As filed with the Securities and Exchange Commission on April 30, 2000
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. 10
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11
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)
Johanne Castro, 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:
_X_ immediately upon filing pursuant to Rule 485(b)
___ on ___________ pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)(1)
___ 75 days after filing pursuant to Rule 485(a)(2)
___ on ___________ pursuant to Rule 485(a)(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 B - Combined Statement of Additional Information for Montgomery
Variable Series: Growth Fund and Montgomery Variable Series:
Emerging Markets Fund
Part C - Other Information
Signature Page
Exhibits
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PART A
PROSPECTUS FOR
MONTGOMERY VARIABLE SERIES: GROWTH FUND
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<PAGE>
Montgomery Variable Series: Growth Fund
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Prospectus
April 30, 2000
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 6:00 a.m. to 5:00 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.......................................................................
Strategy........................................................................
Risks...........................................................................
Past Fund Performance...........................................................
Fees and Expenses...............................................................
Portfolio Management............................................................
Management Fees............................................................
Additional Investment Strategies and Related Risks..............................
Mixed and Shared Funding...................................................
Defensive Investments......................................................
Portfolio Turnover.........................................................
Financial Highlights............................................................
Account Information.............................................................
How to Invest in the Fund..................................................
How to Redeem an Investment in the Fund....................................
Exchange Privileges and Restrictions.......................................
How Net Asset Value Is Determined..........................................
Dividends and Distributions................................................
Effect of Distributions on the Fund's Net Asset Value......................
How to Avoid "Buying a Dividend" ..........................................
Taxation...................................................................
Our Partners...............................................................
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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, a series of
The Montgomery Funds III, 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
<PAGE>
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
Principal Strategy
Under normal conditions, 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 with the following three
steps of their investment process:
| | Identify companies with improving business fundamentals
| | Conduct 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
When the Fund's portfolio managers think that market conditions are not
favorable or when they are unable to locate attractive investments, they may
(but are not required to) 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.
Principal Risks
By investing in the Fund, you could lose money, particularly due to a sudden
decline in the share price of a portfolio holding 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.
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5
<PAGE>
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 1999
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During the three-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%).
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28.57% 2.93% 20.79%
Montgomery Variable Series: Growth Fund 20.79% 20.00%
S&P 500 Index 20.98% 25.94%*
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* Calculated From 1/31/96 1 Year Inception (2/9/96)
2000 Return Through 3/31/00: 2.88% Average Annual Returns Through 12/31/99
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 1.25%
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Total Annual Fund Operating Expenses 2.25%
Fee Reduction and/or Expense Reimbursement 1.00%
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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 expenses) to 1.25%. This contract has a rolling
10-year term.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------
$127 $396 $685 $1,506
PORTFOLIO MANAGEMENT
Roger Honour and Kathryn Peters For financial highlights
For more detail see page __. see page __.
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6
<PAGE>
Montgomery Variable Series: Growth Fund
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PORTFOLIO MANAGEMENT
The investment manager for the 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, 1999,
Montgomery Asset Management managed approximately $5 billion on behalf of some
200,000 investors in The Montgomery Funds.
ROGER HONOUR, Senior Portfolio Manager and Principal
o Montgomery Variable Series: Growth Fund (since 1996)
Mr. Honour joined Montgomery in 1993 from Twentieth Century Investors in Kansas
City, Missouri, where he was a vice president and portfolio manager. There he
helped manage several growth mutual funds. Before joining Twentieth Century, he
was vice president and portfolio manager at Alliance Capital Management in San
Francisco. Mr. Honour has a bachelor of science degree and obtained highest
honors in finance from the University of Louisville, Kentucky.
KATHRYN PETERS, Portfolio Manager and Principal
o Montgomery Variable Series: Growth Fund (since 1996)
Before joining Montgomery, Ms. Peters worked for the investment banking division
of Donaldson, Lufkin & Jenrette in New York, evaluating prospective equity
investments for the merchant banking fund, including equity and high-yield
offerings. Prior to that she analyzed mezzanine investments for Barclays de
Zoete Wedd in New York and worked in the leveraged buyout group of Marine
Midland Bank. Ms. Peters has a master of business of administration degree from
Harvard Graduate School of Business Administration and a bachelor of arts degree
with high honors in psychology with a concentration in business from Boston
College.
Management Fees
The table below shows the management fee rate actually paid to Montgomery Asset
Management over the past fiscal year and the contractual limits on total
operating expenses for the Fund. The management fee amount shown may vary from
year to year, depending on actual expenses. Actual fee rates may be greater than
contractual rates to the extent Montgomery recouped previously deferred fees
during the fiscal year.
Management Fees Lower Of Total Expense Limit Or Actual
Total Expenses
0.52% 1.25%
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.
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7
<PAGE>
Montgomery Variable Series: Growth Fund
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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 involve 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," on page __, for the Fund's historical portfolio turnover.
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8
<PAGE>
Montgomery Variable Series: Growth Fund
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FINANCIAL HIGHLIGHTS
<TABLE>
The following financial information for the period ended December 31, 1999, was
audited by PricewaterhouseCoopers LLP, whose report, dated February 4, 2000,
appears in the 1999 Annual Report of the Fund. The information for the periods
ended December 31, 1997 and December 31, 1998, 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>
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MONTGOMERY VARIABLE SERIES:
GROWTH FUND
- -------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA FOR 1999 1998 1997 1996(a)
<S> <C> <C> <C> <C>
THE YEAR OR PERIOD ENDED DECEMBER 31:
Net Asset-Value Beginning of Period $15.39 $15.09 $12.33 $10.08
Net investment income/(loss) 0.06 0.09 0.16 0.15
Net realized and unrealized gain/(loss) on 3.13 0.35
investments 3.35 2.59
Net increase/(decrease) in net assets
resulting from investment operations 3.19 0.44 3.51 2.74
Distributions to shareholders:
Dividends from net investment income (0.01) (0.06) (0.16) (0.15)
Distributions in excess of net investment income -- -- -- --
Distributions from net realized capital gains (0.18) (0.08) (0.59) (0.34)
Distributions in excess of net capitalized gains -- -- -- --
Distributions from capital -- -- -- --
Total distributions: (0.19) (0.14) (0.75) (0.49)
Net Asset Value-End of Period $18.39 $15.39 $15.09 $12.33
Total Return* 20.79% 2.93% 28.57% 27.22%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) $19,649 $13,452 $12,597 $2,127
Ratio of net investment income/(loss) to
average net assets 0.46% 0.57% 1.74% 2.55%+
Net investment income/(loss) before deferral of
fees by Manager $(0.07) $0.07 $0.01 $(0.27)
Portfolio turnover rate 77% 57% 53% 78%
Expense ratio including interest and tax expenses 1.26% 1.25% 0.35% 0.01%+
Expense ratio before deferral of fees by
Manager, including interest and tax expenses 2.25% 1.40% 1.97% 6.98%+
Expense ratio excluding interest and tax expenses 1.25% 1.25% 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>
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9
</TABLE>
<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, subject to the supervision of the Fund's Board of
Trustees or Pricing Committee, will make a good-faith estimate of the security's
"fair value," which may be higher or lower than the security's closing price in
its relevant market.
We calculate the NAV of the Fund after the close of trading on the New York
Stock Exchange (NYSE) every day the NYSE is open. We do not calculate NAVs on
the days that the NYSE is closed for trading. If we receive your order by the
close of trading on the NYSE, you can purchase shares at the price calculated
for that day. The NYSE usually closes at 4:00 P.M. on weekdays, except 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. 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>
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10
<PAGE>
Montgomery Variable Series: Growth Fund
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INCOME DIVIDENDS CAPITAL GAINS
<S> <C> <C>
Montgomery Variable Declared and paid in the last Declared and paid in the last
Series: Growth Fund quarter of each calendar year* quarter of each calendar year*
<FN>
*Following its fiscal year end (December 31), the Fund may make additional distributions to
avoid the imposition of a tax.
</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.
How to Avoid "Buying a Dividend"
If you plan to purchase shares in the Fund, check if it is planning to make a
distribution in the near future. Here's why: If you buy shares of the Fund just
before a distribution, you'll pay full price for the shares but receive a
portion of you purchase price back as a taxable distribution. This is called
"buying a dividend." Unless you hold the Fund in a tax-deferred account, you
will have to include the distribution of your gross income for tax purposes,
even though you may not have participated in the increase of the Fund's
appreciation.
