the
Client Services Guide, of credits for dividends and interest payments on
Securities. All such extensions of credit shall be repayable by the Client on
demand.
(b) The Custodian shall be entitled to charge the Client interest for
any such credit extension at rates to be agreed upon from time to time or, if
such credit is arranged by the Custodian with a third party on behalf of the
Client, the Client shall reimburse the Custodian for any interest charge. In
addition to any other remedies available, the Custodian shall be entitled to a
fight of set-off against the Property to satisfy the repayment of such credit
extensions and the payment of, or reimbursement for, accrued interest thereon.
14. Representations and Warranties. (a) The Client represents and
warrants
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that (i) the execution, delivery and performance of this Agreement (including,
without limitation, the ability to obtain the short-term extensions of credit in
accordance with Section 13) are within the Client's power and authority and have
been duly authorized by all requisite action (corporate or otherwise) of the
Client and of the beneficial owner of the Property, if other than the Client,
and (ii) this Agreement and each extension of short-term credit extended to or
arranged for the benefit of the Client in accordance with Section 13 shall at
all times constitute a legal, valid and binding obligation of the Client
enforceable against the Client in accordance with their respective terms, except
as may be limited by bankruptcy, insolvency or other singular laws affecting the
enforcement of creditors' rights in general and subject to the effect of general
principles of equity (regardless of whether considered in a proceeding in equity
or at law).
(b) The Custodian represents and warrants that (i) the execution,
delivery and performance of this Agreement are within the Custodian's power and
authority and have been duly authorized by all requisite action (corporate or
otherwise) of the Custodian and (ii) this Agreement constitutes the legal, valid
and binding obligation of the Custodian enforceable against the Custodian in
accordance with its terms, except as may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights in general and
subject to the effect of general principles of equity (regardless of whether
considered in a proceeding in equity or at law).
15. Standard of Care, Indemnification. (a) The Custodian shall be
responsible for the performance of only such duties as are set forth in this
Agreement or contained in Authorized Instructions given to the Custodian which
are not contrary to the provisions of any relevant law or regulation. The
Custodian shall be liable to the Client for any loss, liability or expense
incurred by the Client in connection with this Agreement to the extent that any
such loss, liability or expense results from the negligence or willful
misconduct of the Custodian or any Subcustodian, provided that the Custodian
shall have no greater or lesser responsibility or liability to the Client on
account of any actions or omissions of any Subcustodian than the responsibility
or liability such Subcustodian has to the Custodian.
(b) The Client acknowledges that the Property may be physically held
outside the United States. The Custodian shall not be liable for any loss,
liability or expense resulting from events beyond the reasonable control of the
Custodian, including, but not limited to, force majeure.
(c) In addition, the Client shall indemnify the Custodian and
Subcustodians and any nominee for, and hold each of them harmless from, any
liability, loss or expense (including attorneys' fees and disbursements)
incurred in connection with this Agreement, including without limitation, (i) as
a result of the Custodian having acted or relied upon any Authorized
Instructions or (ii) arising out of any such person acting as a nominee or
holder of record of Securities.
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16. Fees; Liens. The Client shall pay to the Custodian from time to
time such compensation for its services pursuant to this Agreement as may be
mutually agreed upon as well as the Custodian's out-of-pocket and incidental
expenses. The Client shall hold the Custodian harmless from any liability or
loss resulting from any taxes or other governmental charges, and any expenses
related thereto, which may be imposed or assessed with respect to the Accounts
or any Property held therein. The Custodian is, and any Subcustodians are,
authorized to charge the Accounts for such items and the Custodian shall have a
lien, charge and security interest on any and all Property for any amount owing
to the Custodian from time to time under this Agreement.
17. Termination. This Agreement may be terminated by the Client or the
Custodian by 60 days written notice to the other, sent by registered mail. If
notice of termination is given, the Client shall, within 30 days following the
giving of such notice, deliver to the Custodian a statement in writing
specifying the successor custodian or other person to whom the Custodian shall
transfer the Property. In either event, the Custodian, subject to the
satisfaction of any lien it may have, shall transfer the Property to the person
so specified. If the Custodian does not receive such statement the Custodian, at
its election, may transfer the Property to a bank or trust company established
under the laws of the United States or any state thereof to be held and disposed
of pursuant to the provisions of this Agreement or may continue to hold the
Property until such a statement is delivered to the Custodian. In such event the
Custodian shall be entitled to fair compensation for its services during such
period as the Custodian remains in possession of any Property and the provisions
of this Agreement relating to the duties and obligations of the Custodian shall
remain in full force and effect; provided, however, that the Custodian shall
have no obligation to settle any transactions in Securities for the Accounts.
The provisions of Sections 15 and 16 shall survive termination of this
Agreement.
18. Investment Advice. The Custodian shall not supervise, recommend or
advise the Client relative to the investment, purchase, sale, retention or other
disposition of any Property held under this Agreement.
19. Confidentiality. The Custodian, its agents and employees shall
maintain the confidentiality of information concerning the Property held in the
Client's account, including in dealings with affiliates of the Custodian. In the
event the Custodian or any Subcustodian is requested or required to disclose any
confidential information concerning the Property, the Custodian shall, to the
extent practicable and legally permissible, promptly notify the Client of such
request or requirement so that the Client may seek a protective order or waive
any objection to the Custodian's or such Subcustodian's compliance with this
Section 19. In the absence of such a waiver, if the Custodian or such
Subcustodian is compelled, in the opinion of its counsel, to disclose any
confidential information, the Custodian or such Subcustodian may disclose such
information to such persons as, in the opinion of counsel, is so required.
20. Notices. Any notice or other communication from the Client to the
Custodian, unless otherwise provided by this Agreement or the Client Services
Guide, shall be
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sent by certified or registered mail to _____________________________,
Attention: President, and any notice from the Custodian to the Client is to be
mailed postage prepaid, addressed to the Client at the address appearing below,
or as it, may hereafter be changed on the Custodian's records in accordance with
written notice from the Client.
21. Assignment. This contract may not be assigned by either party
without the prior written approval of the other.
22. Miscellaneous. (a) This Agreement shall bind the successors and
assigns of the Client and the Custodian.
(b) This Agreement shall be governed by and construed in accordance
with the internal laws of the State of ________ without regard to its conflicts
of law rules and to the extent not preempted by federal law. The Custodian and
the Client hereby irrevocably submit to the exclusive jurisdiction of any
___________ State court or any United States District Court located in the State
of _______ in any action or proceeding arising out of this Agreement and hereby
irrevocably waive any objection to the venue of any such action or proceeding
brought in any such court or any defense of an inconvenient forum.
In witness whereof, the parties hereto have set their hands as of the
date first above written.
THE MONTGOMERY FUNDS III,
on behalf of each investment portfolio
listed in Appendix 2
By: ____________________________________
Name:
Title:
Address for record: ____________________
____________________
____________________
Accepted:
___________________________
By: _______________________
Authorized Signature
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Exhibit 23(h)(1)
Form of Administrative Services Agreement
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C-9
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement") is made as of
____________, by and between Montgomery Asset Management, LLC, a California
limited liability corporation (the "Administrator") and The Montgomery Funds
III, a Delaware business trust (the "Trust").
W I T N E S E T H:
WHEREAS, the Trust wish to retain the Administrator to provide certain
administrative services with respect to each investment company portfolio
managed by the Administrator (collectively, the "Series"), and the Administrator
is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints the Administrator to provide
certain administrative services required by the Trust for each Series for the
period and on the terms set forth in this Agreement; provided that this
Agreement shall not be effective until approved by the Board of Trustees of the
Trust. The Administrator accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Paragraph 3 of this Agreement. In the event that the Trust decides to modify the
Administrator's duties hereunder with respect to one or more Series, the Trust
shall notify the Administrator in writing.
2. Services and Duties. Subject to the control of the Trust and the
oversight of the Trust's Board of Trustees, the Administrator undertakes to
perform the following types of services:
(a) Performance measurement and analytics, including
furnishing performance data, statistical data and research data;
(b) Tax and treasury services, including preparing and filing
various reports (including tax returns) or other documents required by federal,
state and other applicable laws and regulations other than those required to be
filed by the Trust's custodian, investment manager or transfer agent;
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(c) Management of printing, including assisting in the
preparation and printing of all documents, prospectuses and reports sent to
shareholders;
(d) Financial reporting and assisting in the preparation of
financial statements.
