<PAGE>
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The
Montgomery
Funds
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Annual Report
June 30, 1996
[ARTWORK APPEARS HERE]
<PAGE>
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The Montgomery Funds
- ----------------------
Annual Report
- ----------------------
JUNE 30, 1996
======================================
C O N T E N T S
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Portfolio Highlights and Investments
Montgomery U.S. Equity Funds
- ----------------------------------------
Growth Fund.......................... 4
Micro Cap Fund....................... 7
Small Cap Fund....................... 11
Small Cap Opportunities Fund......... 15
Equity Income Fund................... 18
Montgomery Global and International
Equity Funds
- ----------------------------------------
International Growth Fund............ 21
International Small Cap Fund......... 25
Global Opportunities Fund............ 29
Global Communications Fund........... 32
Emerging Markets Fund................ 36
Montgomery Multi-Strategy Funds
- ----------------------------------------
Select 50 Fund....................... 43
Asset Allocation Fund................ 46
Montgomery Fixed-Income Funds
- ----------------------------------------
Short Government Bond Fund........... 50
California Tax-Free
Intermediate Bond Fund............... 53
Government Reserve Fund.............. 57
California Tax-Free Money Fund....... 57
Financial Statements
- ----------------------------------------
Statements of Assets and Liabilities. 64
Statements of Operations............. 68
Statements of Changes in Net Assets.. 72
Transactions in Shares with a
Beneficial Interest.................. 76
Statement of Cash Flows.............. 79
Financial Highlights................. 80
Notes to Financial Statements....... 84
Independent Auditors' Report........ 97
Tax Information..................... 98
The Montgomery Funds represent a growing family of no-load mutual funds
providing a comprehensive range of equity, fixed-income and global investment
opportunities.
We currently manage more than $3.5 billion on behalf of more than 225,000
individual investors, helping them meet their financial goals through a
combination of professional portfolio management and high-quality customer
service.
The Montgomery Funds
101 California Street
San Francisco, CA 94111
(800) 572-3863
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www.xperts.montgomery.com/1
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<PAGE>
[LOGO OF THE MONTGOMERY
FUNDS APPEARS HERE]
Invest wisely.(SM)
C H A I R M A N ' S L E T T E R
July 1996
Dear Fellow Shareholders:
At Montgomery, we believe it is important to clearly and efficiently communicate
investment information to you. To that end, we are pleased to introduce several
changes to our Annual Report. We've added a recap of market trends over the past
year to help you place our funds' performances in context. We've also expanded
our narrative reviews of each fund to include interviews with portfolio
managers, now followed by each fund's portfolio holdings. You'll notice several
other changes throughout, all designed to help you better understand your
investments. As always, we invite your comments.
With market volatility no doubt weighing on the minds of many investors, I would
like to share some of our thoughts. When the markets become rocky, it's easy to
lose sight of both long-term goals and historical trends. Although stocks are,
of course, sometimes prone to considerable short-term volatility, historically
they have outperformed every other type of investment over time. There's little
reason to think that will change. Without minimizing the anxiety that temporary
market jolts may cause, we'd like to re-emphasize our belief that one of the
most important ways to invest wisely is to take the long view.
At Montgomery, our highest priority is to earn your continued confidence with
strong, long-term performance. We know your expectations are high, and we are
determined to meet them. This year marks the sixth anniversary of The Montgomery
Funds. Over the six years, we have grown to 17 mutual funds, all of them founded
on our belief in value-added investing. This value-added approach is based on
three key components: motivation, autonomy and focus. We attract top investment
talent and motivate them by giving them a stake in the company through equity
ownership. Each investment team has the autonomy to manage as they see fit
within their investment discipline. And we surround our portfolio managers and
analysts with a dedicated team of support staff so that they can focus on what
they do best: manage your money.
We are committed to justifying your trust in us with excellent results over
time. We're pleased that our funds have made strides toward meeting that goal,
as you'll see in the following pages. Thank you for investing with us.
Sincerely,
/s/ R. Stephen Doyle
R. Stephen Doyle
Chairman and Chief Executive Officer
================================================================================
"Without minimizing the anxiety that temporary market jolts may cause, we'd like
to re-emphasize our belief that one of the most important ways to invest wisely
is to take the long view."
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<PAGE>
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The Montgomery Funds
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Annual Report
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J U N E 3 0, 1 9 9 6
STOCK AND BOND MARKET OVERVIEW
STOCKS: CAN THE GOOD TIMES LAST?
That was the question on equity investors' minds during the second half of 1995
and the first half of 1996. The U.S. stock market enjoyed nearly ideal
conditions--solid economic growth and low inflation. That good news, along with
strong corporate earnings, sunny consumer sentiment, the continuing enthusiasm
for technology stocks and other positive factors, fueled the five-year-old stock
market rally even further during the period, sending the Dow Jones Industrial
Average above 5000 in November 1995. Record high cash inflows into equity mutual
funds underpinned the rise, though the increased demand was met with a decreased
supply of stocks, as corporate share buybacks and merger and acquisition
activity continued unabated throughout the period.
Not surprisingly, all that enthusiasm for U.S. stocks drove their prices higher,
which renewed investor interest in cheaper overseas exchanges. During the second
half of 1995, both developed and emerging markets generally recovered from their
severe declines in 1994 and the first half of 1995. Their rebound continued in
the first half of 1996. Many emerging equity markets, in particular, rose
sharply in the firrst quarter of 1996, lifted by a wave of cash from the U.S.
and other developed countries. Foreign bonds also performed well--extremely
well, in the case of most emerging market debt--even though U.S. economic
strength (and the ensuing rise in interest rates) caused the U.S. dollar to
appreciate versus most major currencies, diminishing returns somewhat for U.S.
dollar-based investors.
- --------------------------------------------------------------------------------
THE S&P 500 INDEX:
PERFORMANCE JULY 1, 1995 TO JUNE 30, 1996
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
$680
$660
$640
$620
$600
$580
$560
$540
- --------------------------------------------------------------------------------
6/95 9/95 12/95 3/96 6/96
Stocks, in dramatic contrast to bonds, continued their upward trek for
most of the period from mid-1995 to mid-1996. The S&P 500 was especially
strong between November 1995 and February 1996.
- --------------------------------------------------------------------------------
U.S. TREASURY 30-YEAR BOND:
YIELD JULY 1, 1995 TO JUNE 30, 1996
[GRAPH APPEARS HERE]
7.0%
6.8%
6.6%
6.4%
6.2%
6.0%
5.8%
- --------------------------------------------------------------------------------
6/95 9/95 12/95 3/96 6/96
After posting one of its best-ever showings in 1995, the yield on the 30-
year Treasury bond rose sharply in the first quarter of 1996 on concerns
that job growth, for one, would spur inflation. (Bond yields are
inversely correlated with bond prices.) Though the bond market stablized
during the second quarter of 1996, its performance remained subdued
through the first half.
BONDS: WILL THE GOOD TIMES RETURN?
For investors in the U.S. bond market, the question wasn't "Can the good times
last?" but rather "Will the good times return?" The same economic strength that
boosted most U.S. stocks sent the bond market into a tailspin in early 1996,
boomeranging from its banner performance in 1995.
In contrast to the stable to slightly declining interest rate environment of
1995's second half, early 1996's climate was sharply more volatile. In February,
an unexpectedly strong employment report touched off a spike in long-term
interest rates, from which the bond market still hadn't recovered by the close
of the first half. Nonetheless, there was no clear sign that rampant inflation
was a real threat. Although prices increased on several commodities (including
gasoline) during the first quarter of 1996, by the end of the second quarter
economic indicators hadn't registered significant wage inflation. With no
conclusive evidence on the economy's direction, both bond and stock investors
ended the funds' fiscal year as they began it: waiting and watching.
Source: Bloomberg
2
<PAGE>
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The Montgomery Funds
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Performance Summary
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J U N E 3 0, 1 9 9 6
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/96
<TABLE>
<CAPTION>
Fund name (fund number) Inception date One year Three years Five years Since inception
Montgomery U.S. Equity Funds
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Fund (284) 9/30/93 24.85% -- -- 29.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Micro Cap Fund (294)* 12/30/94 30.95% -- -- 31.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Fund (276)* 7/13/90 39.28% 18.08% 22.36% 22.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities Fund (645)/+/ 12/29/95 -- -- -- 31.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund (293) 9/30/94 24.56% -- -- 22.34%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Global and International Equity Funds
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
International Growth Fund (296) 7/3/95 27.58% -- -- 27.58%
- ------------------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund (283) 9/30/93 26.68% -- -- 8.16%
- ------------------------------------------------------------------------------------------------------------------------------------
Global Opportunities Fund (285) 9/30/93 28.64% -- -- 15.15%
- ------------------------------------------------------------------------------------------------------------------------------------
Global Communications Fund (280) 6/1/93 17.06% 13.26% -- 14.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund (277) 3/1/92 7.74% 11.27% -- 10.26%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Multi-Strategy Funds
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Select 50 Fund (295)/+/ 10/2/95 -- -- -- 37.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund (291) 3/31/94 23.92% -- -- 27.22%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Montgomery Fixed-Income Funds
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short Government Bond Fund (279) 12/18/92 5.74% 5.48% -- 6.27%
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Intermediate Bond Fund (281) 7/1/93 6.11% -- -- 4.60%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of 6/30/96 One-day yield Seven-day yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Reserve Fund (278) 9/14/92 5.02% 4.97%
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund (292) 9/30/94 2.83% 2.89%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Performance information is for Class R (Retail) shares only.
*Closed to new investors.
+Performance is cumulative and for a limited period of time.
Past performance is no guarantee of future results. Net asset value, investment
return and principal value of an investment will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than their original cost.
Income from tax-free funds may be subject to the Alternative Minimum Tax and/or
state and local taxes.
An investment in one of our money market funds is neither insured nor guaranteed
by the government. There can be no assurance that the money market funds will be
able to maintain a stable net asset value of $1 per share. Yield may fluctuate.
There are certain risks associated with investing in foreign markets, such as
currency fluctuation and political and economic instability. There are also
additional risks associated with investing in small-cap companies. Investors are
encouraged to read the prospectus carefully before investing.
3
<PAGE>
I N V E S T M E N T R E V I E W
Q: The Montgomery Growth Fund performed in line with the S&P 500 and the
Lipper Growth Funds Average. Why?
A: The short answer is good stock selection. We don't impose any kind of top-
down, sector positioning for the Growth Fund. Instead, we apply our process-
driven investment strategy to find companies with improving growth at reasonable
valuations. And the Fund is, by design, fairly concentrated with about 45 stocks
in the portfolio. We want each position to add performance to the Fund while
maintaining reasonable diversification.
For the past 12 months, our sector weightings have not differed much from the
S&P 500--yet we performed in line with that benchmark and did so with a lower
risk profile, or beta, than the market as a whole.
Q: How were your sector weightings different from those of the S&P 500?
A: The Fund often has a very different sector profile than the market as a
whole, because we focus on stock selection, looking for undervalued growth
situations. This past year, however, we had slightly more technology exposure
than the S&P 500, and we were underweighted in the consumer staples sector. We
also had a fairly high cash position, around 20%, for most of the period. The
good news is that our cash position made the portfolio less volatile than the
rest of the market. Of course, in a rising market, if that 20% had been
invested, it may have enhanced overall fund performance. We don't seek
incremental performance by adding incremental risk; we stick to our screening
and valuation discipline, which we believe will result in relatively stable
long-term performance.
Q: What sectors did particularly well for the Fund during the year?
A: Retailing and energy stocks did well for the Fund in the past 12 months.
The retail sector is a great example of how we uncover out-of-favor stocks with
excellent potential. The market has been very bearish on retail stocks in the
past year or so, but we found some companies, like Dayton Hudson, that were
responding well to a challenging environment. Dayton Hudson demonstrated
improving growth, and we bought the stock at a very attractive price. It has
performed very well for the portfolio, already up substantially in the first
half of 1996.
Q: Were there any sectors that did not perform as well as you expected during
the year?
A: Technology stocks in aggregate were flat over the period; however, by
sticking with our stock selection process, we were able to find some
opportunities. One example is Avid Technology, which makes tools for digital
film editing. More and more, film and broadcast professionals, as well as home
video makers, are using digital tools to edit video footage on computers. That
market is growing about 30% a year. Avid is a leader in this business but
slipped by focusing more on market share than profitability. Going forward, new
management is in place, and the company is focused on profitable growth. We saw
this as an opportunity--which is why we made Avid a top priority in the Growth
Fund.
- -----------------------------------------------
The Montgomery Funds
--------------------
Growth Fund
--------------------
PORTFOLIO HIGHLIGHTS
- -----------------------------------------------
PORTFOLIO MANAGEMENT
- -----------------------------------------------
Roger Honour...........Senior Portfolio Manager
Andy Pratt....................Portfolio Manager
Michael Carmen................Portfolio Manager
Kathy Peters............................Analyst
- -----------------------------------------------
FUND PERFORMANCE
- -----------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- -----------------------------------------------
Montgomery Growth Fund
Since inception (9/30/93)................29.17%
One year.................................24.85%
- -----------------------------------------------
S&P 500 Index
Since 9/30/93............................17.83%
One year.................................26.00%
- -----------------------------------------------
Past performance is no guarantee of future results. Net asset value,
investment return and principal value will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment
Montgomery Growth Fund $20,217
S&P 500 Index/1/ $15,698
Lipper Growth
Funds Average/2/ $14,398
- --------------------------------------------------------------------------------
9/93 12/93 6/94 12/94 6/95 12/95 6/96
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common stocks
listed on the NYSE, AMEX and OTC market.
/2/ The Lipper Growth Funds Average universe consists of 619 funds.
4
<PAGE>
--------------------
The Montgomery Funds
Growth Fund
PORTFOLIO HIGHLIGHTS
Q: How has the Fund's strategy changed over the year?
A: The strategy remains constant, but it's worth reviewing for our
shareholders. We use proprietary, quantitative screening techniques to uncover
established companies (generally with market capitalizations of more than $1
billion) with improving growth, then we use fundamental research to validate
each company's prospects and future outlook. Those two steps help us find good
companies. Then, our valuation analysis helps us determine which of those
companies' stocks are good for the Growth Fund.
We stick to that disciplined process of stock selection. And, of course, we'll
change the underlying portfolio whenever good opportunities appear or existing
positions no longer seem attractive.
Q: How will the Fund be positioned for the next 12 months?
A: More of the same. Apply the process. Look for stocks that offer "growth at
the right price" and look in every sector for opportunities.
Q: Why should an investor consider the Growth Fund right now?
A: Historically, stocks have outperformed bonds over the long run, and there's
little reason to think that won't be true in the future. But in the short term,
it's wise to keep in mind that this bull market has had quite a long run. In
this environment, we believe that paying close attention to valuations--a key
component of our strategy--is especially prudent. We won't chase high-flying
stocks, because if there's a correction, those are the stocks that can get
knocked down--sometimes severely. Instead, the stocks in which the Growth Fund
invests are inexpensive relative to our projections for their companies'
prospects. We believe that our discipline of buying "growth at the right price"
will pay off, both in the current market climate and over the long term.
- ---------------------------------------
TOP TEN HOLDINGS
(as a percentage of total net assets)
HFS Inc. ..........................7.6%
Octel Communications Corporation...3.2%
International Paper Company........3.1%
Dayton Hudson Corporation..........3.1%
Masco Corporation..................2.9%
Northern Telecom Ltd. .............2.9%
Avid Technology Inc. ..............2.9%
Nordstrom, Inc. ...................2.9%
Lucent Technologies Inc. ..........2.8%
Golden West Financial Corporation..2.6%
- ---------------------------------------
TOP FIVE INDUSTRIES
- ---------------------------------------
(as a percentage of total net assets)
Telecommunications Equipment.......10.3%
Retail Trade........................9.6%
Lodging.............................8.6%
Oilfield Equipment..................4.6%
Banks/Savings and Loan..............4.5%
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
COMMON STOCKS -- 80.0%
<TABLE>
<CAPTION>
Shares Value (Note 1)
Banks/Savings and Loan -- 4.5%
<S> <C> <C> <C>
125,000 BankAmerica Corporation.......................... $ 9,468,750
105,000 Citicorp......................................... 8,675,625
425,000 Golden West Financial Corporation................ 23,800,000
------------
41,944,375
Broadcasting/Advertising -- 1.0%
300,000 Grupo Televisa S.A., GDR......................... 9,225,000
Building Materials -- 3.8%
400,000 Clayton Homes Inc. .............................. 8,000,000
900,000 Masco Corporation................................ 27,225,000
------------
35,225,000
Business Services -- 2.6%
550,000 AccuStaff Inc.+ ................................. 15,056,250
125,000 Computer Sciences Corporation+ .................. 9,343,750
------------
24,400,000
<CAPTION>
Shares Value (Note 1)
Conglomerates -- 1.0%
<S> <C> <C> <C>
225,000 Tyco International Ltd. ......................... $ 9,168,750
Diversified Financial Services -- 2.7%
185,000 American Express Company......................... 8,255,625
200,000 Associates First Capital Corporation............. 7,525,000
250,000 Norwest Corporation.............................. 8,718,750
------------
24,499,375
Health Care -- 2.3%
650,000 Healthsource Inc.+ .............................. 11,375,000
250,000 Oxford Health Plans, Inc.+ ...................... 10,265,625
------------
21,640,625
Home Appliances -- 0.8%
150,000 Whirlpool Corporation............................ 7,443,750
Leisure Time -- 1.4%
425,000 GTECH Holdings Corporation+ ..................... 12,590,625
</TABLE>
5
<PAGE>
- ---------------------
The Montgomery Funds
Growth Fund
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C> <C>
Lodging -- 8.6%
1,000,000 HFS Inc.+...................................... $ 70,000,000
430,000 Interstate Hotels Company+..................... 9,567,500
------------
79,567,500
Machinery and Tools -- 2.2%
700,000 Measurex Corporation........................... 20,475,000
Metal and Mining -- 1.7%
500,000 Freeport-McMoRan Copper, Series B.............. 15,937,500
Newspapers/Publishing -- 1.1%
400,000 World Color Press Inc.+........................ 10,150,000
Oil -- 1.2%
315,000 Belco Oil & Gas Corporation+................... 11,182,500
Oilfield Equipment -- 4.6%
275,000 Schlumberger Ltd. ........................... 23,168,750
450,000 Tidewater Inc. .............................. 19,743,750
------------
42,912,500
Pharmacy/Drugs -- 2.3%
172,700 Dura Pharmaceuticals Inc.+................... 9,681,994
250,000 Pharmacia and Upjohn Inc. ................... 11,093,750
------------
20,775,744
Pipelines -- 1.0%
235,000 Enron Corporation............................ 9,605,625
Pulp and Paper -- 3.9%
300,000 Chesapeake Corporation....................... 7,875,000
775,000 International Paper Company.................. 28,578,125
------------
36,453,125
Railroad -- 1.6%
825,000 Canadian National Railway Company............ 15,159,375
Real Estate -- 1.0%
245,000 Starwood Lodging Trust....................... 8,911,875
Retail Trade -- 9.6%
275,000 Dayton Hudson Corporation.................... 28,359,375
150,000 Gucci Group.................................. 9,675,000
600,000 Nordstrom, Inc. ............................. 26,625,000
400,000 Saks Holdings Inc.+.......................... 13,650,000
550,000 Staples, Inc.+............................... 10,690,625
------------
89,000,000
Semiconductors -- 2.4%
600,000 Analog Devices Inc.+......................... 15,300,000
450,000 International Rectifier Corporation+......... 7,256,250
------------
22,556,250
Software Systems -- 0.5%
70,000 HBO & Company................................ 4,733,750
Technology--Miscellaneous -- 3.5%
1,450,000 Avid Technology Inc.+........................ 26,734,375
143,500 Compuware Corporation+....................... 5,650,312
------------
32,384,687
<CAPTION>
Shares Value (Note 1)
Telecommunications -- 2.8%
<S> <C> <C>
675,000 Lucent Technologies Inc.+.................... $25,565,625
Telecommunications Equipment -- 10.3%
475,000 Ericsson (L.M.) Telephone Company,
Class B, ADR................................. 10,182,813
600,000 General Instruments Corporation, New+........ 17,325,000
500,000 Northern Telecom Ltd. ....................... 27,187,500
1,500,000 Octel Communications Corporation+............ 29,437,500
275,000 PictureTel Corporation+...................... 10,845,313
-----------
94,978,126
Tobacco -- 1.6%
140,000 Philip Morris Companies, Inc. ............... 14,560,000
-----------
TOTAL COMMON STOCKS
(Cost $590,005,525).............................................. 741,046,682
------------
REPURCHASE AGREEMENTS -- 20.3%
Principal amount
$47,968,000 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/28/96, to be
repurchased at $47,990,385 on 07/01/96,
collateralized by $48,927,360 market value of
U.S. Government securities, having various
maturities and various interest rates........ 47,968,000
80,000,000 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be repurchased
at $80,037,333 on 07/01/96, collateralized
by $89,458,144 market value of U.S.
Government securities, having various
maturities and various interest rates........ 80,000,000
60,000,000 Agreement with Paine Webber Group, Inc.
Tri-Party, 5.600% dated 06/28/96, to be
repurchased at $60,028,000 on 07/01/96,
collateralized by $61,201,710 market value of
U.S. Government securities, having various
maturities and various interest rates........ 60,000,000
-----------
TOTAL REPURCHASE AGREEMENTS
(Cost $187,968,000).............................................. 187,968,000
------------
TOTAL INVESTMENTS -- 100.3%
(Cost $777,973,525*)............................................. 929,014,682
OTHER ASSETS AND LIABILITIES -- (0.3)%
(Net)............................................................ (2,550,709)
------------
NET ASSETS -- 100.0%............................................. $926,463,973
============
</TABLE>
* Aggregate cost for Federal tax purposes was $781,749,602.
+ Non-income producing security. Descriptions of securities have not been
audited by Deloitte & Touche LLP.
Abbreviations:
ADR...American Depositary Receipt
GDR...Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
--------------------
The Montgomery Funds
--------------------
Micro Cap Fund
--------------------
PORTFOLIO HIGHLIGHTS
I N V E S T M E N T R E V I E W
Q: The past year has been great for the Montgomery Micro Cap Fund. Why has it
significantly outperformed its benchmark?
A: As you can see from the Russell 2000 Index, the micro cap asset class was a
strong performer. We don't focus on specific sectors, we just look for the best
stocks we can find and still be prudently diversified. We found some excellent
opportunities that fit our investment criteria, and many of them performed well.
Q: What are some stocks that performed exceptionally well?
A: One of our better investments was Whole Foods Market, Inc. Whole Foods owns
and operates the country's largest chain of natural food supermarkets. The
company is benefiting from trends toward healthier eating, environmentally
friendly products and higher-quality food. Whole Foods' management is focused on
expansion through building new stores and acquiring other natural food chains in
areas where they have limited presence.
Another successful investment was HA-LO Industries, the nation's leading
marketer and distributor of advertising specialty products. These products, such
as pens, coffee cups and apparel, are emblazoned with company logos and used for
brand building or promotion. HA-LO is a good example of a small, well-managed,
rapid-growth company that is consolidating its industry.
Q: How about a newer position that you're excited about?
A: One new investment we added to the portfolio during the fiscal year was
Granite Construction, based in Santa Cruz, California. It's involved in heavy
construction, including dams, toll roads and airports, and has historically
focused only on the California market. Over the past few years, the California
economy has been in the doldrums, and Granite acquired businesses in other
states. Now that the California economy is on the upswing, Granite is performing
well both there and elsewhere.
Q: What was an investment that did not do so well?
A: We bought stock in Circon, a medical devices company focused on the
urology/gynecology market with products that are less invasive than traditional
surgery. Circon made a large strategic acquisition but ran into problems
integrating two different sales forces. Its earnings have suffered as a result
and its stock price has dropped, but we think management can turn the situation
around, so we're holding on to the stock.
Q: Any big changes in the Fund's strategy over the last 12 months?
A: No, we remained focused on screening for stocks in the micro cap universe
(with market capitalizations of less than $500 million) with accelerating
earnings and revenue growth. We do intense, fundamental analysis to uncover what
we believe are sustainable opportunities and then subject these companies to our
rigorous valuation analysis.
- ------------------------------------------
PORTFOLIO MANAGEMENT
- ------------------------------------------
Roger Honour......Senior Portfolio Manager
Andy Pratt...............Portfolio Manager
Michael Carmen...........Portfolio Manager
- ------------------------------------------
F U N D P E R F O R M A N C E
- ------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- ------------------------------------------
Montgomery Micro Cap Fund
Since inception (12/31/94)..........31.00%
One year............................30.95%
- ------------------------------------------
Russell 2000 Index
Since 12/31/94......................26.19%
One year............................23.89%
- ------------------------------------------
Past performance is no guarantee of future results.
Net asset value, investment return and principal
value will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost.
- -----------------------------------------------
Growth of a $10,000 Investment
++++ Montgomery Micro Cap Fund $15,005
---- Russell 2000 Index/1/ $14,176
==== Lipper Small Company Growth $15,114
Funds Average/2/
[LINE CHART APPEARS HERE]
- -----------------------------------------------
1 The Russell 2000 Index is a capitalization-weighted total return index that
comprises 2,000 of the smallest-capitalized U.S. domiciled companies whose
common stock is traded in the U.S. on NYSE,AMEX and NASDQ.
2 The Lipper Small Company Growth Funds Average universe Consists of 340 funds.
7
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Micro Cap Fund
- --------------------
PORTFOLIO HIGHLIGHTS
Q: How are you positioning the Micro Cap Fund for the year ahead?
A: Well, the first thing to remember is that we really don't "position" the
Fund. We don't pick sectors; we pick stocks. We apply our disciplined process to
finding good opportunities in micro cap stocks. We make sure the Fund is well
diversified and isn't highly overweighted in any one sector.
Q: Why is now a good time to be invested in the Fund?
A: The Micro Cap Fund is closed to new investors, but existing shareholders can
continue to invest in it. We focus on fast-growing, mostly undiscovered stocks,
and that helps us invest at good valuations. The Micro Cap Fund is a way for
long-term investors who understand the risks of investing in small companies and
who are comfortable with a degree of volatility to gain exposure to an exciting,
aggressive part of the stock market.
- -------------------------------------
T O P T E N H O L D I N G S
- -------------------------------------
(as a percentage of total net assets)
AMRE, Inc. ....................3.9%
Comshare, Inc. ................2.8%
NetCOM On-Line
Communication Services Inc. ...2.6%
St. John Knits Inc. ...........2.6%
Moog Inc., Class A.............2.5%
Aames Financial Corporation....2.2%
Life Re Corporation............2.1%
Avid Technology Inc. ..........2.1%
Renaissance Hotel Group N.V. ..2.0%
Authentic Fitness Corporation..1.9%
- -------------------------------------
T O P F I V E I D U S T R I E S
- -------------------------------------
(as a percentage of total net assets)
Software Systems..............10.3%
Building Materials............10.3%
Insurance......................7.8%
Apparel and Textiles...........5.5%
Machinery and Tools............5.0%
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
COMMON STOCKS -- 90.0%
<TABLE>
<CAPTION>
Shares Value (Note 1)
Aerospace and Defense -- 2.5%
<S> <C> <C> <C>
312,200 Moog Inc., Class A+.......................... $ 7,648,900
Apparel and Textiles -- 5.5%
310,000 Authentic Fitness Corporation................ 5,773,750
176,000 St. John Knits Inc. ......................... 7,854,000
100,000 The Men's Wearhouse Inc.+.................... 3,262,500
-----------
16,890,250
Broadcasting/Advertising -- 3.6%
180,000 HA-LO Industries+............................ 4,725,000
167,500 Holopak Technologies Inc. ................... 732,813
249,900 Norwood Promotional Products Inc.+........... 5,529,038
-----------
10,986,851
Building Materials -- 10.3%
545,000 AMRE, Inc.+.................................. 11,921,875
250,000 Champion Enterprises Inc.+................... 5,218,750
200,000 Republic Group Inc. ......................... 2,850,000
160,000 Shelter Components Corporation............... 2,700,000
204,500 Southern Energy Homes Inc.+.................. 4,358,406
222,500 Triangle Pacific Corporation+................ 4,436,094
-----------
31,485,125
</TABLE>
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C> <C> <C>
Business Services -- 4.3%
106,500 Bell & Howell Holdings+...................... $ 3,474,563
50,000 HCIA Inc. +.................................. 3,162,500
78,100 On Assignment Inc.+.......................... 2,860,412
107,500 Right Management Consulting+................. 3,816,250
-----------
13,313,725
Consumer Services -- 0.5%
103,500 Team Rental Group Inc.+...................... 1,436,062
Containers and Packaging -- 0.5%
100,100 Continental Can Inc.+........................ 1,463,963
Diversified Financial Services -- 2.2%
187,500 Aames Financial Corporation.................. 6,726,563
Electrical Equipment -- 3.1%
100,000 Charter Power Systems........................ 3,450,000
54,400 Coherent, Inc.+.............................. 2,849,200
178,000 Giga-Tronics Inc. ........................... 1,958,000
118,100 Woodhead Industries, Inc..................... 1,395,056
-----------
9,652,256
</TABLE>
8
The accompanying notes are an integral part of these financial statements.
<PAGE>
THE MONTGOMERY FUNDS
Micro Cap Fund
I N V E S T M E N T S
<TABLE>
<CAPTION>
COMMON STOCKS -- continued
Shares Value (Note 1)
Electronics -- 2.0%
<S> <C> <C>
100,000 Checkpoint Systems Inc.+......................... $ 3,437,500
78,000 Cubic Corporation................................ 2,544,750
--------------
5,982,250
Food and Beverage -- 2.0%
125,000 Nature's Sunshine Products Inc. ................. 3,218,750
20,000 Pete's Brewing Company+.......................... 297,500
100,000 Whole Foods Market Inc.+......................... 2,643,750
--------------
6,160,000
Health Care -- 2.6%
90,000 Genesis Health Ventures Inc.+.................... 2,823,750
262,900 Maxicare Health Plans, Inc.+..................... 5,011,531
---------
7,835,281
Heavy Construction -- 1.4%
178,000 Granite Construction, Inc. ...................... 4,138,500
Insurance -- 7.8%
85,000 Amerin Corporation+.............................. 2,263,125
175,000 AVEMCO Corporation............................... 2,362,500
75,000 Berkley (W.R.) Corporation....................... 3,159,375
211,000 Life Re Corporation.............................. 6,514,625
135,000 PennCorp Financial Group Inc. ................... 4,286,250
190,000 Pioneer Financial Services Inc. ................. 3,158,750
125,000 U.S. Facilities Corporation...................... 2,140,625
--------------
23,885,250
Lodging -- 3.1%
110,000 Bristol Hotel Company+........................... 3,575,000
279,900 Renaissance Hotel Group N.V.+.................... 6,017,850
--------------
9,592,850
Machinery and Tools -- 5.0%
80,000 Applied Power Inc. .............................. 2,240,000
270,000 II-VI Inc.+...................................... 4,320,000
125,000 Manitowoc Company................................ 4,484,375
150,000 Measurex Corporation............................. 4,387,500
--------------
15,431,875
Medical Products -- 2.2%
323,000 Circon Corporation+.............................. 3,815,437
163,300 PCI Services Inc.+............................... 3,143,525
--------------
6,958,962
Metal and Mining -- 2.1%
100,000 IMCO Recycling, Inc. ............................ 1,800,000
195,500 Lindberg Corporation............................. 2,052,750
67,700 Tremont Corporation, New+........................ 2,445,663
--------------
6,298,413
Oil -- 1.3%
600,000 Unit Corporation+................................ 3,975,000
Oilfield Equipment -- 4.4%
195,000 Falcon Drilling Company Inc.+.................... $5,277,187
329,500 Pride Petroleum Services Inc.+................... 4,654,188
200,000 Varco International Inc.+........................ 3,625,000
--------------
13,556,375
Pharmacy/Drugs -- 0.8%
121,700 ALPHARMA Inc., Class A........................... 2,418,787
Real Estate -- 1.0%
85,000 Starwood Lodging Trust........................... 3,091,875
Restaurants -- 1.0%
125,000 Sonic Corporation+............................... 3,062,500
Retail Trade -- 3.2%
900,000 Filene's Basement Corporation.................... 4,471,875
205,000 Friedman's Inc., Class A+........................ 5,253,125
--------------
9,725,000
Semiconductors -- 3.4%
240,000 Actel Corporation+............................... 4,425,000
145,000 International Rectifier Corporation+............. 2,338,125
191,500 Unitrode Corporation+............................ 3,710,312
--------------
10,473,437
Software Systems -- 10.3%
54,000 Barra Inc.+...................................... 1,383,750
279,600 Comshare, Inc.+.................................. 8,597,700
473,300 Discreet Logic Inc.+............................. 3,224,356
90,000 Henry (Jack) & Associates........................ 3,071,250
95,200 Kronos, Inc.+.................................... 3,332,000
66,700 Manugistics Group Inc. .......................... 1,108,887
300,000 NetCOM On-Line Communication
Services Inc.+................................... 8,025,000
64,500 Veritas Software Corporation+.................... 2,765,438
--------------
31,508,381
Technology/Miscellaneous -- 2.8%
350,000 Avid Technology Inc.+............................ 6,453,125
100,000 Data Research Associates Inc.+................... 2,175,000
--------------
8,628,125
Trucking -- 1.1%
170,000 Swift Transportation Company Inc.+............... 3,251,250
--------------
TOTAL COMMON STOCKS
(Cost $212,261,149)............................................. 275,577,806
------------
</TABLE>
The accompanying notes are an integral part of these financial statments.
9
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Micro Cap Fund
- ---------------------
I N V E S T M E N T S
REPURCHASE AGREEMENTS -- 8.4%
<TABLE>
<CAPTION>
Principal Amount Value (Note 1)
<S> <C> <C>
$12,928,500 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/28/96, to
be repurchased at $12,934,533 on
07/01/96, collateralized by $13,187,070
market value of U.S. Government
securities, having various maturities
and various interest rates.................. $ 12,928,500
12,928,500 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be
repurchased at $12,934,533 on 07/01/96,
collateralized by $14,456,995 market value
of U.S. Government securities, having
various maturities and various
interest rates.............................. 12,928,500
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $25,857,000)............................................. 25,857,000
----------
TOTAL INVESTMENTS --98.4%
(Cost $238,118,149*)........................................... $301,434,806
OTHER ASSETS AND LIABILITIES -- 1.6%
(Net).......................................................... 4,782,360
---------
NET ASSETS -- 100.0%........................................... $306,217,166
============
</TABLE>
* Aggregate cost for Federal tax purposes was $238,609,828.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
--------------------
The Montgomery Funds
--------------------
Small Cap Fund
--------------------
PORTFOLIO HIGHLIGHTS
I N V E S T M E N T R E V I E W
Q: The Montgomery Small Cap Fund significantly outperformed the Russell 2000
Index. Why?
A: The 12 months ended June 30, 1996 offered a positive environment for small-
cap growth stocks. Our approach to stock selection worked very well in this
environment and is the primary reason for the Fund's excellent performance.
During the past 12 months, the vast majority of the companies in the Fund have
reported earnings in line with, or better than, our expectations. This
contributed to excellent price appreciation.
Q: What's the Fund's underlying strategy? And did it change during the year?
A: Our strategy for the Montgomery Small Cap Fund has been constant since the
Fund was created six years ago. We apply bottom-up, fundamental analysis to
stocks that fit our basic criteria for capitalization, sustainable growth and
valuation. We look for stocks with market capitalizations of between $100
million and $1 billion, stocks that offer superior growth potential at an early
or transitional stage of development, and stocks whose valuation does not fully
reflect their growth potential.
We also seek to maintain a high degree of diversification. There are usually
between 70 and 100 stocks in the portfolio; as of June 30, 1996, the Small Cap
Fund held stocks in 91 companies.
Q: What are some stocks that performed particularly well during the year?
A: We hold several good companies in the telecommunications services sector,
primarily second-tier long-distance service providers like WorldCom and Frontier
Corp. These companies are not household names as they sell primarily to small
businesses. Despite that, they demonstrated great growth during the first
quarter of 1996. Another example of a stock that performed well is APAC
Teleservices, which provides outsourced telemarketing services for all kinds of
companies. It's an example of a firm that has profited from the trend in
corporate downsizing. APAC reached our target price, though, and we sold it.
Q: And an investment that didn't do so well?
A: We try to identify companies with potential before that potential is widely
recognized, and pharmaceutical companies often fit that category, especially
those with promising drugs under development. Sometimes those drugs don't live
up to their potential. That was the case with Seprocor Inc., a drug company
that performed poorly for the Fund during the 12 months ended June 30, 1996.
Q: Any new positions you are excited about for the future?
A: We continue to see exciting opportunities in business services, and we
recently added to our position in CheckFree, a company that offers electronic
bill payment services through home computers. This is a fairly established
company, but it could be one of the first businesses to make money in the
emerging market for Internet commerce. Although this investment has not yet been
profitable, we're excited about its potential.
- ---------------------------------------------
PORTFOLIO MANAGEMENT
- ---------------------------------------------
Stuart Roberts.......Senior Portfolio Manager
Jerome Philpott.............Portfolio Manager
Bradford Kidwell............Portfolio Manager
- ---------------------------------------------
FUND PERFORMANCE
- ---------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- ---------------------------------------------
Montgomery Small Cap Fund
Since inception (7/13/90)..............22.92%
One year...............................39.28%
Five years.............................22.36%
- ---------------------------------------------
Russell 2000 Index
Since 6/30/90..........................14.65%
One year...............................23.89%
Five years.............................17.51%
- ---------------------------------------------
Past performance is no guarantee of future results.
Net asset value, investment return and principal
value will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost.
[GRAPH APPEARS HERE]
-----------------------------------------------------------------
$35,000 Growth of a $10,000 Investment
$34,253
$30,000 Montgomery Small Cap Fund
Russell 2000 Index/1/
$25,000 Lipper Small Company Growth $25,257
Funds Average/2/ $22,680
$20,000
$15,000
$10,000
-----------------------------------------------------------------
6/90 12/90 12/91 12/92 12/93 12/94 12/95 6/96
/1/ The Russell 2000 Index is a captialization-weighted total return index that
comprises 2,000 of the smallest-capitalized U.S. domiciled companies whose
common stock is traded in the U.S. on NYSE, AMEX and NASDAQ.
/2/ The Lipper Small Company Growth Funds Average universe consissts of 340
funds.
11
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Small Cap Fund
- --------------------
PORTFOLIO HIGHLIGHTS
- --------------------
Q: How are you positioning the Small Cap Fund for the next 12 months?
A: Part of our strategy is to stay fully invested; at the end of June 1996, our
cash position was 3.5%. We are always looking for new opportunities for the
Small Cap Fund, regardless of market conditions. Although macroeconomic and
other external factors don't play a big role in our stock selection process, the
threat of inflation, and possible Fed tightening to control it, is casting a
shadow over the equity markets as we go forward.
While we don't expect a continuation of the first half of 1996's excellent
performance, we have not seen a deterioration in the strong business
fundamentals and earnings power of the companies in the Fund's portfolio.
Correspondingly, we have not materially changed the Fund positions during the
first half of the year. As always, economic cycles move up and down, and we
believe that over time investors will once again be focused on earnings growth.
We continue to focus on the long term.
- -------------------------------------
T O P T E N H O L D I N G S
- -------------------------------------
(as a percentage of total net assets)
WorldCom, Inc. ..................5.1%
LCI International Worldwide
Telecommunications...............4.5%
Frontier Corporation.............3.0%
OrNda Healthcorp.................2.6%
IntelCom Group, Inc. ............2.5%
Renters Choice Inc. .............2.4%
ACC Corporation..................2.2%
National Data Corporation........2.1%
Medaphis Corporation.............2.1%
OEA Systems Inc..................2.1%
- -------------------------------------
T O P F I V E I N D U S T R I E S
- -------------------------------------
(as a percentage of total net assets)
Telecommunications..............21.7%
Business Services...............12.0%
Oil..............................6.2%
Health Care......................5.9%
Insurance........................4.9%
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
COMMON STOCKS -- 93.9%
<TABLE>
<CAPTION>
Shares Value (Note 1)
Auto/Auto Parts -- 2.0%
<S> <C> <C>
150,800 OEA Systems Inc................................ $ 5,655,000
Banks/Savings and Loans -- 2.0%
112,000 Commercial Federal Corporation................. 4,284,000
35,400 OnBancorp Inc.................................. 1,157,138
-----------
5,441,138
Biotechnology -- 1.6%
49,600 Centocor Inc................................... 1,484,900
96,000 Idec Pharmaceuticals Corporation............... 2,220,000
68,000 Ostex International Inc........................ 739,500
-----------
4,444,400
Building Materials -- 2.3%
136,000 AMRE, Inc...................................... 2,975,000
148,200 Oakwood Homes Corporation...................... 3,353,025
-----------
6,328,025
Business Services -- 12.0%
74,000 BiSYS Group, Inc............................... $ 2,779,625
118,000 Caribiner International Inc.................... 3,790,750
88,000 CheckFree Corporation.......................... 1,754,500
96,000 DecisionOne Holdings Corporation+.............. 2,304,000
63,100 DST Systems Inc................................ 2,019,200
43,500 Envoy Corporation+............................. 1,266,937
144,000 Medaphis Corporation........................... 5,715,000
34,800 Metromail Corporation.......................... 778,650
168,000 National Data Corporation...................... 5,754,000
89,000 Personnel Group America Inc.................... 2,191,625
113,300 VeriFone, Inc.................................. 4,786,925
-----------
33,141,212
Cable T.V. -- 0.4%
80,000 CellularVision USA Inc......................... 1,240,000
Capital Goods -- 2.0%
50,000 Corrections Corporation of America............. 3,500,000
150,000 Thermatrix Inc................................. 1,912,500
-----------
5,412,500
</TABLE>
12
The accompanying notes are an integral part of these financial statements.