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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11
<PAGE>
Montgomery Variable Series: Growth 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 recordkeeping and accounting functions for the Fund.
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12
<PAGE>
Montgomery Variable Series: Growth Fund
- --------------------------------------------------------------------------------
You can find more information about the investment policies of the Montgomery
Variable Series: Growth Fund in the Statement of Additional Information (SAI),
which is incorporated by reference into this prospectus.
You can also find further information about the Fund in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected the Fund's performance during
its most recent fiscal period. To request a free copy of the most recent annual
or semiannual report, please call us at 800.572.FUND [3863], option 3.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about the Fund, including the SAI, at the
Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. To obtain information on the operation of the Public Reference
Room, please call 202.942.8090. Reports and other information about the Fund are
available at the SEC's Web site at www.sec.gov. You can also obtain copies of
this information, upon payment of a duplicating fee, by writing the Public
Reference Section of the SEC, Washington, D.C., 20549-6009, or e-mailing the SEC
at [email protected].
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. 4/00
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13
<PAGE>
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PART A
PROSPECTUS FOR
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
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<PAGE>
Montgomery Variable Series: Emerging Markets Fund
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Prospectus
April 30, 2000
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 6:00 a.m. to 5:00 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.......................................................................
Principal Strategy..............................................................
Principal Risks.................................................................
Past Fund Performance...........................................................
Fees and Expenses...............................................................
Portfolio Management............................................................
Management Fees............................................................
Additional Investment Strategies and Related Risks..............................
Mixed and Shared Funding...................................................
The Euro: Single European Currency.........................................
Defensive Investments......................................................
Portfolio Turnover.........................................................
Financial Highlights............................................................
Account Information.............................................................
How to Invest in the Fund..................................................
How to Redeem an Investment in the Fund....................................
Exchange Privileges and Restrictions.......................................
How Net Asset Value Is Determined..........................................
Dividends and Distributions................................................
Effect of Distributions on the Fund's Net Asset Value......................
How to Avoid "Buying a Dividend" ..........................................
Taxation...................................................................
Our Partners...............................................................
- --------------------------------------------------------------------------------
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, a
series of The Montgomery Funds III, 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
Principal Strategy
Under normal conditions, 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 in-depth financial review with 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. The Fund allocates its assets among
emerging countries with stable or improving macroeconomic environments and
invests in companies within those countries that the portfolio managers believe
have high capital appreciation potential without excessive risks. The portfolio
managers strive to keep the Fund well diversified across individual stocks,
industries and countries to reduce its overall risk.
Principal Risks
By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, particularly a 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 relative immaturity and occasional
instability. Some emerging markets restrict the flow of money into or out of
their stock markets and 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 based on only a few industries or on
revenue from particular commodities and international aid. Most of the foreign
securities in which the Fund invests are denominated in foreign currencies,
whose values 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 1999
- --------------------------------------------------------------------------------
During the three-year period described in
the bar chart on the left, the Fund's best
quarter was Q4 1999 (+34.75%) and its worst
quarter was Q3 1998 (-23.02%).
- --------------------------------------------------------------------------------
(0.58%) (37.53%) 64.81%
Montgomery Variable Series: Emerging Markets Fund 64.81% 2.30%
MSCI Emerging Markets Free Index 66.41% 2.16%+
- --------------------------------------------------------------------------------
+ Calculated from 1/31/96. 1 Year Inception (2/2/96)
2000 Return Through 3/31/00: 3.68% Average Annual Returns Through 12/31/99
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 0.40%
- ------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.65%
<FN>
* Montgomery Asset Management has contractually agreed to reduce its fees and/or
absorb expenses to limit the Fund's total annual operating expenses (including
interest and tax expenses) to 1.65%. This contract has a rolling 10-year term.
</FN>
</TABLE>
Example of Fund expenses: This example is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
table below shows what you would pay in expenses over time, whether or not you
sold your shares at the end of each period. It assumes a $10,000 initial
investment, 5% total return each year and no changes in expenses. This example
is for comparison purposes only. It does not necessarily represent the Fund's
actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------
$167 $519 $895 $1,947
PORTFOLIO MANAGEMENT
Josephine Jimenez
Frank Chiang For financial highlights
For more details see page __. see page __.
- --------------------------------------------------------------------------------
6
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
Portfolio Management
The investment manager for the 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, 1999,
Montgomery Asset Management managed approximately $5 billion on behalf of some
200,000 investors in The Montgomery Funds.
JOSEPHINE JIMENEZ, CFA, Senior Portfolio Manager and Principal
o Montgomery Variable Series: Emerging Markets Fund (since 1996)
Prior to joining Montgomery, Ms. Jimenez was a portfolio manager at Emerging
Markets Investors Corporation. From 1981 through 1988, she analyzed U.S. equity
securities, first at Massachusetts Mutual Life Insurance Company, then at
Shawmut Corporation. She received a master of science degree from the
Massachusetts Institute of Technology in 1981; a bachelor of science degree from
New York University in 1979 and is a chartered financial analyst. Ms. Jimenez
serves on the Board of Trustees of M.I.T. and is a member of the Investment
Committee overseeing M.I.T.'s endowment fund.
FRANK CHIANG, Portfolio Manager and Principal
o Montgomery Variable Series: Emerging Markets Fund (since 1996)
Mr. Chiang was formerly with TCW Asia Ltd., Hong Kong, where he was a managing
director and portfolio manager responsible for TCW's asian equity strategy.
Prior to TCW Asia, he was associate director and portfolio manager for Wardley
Investment Services, Hong Kong, where he created and managed three dedicated
China funds. Mr. Chiang has a bachelor of science degree in physics and
mathematics from McGill University in Montreal, Canada, and a master of business
administration and finance from New York University. Mr. Chiang is fluent in
three Chinese dialects: Mandarin, Shanghainese and Cantonese.
Management Fees
The table below shows the management fee rate actually paid to Montgomery Asset
Management over the past fiscal year and the contractual limits on total
operating expenses for the Fund. The management fee amount shown may vary from
year to year, depending on actual expenses. Actual fee rates may be greater than
contractual rates to the extent Montgomery recouped previously deferred fees
during the fiscal year.
Management Fees Lower Of Total Expense Limit Or Actual
Total Expenses
1.25% 1.65%
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. Eleven of the 15 EU members have begun to convert
their currencies to the euro: Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain (leaving out
Britain, Sweden, Denmark and Greece). For the first three years, the euro will
be a phantom currency (only an accounting entry). Euro notes and coins will
begin circulating in 2002.
The introduction of the euro has occurred, but the following uncertainties will
continue to exist for some time:
> Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably
> The applicable conversion rate for contracts stated in the national
currency of an EU member
> The ability of clearing and settlement systems to process transactions
reliably
> The effects of the euro on European financial and commercial markets
> The effects 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 involve 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," on page __, for the Fund's historical portfolio turnover.
- --------------------------------------------------------------------------------
8
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
The following financial information for the period ended December 31, 1999, was
audited by PricewaterhouseCoopers LLP, whose report, dated February 4, 2000
appears in the 1999 Annual Report of the Fund. The information for the periods
ended December 31, 1997 and December 31, 1998, 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
THE YEAR OR PERIOD ENDED DECEMBER 31: 1999 1998 1997 1996(a)
<S> <C> <C> <C> <C>
Net Asset-Value Beginning of Period $6.59 $10.57 $10.65 $10.00
Net investment income/(loss) 0.02 0.01 0.02 0.03
Net realized and unrealized gain/(loss) on
investments 4.25 (3.98) (0.08) 0.65
Net increase/(decrease) in net assets
resulting from investment operations 4.27 (3.97) (0.06) 0.68
Distributions to shareholders:
Dividends from net investment income (0.00)@ (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: (0.00) (0.01) (0.02) (0.03)
Net Asset Value-End of Period $10.86 $6.59 $10.57 $10.65
Total Return* 64.81% (37.53)% (0.58)% 6.79%
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in 000s) $131,197 $72,323 $114,837 $26,966
Ratio of net investment income/(loss) to
average net assets 0.20% 0.67% 0.63% 0.81%+
Net investment income/(loss) before deferral of
fees by Manager $0.02 $0.01 $0.02 $(0.01)
Portfolio turnover rate 124% 112% 71% 43%
Expense ratio including interest and tax expenses 1.65% 1.80% 1.76% 1.45%+
Expense ratio before deferral of fees by Manager, 1.65% -- 1.81% 2.47%+
including interest and tax expenses
Expense ratio excluding interest and tax expenses 1.62% 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.