(e) At the request of the Trust, assisting in the preparation
of all agendas, notices and minutes for meetings of the Trust's Board of
Trustees or shareholders; assisting in the preparation of all resolutions to be
voted upon by the Board of Trustees; assisting in the preparation of supporting
information for such meetings with regard to the duties of the Administrator
under this Agreement, and collection and distribution of supporting information
for such meetings with respect to the duties performed by other persons who
provide services to the Trusts;
(f) At the request of the Trust, developing and monitoring
compliance procedures for each Series concerning, among other matters, adherence
of each series to its investment objectives, policies, restrictions, tax matters
and applicable laws and regulations; and
(g) Blue sky monitoring; and
(h) management of legal services.
The Administrator's duties shall not include acting as Trust
accountant, pricing any Series' portfolio, acting as transfer agent or
shareholder servicing agent, or performing blue sky registration services. To
the extent any of these services are performed by the Administrator, the
Administrator shall be entitled to separate compensation therefor.
In performing its duties under this Agreement, the Administrator will
(i) act in accordance with the Trust's Agreement and Declaration of Trust and
all amendments thereto (the "Declaration of Trust"), the Trust's By-Laws, the
effective prospectuses and statements of additional information of the Series
and with the instructions and directions of the Trust, (ii) conform to and
comply with the requirements of the Investment Company Act of 1940, as amended
(the "Investment Company Act"), and all other applicable federal or state laws
and regulations, and (iii) consult with legal counsel to and the independent
public accountants for the Trust, as necessary and appropriate, on whose advice
the Administrator shall be entitled to rely. Each Trust will furnish the
Administrator from time to time with copies of any documents that the
Administrator may reasonably request and that are necessary for it to perform
its obligations and duties under this Agreement and will notify the
Administrator as soon as possible of any matter materially affecting the
performance by the Administrator of its services under this Agreement.
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3. Compensation and Allocation of Expenses.
(a) The Trust shall compensate the Administrator for its
services rendered pursuant to this Agreement in accordance with the fees set
forth in Schedule A hereto. Such fees do not include out-of-pocket disbursements
of the Administrator, for which the Administrator shall be entitled to bill
separately. Out-of- pocket disbursements shall include, but shall not be limited
to, the items specified in Schedule A hereto. Fees shall be payable monthly in
arrears on the first business day of each month.
(b) The Administrator shall not be required to pay any
Trust/Series expenses except those which it has agreed to pay in connection with
performing the duties described herein or which it has agreed to pay in another
written agreement between the parties hereto.
(c) Upon any termination of this Agreement before the end of
any month, the fee for such period shall be prorated according to the proportion
that such period bears to the full month period. For purposes of determining
fees payable to the Administrator, the value of the net assets of each Series
shall be computed at the time and in the manner specified in the then-current
prospectus and statement of additional information for the Series.
(d) The Administrator will, from time to time, employ or
associate itself with such person or persons as the Administrator may believe to
be particularly suited to assist it in performing services under this Agreement.
Such person or persons may be officers and employees who are employed by both
the Administrator and the Trust. The compensation of such person or persons
shall be paid by the Administrator, and no obligation shall be incurred on
behalf of the Trust in such respect.
4. Administrator's Liability.
(a) In the absence of willful misfeasance, bad faith, reckless
disregard or negligence of the obligations or duties hereunder on the part of
the Administrator, the Administrator shall not be subject to liability to the
Trust or any Series or to any shareholder of any Series for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security by
a Series.
(b) The Trust shall indemnify and hold harmless the
Administrator, its partners and the shareholders, partners, directors, officers
and employees of each of them (any such person, an "Indemnified Party") against
any loss, liability, claim, damage or expense (including the reasonable cost of
investigating and defending any alleged loss, liability, claim, damage or
expenses and reasonable counsel fees incurred in connection therewith) arising
out of the Indemnified Party's performance or non-performance of any duties
under this Agreement;
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provided, however, that nothing herein shall be deemed to protect any
Indemnified Party against any liability to which such Indemnified Party would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties hereunder or by reason of reckless
disregard of obligations and duties under this Agreement.
(c) No provision of this Agreement shall be construed to
protect any Trustee or officer of the Trust, or partner or officer of the
Administrator, from liability in violation of Sections 17(h) and (i) of the
Investment Company Act.
5. Termination of Agreement.
(a) This Agreement shall become effective on the date first
set forth above and shall remain in force unless terminated pursuant to the
provisions of subparagraph (b) of this Paragraph.
(b) This Agreement may be terminated at any time without
payment of any penalty, upon thirty (30) days' written notice by the Trust or by
the Administrator.
6. Amendment to this Agreement. No provision of this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, discharge or
termination is sought.
7. Assignment. This Agreement shall extend to, and shall be binding
upon, the parties hereto and their respective successors and assigns. This
Agreement may be assigned by the Administrator; provided, however, that the
Trust has consented in writing to such assignment. The Administrator may
delegate any duty hereunder, and no consent by the Trust shall be needed
therefore; provided, however, that any such delegation does not effect a release
of the Administrator from guaranty of the fulfillment of any duty delegated by
the Administrator.
8. Notice. Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Trust or the Administrator shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Trust:
The Montgomery Funds III
101 California Street
San Francisco, California 94111
Attention: Mark B. Geist, President
4
<PAGE>
To the Administrator:
Montgomery Asset Management, LLC
101 California Street
San Francisco, California 94111
Attention: Mark B. Geist, President
9. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without giving effect to
the conflict of laws principles thereof; provided that nothing herein shall be
construed to preempt, or to be inconsistent with, any federal law, regulation or
rule, including the Investment Company Act and the Investment Advisers Act of
1940, as amended, and any rules and regulations promulgated thereunder.
10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and which
collectively shall be deemed to constitute only one instrument.
11. Captions. The captions of this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
12. Non-Exclusivity. The Trust's employment of the Administrator is not
an exclusive arrangement, and the Trust may, from time to time, employ other
individuals or entities to furnish it with the services provided for herein. In
the event this Agreement is terminated or modified with respect to any Series,
this Agreement shall remain in full force and effect with respect to all other
series.
13. Independent Contractor. The Administrator shall, for all purposes
herein, be deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act for or
represent the Trust or the Series in any way, or in any way be deemed an agent
for the Trust or for the Series. It is expressly understood and agreed that the
services to be rendered by the Administrator to the Series under the provisions
of this Agreement are not to be deemed exclusive, and the Administrator shall be
free to render similar or different services to others so long as its ability to
render the services provided for in this Agreement shall not be impaired
thereby.
14. Administrator's Office Facilities and Personnel. The Administrator
shall, at its own expense, maintain adequate office facilities and staff and
employ or retain such personnel and consult with such other persons as it shall
from time to time determine to be necessary to the performance of its
obligations under this Agreement. Without limiting the generality of the
foregoing, the staff and personnel of the Administrator shall be deemed to
5
<PAGE>
include persons employed or retained by the Administrator to furnish statistical
information, research, and other factual information, advice regarding economic
factors and trends, information with respect to technical and scientific
developments, and such other information, advice and assistance as the
Administrator or the Trust's Board of Trustees may desire and reasonably
request.
15. Notice of Declaration of Trust. The Administrator acknowledges that
it has received notice of and accepts the limitations of the Trust's liability
as set forth in its respective Declaration of Trust. The Administrator agrees
that the Trust's obligations under this Agreement shall be limited to its
respective Series and to their assets, and that the Administrator shall not seek
satisfaction of any such obligation from the shareholders of another Series or
Trust nor from any Trustee, officer, employee or agent of the Trust or a Series.
16. Conflicts with Trust's Governing Documents and Applicable Laws.
Nothing herein shall be deemed to require the Trust or a Series to take any
action contrary to the Trust's Declaration of Trust, By-Laws or any applicable
statute or regulation, or to relieve or deprive the Board of Trustees of the
Trust of its responsibility for and control of the conduct of the affairs of the
Trust and its Series.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed and delivered by their duly authorized officers as of the date,
first written above.