<PAGE>
---------------------
The Montgomery Funds
---------------------
Small Cap Fund
---------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
Computers and Office Equipment -- 1.0%
<S> <C> <C>
112,000 EIS International Inc........................... $ 2,835,000
Diversified Financial Services -- 3.6%
220,000 AmeriCredit Corporation......................... 3,437,500
72,000 ContiFinancial Corporation...................... 2,124,000
97,410 Imperial Credit Industries...................... 2,977,093
100,000 Union Acceptance Corporation.................... 1,512,500
-----------
10,051,093
Electrical Equipment -- 0.6%
88,000 C-COR Electronics............................... 1,562,000
Electronics -- 1.2%
66,000 DSP Communications Inc.......................... 3,386,625
Food and Beverage -- 2.0%
96,000 Canandaigua Wine Company, Inc., Class A......... 2,892,000
99,600 Smithfield Foods Inc............................ 2,502,450
-----------
5,394,450
Health Care -- 5.9%
70,000 HealthPlans Services Corporation................ 1,610,000
112,000 Omnicare, Inc. ................................. 2,968,000
296,000 OrNda Healthcorp................................ 7,104,000
47,700 PHP Healthcare Corporation...................... 1,502,550
77,300 PhyMatrix Corporation+.......................... 1,787,562
107,800 Physician Computer Network Inc.................. 1,253,175
-----------
16,225,287
Insurance -- 4.9%
56,000 CMAC Investment Corporation..................... 3,220,000
80,000 Conseco Inc. ................................... 3,200,000
45,000 Equitable of Iowa Companies..................... 1,597,500
110,000 Everest Reinsurance Holdings Inc. .............. 2,846,250
89,400 Life Re Corporation............................. 2,760,225
-----------
13,623,975
Leisure Time -- 2.7%
80,000 K2 Resources Inc................................ 2,170,000
60,000 Regal Cinemas Inc............................... 2,737,500
81,400 Silver King Communication Inc................... 2,431,825
-----------
7,339,325
Lodging -- 1.4%
64,900 Red Lion Hotels Inc............................. 1,362,900
200,004 ShoLodge, Inc................................... 2,450,049
-----------
3,812,949
Machinery and Tools -- 0.9%
72,000 Greenfield Industries Inc. ..................... 2,394,000
Medical Products -- 3.1%
52,000 Arrow International............................. 1,449,500
120,000 I-Stat Corporation+............................. 2,265,000
76,300 Mentor Corporation.............................. 1,940,881
91,700 Physio-Control International Corporation+....... 1,610,481
56,000 Research Medical Inc............................ 1,235,500
-----------
8,501,362
Newspapers/Publishing -- 0.8%
88,000 World Color Press Inc........................... $ 2,233,000
Oil -- 6.2%
82,400 BJ Services Company............................. 2,894,300
78,200 Camco International Inc. ....................... 2,649,025
50,000 Nuevo Energy Company............................ 1,612,500
184,000 Petroleum Geo-Services, ADR..................... 5,209,500
44,000 SEACOR Holdings Inc............................. 1,958,000
107,000 Seagull Energy Corporation...................... 2,675,000
-----------
16,998,325
Pharmacy/Drugs -- 3.9%
40,000 Agouron Pharmaceuticals Inc..................... 1,555,000
104,000 AmeriSource Health Corporation, Class A......... 3,458,000
104,000 MedImmune, Inc.................................. 1,748,500
78,000 North American Vaccine Inc...................... 1,423,500
64,000 Watson Pharmaceuticals Inc...................... 2,424,000
-----------
10,609,000
Pollution Control -- 1.0%
166,000 TETRA Technologies Inc.......................... 2,905,000
Real Estate -- 0.8%
75,000 Highwoods Properties, Inc. ..................... 2,071,875
Retail Trade -- 4.4%
114,600 Black Box Corporation........................... 2,693,100
72,200 Global Direct Mail Corporation.................. 2,851,900
256,000 Renters Choice Inc.............................. 6,496,000
-----------
12,041,000
Software Systems -- 0.8%
112,000 Soft Key International Inc...................... 2,128,000
Steel -- 0.6%
100,000 Northwest Pipe Company.......................... 1,700,000
Telecommunications -- 21.7%
128,000 ACC Corporation................................. 6,184,000
270,500 Frontier Corporation............................ 8,284,063
44,000 Globalstar Telecommunication Ltd................ 1,919,500
280,000 IntelCom Group, Inc............................. 7,000,000
104,000 Intercel Inc. .................................. 2,106,000
394,200 LCI International Worldwide
Telecommunications.............................. 12,368,025
88,000 McLeod, Inc. ................................... 2,134,000
30,900 Metrocall Inc................................... 341,831
160,000 MIDCOM Communications, Inc...................... 2,280,000
148,000 Tel-Save Holdings Inc........................... 3,108,000
252,000 WorldCom, Inc................................... 13,938,750
-----------
59,664,169
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Small Cap Fund
- ---------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
Telecommunications Equipment -- 3.1%
<S> <C> <C>
53,600 CIDCO, Inc. .................................... $ 1,889,400
115,900 Comverse Technology Inc......................... 3,549,438
88,000 Scientific-Atlanta Inc. ........................ 1,364,000
42,800 Teltrend, Inc................................... 1,674,550
---------
8,477,388
Toys -- 1.0%
96,000 Galoob (Lewis) Toys Inc......................... 2,712,000
---------
TOTAL COMMON STOCKS
(Cost $180,160,059)............................................ 258,328,098
-----------
CORPORATE BONDS -- 3.3%
Principal amount
$1,000,000 All American Communications, Subordinated
Notes, 6.500% due 10/01/03...................... 900,000
2,500,000 Alliance Gaming Inc, Subordinated
Debenture, 7.500% due 09/15/03 **............... 1,500,000
4,700,000 IntelCom Group, Subordinated Notes,
Payment-in-Kind, 7.000% due 10/30/98............ 6,527,125
---------
TOTAL CORPORATE BONDS
(Cost $8,200,000).............................................. 8,927,125
---------
TOTAL SECURITIES
(Cost $188,360,059)............................................ 267,255,223
-----------
REPURCHASE AGREEMENTS -- 3.5%
Principal amount Value (Note 1)
$4,840,000 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/30/96 to be
repurchased at $4,842,259, on 07/01/96,
collateralized by $4,936,800 market value
of U.S. Government securities, having
various maturities and various
interest rates.................................. $ 4,840,000
4,840,000 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/30/96, to be repurchased at
$4,842,259, on 07/01/96, collateralized by
$5,412,218 market value of U.S. Government
securities, having various maturities and various
interest rates.................................. 4,840,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $9,680,000).............................................. 9,680,000
---------
TOTAL INVESTMENTS -- 100.7%
(Cost $198,040,059*)........................................... 276,935,223
OTHER ASSETS AND LIABILITIES -- (0.7%)
(Net).......................................................... (1,873,695)
---------
NET ASSETS -- 100.0%........................................... $275,061,528
============
</TABLE>
* Aggregate cost for Federal tax purposes was $198,049,571.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviation:
ADR....American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
--------------------
The Montgomery Funds
--------------------
Small Cap Fund
Opportunities Fund
--------------------
PORTFOLIO HIGHLIGHTS
I N V E S T M E N T R E V I E W
Q: Why did the Small Cap Opportunities Fund dramatically outperform its
benchmark?
A: Two factors drove the Fund's performance in the six months following its
launch on December 29, 1995. First was our stock selection, using the same
investment process that we apply throughout the Montgomery growth equity
discipline. Second, small-cap stocks continued to show strong earnings growth
relative to large caps in the first half of 1996. That strength was reflected in
the stock market.
Q: What was a particularly strong performer?
A: We were very pleased with a stock called American Radio, which manages radio
stations around the country and manages them well. After Congress passed the
telecommunications bill in February 1996, it became easier to acquire radio
stations. Since then, American Radio has been expanding aggressively; it doubled
in size in the last few months of the period.
Another small-cap company that helped the portfolio's performance was Aames
Financial, a leader in the field of subprime-credit home equity lending. The
company is very good at analyzing risks and managing its growth and has expanded
from California to a national level. Its earnings and revenues both grew
substantially during the past year.
Q: But not every stock did well...
A: We bought shares in MedPartners, a company that acquires and manages medical
practices. It's a great business, with earnings and revenues that are growing
quickly, but the stock is out of favor because some investors fear it's growing
too fast. Although it did not do well over the period, we believe the company's
fundamentals remain strong. Its stock is still cheap on an earnings basis, and
we think it still has strong potential.
Q: What is the Fund's current strategy?
A: We use the same basic analytical process that is characteristic of
Montgomery's growth equity discipline: proprietary, quantitative screening to
find small-cap stocks (generally defined as companies having market
capitalizations of less than $1 billion) that fit our growth criteria,
fundamental analysis to see which companies can sustain their growth and
valuation analysis to see which companies represent good bargains. In short, we
don't pick sectors; we pick stocks.
Q: How will you position the Fund for the year ahead?
A: Since we focus so intensely on stock picking, "positioning" is not part of
our strategy. We think it's always important to be diversified. At June 30,
1996, we had 57 stocks covering nine sectors and representing 26 different
industries. We will continue to seek a high degree of portfolio diversification.
We don't believe we're in a sector-driven market; returns will be driven by
stock selection.
- ----------------------------------------
PORTFOLIO MANAGEMENT
- ----------------------------------------
Roger Honour....Senior Portfolio Manager
Andy Pratt.............Portfolio Manager
Michael Carmen.........Portfolio Manager
- ----------------------------------------
F U N D P E R F O R M A N C E
- ----------------------------------------
Average annual total returns
for the periods ended 6/30/96
- ----------------------------------------
Montgomery
Small Cap Opportunities Fund
Since inception (12/29/95)........31.67%
- ----------------------------------------
Russell 2000 Index
Since 12/31/95....................10.36%
- ----------------------------------------
Past performance is no guarantee of future results.
Net asset value, investment return and principal
value will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost.
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
GROWTH OF A $10,000 INVESTMENT
$14,000 Montgomery Small Cap
Opportunities Fund
$13,000 $13,167
Russell 2000 Index/1/
$12,000
Lipper Small Company Growth
$11,000 Funds Average/2/ $11,505
$11,036
$10,000
- --------------------------------------------------------------------------------
12/95 1/96 2/96 3/96 4/96 5/96 6/96
/1/ The Russell 2000 Index is a capitalization-weighted total return index that
is comprised of 2,000 of the smallest-capitalized U.S. domiciled companies
whose common stock is traded in the U.S. on NYSE, AMEX and NASDAQ.
/2/ The Lipper Small Company Growth Funds Average universe consists of 340
funds.
15
<PAGE>
- --------------------
The Montgomery Funds
Small Cap
Opportunities Fund
PORTFOLIO HIGHLIGHTS
Q: Why should investors consider the Montgomery Small Cap Opportunities Fund
now?
A: For the same reasons they should consider it at any time. The Fund looks for
long-term capital appreciation from small, fast-growing stocks with reasonable
valuations. We don't believe in market timing.
The more aggressive sectors of the U.S. equity market have done very well
lately, and that makes some investors nervous. However, we don't chase high-
flying stocks with excessive valuations, which have the most room to fall in a
negative market environment. We believe our focus on valuations helps us
mitigate downside risk.
- ----------------------------------------
TOP TEN HOLDINGS
- ----------------------------------------
(as a percentage of total net assets)
Sanmina Corporation.................3.8%
Sunglass Hut International Inc. ....3.5%
Waters Corporation..................3.5%
Caribiner International Inc. .......3.4%
Boston Chicken Inc. ................3.3%
Medaphis Corporation................3.2%
Apple South Inc. ...................3.2%
Heftel Broadcasting Corporation,
Class A.............................3.2%
Borders Group Inc. .................2.9%
Medpartners/Mullikin, Inc. .........2.8%
- ----------------------------------------
TOP FIVE INDUSTRIES
- ----------------------------------------
(as a percentage of total net assets)
Broadcasting/Advertising...........10.0%
Health Care.........................7.7%
Business Services...................7.6%
Retail Trade........................7.5%
Medical Products....................7.2%
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
COMMON STOCKS -- 91.1%
<TABLE>
<CAPTION>
Shares Value (Note 1)
Apparel and Textiles -- 2.9%
<S> <C> <C>
79,200 Authentic Fitness Corporation.................. $ 1,475,100
25,000 St. John Knits Inc. ........................... 1,115,625
40,000 The Men's Wearhouse Inc. ...................... 1,305,000
-----------
3,895,725
Broadcasting/Advertising -- 10.0%
77,000 American Radio Systems Corporation+............ 3,330,250
146,500 Heftel Broadcasting Corporation, Class A+...... 4,321,750
60,000 Jacor Communications Inc.+..................... 1,863,750
120,000 Metromedia International Group Inc.+........... 1,470,000
118,700 Norwood Promotional Products Inc.+............. 2,626,238
-----------
13,611,988
Building Materials -- 1.2%
76,000 AMRE, Inc.+.................................... 1,662,500
Business Services -- 7.6%
17,600 BT Office Products International Inc.+......... 319,000
145,500 Caribiner International Inc.+.................. 4,674,187
110,000 Medaphis Corporation+.......................... 4,365,625
9,000 Outdoor Systems Inc.+.......................... 312,750
19,300 Whittman-Hart Inc.+............................ 704,450
-----------
10,376,012
<CAPTION>
Shares Value (Note 1)
Capital Goods -- 3.7%
<S> <C> <C>
19,000 Ballantyne of Omaha Inc.+...................... $ 294,500
145,000 Waters Corporation+............................ 4,785,000
-----------
5,079,500
Computers and Office Equipment -- 2.7%
85,000 EIS International Inc.+........................ 2,151,563
70,000 Evans & Sutherland Computer Corporation+....... 1,478,750
-----------
3,630,313
Consumer Products -- 2.9%
123,700 Borders Group Inc.+............................ 3,989,325
Consumer Services -- 0.1%
9,000 Team Rental Group Inc.+........................ 124,875
Cosmetics and Personal Care -- 0.6%
85,000 Parlux Fragrances Inc.+........................ 850,000
Diversified Financial Services -- 3.6%
70,600 Aames Financial Corporation.................... 2,532,775
75,000 Imperial Credit Industries..................... 2,292,188
-----------
4,824,963
Furniture -- 1.3%
33,600 Industrie Natuzzi Spa, ADR..................... 1,722,000
</TABLE>
16
<PAGE>
- ---------------------
The Montgomery Funds
Small Cap
Opportunities Fund
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
Health Care -- 7.7%
<S> <C> <C>
67,800 Express Scripts Inc., Class A+................ $ 3,110,325
53,000 HealthCare COMPARE Corporation+............... 2,580,437
60,000 Healthsource Inc+............................. 1,050,000
180,900 MedPartners/Mullikin Inc+..................... 3,776,288
------------
10,517,050
Insurance -- 4.0%
70,000 Berkley (W.R.) Corporation.................... 2,948,750
80,000 PennCorp Financial Group Inc. ................ 2,540,000
------------
5,488,750
Leisure Time -- 0.2%
10,000 Penske Motorsports Inc.+...................... 262,500
Lodging -- 2.5%
160,000 Renaissance Hotel Group N.V.+................. 3,440,000
Medical Products -- 7.2%
60,000 Apache Medical Systems, Inc.+................. 742,500
215,200 Cooper Companies Inc.+........................ 2,528,600
120,100 Maxicare Health Plans, Inc.+.................. 2,289,406
82,600 PCI Services Inc.+............................ 1,590,050
90,000 Sola International, Inc.+..................... 2,587,500
------------
9,738,056
Newspapers/Publishing -- 2.5%
90,000 National Media Corporation+................... 1,586,250
72,800 World Color Press Inc.+....................... 1,847,300
------------
3,433,550
Pharmacy/Drugs -- 0.5%
32,300 ALPHARMA Inc., Class A........................ 641,962
Real Estate -- 0.9%
45,500 Redwood Trust Inc. ........................... 1,262,625
Restaurants -- 6.5%
162,300 Apple South Inc. ............................. 4,341,525
138,700 Boston Chicken Inc.+.......................... 4,499,081
------------
8,840,606
Retail Trade -- 7.5%
170,000 Kenneth Cole Productions Inc.+................ 3,357,500
197,500 Sunglass Hut International Inc.+.............. 4,801,719
125,000 Vans Inc. +................................... 2,117,188
------------
10,276,407
Semiconductors -- 4.8%
190,000 Sanmina Corporation+.......................... 5,130,000
73,600 Unitrode Corporation+......................... 1,426,000
------------
6,556,000
</TABLE>
<TABLE>
<CAPTION>
Shares Value (Note 1)
Software Systems -- 6.6%
<S> <C> <C>
5,000 Aspect Development Inc.+...................... $ 126,875
10,000 I2 Technologies Inc.+......................... 431,250
390,000 Meridian Data Inc.+........................... 3,510,000
10,000 Planning Sciences International PLC, ADR+..... 221,250
225,000 Viewlogic Systems Inc.+....................... 3,107,812
73,000 Wall Data Inc.+............................... 1,578,625
------------
8,975,812
Technology -- Miscellaneous -- 1.4%
100,000 Avid Technology Inc.+......................... 1,843,750
Telecommunications Equipment -- 1.1%
37,000 PictureTel Corporation+....................... 1,459,188
Utilities -- Telecommunications -- 1.1%
75,000 Palmer Wireless Inc., Class A+................ 1,514,062
------------
TOTAL COMMON STOCKS
(Cost $125,639,891)........................................... 124,017,519
------------
REPURCHASE AGREEMENTS -- 12.8%
Principal Amount
$8,702,000 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/28/96, to be
repurchased at $8,706,061 on 07/01/96,
collateralized by $8,876,040 market value of
U.S. Government securities, having various
maturities and various interest rates......... 8,702,000
8,702,000 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be repurchased at
$8,706,061 on 07/01/96, collateralized by
$9,730,810 market value of U.S. Government
securities, having various maturities and
various interest rates........................ 8,702,000
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $17,404,000)............................................ 17,404,000
------------
TOTAL INVESTMENTS -- 103.9%
(Cost $143,043,891*).......................................... 141,421,519
OTHER ASSETS AND LIABILITIES -- (3.9%)
(Net)......................................................... (5,281,306)
------------
NET ASSETS -- 100.0% $136,140,213
============
</TABLE>
* Aggregate cost for Federal tax purposes was $143,254,355.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviation:
ADR American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
- ---------------------------------------
The Montgomery Funds
Equity Income Fund
PORTFOLIO HIGHLIGHTS
- ---------------------------------------
PORTFOLIO MANAGEMENT
- ---------------------------------------
<TABLE>
<CAPTION>
John Brown.....Senior Portfolio Manager
- ---------------------------------------
FUND PERFORMANCE
- ---------------------------------------
<S> <C>
Average annual total returns
for the periods ended 6/30/96
- ---------------------------------------
Montgomery Equity Income Fund
Since inception (9/30/94)........22.34%
One Year.........................24.56%
- ---------------------------------------
S&P 500 Index
Since 9/30/94....................26.77%
One year.........................26.00%
- ---------------------------------------
</TABLE>
Past performance is no guarantee of
future results. Net asset value,
investment return and principal value
will fluctuate so that shares, when
redeemed, may be worth more or less
than their original cost.
I N V E S T M E N T R E V I E W
Q: The Montgomery Equity Income Fund performed ahead of its peers in the
Lipper Equity Income Funds Average and slightly behind the broad Standard &
Poor's 500 Index. Why?
A: The Equity Income Fund's performance will often differ from its benchmarks
because we look for stocks that are currently out of favor with the market as
a whole. In a strong market, the Fund may well lag the market because of our
focus on stability and avoiding risk.
Q: Which of your stocks or sectors performed particularly well during the
period?
A: Non-cyclical companies, such as drug manufacturers like American Home
Products and Bristol-Myers Squibb, were undervalued a year ago, and their
performance was good over the past 12 months. We also did well with consumer
stocks, including beer maker Anheuser-Busch.
Q: What about underperforming sectors?
A: Our biggest underperformer was electric utilities, which accounted for
about 12% of the portfolio at the end of the period. Investors didn't like
utility stocks last year, choosing instead to chase higher returns in more
aggressive stocks. Also, rising interest rates have dampened utility stock
performance.
Q: Any significant shifts in the Equity Income Fund strategy?
A: None at all in terms of our overall strategy: We invest in high-quality,
dividend-paying companies that we believe are undervalued--companies with
strong balance sheets and stable cash flows. Because we target undervalued
stocks, the Fund has the potential to generate capital appreciation, as it did
over the past year. We believe that dividends help cushion the Fund against
market volatility; the Fund's yield at year-end (before expenses) was 3.8%.*
Based on our desire for a high level of diversification, at June 30, 1996, the
Fund held 57 stocks across 22 different industries.
Q: How are you positioning the Fund for the year ahead?
A: We shift our focus as market conditions change. For example, we began
adding to our utility positions toward the end of the period because we think
this sector will come back into favor. We're taking a slightly defensive
stance, which seems appropriate given the high valuations found in the U.S.
equity market. We've also begun moving into a cyclical sector we consider to
be undervalued: paper and forest products.
* Yield will fluctuate.
[LINE GRAPH APPEARS HERE]
Growth of a $10,000 Investment
Montgomery Equity Income Fund $14,232
S&P 500 Index/1/ $15,140
Lipper Equity Income Funds Average/2/ $13,623
/1/ The Standard & Poor's 500 Index is composed of 500
widely held common stocks listed on the NYSE, AMEX
and OTC market.
/2/ The Lipper Equity Income Funds Average universe
consists of 140 funds.
18
<PAGE>
---------------------------------------
The Montgomery Funds
Equity Income Fund
PORTFOLIO HIGHLIGHTS
---------------------------------------
Q: Why should an investor consider the Equity Income Fund right now?
A: The Fund offers what we believe is a relatively low-risk way to stay
invested in stocks. The U.S. equity market has had a tremendous run over the
last 18 months, and we're starting to see more volatility. The long period of
economic growth we've enjoyed may be nearing the end, too. Long-term investors
should want to stay invested in the market, of course, since we don't believe
in market timing. But we expect a flight to quality in the year ahead. People
may well begin moving into less speculative investments. That's the kind of
environment in which the Equity Income Fund can continue to perform well. The
Fund's risk-averse positioning should help it weather any volatility in the
coming months, and it could help nervous investors sleep a little easier at
night.
------------------------------------------
TOP TEN HOLDINGS
------------------------------------------
(as a percentage of total net assets)
<TABLE>
<S> <C>
Philip Morris Companies, Inc........ 4.3%
UST Inc............................. 3.5%
Bristol-Myers Squibb Company........ 3.4%
Amoco Corporation................... 3.4%
Anheuser-Busch Companies Inc........ 3.0%
Baltimore Gas & Electric Company.... 2.5%
Wachovia Corporation................ 2.5%
SAFECO Corporation.................. 2.5%
Exxon Corporation................... 2.5%
Penney (J.C.) Company, Inc.......... 2.4%
</TABLE>
------------------------------------------
TOP FIVE INDUSTRIES
------------------------------------------
(as a percentage of total net assets)
<TABLE>
<S> <C>
Electric Utilities.................. 11.8%
Oil................................. 11.4%
Tobacco............................. 10.1%
Banks/Savings and Loans............. 8.2%
Pulp and Paper...................... 8.0%
</TABLE>
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
COMMON STOCKS -- 95.3%
<TABLE>
<CAPTION>
Shares Value (Note 1)
<C> <S> <C>
Auto/Auto Parts --1.9%
1,500 Eaton Corporation.....................................$ 87,938
6,000 Genuine Parts Company................................. 274,500
-------
362,438
Banks/Savings and Loans -- 8.2%
10,000 Banc One Corporation................................. 340,000
5,500 Great Western Financial Corporation................... 131,313
7,000 KeyCorp............................................... 271,250
2,000 Morgan (J.P.) & Company Inc........................... 169,250
5,500 National City Corporation............................. 193,187
11,000 Wachovia Corporation................................. 481,250
-------
1,586,250
Building Materials -- 1.6%
10,000 Masco Corporation..................................... 302,500
Consumer Products -- 2.4%
6,700 Minnesota Mining & Manufacturing
Company............................................... 462,300
Chemicals -- 3.2%
10,000 Betz Laboratories Inc................................. 438,750
3,500 PPG Industries Inc.................................... 170,625
-------
609,375
Computers and Office Equipment -- 1.0%
4,000 Pitney Bowes Inc...................................... 191,000
Cosmetics and Personal Care -- 1.6%
7,500 Tambrands Inc......................................... 306,563
Electric Utilities -- 11.8%
17,000 Baltimore Gas & Electric Company..................... 482,375
9,500 Central & South West Corporation...................... 275,500
8,000 Florida Progress Corporation.......................... 278,000
17,500 PacifiCorp............................................ 389,375
2,500 Union Electric Company............................... 100,625
15,500 Western Resources Inc................................. 463,063
10,000 Wisconsin Energy Corporation......................... 288,751
-------
2,277,689
Electrical Equipment -- 1.0%
3,000 Hubbell Inc., Class B................................. 198,750
Food and Beverage -- 6.1%
7,700 Anheuser-Busch Companies Inc.......................... 577,500
5,000 General Mills Inc..................................... 272,500
10,550 Heinz (H.J.) Company.................................. 320,456
-------
1,170,456
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
- -------------------------------
The Montgomery Funds
Equity Income Fund
- -------------------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
Gas Utilities -- 4.0%
<C> <S> <C>
3,000 Brooklyn Union Gas Company............................$ 81,750
5,500 National Fuel Gas Company............................. 198,000
10,500 NICOR Inc. ........................................... 297,938
5,500 Questar Corporation................................... 187,000
-------
764,688
Insurance -- 7.7%
5,000 American General Corporation.......................... 181,875
4,600 Marsh & McLennan Companies............................ 443,900
13,500 SAFECO Corporation.................................... 478,406
7,000 St. Paul Companies, Inc. ............................. 374,500
-------
1,478,681
Machinery and Tools -- 1.0%
4,500 Cooper Industries Inc. ............................... 186,750
Medical Products -- 1.4%
6,000 Baxter International Inc. ............................ 283,500
Newspapers/Publishing -- 1.4%
6,000 McGraw-Hill Companies Inc. ........................... 274,500
Oil -- 11.4%
9,000 Amoco Corporation..................................... 651,375
1,600 Atlantic Richfield Company............................ 189,600
4,500 Chevron Corporation................................... 265,500
8,500 Dresser Industries Inc. .............................. 250,750
5,500 Exxon Corporation..................................... 477,812
4,500 Texaco Inc. .......................................... 377,437
-------
2,212,474
Pharmacy/Drugs -- 5.9%
4,900 American Home Products Corporation.................... 294,612
7,300 Bristol-Myers Squibb Company.......................... 657,000
3,400 Warner-Lambert Company................................ 187,000
-------
1,138,612
Pulp and Paper -- 8.0%
8,000 Consolidated Papers Inc. ............................. 416,000
5,000 Kimberly-Clark Corporation............................ 386,250
4,500 Potlatch Corporation.................................. 176,062
3,500 Union Camp Corporation................................ 170,625
9,500 Weyerhaeuser Company.................................. 403,750
-------
1,552,687
Railroad -- 1.0%
2,200 Norfolk Southern Corporation.......................... 186,450
Retail Trade -- 2.4%
9,000 Penney (J.C.) Company, Inc. .......................... 472,500
Telecommunications -- 2.2%
5,500 Nynex Corporation..................................... 261,250
4,000 Southern New England
Telecommunications Corporation........................ 168,000
-------
429,250
Tobacco -- 10.1%
10,000 American Brands Inc. ................................. 453,750
8,000 Philip Morris Companies, Inc. ........................ 832,000
19,500 UST Inc. ............................................. 667,874
-------
1,953,624
TOTAL COMMON STOCKS
(Cost $17,445,681)................................................ 18,401,037
----------
REPURCHASE AGREEMENT -- 4.5%
(Cost $866,000)
Principal amount
$866,000 Agreement with Bear Stearns Tri-Party,
5,600% dated 06/28/96, to be purchased
at $866,404 on 07/01/96, collateralized
by $968,384 market value of U.S.
Government securities, having various
maturities and various interest rates................. 866,000
-------
TOTAL INVESTMENTS -- 99.8%
(Cost $18,311,681*)............................................... 19,267,037
OTHER ASSETS AND LIABILITIES -- 0.2%
(Net)............................................................. 46,811
------
NET ASSETS -- 100.0%..............................................$ 19,313,848
=============
</TABLE>
*Aggregate cost for Federal tax purposes was $18,315,700.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
--------------------
The Montogmery Funds
--------------------
International
Growth Fund
--------------------
PORTFOLIO HIGHLIGHTS
INVESTMENT REVIEW
Q: What factors helped the Montgomery International Growth Fund outperform
its relevant benchmarks for the year?
A: It was a positive environment for stocks: Interest rates declined, growth
was moderate and the markets we invest in performed well during the year. Good
bottom-up stock picking focused on sectors we felt had the potential to
outperform fueled Fund performance for the year.
Q: What sectors did particularly well?
A: Our economic outlook led us to focus on consumer stocks--retail, apparel
and textiles--in Europe and Japan. For example, we invested in sporting goods
manufacturer Adidas after it went public in 1995, and it has performed very
well. A related sector we like is luxury goods, particularly companies with a
global market like Gucci and Bulgari. These companies benefited from good
economic growth in the United States and elsewhere and they performed
handsomely for the Fund.
Q: What about investments that did not live up to expectations?
A: Two examples come to mind; both are good companies in which we invested at
the wrong time. The first was SoftQuad, a Canadian software company with a
tremendous product for building sites on the Internet's World Wide Web. We
invested in SoftQuad in February 1996--just before the market turned lukewarm
on Internet stocks. We still believe in the stock for the long term, but it
did not perform well over the Fund's fiscal year. Another example is Canadian
biotech company Biochem Pharma. Again, this is a case of a good company with
solid prospects, but the market for biotech companies has not performed well.
We're hanging onto it, though.
Q: Have you changed your strategy for the Fund?
A: Not at all. We combine bottom-up stock picking with thorough sector and
country analysis to uncover the best investment opportunities in the
international universe. Our sector specialists provide us with insights into
long-term trends that we believe will support the earnings of our companies.
Of course, we always concentrate the bulk of our research efforts on finding
stocks with good potential at good relative value. We take a focused approach
to stock picking, but we'll always be well diversified. At the end of the
period, the Fund's portfolio included approximately 69 stocks from 22
countries, with Japan representing the largest single exposure at 17% of
common stock holdings.
Q: How are you positioning the Fund for the upcoming year?
A: We remain excited about the consumer-related sectors and we like
valuations in the technology sector in Europe and Japan.
==============================================
PORTFOLIO MANAGEMENT
- ----------------------------------------------
Oscar A. Castro .... Senior Portfolio Manager
John Boich ......... Senior Portfolio Manager
==============================================
FUND PERFORMANCE
- ----------------------------------------------
Aggregate total returns
for the period ended 6/30/96
- ----------------------------------------------
Montogomery
International Growth Fund
Since inception (7/3/95) .............. 27.58%
One year .............................. 27.58%
- ----------------------------------------------
MSCI EAFE Index
Since 6/30/95 ......................... 12.54%
One year .............................. 12.54%
- ----------------------------------------------
Past performance is no guarantee of future results. Net Asset value, investment
return and principal value will fluctuate so that shares, when redeemed may be
worth more or less than their original cost.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
6/95 6/96
MONTGOMERY INTERNATION GROWTH FUND $10,000 $12,758
MSCI EAFE INDEX/1/ $10,000 $11,328
LIPPER INTERNATIONAL GROWTH FUND'S AVERAGE/2/ $10,000 $11,548
/1/ The Morgan Stanley Capital International EAFE Index is composed of 18
developed market countries in Europe, Australia and the Far East.
/2/ The Lipper International Growth Funds Average universe consists of 296
funds.
21
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
International
Growth Fund
- ----------------------
PORTFOLIO HIGHLIGHTS
==================================================
TOP TEN HOLDINGS
- --------------------------------------------------
(as a percentage of total net assets)
SGL Carbon AG.............................. 2.6%
Sandoz AG.................................. 2.1%
Bombardier Inc., Class B................... 2.0%
Compagnie Financiere Richemont, Series A... 2.0%
Astra AB, Class A.......................... 2.0%
Korea Mobile Telecommunications............ 1.9%
Dixons Group, ORD.......................... 1.9%
Sony Corporation........................... 1.9%
W.M. Data AB, Class B...................... 1.8%
Nippon Television Network Corporation...... 1.7%
==================================================
TOP FIVE COUNTRIES
- --------------------------------------------------
(as a percentage of total net assets)
Japan...................................... 15.3%
Great Britain.............................. 10.5%
France..................................... 8.2%
Germany.................................... 7.0%
Italy...................................... 6.2%
Q: Why would an investor be interested in this Fund?
A: Economic growth is accelerating in the countries we follow, and that can
generate corporate earnings momentum. In fact, we see a positive environment for
stocks around the world due to moderate growth, low inflation and low interest
rates. We also see much better valuations as a whole in Europe and Japan than in
the United States. One of the biggest risks is that worldwide growth will spark
inflation and higher rates. But we continue to remain optimistic about the year
ahead and, of course, the long-term potential of international developed
markets.
PORTFOLIO INVESTMENTS
June 30, 1996
COMMON STOCKS -- 89.3%
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
Australia--1.0%
19,306 National Australia Bank, Ltd., (Banks)........$ $178,267
Brazil--1.3%
3,400 Telebras, ADR (Telephone/Networks)............ 236,725
Canada--5.0%
8,360 Biochem Pharma, Inc.+ (Pharmacy/Drugs) 312,978
24,700 Bombardier Inc., Class B
(Machinery and Tools)......................... 369,980
41,400 SoftQuad International, Inc.+
(Software Systems)............................ 232,875
-------
915,833
Finland--1.4%
6,800 Nokia Corp AB, Series A
(Telecommunications/Equipment)................ 250,086
France--8.2%
1,825 Accor (Lodging)...............................$ 255,431
10,000 Assurances General de France (Insurance)...... 270,982
7,342 Banque Nationale de Paris, ORD (Banks)........ 257,899
1,600 Bouygues (Heavy Construction)................. 178,529
1,000 Christian Dior S.A.
(Cosmetics and Personal Care)................. 130,243
13,640 Coflexip, Sponsored ADR
(Oilfield Equipment).......................... 238,700
1,350 Grand Optical Photo Service (Retail Trade) 173,990
-------
1,505,774
Germany--5.5%
3,250 Adidas AG (Footware).......................... 273,354
410 Axel Springer Verlag, Class A
(Newspapers/Publishing)....................... 256,140
4,010 SGL Carbon AG (Metals and Mining)............. 469,391
-------
998,885
</TABLE>
22
The accompanying notes are an integral part of these financial statements
<PAGE>
--------------------
The Montgomery Funds
--------------------
International
Growth Fund
--------------------
INVESTMENTS
<TABLE>
<CAPTION>
COMMON STOCKS--continued
Shares Value (Note 1)
<S> <C>
Great Britain--10.5%
322,900 Aegis Group, ORD+
(Broadcasting/Advertising)....................$ 263,497
16,000 Bell Cablemedia PLC, ADR+
(Cable Television)............................ 264,000
50,400 Cortec International, Ltd.+ (Biotechnology)... 242,852
42,124 Dixons Group, ORD (Retail Trade).............. 346,038
25,900 Ethical Holdings PLC, ADR+
(Pharmacy/Drugs).............................. 252,525
87,500 Railtrack Group PLC+ (Railroad).............. 297,852
21,100 Reuters Holding PLC
(Broadcasting/Advertising).................... 255,487
-------
1,922,251
Hong Kong--2.6%
74,405 First Pacific Company (Conglomerates)......... 114,384
197,000 Giordano International, Ltd. (Retail Trade)... 190,873
205,000 Goldlion Holdings, Ltd., ORD
(Apparel/Textiles)............................ 176,113
-------
481,370
Ireland--2.7%
246,498 Anglo Irish Bank Corporation (Banks)........... 242,175
4,400 Elan Corporation PLC, ADR.+
(Pharmacy/Drugs)............................... 251,350
-------
493,525
Israel--3.0%
12,300 Gilat Satellite Network, Ltd.+
(Telecommunications/Wireless)................. 268,294
7,400 Teva Pharmaceuticals, ADR
(Pharmacy/Drugs).............................. 280,737
-------
549,031
Italy--6.2%
15,600 Bulgari SpA (Retail Trade).................... 249,519
4,740 Gucci Group (Retail Trade).................... 305,730
408,000 Olivetti & Company SpA
(Computers and Office Equipment).............. 220,281
77,000 Telecom Italia Mobile Di Risp
(Telephone/Wireless).......................... 105,063
46,800 Telecom Italia Mobile SpA
(Telephone/Wireless).......................... 104,645
41,400 Telecom Italia Risp
(Telephone/Regional-Local).................... 71,489
34,500 Telecom Italia SpA
(Telephone/Regional-Local).................... 74,214
------
1,130,941
Japan--15.3%
5,200 Amway Japan NPV (Household Products)..........$ 261,426
10,000 Canon Sales Company
(Computers and Office Equipment).............. 278,793
24 DDI Corporation (Telephone/Networks).......... 209,726
11,000 Honda Motor Company (Auto/Auto Parts)......... 285,558
12,000 Loax (Retail Trade)........................... 287,386
13,000 Mitsukoshi, Ltd. (Retail Trade)............... 139,031
34,000 Nippon Fire and Marine Insurance
Company (Insurance)........................... 222,212
1,030 Nippon Television Network Corporation
(Broadcasting/Advertising).................... 320,110
7 NTT Data Communication Systems
Corporation (Software Systems)................ 209,872
5,200 Sony Corporation (Electronics)................ 342,706
18,000 Tokio Marine & Fire Insurance Company
(Insurance)................................... 240,219
-------
2,797,039
Korea--2.6%
290 Korea Mobile Telecommunications
(Telephone/Wireless).......................... 354,635
7,500 Korea Mobile Telecommunications, ADS
(Telephone/Wireless).......................... 128,438
-------
483,073
Mexico--1.1%
37,100 Apasco S.A. de C.V. (Building Materials)...... 204,698
Morocco--1.1%
14,700 Banque Marocaine de Commerce, GDR +
(Banks)....................................... 209,475
Netherlands--2.5%
3,576 ABN Amro Holdings (Banks)..................... 192,062
11,200 Toolex Alpha N.V. + (Machinery and Tools)..... 273,000
-------
465,062
Norway--4.7%
13,200 Netcom ASA + (Telephone/Wireless)............. 141,355
9,700 Stolt-Nielson S.A., ADR (Shipping)............ 180,056
61,500 UNI Storebrand ASA, Class A + (Insurance)..... 276,700
10,700 Union Bank of Norway (Banks).................. 262,140
-------
860,251
Peru--0.6%
53,500 Telefonica del Peru, Class B
(Telephone/Networks).......................... 108,621
Spain--1.7%
2,400 Empresa Nacional de Electricidad (Endesa)
(Electric Utilities).......................... 149,807
9,000 Telefonica Nacional de Espana, ORD
(Telephone/Networks).......................... 165,930
-------
315,737
</TABLE>
23
The accompanying notes are an integral part of these financial statements
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
International
Growth Fund
- --------------------
INVESTMENTS
<TABLE>
<CAPTION>
COMMON STOCKS -- continued
Shares Value (Note 1)
<S> <C>
Sweden -- 3.8%
8,100 Astra AB, Class A (Pharmacy/Drugs)............$ 358,450
5,300 W.M. Data AB, Class B
(Software Systems)............................ 336,203
-------
694,653
Switzerland -- 5.8%
230 Compagnie Financiere Richemont, Series A
(Holding)..................................... 364,320
290 Danzas Holdings (Airfreight Couriers)......... 315,520
330 Sandoz AG (Pharmacy/Drugs).................... 377,784
-------
1,057,624
United States -- 2.7%
7,100 Associates First Capital Corporation+
(Diversified Financial Services).............. 267,138
8,500 Designer Holdings, Ltd.+
(Apparel and Textiles)........................ 226,313
-------
493,451
-------
TOTAL COMMON STOCKS
(Cost $16,273,923)......................................... 16,352,372
----------
PREFERRED STOCKS -- 1.5%
Germany-- 1.5%
(Cost $269,844)
5,595 Fielmann AG (Health Care)..................... 268,592
-------
TOTAL SECURITIES
(Cost $16,543,767)......................................... 16,620,964
----------
REPURCHASE AGREEMENTS -- 9.2%
Principal amount Value (Note 1)
$840,000 Agreement with Barclays de Zoete Wedd
Tri-Party,5.600% dated 06/28/96, to be
repurchased at $840,392 on 07/01/96,
collateralized by $856,800 market value of
U.S. Government securities, having various
maturities and various interest rates.........$ 840,000
840,000 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be repurchased
at $840,392 on 07/01/96, collateralized
by $939,311 market value of U.S.
Government securities, having various
maturities and various interest rates......... 840,000
-------
TOTAL REPURCHASE AGREEMENTS
(Cost $1,680,000).......................................... 1,680,000
---------
TOTAL INVESTMENTS -- 100.0%
(Cost $18,223,767*)........................................ 18,300,964
OTHER ASSETS AND LIABILITIES -- 0.0%
(Net)...................................................... 2,888
-----
NET ASSETS -- 100.0%.......................................$ 18,303,852
==========
</TABLE>
* Aggregate cost for Federal tax purposes was $18,245,261.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
ADR ..... American Depositary Receipt
ADS ..... American Depositary Share
GDR ..... Global Depositary Receipt
ORD ..... Ordinary
24
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
International
Small Cap Fund
--------------------
PORTFOLIO HIGHLIGHTS
INVESTMENT REVIEW
Q: Why did the Montgomery International Small Cap Fund outperform its
benchmark during the year?
A: In the still-embryonic sector of international small caps, stock picking
is the biggest driver of returns. Our success at finding high-quality, high-
growth small-cap stocks outside the United States sparked the Fund's strong
performance.
Q: What sectors and stocks did particularly well during the past year?
A: We entered the year excited by the prospects of a technology boom.
Personal computers have been (and remain) far less prevalent in Europe and
Japan than in the United States, and with prices coming down while
functionality is on the rise, we expected an explosion of technology sales.
For example, Sweden-based W.M. Data provides information-technology consulting
and data processing to businesses. It has grown at 25% a year and trades at
only 17 times current earnings. This stock turned in a great performance
during the year. Another strong performer has been a U.K. firm called
M.A.I.D., which has created a better interface between the user and on-line
data. The stock price tripled in 1995 and was up 25% in the first six months
of 1996.
Another trend that generated good investment opportunities in fiscal 1996 was
the growing oil services sector. The cost of exploration has declined, and
demand for exploration and extraction services and technology has been
increasing. We like a Dutch company, IHC Caland, which was up 47% in the first
six months of 1996.
Q: Any stocks that didn't live up to your expectations?