@ Amount represents less than $0.01.
</FN>
- -------------------------------------------------------------------------------------------------------------
9
</TABLE>
<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, subject to the supervision of the Fund's Board of
Trustees or Pricing Committee, will make a good-faith estimate of the security's
"fair-value," which may be higher or lower than the security's closing price in
its relevant market.
We calculate the NAV of the Fund after the close of trading on the New York
Stock Exchange (NYSE) every day the NYSE is open. We do not calculate NAVs on
the days that the NYSE is closed for trading. An exception applies as described
below. If we receive your order by the close of trading on the NYSE, you can
purchase shares at the price calculated for that day. The NYSE usually closes at
4:00 P.M. 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. More details about how we calculate
the Fund's NAV are in the Statement of Additional Information.
Foreign Funds. The Fund invests in securities denominated in foreign currencies
and traded on foreign exchanges. To determine their value, we convert their
foreign-currency price into U.S. dollars by using the exchange rate last quoted
by a major bank. Exchange rates fluctuate frequently and may affect the U.S.
dollar value of foreign-denominated securities, even if their market price does
not change. In addition, some foreign exchanges are open for trading when the
U.S. market is closed. As a result, the
- --------------------------------------------------------------------------------
10
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
Fund's foreign securities--and its price--may fluctuate during periods when you
can't buy, sell or exchange shares in the Fund.
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 last
Emerging Markets Fund quarter of each calendar year* quarter of each calendar year*
<FN>
*Following its fiscal year end (December 31), the Fund may make additional
distributions to avoid the imposition of a tax.
</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.
How to Avoid "Buying a Dividend"
If you plan to purchase shares in the Fund, check if it is planning to make a
distribution in the near future. Here's why: If you buy shares of the Fund just
before a distribution, you'll pay full price for the shares but receive a
portion of you purchase price back as a taxable distribution. This is called
"buying a dividend." Unless you hold the Fund in a tax-deferred account, you
will have to include the distribution of your gross income for tax purposes,
even though you may not have participated in the increase of the Fund's
appreciation.
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.
- --------------------------------------------------------------------------------
11
<PAGE>
Montgomery Variable Series: Emerging Markets Fund
- --------------------------------------------------------------------------------
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 recordkeeping 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), which is incorporated by reference into this prospectus.
You can also find further information about the Fund in our annual and
semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected the Fund's performance during
its most recent fiscal period. To request a free copy of the most recent annual
or semiannual report, please call us at 800.572.FUND [3863], option 3.
To request a free copy of the SAI, call us at 800.572.FUND [3863]. You can
review and copy further information about the Fund, including the SAI, at the
Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. To obtain information on the operation of the Public Reference
Room, please call 202.942.8090. Reports and other information about the Fund are
available at the SEC's Web site at www.sec.gov. You can also obtain copies of
this information, upon payment of a duplicating fee, by writing the Public
Reference Section of the SEC, Washington, D.C., 20549-6009, or e-mailing the SEC
at [email protected].
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. 4/00
<PAGE>
---------------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION FOR
MONTGOMERY VARIABLE SERIES: GROWTH FUND
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
---------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
THE MONTGOMERY FUNDS III
- --------------------------------------------------------------------------------
MONTGOMERY VARIABLE SERIES: GROWTH FUND
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
101 California Street
San Francisco, California 94111
(800) 572-FUND [3863]
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
April 30, 2000
The Montgomery Funds III (the "Trust") is an open-end management
investment company organized as a Delaware business trust, having two 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 and Montgomery Variable Series: Emerging Markets Fund, each
dated April 30, 2000, 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,
1999, 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.........................................................27
INVESTMENT MANAGEMENT AND OTHER SERVICES......................................31
EXECUTION OF PORTFOLIO TRANSACTIONS...........................................34
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................37
DETERMINATION OF NET ASSET VALUE..............................................38
PERFORMANCE INFORMATION.......................................................40
GENERAL INFORMATION...........................................................43
FINANCIAL STATEMENTS..........................................................44
APPENDIX......................................................................45
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 two series. This Statement of Additional
Information pertains to The Montgomery Variable Series: Growth Fund (the "Growth
Fund") and The Montgomery Variable Series: Emerging Markets Fund (the "Emerging
Markets 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 Markets 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 similar instruments
will be deemed to be investments in the equity securities representing the
securities of foreign issuers into which they may be converted.
B-3
<PAGE>
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 selecting debt
securities, the Manager seeks out good credits and analyzes interest rate trends
and specific developments that may affect individual issuers.
B-4
<PAGE>
Debt securities may also consist of participation certificates in large
loans made by financial institutions to various borrowers, typically in the form
of large unsecured corporate loans. These certificates must otherwise comply
with the maturity and credit-quality standards of each Fund and will be limited
to 5% of a Fund's total assets.
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 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.
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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 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.
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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 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.
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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.
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.
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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.
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
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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.
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
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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 institution by an
exchange of special procedures that may interfere with the timely execution of
the Funds' orders.
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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 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
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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.
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
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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 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
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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.
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,
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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. Even when portfolio turnover exceeds 100%,
however, the Fund does not regard portfolio turnover as a limiting factor.
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<PAGE>
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.
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
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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 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
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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 Manager considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions that would
affect the liquidity of the 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 Manager 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 be protected is imperfect, the desired protection may not
be obtained, and a Fund may be exposed to risk of financial loss.
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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% 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) 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 or from
engaging in transactions that are fully collateralized in a
manner that does not involve the prohibited issuance of a
senior security within the meaning of Section 18(f) of the
Investment Company Act.)
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 (including forward currency
exchange contracts), futures contracts, and related options
generally
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<PAGE>
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.)
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.)
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<PAGE>
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.
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
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<PAGE>
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 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
B-23
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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 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.
B-24
<PAGE>
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.
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
B-25
<PAGE>
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 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
B-26
<PAGE>
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.
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
B-27
<PAGE>
operations, are appointed by the Board of Trustees. The current Trustees and
officers of the Trust performing a policy-making function and their affiliations
and principal occupations for the past five years are set forth below:
George A. Rio, President and Treasurer (born 1955)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Rio is Executive
Vice President and Client Service Director of Funds Distributor, Inc. ("FDI")
and an officer of certain investment companies distributed by FDI or its
affiliates (since April 1998). From June 1995 to March 1998, he was Senior Vice
President, Senior Key Account Manager for Putnam Mutual Funds. From May 1994 to
June 1995, he was Director of business development for First Data Corporation.
From September 1993 to May 1994, he was Senior Vice President and Manager of
Client Services; and Director of Internal Audit at the Boston Company.
Karen Jacoppo-Wood, Vice President and Assistant Secretary (born 1966)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Jacoppo-Wood is
the Vice President and Senior Counsel of FDI and an officer of certain
investment companies distributed by FDI or its affiliates. From June 1994 to
January 1996, Ms. Jacoppo-Wood was a Manager, SEC Registration, Scudder, Stevens
& Clark, Inc.
Margaret W. Chambers, Secretary (born 1959)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Chambers is Senior
Vice President and General Counsel of FDI and an officer of certain investment
companies distributed by FDI or its affiliates (since April 1998). From August
1996 to March 1998, Ms. Chambers was Vice President and Assistant General
Counsel for Loomis, Sayles & Company, L.P. From January 1986 to July 1996, she
was an associate with the law firm of Ropes & Gray.
Christopher J. Kelley, Vice President and Assistant Secretary (born 1964)
60 State Street, Suite 300, Boston, Massachusetts 02109. Mr. Kelley is the Vice
President and Senior Associate General Counsel of FDI and Premier Mutual, and an
officer of certain investment companies distributed by FDI or its affiliates.
From April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum
Financial Group.
Mary A. Nelson, Vice President and Assistant Treasurer (born 1964)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is the Vice
President and Manager of Treasury Services and Administration of FDI and Premier
Mutual, and an officer of certain investment companies distributed by FDI or its
affiliates. From 1989 to 1994 Ms. Nelson was Assistant Vice President and Client
Manager for The Boston Company, Inc.
B-28
<PAGE>
Kathleen K. Morrisey, Vice President and Assistant Treasurer (born 1972)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Morrisey is the
Assistant Vice President and Manager of Financial Administration of FDI and an
officer of certain investment companies distributed by FDI or its affiliates.