MONTGOMERY ASSET MANAGEMENT, LLC
By: _____________________________
Name: _____________________________
Title: _____________________________
THE MONTGOMERY FUNDS III
By: _____________________________
Name: _____________________________
Title: _____________________________
7
<PAGE>
SCHEDULE A [_____________]
ADMINISTRATIVE SERVICES AGREEMENT
<TABLE>
The Montgomery Funds III
<CAPTION>
Average Daily Net Assets Annual Rate
------------------------ -----------
<S> <C> <C>
Montgomery Variable Series: Growth Fund First $__________ ____%
Over $__________ ____%
Montgomery Variable Series: Emerging Markets First $__________ ____%
Fund Over $__________ ____%
Montgomery Variable Series: Small Cap First $__________ ____%
Opportunities Fund Over $__________ ____%
</TABLE>
OUT-OF-POCKET EXPENSES
- overnight delivery and courier services; postage
- telephone and telecommunication charges
- pricing services
- terminals, transmitting lines and expenses in connection
therewith
- travel outside of San Francisco area on Fund business
- costs of preparing Board books, presentations and other
materials for the Board of Trustees
- printing and related costs
- extraordinary expenses
8
- --------------------------------------------------------------------------------
Exhibit 23(h)(2)
Form of Participation Agreement
- --------------------------------------------------------------------------------
C-10
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. Sale of Fund Shares ...................................... 2
ARTICLE II. Representations and Warranties ........................... 4
ARTICLE III. Prospectuses and Proxy Statements: Voting ................ 6
ARTICLE IV. Sales Material and Information ........................... 8
ARTICLE V. Fees and Expenses ........................................ 10
ARTICLE VI. Diversification .......................................... 11
ARTICLE VII. Potential Conflicts ...................................... 11
ARTICLE VIII. Indemnification .......................................... 14
8.1 Indemnification By The Company .............................. 14
8.2 Indemnification By The Adviser .............................. 16
8.3 Indemnification By the Fund ................................. 17
8.4 Indemnification Procedure ................................... 18
ARTICLE IX. Applicable Law ........................................... 19
ARTICLE X. Termination .............................................. 20
10.2 Notice Requirement .......................................... 22
10.3 Effect of Termination ....................................... 22
10.4 Surviving Provisions ........................................ 23
ARTICLE XI. Notices .................................................. 23
ARTICLE XII. Miscellaneous ............................................ 23
i
<PAGE>
o PARTICIPATION AGREEMENT
By and Among
[Insurance Company]
And
MONTGOMERY FUNDS III
And
MONTGOMERY ASSET MANAGEMENT, LLC
THIS AGREEMENT, made and entered into this ________ day of ________, ____ by and
among [Insurance Company], organized under the laws of the State of
______________ (the "Company"), on its own behalf and on behalf of each separate
account of the Company named in Schedule I to this Agreement, as may be amended
from time to time (each account referred to as the "Account"), Montgomery Funds
III, an open-end management investment company and business trust organized
under the laws of the State of Delaware (the "Fund") and Montgomery Asset
Management, LLC, a limited liability company (the "Adviser").
WHEREAS, the Fund engages in business as an open-end management investment
company and was established for the purpose of serving as the investment vehicle
for separate accounts established for variable life insurance contracts and
variable annuity contracts to be offered by insurance companies which have
entered into participation agreements substantially identical to this Agreement
(the "Participating Insurance Companies"), and
WHEREAS, beneficial Interests in the Fund are divided into several series of
shares, each representing the interest in a particular managed portfolio of
securities and other assets (the "Portfolios"); and
WHEREAS, the Fund has received an order from the Securities & Exchange
Commission (alternatively referred to as the "SEC" or the "Commission") granting
Participating Insurance Companies and variable annuity separate accounts and
variable life insurance separate accounts relief from the provisions of Sections
9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(the "1940 Act") and Rules 6e-2(b)(15) and 6e3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Fund to be sold to and held by variable
annuity separate accounts and variable life insurance separate accounts of both
affiliated and unaffiliated Participating Insurance Companies and qualified
pension and retirement plans outside of the separate account context (the "Mixed
and Shared Funding Exemptive Order"). The parties to this Agreement agree that
the conditions or undertakings specified in the Mixed and Shared Funding
Exemptive Order and that may be imposed on the Company, the Fund and/or the
Adviser by virtue of the receipt of such order by the SEC will be incorporated
herein by reference, and such parties agree to comply with such conditions and
undertakings to the extent applicable to each such party; and
<PAGE>
WHEREAS, the Fund is registered as an open-end management investment company
under the 1940 Act and its shares are registered under the Securities Act of
1933, as amended (the "1933 Act"); and
WHEREAS, the Company has registered or will register certain variable annuity
contracts (the "Contracts") under the 1933 Act; and
WHEREAS, the Account is a duly organized, validly existing segregated asset
account, established by resolution of the Board of Directors of the Company
under the insurance laws of the State of ___________ to set aside and invest
assets attributable to the Contracts; and
WHEREAS, the Company has registered the Account as a unit investment trust under
the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company intends to purchase shares of the Portfolios named in Schedule 2, as
such schedule may be amended from time to time (the "Designated Portfolios") on
behalf of the Account to fund the Contracts, and the Fund is authorized to sell
such shares to unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund
and the Adviser agree as follows:
ARTICLE I. Sale of Fund Shares
1.1 The Fund agrees to sell to the Company those shares of the
Designated Portfolios which each Account orders, executing
such orders on a daily basis at the net asset value next
computed after receipt and acceptance by the Fund or its
designee of the order for the shares of the Fund. For purposes
of this Section 1.1, the Company will be the designee of the
Fund for receipt of such orders from each Account and receipt
by such designee will constitute receipt by the Fund; provided
that the Fund receives notice of such order by 9:00 a.m.
Central Time on the next following business day. "Business
Day" will mean any day on which the New York Stock Exchange is
open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the SEC.
1.2 The Company will pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance
with Section 1.1 above. Payment will be in federal funds
transmitted by wire except for amounts less than $500, which
may be paid by check or by another method acceptable to the
parties.
2
<PAGE>
1.3 The Fund agrees to make shares of the Designated Portfolios
available indefinitely for purchase at the applicable net
asset value per share by Participating Insurance Companies and
their separate accounts on those days on which the Fund
calculates its Designated Portfolio net asset value pursuant
to rules of the SEC; provided, however, that the Board of
Trustees of the Fund (the "Fund Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate
the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Fund Board,
acting in good faith and in light of its fiduciary duties
under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.4 The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts,
qualified pension and retirement plans or such other persons
as are permitted under applicable provisions of the Internal
Revenue Code of 1986, as amended, (the "Internal Revenue
Code"), and regulations promulgated thereunder, the sale to
which will not impair the tax treatment currently afforded the
Contracts. No shares of any Portfolio will be sold to the
general public.
1.5 The Fund will not sell Fund shares to any insurance company or
separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, and VII of this
Agreement are in effect to govern such sales.
1.6 The Fund agrees to redeem for cash, upon the Company's
request, any full or fractional shares of the Fund held by the
Company, executing such requests on a daily basis at the net
asset value next computed after receipt and acceptance by the
Fund or its agent of the request for redemption. For purposes
of this Section 1.6, the Company will be the designee of the
Fund for receipt of requests for redemption from each Account
and receipt by such designee will constitute receipt by the
Fund; provided the Fund receives notice of such requests for
redemption by 9:00 a.m. Central Time on the next following
Business Day. Payment will be in federal funds transmitted by
wire to the Company's account as designated by the Company in
writing from time to time, on the same Business Day the Fund
receives notice of the redemption order from the Company,
except for amounts less than $500 which may be paid by check
or by another method acceptable to the parties. The Fund
reserves the right to delay payment of redemption proceeds,
but in no event may such payment be delayed longer than the
period permitted under Section 22(e) of the 1940 Act. The Fund
will not bear any responsibility whatsoever for the proper
disbursement or crediting of redemption proceeds; the Company
alone will be responsible for such action. If
3
<PAGE>
notification of redemption is received after 9:00 a.m. Central
Time, payment for redeemed shares will be made on the next
following Business Day.
1.7 The Company agrees to purchase and redeem the shares of the
Designated Portfolios offered by the then current prospectus
of the Fund in accordance with the provisions of such
prospectus.
1.8 Issuance and transfer of the Fund's shares will be by book
entry only. Stock certificates will not be issued to the
Company or to any Account. Purchase and redemption orders for
Fund shares will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9 The Fund will furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of the
declaration of any income, dividends or capital gain
distributions payable on each Designated Portfolio's shares.
The Company hereby elects to receive all such dividends and
distributions as are payable on the Portfolio shares in the
form of additional shares of that Portfolio. The Company
reserves the right to revoke this election and to receive all
such dividends and distributions in cash. The Fund will notify
the Company of the number of shares so issued as payment of
such dividends and distributions.
1.10 The Fund will make the net asset value per share for each
Designated Portfolio available to the Company on a daily basis
as soon as reasonably practical after the net asset value per
share is calculated and will use its best efforts to make such
net asset value per share available by 5:00 p.m., Central
Time, each business day.