A: One Austrian company we liked, V.A.E., is the global leader in providing
railroad turnouts--that is, sidings, switches and related technology. The rail
business is in a period of growth all over the world, but V.A.E. has not been
as aggressive at pursuing this business as we had anticipated. The stock
performed poorly, although we still believe in its potential.
Q: Has your strategy changed at all over the year?
A: Not really. This Fund thrives on good, focused stock picking, and it takes
a lot of hands-on, fundamental research to find smaller companies with above-
average growth. We use our macroeconomic model to lead us to sectors with
superior potential, but the bulk of our work is stock picking.
==================================================
PORTFOLIO MANAGEMENT
- --------------------------------------------------
Oscar A. Castro ......... Senior Portfolio Manager
John Boich .............. Senior Portfolio Manager
==================================================
FUND PERFORMANCE
- --------------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- --------------------------------------------------
Montgomery
International Small Cap Fund
Since inception (9/30/93) ................. 8.16%
One year .................................. 26.68%
- --------------------------------------------------
MSCI EAFE Index
Since 9/30/93 ............................. 8.88%
One year .................................. 13.28%
- --------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate so that shares, when redeemed, may
be worth more or less than their original cost.
Growth Of A $10,000 Investment
[LINE GRAPH APPEARS HERE]
$13,000 Montgomery International Small Cap Fund
MSCI EAFE Index/1/ $12,893
$12,500 Lipper International Small Cap $12,635
Funds Average/2/ $12,406
$12,000
$11,500
$11,000
$10,500
$10,500
9/93 12/93 6/94 12/94 6/95 12/95 6/96
/1/ The Morgan Stanley Capital International EAFE Index is composed of 18
developed market countries in Europe, Australia and the Far East.
/2/ The Lipper International Small Cap Funds Average universe consists of 12
funds.
25
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
International
Small Cap Fund
- --------------------
PORTFOLIO HIGHLIGHTS
==========================================
TOP TEN HOLDINGS
- ------------------------------------------
(as a percentage of total net assets)
SGL Carbon AG ....................... 2.6%
Nippon Television Network
Corporation ......................... 2.4%
W.M. Data AB, Class B ............... 2.4%
Adidas AG ........................... 2.2%
Anglo Irish Bank Corporation ........ 2.1%
Cortefiel SA ........................ 2.0%
Nissin Company ...................... 2.0%
Loax ................................ 2.0%
Fielmann AG ......................... 1.9%
Coflexip, Sponsored ADR ............. 1.8%
==========================================
TOP FIVE COUNTRIES
- ------------------------------------------
(as a percentage of total net assets)
Japan .............................. 16.9%
Great Britain ....................... 8.6%
Germany ............................. 8.4%
Sweden .............................. 8.3%
Norway .............................. 8.2%
Q: What sectors do you like for the year ahead?
A: We expect to stay relatively well-diversified by geography and by sector,
but we still find technology, railroads and oil services expecially attractive.
We also believe there are good prospects in financial services. We view
Mediolanum, an Italian financial services company, as poised to tap the emerging
private pension fund market there, which we think is a great opportunity. Small
caps in Japan are just beginning to emerge as an asset class, so we'll be
aggressively looking there for opportunities.
Q: Why is now a good time to invest in the International Small Cap Fund?
A: Two reasons: First, it's a pretty good environment for small-cap stocks in
general. And second, international small caps are still a young and, therefore,
inefficient asset class. Only a handful of the more than 400 international
mutual funds focus on this sector, and that means we can still find relatively
undiscovered opportunities.
PORTFOLIO INVESTMENTS
June 30, 1996
<TABLE>
<CAPTION>
COMMON STOCKS -- 94.0%
Shares Value (Note 1)
<S> <C>
Argentina -- 1.5%
247,000 Siderar S.A.+ (Steel).........................$ 635,028
Australia -- 1.5%
474,980 Tyndall Australia Ltd.
(Diversified Financial Services).............. 578,558
47,498 Tyndall Australia Ltd. (New)
(Diversified Financial Services).............. 57,856
------
636,414
Austria -- 2.7%
8,160 Burgenland Holdings AG (Electric Utilities)... 369,783
7,993 Voest Alpine Eisenbahnsystem
(Heavy Construction).......................... 754,303
-------
1,124,086
Canada -- 4.7%
136,300 Abacan Resource Corporation+ (Oil)............ 569,061
19,540 Biochem Pharma, Inc.+ (Pharmacy/Drugs)........ 731,529
116,500 SoftQuad International, Inc.+
(Software Systems)............................ 655,313
-------
1,955,903
France -- 3.3%
43,600 Coflexip, Sponsored ADR
(Oilfield Equipment)..........................$ 763,000
4,650 Grand Optical Photo Service (Retail Trade).... 599,300
-------
1,362,300
Germany -- 6.5%
11,060 Adidas AG (Footwear).......................... 930,243
1,050 Axel Springer Verlag, Class A
(Newspapers/Publishing)....................... 655,969
9,360 SGL Carbon AG (Metals and Mining)............. 1,095,637
---------
2,681,849
Great Britain -- 8.6%
747,400 Aegis Group+ (Broadcasting/Advertising)....... 609,903
37,100 Bell Cablemedia PLC, ADR+
(Cable Television)............................ 612,150
143,300 Cortec International Ltd.+ (Biotechnology).... 690,489
49,700 Eidos PLC +
(Computers and Office Equipment).............. 614,147
62,900 Ethical Holdings PLC, ADR+
(Pharmacy/Drugs).............................. 613,275
114,500 M.A.I.D. PLC (Software Systems)............... 458,280
-------
3,598,244
</TABLE>
26
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montogmery Funds
--------------------
International
Small Cap Fund
--------------------
INVESTMENTS
<TABLE>
<CAPTION>
COMMON STOCKS -- continued
Shares Value (Note 1)
<S> <C>
Hong Kong -- 2.1%
476,000 Giordano International Ltd. (Retail Trade)....$ 461,196
485,000 Goldlion Holdings, Ltd.
(Apparel and Textiles)........................ 416,659
-------
877,855
Ireland -- 3.8%
898,899 Anglo Irish Bank Corporation (Banks).......... 883,135
228,245 Anglo Irish Bank Corporation (UK) (Banks)..... 224,242
8,000 Elan Corporation PLC, ADR+
(Pharmacy/Drugs).............................. 457,000
-------
1,564,377
Israel -- 3.0%
27,700 Gilat Satellite Network, Ltd.+
(Telecommunications/Wireless)................. 604,206
17,300 Teva Pharmaceuticals, ADR
(Pharmacy/Drugs).............................. 656,319
-------
1,260,525
Italy -- 6.1%
40,400 Bulgari SpA (Retail Trade).................... 646,189
156,600 Editoriale L' Expresso SpA+
(Newspapers/Publishing)....................... 437,059
11,100 Gucci Group (Retail Trade).................... 715,950
75,000 Mediolanum SpA (Insurance).................... 746,695
-------
2,545,893
Japan -- 16.9%
12,100 Amway Japan NPV (Household Products).......... 608,318
22,000 Canon Sales Company
(Computers and Office Equipment).............. 613,346
110,000 Dowa Fire and Marine Insurance Company
(Insurance)................................... 601,280
11,700 Hokuto Corporation
(Agricultural Commodities).................... 562,541
34,000 Loax (Retail Trade)........................... 814,260
70,000 Nichido Fire and Marine Insurance
(Insurance)................................... 541,956
33,000 Nichiha Corporation (Building Materials)...... 669,653
3,260 Nippon Television Network Corporation
(Broadcasting/Advertising).................... 1,013,162
18,720 Nissin Company
(Diversified Financial Services).............. 838,464
700 Royal Ltd. (Retail Trade)..................... 21,947
54,000 Tohoku Misawa Homes
(Heavy Construction).......................... 745,338
-------
7,030,265
Korea -- 1.6%
290 Korea Mobile Telecommunications
(Telephone/Wireless).......................... 354,635
1,470 Sungmi Telecom
(Telecommunications/Networking)............... 326,617
-------
681,252
Mexico -- 1.7%
129,500 Apasco S.A. de C.V. (Building Materials)......$ 714,512
Netherlands -- 4.5%
13,080 IHC Caland N.V. (Heavy Construction).......... 644,222
17,056 Ordina Beheer N.V. + (Software Systems)....... 654,038
23,700 Toolex Alpha, ADR+ (Machinery and Tools)...... 577,688
-------
1,875,948
New Zealand -- 2.6%
783,240 Tasman Agriculture Ltd.
(Food and Beverage)........................... 673,586
28,000 Trans Rail Holdings, ADR (Railroad)........... 392,000
-------
1,065,586
Norway -- 8.2%
27,800 Bolig-OG Naerings Kredit (Banks).............. 531,152
14,800 CN Selmer A.S. (Heavy Construction)........... 362,586
29,900 Stolt-Nielson S.A., ADR (Shipping)............ 555,019
142,500 UNI Storebrand ASA, Class A+ (Insurance)...... 641,135
24,900 Union Bank of Norway (Banks).................. 610,025
45,000 Unitor Ships Services (Shipping).............. 728,038
-------
3,427,955
Philippines -- 1.1%
296,000 Philipino Telephone Corporation
(Telephone/Wireless).......................... 451,908
Spain -- 3.5%
36,700 Cortefiel SA (Retail Trade)................... 838,620
11,100 Gas y Electricidad (Electric Utilities)....... 615,679
-------
1,454,299
Sweden -- 8.3%
47,200 Dahl International AB (Building Materials).... 680,804
14,700 Kinnevik Investment AB, Class B (Holding)..... 446,262
30,700 Nordbanken AB (Banks)......................... 593,504
26,100 OM Gruppen AB
(Diversified Financial Services).............. 717,445
15,800 W.M. Data AB, Class B (Software Systems)...... 1,002,265
---------
3,440,280
Switzerland -- 1.8%
690 Danzas Holding (Airfreight Couriers).......... 750,720
Venezuela -- 0.0%#
87 Electricidad de Caracas**(Electric Utilities) 72
-------
TOTAL COMMON STOCKS
(Cost $34,815,655)......................................... 39,135,271
----------
</TABLE>
27
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------
The Montogmery Funds
- --------------------
International
Small Cap Fund
- --------------------
INVESTMENTS
PREFERRED STOCKS -- 1.9%
(Cost $904,852)
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
Germany -- 1.9%
16,440 Fielmann AG (Health Care).....................$ 789,215
-------
TOTAL SECURITIES
(Cost $35,720,507)......................................... 39,924,486
----------
REPURCHASE AGREEMENT -- 2.3%
(Cost $950,000)
Principal amount
$950,000 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/28/96, to be
repurchased at $950,443 on 07/01/96,
collateralized by $969,000 market value
of U.S. Government securities, having
various maturities and various
interest rates ................................ 950,000
-------
TOTAL INVESTMENTS -- 98.2%
(Cost $36,670,507*)........................................$ 40,874,486
OTHER ASSETS AND LIABILITIES -- 1.8%
(Net)...................................................... 765,106
-------
NET ASSETS -- 100.0%.......................................$ 41,639,592
==========
</TABLE>
* Aggregate cost for Federal tax purposes was $36,729,373.
** Illiquid or Special Situation Security (See Note 7 to Financial Statements).
+ Non-income producing security.
# Amount represents less than 0.1%.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviation:
ADR .... American Depositary Receipt
28
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Global Opportunities
Fund
- --------------------
PORTFOLIO HIGHLIGHTS
INVESTMENT REVIEW
Q: The Montgomery Global Opportunities Fund generated great returns relative to
its benchmarks during the past 12 months. What's behind that performance?
A: Global Opportunities is a very opportunistic fund, which means we can invest
wherever we believe the best returns can be found. In the second half of 1995,
we emphasized U.S. markets, focusing on technology and consumer non-durables.
That focus paid off.
In the first half of 1996, we moved away from U.S. technology stocks and into
similar companies in Europe, where the valuations were much more attractive.
Q: Besides technology, what other sectors performed well for the Fund?
A: Two sectors were particularly strong. The luxury consumer non-durable sector
is benefiting from worldwide economic growth. European companies such as Gucci
and Bulgari did well, along with a company called Goldlion, the premier supplier
of luxury goods in China. The other strong sector for the year was wireless
telecommunications services and equipment in both developed and emerging
markets. Companies like Korea Mobile Telecom and Sungmi Telecom, a
telecommunications equipment manufacturer in Korea, both contributed positively
to the Fund's performance.
Q: Any disappointments over the period?
A: The Fund's emerging markets positions did not meet our expectations in the
second half of 1995, though they rebounded somewhat in the first six months of
1996. We had some Japanese market exposure, which was disappointing, despite
strong economic activity in Japan.
Q: Did the Fund's strategy change over the year?
A: The Fund's basic strategy has not changed. We shift emphasis when our
research indicates that a new sector is worth pursuing. We emphasize high-
quality companies with positive earnings momentum and good relative valuations,
and we seek a very high degree of diversification, on a stock as well as a
regional basis.
Q: How have you positioned the Fund for the next 12 months?
A: World markets have been skittish about the possibility of rampant economic
growth, which might lead to an increase in interest rates. We don't think that's
going to be a problem, but of course we have to consider it as we invest on a
global basis. We've reduced our exposure to the expensive U.S. market, but
continue to look for U.S. companies that offer good valuations. We also like
some of the U.S. telecommunications companies, which are benefiting from
deregulation. We remain bullish on Japan but, again, are highly selective. We
are taking positions in European technology stocks and remain excited about the
wireless communications markets around the world.
=============================================
PORTFOLIO MANAGEMENT
- ---------------------------------------------
Oscar A. Castro .... Senior Portfolio Manager
John Boich ......... Senior Portfolio Manager
=============================================
FUND PERFORMANCE
- ---------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- ---------------------------------------------
Montgomery
Global Opportunities Fund
Since inception (9/30/93)............ 15.15%
One year............................. 28.64%
- ---------------------------------------------
MSCI World Index
Since 9/30/93........................ 12.43%
One year............................. 18.44%
- ---------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
Growth Of A $10,000 Investment
[LINE GRAPH APPEARS HERE]
9/93 6/96
MONTGOMERY GLOBAL OPPORTUNITIES FUND $10,000 $14,741
MSCI WORLD INDEX/1/ $10,000 $13,800
LIPPER GLOBAL FUNDS AVERAGE/2/ $10,000 $13,635
/1/ The Morgan Stanley Capital International World Index measures the
performance of 20 global stock markets.
/2/ The Lipper Global Funds Average universe consists of 142 funds.
29
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Global Opportunities
Fund
- --------------------
PORTFOLIO HIGHLIGHTS
=======================================
TOP TEN HOLDINGS
- ---------------------------------------
(as a percentage of total net assets)
SGL Carbon AG .................... 2.6%
Waters Corporation ............... 2.3%
MMI Company, Inc. ................ 2.2%
Sola International, Inc. ......... 2.1%
Sandoz AG ........................ 2.0%
Astra AB, Class A ................ 2.0%
Compagnie Financiere Richemont,
Series A ........................ 1.9%
Nippon Television Network
Corporation ...................... 1.9%
Sony Corporation ................. 1.8%
Bombardier Inc., Class B ......... 1.8%
=======================================
TOP FIVE COUNTRIES
- ---------------------------------------
(as a percentage of total net assets)
United States ................... 29.4%
Japan ........................... 10.4%
Great Britain .................... 9.0%
Germany .......................... 7.0%
Switzerland ...................... 5.7%
Q: Why should an investor consider the Global Opportunities Fund now?
A: This fund is appropriate for long-term investors looking for a single
vehicle for exposure to all the world's markets. The Fund will always be highly
diversified. It's also for investors who believe in our ability to pick stocks.
The best stock opportunities we can find in the world go into this fund; it's
not limited in terms of scope, company size or sector.
PORTFOLIO INVESTMENTS
June 30, 1996
COMMON STOCKS -- 97.0%
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
Australia -- 1.7%
51,121 National Australia Bank, Ltd., ORD (Banks)....$ 472,038
Brazil -- 1.3%
5,400 Telebras, ADR (Telephone/Networks)............ 375,975
Canada -- 4.6%
12,850 Biochem Pharma, Inc.+ (Pharmacy/Drugs)........ 481,072
33,400 Bombardier Inc., Class B
(Machinery and Tools)......................... 500,297
56,500 SoftQuad International, Inc.+
(Software Systems)............................ 317,812
-------
1,299,181
Finland -- 1.4%
10,500 Nokia Corporation AB, Series A
(Telecommunications/Equipment)................ 386,163
France -- 3.9%
16,100 Assurances General de France (Insurance)...... 436,281
2,500 Bouygues (Heavy Construction)................ 278,952
23,300 Coflexip, Sponsored ADR
(Oilfield Equipment).......................... 407,750
-------
1,122,983
Germany -- 5.5%
5,370 Adidas AG (Footwear)..........................$ 451,664
620 Axel Springer Verlag, Class A
(Newspapers/Publishing)....................... 387,334
6,270 SGL Carbon AG (Metals and Mining)............. 733,936
-------
1,572,934
Great Britain -- 9.0%
486,800 Aegis Group+ (Broadcasting/Advertising)........ 397,245
83,100 Cortec International, Ltd.+ (Biotechnology)... 400,416
53,528 Dixons Group PLC (Retail Trade)................ 439,718
39,800 Ethical Holdings PLC, ADR+
(Pharmacy/Drugs)............................... 388,050
137,500 Railtrack Group PLC+ (Railroad)................ 468,053
37,900 Reuters Holdings PLC
(Broadcasting/Advertising)..................... 458,908
-------
2,552,390
Hong Kong -- 2.8%
148,000 First Pacific Company (Conglomerates).......... 227,523
301,000 Giordano International, Ltd. (Retail Trade).... 291,638
314,000 Goldlion Holdings, Ltd.(Apparel and Textiles).. 269,754
112 HSBC Holdings (Banks).......................... 1,693
-----
790,608
Ireland -- 0.0%#
7,748 Anglo Irish Bank Corporation (Banks)........... 7,613
Israel -- 2.9%
18,300 Gilat Satellite Network, Ltd.+
(Telecommunications/Wireless).................. 399,169
11,300 Teva Pharmaceuticals, ADR
(Pharmacy/Drugs)............................... 428,694
-------
827,863
</TABLE>
30
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Global Opportunities
Fund
--------------------
INVESTMENTS
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C>
Italy -- 4.8%
22,600 Bulgari SpA (Retail Trade).....................$ 361,482
6,700 Gucci Group (Retail Trade)..................... 432,150
123,900 Telecom Italia Mobile Di Risp
(Telephone/Wireless)........................... 169,056
74,100 Telecom Italia Mobile SpA (Telephone/Wireless). 165,688
66,100 Telecom Italia Risp (Telephone/Regional-Local) 114,140
55,400 Telecom Italia SpA (Telephone/Regional-Local).. 119,173
-------
1,361,689
Japan -- 10.4%
25 DDI Corporation (Telephone/Networks)........... 218,464
17,000 Honda Motor Company (Auto/Auto Parts).......... 441,316
17,000 Mitsukoshi, Ltd. (Retail Trade)................ 181,810
48,000 Nippon Fire and Marine Insurance (Insurance)... 313,711
1,700 Nippon Television Network Corporation
(Broadcasting/Advertising)..................... 528,336
15 NTT Data Communication Systems
Corporation (Software Systems)................. 449,726
7,900 Sony Corporation (Electronics)................. 520,649
23,000 Tokio Marine & Fire Insurance Company
(Insurance).................................... 306,947
-------
2,960,959
Korea -- 2.0%
290 Korea Mobile Telecommunications
(Telephone/Wireless)........................... 354,635
1,040 Sungmi Telecom, ORD
(Telecommunications/Networking)................ 231,076
-------
585,711
Mexico -- 1.2%
61,300 Apasco S.A. de C.V. (Building Materials)....... 338,221
Netherlands -- 3.1%
8,447 ABN Amro Holdings (Banks)..................... 453,676
17,700 Toolex Alpha, ADR+ (Machinery and Tools)...... 431,437
-------
885,113
Norway -- 1.2%
4,100 Netcom ASA+ (Telephone/Wireless)............... 43,906
16,600 Stolt-Nielson S.A., ADR (Shipping)............. 308,137
-------
352,043
Spain -- 1.9%
3,600 Empresa Nacional de Electricidad
(Electric Utilities)........................... 224,710
17,500 Telefonica Nacional de Espana
(Telephone/Networks)........................... 322,644
-------
547,354
Sweden -- 4.2%
12,800 Astra AB, Class A (Pharmacy/Drugs)............ 566,440
9,248 Ericsson (L.M.) Telephone Company, Class B
(Telecommunications/Equipment)................. 199,738
6,900 W.M. Data AB, Class B (Software Systems)....... 437,698
-------
1,203,876
Switzerland -- 5.7%
350 Compagnie Financiere Richemont,
Series A (Holding).............................$ 554,400
440 Danzas Holding (Airfreight Couriers)........... 478,720
510 Sandoz AG (Pharmacy/Drugs)..................... 583,848
-------
1,616,968
United States -- 29.4%
4,600 AK Steel Holding Corporation (Steel)........... 179,975
4,801 American International Group, Inc. (Insurance). 473,499
12,600 Associates First Capital Corporation+
(Diversified Financial Services)............... 474,075
13,900 Autozone, Inc.+ (Auto/Auto Parts).............. 483,025
15,100 Cephalon, Inc.+ (Biotechnology)................ 296,337
16,300 Claire's Stores, Inc. (Retail Trade)........... 450,287
17,500 Designer Holdings, Ltd.+ (Apparel and Textiles) 465,938
6,800 First USA, Inc. (Diversified Financial Services) 374,000
28,000 General Nutrition Center, Inc.+ (Retail Trade) 488,250
11,300 Linear Technology Corporation
(Electrical Equipment)......................... 338,294
6,500 Lucent Technologies, Inc.
(Telecommunications/Equipment)................. 246,188
23,300 Matrix Pharmaceutical, Inc.+ (Biotechnology).. 413,575
20,100 MMI Company, Inc. (Insurance).................. 620,588
4,600 Mossimo, Inc.+ (Apparel and Textiles).......... 183,425
9,300 Saks Holdings, Inc.+ (Retail Trade)............ 317,363
20,400 Sola International, Inc.+
(Cosmetics and Personal Care).................. 586,500
11,400 Time Warner, Inc. (Newspapers/Publishing)...... 447,450
10,200 UCAR International, Inc.+ (Metals and Mining).. 424,575
26,500 Vans, Inc.+ (Footwear)........................ 448,844
20,030 Waters Corporation+ (Medical Products)......... 660,990
-------
8,373,178
---------
TOTAL COMMON STOCKS
(Cost $24,258,699 )......................................... 27,632,860
----------
PREFERRED STOCKS -- 1.6%
(Cost $483,320)
Germany -- 1.6%
9,590 Fielmann AG (Health Care)..................... 460,376
-------
TOTAL INVESTMENTS -- 98.6%
(Cost $24,742,019*)......................................... 28,093,236
OTHER ASSETS AND LIABILITIES --1.4%
(Net)....................................................... 402,265
-------
NET ASSETS -- 100.0%........................................$ 28,495,501
----------
</TABLE>
* Aggregate cost for Federal tax purposes was $24,756,087.
+ Non-income producing security.
# Amount represents less than 0.1%.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
ADR ... American Depositary Receipt
ORD ... Ordinary
31
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------------------------------
The Montgomery Funds
Global
Communications Fund
- ---------------------------------------------
PORTFOLIO HIGHLIGHTS
=============================================
PORTFOLIO MANAGEMENT
- ---------------------------------------------
Oscar A. Castro .... Senior Portfolio Manager
John Boich ......... Senior Portfolio Manager
INVESTMENT REVIEW
Q: What drove the solid returns of the Montgomery Global Communications Fund?
A: It's somewhat unusual for a sector-specific fund to perform close to a
broader index, but that shows just how big and diverse the telecommunications
sector really is. We emphasized the technology companies active in this sector
in the second half of calendar 1995. These stocks performed very well, but we
sold many of these companies during the first six months of 1996 as valuations
got too rich for our taste. Those stocks were mainly in developed countries,
and, during the same period, we began to focus more on telecommunications
stocks in the emerging markets.
Q: Which sector did particularly well for the Fund?
A: The global wireless business proved to be a positive theme for the past
year. In the emerging markets, for example, it's easier and cheaper to build a
cellular telephone network than it is to build a traditional "wired" network,
so in many countries the growth in wireless phones has been dramatic. Wireless
communication has also increased in the developed markets as more people use
cellular phones.
Q: And which didn't do so well?
A: We had some emerging markets exposure in the last six months of 1995;
those markets were disappointing. Our cable television stocks in England did
not do well either.
Q: How has the Fund's strategy changed over the past 12 months?
A: Our underlying strategy--looking at the entire, broad communications
sector on a global basis--has not changed. We make adjustments to the
portfolio based on our projections for the specific subsectors of the
communications industry and on our fundamental research into individual
stocks. Then we shift the Fund's positioning as needed to find the best
opportunities.
Q: How have you positioned the Fund for the year ahead?
A: Though we are shifting away from U.S. telecommunications technology
stocks, we remain interested in some of the telecommunications services
stocks, which we expect to benefit from the deregulation legislation that was
signed into law in February 1996. We still like the wireless companies, such
as Bouygues, one of the three providers of cellular service in France, and DDI
Corporation, one of the largest such providers in Japan.
We also like certain technology stocks, such as Sony Corporation in Japan. Its
Playstation product is in great demand around the world, and of course Sony
has a great franchise in the whole consumer electronics arena. Finally, we are
very impressed by some telecommunications companies in the emerging markets.
The Brazilian phone companies, for example, appear to present a tremendous
opportunity.
=============================================
FUND PERFORMANCE
- ---------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- ---------------------------------------------
Montgomery
Global Opportunities Fund
Since inception (6/1/93)............. 14.25%
One year............................. 17.06%
- ---------------------------------------------
MSCI World Index
Since 5/31/93........................ 12.36%
One year............................. 18.44%
- ---------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
Growth Of A $10,000 Investment
[LINE GRAPH APPEARS HERE]
5/93 6/96
MONTGOMERY GLOBAL COMMUNICATIONS FUND $10,000 $15,074
MSCI WORLD INDEX $10,000 $14,323
LIPPER GLOBAL FUNDS AVERAGE $10,000 $14,569
/1/ The Morgan Stanley Capital International World Index measures the
performance of 20 global stock markets.
/2/ The Lipper Global Funds Average universe consists of 142 funds.
32
<PAGE>
- ---------------------------------------------
The Montgomery Funds
- ---------------------------------------------
Global
Communications Fund
- ---------------------------------------------
PORTFOLIO HIGHLIGHTS
Q: Why should an investor consider the Global Communications Fund?
A: We still believe the telecommunications industry is in the midst of a
revolution. New kinds of services such as cellular are developing quickly
around the world. Data communications and the Internet represent new
opportunities for services and equipment providers. And emerging countries
remain high-growth markets for all kinds of communications services. We
believe it's a sector with excellent growth prospects on a global basis.
The Fund also offers an unusual degree of diversification for a sector fund.
It can provide emerging markets exposure, technology exposure and telephone
services exposure all in one fund.
=============================================
TOP TEN HOLIDINGS
- ---------------------------------------------
(as a percentage of total net assets)
Global Telesystems Group, Inc............3.6%
Telefonica del Peru, Series B............2.6%
NTT Data Communications Systems
Corporation..............................2.6%
Gilat Satellite Network, Ltd.............2.5%
Sony Corporation.........................2.4%
Korea Mobile Telecommunications..........2.3%
Ionica...................................2.3%
Nippon Television Network Corporation....2.3%
Telec de Sao Paulo S.A...................2.2%
Sungmi Telecom, ORD......................2.2%
=============================================
TOP FIVE COUNTRIES
- ---------------------------------------------
(as a percentage of total net assets)
United States...........................19.4%
Japan...................................12.5%
Great Britain...........................10.7%
Brazil...................................5.8%
Sweden...................................5.8%
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENTS
June 30, 1996
COMMON STOCKS -- 95.8%
Shares Value (Note 1)
<S> <C>
Argentina -- 0.5%
73,650 Argentine Cellular Communications, Ltd.**
(Telephone/Wireless)........................... $941,674
Australia -- 0.8%
4,946,700 Australis Media, Ltd.+
(Broadcasting/Advertising)..................... 1,671,567
Brazil -- 2.1%
60,900 Telebras, ADR (Telephone/Networks)............. 4,240,162
356,533 Telec de Minas Gerais S.A.
(Telephone/Regional-Local)..................... 29,115
901,693 Telec de Sao Paulo S.A.
(Telephone/Regional-Local)..................... 158,940
-------
4,428,217
Finland -- 1.4%
76,300 Nokia Corporation AB, Series A
(Telecommunications/Equipment)................. 2,806,115
France -- 3.4%
23,400 Alcatel Alsthom Cie Generale D'Electric
(Telecommunications/Equipment)................. $2,042,397
31,100 Bouygues (Heavy Construction)................. 3,470,166
50,000 Dassault Systemes S.A., ADR+
(Computer and Office Equipment)................ 1,556,250
---------
7,068,813
Germany -- 2.1%
3,460 Axel Springer Verlag, Class A
(Newspapers/Publishing)........................ 2,161,576
42,800 Veba AG (Electric Utilities).................. 2,276,156
---------
4,437,732
Great Britain -- 10.7%
4,219,000 Aegis Group, ORD+
(Broadcasting/Advertising)..................... 3,442,845
67,300 Bell Cablemedia PLC, ADR+
(Cable Television)............................. 1,110,450
366,100 General Cable+ (Cable Television)............. 1,103,952
11,100 Ionica** (Telephone).......................... 4,744,651
945,000 Orange PLC+ (Telephone)....................... 3,312,280
995,000 Pace Micro Technology+*** (Electronics)....... 2,938,497
262,300 Reuters Holdings PLC
(Broadcasting/Advertising)..................... 3,176,029
597,234 Vodafone Group (Telephone).................... 2,223,303
---------
22,052,007
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
===============================
The Montgomery Funds
- -------------------------------
Global
Communications Fund
- -------------------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C> <C>
Hong Kong -- 2.3%
2,402,125 First Pacific Company (Conglomerates).... $ 3,692,832
2,329,000 Founder Hong Kong, Ltd.
(Software Systems)....................... 970,323
-------
4,663,155
Indonesia -- 1.0%
70,600 Telekomunikas Indonesia, ADR
(Telephone/Regional-Local)................ 2,100,350
Israel -- 3.8%
121,500 ECI Telecommunications, Ltd., ADR
(Telecommunications/Other)................ 2,817,281
234,400 Gilat Satellite Network, Ltd.+
(Telecommunications/Wireless)............. 5,112,850
---------
7,930,131
Italy -- 4.6%
1,718,900 Telecom Italia Mobile Di Risp
(Telephone/Wireless)...................... 2,345,357
1,024,800 Telecom Italia Mobile SpA
(Telephone/Wireless)...................... 2,291,458
1,375,100 Telecom Italia Risp
(Telephone/Regional-Local)................ 2,374,499
1,131,900 Telecom Italia SpA
(Telephone/Regional-Local)................ 2,434,869
---------
9,446,183
Japan -- 12.5%
491 DDI Corporation (Telephone/Networks)...... 4,290,640
72,800 NAMCO (Newspapers/Publishing)............. 2,415,575
15,070 Nippon Television Network Corporation
(Broadcasting/Advertising)................ 4,683,547
177 NTT Data Communication Systems
Corporation (Software Systems)............ 5,306,764
76,000 Sony Corporation (Electronics)............ 5,008,775
70,400 Square Company, Ltd. (Software Systems)... 4,137,770
---------
25,843,071
Korea -- 4.5%
3,960 Korea Mobile Telecommunications
(Telephone/Wireless)...................... 4,842,604
20,050 Sungmi Telecom, ORD
(Telecommunications/Networking)........... 4,454,874
---------
9,297,478
Malaysia -- 1.2%
657,000 Leader Universal Holdings
(Telecommunications/Equipment)............ 1,856,825
318,000 Sistem Televisyen Malaysia, Class A+
(Broadcasting/Advertising)................ 599,158
---------
2,455,983
Mexico -- 3.1%
295,000 Grupo Iusacell, Series L, ADR+
(Telephone/Wireless)...................... $3,171,250
105,000 Grupo Mexicano de Video**+
(Leisure Time)............................ 52,116
105,400 Grupo Televisa S.A., GDR
(Broadcasting/Advertising)................ 3,241,050
---------
6,464,416
Netherlands -- 0.6%
35,000 Ordina Beheer N.V.+ (Software Systems)... 1,342,128
Norway -- 1.3%
250,000 Netcom ASA+ (Telephone/Wireless)......... 2,677,175
Peru -- 2.6%
2,617,094 Telefonica del Peru, Series B
(Telephone/Networks)...................... 5,313,461
Philippines -- 1.6%
2,106,500 Philipino Telephone Corporation
(Telephone/Wireless)...................... 3,216,031
Russia -- 5.4%
168,500 FGI Wireless** (Telephone/Wireless)....... 2,134,681
450,987 Global Telesystems Group, Inc.**
(Telephone/Networks)...................... 7,337,709
200,000 Russian Telecommunications Development
Corporation**+ (Telephone/Networks)....... 1,681,397
---------
11,153,787
Spain -- 2.1%
234,400 Telefonica Nacional de Espana, ORD
(Telephone/Networks)...................... 4,321,581
Sweden -- 5.8%
206,020 Ericsson (L.M.) Telephone Company, Class B
(Telecommunications/Equipment)............ 4,449,609
116,400 Kinnevik Investment AB, Class B (Holding) 3,533,666
63,000 W.M. Data AB, Class B (Software Systems).. 3,996,375
---------
11,979,650
Switzerland -- 1.6%
2,110 Compagnie Financiere Richemont, Series A
(Holding)................................. 3,342,240
Thailand -- 1.4%
341,000 Total Access Communications
(Telephone/Wireless)...................... 2,898,500
</TABLE>
34
The accompanying notes are an integral part of these financial statements.
<PAGE>
===============================
The Montgomery Funds
-------------------------------
Global
Communications Fund
-------------------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C> <C>
United States -- 19.4%
50,000 ACC Corporation (Telephone/
Long Distance)...................... $ 2,415,625
75,075 Andrew Corporation+
(Telecommunications/Wireless)....... 4,063,434
101,449 Arch Communications Group+
(Telephone/Wireless)................ 1,876,806
80,000 Boston Communications
Group, Inc.+
(Telecommunications/Wireless)....... 1,310,000
90,000 Brooks Fiber Properties+
(Telecommunications/Networking)..... 2,958,750
69,684 Cisco Systems, Inc.+
(Computers and Office Equipment).... 3,950,212
82,900 Frontier Corporation................ 2,538,813
(Telephone/Networks)
69,000 Lucent Technologies, Inc.
(Telecommunications Equipment)...... 2,613,375
90,000 Montgomery Emerging Communications
Fund++ (Mutual Funds)............... 1,001,250
78,800 Omnipoint Corporation+
(Telecommunications/Equipment)...... 2,053,725
84,500 Scripps Company (E.W.)
(Entertainment)..................... 3,939,812
85,700 Time Warner, Inc.
(Newspapers/Publishing)............. 3,363,725
187,500 Western Wireless Corporation+
(Telecommunications/Wireless)....... 4,042,969
73,004 Worldcom, Inc.+ (Telephone/Long
Distance)........................... 4,038,034
----------
40,166,530
Venezuela -- 0.0% #
37,694 Electricidad de Caracas (Electric
Utilities).......................... 31,336
------
TOTAL COMMON STOCKS
(Cost $161,133,071)..................................... 198,049,311
-----------
PREFERRED STOCKS -- 3.7%
Brazil -- 3.7%
31,100,000 Telec de Minas Gerais S.A.
(Telephone/Regional-Local).......... 3,205,856
21,040,000 Telec de Sao Paulo S.A.
(Telephone/Regional-Local).......... 4,504,905
----------
TOTAL PREFERRED STOCKS
(Cost $6,300,311)....................................... 7,710,761
----------
TOTAL SECURITIES
(Cost $167,433,382)..................................... 205,760,072
-----------
</TABLE>
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS -- 1.5%
Principal amount Value (Note 1)
<C> <S> <C>
$1,562,500 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/28/96,
to be repurchased at $1,563,229 on
07/01/96, collateralized by $1,593,750
market value of U.S. Government
securities, having various maturities
and various interest rates ........... $ 1,562,500
1,562,500 Agreement with Paine Webber Group,
Inc. Tri-Party, 5.600% dated 06/28/96,
to be repurchased at $1,563,229 on
07/01/96, collateralized by $1,593,795
market value of U.S. Government
securities, having various maturities
and various interest.................. 1,562,500
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $3,125,000)....................................... 3,125,000
---------
TOTAL INVESTMENTS --101.0%
(Cost $170,558,382*).................................... 208,885,072
OTHER ASSETS AND LIABILITIES -- (1.0%)
(Net)................................................... (2,214,337)
----------
NET ASSETS -- 100.0%.................................... $206,670,735
=============
</TABLE>
* Aggregate cost for Federal tax purpose was $170,659,632.
** Illiquid Security or Special Situation Security (See Note 7 to
Financial Statements).
*** Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Amount represents less than 0.1%.
+ Non-income producing security.
++ See Note 2 to Financial Statements.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
ADR...American Depositary Receipt
GDR...Global Depositary Receipt
ORD...Ordinary
The Montgomery Global Communications Fund concentrates its investments in the
global communications industry. Because of this concentration, the value of this
Fund's shares may vary in response to factors affecting the global
communications industry, and therefore may be more volatile than that of
investment companies that do not similary concentrate their investments. The
global communications industry may be subject to greater changes in governmental
policies and governmental regulation than many other industries, and regulatory
approval requirements may materially affect the products and services of this
industry.
35
The accompanying notes are an integral part of these financial statements.
<PAGE>
=============================================
The Montgomery Funds
- ---------------------------------------------
Emerging Markets Fund
- ---------------------------------------------
P O R T F O L I O H I G H L I G H T S
=============================================
P O R T F O L I O M A N A G E M E N T
- ---------------------------------------------
Josephine Jimenez....Senior Portfolio Manager
Bryan Sudweeks.......Senior Portfolio Manager
Thomas Haslett.......Senior Portfolio Manager
Angeline Ee.................Portfolio Manager
- ---------------------------------------------
=============================================
F U N D P E R F O R M A N C E
- ---------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- ---------------------------------------------
Montgomery
Emerging Markets Fund
Since inception (3/1/92).............. 10.26%
One year............................... 7.74%
- ---------------------------------------------
IFC Global Composite Fund Index
Since 2/28/92.......................... 9.53%
One year............................... 8.45%
- ---------------------------------------------
Past performance is no guarantee of future results.
Net asset value, investment return and principal
value will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost.
[LINE GRAPH APPEARS HERE]
Growth of a $10,000 Investment
[plot points to come]
6/96
Montgomery Emerging Markets Fund $15,268
IFC Global Composite Fund Index/1/ $14,834
Lipper Emerging Markets Fund Average/2/ $15,909
/1/ The IFC Global Composite Index is comprised
of more than 1,200 individual stocks from 25
developing countries in Asia, Latin America,
Middle East, Africa and Europe.
/2/ The Lipper Emerging Markets Funds Average
universe consists of 73 funds.
I N V E S T M E N T R E V I E W
Q: Returns for the Montgomery Emerging Markets Fund were in line with the
IFC Global Composite Fund Index and somewhat lower than the Lipper Emerging
Markets Funds Average. What drove the Fund's performance last year?
A: We constantly survey the world's emerging markets, looking for markets we
believe will offer the best relative value around the world. In fiscal 1996,
the Fund's geographical weightings played the biggest role in driving returns.
Q: What regions performed best for the Fund and why?
A: The best region for the Fund during the year was Latin America, and the
Fund was overweight in its exposure to Brazil and Mexico (relative to the
index), both of which turned in strong results in the first six months of
1996. Brazil, which we believe has great promise and potential, is finally
beginning to deliver on that promise. Inflation is low and seems under
control, and the political situation is relatively stable. The country is
getting its act together, and its stock market began to reflect that over the
period. Mexico also began to recover during the year, and its economy is
showing real strength. Some Asian markets in the portfolio, particularly the
Philippines, also proved to be strong performers during the year.
Q: And which markets were poor performers?
A: As we entered the fiscal year, the Montgomery Emerging Markets Fund had a
strategic overweighting in North Asia, including Korea and Taiwan, but both
markets were poor performers for much of the year. In Taiwan, for example, the
specter of the Chinese military maneuvers drove investors away, and that
market did not begin to recover until the second quarter of 1996. The
situation there is stabilizing, however, and investors are beginning to return
to this market.
Q: Did the Fund's strategy change during the year?
A: The strategy for the Emerging Markets Fund in terms of geographic sectors
changes constantly as our macroeconomic analysis suggests new opportunities in
the world's emerging markets. We also made shifts in terms of the kind of
stocks we invest in, favoring large companies over smaller ones for much of
the year. This shift was based on our belief that the larger, more established
companies would be most attractive as investment capital returned to the
emerging markets, generating a wave of liquidity. This shift led to a reduced
exposure in consumer stocks, which tend to be smaller companies, in favor of
the generally larger companies like financial services firms, which should
also benefit from the ebbing of inflation in the emerging markets.
In terms of portfolio diversification, we continue to stress a high degree of
diversity. As of June 30, 1996, the portfolio was exposed to approximately 30
different emerging markets with positions in about 225 different companies.
36
<PAGE>
Q: How have you positioned the Fund for the year ahead?
A: One guide for our investing in the year ahead is low inflation. In the
aggregate, inflation rates have declined to less than 10% annually. That may
seem high among emerging markets compared with inflation in the developed
economies, but it's very low on a historical basis in the emerging markets and
demonstrates the remarkable progress some of these economies have made in
recent years. Relatively low inflation suggests that high real interest rates
could decline in these markets, and that could be positive for stocks.
We also believe that economic growth will continue at a sustainable pace in
the United States, Europe and Japan, which would be positive for emerging
market companies with significant exports. On a regional basis, we remain
overweighted in Latin America, with a focus on Brazil and Mexico.
Q: Why should an investor consider the Emerging Markets Fund now?
A: For long-term investors who are comfortable with the volatility that is
characteristic of the emerging markets, there are three reasons to invest.
First, these markets offer, in general, very good valuations. Our projections
for the stocks in our portfolio indicate aggregate growth of more than 25% per
year, but they are trading only at around 15 to 16 times 1996 earnings.