From July 1994 to November 1995, Ms. Morrisey was a Fund Accountant II for
Investors Bank & Trust Company.
Marie E. Connolly, Vice President and Assistant Treasurer (born 1957)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Connolly is the
President, Chief Executive Officer, Chief Compliance Officer and Director of FDI
and Premier Mutual, and an officer of certain investment companies distributed
by FDI or its affiliates. From December 1991 to July 1994, Ms. Connolly was
President and Chief Compliance Officer of FDI. Prior to December 1991, Ms.
Connolly served as Vice President and Controller, and later Senior Vice
President of TBCA.
Douglas C. Conroy, Vice President and Assistant Treasurer (born 1969)
60 State Street, Suite 130, Boston, Massachusetts 02109. Mr. Conroy is a Vice
President and Senior Client Service Manager of FDI, and an officer of certain
investment companies distributed by FDI or its affiliates. From January 1995 to
June 1998, Mr. Conroy was the Assistant Vice President and Manager of Treasury
Services and Administration. From April 1993 to January 1995, Mr. Conroy was a
Senior Fund Accountant at Investors Bank & Trust Company.
Joseph F. Tower, III, Vice President and Assistant Treasurer (born 1962)
60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Tower is the
Executive Vice President, Treasurer and Chief Financial Officer, Chief
Administrative Officer and Director of FDI; Senior Vice President, Treasurer and
Chief Financial Officer, Chief Administrative Officer and Director of Premier
Mutual, and an officer of certain investment companies advised or administered
by Morgan, Dreyfus and Waterhouse or their respective affiliates. Prior to April
1997, Mr. Tower was Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of FDI. From July 1988 to
November 1993, Mr. Tower was Financial Manager of The Boston Company, Inc.
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.
B-29
<PAGE>
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.
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, 1999, and the aggregate compensation paid to each of the
Trustees during the fiscal year ended December 31, 1999, by all of the
registered investment companies to which the Manager provides investment
advisory services, are set forth below:
- --------
+ Trustee deemed an "interested person" of the Funds as defined in the
Investment Company Act.
B-30
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation Pension or Retirement Total Compensation From the
from Benefits Accrued as Part Trust and Fund Complex
Name of Trustee The Montgomery Funds III of Fund Expenses* (2 Additional Trusts)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R. Stephen Doyle None -- None
- -------------------------------------------------------------------------------------------------------------------------
John A. Farnsworth $5,000 -- $55,000
- -------------------------------------------------------------------------------------------------------------------------
Andrew Cox $5,000 -- $55,000
- -------------------------------------------------------------------------------------------------------------------------
Cecilia H. Herbert $5,000 -- $55,000
- -------------------------------------------------------------------------------------------------------------------------
<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%
- --------------------------------------------------------------------------------
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 and one and
seventy-five one-hundredths of one percent (1.75%) of the Emerging Markets
Fund's average net assets. The Operating Expense Agreements have a 10-year
rolling term. The Manager also may voluntarily reduce additional amounts to
B-31
<PAGE>
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.
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.
- --------------------------------------------------------------------------------
Year Ended December 31,
Fund
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Growth Fund $ 234,533 $ 143,412 $ 71,499
- --------------------------------------------------------------------------------
Emerging Markets Fund $ 1,188,824 $ 1,146,101 $ 1,201,496
- --------------------------------------------------------------------------------
The Manager also may act as an investment adviser or administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above, which indicates officers and Trustees who are
affiliated persons of the Trust and who are also affiliated persons of the
Manager.
The Trust and the Manager have adopted respective Codes of Ethics
pursuant to Section 17(j) of the Investment Company Act and Rule 17j-1
thereunder (collectively, the "Codes of Ethics"). Both the Trust and the Manager
intend to revise their respective Codes of Ethics, as appropriate, to conform
with certain new provisions of Rule 17j-1 as adopted by the SEC on October 29,
1999. Currently, the Codes of Ethics for both the Manager and the Trust permit
personnel subject to such Codes to buy and sell securities for their individual
B-32
<PAGE>
account, unless such securities at the time of such purchase or sale: (i) are
being considered for purchase or sale by a Fund; (ii) are being purchased or
sold by a Fund; or (iii) were purchased or sold by a Fund within the most recent
15 days.
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 serves as principal Custodian
of the Funds' assets, which are maintained at the Custodian's principal office,
4 Chase MetroTech Center, Brooklyn, New York 11245, 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.
Administrative and Other Services. Montgomery Asset Management, LLC
("MAM") serves as the Administrator to the Funds pursuant to an Administrative
Services Agreement among the Trust and MAM (the "Agreement"). In approving the
Agreement, the Board of Trustees, including a majority of the independent
Trustees, recognizes that the Agreement involves an affiliate of the Trust;
however, it has made separate determinations that, among other things, the
nature and quality of the services rendered under the Agreement are at least
equal to the nature and quality of the service that would be provided by an
unaffiliated entity. Subject to the control of the Trust and the supervision of
the Board of Trust, the Administrator performs the following types of services
for the Funds: (i) furnish performance, statistical and research data; (ii)
prepare and file various reports required by federal, state and other applicable
laws and regulations; (iii) prepare and print of all documents, prospectuses and
reports to shareholders; (iv) prepare financial statements; (v) prepare agendas,
notices and minutes for each meeting of the Boards; (vi) develop and monitor
compliance procedures; (vii) monitor Blue Sky filings and (viii) manage legal
services. For its services performed under the Agreement, each Fund pays the
Administrator an administrative fee based upon a percentage of the average daily
net assets of each Fund. The fee per Fund varies from an annual rate of 0.07% to
0.04% depending on the Fund and level of assets.
Chase Global Funds Services Company ("Chase"), 73 Tremont Street,
Boston, Massachusetts 02108, serves as the Sub-Administrator to the Funds
pursuant to a Mutual Funds Service Agreement (the "Sub-Agreement") between Chase
and MAM. Subject to the control, direction and supervision of MAM and the Trust,
Chase assists MAM in providing administrative services to the Funds. As
compensation for the services rendered pursuant to the Sub-Agreement, MAM pays
Chase an annual sub-administrative fee based upon a percentage of the average
net assets in the aggregate of the Trust and The Montgomery Funds and The
Montgomery Funds II. The sub-administrative fee is paid monthly for the month or
portion of the month Chase assists MAM in providing administrative services to
the Funds. This fee is based on all assets of the Trust and related trusts or
funds and is equal to an annual rate of 0.01625% of the first $3 billion, plus
0.0125% of the next $2 billion and 0.0075% of amounts over $5 billion. The
sub-administrative fee paid to Chase is paid from
B-33
<PAGE>
the administrative fees paid to MAM by the Funds. Chase succeeded First Data
Corporation as sub-administrator.
Chase also serves as Fund Accountant to the Trust pursuant to Mutual
Funds Service Agreements ("Fund Accounting Agreement") entered into between the
Trust and Chase on May 3, 1999. By entering into the Fund Accounting Agreement,
Chase also succeeds First Data Corporation as Fund Accountant to the Trust. As
Fund Accountant, Chase provides the Trust with various services, including, but
are not limited to: (i) maintaining the books and records for the Funds' assets,
(ii) calculating net asset values of the Funds, (iii) accounting for dividends
and distributions made by the Funds, and (iv) assisting the Funds' independent
auditors with respect to the annual audit. This fee is based on all assets of
the Trust and related trusts or funds and is equal to an annual rate of 0.04875%
of the first $3 billion, plus 0.0375% of the next $2 billion and 0.0225% of
amounts over $5 billion.
The table below provides information on the administrative and
accounting fees paid over the past three fiscal years.
- -------------------------------------------------------------------------------
Administrative/Accounting Fees Paid
for year ended December 30,
----------------- ----------------- ----------------
Fund 1999 1998 1997
- -------------------------------------------- ----------------- ----------------
Growth Fund $10,805 N/A N/A
- -------------------------------------------- ----------------- ----------------
Emerging Markets Fund $48,245 $32,080 N/A
- -------------------------------------------- ----------------- ----------------
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 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
B-34
<PAGE>
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 reasonable flexibility to use
allocation methodologies that are appropriate to their investment discipline on
client accounts.
B-35
<PAGE>
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.