ARTICLE II. Representations and Warranties
2.1 The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act and that the Contracts
will be issued and sold in compliance with all applicable
federal and state laws, including state insurance suitability
requirements. The Company further represents and warrants that
it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly
established each Account as a separate account under
applicable state law and has registered each such account as a
unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the
Contracts, and that it will maintain such registration for so
long as any Contracts are outstanding. The Company will amend
the registration statement under the 1933 Act for the
Contracts and the registration statement under the 1940 Act
for the Account from time to time as required in order to
effect the continuous offering of the Contracts or as may
otherwise be required by applicable law. The Company will
register and qualify
4
<PAGE>
the Contracts for sale in accordance with the securities laws
of the various states only if and to the extent deemed
necessary by the Company.
2.2 The Company represents that the Contracts are currently and at
the time of issuance will be treated as annuity contracts
under applicable provisions of the Internal Revenue Code, and
that it will make every effort to maintain such treatment and
that it will notify the Fund and the Adviser immediately upon
having a reasonable basis for believing that the Contracts
have ceased to be so treated or that they might not be so
treated in the future.
2.3 The Company represents and warrants that it will not purchase
shares of the Designated Portfolios with assets derived from
tax-qualified retirement plans except, indirectly, through
Contracts purchased in connection with such plans.
2.4 The Fund represents and warrants that Fund shares of the
Designated Portfolios sold pursuant to this Agreement will be
registered under the 1933 Act and duly authorized for issuance
in accordance with applicable law and that the Fund is and
will remain registered under the 1940 Act for as long as such
shares of the Designated Portfolios are sold. The Fund will
amend the registration statement for its shares under the 1933
Act and the 1940 Act from time to time as required in order to
effect the continuous offering of its shares. The Fund will
register and qualify the shares of the Designated Portfolios
for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the Fund.
2.5 The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the
Internal Revenue Code, and that it will make every effort to
maintain such qualification (under Subchapter M or any
successor or similar provision) and that it will notify the
Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might
not so qualify in the future.
2.6 The Fund represents that its investment objectives, policies
and restrictions comply with applicable state investment laws
as they may apply to the Fund. The Fund makes no
representation as to whether any aspect of its operations
(including, but not limited to, fees and expenses and
investment policies, objectives and restrictions) complies
with the insurance laws and regulations of any state. The
Company alone will be responsible for informing the Fund of
any insurance restrictions imposed by state insurance laws
which are applicable to the Fund. To the extent feasible and
consistent with market conditions, the Fund will adjust its
investments to comply with the aforementioned state insurance
laws upon written notice from the Company of such requirements
and proposed adjustments, it being agreed and understood that
in any such case the Fund will be
5
<PAGE>
allowed a reasonable period of time under the circumstances
after receipt of such notice to make any such adjustment. The
Fund and the Adviser agree that they will furnish the
information required by state insurance laws so that the
Company can obtain the authority needed to issue the Contracts
in the various states.
2.7 The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the
1940 Act or otherwise, although it reserves the right to make
such payments in the future. To the extent that it decides to
finance distribution expenses pursuant to Rule 12b-1, the Fund
undertakes to have the trustees of its Fund Board, a majority
of whom are not "interested" persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.8 The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Delaware and that it
does and will comply in all material respects with applicable
provisions of the 1940 Act.
2.9 The Adviser represents and warrants that it is and will remain
duly registered under all applicable federal and state
securities laws and that it will perform its obligations for
the Fund in accordance in all material respects with the laws
of the State of California and any applicable state and
federal securities laws.
2.10 The Fund represents and warrants that all of its trustees,
officers, employees, investment advisers, and other
individuals/entities having access to the funds and/or
securities of the Fund are and continue to be at all times
covered by a blanket fidelity bond or similar coverage for the
benefit of the Fund in an amount not less than the minimal
coverage as required currently by Rule 17g-(1) of the 1940 Act
or related provisions as may be promulgated from time to time.
The aforesaid bond includes coverage for larceny and
embezzlement and is issued by a reputable bonding company.
ARTICLE III. Prospectuses and Proxy Statements: Voting
3.1 The Fund will provide the Company, at the Fund's expense, with
as many copies of the current Fund prospectus for the
Designated Portfolios as the Company may reasonably request
for distribution, at the Company's expense, to prospective
contract owners and applicants. The Fund will provide, at the
Fund's expense, as many copies of said prospectus as necessary
for distribution, at the Fund's expense, to existing contract
owners. The Fund will provide the copies of said prospectus to
the Company or to its mailing agent. The Company will
distribute the prospectus to existing contract owners and will
bill the Fund for the reasonable cost of such distribution. If
requested by the Company in lieu thereof,
6
<PAGE>
the Fund will provide such documentation, including a final
copy of a current prospectus set in type at the Fund's
expense, and other assistance as is reasonably necessary in
order for the Company at least annually (or more frequently if
the Fund prospectus is amended more frequently) to have the
new prospectus for the Contracts and the Fund's new prospectus
printed together, in which case the Fund will pay its share of
reasonable expenses directly related to the required
disclosure of information concerning the Fund.
3.2 The Fund's prospectus will state that the statement of
additional information for the Fund is available from the
Company. The Fund will provide the Company, at the Fund's
expense, with as many copies of the statement of additional
information as the Company may reasonably request for
distribution, at the Company's expense, to prospective
contract owners and applicants. The Fund will provide, at the
Fund's expense, as many copies of said statement of additional
information as necessary for distribution, at the Fund's
expense, to any existing contract owner who requests such
statement or whenever state or federal law otherwise requires
that such statement be provided. The Fund will provide the
copies of said statement of additional information to the
Company or to its mailing agent. The Company will distribute
the statement of additional information as requested or
required and will bill the Fund for the reasonable cost of
such distribution.
3.3 The Fund, at its expense, will provide the Company or its
mailing agent with copies of its proxy material, if any,
reports to shareholders and other communications to
shareholders in such quantity as the Company will reasonably
require. The Company will distribute this proxy material,
reports and other communications to existing contract owners
and will bill the Fund for the reasonable cost of such
distribution.
3.4 If and to the extent required by law the Company will:
(a) solicit voting instructions from contractowners;
(b) vote the shares of the Designated Portfolios held in
the Account in accordance with instructions received
from contractowners; and
(c) vote shares of the Designated Portfolios held in the
Account for which no timely instructions have been
received, in the same proportion as shares of such
Designated Portfolio for which instructions have been
received from the Company's contractowners;
7
<PAGE>
so long as and to the extent that the SEC continues to
interpret the 1940 Act to require pass-through voting
privileges for variable contractowners. The Company reserves
the right to vote Fund shares held in any segregated asset
account in its own right, to the extent permitted by law.
Participating Insurance Companies will be responsible for
assuring that each of their separate accounts participating in
the Fund calculates voting privileges in a manner consistent
with all legal requirements, including the Mixed and Shared
Funding Exemptive Order.
3.5 The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular, the Fund
either will provide for annual meetings (except insofar as the
SEC may interpret Section 16 of the 1940 Act not to require
such meetings) or, as the Fund currently intends, to comply
with Section 16(c) of the 1940 Act (although the Fund is not
one of the trusts described in Section 16(c) of that Act) as
well as with Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the SEC's
interpretation of the requirements of Section 16(a) with
respect to periodic elections of directors and with whatever
rules the Commission may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1 The Company will furnish, or will cause to be furnished, to
the Fund or the Adviser, each piece of sales literature or
other promotional material in which the Fund or the Adviser is
named, at least ten (10) Business Days prior to its use. No
such material will be used if the Fund or the Adviser
reasonably objects to such use within five (5) Business Days
after receipt of such material.
4.2 The Company will not give any information or make any
representations or statements on behalf of the Fund or
concerning the Fund in connection with the sale of the
Contracts other than the information or representations
contained in the registration statement, prospectus or
statement of additional information for Fund shares, as such
registration statement, prospectus and statement of additional
information may be amended or supplemented from time to time,
or in reports or proxy statements for the Fund, or in
published reports for the Fund which are in the public domain
or approved by the Fund or the Adviser for distribution, or in
sales literature or other material provided by the Fund or by
the Adviser, except with permission of the Fund or the
Adviser. The Fund and the Adviser agree to respond to any
request for approval on a prompt and timely basis. Nothing in
this Section 4.2 will be construed as preventing the Company
or its employees or agents from giving advice on investment in
the Fund.