Second, the liquidity wave continues. Capital is flowing into the emerging
markets from both foreign and domestic investors, particularly in light of
declining inflation and the possibility of lower interest rates. Finally, the
political turmoil in many large countries seems to have eased. Relations
between Taiwan and China are calmer; Yeltzin's presidential victory
ameliorates concerns of Russia's regressing and India and Brazil are also
demonstrating a more benign political environment.
=============================================
The Montgomery Funds
- ---------------------------------------------
Emerging Markets Fund
- ---------------------------------------------
P O R T F O L I O H I G H L I G H T S
=============================================
T O P T E N H O L D I N G S
- ---------------------------------------------
(as a percentage of total net assets)
Banco Bradesco......................... 2.5%
Electrobras, "B"....................... 2.3%
Telebras, ADR.......................... 1.9%
Alfa S.A. de C.V....................... 1.9%
IOI Corporation Oxygen Inc............. 1.8%
Grupo Financiero Banamex, Series B..... 1.7%
Arab Malaysian Corporation............. 1.7%
Petroleo Brasileiros................... 1.6%
Cementos Mexicanos, S.A., Class B...... 1.6%
Petronas Gas........................... 1.3%
=============================================
T O P F I V E C O U N T R I E S
- ---------------------------------------------
(as a percentage of total net assets)
Brazil................................. 16.5%
Mexico................................. 10.0%
Malaysia............................... 9.2%
Thailand............................... 8.5%
South Africa........................... 5.4%
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
COMMON STOCKS -- 77.6%
<TABLE>
<CAPTION>
Shares Value (Note 1)
<C> <S> <C>
Argentina -- 3.2%
151,300 Banco Frances, ADR (Banks) $ 4,349,875
382,629 Central Costanera (Electric Utilities) 1,408,603
638,004 C.I.A. Interam de Automo S.A.
(Auto/Auto Parts) 4,435,791
3,444,033 Cresud S.A.+ (Real Estate) 6,890,650
694,004 Inversiones y Representaciones
(Real Estate) 2,325,786
45,496 Inversiones y Representaciones, GDR
(Real Estate) 1,535,490
995,428 Perez Companc, "B" Shares (Oil) 6,522,499
1,839,595 Siderar S.A.+ (Steel) 4,729,533
-----------
32,198,227
Bangladesh-- 0.2%
98,080 Apex Tannery (Apparel and Textiles) 1,404,764
44,000 Eastern Housing Ltd. (Real Estate) 97,253
----------
1,502,017
Brazil -- 3.0%
275,111 Telebras, ADR (Telephone/Networks) $19,154,603
810 Telebras, ADR*** (Telephone/Networks) 56,396
180,900,000 Telec Brasileiras-Telebras ON
(Telephone/Networks) 10,628,990
578,151 Telec de Minas Gerais S.A.
(Telephone/Regional-Local) 47,212
766,225 Telec de Sao Paulo S.A.
(Telephone/Regional-Local) 135,061
-----------
30,022,262
Chile -- 2.0%
86,800 Compania de Telefonos de Chile, ADR
(Telecommunications/Wireless) 8,517,250
156,040 Enersis, S.A., ADR (Electric Utilities) 4,837,240
29,616 Sociedad Quimica Minera de Chile
(Chemicals) 1,606,668
152,024 The Chile Fund, Inc. 3,724,588
(Mutual Funds)
82,783 The Moneda Chile Fund, Ltd. (Mutual Funds) 703,656
-----------
19,389,402
</TABLE>
37
The accompanying notes are an integral part of thse financial statements.
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
<C> <S> <C>
China -- 3.2%
3,895,750 Guangdong Investment Holdings, Ltd.
(Real Estate).................................$ 2,466,063
165,500 Guanshen Railway Company, Ltd., ADR+
(Railroad).................................... 3,165,188
129,600 Huaneng Power International, ADS +
(Electric Utilities).......................... 2,316,600
2,021,880 Johnson Electric Holdings Ltd. (Electronics).. 4,544,871
12,331,000 M.C. Packaging of Hong Kong, Ltd.
(Containers and Packaging).................... 5,217,069
459,429 Shanghai Dazhong Taxi, Class B (Trucking)..... 335,383
4,278,900 Shangri-La Asia (Lodging)..................... 5,997,618
13,482,000 Tian An China Investments Company
(Real Estate)................................. 1,828,776
20,954,880 Yue Yuen Industrial Holdings (Footwear)....... 5,955,590
-----------
31,827,158
Czech Republic -- 3.2%
12,739 Cokoladovny (Food and Beverage)............... 1,759,466
290,651 Komercni Banka I.F. (Mutual Funds)............ 8,155,511
96,900 Komercni Banka, GDR (Banks)................... 2,616,300
149,510 PIF (Mutual Funds)............................ 2,967,050
57,460 SPT Telecom A.S. (Telephone/Networks)......... 7,017,250
406,500 The Czech Value Fund (Mutual Funds)........... 3,861,750
534,506 Vseobecny I.F. (Mutual Funds)................. 2,739,652
406,584 Vynosovy I.F. (Mutual Funds).................. 2,203,531
-----------
31,320,510
Egypt -- 0.3%
176,000 Amreya Cement (Cement)........................ 2,390,475
3,925 Tora Cement (Cement).......................... 51,372
-----------
2,441,847
Greece -- 0.3%
146,510 Aegek (Heavy Construction).................... 974,419
6 Hellenic Bottling Company S.A.
(Food and Beverage)........................... 199
167,480 The Greek Progress Fund (Mutual Funds)........ 1,479,382
-----------
2,454,000
Hong Kong -- 2.2%
4,474,000 ASM Pacific Technology (Semiconductor)........ 3,525,679
549,000 Cheung Kong Holdings (Real Estate)............ 3,953,977
1,046,000 Guoco Group, Ltd.
(Diversified Financial Services).............. 4,986,261
549,000 Henderson Land Development Company
(Real Estate)................................. 4,113,555
256,400 HSBC Holdings (Banks)......................... 3,875,438
2,864,000 Joyce Boutique Holdings
(Apparel and Textiles)........................ 961,974
-----------
21,416,884
Hungary -- 0.2%
104,100 Borsodchem, GDR*** (Chemicals)................ 2,029,950
India -- 4.6%
1,667 Arvind Mills, Ltd.** (Apparel and Textiles)... 6,624
265,700 Bajaj Auto, Ltd.** (Auto/Auto Parts).......... 7,464,564
211,500 Business India Television International, Ltd.**
(Broadcasting/Advertising).................... 210,119
771,100 Carrier Aircon, Ltd.** (Home Appliance)....... 5,548,506
490 Finolex Cables (Electrical Equipment)......... 3,310
502,300 Floatglass** (Chemicals)...................... 454,109
139,075 Grasim Industries, Ltd.** (Conglomerates)..... 2,259,031
600 Great Eastern Shipping (Shipping)............. 860
780 Great Eastern Shipping, New (Shipping)........ 1,118
90,000 HDFC Bank, Ltd.**+ (Banks).................... 99,631
80,520 Housing Development and Finance
Corporation (Banks)........................... 6,714,952
10,800 Indian Hotels, GDS+ (Lodging)................. 307,800
155,700 Indian Hotels, GDS***+ (Lodging).............. 4,437,450
323,180 Industrial Credit & Investment Corporation**
(Banks)....................................... 825,609
2,600 Kotak Mahindra** (Securities Brokerage)....... 6,531
7,000 Larsen & Toubro, Ltd.*** (Heavy Construction). 131,250
38,600 Larsen & Toubro, Ltd. New, GDR
(Heavy Construction).......................... 723,750
1,000 Lok Housing and Constructions, Ltd.**
(Building Materials).......................... 1,284
887,400 Mahanagar Telephone Nigam, Ltd.**
(Electric Utilities).......................... 6,391,648
280 Reliance Industries, Ltd.** (Conglomerates)... 1,685
472,900 State Bank of India**+ (Banks)................ 4,030,321
233,650 Tata Engineering & Locomotive Company,
Ltd.** (Auto/Auto Parts)...................... 3,448,708
12,192 Tata Iron & Steel Company, Ltd.** (Steel)..... 83,835
91,920 The Indian Hotels Company, Ltd.**
(Lodging)..................................... 2,155,150
1,400 Titan Industries** (Household Products)....... 5,166
100 Upcom Cables (Heavy Construction)............. 73
-----------
45,313,084
Indonesia -- 3.4%
423,000 Aneka Kimia Raya (F) (Chemicals).............. 708,786
1,445,000 Asahimas Flat Glass (F) (Glass)............... 1,521,053
475 Bank Bali (F) (Banks)......................... 1,046
1,690,000 Bimantara (F) (Conglomerates)................. 2,123,845
258,000 Ciputra Development (Heavy Construction)...... 523,759
50 Dankos Laboratories (F)** (Health Care)....... 115
644,500 Hanjaya Mandala Sampoerna (F) (Tobacco)....... 7,338,024
1,290,000 Matahari Putra Prima (F)** (Retail Trade)..... 2,355,532
3,451,400 Mulia Industrindo (F)** (Building Materials).. 5,115,931
990,000 Sekar Bumi (F) (Food and Beverage)............ 595,489
644,000 Semen Cibinong (F) (Building Materials)....... 1,452,632
1,118,000 Semen Gresik (F) (Building Materials)......... 3,254,329
200,400 Tambang Timah, GDR*** (Metals and Mining)..... 3,637,260
155,400 Telekomunikas Indonesia, ADR
(Telephone/Regional-Local).................... 4,623,150
455,000 Telekomunikas Indonesia (F)
(Telephone/Regional-Local).................... 689,098
-----------
33,940,049
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Markets Fund
---------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
<C> <S> <C>
Israel -- 0.5%
19,929 ECI Telecommunications, Ltd., ADR
(Telecommunications/Other)....................$ 462,104
50,000 Koor Industries, ADR (Holding)................ 862,500
71,000 Osem Investment, Ltd. (Food and Beverage)..... 419,704
7,132 Teva Pharmaceuticals (Pharmacy/Drugs)......... 2,694,918
21,203 Teva Pharmaceuticals, ADR
(Pharmacy/Drugs).............................. 804,389
-----------
5,243,615
Jordan -- 0.1%
203,084 Dar Al Dawa Development & Inv.
(Health Care)................................. 1,302,371
Korea -- 4.2%
259,534 Korea Electric Power Corporation, ADR
(Electric Utilities).......................... 10,510,743
8,200 Korea Housing Bank New (Banks)................ 191,050
5,478 Korea Mobile Telecommunications
(Telephone/Wireless).......................... 6,698,935
57,600 Pohang Iron & Steel Company (Steel)........... 4,695,570
173,295 Samsung Company, Ltd. (Holding)............... 3,695,764
21,998 Samsung Company, Ltd., GDS Non-voting
(Holding)..................................... 129,238
7,865 Samsung Company, Ltd., Sponsored GDS***
(Holding)..................................... 46,207
9,866 Samsung Company, Ltd., Refunding 1/1/97
(Holding)..................................... 199,886
9 Samsung Electronics Ltd., GDR ***
(Electronics)................................. 447
64 Samsung Electronics Ltd., GDR, Voting
(Electronics)................................. 3,182
2,923 Samsung Electronics Ltd., GDR ***
Non-voting (Electronics)...................... 68,756
31 Samsung Electronics Ltd., GDR***
Non-voting (Electronics)...................... 1,589
25,089 Samsung Electronics Ltd., Refunding 1/1/97
(Electronics)................................. 1,994,872
9,700 Samsung Electronics Ltd., GDS***
(Electronics)................................. 235,225
213 Samsung Electronics Ltd New., GDS
(Electronics)................................. 10,916
4,012 Samsung Electronics Ltd. (F) (Electronics).... 336,806
459,192 Shinhan Bank (Banks).......................... 10,786,370
84,500 Yukong, Ltd. (Oil)............................ 2,479,167
-----------
42,084,723
Malaysia -- 8.9%
4,203,000 Arab Malaysian Corporation
(Diversified Financial Services)............... 16,512,087
267,000 Arab Malaysian Finance (F)
(Diversified Financial Services)............... 1,166,687
3,343,000 Development & Commercial Bank Holdings
Corporation (Banks)............................ 11,458,268
145,000 Edaran Otomobil Nasional Berhad**
(Auto/Auto Parts).............................. 1,389,256
7,063,000 IJM Corporation Berhad
(Heavy Construction)........................... 12,231,774
13,130,000 IOI Corporation Oxygen
Inc. (Chemicals)............................... 18,211,986
383,000 IOI Industrial Oxygen
Inc. (Chemicals)............................... 523,877
1,649,000 Metacorp Berhad
(Chemicals).................................... 4,759,591
1,004,000 New Straits Time**
(Newspaper/Publishing)......................... 5,232,311
3,067,000 Petronas Gas (Oil)............................. 13,155,703
654,000 Resorts World Berhad
(Leisure Time)................................. 3,749,128
700 United Engineers Berhad**
(Heavy Construction)........................... 4,855
-----------
88,395,523
Mexico -- 9.9%
4,190,941 Alfa S.A. de C.V. (Steel)...................... 18,813,651
2,747,500 Cementos Mexicanos, S.A.
(Building Materials)........................... 9,743,935
4,075,500 Cementos Mexicanos, S.A., Class B
(Building Materials)........................... 15,823,794
2,641,000 Empresas La Moderna S.A. de C.V.
(Tobacco)...................................... 11,786,137
8,068,000 Grupo Financiero Banamex, Series B (Banks)..... 16,763,570
2,069,385 Grupo Financiero Banamex, Series L (Banks)..... 3,928,694
2,692,194 Industrias Penoles CPO (Metals and Mining)..... 12,316,300
310,000 Kimberly Clark de Mexico, Class A
(Pulp and Paper)............................... 5,640,079
549,000 San Luis Corporacion S.A. de C.V.
(Metals and Mining)............................ 3,372,894
-----------
98,189,054
Morocco -- 0.2%
171,000 Banque Marocaine de Commerce,
GDR+ *** (Banks)............................... 2,436,750
Pakistan -- 0.2%
73,617 Adamjee Insurance Company** (Insurance)........ 292,324
508,000 DG Khan Cement**+ (Building Materials)......... 201,720
62,458 Engro Chemical Pakistan** (Chemicals).......... 289,050
518,760 ICI Pakistan (Chemicals)....................... 798,035
69,068 Nishat Textile Mills**+ (Apparel and Textiles). 27,623
995 Pakistan Elektron (Electrical Equipment)....... 938
71,165 Pakistan State Oil** (Oil)..................... 839,627
-----------
2,449,317
Peru -- 1.7%
76,800 Buenaventura, ADR+ (Metals and Mining)......... 1,526,400
403,806 Credicorp Ltd. (Banks)......................... 8,025,644
1,433,939 Enrique Ferreyros S.A. (Holding)............... 2,054,354
2,577,610 Telefonica del Peru, Class B
(Telephone/Networks)........................... 5,233,297
-----------
16,839,695
Philippines -- 4.0%
21,002,560 Aboitiz Equity Ventures + (Conglomerates)...... 3,927,960
48 Ayala Land Inc., Class B (Real Estate)......... 86
16 Bacnotan Cement (Building Materials)........... 12
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
<C> <S> <C>
Philippines -- continued
890 BenPres Holdings, GDR***
(Broadcasting/Advertising)....................$ 7,178
4,343,800 C & P Homes (Real Estate)..................... 3,771,811
7,118,000 DMCI Holdings (Building Materials)............ 5,093,989
17,061,300 Filinvest Land, Inc. (Real Estate)............ 7,000,343
3,296,906 Keppel Philippine Shipyards, Inc., Class B
(Shipping).................................... 968,938
1,554,834,234 Manila Mining, Class B (Metals and Mining).... 1,542,965
34,261,351 Metro Pacific Inc., Class B (Conglomerates)... 10,199,944
21,650 Philippine Long Distance Telephone
(Telephone/Long Distance)..................... 1,289,084
8,495 Philippine Long Distance Telephone, ADR
(Telephone/Long Distance)..................... 493,772
240,420 Philippine National Bank (Banks).............. 4,014,647
4,274,000 Republic Glass (Glass)........................ 1,631,298
-----------
39,942,027
Portugal -- 2.4%
50,175 Capital Portugal Fund (Mutual Funds).......... 4,951,797
307,750 Electricas Empresa Fabril de Maquinas
(Electrical Equipment)........................ 2,889,764
911,800 Portucel Industries Empresa (Pulp and Paper).. 5,841,810
397,750 Sonae Investmentos (Conglomerates)............ 10,340,738
-----------
24,024,109
Russia -- 1.5%
46,389 Global Telesystems Group, Inc.**
(Telephone/Networks).......................... 754,765
150 Irkutskenegro, RDC*** (Oilfield Equipment).... 3,900,000
125 LukOil, RDC*** (Oil).......................... 6,795,313
81,700 Mosenergo, ADS*** (Electric Utilities)........ 2,328,450
43,500 Mosenergo, Sponsored ADS (Electric Utilities). 1,239,750
-----------
15,018,278
Singapore -- 0.7%
4,575,572 CDL Hotels International, Ltd. (Real Estate).. 2,512,183
839,000 Far East Levingston (Heavy Construction)...... 4,637,987
444 United Overseas Bank (F) (Banks).............. 4,248
-----------
7,154,418
South Africa -- 5.1%
45,000 Anglo American Gold Investment Company
(Metals and Mining)........................... 3,904,916
77,100 Anglovaal, Ltd. (Diversified Financial Services) 2,811,401
50,430 Barlow, Ltd. (Building Materials)............. 526,646
2,146,700 Clinic Holdings (Health Care)................. 2,613,395
5,895,000 Highstone Property Fund (Real Estate)......... 1,945,500
2,893,700 Lonrho (Conglomerates)........................ 8,180,897
32,000 Pepsi International Bottlers**+
(Food and Beverage)........................... 3,250,589
601,500 Randgold & Exploration Company
(Metals and Mining)........................... 3,165,059
396,000 Sappi, Ltd. (Pulp and Paper).................. 4,377,660
689,836 Sasol, Ltd. (Metals and Mining)............... 7,482,643
500,600 Servgro International, Ltd.
(Consumer Services)........................... 2,946,065
7,867,194 South Africa Iron & Steel Industrial
Corporation (Steel)........................... 6,155,040
1,118,890 Waltons Stationary Company (Retail Trade)..... 2,969,590
-----------
50,329,401
Sri Lanka -- 0.1%
216,195 Aitken Spence and Company (Conglomerates)..... 619,314
61,300 Development Finance Corporation of
Ceylon+ (Banks)............................... 332,426
-----------
951,740
Taiwan -- 3.9%
2,218,759 ASE, Ltd.** (Semiconductor)................... 3,660,307
885,840 Cathay Life Insurance** (Insurance)........... 6,244,657
9,336,000 China Steel Corporation** (Steel)............. 9,770,233
6,254,600 Pacific Construction**+ (Heavy Construction).. 6,181,872
1,383,760 Taiwan Mask** (Semiconductor)................. 3,720,866
2,273,280 Taiwan Semiconductor Company** (Semiconductor) 4,749,767
1,153,600 Yageo Corporation** (Electronics)............. 1,764,773
120,148 Yageo Corporation, GDR (Electronics).......... 938,957
269,350 Yageo Corporation, GDR*** (Electronics)....... 2,104,970
-----------
39,136,402
Thailand -- 7.2%
430,986 Ban Pu Coal Public Company, Ltd. (F) (Coal)... 12,426,412
193,800 Bangkok Bank Public Company, Ltd.,
SER 1 (F) (Banks)............................. 1,831,410
1,192,300 Bangkok Bank Public Company, Ltd.,
SER 2 (F) (Banks)............................. 11,267,235
149,250 Bangkok Insurance Public Company, Ltd. (F)
(Insurance)................................... 2,798,291
290,100 Central Pattana Public Company, Ltd. (F)
(Real Estate)................................. 1,348,346
536,700 CH Karnchang Public Company (F)
(Heavy Construction).......................... 3,720,624
246,100 Dhana Siam Finance and Securities Public
Company (F) (Diversified Financial Services).. 1,366,791
1,986,450 Electricity Generating Company of Thailand (F)
(Electric Utilities).......................... 6,924,564
163,800 Phatra Thanakit Finance & Security Company (F)
(Securities Brokerage)........................ 1,141,980
1,058,400 Phatra Thanakit Company, Ltd. (Diversified
Financial Services)........................... 7,133,616
109,500 PTT Exploration and Production Public
Company, Ltd. (F) (Oil)....................... 1,604,459
301,600 Regional Container Lines (F) (Shipping)....... 4,419,222
37,300 Siam Cement Public Company, Ltd.
(Building Materials).......................... 1,716,173
85,100 Siam Cement Public Company, Ltd. (F)
(Building Materials).......................... 4,176,564
1,236,300 Thai Farmers Bank Public Company,
SER 1 (F) (Banks)............................. 9,160,983
39,900 Thai Farmers Bank Public Company,
SER 2 (F) (Banks)............................. 295,659
1,391,500 Wongpaitoon Footwear Public Company, Ltd.
(F) (Footwear)................................ 753,629
----------
72,085,958
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
---------------------
The Montgomery Funds
---------------------
Emerging Markets Fund
---------------------
I N V E S T M E N T S
<TABLE>
<CAPTION>
COMMON STOCKS -- continued
Shares Value (Note 1)
Turkey -- 1.1%
<S> <C> <C>
5,532,043 Cimentas A.S., ORD (Building Materials).......... $ 1,212,576
4,602,600 Efes Sinai Yatrium ve Ticaret**
(Food and Beverage).............................. 316,443
136,250 Erciyas Biracilik ve Malt, ADS
(Food and Beverage).............................. 1,532,812
9,952,900 Koc Holding (Holding)............................ 2,423,989
4,728,564 Tat Konserve (Food and Beverage)................. 1,108,437
21,644,663 Trakya Cam Sanayil (Glass)....................... 1,186,081
24,326,000 Turk Sise ve Cam (Glass)......................... 1,925,463
58,354,000 Yapi ve Kredi Bankasi A.S. (Banks)............... 1,652,132
---------
11,357,933
Vietnam -- 0.1%
42,600 Southeast Asia Frontier Fund (Mutual Funds) 223,650
38,000 The Vietnam Frontier Fund (Mutual Funds) 437,000
-------
660,650
-------
TOTAL COMMON STOCKS
(Cost $698,090,356)............................................ 771,457,354
-----------
PREFERRED STOCKS -- 14.2%
Brazil -- 13.5%
3,033,001,596 Banco Bradesco (Banks)........................... 24,767,827
12,470,000 Brahma (Food and Beverage)....................... 7,438,660
343,420,000 Cia Energetica de Minas Gerais
(Electric Utilities)............................. 9,131,419
6,286,675 Cimento Itau (Building Materials)................ 1,778,037
11,805,400 Coteminas (Apparel and Textiles)................. 4,661,496
79,551,000 Electrobras, "B" (Electric Utilities)............ 22,736,779
88,757,143 Industrias Romi, S.A.
(Machinery and Tools)............................ 1,356,791
50,500 Kepler Weber S.A. (Machinery and Tools).......... 276,602
67,300,000 Lojas Americanas (Retail Trade).................. 1,327,033
91,972,000 Lojas Renner S.A. (Retail Trade)................. 4,854,370
9,680,000 Marcopolo S.A., Series B (Auto/Auto Parts)....... 2,082,239
19,025,000 Metalurgica E Shultz S.A. (Steel)................ 303,142
130,321,300 Petroleo Brasileiros (Oil)....................... 16,028,164
3,027,055,800 Randon Participacoes (Auto/Auto Parts).......... 1,597,709
8,175,001 Sadia Condordia (Food and Beverage).............. 5,698,850
72,785,194 Telebras (Telephone/Networks).................... 5,081,155
42,810,000 Telec de Minas Gerais S.A.
(Telephone/Regional-Local)....................... 4,412,949
17,879,000 Telec de Sao Paulo S.A.
(Telephone/Regional-Local)....................... 3,828,098
80,104,944 Telec do Rio Janeiro S.A.
(Telephone/Networks)............................. 9,014,449
345,888 Vale do Rio Doce (Metals and Mining)............. 6,699,718
2,423,000 Weg S.A. (Furniture)............................. 1,128,071
---------
134,203,558
<CAPTION>
Shares Value (Note 1)
<S> <C> <C>
Korea -- 0.1%
5,775 Samsung Electronics, Ltd., Refunding
1/1/97 (Electronics)............................. 228,162
19,165 Samsung Electronics, Ltd (F) (Electronics)....... 814,282
-------
1,042,444
Philippines -- 0.6%
23,500 Philippine Long Distance Telephone
(Telephone/Long Distance)........................ 1,280,750
138,700 Philippine Long Distance Telephone,
Convertible Preferred, 5.750%
12/31/49 (Telephone/Long Distance)............... 4,684,939
---------
5,965,689
---------
TOTAL PREFERRED STOCKS
(Cost $127,890,293)............................................ 141,211,691
-----------
CONVERTIBLE BONDS -- 2.0%
Principal amount
Malaysia -- 0.0%#
$578,000 AMMB Loan Stock, 7.500% due 12/31/99
(Diversified Financial Services)................. 352,199
50,000 United Engineers Berhad, 2.000% due
03/01/04 (Heavy Construction).................... 60,250
------
412,449
Mexico -- 0.1%
650,000 Alfa S.A. de C.V.,, 8.000% due 09/15/00***
(Steel).......................................... 702,163
Philippines -- 0.1%
1,030,000 Metro Pacific, Inc., 2.500% due 04/11/03
(Conglomerates).................................. 1,156,175
South Africa -- 0.3%
2,360,000 Barlow, Ltd., 7.000% due 09/20/04***
(Building Materials)............................. 2,891,000
Taiwan -- 0.2%
2,250,000 Pacific Construction, 2.125% due 10/01/98
(Heavy Construction)............................. 2,094,750
Thailand -- 1.3%
7,975,000 Bangkok Bank Public Company, Ltd.,
3.250% due 03/03/04 (Banks)...................... 9,079,538
2,100,000 Central Pattana Public Company, Ltd.,
2.750% due 04/10/01 (Real Estate)................ 2,299,500
1,500,000 Siam Sindhorn, 2.000% due 07/31/00***
(Real Estate).................................... 1,051,875
---------
12,430,913
----------
TOTAL CONVERTIBLE BONDS
(Cost $18,439,386)............................................. 19,687,450
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Emerging Markets Fund
- ---------------------
I N V E S T M E N T S
<TABLE>
<CAPTION>
WARRANTS -- 0.3%
Shares Value (Note 1)
Czech Republic -- 0.0%#
<S> <C> <C>
81,300 The Czech Value Fund, Warrants Expire
09/13/98 + (Mutual Funds)........................... $ 142,275
Indonesia -- 0.0%#
200 Bank Bali (F), Warrants Expire 08/29/00 +
(Banks)............................................. 107
Malaysia -- 0.3%
2,317,500 Development and Commercial Bank Holdings
Corporation, Warrants Expire 12/27/99 +
(Banks)............................................. 3,047,264
105,000 Petronas Gas, Warrants Expire 08/17/00 +
(Oil)............................................... 231,509
-------
3,278,773
---------
TOTAL WARRANTS
(Cost $2,489,074)............................................... 3,421,155
---------
CORPORATE BONDS -- 0.2%
(Cost $1,629,246)
Principal amount
Philippines -- 0.2%
$1,905,000 Ayala Land, Inc., Zero Coupon due
12/08/00 (Real Estate).............................. 1,685,925
---------
RIGHTS -- 0.1%
Shares
Pakistan -- 0.0% #
1,685,970 ICI Pakistan, Rights, Expire 11/21/96+
(Chemicals)......................................... 481,637
Turkey -- 0.1%
3,546,512 Tat Konserve, Rights, Expire 07/24/96+
(Food and Beverage)................................. 525,389
-------
TOTAL RIGHTS
(Cost $703,746 )................................................ 1,007,026
---------
TOTAL SECURITIES
(Cost $849,242,101)............................................. 938,470,601
-----------
<CAPTION>
REPURCHASE AGREEMENTS -- 4.2%
Principal amount Value (Note 1)
<S> <C> <C>
$20,870,000 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be repurchased
at $20,879,739 on 07/01/96, collateralized by
$23,337,393 market value of U.S. Government
securities, having various maturities and
various interest rates.............................. $ 20,870,000
20,870,000 Agreement with Paine Webber Group, Inc.
Tri-Party, 5.600% dated 06/28/96, to be
repurchased at $20,879,739 on 07/01/96,
collateralized by $21,287,995 market value
of U.S. Government securities, having
various maturities and various
interest rates...................................... 20,870,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $41,740,000).............................................. 41,740,000
----------
TOTAL INVESTMENTS -- 98.6%
(Cost $890,982,101*)............................................ 980,210,601
OTHER ASSETS AND LIABILITIES --1.4%
(Net)........................................................... 14,169,460
----------
NET ASSETS -- 100.0%............................................. $994,380,061
------------
</TABLE>
* Aggregate cost for Federal tax purposes was $893,945,912.
** Illiquid Security or Special Situation Security (See Note 7 to Financial
Statements).
*** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Amount represents less than 0.1%.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
ADR....American Depositary Receipt
ADS....American Depositary Share
(F)....Foreign or Alien Shares
GDR....Global Depositary Receipt
GDS....Global Depositary Share
ORD....Ordinary
RDC....Russian Depositary Certificate
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
INVESTMENT REVIEW
Q: Since the inception of the Montgomery Select 50 Fund on October 2, 1995,
the returns have been impressive, substantially outperforming the Standard &
Poor's 500 Index. Why?
A: The Fund's strong performance to date is due primarily to effective stock
selection. The Select 50 Fund has a simple, straightforward strategy in its
quest for capital appreciation: The teams from five of Montgomery's equity
investment disciplines--Growth, Micro Cap, Equity Income, Emerging Markets and
International--each pick at least 10 stocks within their respective discipline
which they believe have the best potential for capital appreciation. Over the
past nine months, most stocks selected by each discipline contributed
positively to overall Fund performance.
Q: Has the strategy of the Fund changed over the nine months since its
inception?
A: No, the strategy is exactly as originally conceived: Five equity
disciplines each select at least 10 stocks. It's worth elaborating on the idea
behind the Fund, though. It's meant to be a focused approach to seeking long-
term capital appreciation. The Fund tries to be fully invested; at the end of
fiscal 1996, the Fund had a cash position of about 15.2%. Other than the five
disciplines, there's no "top-down" allocation process; this fund focuses on
stock picking.
Because the Fund gets stock selection ideas from five different disciplines,
it is diversified by both style and geography. At year-end, there were 51
different stocks in the portfolio, with exposure to the U.S., other developed
countries and emerging markets.
Q: Why should an investor consider the Montgomery Select 50 Fund now?
A: We believe it offers an easy, convenient way to tap some of the best stock
opportunities uncovered by Montgomery's investment professionals. It's an
aggressive stock fund focused on long-term capital appreciation, but it also
offers diversification, which helps to control volatility of returns.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
/1/ The Standard & Poor's 500 Index is composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC market.
/2/ The Lipper Capital Appreciation Funds Average universe consists of 169
funds.
- --------------------------------------------------------------------------------
The Montgomery Funds
- --------------------------------------------------------------------------------
Select 50 Fund
- --------------------------------------------------------------------------------
P O R T F O L I O H I G H L I G H T S
================================================================================
P O R T F O L I O M A N A G E M E N T
- --------------------------------------------------------------------------------
Montgomery Growth Team
Montgomery Micro Cap Team
Montgomery Equity Income Team
Montgomery International/Global Team
Montgomery Emerging Markets Team
================================================================================
F U N D P E R F O R M A N C E
- --------------------------------------------------------------------------------
Aggregate total returns
for the periods ended 6/30/96
- --------------------------------------------------------------------------------
Montgomery Select 50 Fund
Since inception (10/2/95)................................................ 37.75%
- --------------------------------------------------------------------------------
S&P 500 Index
Since 9/30/95............................................................ 16.72%
- --------------------------------------------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
<TABLE>
<CAPTION>
================================================================================
T O P T E N H O L D I N G S
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
<S> <C>
Masco Corporation.......................................................... 4.0%
HFS Inc.................................................................... 3.6%
Teva Pharmaceuticals, ADR.................................................. 3.4%
Gucci Group................................................................ 3.2%
Moog Inc., Class A......................................................... 2.7%
Comshare Inc............................................................... 2.6%
DMCI Holdings.............................................................. 2.5%
Eidos PLC.................................................................. 2.5%
SGL Carbon AG.............................................................. 2.4%
Avid Technology Inc........................................................ 2.3%
</TABLE>
<TABLE>
<CAPTION>
================================================================================
T O P F I V E I N D U S T R I E S
- --------------------------------------------------------------------------------
(as a percentage of total net assets)
<S> <C>
Software Systems.......................................................... 11.4%
Building Materials......................................................... 8.5%
Pharmacy/Drugs............................................................. 7.2%
Telecommunications Equipment............................................... 5.7%
Metal and Mining........................................................... 5.4%
</TABLE>
43
<PAGE>
--------------------
The Montgomery Funds
--------------------
Select 50 Fund
--------------------
I N V E S T M E N T S
PORTFOLIO INVESTMENTS
June 30, 1996
<TABLE>
<CAPTION>
COMMON STOCKS -- 91.1%
Shares Value (Note 1)
<S> <C>
Aerospace and Defense -- 2.7%
87,000 Moog Inc., Class A+ (United States)................. $ 2,131,500
Apparel and Textiles -- 0.7%
615,000 Goldlion Holdings, Ltd. ORD (Hong Kong)............. 528,340
Auto/Auto Parts -- 0.6%
145,000 Diversified Resource (Malaysia)..................... 499,900
Bank/Savings and Loan -- 4.8%
39,000 Banc One Corporation (United States)................ 1,326,000
63,000 Great Western Financial Corporation
(United States)..................................... 1,504,125
432,000 Grupo Financiero Banamex, Series B (Mexico)......... 897,603
12,960 Grupo Financiero Banamex, Series L (Mexico)......... 24,604
------
3,752,332
Biotechnology -- 1.7%
279,400 Cortec International, Ltd.+ (Great Britain)......... 1,346,284
Broadcasting/Advertising -- 2.0%
60,750 HA-LO Industries+ (United States)................... 1,594,688
Building Materials -- 8.5%
69,000 AMRE Inc.+ (United States).......................... 1,509,375
2,743,000 DMCI Holdings+ (Philippines)........................ 1,963,025
104,000 Masco Corpation (United States)..................... 3,146,000
---------
6,618,400
Chemicals -- 1.6%
29,000 Betz Laboratories Inc. (United States).............. 1,272,375
Computers and Office Equipment -- 2.5%
155,260 Eidos PLC+ (Great Britain).......................... 1,918,560
Electric Utilities -- 1.4%
31,800 Mosenergo, ADS**+ (Russia).......................... 906,300
6,000 Western Resources Inc. (United States).............. 179,250
-------
1,085,550
Food and Beverage -- 1.3%
13,000 Anheuser-Busch Companies Inc. (United States)....... 975,000
Holding -- 1.3%
1,589,000 Koc Holding (Turkey)................................ 256,384
187,000 Westmont Industries Berhad (Malaysia)............... 328,346
261,800 Westmont Industries Berhad, Class A (Malaysia)...... 434,497
-------
1,019,227
Leisure Time -- 0.8%
20,000 GTECH Holdings Corporation+
(United States)..................................... 592,500
Lodging -- 3.6%
40,000 HFS Inc.+ (United States)........................... 2,800,000
Machinery and Tools -- 1.6%
52,400 Toolex Alpha N.V., ADR+ (Netherlands)............... 1,277,250
Metal and Mining -- 5.4%
16,150 SGL Carbon AG (Germany)............................. 1,890,442
303,000 Tambang Timah (F) (Indonesia)....................... 559,785
37,600 Tambang Timah GDR (Indonesia)....................... 682,440
60,700 Tambang Timah GDR** (Indonesia)..................... 1,101,705
---------
4,234,372
Oil -- 3.8%
20,000 Amoco Corporation (United States)................... 1,447,500
41,900 Belco Oil & Gas Corporation+ (United States)........ 1,487,450
---------
2,934,950
Oilfield Equipment -- 1.0%
30,000 Falcon Drilling Company Inc.+ (United States)....... 811,875
Pharmacy/Drugs -- 7.2%
17,000 Bristol-Myers Squibb Company
(United States)..................................... 1,530,000
24,700 Elan Corporation PLC, ADR+ (Ireland)................ 1,410,987
70,700 Teva Pharmaceuticals, ADR (Israel)................. 2,682,181
---------
5,623,168
Pulp and Paper -- 3.2%
30,000 International Paper Company (United States)......... 1,106,250
32,000 Weyerhauser Company (United States)................. 1,360,000
---------
2,466,250
Retail Trade -- 4.2%
7,500 Dayton-Hudson Corporation (United States)........... 773,437
38,600 Gucci Group (Italy)................................. 2,489,700
---------
3,263,137
Semiconductors -- 1.3%
51,100 Unitrode Corporation+ (United States)............... 990,063
Software Systems -- 11.4%
65,000 Comshare Inc.+ (United States)...................... 1,998,750
15,000 Edify Corporation+ (United States).................. 393,750
40,500 Kronos, Inc.+ (United States)....................... 1,417,500
60,000 NETCOM On-Line Communication
Services+ (United States)........................... 1,605,000
39,520 Ordina Beheer N.V.+ (Netherlands)................... 1,515,455
20,000 Transition Systems Inc.+ (United States)............ 565,000
22,400 W.M. Data AB, Class B+ (Sweden)..................... 1,420,933
---------
8,916,388
Steel -- 1.6%
481,000 Siderar S.A.I.C., Class A+ (Argentina).............. 1,236,634
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
---------------------
The Montgomery Funds
---------------------
Select 50 Fund
---------------------
I N V E S T M E N T S
<TABLE>
<CAPTION>
COMMON STOCKS -- continued
Shares Value (Note 1)
<S> <C>
Technology--Miscellaneous -- 2.3%
96,400 Avid Technology Inc.+ (United States)................$ 1,777,375
Telecommunications/Wireless -- 1.9%
850 Korean Mobile Telecommunications (Korea)............. 1,039,448
24,900 Korean Mobile Telecommunications, ADR
(Korea).............................................. 426,412
---------
1,465,860
Telecommunications Equipment -- 5.7%
68,400 Ericsson (L.M.) Telephone Company,
Class B (Sweden)..................................... 1,477,300
30,000 Northern Telecom Ltd. (United States)................ 1,631,250
68,700 Octel Communications Corporation+
(United States)...................................... 1,348,238
---------
4,456,788
Telephone/Long Distance -- 1.4%
30 Philippine Long Distance Telephone
(Philippines)........................................ 1,786
18,300 Philippine Long Distance Telephone, ADR
(Philippines)........................................ 1,063,687
---------
1,065,473
Telephone/Networks -- 1.8%
20,100 Telebras, ADR (Brazil) 1,399,463
Tobacco -- 3.8%
14,000 Philip Morris Companies, Inc. (United States) 1,456,000
43,000 UST Inc. (United States) 1,472,750
---------
2,928,750
---------
TOTAL COMMON STOCKS
(Cost $64,362,365)............................................... 70,982,452
----------
<CAPTION>
REPURCHASE AGREEMENTS -- 15.2%
Principal amount Value (Note 1)
<S> <C> <C>
$5,933,500 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/28/96, to
be repurchased at $5,936,269 on
07/01/96, collateralized by $6,052,170
market value of U.S. Government
securities, having various maturities
and various interest rates........................... 5,933,500
5,933,500 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be repurchased
at $5,936,269 on 07/01/96 collateralized
by $6,634,999 market value of U.S.
Government securities, having various
maturities and various interest rates................ 5,933,500
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $11,867,000)............................................... 11,867,000
----------
TOTAL INVESTMENTS -- 106.3%
(Cost $76,229,365*).............................................. 82,849,452
OTHER ASSETS AND LIABILITIES -- (6.3%)
(Net)............................................................ (4,894,775)
-----------
NET ASSETS -- 100.0%.............................................$ 77,954,677
==============
</TABLE>
* Aggregate cost for Federal tax purposes was $76,330,662.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
ADR....American Depositary Receipt
ADS....American Depositary shares
(F)....Foreign or alien shares
GDR....Global Depositary Receipt
ORD....Ordinary
45
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ------------------------------------------
The Montgomery Funds
- ------------------------------------------
Asset Allocation Fund
- ------------------------------------------
P O R T F O L I O H I G H L I G H T S
==========================================
P O R T F O L I O M A N A G E M E N T
- ------------------------------------------
Roger Honour......Senior Portfolio Manager
Bill Stevens......Senior Portfolio Manager
Andy Pratt...............Portfolio Manager
===========================================
F U N D P E R F O R M A N C E
- -------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- -------------------------------------------
Montgomery
Asset Allocation Fund
Since inception (3/31/94)............27.22%
One year.............................23.92%
- -------------------------------------------
S&P 500 Index
Since 3/31/94........................23.07%
One year.............................26.00%
- -------------------------------------------
Lehman Aggregate
High-Grade Bond Index
Since 3/31/94.........................7.22%
One year..............................5.02%
- -------------------------------------------
Past performance is no guarantee of future
results. Net asset value, investment return
and principal value will fluctuate so that
shares, when redeemed, may be worth more or
less than their original cost.
[LINE CHART APPEARS HERE]
Growth of a $10,000 Investment
/1/The Standard & Poor's 500 Index is
composed of 500 widely held common
stocks listed on the NYSE, AMEX and OTC
market.
/2/The Lehman Brothers Aggregate High-Grade
Bond Index includes fixed-rate debt
issues rated investment grade or higher
by Moody's, S&P or Fitch.
/3/The Lipper Flexible Portfolio Funds
Average universe consists of 174 funds.
I N V E S T M E N T R E V I E W
Q: How did the Asset Allocation Fund perform relative to its benchmarks and
why?
A: The Asset Allocation Fund outperformed the Standard & Poor's 500 Index and
the Lehman Aggregate High-Grade Bond Index for the year ended June 30, 1996. The
Fund's performance was driven primarily by its equity exposure, which is managed
by Montgomery's Growth Equity team. Good stock selection, the result of our
long-standing investment process, led to strong performance in the equity
portion of the Fund, which represented 52% of the Fund's investments at June 30,
1996. The fixed-income component of the Fund made up the remaining 48% of the
portfolio.
Q: Which sectors did particularly well during the year?