For the year ended December 31, 1999, the Funds' total securities
transactions generated commissions of $1,264,177.45, of which $988.70 was paid
to Banc of America Securities, LLC (formerly named Nationsbanc Montgomery
Securities, which, in turn, was formerly named Montgomery Securities). 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 Banc of America
Securities, LLC. 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 Banc of America Securities, LLC. For the three fiscal years ended
December 31, 1999, the Funds securities transactions generated commissions of:
B-36
<PAGE>
- --------------------------------------------------------------------------------
Commissions for the fiscal year ended:
- --------------------------------------------------------------------------------
December 31, December 31, December 31,
Fund 1999 1998 1997
- --------------------------------------------------------------------------------
Growth Fund $75,115.60 $51,175.30 $59,348.80
- --------------------------------------------------------------------------------
Emerging Markets Fund $1,189,061.45 $15,071.89 $992,234.49
- --------------------------------------------------------------------------------
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-37
<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-38
<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, U.S. government securities, mortgage-related
securities and asset-backed fixed-income 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
B-39
<PAGE>
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board 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-40
<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
Fund December 31, 1999 December 31, 1999
- --------------------------------------------------------------------------------
Growth Fund 20.79% 20.00%
- --------------------------------------------------------------------------------
Emerging Markets Fund 64.81% 2.30%
- --------------------------------------------------------------------------------
* 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 and February 2, 1996 for the Emerging Markets 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.
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
B-41
<PAGE>
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.
Also, from time to time, the Manager may refer to its quality and size,
including references to its total assets under management (as of December 31,
1999, over $5 billion for retail and institutional investors) and total
shareholders invested in the Funds (as of December 31, 1999, around 200,000).
B-42
<PAGE>
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 February 29, 2000, 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:
<CAPTION>
B-43
<PAGE>
- ------------------------------------------------------------------------------------------------------------------
Name of Fund/Name and Address of Record Owner Number of Shares Owned Percent of Shares
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Montgomery Variable Series:
Growth Fund
Travelers Life & Annuity 464,158.9620 38.47%
One Tower Square
Hartford, Connecticut 06183
- ------------------------------------------------------------------------------------------------------------------
BenefitsCorp Equities, Inc. (Class 1) 350,361.1060 29.04%
8515 East Orchard Road
Englewood, Colorado 80111
- ------------------------------------------------------------------------------------------------------------------
Advisors Edge Select 68,401.8240 5.67%
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499
- ------------------------------------------------------------------------------------------------------------------
Peoples Benefit Life Insurance Co. (Class 1) 97,727.0760 8.10%
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Name of Fund/Name and Address of Record Owner Number of Shares Owned Percent of Shares
- ------------------------------------------------------------------------------------------------------------------
Montgomery Variable Series:
Emerging Markets Fund
American Skandia Life Assurance Corp. 12,608,571.6730 92.40%
1 Corporate Drive, 10th Floor
Shelton, Connecticut 06484
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 29, 2000, 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, 1999, for The Montgomery Variable Series: Growth Fund, and The Montgomery
Variable Series: Emerging Markets Fund as contained in the Annual Report to
Shareholders of such Funds for the fiscal year ended December 31, 1999 (the
"Report"), are incorporated herein by reference to the Reports.
B-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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, as
incorporated by reference to Post-Effective Amendment No. 9 to
the Registration Statement as filed with the Commission on
April 15, 1999 ("Post-Effective Amendment No. 9").
(b) By-Laws, dated August 16, 1994, is incorporated by reference
to Post-Effective Amendment No. 9.
(c) Instruments Defining Rights of Security Holder--Not
applicable.
(d) Investment Advisory Contract, dated July 31, 1997, is
incorporated by reference to Post-Effective Amendment No. 9.
(e) Form of Underwriting Agreement - Not applicable.
(f) Bonus or Profit Sharing Contracts - Not applicable.
(g) Form of Custody Agreement is incorporated by reference to
Post-Effective Amendment No. 9.
(h) Other Material Contracts:
(1) Form of Administrative Services Agreement is
incorporated by reference to Post-Effective Amendment
No. 9.
(2) Form of Participation Agreement is incorporated by
reference to Post-Effective Amendment No. 9.
(i) Opinion of Counsel as to legality of shares - Filed herewith.
(j) Other Opinions - Independent Auditors' Consent - Filed
herewith.
(k) Omitted Financial Statements - Not applicable.
(l) Initial Capital Agreement - Letter of Understanding Regarding
Initial Shares, dated April 7, 1995, is incorporated by
reference to Post-Effective Amendment No. 9.
(m) Rule 12b-1 Plan - Not applicable.
(n) Financial Data Schedule - Not applicable.
(o) Rule 18f-3 Plan - Not applicable.
(p) Codes of Ethics - Filed herewith.
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
<PAGE>
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.
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
Mark B. Geist Chief Executive Officer and Director of MAM, LLC
F. Scott Tuck President 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-2
<PAGE>
(c) Not Applicable.
Item 28. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "Investment
Company Act") will be kept by the Registrant's Transfer Agent, DST Systems,
Inc., P.O. Box 1004 Baltimore, Kansas City, Missouri 64105, except those records
relating to portfolio transactions and the basic organizational and Trust
documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9),
(10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at 101
California Street, San Francisco, California 94111.
Item 29. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 30. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last
annual report to Shareholders, upon request and without
charge.
(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 29th day of April, 2000.
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 30, 2000
- -------------- Principal Executive Officer,
George A. Rio Treasurer and Principal
Financial and Accounting
Officer
R. Stephen Doyle * Chairman of the April 30, 2000
- ------------------ Board of Trustees
R. Stephen Doyle
Andrew Cox * Trustee April 30, 2000
- ------------
Andrew Cox
Cecilia H. Herbert * Trustee April 30, 2000
- --------------------
Cecilia H. Herbert
John A. Farnsworth * Trustee April 30, 2000
- --------------------
John A. Farnsworth
* By: /s/ Julie Allecta
-----------------
Julie Allecta, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
- --------------------------------------------------------------------------------
Exhibit 23(i)
Consent and Opinion of Counsel as to Legality of Shares
- --------------------------------------------------------------------------------
<PAGE>
PAUL, HASTINGS, JANOFSKY & WALKER LLP
345 California Street, Suite 2900
San Francisco, California 94104
(415) 835-1600
(415) 217-5333 fax
www.phjw.com
April 28, 2000
The Montgomery Funds III
101 California Street
San Francisco, California 94111
Re: The Montgomery Funds III
Ladies and Gentlemen:
We have acted as legal counsel to The Montgomery Funds III, a Delaware
business trust (the "Trust"), in connection with Post-Effective Amendments to
the Trust's Registration Statement filed on Form N-1A with the Securities and
Exchange Commission (the "Post-Effective Amendments") and relating to the
issuance by the Trust of an indefinite number of $.01 par value shares of
beneficial interest (the "Shares") for the following series of the Trust:
Montgomery Variable Series: Growth Fund and Montgomery Variable Series: Emerging
Markets Fund (each a "Fund" and collectively the "Funds").
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 on the following:
(a) the Trust's Agreement and Declaration of Trust dated August
16, 1994 (the "Declaration of Trust"). The Declaration of
Trust has been in full force and effect from August 16, 1994,
through the date hereof;
(b) the Trust's Certificate of Trust as originally filed with the
Secretary of State of Delaware on August 24, 1994 (the
"Certificate of Trust"). The Certificate of Trust has been in
full effect from August 24, 1994, through the date hereof;
(c) the By-laws of the Trust dated August 16, 1994, as amended
February 29, 2000. The By-laws, as amended, have been in full
force and effect from the original date of its adoption
through the date hereof;
(d) resolutions of the Trustees of the Trust, authorizing the
establishment of the Funds and the issuance of the Shares,
certified by an officer of the Trust as being in full force
and effect through the date hereof;
<PAGE>
The Montgomery Funds III
April 28, 2000
Page 2
(e) the Post-Effective Amendments; and
(f) a certificate of an officer of the Trust as to certain factual
matters relevant to this opinion.
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 Laws Annotated (Aspen Law
& Business, 2000). 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 at the
per-share public offering price on the date of their issuance in accordance with
statements in the Fund's Prospectus included in the Post-Effective Amendment and
in accordance with the Declaration of Trust, (ii) all consideration for the
Shares will be actually received by the Fund, and (iii) all applicable
securities laws will be complied with, it is our opinion that, when issued and
sold by the Fund, the Shares will be legally issued, fully paid and
nonassessable.