4.3 The Fund or the Adviser will furnish, or will cause to be
furnished, to the Company or its designee, each piece of sales
literature or other promotional
8
<PAGE>
material in which the Company or its separate account is
named, at least ten (10) Business Days prior to its use. No
such material will be used if the Company reasonably objects
to such use within five (5) Business Days after receipt of
such material.
4.4 The Fund and the Adviser will not give any information or make
any representations or statements on behalf of the Company or
concerning the Company, each Account, or the Contracts other
than the information or representations contained in a
registration statement, prospectus or statement of additional
information for the Contracts, as such registration statement,
prospectus and statement of additional information may be
amended or supplemented from time to time, or in published
reports for each Account or the Contracts which are in the
public domain or approved by the Company for distribution to
contractowners, or in sales literature or other material
provided by the Company, except with permission of the
Company. The Company agrees to respond to any request for
approval on a prompt and timely basis.
4.5 The Fund will provide to the Company at least one complete
copy of all registration statements, prospectuses, statements
of additional information, reports, proxy statements, sales
literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of each such document with
the SEC or the NASD.
4.6 The Company will provide to the Fund at least one complete
copy of all registration statements, prospectuses, statements
of additional information, reports, solicitations for voting
instructions, sales literature and other promotional
materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate
to the Contracts or each Account, contemporaneously with the
filing of each such document with the SEC or the NASD.
4.7 For purposes of this Article IV, the phrase "sales literature
or other promotional material" includes, but is not limited
to, advertisements (such as material published, or designed
for use in, a newspaper, magazine, or other periodical, radio,
television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media,
(i.e., on-line networks such as the Internet or other
electronic messages), sales literature (i.e., any written
communication distributed or made generally available to
customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales
literature, or published article), educational or training
materials or other communications
9
<PAGE>
distributed or made generally available to some or all agents
or employees, registration statements, prospectuses,
statements of additional information, shareholder reports, and
proxy materials and any other material constituting sales
literature or advertising under the NASD rules, the 1933 Act
or the 1940 Act.
4.8 The Fund and the Adviser hereby consent to the Company's use
of the names Montgomery, Montgomery Funds III, Montgomery
Variable Series and Montgomery Asset Management, in connection
with marketing the Contracts, subject to the terms of Sections
4.1 and 4.2 of this Agreement. Such consent will terminate
with the termination of this Agreement.
ARTICLE V. Fees and Expenses
5.1 The Fund will pay no fee or other compensation to the Company
under this Agreement, except as provided below: (a) if the
Fund or any Designated Portfolio adopts and implements a plan
pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses, then, subject to obtaining any required
exemptive orders or other regulatory approvals, the Fund may
make payments to the Company or to the underwriter for the
Contracts if and in such amounts agreed to by the Fund in
writing; (b) the Fund may pay fees to the Company for services
provided to contractowners that are not primarily intended to
result in the sale of shares of the Designated Portfolio or of
underlying Contracts.
5.2 All expenses incident to performance by the Fund of this
Agreement will be paid by the Fund to the extent permitted by
law. All shares of the Designated Portfolios will be duly
authorized for issuance and registered in accordance with
applicable federal law and, to the extent deemed advisable by
the Fund, in accordance with applicable state law, prior to
sale. The Fund will bear the expenses for the cost of
registration and qualification of the Fund's shares;
preparation and filing of the Fund's prospectus, statement of
additional information and registration statement, proxy
materials and reports; setting the Fund's prospectus in type;
setting in type and printing proxy materials and reports to
contractowners (including the costs of printing a Fund
prospectus that constitutes an annual report); the preparation
of all statements and notices required by any federal or state
law; all taxes on the issuance or transfer of the Fund's
shares; any expenses permitted to be paid or assumed by the
Fund pursuant to a plan, if any, under Rule 12b-1 under the
1940 Act; and all other typesetting, printing and distribution
expenses as set forth in Article III of this Agreement.
10
<PAGE>
ARTICLE VI. Diversification
6.1 The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated
as variable annuity contracts under the Internal Revenue Code
and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will comply with Section
817(h) of the Internal Revenue Code and Treasury Regulation
1.817-5, as amended from time to time, relating to the
diversification requirements for variable annuity, endowment,
or life insurance contracts and any amendments or other
modifications to such Section or Regulation in accordance with
guidelines provided by the Company prior to the execution of
this Agreement and as necessary thereafter. In the event of a
breach of this Article VI by the Fund, it will take all
reasonable steps: (a) to notify the Company of such breach;
and (b) to adequately diversify the Fund so as to achieve
compliance within the grace period afforded by Treasury
Regulation 1.817-5.
ARTICLE VII. Potential Conflicts
7.1 The Fund Board will monitor the Fund for the existence of any
irreconcilable material conflict among the interests of the
contractowners of all separate accounts investing in the Fund.
An irreconcilable material conflict may arise for a variety of
reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a
public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting
instructions given by Participating Insurance Companies or by
variable annuity and variable life insurance contractowners;
or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Fund Board will promptly
inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof. A
majority of the Fund Board will consist of persons who are not
"interested" persons of the Fund.
7.2 The Company will report any potential or existing conflicts of
which it is aware to the Fund Board. The Company agrees to
assist the Fund Board in carrying out its responsibilities, as
delineated in the Mixed and Shared Funding Exemptive Order, by
providing the Fund Board with all information reasonably
necessary for the Fund Board to consider any issues raised.
This includes, but is not limited to, an obligation by the
Company to inform the Fund Board whenever contractowner voting
instructions are to be disregarded. The Fund Board will record
in its
11
<PAGE>
minutes, or other appropriate records, all reports received by
it and all action with regard to a conflict.
7.3 If it is determined by a majority of the Fund Board, or a
majority of its disinterested trustees, that an irreconcilable
material conflict exists, the Company and other Participating
Insurance Companies will, at their expense and to the extent
reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to
remedy or eliminate the irreconcilable material conflict, up
to and including: (a) withdrawing the assets allocable to some
or all of the Accounts from the Fund or any Portfolio and
reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund,
or submitting the question whether such segregation should be
implemented to a vote of all affected contractowners and, as
appropriate, segregating the assets of any appropriate group
(i.e., variable annuity contractowners or variable life ----
insurance contractowners of one or more Participating
Insurance Companies) that votes in favor of such segregation,
or offering to the affected contractowners the option of
making such a change; and (b) establishing a new registered
management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a
decision by the Company to disregard contractowner voting
instructions, and such disregard of voting instructions could
conflict with the majority of contractowner voting
instructions, and the Company's judgment represents a minority
position or would preclude a majority vote, the Company may be
required, at the Fund's election, to withdraw the affected
subaccount of the Account's investment in the Fund and
terminate this Agreement with respect to such subaccount;
provided, however, that such withdrawal and termination will
be limited to the extent required by the foregoing
irreconcilable material conflict as determined by a majority
of the disinterested trustees of them Fund Board. No charge or
penalty will be imposed as a result of such withdrawal. Any
such withdrawal and termination must take place within six (6)
months after the Fund gives written notice to the Company that
this provision is being implemented. Until the end of such
six-month period the Adviser and Fund will, to the extent
permitted by law and any exemptive relief previously granted
to the Fund, continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the
Fund.
7.5 If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to
the Company conflicts with the majority of other state
insurance regulators, then the Company will withdraw the
affected subaccount of the Account's investment in the Fund
and terminate this Agreement with respect to such subaccount;
provided, however, that such withdrawal and
12
<PAGE>
termination will be limited to the extent required by the
foregoing irreconcilable material conflict as determined by a
majority of the disinterested directors of the Fund Board. No
charge or penalty will be imposed as a result of such
withdrawal. Any such withdrawal and termination must take
place within six (6) months after the Fund gives written
notice to the Company that this provision is being
implemented. Until the end of such six-month period the
Advisor and Fund will, to the extent permitted by law and any
exemptive relief previously granted to the Fund, continue to
accept and implement orders by the Company for the purchase
(and redemption) of shares of the Fund.
7.6 For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Fund Board will
determine whether any proposed action adequately remedies any
irreconcilable material conflict, but in no event will the
Fund be required to establish a new funding medium for the
Contracts. The Company will not be required by Section 7.3 to
establish a new funding medium for the Contracts if an offer
to do so has been declined by vote of a majority of
contractowners affected by the irreconcilable material
conflict.
7.7 The Company will at least annually submit to the Fund Board
such reports, materials or data as the Fund Board may
reasonably request so that the Fund Board may fully carry out
the duties imposed upon it as delineated in the Mixed and
Shared Funding Exemptive Order, and said reports, materials
and data will be submitted more frequently if deemed
appropriate by the Fund Board.