A: The equity portion of the Fund is managed from a bottom-up perspective; we
pick stocks, not sectors. But from a sector perspective, retail and energy
stocks were good performers, while our technology stocks were essentially flat
for the year.
Bonds as a whole did not fare well over the past 12 months, particularly in the
first six months of calendar 1996. In fact, the bond and stock markets decoupled
- -- rising interest rates drove bond yields up and prices down, but equity
markets continued their dramatic rally. This year demonstrates how the Asset
Allocation Fund works to the advantage of the investor: The Fund's equity
holdings more than offset poorly performing bonds.
The duration of the fixed-income portion of the Fund was in the intermediate
range of the spectrum, at about 4 3/4 years. We remain underweighted in
corporate bonds, which we believe do not offer enough yield for their credit
risk.
Q: How are you positioning the Fund for the year ahead?
A: We don't really "position" the equity portion of the Fund; we simply apply
our disciplined stock selection process to finding "growth at the right price."
We use proprietary, quantitative screening techniques to uncover companies with
accelerating growth, then use fundamental research to identify those companies
with sustainable growth. These two steps help us find good companies. Then,
rigorous valuation analysis helps us determine which of those companies are good
bargains.
On the fixed-income side, we're positioned to take advantage of our somewhat
bullish forecast for interest rates. The market clearly believes that rates are
going to go up even further, but we feel the economy will show signs of weakness
in the second half of 1996, alleviating the pressure on interest rates. As a
result, we will probably increase the allocation of bonds in the coming months.
46
<PAGE>
---------------------------------------
The Montgomery Funds
---------------------------------------
Asset Allocation Fund
---------------------------------------
P O R T F O L I O H I G H L I G H T S
Q: Why should an investor consider the Asset Allocation Fund now?
A: For investors who are uncertain about the market, the Asset Allocation Fund
provides "one-stop shopping" in terms of portfolio diversification; we have a
proprietary optimization model which is reviewed monthly to determine the
optimum mixture of stocks and bonds. Stock market exposure provides the
potential for capital growth, while the bonds provide current income and a
degree of stability.
=================================================
T O P T E N H O L D I N G S
- -------------------------------------------------
(as a percentage of total net assets)
FNMA, 7.000% due TBA.........................5.8%
HFS Inc......................................5.3%
U.S. Treasury Notes, 6.250% due 06/30/98.....3.8%
U.S. Treasury Notes, 6.875% due 07/31/99.....3.4%
U.S. Treasury Notes, 6.875% due 05/15/06.....2.3%
Octel Communications Corporation.............2.2%
International Paper Company..................2.2%
Dayton Hudson Corporation....................2.2%
Masco Corporation............................2.1%
U.S. Treasury Bonds, 6.250% due 08/15/23.....2.1%
=================================================
A S S E T M I X
- -------------------------------------------------
(as a percentage of total investments,
which excludes other liabilities)
Stocks......................................51.8%
Bonds.......................................48.2%
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
<TABLE>
<CAPTION>
COMMON STOCKS -- 56.7%
Shares Value (Note 1)
Banks/Savings and Loan -- 3.2%
<S> <C> <C>
12,500 BankAmerica Corporation.............................. $ 946,875
10,000 Citicorp............................................. 826,250
45,000 Golden West Financial Corporation.................... 2,520,000
---------
4,293,125
Building Materials -- 3.8%
70,000 Champion Enterprises Inc.+........................... 1,461,250
41,000 Clayton Homes Inc.................................... 820,000
90,000 Masco Corporation.................................... 2,722,500
---------
5,003,750
Business Services -- 1.9%
55,200 AccuStaff Inc. +..................................... 1,511,100
12,900 Computer Sciences Corporation +...................... 964,275
---------
2,475,375
Conglomerates -- 0.7%
22,500 Tyco International Ltd............................... 916,875
Diversified Financial Services -- 1.9%
20,000 American Express Company............................. 892,500
20,000 Associates First Capital Corporation+................ 752,500
26,000 Norwest Corporation.................................. 906,750
---------
2,551,750
Health Care -- 1.6%
65,000 Healthsource Inc.+................................... 1,137,500
25,000 Oxford Health Plans, Inc.+........................... 1,026,563
---------
2,164,063
<CAPTION>
Shares Value (Note 1)
<S> <C>
Home Appliances -- 0.6%
15,000 Whirlpool Corporation................................ $ 744,375
Insurance -- 1.6%
70,000 Life Re Corporation.................................. 2,161,250
Leisure Time -- 1.0%
42,600 GTECH Holdings Corporation+.......................... 1,262,025
Lodging -- 6.0%
100,000 HFS Inc.+............................................ 7,000,000
43,400 Interstate Hotels Company+........................... 965,650
---------
7,965,650
Machinery and Tools -- 2.7%
42,000 Manitowoc Company.................................... 1,506,750
70,600 Measurex Corporation................................. 2,065,050
---------
3,571,800
Newspapers/Publishing -- 0.8%
44,000 World Color Press Inc.+.............................. 1,116,500
Oil -- 1.3%
50,000 Belco Oil & Gas Corporation+......................... 1,775,000
Oilfield Equipment -- 3.3%
27,600 Schlumberger Ltd..................................... 2,325,300
47,000 Tidewater Inc........................................ 2,062,125
---------
4,387,425
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Asset Allocation Fund
- ---------------------
I N V E S T M E N T S
COMMON STOCKS -- continued
<TABLE>
<CAPTION>
Shares Value (Note 1)
Pharmacy/Drugs -- 1.6%
<S> <C> <C>
17,400 Dura Pharmaceuticals Inc..............................$ 975,487
25,000 Pharmacia and Upjohn Inc.............................. 1,109,375
---------
2,084,862
Pipelines -- 0.8%
25,000 Enron Corporation..................................... 1,021,875
Pulp and Paper -- 2.2%
80,000 International Paper Company........................... 2,950,000
Real Estate -- 0.7%
24,600 Starwood Lodging Trust................................ 894,825
Retail Trade -- 6.7%
27,800 Dayton Hudson Corporation............................. 2,866,875
15,100 Gucci Group.......................................... 973,950
60,500 Nordstrom, Inc........................................ 2,684,688
40,000 Saks Holdings Inc.+................................... 1,365,000
55,000 Staples, Inc.+........................................ 1,069,063
---------
8,959,576
Semiconductors -- 1.7%
60,000 Analog Devices Inc.+.................................. 1,530,000
45,000 International Rectifier Corporation+.................. 725,625
---------
2,255,625
Software Systems -- 0.7%
27,750 Kronos, Inc.+......................................... 971,250
Technology--Miscellaneous -- 2.5%
146,300 Avid Technology Inc.+................................. 2,697,406
14,300 Compuware Corporation+................................ 563,062
---------
3,260,468
Telecommunications -- 2.0%
68,400 Lucent Technologies Inc.+............................. 2,590,650
Telecommunications Equipment -- 5.1%
48,000 Ericsson (L.M.) Telephone Company,
Class B, ADR.......................................... 1,029,000
60,000 General Instruments Corporation, New+................. 1,732,500
151,300 Octel Communications Corporation+..................... 2,969,262
27,000 PictureTel Corporation+............................... 1,064,813
---------
6,795,575
Tobacco -- 1.1%
14,000 Philip Morris Companies, Inc.......................... 1,456,000
Trucking -- 1.2%
83,000 Swift Transportation Company Inc.+.................... 1,587,375
---------
TOTAL COMMON STOCKS
(Cost $62,536,774)................................................ 75,217,044
----------
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.9%
Principal amount Value (Note 1)
<S> <C> <C>
$10,964 Drexel Burnham Lambert
Mortgage, Series C, (SEQ), 9.500% due 05/20/14........$ 10,951
385,221 Residential Funding Mortgage, (INV)
Series 1993-S44, 7.303% due 11/25/23.................. 196,703
1,000,000 Vendee Mortgage Trust, Series 1994-1,
(LIQ) 6.500% due 12/15/06............................. 949,063
-------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $1,184,962)................................................. 1,156,717
---------
CORPORATE BONDS -- 2.9%
1,300,000 Ford Motor Company, Notes,
7.875% due 10/15/96................................... 1,306,500
110,000 Occidental Petroleum Corporation,
MTN, 9.750% due 06/15/01.............................. 122,512
500,000 Smith Barney Holdings, MTN, 5.625%
due 11/15/98.......................................... 490,000
Union Acceptance Corporation:
16,376,576 Series 1995-D, 3.000% due 02/07/99.................... 546,306
41,880,337 Series 1995-C, 3.000% due 10/02/02.................... 1,185,967
122,000 U.S. West Communications Corporation,
FRN, 5.500% due 03/15/99**............................ 119,122
100,000 Xerox Corporation, MTN, 9.200% due 07/15/99........... 100,000
-------
TOTAL CORPORATE BONDS
(Cost $3,857,501)................................................. 3,870,407
---------
FEDERAL HOME LOAN BANK (FHLB) -- 2.8%
Agencies:
2,200,000 4.871% (FLTR) due 02/10/97**.......................... 2,185,391
1,000,000 4.655% (FLTR) due 08/24/98**.......................... 959,844
650,000 4.685% (FLTR) due 03/22/00**.......................... 608,664
-------
TOTAL FEDERAL HOME LOAN BANK
(Cost $3,771,951)................................................. 3,753,899
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 3.1%
327,793 Pool #M90066, 8.000% due 10/01/96..................... 328,343
45,405 Pool #200043, 9.000% due 07/01/01..................... 46,391
FHLMC, CMO:
482,457 1134I 15.490% due 09/15/96**......................... 489,317
286,016 1661PB (PAC), 5.250% due 10/15/00..................... 285,122
479,254 1759A (PAC), 8.000% due 08/15/07...................... 480,078
2,000,000 37G (PAC) 6.000% due 09/17/16......................... 1,885,000
114,592 1394C (PAC), 5.000% due 12/15/22...................... 114,162
239,492 1502PX (PAC), 7.000% due 04/15/23..................... 191,406
318,710 1503PZ (PAC), 7.000% due 05/15/23..................... 263,783
-------
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
---------------------
The Montgomery Funds
Asset Allocation Fund
I N V E S T M E N T S
<TABLE>
<S> <C>
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $4,105,705)...................................................$ 4,083,602
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 12.3%
Principal amount Value (Note 1)
$8,000,000 7.000% due TBA.......................................... 7,703,750
FNMA, CMO:
766,596 1995--13PB (PAC), 5.250% due 09/25/00 762,643
735,567 1993--220PB (PAC), 4.350% due 06/25/03 729,935
431,291 1993--202B (PAC), 4.750% due 08/25/08 428,798
576,458 1993--167B (PAC), 4.750% due 02/25/09 573,576
416,707 1991--146FB (BPAC), 5.566% 10/25/06** 413,907
2,773,000 1993--220PH (PAC), 5.550% due 12/25/11 2,616,585
2,030,000 1993--226PG (PAC), 5.750% due 05/25/19 1,910,420
171,000 1993--143D (PAC), 5.000% due 08/25/23 166,244
1,000,000 1991--74L (BPAC), 8.500% due 08/25/21 1,028,437
---------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $16,257,974).................................................. 16,334,295
----------
U.S. TREASURY BONDS -- 3.0%
1,000,000 U.S. Treasury Bonds, 8.875% due 02/15/19 1,205,625
3,000,000 U.S. Treasury Bonds, 6.250% due 08/15/23 2,720,156
---------
TOTAL U.S. TREASURY BONDS
(Cost $4,041,680)................................................... 3,925,781
---------
U.S. TREASURY NOTES -- 9.5%
5,000,000 U.S. Treasury Notes, 6.250% due 06/30/98 5,012,500
4,500,000 U.S. Treasury Notes, 6.875% due 07/31/99 4,565,391
3,000,000 U.S. Treasury Notes, 6.875% due 05/15/06................ 3,033,281
---------
TOTAL U.S. TREASURY NOTES
(Cost $12,544,955).................................................. 12,611,172
----------
COMMERCIAL PAPER -- 0.8%
500,000 Bell Atlantic Corporation,
5.340% due 07/10/96 499,333
500,000 Merrill Lynch and Company, 5.350% due 07/02/96 499,925
-------
TOTAL COMMERCIAL PAPER
(Cost $999,258)..................................................... 999,258
-------
TOTAL SECURITIES
(Cost $109,300,760).................................................21,952,175
-----------
</TABLE>
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS -- 17.5%
Principal amount Value (Note 1)
<S> <C> <C>
$11,600,000 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/28/96, to
be repurchased at $11,605,413 on 07/01/96,
collateralized by $11,832,000 market value
of U.S. Government securities, having
various maturities and various interest rates........ $ 11,600,000
11,600,000 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be repurchased
at $11,605,413 on 07/01/96, collateralized by
$12,971,431 market value of U.S.
Government securities, having various
maturities and various interest rates................ 11,600,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost $23,200,000)............................................... 23,200,000
----------
TOTAL INVESTMENTS -- 109.5%
(Cost $132,500,760*)............................................. 145,152,175
OTHER ASSETS AND LIABILITIES -- (9.5%)
(Net)............................................................ (12,598,841)
----------
NET ASSETS -- 100.0%............................................. $132,553,334
------------
</TABLE>
* Aggregate cost for Federal tax purposes was $132,989,339.
** Floating rate note reflects the rate in effect at June 30, 1996.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
ADR..American Depositary Receipt.
BPAC.Planned Amortization Class: PAC bonds which have lost their protection
against prepayment risk, resulting in a security similar to a sequential.
FLTR.Floating rate securities; bonds with coupon rates that adjust in
proportion to an index.
FRN..Floating rate note; bonds with coupon rates that adjust periodically at a
spread to an index.
INV..Bonds with coupon rates that adjust in an inverse relationship.
LIQ..Bonds with a shorter, guaranteed final maturity.
MTN..Medium-Term Note.
PAC..Planned Amortization Class: bonds which are protected in part from
variations in prepayments, generally resulting in greater stability.
SEQ..Sequential: bonds which receive amortization from the deal in sequential
order. Their actual principal paydowns are dependent on how quickly the
underlying mortgages prepay. Overall, the sequential bonds have similar
risks to mortgage-backed pass-throughs.
TBA..To be announced security.
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
- ----------------------------------------------
The Montgomery Funds
- ----------------------------------------------
Short Government
Bond Fund
- ----------------------------------------------
P O R T F O L I O H I G H L I G H T S
- ----------------------------------------------
P O R T F O L I O M A N A G E M E N T
- ----------------------------------------------
Bill Stevens..........Senior Portfolio Manager
- ----------------------------------------------
F U N D P E R F O R M A N C E
- ----------------------------------------------
Average annual total returns
for the periods ended 6/30/96
- ----------------------------------------------
Montgomery
Short Government Bond Fund
Since inception (12/18/92) ....... 6.27%
One year ......................... 5.74%
- ----------------------------------------------
Lehman Government Bond
(1-3 Year) Index
Since 12/31/92 ................... 5.12%
One year ......................... 5.47%
- ----------------------------------------------
Past performance is no guarantee of future results. Net asset value, investment
return and principal value will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
/1/ The Lehman Brothers Government Bond (1 to 3-Year) Index is composed of
all U.S. Government issues with maturities of one to three years.
/2/ The Lipper Short U.S. Government Funds Average universe consists of 57
funds.
I N V E S T M E N T R E V I E W
Q: How did the Short Government Bond Fund perform relative to its benchmarks
and why?
A: The year ended June 30, 1996, was a strong one for the Short Government
Bond Fund: It outperformed the Lipper Short U.S. Government Funds Average by a
full percentage point. We found some good opportunities in the agency
securities market--bonds backed by the U.S. government but issued by one of
its agencies--and we were overweighted in that sector and underweighted in
Treasuries. The agency sector was somewhat inefficient, so we were able to
selectively trade within it, adding to the Fund's total return. We also found
opportunities in the mortgage-backed securities market.
Q: How has the Fund's strategy changed over the past 12 months?
A: We continue, as always, to focus intensely on risk management controls,
and we strive for a relatively constant amount of interest rate risk. The
portfolio's duration at the end of the period was at a level very close to
that of a two-year U.S. Treasury bond. The Fund's positioning changed slightly
during the year; the last half of calendar 1995 was a period of falling rates,
but they reversed course during the first half of 1996. That dynamic required
some adjustments to the portfolio, but our overall strategy remained largely
intact.
Q: How are you positioning the Fund for the year ahead?
A: On a tactical level, we're probably going to reduce our exposure to
mortgage-backed securities in the third quarter of 1996; they no longer offer
the risk/return characteristics we're looking for. On a portfolio level, we
expect that the surge in economic growth will slow down in the second half of
the year, which suggests a more benign interest rate environment--that is,
with rates either flat or declining--than we've endured in the first six
months of 1996.
Q: Why should an investor consider the Short Government Bond Fund?
A: Interest rates rose by more than one percentage point in the first half of
1996. We believe that the third and fourth quarter of 1996 will see rates flat
or even declining; that could have a positive impact on the kinds of bonds we
buy for the Fund.
In addition, we continue to believe that the Short Government Bond Fund should
be considered as an alternative to money market funds, so long as investors
can tolerate a bit more volatility. For investors looking for a good short-
term fixed-income investment, we believe that the Fund offers an excellent
opportunity. We should point out, however, that the Fund's share price can and
does fluctuate with market conditions, so its share price is not as stable
as a money market fund's.
50
<PAGE>
- ----------------------------------------------------------
The Montgomery Funds
Short Government
Bond Fund
I N V E S T M E N T S
- ----------------------------------------------------------
T O P T E N H O L D I N G S
- ----------------------------------------------------------
(as a percentage of total net assets)
<TABLE>
<S> <C>
U.S. Treasury Notes, 6.250%
due 06/30/98.........................................22.1%
FNMA, Agencies, 4.500% (FLTR)
due 03/10/98......................................... 8.6%
FHLB, Agencies, 4.261% (FLTR)
due 09/24/97......................................... 8.6%
FNMA Pass-Throughs, 7.000% TBA....................... 8.5%
U.S. Treasury Notes, 6.875%
due 07/31/99......................................... 6.7%
FHLMC, CMO, 1623PC (PAC) 5.000%
due 11/15/07......................................... 5.1%
FHLMC, CMO, 1590CA (PAC) 4.500%
due 08/15/10......................................... 4.3%
FHLMC, CMO, 37G (PAC) 6.000%
due 09/17/16......................................... 4.2%
FNMA, CMO, 93-226PG (PAC) 5.750%
due 05/25/19......................................... 4.1%
FHLMC, CMO, 1134I (INV) 15.490%
due 09/15/96......................................... 4.1%
</TABLE>
- ----------------------------------------------------------
A S S E T M I X
- ----------------------------------------------------------
(as a percentage of total investments)
<TABLE>
<S> <C>
Collateralized Mortgage Obligations....................32%
Treasuries.............................................22%
Agencies...............................................20%
Repurchase Agreements..................................14%
Mortgage Pass-Throughs.................................10%
Asset-Backed Securities................................ 2%
</TABLE>
PORTFOLIO INVESTMENTS
June 30, 1996
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO) -- 3.1%
Principal amount Value (Note 1)
[S] [C] [C]
$ 98,675 Drexel Burnham Lambert Mortgage,
Series C3, (SEQ) 9.500% due 05/20/14............$ 98,567
604,232 Smith Barney Shearson Mortgage, Series 2Z,
(Accrual) 9.900% DUE 09/01/17................... 604,705
-------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $696,611)............................................... 703,272
-------
FEDERAL HOME LOAN BANK (FHLB) -- 12.9%
Agencies:
2,000,000 4.261% (FLTR) due 09/24/97...................... 1,952,344
500,000 4.500% (FLTR) due 03/02/98...................... 486,211
500,000 5.415% (FLTR) due 03/24/99...................... 483,516
-------
TOTAL FEDERAL HOME LOAN BANK
(Cost $2,935,265)............................................. 2,922,071
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 28.1%
Pass-Throughs:
204,355 9.000% Pass-Through Pools
due 10/01/16--05/01/20.......................... 211,507
106,509 Pool #M12831 7.000% due 02/01/97................ 106,726
131,027 Pool #308601 9.500% due 10/01/18................ 138,889
27,181 Pool #730223 9.500% due 01/01/06................ 28,197
8,096 Pool #730288 8.500% due 07/01/06................ 8,245
CMOs:
921,160 1134I (INV) 15.490% due 09/15/96................ 934,257
37,345 1415A (SEQ) 5.000% due 08/15/98................. 37,363
21,494 1380D (PAC) 5.250% due 01/15/01................. 21,443
525,288 1243EB (PAC) 7.500% due 07/15/03................ 524,795
1,170,000 1623PC (PAC) 5.000% due 11/15/07................ 1,156,838
500,000 24A (PAC) 4.650% due 02/25/08................... 493,047
1,000,000 1590CA (PAC) 4.500% due 08/15/10................ 985,312
184,126 1491C (PAC) 4.000% due 08/15/11................. 182,515
1,000,000 37G (PAC) 6.000% due 09/17/16................... 942,500
184,300 72F (PAC) 9.000% due 04/15/20................... 184,530
183,730 1077G (PAC) 7.500% due 05/15/21................. 183,500
227,417 1019D (PAC) 8.750% due 11/15/19................. 227,382 51
-------
The accompanying notes are an integral part of these financial statements.
<PAGE>
- ---------------------
The Montgomery Funds
- ---------------------
Short Government
Bond Fund
- ---------------------
I N V E S T M E N T S
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $6,355,301).................................................$ 6,367,046
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 34.1%
Principal amount Value (Note 1)
Pass-Throughs:
$2,000,000 7.000% due TBA ..................................... 1,925,938
Agencies:
100,000 6.781% (FLTR) due 12/02/96.......................... 99,781
250,000 8.774% (FLTR) due 05/07/97.......................... 253,789
800,000 4.840% (FLTR) due 02/25/98.......................... 778,938
2,000,000 4.500% (FLTR) due 03/10/98.......................... 1,952,969
CMOs:
135,393 92-31G (SEQ) 8.000% due 01/25/97.................... 135,647
88,344 92-24G (LIQ) 6.500% due 04/25/97.................... 88,192
650,000 93-99D (AD) 6.700% due 03/25/04..................... 633,039
271,503 94-13PB (PAC) 5.250% due 09/25/00................... 270,103
214,546 91-149E (PAC) 7.500% due 03/25/05................... 214,412
375,204 93-14G (PAC) 4.500% due 05/25/11.................... 372,331
57,448 88-29B (TAC) 9.500% due 12/25/18.................... 60,653
1,000,000 93-226PG (PAC) 5.750% due 05/25/19.................. 941,094
-------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $7,838,717)................................................. 7,726,886
---------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) -- 1.7%
Pass-Throughs:
157,135 9.000% Pass-Through Pools
due 04/15/16--07/15/20.............................. 164,451
92,808 9.500% Pass-Through Pools
due 09/15/16--04/15/20.............................. 99,101
92,362 10.250% Pass-through Pools
due 04/15/98........................................ 94,108
GNMA II:
21,786 10.500% Pass-through Pools
due 01/20/19........................................ 23,733
------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $371,043)................................................... 381,393
-------
UNION ACCEPTANCE CORPORATION (UAC) -- 2.6%
Asset-Backed Securities:
4,757,006 95-DI (ABS) 3.000% due 02/07/99..................... 158,689
15,600,417 95-CI (ABS) 3.000% due 10/10/02..................... 441,773
-------
TOTAL UNION ACCEPTANCE CORPORATION
(Cost $593,471)................................................... 600,462
-------
U.S. TREASURY OBLIGATIONS -- 28.8%
5,000,000 U.S. Treasury Note, 6.250% due 06/30/98............. 5,012,500
1,500,000 U.S. Treasury Note, 6.875% due 07/31/99............. 1,521,797
---------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $6,511,229).................................................$ 6,534,297
---------
TOTAL SECURITIES
(Cost $25,301,637)................................................ 25,235,427
==========
<CAPTION>
REPURCHASE AGREEMENTS -- 18.4%
<S> <C> <C>
Principal amount Value (Note 1)
2,089,500 Agreement with Barclays de Zoete Wedd,
5.600% dated 06/28/96, to be repurchased at
$2,090,475 on 07/01/96, collateralized by
$2,131,290 market value of U.S. Government
securities, having various maturities and
various interest rates.............................. 2,089,500
2,089,500 Agreement with Bear Stearns, 5.600% dated
06/28/96, to be repurchased at $2,090,475 on
07/01/96, collateralized by $2,336,535 market
value of U.S. Government securities, having
various maturities and various interest rates....... 2,089,500
---------
TOTAL REPURCHASE AGREEMENTS
(Cost $4,179,000)................................................. 4,179,000
---------
TOTAL INVESTMENTS -- 129.7%
(Cost $29,480,637*)............................................... 29,414,427
OTHER ASSETS AND LIABILITIES -- (29.7%)
(Net)............................................................. (6,732,446)
---------
NET ASSETS -- 100.0%..............................................$ 22,681,981
=============
</TABLE>
* Aggregate cost for Federal tax purposes.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
ABS..... Asset-backed securities.
Accrual. Bonds which receive negative amortization (coupon interest is added
to principal) according to the stated coupon rate for a period of
time.
AD...... Accretion directed. These bonds receive, as principal, the negative
amortization from the accrual tranche(s) in a deal. These securities
often have guaranteed final maturities.
FLTR.... Floating rate securities; bonds with coupon rates that adjust in
proportion to an index.
INV..... Bonds with coupon rates that adjust in an inverse relationship.
LIQ..... Bonds with a shorter, guaranteed final maturity.
PAC..... Planned Amortization Class: Bonds which are protected in part from
variations in prepayments, generally resulting in greater stability.
REMIC... Real Estate Mortgage Investment Conduit.
SEQ..... Sequential: bonds which receive amortization from the deal in
sequential order. Their actual principal paydowns are dependent on
how quickly the underlying mortgages prepay and overall have similar
risks to mortgage-backed pass-throughs.
TAC..... Targeted Amortization Class: Bonds which are protected from
prepayments. However, these bonds are usually less stable than PACs.
TBA..... To be announced security.
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
----------------------------------------
The Montgomery Funds
---------------------------------------
California Tax-Free
Intermediate Bond Fund
---------------------------------------
P O R T F O L I O H I G H L I G H T S
I N V E S T M E N T R E V I E W
Q: How did the Montgomery California Tax-Free Intermediate Bond Fund do
relative to its benchmarks?
A: June 30, 1996, marked the first full year of the Fund's operation after
changing its strategy from short-term to intermediate-term bonds, and we are
pleased that performance was in line with the Merrill Lynch California
Municipal Bond Index.
Q: How did the Fund's positioning change over the year?
A: We were actually positioned somewhat defensively. Given the challenging
environment of the past several quarters for California municipal bonds and
the specter of rising interest rates, we focused more on credit quality and
total return than we did on yield.
Q: How are you positioned for the year ahead?
A: The municipal market does not offer particularly compelling opportunities
right now, at least on a relative value basis. However, other factors suggest
that California municipal bonds could rally in the year ahead, so we're
staying fully invested. The prospect of comprehensive tax reform drove many
investors out of the intermediate-term muni market into money market and
short-term tax-free bond funds. Since tax reform is no longer a hot topic in
Washington, we believe investors will return to the municipal market.
Higher interest rates in the first two quarters of 1996 are already luring
some investors back to this market. Toward the end of the period, the market
was suggesting that investors believe interest rates will continue to rise,
although we believe they'll begin to come down in the second half of 1996. We
will position the Fund to benefit from a decline in interest rates, though we
will be vigilant about credit and interest rate risk.
Q: So is now a good time to invest in the California Tax-Free Intermediate
Bond Fund?
A: Yes, for investors whose marginal income tax rates make the Fund an
appropriate investment. With the California economy back on the growth track,
credit risk becomes less of a concern. Plus, if we're right about lower
interest rates on the horizon, the coming year could be a good one for bonds.
- -----------------------------------------
P O R T F O L I O M A N A G E M E N T
- -----------------------------------------
Bill Stevens.... Senior Portfolio Manager
- -----------------------------------------
F U N D P E R F O R M A N C E
- -----------------------------------------
Average annual total returns
for the periods ended 6/30/96
- -----------------------------------------
Montgomery California Tax-Free
Intermediate Bond Fund
Since inception (7/1/93).. 4.60%
One year.................. 6.11%
- -----------------------------------------
Merrill Lynch
California Municipal Bond Index
Since 6/30/93............. 3.46%
One year.................. 5.11%
- -----------------------------------------
Past performance is no guarantee of
future results. Net asset value,
investment return and principal value
will fluctuate so that shares, when
redeemed, may be worth more or less
than their original cost.
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
/1/ Comprised of Merrill Lynch California 0 to 7 years from June 1993 to June
1996 and Merrill Lynch California Intermediate from July 1995 to
September 1993.
/2/ Lipper's California Municipal Debt Funds Average universe consists of 29
funds.
53
<PAGE>
- ------------------------------------------------
The Montgomery Funds
- ------------------------------------------------
California Tax-Free
Intermediate Bond Fund
- ------------------------------------------------
I N V E S T M E N T S
<TABLE>
<CAPTION>
- ------------------------------------------------
T O P T E N H O L D I N G S
- ------------------------------------------------
(as a percentage of total net assets)
<S> <C>
Santa Rosa, California, High School
District (FGIC Insured), 7.000%
due 05/01/01................................3.9%
East Bay, California, Utility District,
Wastewater Treatment System
Revenue, (AMBAC Insured),
6.300% due 06/01/06.........................3.9%
Metropolitan Water District,
Southern California Waterworks
Revenue, 6.000% due 07/01/21................3.8%
Kern, California, High School
District, Refunding, Series A (MBIA
Insured), 6.000% due 08/01/03...............3.4%
Metropolitan Water District,
Southern California Waterworks
Revenue, Refunding, Series B (MBIA
Insured), 4.750% due 07/01/09...............3.3%
Saddleback Valley, California,
Unified School District, Public
Financing Authority, Special Tax
Revenue Bonds (FSA Insured),
5.250% due 09/01/07.........................3.2%
Rancho, California, Water District
Financing Authority, Revenue
Refunding (FGIC Insured),
6.500% due 11/01/05.........................3.2%
California State, University Trust
Certificates, 6.450% due 06/01/02...........2.9%
Eastern Municipal Water District,
California, Water and Sewer Revenue,
Certificates of Participation,
Refunding, Series A (FGIC Insured),
6.250% due 07/01/05.........................2.8%
San Francisco County, California,
City and County, City Hall Improvement
Project, Series A (FGIC Insured),
6.100% due 06/15/00.........................2.8%
</TABLE>
<TABLE>
<CAPTION>
==================================================
I N V E S T M E N T G R A D E
- --------------------------------------------------
(as a percentage of total net assets) (unaudited)
<S> <C>
Aaa 67.9%
Aa 17.6%
A 11.6%
BBB 2.9%
</TABLE>
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
MUNICIPAL BONDS AND NOTES -- 94.6%
<TABLE> <CAPTION>
Principal amount Value (Note 1)
<S> <C> <C>
California -- 94.6%
$ 55,000 Alameda, California, School District,
6.900% due 07/01/97 ...............................$ 56,555
200,000 Bakersfield, California, Hospital,
7.375% due 01/01/14 ............................... 217,750
200,000 Bay Area Government Association,
California, Tax Allocation Revenue,
Redevelopment Agency, Pool A4,
(CGIC Insured), 5.700% due 12/15/08 ............... 203,000
California Health Facilities Financing Authority:
90,000 Revenue Bonds, Cedar Knoll Hospital,
Series A, 6.500% due 08/01/96 ..................... 90,170
350,000 Revenue Refunding, Kaiser Permanente,
Series A, 6.250% due 03/01/21 ..................... 361,812
200,000 California Housing Finance Agency, Housing
Revenue, Series C, (MBIA Insured),
6.150% due 08/01/14 ............................... 201,750
40,000 California State, 6.800% due 03/01/99 ............. 42,350
250,000 California State, (FGIC Insured), 7.000%
due 04/01/06 ...................................... 283,750
100,000 California State, Public Works Board,
Facilities Lease Revenue, San Jose Facilities,
Series A, 7.750% due 08/01/06 ..................... 116,125
California State, Public Works Board,
Lease Revenue:
265,000 Department of Corrections, Series A,
(AMBAC Insured), 6.000% due 01/01/06 .............. 279,575
300,000 Secretary of State, Series A, (AMBAC
Insured), 6.200% due 12/01/05 ..................... 322,875
75,000 California State, University Revenue,
(AMBAC Insured), 6.250% due 11/01/00 .............. 79,781
365,000 California State, University Trust
Certificates, 6.450% due 06/01/02 ................. 397,850
California State, Veterans Bond:
25,000 Series AG, 8.100% due 10/01/98 .................... 27,000
70,000 Series AL, 9.600% due 04/01/01 .................... 84,000
200,000 Series AQ, 8.900% due 10/01/99 .................... 226,000
100,000 Series AT, (FGIC Insured), 9.500%
due 02/01/10 ...................................... 137,750
250,000 California Statewide Communities,
Development Authority Revenue, Certificates
of Participation, (St. Joseph Health System
Group), 6.500% due 07/01/04 ....................... 272,188
100,000 Carpinteria, California, (FGIC Insured),
7.500% due 07/01/00 ............................... 110,375
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
======================
The Montgomery Funds
California Tax-Free
Intermediate Bond Fund
I N V E S T M E N T S
MUNICIPAL BONDS AND NOTES -- continued
<TABLE>
<CAPTION>
Principal amount Value (Note 1)
<S> <C> <C>
California--continued
$150,000 Castaic Lake, California, Water Agency,
Certificates of Participation, Refunding,
Water System Improvement Project, Series A,
(MBIA Insured), 7.250% due 08/01/08 ...............$ 174,187
Contra Costa, California:
300,000 Transportation Authority Sales Tax
Revenue, Series A, (FGIC Insured),
6.000% due 03/01/05 ............................... 319,500
290,000 Water District, Water Revenue,
(FGIC Insured), 5.250% due 10/01/10 ............... 279,850
300,000 Desert Hospital District, California,
Hospital Revenue, Certificates of
Participation, (CGIC Insured),
6.150% due 07/01/02 ............................... 319,125
East Bay, California, Utility District:
75,000 Series M, 7.500% due 03/01/00 ..................... 82,500
500,000 Wastewater Treatment System Revenue,
(AMBAC Insured), 6.300% due 06/01/06 .............. 546,875
375,000 Eastern Municipal Water District, California,
Water and Sewer Revenue, Certificates of
Participation, Refunding, Series A, (FGIC
Insured), 6.250% due 07/01/05 ..................... 396,562
250,000 Elsinore Valley, California, Municipal Water
District, Certificates of Participation,
Refunding, Series A, (FGIC Insured),
6.000% due 07/01/12 ............................... 258,750
270,000 Emeryville, California, Public Financing
Authority, Housing Revenue,
5.600% due 09/01/06 ............................... 269,662
50,000 Estero, California, Series S-1,
7.000% due 07/01/00 ............................... 54,250
90,000 Fremont, California, School District, (CGIC
Insured), 7.700% due 09/01/96 ..................... 90,585
290,000 Fresno, California, Sewer Revenue, Series A,
(MBIA Insured), 6.000% due 09/01/07 ............... 306,675
450,000 Kern, California, High School District,
Refunding, Series A, (MBIA Insured),
6.000% due 08/01/03 ............................... 480,375
175,000 Lafayette, California, Elementary School
District, 6.900% due 05/15/06 ..................... 197,531
100,000 Los Angeles, California, Series A,
6.400% due 09/01/98 ............................... 104,375
350,000 Los Angeles, California, Water and Power,
5.900% due 02/01/05 ............................... 367,938
Los Angeles County, California,
Certificates of Participation:
200,000 6.700% due 03/01/99 ............................... 205,500
200,000 6.708% due 06/01/15 ............................... 199,750
50,000 Los Angeles County, California, Public
Works, Revenue Anticipation Notes,
4.500% due 03/01/01 ............................... 49,750
200,000 Los Angeles County, California,
Transportation Authority,
5.625% due 07/01/18 ............................... 193,000
Metropolitan Water District, Southern California
Waterworks Revenue:
500,000 6.000% due 07/01/21 ............................... 526,250.
500,000 Refunding, Series B, (MBIA Insured),
4.750% due 07/01/09 ............................... 458,750
20,000 Mt. Diablo, California, School District,
(FGIC Insured), 6.800% due 08/01/97 ............... 20,614
250,000 Ontario, California, Redevelopment
Financing Authority, Revenue Refunding,
(Ontario Redevelopment Project No. 1),
(MBIA Insured), 6.550% due 08/01/06 ............... 275,938
75,000 Paramount, California, Redevelopment
Agency, 5.100% due 08/01/98 ....................... 75,844
Piedmont, California, School District: Series A:
75,000 8.300% due 08/01/01 ............................... 87,000
45,000 7.100% due 08/01/02 ............................... 50,456
40,000 Series C, 7.200% due 08/01/01 ..................... 44,450
400,000 Rancho, California, Water District
Financing Authority, Revenue Refunding,
(FGIC Insured), 6.500% due 11/01/05 ............... 439,500
345,000 Redwood City, California, Multi-family
Housing, (Redwood Shores), Series B,
Mandatory Put 10/01/00, 5.200%
due 10/01/08 ...................................... 345,000
325,000 Sacramento, California, Municipal Utilities,
Electric Revenue Refunding, Series A,
(MBIA Insured), 6.250% due 08/15/10 ............... 348,156
450,000 Saddleback Valley, California, Unified School
District, Public Financing Authority, Special
Tax Revenue Bonds, (FSA Insured),
5.250% due 09/01/07 ............................... 443,813
50,000 San Francisco, California, City and County
Police Facilities, 8.000% due 06/15/99 ............ 54,938
100,000 San Francisco, California, City and County,
Series A, 6.100% due 12/15/98 ..................... 104,250
</TABLE>
The accompany notes are an integral part of these financial statements.
55
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
California Tax-Free
Intermediate Bond Fund
- ----------------------
I N V E S T M E N T S
<TABLE> <CAPTION>
MUNICIPAL BONDS AND NOTES -- continued
Principal amount Value (Note 1)
<S> <C>
$ 375,000 San Francisco County, California, City and
County, City Hall Improvement Project,
Series A, (FGIC Insured), 6.100%
due 06/15/00 ......................................$ 395,156
105,000 Santa Clara Valley, California, Water District,
Water Utility System Revenue, Series A,
5.300% due 06/01/03 ............................... 107,888
500,000 Santa Rosa, California, High School District,
(FGIC Insured), 7.000% due 05/01/01 ............... 548,750
400,000 Southern California Public Power Authority,
Refunding, Series A, (AMBAC-TCRS
Insured), 5.500% due 07/01/12 ..................... 389,000
65,000 Watsonville, California, Water Revenue,
(MBIA Insured), 6.100% due 05/15/99 ............... 67,844
-----------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $13,120,377) ............................................... 13,190,993
-----------
SHORT-TERM MUNICIPAL BONDS AND NOTES -- 4.3%
California -- 4.3%
California Health Facilities Financing
Authority Revenue:
100,000 St. Joseph Health System, Series B,
3.000% due 07/01/09+ .............................. 100,000
100,000 Sutter Health, Series A,
3.100% due 03/01/20+ .............................. 100,000
200,000 California Pollution Control Financing
Authority, Pollution Control Revenue,
Southern California Edison Company,
Series A, 3.450% due 02/28/08+ .................... 200,000
200,000 California Statewide Community
Development Authority, Certificates of
Participation, Sutter Health Obligation
Group, (AMBAC Insured),
3.100% due 07/01/15+ .............................. 200,000
-------
TOTAL SHORT-TERM MUNICIPAL BONDS AND NOTES
(Cost $600,000) .................................................. 600,000
-------
TOTAL INVESTMENTS -- 98.9%
(Cost $13,720,377*) ..............................................$13,790,993
OTHER ASSETS AND LIABILITIES --1.1%
(Net) ............................................................ 156,940
-------
NET ASSETS -- 100.0%..............................................$13,947,933
===========
</TABLE>
* Aggregate cost for Federal tax purposes.
+ Floating rate note, rate resets daily.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
AMBAC.... American Municipal Bond Assurance Corporation
CGIC..... Capital Guaranty Insurance Corporation
FGIC..... Federal Guaranty Insurance Corporation
FSA...... Federal Security Assurance
MBIA..... Municipal Bond Investors Assurance
TCRS..... Transferable Custodial Receipts
The Montgomery California Tax-Free Intermediate Bond Fund concentrates in
California municipal securities. Certain California constitutional amendments,
legislative measures, executive orders, administrative regulations, court
decisions and voter initiatives could result in certain adverse consequences,
including impairing the ability of certain issuers of California municipal
securities to pay principal and interest on their obligations.
56
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Money Market Funds
--------------------
PORTFOLIO HIGHLIGHTS
INVESTMENT REVIEW
Montgomery Government Reserve Fund
Montgomery California Tax-Free Money Fund
Q: How did Montgomery's money market funds perform over the year?
A: We are pleased that the Government Reserve Fund was among the top 15 money
market funds (out of a universe of 113) for the 12 months ended June 30,
1996,* with a total return of 5.28%. We positioned the Fund well for the
interest rate rally of the second half of 1995, then took a more conservative
stance in the first half of 1996. We also found some interesting low-risk
alternatives to short-term Treasury securities, which fueled the strong
performance.
The California Tax-Free Money Fund had a total return of 3.03% for the year
ended June 30, 1996. The California short-term paper market was quite volatile
over the past 12 months, and yields have been driven down by investors moving
out of long-term municipal bonds. For much of the year, it was a case of too
much money chasing too few bonds; thus, pressure on yields.
Q: Were any sectors especially strong for either fund?
A: In the Government Reserve Fund, we found an interesting opportunity in the
form of "balloon" mortgage-backed securities which mature within a year. These
provide a bit more yield with relatively low risk and helped to keep the
Fund's performance on track.
Q: How have you positioned the funds for the year ahead?
A: The market for taxable short-term securities seems to be anticipating not
just one Federal Reserve rate hike in the second half of 1996, but possibly
two or three increases. But we doubt that the Fed will be pushed to that
extreme, so we are positioning both funds for a more benign interest rate
environment. Because of the volatility in the California municipal market,
however, we're taking a more conservative, risk-averse approach for the year
ahead, focusing on shorter-term instruments.
Q: Why should investors consider investing in a money market fund? Given the
performance of the stock market over the past 12 months, do money market funds
still make sense?