This opinion is rendered to you in connection with the filing of the
registration statement on Form N-1A with respect to the above Funds of the Trust
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 as Legal Counsel in
the Prospectus included in the Post-Effective Amendments; and (ii) the filing of
this opinion as an exhibit to those Post-Effective Amendments.
Sincerely yours,
/s/ PAUL, HASTINGS, JANOFSKY & WALKER LLP
- --------------------------------------------------------------------------------
Exhibit 23 (j)
Independent Auditors Consent
- --------------------------------------------------------------------------------
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our reports dated February 4, 2000, relating to the
financial statements and financial highlights which appear in the December 31,
1999 Annual Reports to Shareholders of Montgomery Variable Series: Growth Fund
and Montgomery Variable Series: Emerging Markets Fund (constituting The
Montgomery Funds III), which are also incorporated by reference into the
Registration Statement. We also consent to the references to us under the
headings "Financial Highlights" and "General Information" in such Registration
Statement.
PricewaterhouseCoopers LLP
San Francisco, California
April 30, 2000
- --------------------------------------------------------------------------------
Exhibit 23(p)
Code of Ethics
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF POLICY ON PERSONAL SECURITIES TRANSACTIONS AND GUIDELINES
FOR PERSONAL TRADING
(CODE OF ETHICS)
MONTGOMERY ASSET MANAGEMENT, LLC
MAM COLORADO, LLC
THE MONTGOMERY FUNDS
THE MONTGOMERY FUNDS II
THE MONTGOMERY FUNDS III
Revised January 1999
Introduction
As a registered investment company with substantial responsibility to
shareholders, each of The Montgomery Funds, The Montgomery Funds II and The
Montgomery Funds III (together, the "Trusts") has an obligation to implement and
maintain a meaningful policy governing the personal securities transactions of
its trustees, officers, and advisory persons (collectively, "access persons").
The purpose of the Code of Ethics is to minimize conflicts of interest
(including the appearance of such conflicts), as well as to comply with the
provisions of Section 17(j) of the Investment Company Act of 1940 (the "1940
Act") and Rule 17j-1 thereunder. In addition, this Code of Ethics is designed to
protect fiduciary relationships owed to Montgomery Asset Management, LLC and MAM
Colorado, LLC (collectively, "MAM") clients and each series of the Trusts and to
provide a program for detecting and preventing insider trading by the officers,
trustees and employees of MAM and the Trusts.
Section 17(j) of the 1940 Act makes it unlawful for an affiliated
person of a registered investment company to engage in transactions in
securities which are also held or are to be acquired by a registered investment
company if such transactions are in contravention of rules adopted by the
Securities and Exchange Commission to prevent fraudulent, deceptive, or
manipulative practices. Section 17(j) broadly prohibits any such affiliate from
engaging in any type of manipulative, deceptive, or fraudulent practice with
respect to the investment company and, furtherance of that prohibition, requires
each registered investment company to adopt a written code of ethics containing
provisions reasonably necessary to prevent "access persons" from engaging in
conduct prohibited by the Rule. The Rule also requires that reasonable diligence
be used and procedures instituted to prevent violations of such code of ethics.
This Code of Ethics is intended to comply with the requirements of
Section 17(j) and Rule 17j-1 and a copy of this Code of Ethics shall be
circulated to each access person by an officer of the relevant Trust together
with an acknowledgment of receipt which shall be signed and returned to a
designated compliance officer by each access person. The designated compliance
officer is charged with responsibility for ensuring that the requirements of
this Code of Ethics are adhered to by all access persons.
The Code recognizes that a fiduciary relationship exists with respect
to MAM's clients and each series of the Trusts (each, a "Fund"). This Code of
Ethics is intended to provide legal protection to the Trusts and their
shareholders and MAM accounts and account holders for which a fiduciary
relationship exists, and at the same time maintain an atmosphere within which
conscientious professionals can make responsible personal investment decisions.
As a matter of policy, this Code of Ethics should not and is not intended to
inhibit responsible personal investment within the boundaries reasonably
necessary to protect MAM's clients and the Trusts. To that end, this Code is
designed to encourage investment in a manner that is consistent with the
fiduciary relationships that exist between MAM and its clients and MAM and the
Trusts.
<PAGE>
This Code of Ethics is not intended to cover all possible areas of
potential liability under the 1940 Act or under the federal securities law in
general. For example, other provisions of Section 17 of the 1940 Act prohibit
various transactions between a registered investment company on a principal
basis, and joint transactions (e.g., combining to achieve a substantial position
in a security or commingling of funds) between an investment company and an
affiliated person. Persons covered by this Code, therefore, are advised to seek
advice before engaging in any transactions involving securities held or under
consideration for purchase or sale by a Fund or if a transaction directly or
indirectly involves themselves and any Trust, other than the purchase and
redemption of shares of a Fund in the performance of their normal business
duties.
In addition, the Securities Exchange Act of 1934 may impose fiduciary
obligations and trading restrictions on access persons in certain situations. It
is expected that access persons will be sensitive to these areas of potential
conflict, even though this Code of Ethics does not address specifically these
other areas of fiduciary responsibility.
Definitions
1. "Access person" means any officer, trustee or advisory person of a
Fund or a Trust, including certain employees located in the San Francisco office
of the distributor of the Funds, Funds Distributor, Inc., who perform sales
activities for the Funds, and certain members of the Steering Committee for MAM
who have regular access to information about portfolio transactions of the Funds
or other clients of MAM. For purposes of this Code of Ethics, access persons
also include members of such person's immediate family (i.e., husband, wife,
children and who are directly or indirectly dependents of an access person),
accounts in which an access person or members of his or her family has a
beneficial interest or over which an access person has investment control or
exercises investment discretion (e.g., a trust account).
2. "Advisory person" means (i) any employee of the Trusts or its
investment adviser or any company in a control relationship to the Trusts, who
in connection with his, her or its regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale of a
security by a Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (ii) any natural
person in a control relationship to the Trusts or their investment adviser who
obtains information concerning the recommendations made to the Fund with regard
to the purchase or sale of a security.
Advisory persons include officers, members and control persons of MAM,
and the Trusts, as well as all persons involved in the advisory process,
including portfolio managers, traders, employees whose duties or functions
involve them in the investment process, and any employee (including employees of
MAM's affiliates) who obtains information concerning the investment decisions
that are being made for MAM clients and the Funds.
3. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell a security has been communicated and, with
respect to the person making the recommendation, when such person seriously
considers making such a recommendation.
4. "Beneficial ownership" shall be interpreted in the same manner as it
would be in determining whether a person is subject to the provisions of Section
16 of the Securities Exchange Act of 1934 and the rules and regulations
thereunder, except that the determination of direct or indirect beneficial
ownership shall apply to all securities which an access person has or acquires.
5. "Cash compensation" means any discount, concession, fee, service
fee, commission, asset-based sales charge, loan, override or cash employee
benefit received in connection with the sale and distribution of the Funds or
the offering of MAM's services.
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<PAGE>
6. "Control" means the power to exercise a controlling influence over
the management or policies of any Trust, unless such power is solely the result
of an official position with such Trust as further defined in Section 2(a)(9) of
the 1940 Act.
7. "Hot-issue" is defined as securities of a public offering which
trade at a premium in the secondary market whenever such secondary market
begins.
8. "Non-cash compensation" means any form of compensation received in
connection with the sale and distribution of the Funds or the offering of MAM's
services that is not cash compensation, including but not limited to
merchandise, gifts and prizes, travel expenses, meals and lodging.
9. "Securities" or "Security" shall have the meaning set forth in
Section 2(a)(36) of the 1940 Act except that it shall not include shares of
registered open end investment companies, securities issued by the Government of
the United States (including Government agencies), short-term debt securities
which are "government securities" within the meaning of Section 2(a)(16) of the
1940 Act ("Government Securities"), bankers acceptances, bank certificates of
deposit and commercial paper. Securities also shall include futures, options and
other derivatives.
Persons covered by this Code.
This Code applies to all officers, members and control persons of MAM,
and the Trusts. This Code also applies to all persons involved in the advisory
process, including portfolio managers, traders, employees whose duties or
functions involve them in the investment process, and any employee who obtains
information concerning the investment decisions that are being made for MAM
clients and the Funds, including such employees of MAM's affiliates. All such
persons shall be designated access persons for purposes of this Code. This Code
also applies to investments by members of an access person's immediate family
(as described above), accounts in which an access person or members of his or
her family has a beneficial interest or over which an access person has
investment control or exercises investment discretion. Access persons also
remain fully subject to the obligations imposed by MAM's trading policies as
contained in its Compliance Manual.