7.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief
from any provision of the 1940 Act or the rules promulgated
thereunder with respect to mixed or shared funding (as defined
in the Mixed and Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the
Mixed and Shared Funding Exemptive Order, then: (a) the Fund
and/or the Participating Insurance Companies, as appropriate,
will take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to
the extent such rules are applicable; and (b) Sections 3.4,
3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement will
continue in effect only to the extent that terms and
conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
13
<PAGE>
ARTICLE VIII. Indemnification
8.1 Indemnification By The Company
(a) The Company agrees to indemnify and hold harmless the
Fund, the Adviser, and each person, if any, who
controls or is associated with the Fund or the
Adviser within the meaning of such terms under the
federal securities laws and any director, trustee,
officer, employee or agent of the foregoing
(collectively, the "Indemnified Parties" for purposes
of this Section 8.1) against any and all losses,
claims, expenses, damages, Liabilities (including
amounts paid in settlement with the written consent
of the Company) or litigation (including reasonable
legal and other expenses), to which the Indemnified
Parties may become subject under any statute,
regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) or settlements:
(1) arise out of or are based upon any untrue
statements or alleged untrue statements of
any material fact contained in the
registration statement, prospectus or
statement of additional information for the
Contracts or contained in the Contracts or
sales literature or other promotional
material for the Contracts (or any amendment
or supplement to any of the foregoing), or
arise out of or are based upon the omission
or the alleged omission to state therein a
material fact required to be stated or
necessary to make such statements not
misleading in light of the circumstances in
which they were made; provided that this
agreement to indemnify will not apply as to
any Indemnified Party if such statement or
omission or such alleged statement or
omission was made in reliance upon and in
conformity with information furnished to the
Company by or on behalf of the Adviser or
the Fund for use in the registration
statement, prospectus or statement of
additional information for the Contracts or
in the Contracts or sales literature (or any
amendment or supplement) or otherwise for
use in connection with the sale of the
Contracts or Fund shares; or
(2) arise out of or as a result of statements or
representations by or on behalf of the
Company (other than statements or
representations contained in the Fund
registration statement, prospectus,
statement of additional information or sales
literature or other promotional material of
the Fund, or any amendment or supplement to
the foregoing, not supplied by the Company
or persons under its
14
<PAGE>
control) or wrongful conduct of the Company
or persons under its control, with respect
to the sale or distribution of the Contracts
or Fund shares; or
(3) arise out of any untrue statement or alleged
untrue statement of a material fact
contained in the Fund registration
statement, prospectus, statement of
additional information or sales literature
or other promotional material of the Fund
(or amendment or supplement) or the omission
or alleged omission to state therein a
material fact required to be stated therein
or necessary to make such statements not
misleading in light of the circumstances in
which they were made, if such a statement or
omission was made in reliance upon and in
conformity with information furnished to the
Fund by or on behalf of the Company or
persons under its control; or
(4) arise as a result of any failure by the
Company to provide the services and furnish
the materials under the terms of this
Agreement; or
(5) arise out of any material breach of any
representation and/or warranty made by the
Company in this Agreement or arise out of or
result from any other material breach by the
Company of this Agreement;
except to the extent provided in Sections 8.1(b) and 8.4
hereof. This indemnification will be in addition to any
liability that the Company otherwise may have.
(b) No party will be entitled to indemnification under
Section 8.1(a) if such loss, claim, damage, liability
or litigation is due to the willful misfeasance, bad
faith, or gross negligence in the performance of such
party's duties under this Agreement, or by reason of
such party's reckless disregard of its obligations or
duties under this Agreement.
(c) The Indemnified Parties promptly will notify the
Company of the commencement of any litigation,
proceedings, complaints or actions by regulatory
authorities against them in connection with the
issuance or sale of the Fund shares or the Contracts
or the operation of the Fund.
15
<PAGE>
8.2 Indemnification By The Adviser
(a) The Adviser agrees to indemnify and hold harmless the
Company and each person, if any, who controls or is
associated with the Company within the meaning of
such terms under the federal securities laws and any
director, officer, employee or agent of the foregoing
(collectively, the "Indemnified Parties" for purposes
of this Section 8.2) against any and all losses,
claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent
of the Adviser) or litigation (including reasonable
legal and other expenses) to which the Indemnified
Parties may become subject under any statute,
regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) or settlements:
(1) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in the registration
statement, prospectus or statement of
additional information for the Fund or sales
literature or other promotional material of
the Fund (or any amendment or supplement to
any of the foregoing), or arise out of or
are based upon the omission or the alleged
omission to state therein a material fact
required to be stated or necessary to make
such statements not misleading in light of
the circumstances in which they were made;
provided that this agreement to indemnify
will not apply as to any Indemnified Party
if such statement or omission or such
alleged statement or omission was made in
reliance upon and in conformity with
information furnished to the Adviser or Fund
by or on behalf of the Company for use in
the registration statement, prospectus or
statement of additional information for the
Fund or in sales literature of the Fund (or
any amendment or supplement thereto) or
otherwise for use in connection with the
sale of the Contracts or Fund shares; or
(2) arise out of or as a result of statements or
representations (other than statements or
representations contained in the Contracts
or in the Contract or Fund registration
statements, prospectuses or statements of
additional information or sales literature
or other promotional material for the
Contracts or of the Fund, or any amendment
or supplement to the foregoing, not supplied
by the Adviser or the Fund or persons under
the control of the Adviser or the Fund
respectively) or wrongful conduct of the
Adviser or the Fund or persons under the
control of the Adviser or the Fund
16
<PAGE>
respectively, with respect to the sale or
distribution of the Contracts or Fund
shares; or
(3) arise out of any untrue statement or alleged
untrue statement of a material fact
contained in a registration statement,
prospectus, statement of additional
information or sales literature or other
promotional material covering the Contracts
(or any amendment or supplement thereto), or
the omission or alleged omission to state
therein a material fact required to be
stated or necessary to make such statement
or statements not misleading in light of the
circumstances in which they were made, if
such statement or omission was made in
reliance upon and in conformity with
information furnished to the Company by or
on behalf of the Adviser or the Fund or
persons under the control of the Adviser or
the Fund; or
(4) arise as a result of any failure by the Fund
or the Adviser to provide the services and
furnish the materials under the terms of
this Agreement; or
(5) arise out of or result from any material
breach of any representation and/or warranty
made by the Adviser or the Fund in this
Agreement, or arise out of or result from
any other material breach of this Agreement
by the Adviser or the Fund;
except to the extent provided in Sections 8.2(b) and 8.4
hereof.
(b) No party will be entitled to indemnification under
Section 8.2(a) if such loss, claim, damage, liability
or litigation is due to the willful misfeasance, bad
faith, or gross negligence in the performance of such
party's duties under this Agreement, or by reason of
such party's reckless disregard or its obligations or
duties under this Agreement.
(c) The Indemnified Parties will promptly notify the
Adviser and the Fund of the commencement of any
litigation, proceedings, complaints or actions by
regulatory authorities against them in connection
with the issuance or sale of the Contracts or the
operation of the Account.
8.3 Indemnification By the Fund
(a) The Fund agrees to indemnify and hold harmless the
Company and each person, if any, who controls or is
associated with the Company within the
17
<PAGE>
meaning of such terms under the federal securities laws and
any director, officer, employee or agent of the foregoing
(collectively, the "Indemnified Parties" for purposes of this
Section 8.3) against any and all losses, claims, expenses,
damages, liabilities (including amounts paid in settlement
with the written consent of the Fund) or litigation (including
reasonable legal and other expenses) to which the Indemnified
Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect
thereof) or settlements, are related to the operations of the
Fund and:
(i) arise as a result of any failure by the Fund
to provide the services and furnish the
materials under the terms of this Agreement;
or
(ii) arise out of or result from any material
breach of any representation and/or warranty
made by the Fund in this Agreement or arise
out of or result from any other material
breach of this Agreement by the Fund; or
(iii) arise out of or result from the incorrect or
untimely calculation or reporting of the
daily net asset value per share or dividend
or capital gain distribution rate;
except to the extent provided in Sections 8.3(b) and 8.4
hereof.
(b) No party will be entitled to indemnification under Section
8.3(a) if such loss, claim, damage, liability or litigation is
due to the willful misfeasance, bad faith, or gross negligence
in the performance of such party's duties under this
Agreement, or by reason of such party's reckless disregard of
its obligations and duties under this Agreement.