A: The answer is absolutely yes. Money market funds can meet a variety of
personal finance needs. They offer a stable, highly liquid and very
conservative place to keep the cash portion of an investment portfolio or an
emergency "nest egg." They are ideal for "parking" money you're planning to
invest over the next few months or as a basis for dollar-cost averaging,
investing the same amount of cash at regular intervals into a more aggressive
equity fund.
======================================
P O R T F O L I O M A N A G E M E N T
--------------------------------------
Bill Steven...Senior Portfolio Manager
======================================
F u n d P e r f o r m a n c e
--------------------------------------
Yields for the periods ended 6/30/96
--------------------------------------
Montgomery
Government Reserve Fund
One-day yield....................5.02%
Seven-day yield..................4.97%
--------------------------------------
Montgomery
California Tax-Free Money Fund
One-day yield....................2.83%
Seven-day yield..................2.89%
--------------------------------------
Yield will fluctuate. An investment in
one of our money market funds is
neither insured nor guaranteed by the
government. There can be no assurance
that the money market funds will be
able to maintain a stable net asset
value of $1 per share.
*According to Lipper Analytical Services, Inc.
57
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
Government Reserve
Fund
- --------------------
I N V E S T M E N T S
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
<TABLE>
<CAPTION>
Principal amount Value (Note 1)
<C> <S> <C>
FEDERAL FARM CREDIT BANK (FFCB) -- 7.6%
$ 4,125,000 6.760% due 07/01/96.................................$ 4,125,000
12,800,000 Discount Note due 07/02/96.......................... 12,798,130
600,000 4.660% due 08/05/96................................. 599,330
1,000,000 5.920%** due 09/24/96++++.......................... 1,000,142
5,580,000 5.170% due 10/01/96................................. 5,574,922
5,750,000 5.870%** due 10/25/96++............................. 5,753,014
2,200,000 4.024%** due 01/27/97++++++......................... 2,176,822
1,300,000 4.520%** due 03/10/97+++............................ 1,287,891
---------
33,315,251
----------
FEDERAL HOME LOAN BANK (FHLB) -- 13.9%
1,500,000 2.480%** due 07/01/96+++++.......................... 1,500,000
1,000,000 4.410% due 07/08/96................................. 999,771
1,950,000 5.100% due 07/08/96................................. 1,949,784
1,450,000 4.800% due 07/12/96................................. 1,449,569
650,000 7.750% due 07/12/96................................. 650,350
4,080,000 Discount Note due 07/15/96.......................... 4,071,622
500,000 4.660%** due 07/22/96+++++.......................... 499,667
2,745,000 8.000% due 07/25/96................................. 2,748,728
1,000,000 3.265%** due 08/05/96+++++......................... 999,359
1,000,000 4.650%** due 08/05/96+++++......................... 997,340
1,500,000 4.750%** due 08/12/96+++++.......................... 1,498,115
1,000,000 4.650%** due 08/15/96+++++.......................... 998,714
825,000 4.311%** due 09/09/96+.............................. 822,000
5,010,000 8.250% due 09/25/96................................. 5,040,771
15,000,000 5.293%** due 09/26/96++++++......................... 14,996,817
11,600,000 4.374%** due 10/01/96++++++......................... 11,564,600
2,309,124 6.200%** due 10/15/96++++++......................... 2,311,995
500,000 4.240% due 10/28/96................................. 497,671
1,060,000 8.250% due 11/25/96................................. 1,070,776
5,000,000 7.700% due 12/16/96................................. 5,046,420
500,000 4.074%** due 01/15/97++++++......................... 494,991
1,000,000 6.900% due 02/24/97................................. 1,008,300
---------
61,217,360
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 5.2%
846,966 8.500% due 08/01/96................................. 847,975
3,394,700 8.500% due 10/01/96................................. 3,400,864
1,970,083 8.500% due 10/01/96................................. 1,974,264
5,295,649 7.500% due 11/01/96................................. 5,318,342
4,134,513 7.500% due 12/01/96................................. 4,143,383
2,017,203 8.500% due 12/01/96................................. 2,021,087
647,858 8.000% due 12/15/96................................. 650,372
189,357 7.000% due 01/01/97................................. 189,636
342,414 7.000% due 01/01/97................................. 342,919
472,561 7.000% due 01/01/97................................. 473,258
1,013,747 7.500% due 01/01/97................................. 1,017,073
329,711 6.000% due 02/01/97................................. 329,572
492,985 7.000% due 04/01/97................................. 494,051
1,790,212 7.500% due 05/01/97................................. 1,799,628
---------
23,002,424
----------
FEDERAL LANDBANK (FLB) -- 0.2%
$700,000 7.950% due 10/21/96.................................$ 704,859
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 0.8%
450,000 4.324%** due 10/25/96++++++......................... 448,024
1,250,000 6.781%** due 12/02/96+++............................ 1,255,071
378,801 6.650% due 03/25/97................................. 379,490
1,246,493 5.900%** due 05/15/97++++++......................... 1,249,094
---------
3,331,679
---------
STUDENT LOAN MARKETING ASSOCIATION (SLMA) -- 23.2%
2,500,000 3.510% due 07/01/96................................. 2,500,000
18,700,000 6.080% due 07/01/96++............................... 18,700,000
5,150,000 5.390% due 07/19/96................................. 5,149,960
9,255,000 5.690% due 08/22/96+................................ 9,258,133
4,000,000 5.330% due 08/28/96+++.............................. 3,997,839
5,000,000 5.390% due 09/23/96+................................ 4,999,808
6,000,000 5.450% due 09/23/96+................................ 5,988,206
4,700,000 4.374% due 10/01/96++++++........................... 4,685,582
5,000,000 4.191% due 10/15/96++++++........................... 4,976,871
2,000,000 5.800% due 10/22/96+++.............................. 2,000,379
2,500,000 5.640% due 11/01/96+................................ 2,501,584
1,500,000 7.560% due 12/09/96................................. 1,512,044
6,000,000 5.450% due 12/20/96+................................ 5,999,733
500,000 5.700% due 01/21/97++++............................. 500,482
5,680,000 5.740% due 01/29/97+................................ 5,682,481
1,000,000 5.380% due 03/25/97++++++........................... 995,520
4,950,000 5.700% due 04/21/97+++++............................ 4,962,590
15,000,000 6.130% due 06/30/97++............................... 15,000,982
2,500,000 5.590% due 10/30/97+................................ 2,500,391
---------
101,912,585
-----------
TENNESSEE VALLEY AUTHORITY (TVA) -- 0.2%
1,120,000 8.250% due 11/15/96................................. 1,129,899
---------
U.S. SOVEREIGN BONDS -- 0.3%
1,300,932 AID-Israel, Series B, 5.750% due 01/09/99+.......... 1,300,932
---------
U.S. TREASURY NOTES -- 8.0%
10,000,000 7.250% due 11/30/96................................. 10,083,758
5,000,000 8.000% due 01/15/97................................. 5,074,461
4,000,000 6.750% due 02/28/97................................. 4,030,250
10,000,000 6.875% due 02/28/97................................. 10,105,030
3,000,000 6.875% due 03/31/97................................. 3,025,342
3,000,000 6.125% due 05/31/97................................. 3,010,636
---------
35,329,477
----------
TOTAL SECURITIES................................................ 261,244,466
-----------
</TABLE>
58
The accompanying notes are an integral part of these financial statements.
<PAGE>
--------------------
The Montgomery Funds
--------------------
Goverment Reserve
Fund
--------------------
INVESTMENTS
<TABLE>
<CAPTION>
Principal amount Value (Note 1)
<S> <C> <C>
REPURCHASE AGREEMENTS -- 40.8%
$11,175,000 Agreement with Barclays de Zoete Wedd
Tri-Party, 5.600% dated 06/28/96, to be
repurchased at $11,180,215 on 07/01/96,
collateralized by $11,398,500 market value
of U.S. Government securities, having
various maturities and various
interest rates................................. $ 11,175,000
15,000,000 Agreement with Bear Stearns Tri-Party,
5.450% dated 06/24/96, to be
repurchased at $15,015,896 on 07/01/96,
collateralized by $16,773,402 market
value of U.S. Government securities,
having various maturities and various
interest rates................................. 15,000,000
19,084,500 Agreement with Bear Stearns Tri-Party,
5.600% dated 06/28/96, to be
repurchased at $19,093,406 on 07/01/96,
collateralized by $21,340,799 market value
of U.S. Government securities, having
various maturities and various
interest rates................................. 19,084,500
30,000,000 Agreement with Bear Stearns Tri-Party,
5.450% dated 06/25/96, to be repurchased
at $30,031,792 on 07/02/96, collateralized
by $33,546,804 market value of U.S.
Government securities, having various
maturities and various interest rates.......... 30,000,000
20,000,000 Agreement with Bear Stearns Tri-Party,
5.400% dated 06/26/96, to be repurchased
at $20,021,000 on 07/03/96, collateralized
by $22,364,536 market value of U.S.
Government securities, having various
maturities and various interest rates.......... 20,000,000
20,000,000 Agreement with Chemical Bank Tri-Party,
5.450% dated 06/24/96, to be repurchased
at $20,021,194 on 07/01/96, collateralized
by $20,401,062 market value of U.S.
Government securities, having various
maturities and various interest rates.......... 20,000,000
10,000,000 Agreement with Chemical Bank Tri-Party,
5.450% dated 06/28/96, to be repurchased
at $10,004,542, on 07/01/96, collateralized
by $10,201,236 market value of U.S.
Government securities, having various
maturities and various interest rates.......... 10,000,000
15,000,000 Agreement with HSBC Tri-Party, 5.400%
dated 06/28/96, to be repurchased at
$15,006,750 on 07/01/96, collateralized
by $15,300,170 market value of U.S.
Government securities, having various
maturities and various interest rates.......... 15,000,000
38,867,500 Agreement with Paine Webber Group Inc.,
Tri-Party, 5.600% dated 06/28/96, to be
repurchased at $38,885,638 on 07/01/96,
collateralized by $39,645,958 market value
of U.S. Government securities, having
various maturities and various
interest rates................................. 38,867,500
----------
TOTAL REPURCHASE AGREEMENTS.................................. 179,127,000
-----------
TOTAL INVESTMENTS -- 100.2%
(At amortized cost*)......................................... 440,371,466
OTHER ASSETS AND LIABILITIES -- (0.2%)
(Net)........................................................ (947,922)
--------
NET ASSETS -- 100.0%......................................... $439,423,544
============
</TABLE>
* Aggregate cost for Federal tax purposes.
** Rate represents annualized yield at date of purchase.
+ Floating rate note, rate resets weekly.
++ Floating rate note, rate resets annually.
+++ Floating rate note, rate resets semi-annually.
++++ Floating rate note, rate resets daily.
+++++ Floating rate note, rate resets quarterly.
++++++ Floating rate note, rate resets monthly.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
The accompanying notes are an integral part of these financial statements. 59
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
California Tax-Free
Money Fund
- --------------------
I N V E S T M E N T S
P O R T F O L I O I N V E S T M E N T S
June 30, 1996
MUNICIPAL BONDS AND NOTES -- 102.8%
<TABLE>
<CAPTION>
Principal amount Value (Note 1)
<S> <C> <C>
California -- 102.8%
$1,400,000 ABAG Finance Authority for Non-Profit
Corporations, Certificates of Participation,
(Lucile Salter Packard Project), (AMBAC
Insured), 3.250% due 08/01/23++................ $1,400,000
2,000,000 Alameda County, California, Certificates
of Participation, Municipal Financing
Project), 6.150% due 09/01/21,
Mandatory Put 09/01/95......................... 2,006,223
1,500,000 Alameda County, California, TRANS,
4.750% due 07/25/96............................ 1,500,929
1,900,000 Anaheim, California, Certificates of
Participation, (AMBAC Insured), 3.100%
due 08/01/19++................................. 1,900,000
600,000 Anaheim, California, Housing Authority,
Multi-family Housing Revenue (Sage Park Project),
Series A, 3.200% due 12/01/16++................ 600,000
2,200,000 Burbank, California, Redevelopment
Agency Revenue, Issue A, 3.000%
due 11/01/10++................................. 2,200,000
1,500,000 California Community College, TRANS,
4.750% due 07/10/96............................. 1,500,248
California State, Department of Water Resources,
Water Systems Revenue, Commercial Paper:
1,000,000 3.250% due 07/16/96............................. 1,000,000
2,000,000 3.300% due 08/05/96............................. 1,999,982
1,000,000 3.300% due 08/09/96............................. 1,000,000
1,200,000 3.300% due 08/06/96............................. 1,200,000
California State, Health Facilities Finance
Authority Revenue (CASMED):
Catholic Healthcare (MBIA Insured):
100,000 Series A, 3.000% due 07/01/09++.............. 100,000
300,000 Series B, 2.600% due 07/01/16++.............. 300,000
700,000 Series C, 3.500% due 07/01/20++.............. 700,000
400,000 St. Frances Memorial Hospital, Series B,
3.100% due 11/01/19+........................... 400,000
St. Joseph Health System:
495,000 Series A, 3.000% due 07/01/13+............... 495,000
15,000 Series B, 3.000% due 07/01/13+............... 15,000
1,000,000 California State, Metropolitan Water,
Commercial Paper, 3.650% due 07/09/96.......... 1,000,000
California State, Pollution Control Finance
Authority, Commercial Paper:
1,700,000 3.250% due 07/25/96............................ 1,700,000
1,200,000 3.450% due 08/08/96............................ 1,200,000
1,200,000 3.350% due 09/05/96............................ 1,200,000
California State, Pollution Control Finance
Authority: Resource Recovery Revenue:
1,000,000 (Homestake Mining Project), 3.200%
due 05/01/04++................................. 1,000,000
1,000,000 (Pacific Gas and Electric Company Project),
Series C, 3.550% due 11/01/26+................. 1,000,000
200,000 (Shell Oil Company Project), Series A,
3.000% due 10/01/06+........................... 200,000
(Southern California Edison Project):
100,000 Series A, 3.450% due 02/28/08+................. 100,000
400,000 Series C, 3.450% due 02/28/08+................. 400,000
100,000 Series D, 3.000% due 10/01/08+................. 100,000
970,000 (Stanislaus Project), 3.700% due 12/01/17+..... 970,000
2,000,000 California State, School Cash Reserve
Program Authority, Series A,
4.750% due 07/03/96............................ 2,000,033
California Statewide Communities Development
Authority Revenue: Apartment Development Revenue
2,000,000 Sub-Series A-1, 3.150% due 05/15/25++.......... 2,000,000
2,000,000 Sub-Series A-2, 3.150% due 05/15/25++.......... 2,000,000
1,820,000 TRANS, Series A, 4.750% due 07/05/96........... 1,820,172
1,000,000 Chula Vista, California, Multi-family
Housing Revenue, (Terra Nova Association),
Series A, 3.250% due 03/01/05++................ 1,000,000
2,000,000 Conejo Valley, California, Unified School
District, TRANS, 4.500% due 07/02/97........... 2,013,440
2,000,000 Contra Costa, California, Community
College District, TRANS, 4.500%
due 06/30/97................................... 2,013,440
2,500,000 Del Mar Race Track Authority, Commercial
Paper, 3.450% due 07/08/96..................... 2,500,000
1,000,000 East Bay, California, MUD, Commercial
Paper, 3.350% due 08/12/96..................... 1,000,000
1,300,000 East Bay, California, MUD, Waste Water,
Commercial Paper, 3.450% due 07/08/96.......... 1,300,000
800,000 Eastern Municipal Water District, Water
and Sewer Revenue, Certificates of
Participation Series B, (FGIC Insured),
3.000% due 07/01/20++.......................... 800,000
2,000,000 Emeryville, California, Public Finance
Authority Revenue, Series A, 8.100%
due 02/01/17................................... 2,089,641
1,200,000 Fremont, California, Multi-family Housing
Revenue, (Mission Wells Project), Series E,
3.300% due 09/01/07++.......................... 1,200,000
</TABLE>
60
The accompanying notes are an integral part of these financial statements.
<PAGE>
---------------------
The Montgomery Funds
---------------------
California Tax-Free
Money Fund
---------------------
I N V E S T M E N T S
MUNICIPAL BONDS AND NOTES -- continued
<TABLE>
<CAPTION>
Principal amount Value (Note 1)
<S> <C> <C>
California -- continued
$1,000,000 Gardena, California, Public Financing Agency,
(Gardena Public Parking Project), 3.350%
due 09/01/11++................................... $ 1,000,0000
200,000 Imperial Irrigation District, California,
Certificates of Participation, (Electrical
Systems Project), 3.600% due 11/01/96............ 199,894
1,500,000 Kern, California, Community College
District, Certificates of Participation,
3.650% due 01/01/25++............................ 1,500,000
Kern County, California, Certificates of
Participation, (Kern Public Facilities Project):
2,700,000 Series B, 3.000% due 08/01/06++.................. 2,700,000
800,000 Series D, 3.000% due 08/01/06++.................. 800,000
1,000,000 Lassen, California, Municipal Utilities
District Revenue, Series A, (FSA Insured),
3.450% due 05/01/08++............................ 1,000,000
2,900,000 Livermore, California, Multi-family Housing
Revenue, 3.100% due 08/01/18++................... 2,900,000
Los Angeles, California, Metropolitan
Transportation Authority, Commercial Paper:
2,500,000 3.500% due 07/18/96.............................. 2,500,000
1,000,000 3.700% due 07/22/96.............................. 1,000,000
1,000,000 Los Angeles, California, Metropolitan
Transportation District, 3.500%
due 08/07/96..................................... 1,000,000
Los Angeles, California, Multi-family
Housing Revenue:
800,000 Series A, 3.750% due 08/01/26+................... 800,000
600,000 Series B, 3.750% due 12/01/26+................... 600,000
3,300,000 Series K, 3.100% due 07/01/10+................... 3,300,000
1,000,000 Los Angeles County, California, Metropolitan
Rapid Transit Authority Revenue,
(Union Station Gateway Project), Series A,
(FSA 3.150% due 07/01/25++....................... 1,000,000
2,200,000 Los Angeles County, California, Metropolitan
Transportation Authority, Sales Tax Revenue,
Series A, (MBIA Insured), 3.000%
due 07/01/20++................................... 2,200,000
1,000,000 Los Angeles County, California, Pension
Obligation Revenue, Series B, (AMBAC
Insured), 3.150% due 06/30/07+................... 1,000,000
Los Angeles County, California, Transportation
Commission, Sales Tax Revenue Refunding,
Series A:
500,000 7.600% due 07/01/02.............................. 527,820
1,000,000 (FGIC Insured), 3.100% due 07/01/12++........... 1,000,000
1,000,000 Madera, California, Public Financing
Authority, Lease Revenue, (Municipal Golf
Course Project), 4.300% due 11/01/23,
Mandatory Put 08/01/96........................... 1,000,000
500,000 Metropolitan Water District, Southern
California Waterworks Revenue, Series A,
(AMBAC Insured), 2.950%
due 06/01/23++................................... 500,000
2,300,000 Modesto, California, Multi-family Housing
Revenue, (Live Oak Apartments Project),
3.200% due 09/01/24++............................ 2,300,000
600,000 Northern California Power Agency, Public
Power Refunding (Hydroelectric Project
No. 1), Series A, 8.000% due 07/01/13............ 612,000
650,000 Oceanside, California, Community
Development, Community Lease Revenue,
(Oceanside Civic Center Project),
8.000% due 08/01/19.............................. 665,487
Palm Springs, California, Community
Redevelopment Agency, Certficates of Participation:
100,000 District No. 1, 3.300% due 12/01/14++............ 100,000
District No. 5:
200,000 2.750% due 12/01/14++............................ 200,000
300,000 3.300% due 12/01/14++............................ 300,000
700,000 District No. 6, 3.300% due 12/01/14++............ 700,000
100,000 District No. 8, 3.300% due 12/01/14++............ 100,000
200,000 District No. 10, 3.800% due 12/01/14++........... 200,000
100,000 District No. 9, 3.800% due 12/01/14++............ 100,000
1,625,000 Richmond, California, Joint Powers Finance
Authority, Port Lease Revenue, 3.600% due
09/01/04+........................................ 1,625,000
700,000 Riverside County, California, Certificates
of Participation County Public Facilities,
Series C, 2.950% due 12/01/15++.................. 700,000
1,200,000 San Diego, California, TRANS, Series A,
4.750% due 07/03/96.............................. 1,200,066
1,900,000 San Diego, California, Transportation,
Commercial Paper, 3.400%
due 09/04/96..................................... 1,900,000
</TABLE>
61
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------
The Montgomery Funds
- --------------------
California Tax-Free
Money Fund
- --------------------
I N V E S T M E N T S
MUNICIPAL BONDS AND NOTES -- continued
<TABLE>
<CAPTION>
Principal amount Value (Note 1)
<S> <C> <C>
California -- continued
$ 500,000 San Francisco, California, Bay Area Rapid
Transit, District Revenue, Subordinated
Notes, (AMBAC Insured), 4.600%
due 07/01/97................................... $ 500,125
4,000,000 San Francisco, California,
City and County, TRANS,
4.750% due 09/19/96............................. 4,007,318
1,000,000 San Joaquin, California, Delta Community
College District, TRANS, 4.500%
due 07/05/96.................................... 1,000,062
2,000,000 San Joaquin County, California, TRANS,
4.500% due 10/15/96............................. 2,003,340
2,000,000 San Mateo County, California, TRANS,
4.500% due 07/01/97............................. 2,010,580
1,600,000 Santa Ana, California, Health Facilities
Revenue, Multi-modal Town and Country,
3.350% due 10/01/20+............................ 1,600,000
2,000,000 Santa Cruz County, California, TRANS,
4.500% due 07/11/96............................. 2,000,320
1,100,000 Southern California, Public Power Authority
Revenue, (Southern Transmission Project),
7.875% due 07/01/18............................. 1,133,000
500,000 Stockton, California, Multi-family Housing
Revenue, (Mariners Point Association),
Series A, 3.100% due 08/01/18++................ 500,000
------------
TOTAL INVESTMENTS -- 102.8%
(At amortized cost*).............................................. $ 100,909,120
OTHER ASSETS AND LIABILITIES -- (2.8%)
(Net)............................................................. (2,775,101)
-----------
NET ASSETS -- 100.0%.............................................. $ 98,134,019
=============
</TABLE>
* Aggregate cost for Federal tax purposes.
+ Floating rate note, rate resets daily.
++ Floating rate note, rate resets weekly.
Descriptions of securities have not been audited by Deloitte & Touche LLP.
Abbreviations:
AMBAC...American Municipal Bond Assurance Corporation
FGIC....Federal Guaranty Insurance Corporation
FSA.....Federal Security Assurance
MBIA....Municipal Bond Investors Guaranty
TRANS...Tax and Revenue Anticipation Notes
The Montgomery California Tax-Free Money Fund concentrates in California
municipal securities. Certain California constitutional amendments,
legislative measures, executive orders, administrative regulations, court
decisions and voter initiatives could result in certain adverse consequences,
including impairing the ability of certain issuers of California municipal
securities to pay principal and interest on their obligations.
<PAGE>
- ---------------------
The Montgomery Funds
- --------------------
Annual Report
- --------------------
JUNE 30, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
FINANCIAL STATEMENTS
- -----------------------------------------------------------------
<S> <C>
Statements of Assets and Liabilities....................... 64
Statements of Operations................................... 68
Statements of Changes in Net Assets........................ 72
Transactions in Shares with a Beneficial Interest.......... 76
Statement of Cash Flows.................................... 79
Financial Highlights....................................... 80
Notes to Financial Statements.............................. 84
Independent Auditors' Report............................... 97
Tax Information............................................ 98
</TABLE>
<PAGE>
- --------------------
The Montgomery Funds
- ----------------------
Statements of
Assets and Liabilities
- ----------------------
JUNE 30, 1996
<TABLE>
<CAPTION>
Growth Micro Cap
Fund Fund
Assets:
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments in securities, at value (Note 1)
Securities..................................................................... $741,046,682 $275,577,806
Repurchase agreements.......................................................... 187,968,000 25,857,000
------------ ------------
Total investments................................................................. 929,014,682 301,434,806
Cash.............................................................................. 131,239 195,967
Foreign currency, at value (Cost $676,482)........................................ - -
Forward foreign currency exchange contracts:
Forward foreign currency exchange contracts to buy, at value
(Contract cost $106,937) (Note 5)............................................. - -
Forward foreign currency exchange contracts to sell (Note 5)................... - -
Receivables:
Dividends...................................................................... 301,475 60,805
Interest....................................................................... 87,718 12,067
Shares of beneficial interest sold............................................. 1,485,038 391,577
Investment securities sold..................................................... 7,795,034 8,934,203
Other Assets:
Organization costs (Note 1).................................................... 12,296 5,511
------------ ------------
Total Assets...................................................................... 938,827,482 311,034,936
------------ ------------
Liabilities:
- --------------------------------------------------------------------------------------------------------------------
Forward foreign currency exchange contracts:
Payable for forward foreign currency exchange contracts to buy (Note 5)........ - -
Payable for forward foreign currency exchange contracts to sell, at value
(Contract cost $694,310) (Note 5)............................................. - -
Payables:
Shares of beneficial interest redeemed......................................... 1,105,694 191,175
Investment securities purchased................................................ 10,138,301 4,300,925
Management fees................................................................ 168,007 88,555
Administration fees............................................................ 57,998 17,626
Share marketing plan fees (Class P shares only)................................ 58 -
Custodian fees................................................................. 25,778 7,743
Dividends...................................................................... - -
Trustees' fees and expenses.................................................... 1,000 1,000
Due to custodian............................................................... - -
Transfer agency and servicing fees............................................. 460,506 77,422
Accrued liabilities and expenses............................................... 406,167 133,324
------------ ------------
Total Liabilities................................................................. 12,363,509 4,817,770
------------ ------------
Net Assets........................................................................ $926,463,973 $306,217,166
------------ ------------
Investments at Identified Cost.................................................... $777,973,525 $238,118,149
Net Assets consist of:
- --------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss)............. $ 3,630,493 $ -
Accumulated net realized gain/(loss) on securities sold, forward foreign
currency exchange contracts, futures contracts, foreign currency transactions
and securities sold short...................................................... 89,230,071 16,663,993
Net unrealized appreciation/(depreciation) of investments, forward foreign
currency exchange contracts, foreign currency transactions and net other
assets......................................................................... 151,041,157 63,316,657
Shares of beneficial interest..................................................... 422,306 171,817
Additional paid-in capital........................................................ 682,139,946 226,064,699
------------ ------------
Net Assets........................................................................ $926,463,973 $306,217,166
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------
Class R Shares.................................................................... $926,382,297 $306,217,166
Class P Shares.................................................................... 81,676 N/A
------------ ------------
Net Assets........................................................................ $926,463,973 $306,217,166
Number of Fund shares outstanding:
Class R Shares.................................................................... 42,226,914 17,181,734
Class P Shares.................................................................... 3,723 N/A
------------ ------------
Total Shares...................................................................... 42,230,637 17,181,734
Class R Shares:
Net Asset Value, offering and redemption price per share outstanding........... $ 21.94 $ 17.82
------------ ------------
Class P Shares:
Net Asset Value, offering and redemption price per share outstanding........... $ 21.94 N/A
------------ ------------
</TABLE>
64
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Small Cap Equity International International Global
Small Cap Opportunities Income Growth Small Cap Opportunities
Fund Fund Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$267,255,223 $124,017,519 $18,401,037 $16,620,964 $39,924,486 $28,093,236
9,680,000 17,404,000 866,000 1,680,000 950,000 -
------------ ------------ ----------- ----------- ----------- -----------
276,935,223 141,421,519 19,267,037 18,300,964 40,874,486 28,093,236
783 105,727 727 57,060 3,392 -
- - - - 671,571 -
- - - - 107,394 -
- - - - - 694,310
34,128 25,690 46,605 39,738 265,770 48,395
180,898 8,122 404 784 443 -
28,607 2,094,322 11,616 144,670 102,796 124,229
304,235 1,861,353 177,139 44,299 115,244 1,660,085
- 20,056 10,525 8,397 12,998 12,644
------------ ------------ ----------- ----------- ----------- -----------
277,483,874 145,536,789 19,514,053 18,595,912 42,154,094 30,632,899
------------ ------------ ----------- ----------- ----------- -----------
- ------------------------------------------------------------------------------------------------------------
- - - - 106,937 -
- - - - - 698,192
27,005 849,424 5,711 168,449 50,386 26,668
2,131,167 8,371,301 131,324 80,091 245,263 117,931
51,283 50,838 859 816 37,403 31,973
4,081 7,246 1,112 1,043 2,389 1,657
- - 1 1 -
87,534 7,448 1,769 6,999 12,022 7,843
- - 10,626 - -
1,000 1,000 1,000 1,000 1,000 1,000
- - - - - 1,208,533
28,103 39,855 8,156 3,722 16,810 9,352
92,173 69,464 39,647 29,939 42,292 34,249
------------ ------------ ----------- ----------- ----------- -----------
2,422,346 9,396,576 200,205 292,060 514,502 2,137,398
------------ ------------ ----------- ----------- ----------- -----------
$275,061,528 $136,140,213 $19,313,848 $18,303,852 $41,639,592 $28,495,501
------------ ------------ ----------- ----------- ----------- -----------
$198,040,059 $143,043,891 $18,311,681 $18,223,767 $36,670,507 $24,742,019
- ------------------------------------------------------------------------------------------------------------
$ - $ 40,908 $ 3,365 $ 22,797 $ - $ (59,840)
30,504,376 (1,059,678) 1,828,537 2,121,271 (1,994,430) 951,46
78,895,164 (1,622,372) 955,356 77,106 4,198,849 3,350,252
127,648 86,167 12,007 11,952 28,029 16,803
165,534,340 138,695,188 16,514,583 16,070,726 39,407,144 24,236,823
------------ ------------ ----------- ----------- ----------- -----------
$275,061,528 $136,140,213 $19,313,848 $18,303,852 $41,639,592 $28,495,501
- ------------------------------------------------------------------------------------------------------------
$275,061,528 $136,140,213 $19,312,126 $18,302,796 $41,639,592 $28,495,501
N/A N/A 1,722 1,056 N/A N/A
------------ ------------ ----------- ----------- ----------- -----------
$275,061,528 $136,140,213 $19,313,848 $18,303,852 $41,639,592 $28,495,501
12,764,784 8,616,739 1,200,585 1,195,109 2,802,921 1,680,278
N/A N/A 107 69 N/A N/A
------------ ------------ ----------- ----------- ----------- -----------
12,764,784 8,616,739 1,200,692 1,195,178 2,802,921 1,680,278
$ 21.55 $ 15.80 $ 16.09 $ 15.31 $ 14.86 $ 16.96
------------ ------------ ----------- ----------- ----------- -----------
N/A N/A $ 16.09 $ 15.31 N/A N/A
------------ ------------ ----------- ----------- ----------- -----------
</TABLE>
65
<PAGE>
- ----------------------
The Montgomery Funds
- ----------------------
Statements of
Assets and Liabilities
- ----------------------
JUNE 30, 1996
<TABLE>
<CAPTION>
Global Emerging
Communications Markets
Fund Fund
Assets:
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments in securities, at value (Note 1)
Securities..................................................................... $205,760,072 $ 938,470,601
Repurchase agreements.......................................................... 3,125,000 41,740,000
------------ -------------
Total investments................................................................. 208,885,072 980,210,601
Cash.............................................................................. 306,183 2,861,561
Foreign currency, at value (Cost $1,576,724 and $15,212,065, respectively)........ 1,575,737 15,071,774
Forward foreign currency exchange contracts:
Forward foreign currency exchange contracts to buy, at value
(Contract cost $1,323,162, $3,916,746 and $602,461, respectively) (Note 5).... 1,327,291 3,911,658
Forward foreign currency exchange contracts to sell (Note 5)................... 3,076,538 8,253,279
Receivables:
Dividends...................................................................... 259,791 4,729,699
Interest....................................................................... 1,458 495,829
Expenses absorbed by Manager................................................... - -
Shares of beneficial interest sold............................................. 61,522 2,067,031
Investment securities sold..................................................... 3,192,037 11,919,670
Deferred loss on dollar roll transactions...................................... - -
Other Assets:
Organization costs (Note 1).................................................... 17,512 11,342
------------ -------------
Total Assets...................................................................... 218,703,141 1,029,532,444
------------ -------------
Liabilities:
- ---------------------------------------------------------------------------------------------------------------------------
Forward foreign exchange contracts:
Payable for forward foreign currency exchange contracts to buy (Note 5)........ 1,323,162 3,916,746
Payable for forward foreign currency exchange contracts to sell, at value
(Contract cost $3,076,538 and $8,253,279, respectively) (note 5).............. 3,086,599 8,273,317
Payables:
Deferred fee income on dollar roll transaction................................. - -
Shares of beneficial interest redeemed......................................... 373,135 852,453
Investment securities purchased................................................ 6,871,733 20,621,448
Management fees................................................................ 70,057 202,522
Administration fees............................................................ 11,875 60,509
Share marketing plan fees (Class P shares only)................................ - 1
Custodian fees................................................................. 37,893 363,511
Dividends...................................................................... - -
Trustees' fees and expenses.................................................... 1,000 1,000
Due to custodian............................................................... - -
Transfer agency and servicing fees............................................. 117,592 441,858
Accrued liabilities and expenses............................................... 139,360 419,018
------------ -------------
Total Liabilities................................................................. 12,032,406 35,152,383
------------ -------------
Net Assets........................................................................ $206,670,735 $ 994,380,061
------------ -------------
Investments at Identified Cost.................................................... $170,558,382 $ 890,982,101
Net Assets consist of:
- ---------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income/(accumulated net investment loss)............. $ (608,643) $ 1,128,370
Accumulated net realized gain/(loss) on securities sold, forward foreign
currency exchange contracts, futures contracts, foreign currency transactions
and securities sold short...................................................... 7,038,719 (24,574,978)
Net unrealized appreciation/(depreciation) of investments, forward foreign
currency exchange contracts, foreign currency transactions and net other
assets......................................................................... 38,302,625 88,975,116
Shares of beneficial interest..................................................... 114,494 700,744
Additional paid-in capital........................................................ 161,823,540 928,150,809
------------ -------------
Net Assets........................................................................ $206,670,735 $ 994,380,061
Net Assets:
- ---------------------------------------------------------------------------------------------------------------------------
Class R Shares.................................................................... $206,670,735 $ 994,377,847
Class P Shares.................................................................... N/A 2,214
------------ -------------
Net Assets........................................................................ $206,670,735 $ 994,380,061
Number of Fund shares outstanding:
Class R Shares.................................................................... 11,449,397 70,074,258
Class P Shares.................................................................... N/A 156
------------ -------------
Total Shares...................................................................... 11,449,397 70,074,414
Class R Shares:
Net Asset Value, offering and redemption price per share outstanding........... $ 18.05 $ 14.19
------------ -------------
Class P Shares:
Net Asset Value, offering and redemption price per share outstanding........... N/A $ 14.19
------------ -------------
</TABLE>
66
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
California
Select Asset Short Tax-Free Government California
50 Allocation Government Intermediate Reserve Tax-Free Money
Fund Fund Bond Fund Bond Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$70,982,452 $121,952,175 $25,235,427 $13,790,993 $261,244,466 $100,909,120
11,867,000 23,200,000 4,179,000 - 179,127,000 -
----------- ------------ ----------- ----------- ------------ ------------
82,849,452 145,152,175 29,414,427 13,790,993 440,371,466 100,909,120
3,521 2,695 7,117 27,136 - 2,107,198
- - - - - -
602,245 - - - - -
- - - - - -
73,951 30,090 - - - -
5,538 573,265 207,105 259,827 3,444,923 1,277,464
- - 4,374 997 - -
665,610 226,834 5,092 14,650 344,126 32,549
1,458,611 7,951,403 12,247 394,246 44,618 -
- - 4,062 - - -
10,728 19,971 15,366 16,958 12,567 1,855
----------- ------------ ----------- ----------- ------------ ------------
85,669,656 153,956,433 29,669,790 14,504,807 444,217,700 104,328,186
----------- ------------ ----------- ----------- ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
602,461 - - - - -
- - - - - -
- - 1,435 - - -
264,837 398,742 9,375 500,000 533,218 47,000
6,680,521 20,771,082 6,923,304 - 4,054,565 6,037,460
59,037 87,755 - - 18,313 46,662
4,534 7,619 902 561 15,411 4,081
- 31 1 - 1 -
10,113 3,395 637 1,000 4,235 3,360
- - 10,876 21,916 22,849 -
1,000 1,600 1,000 1,000 1,000 1,000
- - - - 507 -
27,773 52,018 4,948 3,044 31,159 4,421
64,703 80,857 35,331 29,353 112,898 50,183
----------- ------------ ----------- ----------- ------------ ------------
7,714,979 21,403,099 6,987,809 556,874 4,794,156 6,194,167
----------- ------------ ----------- ----------- ------------ ------------
$77,954,677 $132,553,334 $22,681,981 $13,947,933 $439,423,544 $ 98,134,019
----------- ------------ ----------- ----------- ------------ ------------
$76,229,365 $132,500,760 $29,480,637 $13,720,377 $440,371,466 $100,909,120
- ------------------------------------------------------------------------------------------------------------------------
$ 6,184 $ 1,002,787 $ (95,412) $ 384 $ (26,550) $ (894)
2,987,674 8,779,843 (374,263) (157,938) (42,895) (6,745)
6,617,954 12,651,415 (66,210) 70,616 - -
47,372 68,571 22,875 11,405 4,394,973 981,417
68,295,493 110,050,718 23,194,991 14,023,466 435,098,016 97,160,241
----------- ------------ ----------- ----------- ------------ ------------
$77,954,677 $132,553,334 $22,681,981 $13,947,933 $439,423,544 $ 98,134,019
- ------------------------------------------------------------------------------------------------------------------------
$77,954,677 $132,510,808 $22,681,068 $13,947,933 $439,422,637 $ 98,134,019
N/A 42,526 913 N/A 907 N/A
----------- ------------ ----------- ----------- ------------ ------------
$77,954,677 $132,553,334 $22,681,981 $13,947,933 $439,423,544 $ 98,134,019
4,737,171 6,854,928 2,287,385 1,140,547 439,496,387 98,141,658
N/A 2,200 92 N/A 907 N/A
----------- ------------ ----------- ----------- ------------ ------------
4,737,171 6,857,128 2,287,477 1,140,547 439,497,294 98,141,658
$ 16.46 $ 19.33 $ 9.92 $ 12.23 $ 1.00 $ 1.00
----------- ------------ ----------- ----------- ------------ ------------
N/A $ 19.33 $ 9.92 N/A $ 1.00 N/A
----------- ------------ ----------- ----------- ------------ ------------
</TABLE>
67
<PAGE>
- --------------------
The Montgomery Funds
- ------------------------
Statements of Operations
- ------------------------
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Growth Micro Cap
Fund Fund
Net Investment Income:
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Interest.................................................... $ 11,518,116 $ 3,367,420
Dividends................................................... 7,034,199 912,801
------------ -----------
Total Income................................................ 18,552,315 4,280,221
------------ -----------
Expenses:
Management fee (Note 2)..................................... 8,336,529 3,732,720
Custodian fee............................................... 73,235 31,872
Transfer agency and servicing fees.......................... 1,784,026 400,831
Administration fee (Note 2)................................. 568,256 181,744
Share marketing plan fee (Note 3) (Class P shares only)..... 58 -
Legal and audit fees........................................ 189,061 68,787
Trustees' fees.............................................. 6,174 6,441
Registration fees........................................... 71,639 47,442
Printing fees............................................... 314,111 64,911
Accounting fees............................................. 352,857 105,559
Amortization of organization expenses (Note 1).............. 23,282 18,463
Other....................................................... 65,761 24,375
Interest expense............................................ - -
------------ -----------
Total Expenses.............................................. 11,784,989 4,683,145
Fees deferred and/or expenses absorbed by Manager (Note 2).. - (101,797)
Net Expenses................................................ 11,784,989 4,581,348
------------ -----------
Net Investment Income/(Loss)................................ 6,767,326 (301,127)
------------ -----------
Net Realized and Unrealized Gain/(Loss) on Investments:
- ----------------------------------------------------------------------------------------------------
Net realized gain/(loss) from:
Security transactions.................................... 128,752,240 18,612,352
Forward foreign currency exchange contracts.............. (1,064) -
Futures contracts........................................ 1,438,122 -
Foreign currency transactions............................ 1,165 -
------------ -----------
Net realized gain/(loss) on investments during the year..... 130,190,463 18,612,352
------------ -----------
Net change in unrealized appreciation/(depreciation) of:
Securities............................................... 50,658,955 48,603,938
Forward foreign currency exchange contracts.............. - -
Foreign currency transactions and net other assets....... - -
------------ -----------
Net unrealized appreciation/(depreciation) of investments
during the year............................................ 50,658,955 48,603,938
------------ -----------
Net Realized and Unrealized Gain/(Loss) on Investments...... 180,849,418 67,216,290
------------ -----------
Net Increase/(Decrease) in Net Assets Resulting From
Operations................................................. $187,616,744 $66,915,163
------------ -----------
Foreign dividend withholding taxes.......................... $ 47,995 $ -
</TABLE>
* The Montgomery Small Cap Opportunities Fund and International Growth Fund
commenced operations on December 29, 1995 and July 3, 1995, respectively.