The disinterested trustees of the Trusts shall not be considered access
persons solely by reason of their trusteeship.
Persons Covered by Other Codes of Ethics
Each Access Person or Advisory Person who would otherwise be covered by
this Code of Ethics shall be excluded from the pre-approval, reporting and other
requirements of this Code of Ethics if that Access Person or Advisory Person is
subject to another organization's code of ethics satisfactory to MAM and the
Trustees of the Trusts.
Pre-Approval
All purchases and sales (including short sales) of individual
Securities (defined above to exclude Government Securities and other items) must
be pre-approved before an order is placed. Transactions involving options,
futures and other derivatives also require pre-approval. Approval must be given
by one of the persons on Exhibit A of this Code. Approval should be obtained in
writing using the form attached as Exhibit B (or, in unusual circumstances,
promptly confirmed in writing), initialed by one of the three persons identified
on Exhibit A, and, once approved, orders must be executed within two business
days of the approval date. As necessary, before giving approval, the person
providing approval will consult (on a "no name" basis) with the appropriate
portfolio managers to determine whether the proposed sale
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<PAGE>
or accusation in any way conflicts with an investment decision being
contemplated or carried out on behalf of a MAM client or Fund. Access persons
seeking approval to acquire or dispose of individual securities should allow
sufficient time for this review and approval process.
Prohibited Purchases and Sales
No approval will be given for proposed transactions that violate the
following rules, subject to the limited exception given below. No access person
shall purchase or sell (including short sales and options), directly or
indirectly, any security in which he or she has, or by such transaction
acquires, any direct or indirect beneficial ownership, which security at the
time of such purchase or sale:
(1) is being considered for purchase or sale by a Fund or a MAM client
account;
(2) is being purchased or sold by a Fund or a MAM client account; or
(3) was purchased or sold by a Fund or a MAM client account within the
most recent 15 days.
Additionally, no access person shall engage in a transaction, directly
or indirectly, that involves an opportunity that a Fund could utilize, unless
one of the persons indicated in Exhibit A has confirmed, on behalf of the Funds,
that the Funds do not wish to take advantage of the opportunity and approves
such transaction.
These restrictions shall continue to apply until the recommendation has
been rejected or any authorization to buy or sell has been completed or
canceled. Knowledge of any such consideration, intention, recommendation or
purchase or sale is always a matter of strictest confidence.
These restrictions shall not apply to purchases or sales of securities
which receive the prior approval of a person indicated in Exhibit A where that
person, in his or her discretion, has determined that such purchases or sales
are only remotely potentially harmful to any Trust or its Funds or a MAM client
account, where they would be very unlikely to affect a highly institutional
market or where they are clearly not related economically to the securities to
be purchased, sold or held by a Fund or a MAM client account.
Additional Investment Policies
1. No Insider Trading. Access persons are prohibited from trading in or
recommending that others trade in securities on the basis of material non-public
information about the issuers of such securities. Access persons who obtain
confidential information about a security should contact MAM's General Counsel
or Chief Compliance Officer immediately. MAM will not provide any assistance to
any individual who has acted improperly with regard to confidential information
about securities. If you have any doubt as to whether you may trade particular
securities or recommend particular securities for purchase or sale, ask before
you trade or make such a recommendation.
2. Investment Through the Funds Encouraged. All access persons are
encouraged to make personal investments exclusively through the Funds or other
mutual funds, and to limit their investments in individual securities to mutual
funds or to Government Securities. No prior approval is needed to make such
investments.
3. No Trading. All individual security positions are expected to be
taken for investment purposes. Securities trading as distinct from investment is
discouraged. If an access person desires to sell a position he or she has held
for less than six months (or desires to re-acquire a recently liquidated
position), the approval request must include an explanation of the reason for
the transaction (mutual funds and Government Securities excepted).
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<PAGE>
4. Ownership Reports and New Employees. Access persons who are new
employees of MAM shall submit a schedule of current security holdings at the
time their employment commences and shall subsequently follow this Code of
Ethics in receiving approvals to liquidate or add to their security positions.
5. Private Placements. Investments in private placements and other
individual securities that are not generally available to the public may present
conflicts of interest even though such securities may not be currently eligible
for acquisition by some or all of MAM's clients or Funds. Prior approval must be
obtained before buying or selling such investments, as with any other individual
security transaction. In addition, with respect to private placements, the
approval request must indicate that the investment is being purchased (or
liquidated) on terms that are substantially the same to the terms available to
other similarly situated private investors, and that the access person does not
have any specific knowledge of an imminent public offering or any material
nonpublic information about the issuer. It is expected that any investment in a
private placement or similar security will be held for at least six months. If
the security subsequently becomes eligible for investment by a MAM client and/or
a Fund and is, in fact, purchased by such client or Fund, any access person who
owns the security will be expected to continue to hold such security for at
least six months following its public offering.
6. Private Investment Partnerships. Just as investments through mutual
funds are encouraged and investments in individual securities are discouraged in
order to minimize potential conflicts of interest and/or the appearance of any
conflict of interest, MAM likewise encourages access persons to effect their
venture investments through venture limited partnerships rather than individual
private placements. Although venture limited partnerships are preferred over
individual private placements, venture limited partnerships nevertheless can
present potential conflicts. Accordingly, while pre-approval is not required to
participate in a venture limited partnership, an access person will be expected
to report any transaction involving a venture limited partnership within 10 days
of the investment to one of the persons on Exhibit A.
7. Trade Through Charles Schwab & Co., Inc. All access persons are
strongly encouraged to execute all of their securities transactions through
Charles Schwab & Co., Inc. ("Schwab") (unless Schwab cannot execute the trade
and/or custody the securities). Accounts with other brokerage firms should not
be maintained unless specific written approval regarding the maintenance of such
accounts has been given by one of the persons on Exhibit A. All brokers other
than Schwab maintaining accounts for MAM access persons shall be instructed to
provide duplicate confirmations of all transactions to MAM and it shall be the
responsibility of the access person to ensure that MAM receives such duplicate
confirmations.
8. No Directorships. No access person may serve on the board of
directors for any private or public operating company without prior written
approval from one of the persons on Exhibit A. Such directorships are generally
discouraged because of their potential for creating conflicts of interest.
Access persons should also restrict their activities on committees (e.g.,
advisory committees or shareholder/creditor committees). This restriction is
necessary because of the potential conflict of interest involved and the
potential impediment created for MAM's clients and the Funds. Access persons
serving on boards or committees of operating companies may obtain material
non-public information in connection with their directorship or position on a
committee that would effectively preclude the investment freedom that would
otherwise be available to MAM's clients and the Funds.
9. No Special Favors. It goes without saying that no access person may
purchase or sell securities on the basis of material non-public information or
in reciprocity for allocating brokerage, buying securities in MAM's client and
Fund accounts, or any other business dealings with a third party. Information on
or access to personal investments as a favor for doing business on behalf of
MAM's clients or Funds - - regardless of what form the favor takes - - is
strictly prohibited. The appearance of a "special favor" is also sufficient to
make a personal transaction prohibited under this Code.
10. Non-Cash Compensation. No access person shall directly or
indirectly accept or make payments or offers of payments of any non-cash
compensation except as provided below:
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<PAGE>
(a) gifts that do not exceed an annual amount per access
person or other person of $100 and are not
preconditioned on achievement of a sales target or
volume of trades;
(b) an occasional meal, a ticket to a sporting event or
theater or comparable entertainment which is neither
so frequent nor so extensive as to raise any question
of propriety and is not preconditioned on achievement
of a sales target or volume of trades;
(c) payment or reimbursement in connection with meetings
held for the purpose of training or education of
access persons or other persons provided that:
(i) (in the case of access persons only) access
persons obtain MAM's written approval using
the form attached as Exhibit C to attend the
meeting and (in the case of access persons
and other persons) attendance by access
persons or other persons is not
preconditioned on the achievement of a sales
target or any other incentives pursuant to a
non-cash compensation arrangement;
(ii) the location is appropriate for the purpose
of the meeting;
(iii) the payment or reimbursement is not applied
to the expenses of guests of the access
person or other person; and
(iv) the payment or reimbursement is not
preconditioned on the achievement of a sales
target or volume of trades.