(c) The Indemnified Parties will promptly notify the Fund of the
commencement of any litigation, proceedings, complaints or
actions by regulatory authorities against them in connection
with the issuance or sale of the Contracts or the operation of
the Account.
8.4 Indemnification Procedure
Any person obligated to provide indemnification under this
Article VIII ("Indemnifying Party" for the purpose of this
Section 8.4) will not be liable under the indemnification
provisions of this Article VIII with respect to any claim made
against a party entitled to indemnification under this Article
("Indemnified Party" for the purpose of this Section 8.4)
unless such Indemnified Party will have
18
<PAGE>
notified the Indemnifying Party in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim will have been served
upon such Indemnified Party (or after such party will have
received notice of such service on any designated agent), but
failure to notify the Indemnifying Party of any such claim
will not relieve the Indemnifying Party from any liability
which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of the
indemnification provision of this Article VIII, except to the
extent that the failure to notify results in the failure of
actual notice to the Indemnifying Party and such Indemnifying
Party is damaged solely as a result of failure to give such
notice. In case any such action is brought against the
Indemnified Party, the Indemnifying Party will be entitled to
participate, at its own expense, in the defense thereof. The
Indemnifying Party also will be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the
action. After notice from the Indemnifying Party to the
Indemnified Party of the Indemnifying Party's election to
assume the defense thereof, the Indemnified Party will bear
the fees and expenses of any additional counsel retained by
it, and the Indemnifying Party will not be liable to such
party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in
connection with the defense thereof other than reasonable
costs of investigation, unless: (a) the Indemnifying Party and
the Indemnified Party will have mutually agreed to the
retention of such counsel; or (b) the named parties to any
such proceeding (including any impleaded parties) include both
the Indemnifying Party and the Indemnified Party and
representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests
between them. The Indemnifying Party will not be liable for
any settlement of any proceeding effected without its written
consent but if settled with such consent or if there is a
final judgment for the plaintiff, the Indemnifying Party
agrees to indemnify the Indemnified Party from and against
parties to this Agreement will be entitled to the benefits of
the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VII will
survive any termination of this Agreement.
ARTICLE IX. Applicable Law
9.1 This Agreement will be construed and the provisions hereof
interpreted under and in accordance with the laws of the State
of California.
9.2. This Agreement will be subject to the provisions of the 1933
Act, the 1934 Act and the 1940 Act, and the rules and
regulations and citings thereunder, including such exemptions
from those statutes, rules and regulations as the SEC may
grant (including, but not limited to, the Mixed and Shared
Funding Exemptive Order) and the terms hereof will be
interpreted and construed in accordance therewith.
19
<PAGE>
ARTICLE X. Termination
10.1 This Agreement will terminate:
(a) at the option of any party, with or without cause,
with respect to some or all of the Portfolios, upon
one (1) year's advance written notice to the other
parties or, if later, upon receipt of any required
exemptive relief or orders From the SEC, unless
otherwise agreed in a separate written agreement
among the parties; or
(b) at the option of the Company, upon receipt of written
notice by the other parties, with respect to any
Portfolio if shares of the Portfolio are not
reasonably available to meet the requirements of the
Contracts as determined in good faith by the Company;
or
(c) at the option of the Company, upon receipt of written
notice by the other parties, with respect to any
Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with
applicable state and/or federal law or such law
precludes the use of such shares as the underlying
investment media of the Contracts issued or to be
issued by Company; or
(d) at the option of the Fund, upon receipt of written
notice by the other parties, upon institution of
formal proceedings against the Company by the NASD,
the SEC, the insurance commission of any state or any
other regulatory body regarding the Company's duties
under this Agreement or related to the sale of the
Contracts, the administration of the Contracts, the
operation of the Account, or the purchase of the Fund
shares, provided that the Fund determines in its sole
judgment, exercised in good faith, that any such
proceeding would have a material adverse effect on
the Company's ability to perform its obligations
under this Agreement; or
(e) at the option of the Company, upon receipt of written
notice by the other parties, upon institution of
formal proceedings against the Fund or the Adviser by
the NASD, the SEC, or any state securities or
insurance department or any other regulatory body,
provided that the Company determines in its sole
judgment, exercised in good faith, that any such
proceeding would have a material adverse effect on
the Fund's or the Adviser's ability to perform its
obligations under this Agreement; or
(f) at the option of the Company, upon receipt of written
notice by the other parties, if the Fund ceases to
qualify as a Regulated Investment Company
20
<PAGE>
under Subchapter M of the Internal Revenue Code, or
under any successor or similar provision, or if the
Company reasonably and in good faith believes that
the Fund may fail to so qualify; or
(g) at the option of the Company, upon receipt of written
notice by the other parties, with respect to any
Portfolio if the Fund fails to meet the
diversification requirements specified in Article VI
hereof or if the Company reasonably and in good faith
believes the Fund may fail to meet such requirements;
or
(h) at the option of any party to this Agreement, upon
written notice to the other parties, upon another
party's material breach of any provision of this
Agreement; or
(i) at the option of the Company, if the Company
determines in its sole judgment exercised in good
faith, that either the Fund or the Adviser has
suffered a material adverse change in its business,
operations or financial condition since the date of
this Agreement or is the subject of material adverse
publicity which is likely to have a material adverse
impact upon the business and operations of the
Company, such termination to be effective sixty (60)
days after receipt by the other parties of written
notice of the election to terminate; or
(j) at the option of the Fund or, the Adviser, if the
Fund or Adviser respectively, determines in its sole
judgment exercised in good faith, that the Company
has suffered a material adverse change in its
business, operations or financial condition since the
date of this Agreement or is the subject of material
adverse publicity which is likely to have a material
adverse impact upon the business and operations of
the Fund or the Adviser, such termination to be
effective sixty (60) days after receipt by the other
parties of written notice of the election to
terminate; or
(k) at the option of the Company or the Fund upon receipt
of any necessary regulatory approvals and/or the vote
of the contract owners having an interest in the
Account (or any subaccount) to substitute the shares
of another investment company for the corresponding
Portfolio shares of the Fund in accordance with the
terms of the Contracts for which those Portfolio
shares had been selected to serve as the underlying
investment media. The Company will give sixty (60)
days' prior written notice to the Fund of the date of
any proposed vote or other action taken to replace
the Fund's shares; or
21
<PAGE>
(l) at the option of the Company or the Fund upon a
determination by a majority of the Fund Board, or a
majority of the disinterested Fund Board members,
that an irreconcilable material conflict exists among
the interests of: (1) all contract owners of variable
insurance products of all separate accounts; or (2)
the interests of the Participating Insurance
Companies investing in the Fund as set forth in
Article VII of this Agreement; or
(m) at the option of the Fund in the event any of the
Contracts are not issued or sold in accordance with
applicable federal and/or state law. Termination will
be effective immediately upon such occurrence without
notice.
10.2 Notice Requirement
(a) No termination of this Agreement, except a
termination under Section 10.1(m) of this Agreement,
will be effective unless and until the party
terminating this Agreement gives prior written notice
to all other parties of its intent to terminate,
which notice will set forth the basis for the
termination.
(b) In the event that any termination of this Agreement
is based upon the provisions of Article VII, such
prior written notice will be given in advance of the
effective date of termination as required by such
provisions.
10.3 Effect of Termination
(a) Notwithstanding any termination of this Agreement,
the Fund and the Adviser will, at the option of the
Company, continue to make available additional shares
of the Fund pursuant to the terms and conditions of
this Agreement, for all Contracts in effect on the
effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts").
Specifically, without limitation, the owners of the
Existing Contracts will be permitted to reallocate
investments in the Designated Portfolios (as in
effect on such date), redeem investments in the
Designated Portfolios and/or invest in the Designated
Portfolios upon the making of additional purchase
payments under the Existing Contracts. The parties
agree that this Section 10.3 will not apply to any
terminations under Article VII and the effect of such
Article VII terminations will be governed by Article
VII of this Agreement.
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<PAGE>
10.4 Surviving Provisions
Notwithstanding any termination of this Agreement, each
party's obligations under Article VIII to indemnify other
parties will survive and not be affected by any termination of
this Agreement. In addition, with respect to Existing
Contracts, all provisions of this Agreement also will survive
and not be affected by any termination of this Agreement.
ARTICLE XI. Notices
Any notice will be deemed duly given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other parties.
If to the Company:
_______________________________
_______________________________
_______________________________
If to the Fund:
Montgomery Funds III
101 California Street
San Francisco, CA 94111
Attn: _______________
_______________
If to the Adviser:
Montgomery Asset Management, L.P.