68
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Small Cap Equity International International Global
Small Cap Opportunities Income Growth Small Cap Opportunities
Fund Fund* Fund Fund* Fund Fund
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1,072,389 $ 280,208 $ 60,228 $ 49,885 $ 84,505 $ 19,625
748,425 32,704 588,111 118,617 652,771 262,438
----------- ----------- ---------- ---------- ---------- ----------
1,820,814 312,912 648,339 168,502 737,276 282,063
----------- ----------- ---------- ---------- ---------- ----------
2,364,834 217,603 101,709 97,137 611,587 381,316
8,636 8,348 7,843 29,944 54,394 26,392
106,384 43,601 24,773 12,645 83,512 28,929
154,323 12,677 11,713 6,186 23,974 13,267
- - 1 1 - -
74,787 19,936 32,039 26,455 28,695 25,088
6,174 4,565 5,904 5,786 6,175 6,174
49,352 51,209 32,715 35,038 35,145 18,372
33,987 15,747 - 3,003 16,286 6,891
95,771 7,261 6,723 7,635 28,854 16,219
6,528 9,907 14,835 29,230 23,570 23,415
24,236 637 4,178 3,128 13,109 12,899
- - - - 19,698 28,249
----------- ----------- ---------- ---------- ---------- ----------
2,925,012 391,491 242,433 256,188 944,999 587,211
- (119,487) (100,310) (110,483) (274,944) (199,063)
----------- ----------- ---------- ---------- ---------- ----------
2,925,012 272,004 142,123 145,705 670,055 388,148
----------- ----------- ---------- ---------- ---------- ----------
(1,104,198) 40,908 506,216 22,797 67,221 (106,085)
----------- ----------- ---------- ---------- ---------- ----------
- -------------------------------------------------------------------------------------------------------
45,933,860 (1,059,678) 1,936,696 2,179,972 4,396,897 2,381,197
- - - (50,030) (247,384) (82,972)
- - - - - -
- - - (8,671) (11,455) (11,229)
----------- ----------- ---------- ---------- ---------- ----------
45,933,860 (1,059,678) 1,936,696 2,121,271 4,138,058 2,286,996
----------- ----------- ---------- ---------- ---------- ----------
33,785,316 (1,622,372) 637,261 77,197 3,650,547 2,235,317
- - - - 10,578 (1,827)
- - - (91) (9,423) 1,633
----------- ----------- ---------- ---------- ---------- ----------
33,785,316 (1,622,372) 637,261 77,106 3,651,702 2,235,123
----------- ----------- ---------- ---------- ---------- ----------
79,719,176 (2,682,050) 2,573,957 2,198,377 7,789,760 4,522,119
----------- ----------- ---------- ---------- ---------- ----------
$78,614,978 $(2,641,142) $3,080,173 $2,221,174 $7,856,981 $4,416,034
----------- ----------- ---------- ---------- ---------- ----------
$ - $ - $ - $ 12,083 $ 82,079 $ 30,095
</TABLE>
69
<PAGE>
- --------------------
The Montgomery Funds
- ------------------------
Statements of Operations
- ------------------------
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Global Emerging
Communications Markets
Fund Fund
Net Investment Income:
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Interest...................................................... $ 91,719 $ 2,790,131
Dividends..................................................... 2,156,800 19,396,735
----------- -----------
Total Income.................................................. 2,248,519 22,186,866
----------- -----------
Expenses:
Management fee (Note 2)....................................... 3,186,649 10,262,601
Custodian fee................................................. 156,650 1,995,021
Transfer agency and servicing fees............................ 534,776 2,049,750
Administration fee (Note 2)................................... 156,949 614,086
Share marketing plan fee (Note 3) (Class P shares only)....... - 1
Legal and audit fees.......................................... 68,574 196,915
Trustees' fees................................................ 6,174 6,155
Registration fees............................................. 34,378 119,103
Printing fees................................................. 83,273 381,035
Accounting fees............................................... 192,190 816,053
Amortization of organization expenses (Note 1)................ 29,006 24,635
Other......................................................... 28,974 91,040
Interest expense.............................................. 250,377 70,364
----------- -----------
Total Expenses................................................ 4,727,970 16,626,759
Fees deferred and/or waived and/or expenses absorbed by
Manager (Note 2)............................................. (220,300) -
----------- -----------
Net Expenses.................................................. 4,507,670 16,626,759
----------- -----------
Net Investment Income/(Loss).................................. (2,259,151) 5,560,107
----------- -----------
Net Realized and Unrealized Gain/(Loss) on Investments:
- ---------------------------------------------------------------------------------------------
Net realized gain/(loss) from:
Security transactions (Net of foreign capital gains
tax of $51,425 for the Montgomery Emerging Markets Fund).. 28,487,812 587,373
Written option contracts................................... 110,274 -
Forward foreign currency exchange contracts................ (593,897) (2,840,523)
Futures contracts.......................................... - -
Foreign currency transactions.............................. (305,004) (902,315)
----------- -----------
Net realized gain/(loss) on investments during the year....... 27,699,185 (3,155,465)
----------- -----------
Net change in unrealized appreciation/(depreciation) of:
Securities................................................. 8,720,240 60,438,368
Forward foreign currency exchange contracts................ 4,439 (12,643)
Foreign currency transactions and net other assets......... (102,679) (161,882)
----------- -----------
Net unrealized appreciation/(depreciation) of investments
during the year.............................................. 8,622,000 60,263,843
----------- -----------
Net Realized and Unrealized Gain/(Loss) on Investments........ 36,321,185 57,108,378
----------- -----------
Net Increase in Net Assets Resulting From Operations.......... $34,062,034 $62,668,485
----------- -----------
Foreign dividend withholding taxes............................ $ 293,813 $ 1,911,915
</TABLE>
* The Montgomery Select 50 Fund commenced operations on October 2, 1995.
70
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
California
Select Asset Short Tax-Free Government California
50 Allocation Government Intermediate Reserve Tax-Free Money
Fund* Fund Bond Fund Bond Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 321,596 $ 2,963,402 $1,389,238 $482,977 $18,772,457 $3,039,704
316,874 606,778 - - - -
---------- ----------- ---------- -------- ----------- ----------
638,470 3,570,180 1,389,238 482,977 18,772,457 3,039,704
---------- ----------- ---------- -------- ----------- ----------
359,453 998,198 93,531 48,596 1,703,723 538,030
27,692 19,105 3,819 - 18,173 3,450
70,015 229,646 21,158 15,154 133,755 20,407
20,145 76,543 9,366 4,823 155,793 42,446
- 31 1 - 1 -
28,587 42,629 35,376 25,502 78,742 25,674
5,227 7,899 6,175 6,174 6,174 5,905
32,133 62,883 28,522 6,439 110,430 1,205
17,219 43,216 1,882 1,340 21,425 -
24,896 43,432 7,535 3,911 132,196 34,297
17,309 24,440 26,985 8,470 25,217 1,380
2,704 12,168 20,106 19,230 37,557 2,569
- 130,140 177,609 - - -
---------- ----------- ---------- -------- ----------- ----------
605,380 1,690,330 432,065 139,639 2,423,186 675,363
(87,769) (139,622) (142,217) (80,331) (464,333) (175,094)
---------- ----------- ---------- -------- ----------- ----------
517,611 1,550,708 289,848 59,308 1,958,853 500,269
---------- ----------- ---------- -------- ----------- ----------
120,859 2,019,472 1,099,390 423,669 16,813,604 2,539,435
---------- ----------- ---------- -------- ----------- ----------
- ------------------------------------------------------------------------------------------------------------------
3,003,352 11,016,398 119,785 (15,010) (29,717) (5,421)
- - - - - -
(33,574) - - - - -
- (26,211) 11,083 - - -
(28,773) - - - - -
---------- ----------- ---------- -------- ----------- ----------
2,941,005 10,990,187 130,868 (15,010) (29,717) (5,421)
---------- ----------- ---------- -------- ----------- ----------
6,620,087 9,246,054 (215,716) 31,785 - -
(216) - - - - -
(1,917) - - - - -
---------- ----------- ---------- -------- ----------- ----------
6,617,954 9,246,054 (215,716) 31,785 - -
---------- ----------- ---------- -------- ----------- ----------
9,558,959 20,236,241 (84,848) 16,775 (29,717) (5,421)
---------- ----------- ---------- -------- ----------- ----------
$9,679,818 $22,255,713 $1,014,542 $440,444 $16,783,887 $2,534,014
---------- ----------- ---------- -------- ----------- ----------
$ 10,380 $ - $ - $ - $ - $ -
</TABLE>
71
<PAGE>
- --------------------
The Montgomery Funds
- ---------------------
Statements of
Changes in Net Assets
- ---------------------
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Growth Micro Cap
Fund Fund
Increase/(decrease) in net assets from operations:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss)..................................................................... $ 6,767,326 $ (301,127)
Net realized gain/(loss) on securities, forward foreign currency exchange contracts,
futures contracts, securities sold short and foreign currency transactions during the year.... 130,190,463 18,612,352
Net unrealized appreciation/(depreciation) of securities, forward foreign currency exchange
contracts, futures contracts, securities sold short, foreign currency transactions
and net other assets during the year.......................................................... 50,658,955 48,603,938
Net increase/(decrease) in net assets resulting from operations.................................. 187,616,744 66,915,163
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R Shares................................................................................ (6,829,130) (704,275)
Distributions to shareholders from net realized gains on investments:
Class R Shares................................................................................ (63,292,460) (1,959,952)
------------ ------------
Total distributions.............................................................................. (70,121,590) (2,664,227)
Beneficial interest transactions:
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (Note 4):
Class R Shares................................................................................ (69,881,260) 79,016,734
Class P Shares................................................................................ 74,369
Net increase in net assets....................................................................... 47,688,263 143,267,670
Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning of year................................................................................ 878,775,710 162,949,496
End of year...................................................................................... $926,463,973 $306,217,166
Accumulated undistributed net investment income/(accumulated net investment loss)................ $ 3,630,493 $ -
</TABLE>
* The Montgomery Small Cap Opportunities Fund and International Growth Fund
commenced operations on December 29, 1995 and July 3, 1995, respectively.
<TABLE>
<CAPTION>
Global Emerging
Communications Markets
Fund Fund
Increase/(decrease) in net assets from operations:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss)..................................................................... $ (2,259,151) $ 5,560,107
Net realized gain/(loss) on securities, forward foreign currency exchange contracts,
futures contracts, securities sold short and foreign currency transactions during the year...... 27,699,185 (3,155,465)
Net unrealized appreciation/(depreciation) of securities, forward foreign currency exchange
contracts, futures contracts, securities sold short, foreign currency transactions and net
other assets during the year.................................................................. 8,622,000 60,263,843
Net increase in net assets resulting from operations............................................. 34,062,034 62,668,485
Distributions to shareholders:
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R Shares................................................................................ - -
Class P Shares................................................................................ - -
Distributions to shareholders in excess of net investment income:
Class R Shares................................................................................ - -
Distributions to shareholders from net realized gains on investments:
Class R Shares................................................................................ - -
------------ ------------
Total distributions.............................................................................. - -
Beneficial interest transactions:
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (Note 4):
Class R Shares................................................................................ (37,035,505) (66,373,869)
Class P Shares................................................................................ - 2,050
Net increase/(decrease) in net assets............................................................ (2,973,471) (3,703,334)
Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning of year................................................................................ 209,644,206 998,083,395
End of year...................................................................................... $206,670,735 $994,380,061
Accumulated undistributed net investment income/(accumulated net investment loss)................ $ (608,643) $ 1,128,370
</TABLE>
* The Montgomery Select 50 Fund commenced operations on October 2, 1995.
72
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Small Cap Equity International International Global
Small Cap Opportunities Income Growth Small Cap Opportunities
Fund Fund* Fund Fund* Fund Fund*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (1,104,198) $ 40,908 $ 506,216 $ 22,797 $ 67,221 $ (106,085)
45,933,860 (1,059,678) 1,936,696 2,121,271 4,138,058 2,286,996
33,785,316 (1,622,372) 637,261 77,106 3,651,702 2,235,123
78,614,978 (2,641,142) 3,080,173 2,221,174 7,856,981 4,416,034
- -------------------------------------------------------------------------------------------------------------------
- - (503,831) - (56,523) (80,877)
(20,796,972) - (148,133) - - -
------------ ------------ ----------- ----------- ----------- -----------
(20,796,972) (651,964) (56,523) (80,877)
- -------------------------------------------------------------------------------------------------------------------
14,844,681 138,781,355 10,501,521 16,081,678 5,323,541 10,483,273
- - 1,500 1,000 - -
72,662,687 136,140,213 12,931,230 18,303,852 13,123,999 14,818,430
- -------------------------------------------------------------------------------------------------------------------
202,398,841 - 6,382,618 - 28,515,593 13,677,071
$275,061,528 $136,140,213 $19,313,848 $18,303,852 $41,639,592 $28,495,501
$ - $ 40,908 $ 3,365 $ 22,797 $ - $ (59,840)
</TABLE>
<TABLE>
<CAPTION>
Asset Short California Tax-Free Government California
Select 50 Allocation Government Intermediate Reserve Tax-Free
Fund* Fund Bond Fund Fund Fund Money Fund
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 120,859 $ 2,019,472 $ 1,099,390 $ 423,669 $ 16,813,604 $ 2,539,435
2,941,005 10,990,187 130,868 (15,010) (29,717) (5,421)
6,617,954 9,246,054 (215,716) 31,785 - -
9,679,818 22,255,713 1,014,542 440,444 16,783,887 2,534,014
- -------------------------------------------------------------------------------------------------------------------
(52,328) (1,517,599) (1,094,372) (423,706) (16,816,058) (2,539,934)
- - (15) - (13) -
- - (8,218) - - -
(15,678) (3,316,319) - - - -
----------- ------------ ----------- ----------- ------------ -----------
(68,006) (4,833,918) (1,102,605) (423,706) (16,816,071) (2,539,934)
- -------------------------------------------------------------------------------------------------------------------
68,342,865 54,858,335 5,675,727 8,778,025 180,498,797 33,360,042
- 39,375 914 - 907 -
77,954,677 72,319,505 5,588,578 8,794,763 180,467,520 33,354,122
- -------------------------------------------------------------------------------------------------------------------
- 60,233,829 17,093,403 5,153,170 258,956,024 64,779,897
$77,954,677 $132,553,334 $22,681,981 $13,947,933 $439,423,544 $98,134,019
$ 6,184 $ 1,002,787 $ (95,412) $ 384 $ (26,550) $ (894)
</TABLE>
73
<PAGE>
- --------------------
The Montgomery Funds
Statements of
Changes in Net Assets
YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
Growth Micro Cap
Fund Fund*
Increase/(decrease) in net assets from operations
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss)................................................................. $ 5,493,419 $ 704,275
Net realized gain/(loss) on securities, forward foreign currency exchange contracts,
futures contracts, securities sold short and foreign currency transactions during
the year................................................................................. 25,117,201 312,720
Net unrealized appreciation of securities, forward foreign currency exchange contracts,
futures contracts, securities sold short, foreign currency transactions and net other
assets during the year................................................................... 99,934,770 14,712,719
Net increase/(decrease) in net assets resulting from operations.............................. 130,545,390 15,729,714
Distributions to shareholders:
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R Shares.............................................................................. (2,115,772) -
Distributions to shareholders from net realized gains on investments:
Class R Shares.............................................................................. (2,056,942) -
Distributions to shareholders in excess of net realized gains on investments:
Class R Shares.............................................................................. - -
------------ ------------
Total distributions.......................................................................... (4,172,714) -
Beneficial interest transactions:
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (Note 4):
Class R Shares.............................................................................. 603,300,386 147,219,782
Net increase/(decrease) in net assets........................................................ 729,673,062 162,949,496
Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning of year............................................................................ 149,102,648 -
End of year.................................................................................. $878,775,710 $162,949,496
Accumulated undistributed net investment income/(accumulated net investment loss)............ $ 3,692,196 $ 704,275
</TABLE>
* The Montgomery Micro Cap Fund and the Montgomery Equity Income Fund commenced
operations on December 30, 1994 and September 30, 1994, respectively.
<TABLE>
<CAPTION>
Emerging Asset
Markets Allocation
Fund Fund
Increase/(decrease) in net assets from operations:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income........................................................................ $ 1,967,991 $ 556,718
Net realized gain/(loss) on securities, forward foreign currency exchange
contracts, futures contracts, securities sold short and foreign currency
transactions during the year................................................................ (1,014,943) 1,156,097
Net unrealized appreciation/(depreciation) of securities, forward foreign
currency exchange contracts, futures contracts, securities sold short, foreign
currency transactions and net other assets during the year.................................. (9,853,241) 3,378,657
Net increase/(decrease) in net assets resulting from operations.............................. (8,900,193) 5,091,472
Distributions to shareholders:
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class R Shares.............................................................................. - (59,071)
Distributions to shareholders in excess of net investment income:
Class R Shares.............................................................................. - -
Distributions to shareholders from net realized gains on investments:
Class R Shares.............................................................................. (26,061,048) (35,860)
Distributions to shareholders in excess of net realized gains on investments:
Class R Shares.............................................................................. (22,548,326) -
Distributions to shareholders from capital:
Class R Shares.............................................................................. - -
------------ ------------
Total distributions.......................................................................... (48,609,374) (94,931)
Beneficial interest transactions:
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from beneficial interest transactions (Note 4):
Class R Shares.............................................................................. 400,632,672 53,689,330
Net increase/(decrease) in net assets........................................................ 343,123,105 58,685,871
Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning of year............................................................................ 654,960,290 1,547,958
End of year.................................................................................. $998,083,395 $60,233,829
Accumulated undistributed net investment income/(accumulated net investment loss)............ $ (3,656,524) $ 509,593
</TABLE>
* The Montgomery California Tax-Free Money Fund commenced operations
on September 30, 1994.
74
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Equity International Global Global
Small Cap Income Small Cap Opportunities Communications
Fund Fund* Fund Fund Fund
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ (1,190,171) $ 86,962 $ 298,709 $ 136,864 $ (230,457)
6,527,411 39,974 (6,513,569) (1,468,276) (19,650,990)
32,375,979 318,095 5,715,641 2,069,410 36,382,328
37,713,219 445,031 (499,219) 737,998 16,500,881
- -------------------------------------------------------------------------------------------------
- (86,042) (4,674) - -
(12,839,859) - - (519,575) -
- - - - (523,480)
------------ ---------- ----------- ----------- ------------
(12,839,859) (86,042) (4,674) (519,575) (523,480)
- -------------------------------------------------------------------------------------------------
(31,537,136) 6,023,629 (5,535,750) 954,427 (41,218,767)
(6,663,776) 6,382,618 (6,039,643) 1,172,850 (25,241,366)
- -------------------------------------------------------------------------------------------------
209,062,617 - 34,555,236 12,504,221 234,885,572
$202,398,841 $6,382,618 $28,515,593 $13,677,071 $209,644,206
$ - $ 980 $ (18,308) $ 42,661 $ (366,907)
</TABLE>
<TABLE>
<CAPTION>
Short California Tax-Free Government California
Government Bond Intermediate Reserve Tax-Free
Fund Bond Fund Fund Money Fund*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1,271,461 $ 325,756 $ 12,335,736 $ 1,328,088
(97,852) (87,106) (12,875) (1,324)
295,502 197,541 - -
1,469,111 436,191 12,322,861 1,326,764
- -------------------------------------------------------------------------------------------------
(1,253,298) (325,716) (12,336,143) (1,328,088)
- - - (395)
- (1,870) - -
- - - -
(20,117) - - -
----------- ----------- ------------ -----------
(1,273,415) (327,586) (12,336,143) (1,328,483)
- -------------------------------------------------------------------------------------------------
(5,039,019) (6,511,663) 47,840,494 64,781,616
(4,843,323) (6,403,058) 47,827,212 64,779,897
- -------------------------------------------------------------------------------------------------
21,936,726 11,556,228 211,128,812 -
$17,093,403 $ 5,153,170 $258,956,024 $64,779,897
$ (87,194) $ 317 $ 457 $ (395)
</TABLE>
75
<PAGE>
- --------------------------
The Montgomery Funds
Transactions in Shares
with a Beneficial Interest
<TABLE>
<CAPTION>
GROWTH FUND
Year Ended June 30, 1996 Year Ended June 30, 1995
-------------------------------------------------------------------------
Shares Dollars Shares Dollars
R Shares:*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 14,521,606 $ 296,489,571 55,250,712 $ 934,030,969
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of
dividends 3,640,887 68,571,076 231,401 3,882,010
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (21,790,489) (434,941,907) (19,392,480) (334,612,593)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (3,627,996) $ (69,881,260) 36,089,633 $ 603,300,386
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:**
- ------------------------------------------------------------------------------------------------------------------------------------
Sold 3,723 $ 74,369
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase 3,723 $ 74,369
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP OPPORTUNITIES FUND
Year Ended June 30, 1996
-------------------------------------------------------------------------
Shares Dollars
R Shares:*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sold 9,683,872 $ 155,336,055
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of
dividends - -
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,067,133) (16,554,700)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase 8,616,739 $ 138,781,355
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:**
- ------------------------------------------------------------------------------------------------------------------------------------
Sold
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP FUND
Year Ended June 30, 1996 Year Ended June 30, 1995
-------------------------------------------------------------------------
Shares Dollars Shares Dollars
R Shares:*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 2,772,505 $ 37,233,535 2,251,600 $ 26,655,775
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of
dividends 4,289 54,639 360 4,392
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (2,400,503) (31,964,633) (2,700,718) (32,195,917)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 376,291 $ 5,323,541 (448,758) $ (5,535,750)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
Year Ended June 30, 1996 Year Ended June 30, 1995
-------------------------------------------------------------------------
Shares Dollars Shares Dollars
R Shares:*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 41,685,260 $ 545,015,563 54,598,981 $ 765,638,358
Issued as reinvestment of
dividends - - 3,026,103 44,907,086
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (47,406,852) (611,389,432) (29,715,496) (409,912,772)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (5,721,592) $ (66,373,869) 27,909,588 $ 400,632,672
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:**
- ------------------------------------------------------------------------------------------------------------------------------------
Sold 156 $ 2,050
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase 156 $ 2,050
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Micro Cap Fund, the Small Cap Opportunities Fund, the Equity Income
Fund, the International Growth Fund and the Select 50 Fund Class R shares
commenced operations on December 30, 1994, December 29, 1995, September 30,
1994, July 3, 1996 and October 2, 1995 respectively.
** The Growth Fund, the Equity Income Fund, the International Growth Fund, the
Emerging Markets Fund and the Asset Allocation Fund Class P shares
commenced operations on January 12, 1996, March 12, 1996, March 12, 1996,
March 12, 1996 and January 3, 1996 respectively.
76
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
MICRO CAP FUND SMALL CAP FUND
Year Ended June 30, 1996 Year Ended June 30, 1995 Year Ended June 30, 1996 Year Ended June 30, 1995
- -------------------------------------------------------------- -----------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
<S> <C> <C> <C> <C> <C> <C> <C>
====================================================================================================================================
10,060,282 $151,943,367 12,671,633 $157,656,419 2,364,351 $45,287,531 1,496,300 $ 23,945,432
178,801 2,612,298 - - 1,145,423 19,277,473 773,942 11,895,470
- ------------------------------------------------------------------------------------------------------------------------------------
(4,907,671) (75,538,931) (821,311) (10,436,637) (2,572,896) (49,720,323) (4,243,870) (67,378,038)
- ------------------------------------------------------------------------------------------------------------------------------------
5,331,412 $79,016,734 11,850,322 $147,219,782 936,878 $14,844,681 (1,973,628) $(31,537,136)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND INTERNATIONAL GROWTH FUND
Year Ended June 30, 1996 Year Ended June 30, 1995 Year Ended June 30, 1996
- -------------------------------------------------------------- -----------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
<S> <C> <C> <C> <C> <C>
====================================================================================================================================
1,944,146 $29,241,482 753,880 $ 9,630,958 1,462,014 $19,648,978
35,834 542,721 2,677 33,435 - -
- ------------------------------------------------------------------------------------------------------------------------------------
(1,256,320) (19,282,682) (279,632) (3,640,764) (266,905) (3,567,300)
- ------------------------------------------------------------------------------------------------------------------------------------
723,660 $10,501,521 476,925 $ 6,023,629 1,195,109 $16,081,678
- ------------------------------------------------------------------------------------------------------------------------------------
107 $ 1,500 69 $ 1,000 -
- ------------------------------------------------------------------------------------------------------------------------------------
107 $ 1,500 69 $ 1,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GLOBAL OPPORTUNITIES FUND GLOBAL COMMUNICATIONS FUND
Year Ended June 30, 1996 Year Ended June 30, 1995 Year Ended June 30, 1996 Year Ended June 30, 1995
- -------------------------------------------------------------- -----------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
<S> <C> <C> <C> <C> <C> <C> <C>
====================================================================================================================================
1,808,431 $27,971,751 642,384 $ 8,407,571 4,763,483 $ 79,349,650 4,810,419 $ 70,362,748
5,378 76,525 37,775 497,870 - - 32,523 487,504
- ------------------------------------------------------------------------------------------------------------------------------------
(1,165,605) (17,565,003) (615,561) (7,951,014) (6,912,663) (116,385,155) (7,788,313) (112,069,019)
- ------------------------------------------------------------------------------------------------------------------------------------
648,203 $10,483,273 64,598 $ 954,427 (2,149,180) $(37,035,505) (2,945,371) $(41,218,767)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECT 50 FUND ASSET ALLOCATION FUND
Year Ended June 30, 1996 Year Ended June 30, 1996 Year Ended June 30, 1995
- ----------------------------------------------------------------- --------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
<C> <C> <S> <C> <C> <C>
=================================================================================================================================
5,927,206 $86,339,891 6,554,247 $115,780,937 4,354,998 $65,485,176
4,730 61,750 274,647 4,696,411 6,393 90,647
- ---------------------------------------------------------------------------------------------------------------------------------
(1,194,765) (18,058,776) (3,662,598) $ 65,619,013 (799,234) (11,886,493)
- ---------------------------------------------------------------------------------------------------------------------------------
4,737,171 (68,342,865) 3,166,296 $ 54,858,335 3,562,157 $53,689,330
- ---------------------------------------------------------------------------------------------------------------------------------
2,200 $ 39,375
- ---------------------------------------------------------------------------------------------------------------------------------
2,200 $ 39,375
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
- --------------------------
The Montgomery Funds
Transactions in Shares
with a Beneficial Interest
<TABLE>
<CAPTION>
SHORT GOVERNMENT BOND FUND CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
Year Ended June 30, 1996 Year Ended June 30, 1995 Year Ended June 30, 1996 Year Ended June 30, 1995
---------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
====================================================================================================================================
R Shares:*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Sold 2,121,512 $ 21,194,163 1,495,452 $ 14,635,908 1,161,660 $ 14,281,986 303,088 $ 3,581,420
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of
dividends 101,272 1,010,094 119,259 1,164,807 23,748 292,096 26,720 315,799
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (1,653,638) (16,528,530) (2,134,721) (20,839,734) (472,897) (5,796,057) (881,940) (10,408,882)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 569,146 $ 5,675,727 (520,010) $ (5,039,019) 712,511 $ 8,778,025 (552,132) $(6,511,663)
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:**
- ------------------------------------------------------------------------------------------------------------------------------------
Sold 102 $ 1,010
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of
dividends 1 13
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (11) (109)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase 92 $ 914
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT RESERVE FUND CALIFORNIA TAX-FREE MONEY FUND
Year Ended June 30, 1996 Year Ended June 30, 1995 Year Ended June 30, 1996 Year Ended June 30, 1995
---------------------------------------------------------------------------------------------------------
Shares and Dollars Shares and Dollars Shares and Dollars Shares and Dollars
====================================================================================================================================
R Shares:*
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Sold $ 2,724,266,296 $1,548,087,417 $618,931,453 $ 286,800,141
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of
dividends 15,759,363 11,696,059 2,443,423 1,284,285
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed (2,559,526,862) (1,511,942,982) (588,014,834) (223,302,810)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase $ 180,498,797 $ 47,840,494 $ 33,360,042 $ 64,781,616
- ------------------------------------------------------------------------------------------------------------------------------------
P Shares:**
====================================================================================================================================
Sold $ 900
- ------------------------------------------------------------------------------------------------------------------------------------
Issued as reinvestment of
dividends 7
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemed -
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase $ 907
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The California Tax-Free Money Fund Class R shares commenced operations on
September 30, 1994.
** The Short Government Bond Fund and the Government Reserve Fund Class P
shares commenced operations on March 12, 1996, and March 12, 1996,
respectively.
78
The accompanying notes are an integral part of these financial statements.
<PAGE>
=======================
The Montgomery Funds
Statement of Cash Flows
June 30, 1996
<TABLE>
<CAPTION>
SHORT GOVERNMENT BOND FUND
Cash flows from operating activities:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income received......................................................... $ 1,816,053
Operating expenses paid................................................. (83,833)
Proceeds from sales of long-term securities and purchased options....... 71,504,248
Net proceeds from futures transactions.................................. 11,083
Purchases of long-term securities and purchased options................. (69,385,949)
Net proceeds from short-term investments................................ (5,270,991)
Cash used by operating activities $ (1,409,389)
Cash flows from financing activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds received from subscriptions.................................... 21,517,149
Payments on shares redeemed............................................. (16,575,816)
Decrease in reverse repurchase agreements............................... (4,041,183)
Net dollar roll deferral................................................ (2,627)
Net loss on open dollar rolls........................................... (99,531)
Cash dividends paid*.................................................... (87,551)
Reverse repurchase agreement interest expense........................... (177,609)
Cash provided by financing activities................................... 532,832
Decrease in cash........................................................ (876,557)
Cash at beginning of year............................................... 883,674
Cash at end of year..................................................... $ 7,117
Reconciliation of net increase in net assets from operations to cash provided by operating activities:
Net increase in net assets resulting from operations.................... $ 1,014,542
Increase in investments.............................................. $ (9,635,043)
Increase in interest and dividends receivable........................ (68,454)
Decrease in other assets............................................. 26,320
Decrease in receivables for investments sold......................... 50,716
Increase in payable for investments purchased........................ 7,022,835
Increase in accrued expenses......................................... 2,086
Interest expense..................................................... 177,609
------------
Total adjustments.................................................... (2,423,931)
------------
Cash used by operating activities $ (1,409,389)
</TABLE>
* Non cash activities include reinvestment of dividends of $1,010,107.
79
The accompanying notes are an integral part of these financial statements.
<PAGE>
====================
The Montgomery Funds
Financial Highlights
<TABLE>
<CAPTION>
Growth Fund Micro Cap Fund
Class R Shares Class P Shares Class R Shares
---------------------------------------------------- --------------
Selected Per Share Data for the Year or Period Ended: 1996 1995 1994(a) 1996(a) 1996 1995(b)#
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of year $ 19.16 $ 15.27 $ 12.00 $ 19.22 $ 13.75 $ 12.00
===================================================================================================================================
Net investment income/(loss) 0.17 0.12 0.04 0.03 (0.04) 0.09
Net realized and unrealized gain/(loss) on investments 4.32 3.91 3.31++ 2.69 4.26 1.66
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 4.49 4.03 3.35 2.72 4.22 1.75
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.17) (0.07) (0.01) - (0.04) -
Distributions from net realized capital gains (1.54) (0.07) - - (0.11) -
Distributions in excess of net realized capital gains - - (0.07) - - -
Distributions from capital - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.71) (0.14) (0.08) - (0.15) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $ 21.94 $ 19.16 $ 15.27 $ 21.94 $ 17.82 $ 13.75
===================================================================================================================================
Total return** 24.85% 26.53% 27.98% 14.15% 30.95% 14.58%
===================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in 000's) $926,382 $878,776 $149,103 $ 82 $306,217 $162,949
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets 0.78% 0.98% 1.09%+ 0.53%+ (0.11)% 1.40%+
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.35% 1.50% 1.49%+ 1.60%+ 1.75% 1.75%+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 118.14% 128.36% 110.65% 118.14% 88.98% 36.81%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0596 N/A N/A $0.0596 $ 0.0573 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager - - $ 0.03 - ($0.05) $ 0.07
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager - - 1.79%+ - 1.79% 2.07%+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Growth Fund's Class R Shares and Class P Share commenced operation on
September 30, 1993 and January 12, 1996, respectively:
(b) The Micro Cap Fund's Class R Shares commenced operations on December 30,
1994.
(c) The Small Cap Fund's Class R Shares became available for investment by the
public on July 13, 1990.
(d) The Small Cap Opportunities Fund's Class R Shares commenced operations on
December 29, 1995.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH
EQUITY INCOME FUND FUND
Class R Shares Class P Shares Class R Shares Class P Shares
------------------------------------------- ------------------------------
Selected Per Share Data for the Year or Period Ended: 1996 1995(a) 1996(a) 1996(b) 1996(b)
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of year $ 13.38 $ 12.00 $ 15.66 $ 12.00 $ 13.66
================================================================================================================================
Net investment income/(loss) 0.43 0.31 0.08 0.02 0.00#
Net realized and unrealized gain/(loss) on investments 2.82 1.38 0.35 3.29 1.65
- --------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 3.25 1.69 0.43 3.31 1.65
- --------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.42) (0.31) - - -
Distributions from net realized capital gains (0.12) - - - -
Distributions in excess of net realized capital gains - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.31) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $ 16.09 $ 13.38 $ 16.09 $ 15.31 $ 15.31
================================================================================================================================
Total return** 24.56% 14.26% 2.75% 27.58% 12.08%
================================================================================================================================
Ratios to Average Net Assets/Supplemental Data:
================================================================================================================================
Net assets, end of year (in 000's) $ 19,312 $ 6,383 $ 2 $18,303 $ 1
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets 3.03% 4.06%+ 2.78%+ 0.26%+ 0.01%+ +
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets, excluding
interest expense 0.85% 0.84%+ 1.10%+ 1.65%+ 1.90%+ +
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 89.77% 29.46% 89.77% 238.91% 238.91%
- --------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid +++ $ 0.0423 N/A $ 0.0423 $0.0176 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees
by Manager $ 0.34 $ 0.13 $ 0.06 $ (0.07) $ (0.05)
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.45% 3.16%+ 1.70%+ 2.91%+ 3.16%+ +
- --------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Equity Income Fund's Class R Shares and Class P Shares commenced
operations on September 30, 1994 and March 12, 1996, respectively.
(b) The International Growth Fund's Class R Shares and Class P Shares commenced
operations on July 3, 1995 and March 12, 1996, respectively.
(c) The International Small Cap Fund's Class R Shares commenced operations on
September 30, 1993.
(d) The Global Opportunities Fund's Class R Shares commenced operations on
September 30, 1993.
(e) The Global Communications Fund's Class R Shares commenced operations on
June 1, 1993.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
80
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP
SMALL CAP FUND OPPORTUNITIES FUND
Class R Shares Class R Shares
------------------------------------------------------------------------------------------------- ---------------------
1996 1995 1994 1993 1992 1991 1990(c) 1995(d)#
<S> <C> <C> <C> <C> <C> <C> <C>
$ 17.11 $ 15.15 $ 16.83 $ 12.90 $ 13.24 $ 10.05 $ 10.62 $ 12.00
==================================================================================================================================
(0.09) (0.10) (0.12) (0.11) (0.06) (0.06) (0.07) 0.02
6.31 3.04 (0.47) 4.04 3.25 3.27 2.71 3.78++
- ----------------------------------------------------------------------------------------------------------------------------------
6.22 2.94 (0.59) 3.93 3.19 3.21 2.64 3.80
- ----------------------------------------------------------------------------------------------------------------------------------
- - - - - - - -
(1.78) (0.98) (1.09) - (2.75) (0.02) (0.02) -
- - - - - - - -
- - - - (0.78) - - -
- ----------------------------------------------------------------------------------------------------------------------------------
(1.78) (0.98) (1.09) - (3.53) (0.02) (0.02) -
- ----------------------------------------------------------------------------------------------------------------------------------
$ 21.55 $ 17.11 $ 15.15 $ 16.83 $ 12.90 $ 13.24 $ 13.24 $ 15.80
==================================================================================================================================
39.28% 20.12% (1.59)% 30.47% 27.69% 31.97% 24.89% 31.67%
==================================================================================================================================
==================================================================================================================================
$275,062 $202,399 $209,063 $219,968 $176,588 $ 27,181 $ 27,181 $136,140
- ----------------------------------------------------------------------------------------------------------------------------------
(0.47)% (0.57)% (0.68)% (0.69)% (0.44)% (0.47)% (0.45)%+ 0.23%+
- ----------------------------------------------------------------------------------------------------------------------------------
1.24% 1.37% 1.35% 1.40% 1.50% 1.50% 1.45%+ 1.50%+
- ----------------------------------------------------------------------------------------------------------------------------------
80.00% 85.07% 95.22% 130.37% 80.67% 194.63% 188.16% 81.29%
- ----------------------------------------------------------------------------------------------------------------------------------
$ 0.0529 N/A N/A N/A N/A N/A N/A $ 0.0578
- ----------------------------------------------------------------------------------------------------------------------------------
- - - - - - - $ (0.04)
- ----------------------------------------------------------------------------------------------------------------------------------
- - - - - - - 2.16%+
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Per share mumbers have been calculated using the average share method,
which more appropriately represents the per share data for the period since
the use of the undistributed income method did not accord with results of
operations.
<TABLE>
<CAPTION>
INTERNATIONAL GLOBAL OPPORTUNITIES GLOBAL COMMUNICATIONS
SMALL CAP FUND FUND FUND
Class R Shares Class R Shares Class R Shares
----------------------------------- ----------------------------------- ---------------------------------------
1996 1995 1994(c) 1996 1995 1994(d) 1996 1995 1994 1993(e)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 11.75 $ 12.02 $ 12.00 $ 13.25 $ 12.92 $ 12.00 $ 15.42 $ 14.20 $ 12.45 $ 12.00
====================================================================================================================================
0.03 0.12 0.00# (0.06) 0.13 0.01 (0.20) (0.03) (0.05) 0.00#
3.10 (0.39) 0.02 3.84 0.70 0.91 2.83 1.28 1.80++ 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
3.13 (0.27) 0.02 3.78 0.83 0.92 2.63 1.25 1.75 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
(0.02) (0.00)# - (0.07) - - - - -
- - - - (0.50) - - - - -
- - - - - - (0.03) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
(0.02) (0.00) - (0.07) (0.50) - - (0.03) - -
- ------------------------------------------------------------------------------------------------------------------------------------
$ 14.86 $ 11.75 $ 12.02 $ 16.96 $ 13.25 $ 12.92 $ 18.05 $ 15.42 $ 14.20 $ 12.45
====================================================================================================================================
26.68% (2.23)% 0.17% 28.64% 6.43% 7.67% 17.06% 8.83% 14.06% 3.75%
====================================================================================================================================
====================================================================================================================================
$ 41,640 $ 28,516 $ 34,555 $ 28,496 $ 13,677 $ 12,504 $206,671 $ 209,644 $234,886 $ 4,670
- ------------------------------------------------------------------------------------------------------------------------------------
0.20% 0.95% 0.04%+ (0.56)% 1.03% 0.02%+ (1.01)% (0.10)% (0.46)% (0.05)%
- ------------------------------------------------------------------------------------------------------------------------------------
1.90% 1.90% 1.90%+ 1.90% 1.90% 1.90%+ 1.90% 1.90% 1.90% 1.90%
- ------------------------------------------------------------------------------------------------------------------------------------
177.36% 156.13% 123.50% 163.80% 118.75% 67.22% 103.73% 50.17% 29.20% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0.0123 N/A N/A $ 0.0235 N/A N/A $ 0.0129 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
$ (0.08) $ 0.05 $ (0.02) $ (0.16) $ (0.01) $ (0.05) $ (0.22) $ (0.07)$ (0.06)$ (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
2.76% 2.50% 2.32%+ 3.10% 2.99% 2.75%+ 2.11% 2.09% 2.04% 8.96%
- ------------------------------------------------------------------------------------------------------------------------------------
1.96% 1.91% 1.99%+ 2.05% 1.91% 1.99%+ 2.01% 1.91% 1.94% -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
++ The amount shown in this caption for each share outstanding throughout the
period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of the
portfolio.
+++ Average commission rate paid per share of securities purchased and sold by
the Fund.
# Amount represents less than $0.01 per share.
81
<PAGE>
====================
The Montgomery Funds
Financial Highlights
<TABLE>
<CAPTION>
EMERGING MARKETS
FUND
Class R Shares Class P Shares
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selected Per Share Data for the Year or Period Ended: 1996 1995++ 1994 1993 1992(a) 1996(a)
Net asset value -- beginning of year $ 13.17 $ 13.68 $ 11.07 $ 9.96 $ 10.00 $ 12.62
====================================================================================================================================
Net investment income/(loss) 0.08 0.03 (0.03) 0.07 0.03 0.01
Net realized and unrealized gain/(loss) on investments 0.94 25## 2.92 1.05 (0.07) 1.56
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
investment operations 1.02 0.28 2.89 1.12 (0.04) 1.57
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income - - - (0.01) - -
Distributions in excess of net investment income - - - - - -
Distributions from net realized capital gains - (0.42) (0 .28) (0.00)# - -
Distributions in excess of net realized capital gains - (0.37) - - - -
Distributions from capital - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions - (0.79) (0.28) (0.01) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $ 14.19 $ 13.17 $ 13.68 $ 11.07 $ 9.96 $ 14.19
====================================================================================================================================
Total return** 7.74% 1.40% 26.10% 11.27% (0.40)% 12.44%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data
====================================================================================================================================
Net assets, end of year (in 000's) $994,378 $998,083 $654,960 $206,617 $ 54,625 $ 2
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average
net assets 0.58% 0.23% (0.14)% 0.66% 1.70%+ 0.33%+
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
excluding interest expense 1.72% 1.80% 1.85% 1.90% 1.90%+ 1.97%+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 109.92% 92.09% 63.79% 21.40% 0.19% 109.92%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commission rate paid+++ $ 0.0007 N/A N/A N/A N/A $0.0007
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) before deferral of fees and
absorption of expenses, by Manager - - - $ 0.06 $ 0.01 -
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees and absorption of
expenses by Manager, including interest expense - - - 1.93% 2.80%+ -
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio including interest expense - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Emerging Markets Fund's Class R Shares and Class P Shares commenced
operations on March 1, 1992 and March 12, 1996, respectively.
(b) The Select 50 Fund's Class R Shares commenced operations on October 2,
1995.
(c) The Asset Allocation Fund's Class R Shares and Class P Shares commenced
operations on March 31, 1994 and January 3, 1996, respectively.
(d) The Short Government Bond Fund's Class R Shares and Class P Shares
commenced operations on December 18, 1992 and March 12, 1996,
respectively.
** Total return represents aggregate total return for the periods indicated.
+ Annualized.
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE INTERMEDIATE
BOND FUND
Class R Shares
-------------------------------------------------
<S> <C> <C> <C>
Selected Per Share Data for the Year or Period Ended: 1996 1995 1994(a)
Net asset value -- beginning of year $ 12.04 $ 11.79 $ 12.00
====================================================================================================================================
Net investment income 0.54 0.44 0.41
Net realized and unrealized gain/(loss) on investments 0.19 0.25 (0.21)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
investment operations 0.73 0.69 0.20
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income (0.54) (0.44) (0.41)
Distributions in excess of net investment income - - -
Distributions from net realized capital gains - (0.00)# -
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.44) (0.41)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value -- end of year $ 12.23 $ 12.04 $ 11.79
====================================================================================================================================
Total return** 6.11% 6.03% 1.65%
====================================================================================================================================
Ratios to Average Net Assets/Supplemental Data
====================================================================================================================================
Net assets, end of year (in 000's) $ 13,948 $ 5.153 $ 11,556
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 4.34% 3.71% 3.44%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
excluding interest expense 0.61% 0.56% 0.23%
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 58.11% 37.93% 77.03%
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income before deferral of fees by Manager $ 0.43 $ 0.34 $ 0.25
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratio before deferral of fees by Manager,
including interest expense 1.43% 1.41% 1.63%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense ratios including interest expense - - -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The California Tax-Free Intermediate Bond Fund's Class R Shares commenced
operations on July 1, 1993.