11. No Hot-Issues. No access person may purchase or receive a hot issue
in any of his or her accounts, including any accounts in which the access person
has a beneficial interest.
Reporting
1. Subject to the exceptions set forth below, every access person shall
report to the Trusts the information described in subsection 2 below with
respect to transactions in any security in which such access person has, or by
reason of such transaction acquires, any direct or indirect beneficial ownership
in the securities.
2. Every report shall be made not later than 10 days after the end of
the calendar quarter in which the transaction to which the report relates was
effected and shall be on the Form attached hereto as Exhibit D or on a form that
contains substantially the same information (i.e., a brokerage confirmation
statement) and shall contain the following information:
(a) the date of the transaction, the title and the number
of shares, and the principal amount of each security
involved;
(b) the nature of the transaction (i.e., purchase, sale
or any other type of acquisition or disposition);
(c) the price at which the transaction was effected; and
(d) the name of the broker, dealer or bank with or
through which the transaction was effected.
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<PAGE>
3. Any such report may contain a statement that making such report
should not be construed as an admission that an access person has any direct or
indirect beneficial ownership in the security to which the report relates.
4. Copies of bank statements or broker's advice containing the
information specified in subsection 2 above may be attached to the report
instead of listing the transactions.
Exceptions to Reporting Requirements and Prohibited Sales and Purchases
Notwithstanding any other provision of this Code, an access person need
not make a report:
(a) with respect to transactions effected for any account
over which such person does not have any direct or
indirect influence;
(b) where the purchase or sale of securities involves a
trustee of any Trust who is not an "interested
person" (as defined in Section 2(a)(19) of the 1940
Act) of the Trust, provided such trustee neither knew
nor, in the ordinary course of fulfilling his or her
duties as a trustee, should have known that during
the 15-day period immediately preceding or after the
date of the transaction such security was under
consideration for purchase or sale (or was purchased
or sold) by any Fund of the Trust; and
The reporting provisions and prohibitions on sales and purchases
contained in this Code also shall not apply to:
(a) purchases or sales of securities which are
non-volitional on the part of either the access
person or the relevant Trust (e.g., receipt of
gifts);
(b) purchases of securities which are part of an
automatic dividend reinvestment plan; and
(c) purchases of securities effected upon the exercise of
rights issued by an issuer pro rata to all holders of
a class of its securities, to the extent such rights
were acquired from such issuer, and the sales of such
rights so acquired.
Review
A designated compliance officer shall compare all reports of personal
securities transactions with completed and contemplated portfolio transactions
of each Fund to determine whether a violation of the Code of Ethics may have
occurred. No person shall review his or her own report. Before making any
determination that a violation has been committed by any person, the designated
compliance officer shall give such person an opportunity to supply additional
explanatory material.
If the designated compliance officer determines that a violation of the
Code of Ethics has or may have occurred, he or she shall, following consultation
with counsel to the Trusts, submit his or her written determination, together
with the transaction report, if any, and any additional explanatory material
provided by the individual, to the President or, if the President shall be the
designated compliance officer, the Chairman, who shall make an independent
determination of whether a violation has occurred.
If it is determined that a material violation has occurred, a report of
the violation shall be made to the Board of Trustees, and the trustees shall
determine the appropriate course of action. If a securities transaction of the
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<PAGE>
designated compliance officer is under consideration, the Chairman shall act in
all respects in the manner prescribed herein for the designated compliance
officer.
Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code of Ethics shall be treated as confidential, but are
subject to review as provided herein and by personnel of the Securities and
Exchange Commission.
Interpretation of Provisions
The trustees may from time to time adopt such interpretations of this
Code of Ethics as they may deem appropriate.
Exceptions.
Exceptions to the requirements contained in this Code will be permitted
only in highly unusual circumstances. Any exception must be documented and
approved by one of the persons listed in Exhibit A.
Annual Certification
Each access person shall re-certify annually his or her familiarity
with this Code of Ethics .
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EXHIBIT A
Persons Designated to Give Approval of Transactions:
Mark B. Geist
Dana E. Schmidt
David J. Thelander
<PAGE>
<TABLE>
EXHIBIT B
Montgomery Asset Management
- --------------------------------------------------------------------------------------------------------------------
Employee Trading Authorization Form
Please complete the information below to obtain authorization to purchase or sell securities in your personal
brokerage accounts. AUTHORIZATION, IF GRANTED, WILL ONLY BE VALID FOR A PERIOD OF 48 HOURS FROM THE DATE BELOW.
<CAPTION>
Employee to complete this section.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name ______________________________________________________
Security ______________________________________________________
(if an option, is it covered?)
Symbol & Exchange
______________________________________________________
(NYSE, NASDAQ, ASE, Pink Sheets, Private or other?)
Account # Schwab ______________________ DST _____________________________________________
(If new DST account, attach fund application)
Buy/Sell ______________________________ If sell, date of purchase ______________________
# of Shares or $ Amount of Fund _____________________________________
Reason for trade:
_____________________________________________________________________________________
(If "Buy" you are expected to hold the position for at
least 6 months, in compliance with MAM's Code of Ethics.)
I have read and understood MAM's Insider Trading Policy. This trade is not based
on insider information as defined in the Policy.
Employee Signature ________________________________________________
Date __________________________________
- --------------------------------------------------------------------------------------------------------------------
Compliance to complete this section.
- --------------------------------------------------------------------------------------------------------------------
Is this security currently owned or under consideration for purchase or sale in
MAM advisory accounts?
Yes _______ No _______ Date of Last Trade ___________________________
If yes, provide trading details.
Portfolio Manager(s) contacted: ___________________________________________________________________________________
____________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________
Approval Granted? Yes _______ Date _____________________
If no, provide details.
Compliance Signature* _________________________________________________________
Name
- --------------------------------------------------------------------------------------------------------------------
<FN>
*This Form may only be signed by Dana Schmidt, David Thelander, or Mark Geist.
</FN>
</TABLE>
TRADES MUST BE EXECUTED WITHIN 48 HOURS OF THE APPROVAL DATE!
<PAGE>
EXHIBIT C
Name __________________________________________________________
Name of meeting or event ______________________________________
Location ______________________________________________________
Sponsor _______________________________________________________
I certify that attendance at this meeting or event is in compliance with the
following rules:
1. Attendance is not preconditioned on achievement of sales
targets or a certain volume of trades, or any other incentives
pursuant to a non-cash compensation arrangement.
2. The location of this event is appropriate (e.g., a resort or
other location suitable for corporate events) for the purpose
of the meeting.
3. No payment or reimbursement will be applied to the expenses of
spouses or guests of the access person.
4. No payment or reimbursement is preconditioned on the
achievement of sales targets or a certain volume of trades.
5. Approximate value of payment or reimbursement to access
person: $ ____________________
Employee Signature: _____________________________ Date: ______________________
Approved: Yes ________ No _________
Compliance Officer: _____________________________
<PAGE>
EXHIBIT D
PERSONAL SECURITY TRANSACTION REPORT
(A brokerage statement containing the same information may be submitted in lieu
of this Report.)
Person for whom
Report is being made: ____________________ Quarter Ending _______, 19__
There were NO securities transactions reportable by me during the above quarter,
except those listed below. Note: All transactions are reportable (regardless of
size) except purchases and sales of shares of registered open-end investment
companies, securities issued by the Government of the United States, short term
debt securities which are "government securities" within the meaning of Section
2(a)(16) of the Act, bankers acceptances, bank certificates of deposit and
commercial paper. Bank or brokers statements may be attached if desired instead
of listing the transactions. If necessary, continue on the reverse side. If the
transaction is not a sale or purchase, mark it with a cross and explain the
nature of each account in which the transaction took place, i.e., personal,
wife, children, charitable trust, etc.
PURCHASES
Reviewing
Amount/No. Nature of Officers
Date Security of Shares Price Broker Account Initials
- -------------------------------------------------------------------------------
SALES
Date:
Signature:
<PAGE>
EXPLANATORY NOTES
This report must be filled quarterly by the 10th day of the month following the
end of the quarter and cover all accounts in which you have an interest, direct
or indirect. This includes any account in which you have "beneficial ownership"
(unless you have no interest or control over it) and non-client accounts over
which you act in an advisory or supervisory capacity.
( ) Tick if you wish to claim that the reporting of the account of the
securities transaction shall not be construed as an admission that you have any
direct or indirect beneficial ownership in such account or securities.