101 California Street
San Francisco, CA 94111
Attn: _______________
_______________
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against
the Fund as neither the trustees, officers, agents or
shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
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<PAGE>
12.2 The Fund and the Adviser acknowledge that the identities of
the customers of the Company or any of its affiliates
(collectively the "Protected Parties" for purposes of this
Section 12.2), information maintained regarding those
customers, and all computer programs and procedures developed
by the Protected Parties or any of their employees or agents
in connection with the Company's performance of its duties
under this Agreement are the valuable property of the
Protected Parties. The Fund and the Adviser agree that if they
come into possession of any list or compilation of the
identities of or other information about the Protected
Parties' customers, or Any other property of the Protected
Parties, other than such information as may be independently
developed or compiled by the Fund or the Adviser from
information supplied to them by the Protected Parties'
customers who also maintain accounts directly with the Fund or
the Adviser, the Fund and the Adviser will hold such
information or property in confidence and refrain from using,
disclosing or distributing any of such information or other
property except: (a) with the Company's prior written consent;
or (b) as required by law or judicial process. The Fund and
the Adviser acknowledge that any breach of the agreements in
this Section 12.2 would result in immediate and irreparable
harm to the Protected Parties for which there would be no
adequate remedy at law and agree that in the event of such a
breach, the Protected Parties will be entitled to equitable
relief by way of temporary and permanent injunctions, as well
as such other relief as any court of competent jurisdiction
deems appropriate.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or
effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together will constitute one
and the same instrument.
12.5 If any provision of this Agreement will be held or made
invalid by a court decision, statute, rule or otherwise, the
remainder of the Agreement win not be affected thereby.
12.6 This Agreement will not be assigned by any party hereto
without the prior written consent of all the parties.
12.7 Each party to this Agreement will cooperate with each other
party and all appropriate governmental authorities (including
without limitation the SEC, the NASD and state insurance
regulators) and will permit each other and such authorities
reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby.
24
<PAGE>
12.8 Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions
contemplated herein have been duly authorized by all necessary
corporate or board action, as applicable, by such party and
when so executed and delivered this Agreement will be the
valid and binding obligation of such party enforceable in
accordance with its terms.
12.9 The parties to this Agreement may amend the schedules to this
Agreement from time to time to reflect changes in or relating
to the Contracts, the Accounts or the Portfolios of the Fund
or other applicable terms of this Agreement.
25
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed hereto as of the date specified below.
[INSURANCE COMPANY]
SEAL By: ______________________________
MONTGOMERY FUNDS III
SEAL By: ______________________________
MONTGOMERY ASSET
MANAGEMENT, LLC
SEAL By: ______________________________
26
<PAGE>
Schedule 1
PARTICIPATION AGREEMENT
By and Among
[INSURANCE COMPANY]
And
MONTGOMERY FUNDS III
And
MONTGOMERY ASSET MANAGEMENT, LLC
The following separate accounts of [Insurance Company] are permitted in
accordance with the provisions of this Agreement to invest in Portfolios of the
Fund shown in Schedule 2:
[name of separate account and date the account was established]
__________, ____
27
<PAGE>
Schedule 2
PARTICIPATION AGREEMENT
By and Among
[INSURANCE COMPANY]
And
MONTGOMERY FUNDS III
And
MONTGOMERY ASSET MANAGEMENT, LLC
The Separate Account(s) shown on Schedule I may invest in the following
Portfolios of the Montgomery Funds III:
[Names of Montgomery Funds III Portfolios]
__________, ____
28
- --------------------------------------------------------------------------------
Exhibit 23(i)
Opinion of Counsel
- --------------------------------------------------------------------------------
C-11
<PAGE>
HELLER EHRMAN WHITE & McAULIFFE
333 Bush Street
San Francisco, California 94104
(415) 772-6000
April 14, 1995
20939-0001
The Montgomery Funds III
600 Montgomery Street
San Francisco, California 94111
Registration Statement on Form N-1A
Ladies and Gentlemen:
We have acted as counsel to The Montgomery Funds III, a Delaware
business trust (the "Trust"), in connection with the Registration Statement on
Form N-1A filed on September 27, 1994 (as amended to the date hereof, the
"Registration Statement"), relating to the issuance of an indefinite number of
shares (the "Shares") of beneficial interest pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended (the "Act").
In connection with this opinion, we have assumed the authenticity of
all records, documents and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of all natural persons and the
conformity to the originals of all records, documents and instruments submitted
to us as copies. We have based our opinion upon the following:
(a) the Trust's Agreement and Declaration of Trust;
(b) the Bylaws of the Trust;
(c) resolutions of the Board of Trustees of the Trust relating to
the designation of series of the Trust and issuance of the
Shares;
(d) the Registration Statement; and
<PAGE>
The Montgomery Funds III Page 2
April 14, 1995
(e) a certificate of an officer of the Trust concerning certain
factual matters.
Our opinion below is limited to the federal law of the United States of
America and the business trust law of the State of Delaware. We are not licensed
to practice law in the State of Delaware, and we have based our opinion below
solely on our review of Chapter 38 of Title 12 of the Delaware Code and the case
law interpreting such Chapter as reported in Delaware Code Annotated (Michie Co.
1987 & 1992 Supp.). We have not undertaken a review of other Delaware law or of
any administrative or court decisions in connection with rendering this opinion.
We disclaim any opinion as to any law other than that of the United States of
America and the business trust law of the State of Delaware as described above,
and we disclaim any opinion as to any statute, rule, regulation, ordinance,
order or other promulgation of any regional or local governmental authority.
Based on the foregoing and our examination of such questions of law as
we have deemed necessary and appropriate for the purpose of this opinion, and
assuming that (i) all of the Shares will be issued and sold for cash or
securities at the per-share public offering price on the date of their issuance
in accordance with statements specified in the Trust's then-current Prospectus
and in accordance with Article III of the Trust's Agreement and Declaration of
Trust, (ii) all consideration for the Shares will be actually received by the
Trust, (iii) such consideration will be at least equal in value to the par value
of the Shares, and (iv) all applicable securities laws will be complied with, it
is our opinion that, when issued and sold by the Trust, the Shares will be
legally issued, fully paid and nonassessable.
This opinion is rendered to you in connection with the Registration
Statement and is solely for your benefit. This opinion may not be relied upon by
you for any other purpose or relied upon by any other person, firm, corporation
or other entity for any purpose, without our prior written consent. We disclaim
any obligation to advise you of any developments in areas covered by this
opinion that occur after the date of this opinion.
We hereby consent to (i) the reference to our firm under the caption
"Legal Opinion" in the Prospectuses of the Trust included in the Registration
Statement, and (ii) the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ HELLER EHRMAN WHITE & McAULIFFE
- --------------------------------------------------------------------------------
Exhibit 23(j)
Independent Auditors Consent
- --------------------------------------------------------------------------------
C-12
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 9 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated February 12, 1999, relating to the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Reports to Shareholders of Montgomery Variable Series: Growth Fund, Montgomery
Variable Series: Emerging Markets Fund and Montgomery Variable Series: Small Cap
Opportunities Fund, which are also incorporated by reference into the
Registration Statement. We also consent to the references to us under the
heading "Financial Highlights" in the Prospectuses and under the heading
"General Information" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
San Francisco, CA
April 5, 1999
- --------------------------------------------------------------------------------
Exhibit 23 (l)
Initial Capital Agreement
- --------------------------------------------------------------------------------
C-13
<PAGE>
The Montgomery Funds III
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
The undersigned hereby subscribes for the purchase of 10,000 shares of
beneficial interest (the "Shares") of Montgomery Variable Series: Growth Fund
(the "Fund"), a separate series of The Montgomery Funds III (the "Trust"), at
$10.00 per share for a total investment of $100,000. In connection with said
subscription, the undersigned hereby represents that:
1. There is no present reason to anticipate any change in circumstances
or any other occasion or event which would cause the undersigned to sell or
redeem the Shares shortly after the purchase thereof.
2. There are no agreements or arrangements between the undersigned and
the Trust, or any of its officers, trustees, employees or the investment manager
of the Fund, or any affiliated persons thereof with respect to the resale,
future distribution or redemption of the shares.
3. The sale of the Shares will only be made by redemption to the Fund
and not by a transfer to any third party without the consent of the Trust.
4. The undersigned is aware that in issuing and selling these Shares,
the Fund and the Trust are relying upon the aforementioned representations.
MONTGOMERY ASSET MANAGEMENT, L.P.
Dated: April 7, 1995 By: /s/ Mark Sullivan
------------------------------------
Title Vice President
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