(b) The Government Reserve Fund's Class R Shares and Class P Shares commenced
operations on September 14, 1992 and March 12, 1996, respectively.
(c) The California Tax-Free Money Fund's Class R Shares commenced operations
on September 30, 1994.
** Total return represents aggregate total return for the periods indicated.
82
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
SELECT 50 ASSET ALLOCATION
FUND FUND
Class R Shares Class R Shares Class P Shares
-------------------- ----------------------------------------------------------
<C> <C> <C> <C> <C>
1996(b) 1996 1995 1994(c) 1996(c)
$ 12.00 $ 16.33 $ 12.24 $ 12.00 $ 17.86
=====================================================================================
0.06 0.26 0.25 0.06 0.09
4.45 3.54 4.11 0.18 1.38
- -------------------------------------------------------------------------------------
4.51 3.80 4.36 0.24 1.47
- -------------------------------------------------------------------------------------
(0.04) (0.25) (0.17) - -
- - - - -
- (0.55) (0.10) - -
(0.01)
- - - - -
- -------------------------------------------------------------------------------------
(0.05) (0.80) (0.27) - -
- -------------------------------------------------------------------------------------
$ 16.46 $ 19.33 $ 16.33 $ 12.24 $ 19.33
=====================================================================================
37.75% 23.92% 35.99% 2.00% 8.23%
=====================================================================================
=====================================================================================
$ 77,955 $132,511 $ 60,234 $ 1,548 $ 43
- -------------------------------------------------------------------------------------
0.42%+ 1.85% 3.43% 2.54%+ 1.60%+
- -------------------------------------------------------------------------------------
1.80%+ 1.30% 1.30% 1.30%+ 1.55%+
- -------------------------------------------------------------------------------------
105.98% 225.91% 95.75% 190.94% 225.91%
- -------------------------------------------------------------------------------------
$ 0.0097 $ 0.0595 N/A N/A $0.0595
- -------------------------------------------------------------------------------------
$ 0.02 $ 0.24 $ 0.19 $ (0.11) $ 0.08
- -------------------------------------------------------------------------------------
2.11%+ 1.55% 2.07% 9.00%+ 1.80%+
- -------------------------------------------------------------------------------------
- 1.42% 1.31% 1.43%+ 1.67%+
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT GOVERNMENT
BOND FUND
Class R Shares Class P Shares
----------------------------------------------------------------
1996 1995 1994 1993(d) 1996(d)
<S> <C> <C> <C> <C>
$ 9.95 $ 9.80 $ 10.23 $ 10.00 $ 9.98
====================================================================
0.60 0.62 0.61 0.33 0.16
(0.04) 0.16 (0.34) 0.23 (0.05)
- --------------------------------------------------------------------
0.56 0.78 0.27 0.56 0.11
- --------------------------------------------------------------------
(0.59) (0.62) (0.56) (0.33) (0.17)
(0.00)# - (0.07) - -
- - - - -
- - (0.07) - -
- (0.01) - (0.00)# -
- --------------------------------------------------------------------
(0.59) (0.63) (0.70) (0.33) (0.17)
- --------------------------------------------------------------------
$ 9.92 $ 9.95 $ 9.80 $ 10.23 $ 9.92
====================================================================
5.74% 8.28% 2.49% 5.66% 1.12%
====================================================================
====================================================================
$ 22,681 $17,093 $21,937 $ 22,254 $ 1
- --------------------------------------------------------------------
5.88% 6.41% 5.93% 6.02%+ 5.63%+
- --------------------------------------------------------------------
0.60% 0.47% 0.25% 0.22%+ 0.85%+
- --------------------------------------------------------------------
349.62% 284.23% 603.07% 213.22% 349.62%
- --------------------------------------------------------------------
- - - - -
- --------------------------------------------------------------------
$ 0.52 $ 0.54 $ 0.51 $ 0.27 $ 0.14
- --------------------------------------------------------------------
2.31% 2.23% 1.75% 2.07%+ 2.56%+
- --------------------------------------------------------------------
1.55% 1.38% 0.71% - 1.80%+
- --------------------------------------------------------------------
</TABLE>
++ Per shares numbers have been calculated using the average shares
method, which more appropriately represents the per share data for the
period since the use undistributed income method did not accord with
the results of operations.
+++ Average commission rate paid per share of securities purchased and
sold by the Fund.
# Amount represents less than $0.01 per share.
## The amount shown in this caption for each share outstanding throughout
the period may not be in accord with the net realized and unrealized
gain/(loss) for the period because of the timing of purchases and
withdrawal of shares in relation to the fluctuating market values of
the portfolio .
<TABLE>
<CAPTION>
GOVERNMENT RESERVE
FUND
Class R Shares Class P Shares
- --------------------------------------------------------------------------------
1996 1995 1994 1993(b) 1996(b)
<S> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================================================================================
0.052 0.049 0.029 0.024 0.014
0.000## 0.000## 0.000## 0.000## 0.000##
- --------------------------------------------------------------------------------
0.052 0.049 0.029 0.024 0.014
- --------------------------------------------------------------------------------
(0.052) (0.049) (0.029) (0.024) (0.014)
- - - - -
- - - - -
(0.052) (0.049) (0.029) (0.024) (0.014)
- --------------------------------------------------------------------------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================================================================================
5.28% 4.97% 2.96% 2.41% 1.38%
================================================================================
================================================================================
$439,423 $258,956 $211,129 $124,795 $ 1
- --------------------------------------------------------------------------------
5.17% 4.92% 2.99% 2.96%+ 4.91%+
- --------------------------------------------------------------------------------
0.60% 0.60% 0.60% 0.38%+ 0.85%+
- --------------------------------------------------------------------------------
- - - - -
- --------------------------------------------------------------------------------
$ 0.050 $ 0.047 $ 0.028 $ 0.013 $ 0.013
- --------------------------------------------------------------------------------
0.74% 0.79% 0.71% 0.77%+ 0.99%+
- --------------------------------------------------------------------------------
- 0.63% - - -
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-FREE
MONEY FUND
Class R Shares
- ----------------------------------
1996 1995(c)
<S> <C>
$ 1.00 $ 1.00
==================================
0.030 0.027
0.000## 0.000##
- ----------------------------------
0.030 0.027
- ----------------------------------
(0.030) (0.027)
- (0.000)##
- -
- ----------------------------------
(0.030) (0.027)
- ----------------------------------
$ 1.00 $ 1.00
==================================
3.03% 2.68%
==================================
==================================
$ 98,134 $ 64,780
- ----------------------------------
2.99% 3.55%+
- ----------------------------------
0.59% 0.33%+
- ----------------------------------
- -
- ----------------------------------
$ 0.028 $ 0.023
- ----------------------------------
0.80% 0.86%+
- ----------------------------------
- -
- ----------------------------------
</TABLE>
+ Annualized.
# Amount represents less than $0.01 per share.
## Amount represents less than $0.01 per share
83
<PAGE>
====================
The Montgomery Funds
Notes
TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Montgomery Funds and The Montgomery Funds II (individually, the "Trust" and,
collectively, the "Trusts") are registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as diversified, open-end management
investment companies. As of June 30, 1996, the Trusts had eighteen publicly
offered series: Montgomery Growth Fund, Montgomery Micro Cap Fund, Montgomery
Small Cap Fund, Montgomery Small Cap Opportunities Fund (formerly Montgomery
Small Cap II Fund), Montgomery Equity Income Fund, Montgomery International
Growth Fund, Montgomery International Small Cap Fund, Montgomery Global
Opportunities Fund, Montgomery Global Communications Fund, Montgomery Emerging
Markets Fund, Montgomery Select 50 Fund, Montgomery Asset Allocation Fund,
Montgomery Short Government Bond Fund, Montgomery California Tax-Free
Intermediate Bond Fund, Montgomery Government Reserve Fund, Montgomery
California Tax-Free Money Fund, Montgomery Advisors Emerging Markets Fund and
Montgomery Institutional Series: Emerging Markets Portfolio (individually, the
"Fund" and, collectively, the "Funds").
The Montgomery Funds were organized as a Massachusetts business trust on May 10,
1990 and commenced operations with the Montgomery Small Cap Fund. The
Montgomery Funds II were organized as a Delaware business trust on September 8,
1993 and commenced operations with the Montgomery Institutional Series:
Emerging Markets Portfolio. Prior to the public offerings of shares of each
Fund, a limited number of shares were sold to Montgomery Asset Management, L.P.
and/or affiliated persons of Montgomery Asset Management in private placement
offerings. Otherwise, no Fund had any significant operations prior to the date
on which it commenced operations (i.e., commenced selling shares to the public).
On December 1, 1995, Growth Fund, Equity Income Fund, International Growth Fund,
Emerging Markets Fund, Asset Allocation Fund, Short Government Bond Fund and
Government Reserve Fund commenced offering Class P Shares. Any shares
outstanding prior to December 1, 1995, were designated as Class R Shares.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosure in the financial statements. Actual
results could differ from those estimates. Information presented in these
financial statements pertains to all the above Funds except for Montgomery
Advisors Emerging Markets Fund and Montgomery Institutional Series: Emerging
Markets Portfolio which are presented under separate covers.
The following is a summary of significant accounting policies.
a. Portfolio Valuation
Portfolio securities are valued using current market valuations: either the last
reported sales price, or, in the case of securities for which there is no
reported last sale and in the case of fixed income securities, the mean of the
closing bid and asked prices.
Portfolio securities which are traded primarily on foreign securities exchanges
or for which market quotations are readily available are generally valued at the
last reported sales price on the respective exchanges or markets, except that
when an occurrence subsequent to the time that a value was so established is
likely to have changed said value, the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. Securities traded on the over-the-counter
market are valued at the mean between the last available bid and ask price prior
to the time of valuation.
For the Government Reserve Fund and the California Tax-Free Money Fund,
portfolio securities are valued at amortized cost, which means they are valued
at acquisition cost (as adjusted for amortization of premium or discount) rather
than at current market value. Amortized cost involves valuing a portfolio
security instrument at its cost, initially, and thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. Calculations
are made to compare the value of the Fund's investments valued at amortized cost
with market values. Market valuations are obtained by using actual quotations
provided by market makers, estimates of market value, or values obtained from
yield data relating to classes of money market instruments.
Securities for which market quotations are not readily available (including
restricted securities which are subject to limitations as to their sale) are
valued at fair market value as determined in good faith by or under the
supervision of the Trusts' officers in accordance with methods which are
authorized by the Trusts' Board of Trustees. Short-term securities with
maturities of 60 days or less (excluding the Government Reserve Fund and the
California Tax-Free Money Fund which value all securities at amortized cost) are
carried at amortized cost, which approximates market value.
b. Forward Foreign Currency Exchange Contracts
Certain Funds may engage in forward foreign currency exchange contracts with off
balance sheet risk in the normal course of investing activities in order to
manage exposure to market risks. Forward foreign currency exchange contracts
are valued at the forward rate and are marked-to-market daily. The change in
market value is recorded by the Fund as an unrealized gain or loss.
84
<PAGE>
====================
The Montgomery Funds
Notes
TO FINANCIAL STATEMENTS
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed. Forward foreign currency exchange
contracts have been used solely to establish a rate of exchange for settlement
of transactions. Although forward foreign currency exchange contracts limit the
risk of loss due to a decline in the value of the hedged currency, they also
limit any potential gain that might result should the value of the currency
increase. In addition, a Fund could be exposed to risks if the counterparties
to the contracts are unable to meet the terms of their contracts.
c. Foreign Currency
Foreign currencies, investments and other assets and liabilities are translated
into U.S. dollars at the exchange rates prevailing at the end of the period, and
purchases and sales of investment securities and income and expenses are
translated on the respective dates of such transactions. Unrealized gains and
losses which result from changes in foreign currency exchange rates on
investments have been included in the unrealized appreciation/(depreciation) of
securities. Net realized foreign currency gains and losses resulting from
movement in exchange rates include foreign currency gains and losses between
trade date and settlement date on investment securities transactions, foreign
currency transactions and the difference between the amounts of interest and
dividends recorded on the books of a Fund and the amount actually received and
the portion of foreign currency gains and losses related to fluctuations in
exchange rates between the initial purchase trade date and subsequent sale trade
date.
d. Repurchase Agreements
Each Fund may engage in repurchase agreement transactions individually or
jointly through a joint repurchase account with other series of the Trusts
pursuant to a joint repurchase agreement. Under the terms of a typical
repurchase agreement, a Fund writes a financial contract with a counterparty and
takes possession of a government debt obligation as collateral. The Fund also
agrees with the counterparty to allow the counterparty to repurchase the
financial contract at a specified date and price, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral is at least equal at all times to the total
amount of the repurchase obligations, including interest. In the event of
counterparty default, a Fund has the right to use the collateral to offset
losses incurred. There could be potential loss to the Fund in the event a Fund
is delayed or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period while a Fund seeks to assert its rights.
The Fund's investment manager, acting under the supervision of the Board of
Trustees, reviews the value of the collateral and the creditworthiness of those
banks and dealers with which a Fund enters into repurchase agreements to
evaluate potential risks. The Funds may also participate on an individual or
joint basis in tri-party repurchase agreements which involves a counterparty and
a custodian bank.
e. Dollar Roll Transactions
Certain Funds may enter into dollar roll transactions with financial
institutions to take advantage of opportunities in the mortgage market. A
dollar roll transaction involves a sale by the Fund of securities with a
simultaneous agreement to repurchase substantially similar securities at an
agreed upon price at a future date. The securities repurchased will bear the
same interest as those sold but generally will be collateralized by the
different pools of mortgages with different prepayment histories. During the
period between the sale and repurchase, a Fund will not be entitled to receive
interest and principal payments on the securities sold. The Fund will invest
the proceeds of the sale in additional instruments, the income from which,
together with any additional fee income received for the dollar roll, may or may
not generate income for the Fund exceeding the yield on the securities sold.
Dollar roll transactions involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price of those
securities.
f. Short Sales/Forward Commitments
Certain Funds may seek to hedge investments through forward commitments to sell
high grade liquid debt securities. In some cases, a Fund may enter into forward
commitments to sell securities the Fund does not yet own (but has the right to
acquire). Such forward commitments effectively constitute a form of short sale
and have been limited to date to the Short Government Bond Fund and to
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC") in
connection with certain FHLMC conversion programs. To complete such a
transaction, a Fund must obtain a security that is convertible into the security
it has made a commitment to deliver. Forward commitments involve transaction
costs and entail risk to the extent interest rates move in a direction different
from that anticipated. There is a risk that the market price will increase for
the security it must purchase. Whenever a Fund engaged in this type of
transaction, it maintained other high quality liquid debt securities equal in
value to the forward commitment in a segregated account with its custodian.
g. Reverse Repurchase Agreements
Certain Funds may enter into reverse repurchase agreement transactions with
member banks on the Federal Reserve Bank of New York's list of reporting dealers
for leverage purposes. A reverse repurchase agreement involves a sale by the
Fund of securities that it holds with an agreement by the Fund to repur-
85
<PAGE>
====================
The Montgomery Funds
Notes
TO FINANCIAL STATEMENTS
chase the same securities at an agreed upon price and date. A reverse
repurchase agreement involves the risk that the market value of the securities
sold by the Fund may decline below the repurchase price of the securities. In
the event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Each Fund established a segregated account with its custodian in which the Fund
maintained cash, U.S. government securities or other liquid high grade debt
obligations equal in value to its obligations with respect to reverse repurchase
agreements.
h. Reverse Dollar Roll Transactions
Certain Funds may enter into reverse dollar roll transactions. When a Fund
engages in a reverse dollar roll, it purchases a security from a financial
institution and concurrently agrees to resell a similar security to that
institution at a later date at an agreed-upon price. Under the 1940 Act,
reverse dollar roll transactions are considered to be loans by a Fund and must
be fully collateralized. If the seller defaults on its obligation to repurchase
the underlying security, a Fund may experience delay or difficulty in exercising
its rights to realize upon the security, may incur a loss if the value of the
security declines and may incur disposition costs in liquidating the security.
i. Futures Contracts
Certain Funds may enter into futures contracts. Upon entering into a futures
contract, a Fund is required to deposit with the custodian on behalf of the
broker an amount of cash or cash equivalents equal to a certain percentage of
the contract amount. This is known as the "initial margin." Subsequent
payments ("variation margin") are made or received by a Fund each day, depending
on the daily fluctuation of the value of the contract.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk a
Fund may not be able to enter into a closing transaction because of an illiquid
secondary market.
j. Options
Certain Funds may enter into options contracts. Upon the purchase of a put
option or a call option by the Fund, the premium paid is recorded as an
investment, the value of which is marked-to-market daily. When a purchased
option expires, the Fund will realize a loss in the amount of the cost of the
option. When the Fund enters into a closing sale transaction, the Fund will
realize a gain or loss depending on whether the sales proceeds from the closing
sale transaction are greater or less than the cost of the option. When the Fund
exercises a put option, the proceeds from such sale will be decreased by the
premium originally paid. When the Fund exercises a call option, the cost of the
security which the Fund purchases upon exercise will be increased by the premium
originally paid. When purchased index options are exercised, settlement is made
in cash.
When the Fund writes a call option or a put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security
or index, and the liability related to such option is eliminated. When a call
option is exercised, the Fund realizes a gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received. When a put option is exercised, the amount of the premium
originally received will reduce the cost of the security which the Fund
purchased upon exercise. When written index options are exercised, settlement is
made in cash.
The risk associated with purchasing options is limited to the premium originally
paid. The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market value of the underlying security or index
increases and the option is exercised. The risk in writing a put option is that
the Fund may incur a loss if the market value of the underlying security or
index decreases and the option is exercised. In addition, there is the risk that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
k. Dividends and Distributions
Dividends, if any, from net investment income of the Growth Fund, the Micro Cap
Fund, the Small Cap Fund, the Small Cap Opportunities Fund, the International
Growth Fund, the International Small Cap Fund, the Global Opportunities Fund,
the Global Communications Fund, the Emerging Markets Fund, the Select 50 Fund
and the Asset Allocation Fund, are declared and paid at least annually.
Dividends from net investment income of the Short Government Bond Fund, the
California Tax-Free Intermediate Bond Fund, the Government Reserve Fund, and the
California Tax-Free Money Fund are declared daily and paid monthly. Dividends
from net investment income of the Equity Income Fund are declared and paid
quarterly.
Distributions of any short-term capital gains earned by a Fund are distributed
no less frequently than annually. Additional distributions of net investment
income and capital gains for each Fund may be made in order to avoid the
application of a 4%
86
<PAGE>
====================
The Montgomery Funds
Notes
TO FINANCIAL STATEMENTS
non-deductible excise tax on certain undistributed amounts of ordinary income
and capital gains. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments of income and gains on various investment securities
held by a Fund, timing differences and differing characterization of
distributions made by a Fund. During the year ended June 30, 1996, the Micro Cap
Fund recharacterized $821,379 of distributions from net investment income to
realized gains.
Permanent differences incurred during the year ended June 30, 1996, resulting
from differences in book and tax accounting have been reclassified at year end
to undistributed net investment income, accumulated net realized gain/(loss)
and paid-in capital as follows:
<TABLE>
<CAPTION>
Increase/(Decrease) Increase/(Decrease)
Undistributed Net Accumulated
Decrease Investment Net Realized
Paid-in Capital Income Gain/(Loss)
--------------- ------------------ -------------------
<S> <C> <C> <C>
Growth Fund.................................... - $ 101 $ (101)
Micro Cap Fund................................. - 301,127 (301,127)
Small Cap Fund................................. - 1,104,198 (1,104,198)
International Small Cap Fund................... $ (266,449) 7,610 258,839
Global Opportunities Fund...................... (178,662) 84,461 94,201
Global Communications Fund..................... (2,916,316) 2,017,415 898,901
Emerging Markets Fund.......................... (1,285) (775,213) 776,498
Select 50 Fund................................. - (62,347) 62,347
Asset Allocation Fund.......................... - (8,679) 8,679
Short Government Bond Fund..................... - (5,003) 5,003
California Tax-Free Intermediate Bond Fund..... - 104 (104)
Government Reserve Fund........................ - (24,540) 24,540
</TABLE>
l. Securities Transactions and Investment Income
Securities transactions are recorded on a trade-date basis. Realized gain and
loss from securities transactions are recorded on the specific identified cost
basis. Dividend income is recognized on the ex-dividend date. Dividend income
on foreign securities is recognized as soon as a Fund is informed of the ex-
dividend date. Interest income, including, where applicable, amortization of
discount on short-term investments, is recognized on the accrual basis.
Securities purchased on a when-issued or delayed delivery basis may be settled a
month or more after the trade date; interest income is not accrued until
settlement date. The Funds instruct their custodian to segregate assets in a
separate account with a current value at least equal to the amount of its when-
issued purchase commitments.
The Small Cap Fund has invested in payment-in-kind ("PIK") bonds. PIK bonds pay
interest through the issuance of additional bonds. PIK bonds are recorded at
fair market value on the date of payment and carry a risk that unlike bonds
which pay interest in cash throughout the period to maturity, the Fund will
realize no cash until the cash payment date unless a portion of such securities
are sold and, if the issuer defaults, the Fund may obtain no return at all on
its investment.
m. Federal income Taxes
Each Fund has qualified and it is the intention of each Fund to continue to
qualify and elect treatment as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"), by complying with
the provisions available to certain investment companies, as defined in
applicable sections of the Code, and to make distributions of taxable income to
shareholders sufficient to relieve each Fund from all or substantially all
federal income taxes.
n. Organization Costs
Expenses incurred in connection with the organization of each Fund, including
the fees and expenses of registering and qualifying its shares for distribution
under federal and state securities regulations, are being amortized on a
straight-line basis over a period of five years from the commencement of
operations. All such costs for the Small Cap Fund have been fully amortized.
o. Cash
Cash, as used in the Statement of Cash Flows, is the amount reported in the
Statement of Assets and Liabilities. The Fund issues and redeems its shares,
invests in securities and distributes dividends from net investment income and
net realized gains (which are either paid in cash or reinvested at the
discretion of shareholders). These activities are reported in the Statement of
Changes in Net Assets. Information on cash payments is presented in the
Statement of Cash Flows. Accounting practices that do not affect reporting
activities on a cash basis include unrealized gain or loss on investment
securities and accretion income recognized on investment securities.
p. Expenses
General expenses of the Trusts are allocated to the relevant Fund based upon
relative net assets. Operating expenses directly attributable to a Fund or a
class of shares are charged to that
87
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
TO FINANCIAL STATEMENTS
Fund's or class' operations. Expenses of each Fund not directly attributable to
the operations of any class of shares or Fund are prorated among the classes
based on the relative average net assets of each class of shares or Fund.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES AND OTHER CONTRACTUAL
COMMITMENTS:
a. Montgomery Asset Management, L.P. is the Funds' Manager (the "Manager"). The
Manager, a California limited partnership, is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers Act of
1940, as amended (the "Advisers Act"). The general partner of the Manager is
Montgomery Asset Management, Inc. The sole limited partner of the Manager is
Montgomery Securities, the Funds' principal underwriter and distributor. Under
the Advisers Act, both Montgomery Asset Management, Inc. and Montgomery
Securities may be deemed controlling persons of the Manager. Although the
operations and management of the Manager are independent from those of
Montgomery Securities, it is expected that the Manager may draw upon the
research and administrative resources of Montgomery Securities at its discretion
in a manner consistent with applicable regulations.
Pursuant to investment management agreements ("Investment Management
Agreements"), the Manager provides each Fund with advice on buying and selling
securities, manages the investments of each Fund including the placement of
orders for portfolio transactions, furnishes each Fund with office space and
certain administrative services, and provides the personnel needed by the Trusts
with respect to the Manager's responsibilities under such agreement. The
Manager has agreed to reduce some or all of its management fee or absorb fund
expenses if necessary to keep each Fund's annual operating expenses, exclusive
of interest and taxes, at or below the maximum allowed by applicable state
expense limitations or the following percentages of each Fund's average net
assets, whichever is lower: 1.50% for the Growth Fund; 1.75% for the Micro Cap
Fund; 1.40% for the Small Cap Fund; 1.50% for the Small Cap Opportunities Fund;
0.85% for the Equity Income Fund; 1.65% for the International Growth Fund; 1.90%
for the International Small Cap Fund, the Global Opportunities Fund, the Global
Communications Fund and the Emerging Markets Fund; 1.80% for the Select 50 Fund;
1.30% for the Asset Allocation Fund; 0.70% for the Short Government Bond Fund
and the California Tax-Free Intermediate Bond Fund; 0.60% for the Government
Reserve Fund and the California Tax-Free Money Fund. Any reductions or
absorptions made to a Fund by the Manager are subject to recovery within the
following two years (three years for the Asset Allocation Fund) provided a Fund
is able to affect such reimbursement and remain in compliance with applicable
expense limitations. The Manager may terminate these reductions or absorptions
at any time.
Montgomery Asset Management, L.P. serves as the Funds' administrator (the
"Administrator"). The Administrator performs services with regard to various
aspects of each Fund's administrative operations.
As compensation, each Fund has accrued a monthly management and administration
fee (accrued daily) based upon the average daily net assets of each Fund. The
following effective annual rates include current year accrued fees and
recoupment of prior year deferrals, but do not include the effect of current
year fee deferrals or expense absorptions:
<TABLE>
<CAPTION>
Management
Effective Fee including Effective
Management effect of Administration
Name of Fund Fee fees deferred Fee
---------- ------------- --------------
<S> <C> <C> <C>
Growth Fund........................................ 0.96% 0.96% 0.07%
Micro Cap Fund..................................... 1.42 1.39 0.07
Small Cap Fund..................................... 1.00 1.00 0.07
Small Cap Opportunities Fund....................... 1.20 0.54 0.07
Equity Income Fund................................. 0.61 0.01 0.07
International Growth Fund.......................... 1.10 0.00 0.07
International Small Cap Fund....................... 1.79 0.98 0.07
Global Opportunities Fund.......................... 2.01 0.96 0.07
Global Communications Fund......................... 1.42 1.32 0.07
Emerging Markets Fund.............................. 1.06 1.06 0.06
Select 50 Fund..................................... 1.25 0.94 0.07
Asset Allocation Fund.............................. 0.91 0.79 0.07
Short Government Bond Fund......................... 0.50 0.00 0.05
California Tax-Free Intermediate Bond Fund......... 0.50 0.00 0.05
Government Reserve Fund............................ 0.52 0.38 0.05
California Tax-Free Money Fund..................... 0.63 0.43 0.05
</TABLE>
88
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
To Financial Statements
The Manager recouped previously deferred fees and/or absorbed expenses during
the year ended June 30, 1996. These amounts have been included with current
year management fees in the Statement of Operations and are part of the
effective rates shown. The amounts recouped during the year ended June 30,
1996, were $158,785, $1,399, $184,013, $144,683, $387,886, $124,429, $474,297
and $198,927, for the Micro Cap Fund, Equity Income Fund, International Small
Cap Fund, Global Opportunities Fund, Global Communications Fund, Asset
Allocation Fund, Government Reserve Fund and California Tax-Free Money Fund,
respectively.
For the year ended June 30, 1996, the Manager has deferred fees and/or absorbed
expenses and has deferred management fees and absorbed expenses subject to
recoupment as follows:
<TABLE>
<CAPTION>
Deferred Management
Fees and Absorbed
Fees Expenses Expenses Subject to
Deferred Absorbed Recoupment
-------- -------- -------------------
<S> <C> <C> <C>
Micro Cap Fund........................................ $101,797 - $101,797
Small Cap Opportunities Fund.......................... 119,487 - 119,487
Equity Income Fund.................................... 100,310 - 148,564
International Growth Fund............................. 97,137 $13,346 110,483
International Small Cap Fund.......................... 274,944 - 274,944
Global Opportunities Fund............................. 199,063 - 199,063
Global Communications................................. 220,300* - 203,919
Select 50 Fund........................................ 87,769 - 87,769
Asset Allocation Fund................................. 139,622 - 139,622
Short Government Bond Fund............................ 93,531 48,686 312,560
California Tax-Free Intermediate Bond Fund............ 48,596 31,735 154,971
Government Reserve Fund............................... 464,333 - 464,333
California Tax-Free Money Fund........................ 175,094 - 175,094
</TABLE>
* For the year ended June 30, 1996, the Global Communications Fund waived fees
of $16,381.
b. Certain officers and Trustees of the Trusts are, with respect to the Trusts'
Manager and/or principal underwriter, "affiliated persons" as defined in the
1940 Act. Each Trustee who is not an "affiliated person" will receive an annual
retainer and quarterly meeting fee totaling $35,000 per annum, as well as
reimbursement for expenses, for service as a Trustee of all three Trusts advised
by the Manager ($25,000 of which will be allocated to the Montgomery Funds).
c. For the year ended June 30, 1996, the Funds' securities transactions
generated commissions of $14,874,777 of which $164,056 was paid to Montgomery
Securities.
d. The Class R Shares and Class P Shares of the Funds have no sales load.
e. At June 30, 1996, the Global Communications Fund owned 90,000 shares of the
Montgomery Emerging Communications Fund which has the same investment manager as
the Trust. For the year ended June 30, 1996, the Global Communications Fund
received no dividend income from the Montgomery Emerging Communications Fund.
f. Certain Funds are parties to agreements with financial intermediaries and
recordkeepers related to the Funds' participation in various purchase,
marketplace and retirement programs. The Funds that participate in the programs
make payments to the financial intermediaries and recordkeepers for certain
services provided to shareholders who own shares of the Funds through such
programs. These fees are paid for shareholder servicing and recordkeeping and
are reflected in the Funds' financial statement as "servicing fees." The
Manager may make additional payments to financial intermediaries and record
keepers in connection with the Funds' participation in these programs. The
following Funds participate in one or more of these programs: Growth Fund; Micro
Cap Fund; Small Cap Fund; Small Cap Opportunities; Equity Income Fund; Select 50
Fund; Asset Allocation Fund; International Growth Fund; International Small Cap
Fund; Global Opportunities Fund; Global Communications Fund; Emerging Markets
Fund; Short Government Bond Fund and California Tax-Free Intermediate Bond Fund.
3. SHARE MARKETING PLAN:
Class P Shares of each Fund have adopted a Share Marketing Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act for Class P Shares of each Fund.
Pursuant to that Rule, the Trusts' Board of Trustees and the initial shareholder
of the Class P Shares of each Fund have approved, and each Fund has entered
into, the Plan with the Manager, as the distribution coordinator,
89
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
To Financial Statements
for the Class P Shares. Under the Plan, each Fund will pay distribution fees to
the Manager at an annual rate of 0.25% of the Fund's aggregate average daily net
assets attributable to its Class P Shares, to reimburse the Manager for its
distribution costs with respect to that Class.
The Plan provides that the Manager may use the distribution fees received from
the Class to pay for the distribution expenses of that Class, including but not
limited to (i) incentive compensation paid to the directors, officers and
employees of, agents for and consultants to, the Manager or any other broker-
dealer or financial institution that engages in the distribution of that Class;
and (ii) compensation to broker-dealers, financial institutions or other persons
for providing distribution assistance with respect to that Class. Distribution
fees may also be used for (i) marketing and promotional activities, including,
but not limited to, direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising for that Class; (ii) costs of printing
and distributing prospectuses, statements of additional information and reports
of the Funds to prospective investors in that Class; (iii) costs involved in
preparing, printing and distributing sales literature pertaining to the Funds
and that Class; and (iv) costs involved obtaining whatever information, analysis
and reports with respect to marketing and promotional activities that the Funds
may, from time to time, deem advisable with respect to the distribution of that
Class. Distribution fees are accrued daily and paid monthly, and are charged as
expenses of the Class P shares are accrued.
4. TRANSACTIONS IN SHARES WITH A BENEFICIAL INTEREST:
The Trusts have authorized an unlimited number of shares of beneficial interest
which have a par value of $0.01. Because the Montgomery Government Reserve Fund
and the Montgomery California Tax-Free Money Fund are money market funds and
money market funds sell shares, issue shares for reinvestment of dividends and
redeem shares normally at a constant net asset value of $1.00 per share, the
numbers of shares represented by such sales, reinvestments and redemptions are
the same as the dollar amounts shown for such transactions.
5. SECURITIES TRANSACTIONS:
a. The aggregate amount of purchases and sales of long-term securities,
excluding long-term U.S. Government securities, during the year ended June 30,
1996, were:
<TABLE>
<CAPTION>
Purchases Sales
------------ --------------
<S> <C> <C>
Growth Fund.................................... $791,465,047 $ 896,066,139
Micro Cap Fund................................. 282,669,041 181,950,800
Small Cap Fund................................. 184,025,011 189,688,138
Small Cap Opportunities Fund................... 150,475,820 23,776,251
Equity Income Fund............................. 23,711,720 13,862,646
International Growth Fund...................... 33,544,142 19,180,738
International Small Cap Fund................... 61,762,787 58,779,583
Global Opportunities Fund...................... 40,591,299 31,034,522
Global Communications Fund..................... 231,520,463 273,930,878
Emerging Markets Fund.......................... 929,905,199 1,011,617,740
Select 50 Fund................................. 93,699,844 32,347,956
Asset Allocation Fund.......................... 124,456,006 93,486,682
Short Government Bond Fund..................... 1,657,514 1,151,579
California Tax-Free Intermediate Bond Fund..... 14,324,173 5,380,687
</TABLE>
The aggregate amount of purchases and sales of long-term U.S. Government
securities, during the year ended June 30, 1996, were:
<TABLE>
<CAPTION>
Purchases Sales
------------ --------------
<S> <C> <C>
Global Opportunities Fund...................... $ 24,531 $ 23,662
Asset Allocation Fund.......................... 150,077,643 146,159,334
Short Government Bond Fund..................... 74,747,332 72,271,697
</TABLE>
90
<PAGE>
-----------------------
The Montgomery Funds
-----------------------
Notes
-----------------------
To Financial Statements
b. At June 30, 1996, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value was as follows:
<TABLE>
<CAPTION>
Tax Basis Tax Basis
Unrealized Unrealized
Appreciation Depreciation
------------ ------------
<S> <C> <C>
Growth Fund....................................... $162,745,880 $ 15,480,800
Micro Cap Fund.................................... 72,872,137 10,047,159
Small Cap Fund.................................... 85,005,133 6,119,481
Small Cap Opportunities Fund...................... 5,761,078 7,593,914
Equity Income Fund................................ 1,164,337 213,000
International Growth Fund......................... 693,248 637,545
International Small Cap Fund...................... 5,627,920 1,482,807
Global Opportunities Fund......................... 4,024,004 686,855
Global Communications Fund........................ 44,856,768 6,631,328
Emerging Markets Fund............................. 126,567,359 40,302,670
Select 50 Fund.................................... 8,197,023 1,678,233
Asset Allocation Fund............................. 14,098,524 1,935,688
Short Government Bond Fund........................ 71,306 137,516
California Tax-Free Intermediate Bond Fund........ 142,249 71,633
</TABLE>
c. Information regarding transactions under dollar roll transactions was as
follows:
<TABLE>
<CAPTION>
Average
Maximum Average Average Debt
Amount Amount Amount Shares Per Share
Outstanding Outstanding Outstanding Outstanding Outstanding Fee
During as of During During During Income
Name of Fund Year 06/30/96 Year Year Year Earned
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation Fund .............. $ 10,023,281 - $5,576,548 5,999,123 $0.93 $77,263
Short Government Bond Fund ......... 2,064,063 $ 1,925,938 1,172,259 1,891,373 0.62 17,461
</TABLE>
The average amount outstanding during the period was calculated by totaling
borrowings at the end of each day and dividing the sum by the number of days in
the year ended June 30, 1996.
d. Information regarding borrowing under reverse repurchase agreements is as
follows:
<TABLE>
<CAPTION>
Average
Maximum Average Average Debt
Amount Amount Shares Per Share
Outstanding Outstanding Outstanding Outstanding Average
During During During During Interest Interest
Name of Fund Year Year Year Year Rate Expense
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation Fund................ $10,122,500 $1,769,515 5,999,123 $0.29 3.93% $130,140
Short Government Bond Fund........... 20,000,000 3,309,980 1,891,373 1.75 3.65 177,609
</TABLE>
As of June 30, 1996, there were no reverse repurchase agreements outstanding.
The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days in
the year ended June 30, 1996.
91
<PAGE>
- -----------------------
The Montgomery Funds
- -----------------------
Notes
- -----------------------
To Financial Statements
e. The schedules of forward foreign currency exchange contracts at June 30, 1996
were as follows:
<TABLE>
<CAPTION>
Contract
Value Value
Date (Note 1)
------------ ------------
<S> <C> <C>
International Small Cap Fund:
Forward Foreign Currency Exchange Contracts to Buy:
105,699,458 Italian Lira............................... 07/01/96 $ 69,002
58,811,744 Italian Lira............................... 07/02/96 38,392
----------
TOTAL FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS TO BUY:
(Contract cost $106,937)............................... $ 107,394
==========
Global Opportunities Fund:
Forward Foreign Currency Exchange Contracts to Sell:
148,047,032 Italian Lira.............................. 07/01/96 $ 96,648
64,253,664 Italian Lira.............................. 07/02/96 41,944
507,968 Norwegian Krone........................... 07/02/96 78,270
237,747,780 Italian Lira.............................. 07/03/96 155,190
92,719,664 Italian Lira.............................. 07/05/96 60,512
1,364,349 French Franc.............................. 07/31/96 265,628
----------
TOTAL FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS TO SELL:
(Contract cost $694,310)............................... $ 698,192
==========
Global Communications Fund:
Forward Foreign Currency Exchange Contracts to Buy:
288,811 Great Britain Pound........................ 07/01/96 $ 448,912
565,118 Great Britain Pound........................ 07/03/96 878,379
----------
TOTAL FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS TO BUY:
(Contract cost $1,323,162)............................. $1,327,291
==========
Forward Foreign Currency Exchange Contracts to Sell:
1,191,642,368 Italian Lira............................... 07/01/96 $ 777,926
522,061,020 Italian Lira............................... 07/02/96 340,796
79,617 Malaysian Ringgit.......................... 07/02/96 31,915
215,018 Swedish Krona.............................. 07/02/96 32,475
1,931,270,010 Italian Lira............................... 07/03/96 1,260,636
172,928 Malaysian Ringgit.......................... 07/03/96 69,319
878,785,488 Italian Lira............................... 07/05/96 573,532
----------
TOTAL FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS TO SELL:
(Contract cost $3,076,538)............................. $3,086,599
==========
Emerging Markets Fund:
Forward Foreign Currency Exchange Contracts to Buy:
395,956 Argentine Peso............................. 07/01/96 $ 396,106
1,000,047,880 Indonesian Rupee........................... 07/01/96 450,175
117,405,400 Korean Won................................. 07/01/96 144,731
1,555,838 Philippine Pesos........................... 07/01/96 59,381
575,342 Swiss Franc................................ 07/01/96 460,274
1,621,984 Hong Kong Dollar........................... 07/02/96 209,538
</TABLE>
92
<PAGE>
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The Montgomery Funds
-----------------------
Notes
-----------------------
TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Contract
Value Value
Date (Note 1)
------------ ------------
<S> <C> <C>
Emerging Markets Fund (continued)
8,822,604 South African Commercial Rand................... 07/02/96 $2,035,656
12,794,076,120 Turkish Lira.................................... 07/02/96 155,797
----------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO BUY:
(Contract cost $3,916,746).................................. $3,911,658
==========
Forward Foreign Currency Exchange Contracts to Sell:
394,904 Argentine Peso.................................. 07/01/96 $ 395,053
147,366 Brazilian Real.................................. 07/01/96 146,757
49,691,503 Czech Koruna.................................... 07/01/96 1,806,110
16,669,993 Hong Kong Dollar................................ 07/01/96 2,153,537
134,433,385 Indonesian Rupee................................ 07/01/96 57,753
6,043,495 Philippine Pesos................................ 07/01/96 230,660
16,115,617 Portuguese Escudo............................... 07/01/96 102,940
2,376,920,105 Indonesian Rupee................................ 07/02/96 1,021,042
865,997 Malaysian Ringgit............................... 07/02/96 347,147
34,379,234 Portuguese Escudo............................... 07/02/96 219,596
653,998 Brazilian Real.................................. 07/03/96 651,295
2,481,722,872 Indonesian Rupee................................ 07/03/96 1,065,929
11,820,003 Portuguese Escudo............................... 07/03/96 75,498
----------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO SELL:
(Contract cost $8,253,279).................................. $8,273,317
==========
Select 50 Fund:
Forward Foreign Currency Exchange Contracts to Buy:
3,799,150 Philippine Peso................................. 07/02/96 $ 144,996
136,954 Great Britain Pound............................. 07/03/96 212,871
6,403,459 Philippine Peso................................. 07/03/96 244,378
----------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO BUY:
(Contract cost $602,461).................................... $ 602,245
==========
</TABLE>
f. Under an unsecured Revolving Credit Agreement with Credit Lyonnais San
Francisco Branch and Islands Branch, each of the Funds of The Montgomery Funds
and The Montgomery Funds II may, for one year starting October 1, 1995, borrow
(consistent with applicable law and its investment policies) amounts over
$1,000,000 but not more than 10% of its net asset value, provided that the
aggregate principal amount of outstanding loans under the agreement to all Funds
does not exceed $25,000,000. For the year ended June 30, 1996, only two Funds,
the Global Communications Fund and the Emerging Markets Fund, borrowed under the
Revolving Credit Agreement. As of June 30, 1996, there were no outstanding
loans.
Information regarding borrowings by the Funds for the year ended June 30, 1996
is as follows:
<TABLE>
<CAPTION>
Average
Maximum Average Average Debt
Amount Amount Shares Per Share
Outstanding Outstanding Outstanding Outstanding Average
During During During During Interest Interest
Fund Year Year Year Year Expense Rate
- ---- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Global Communications Fund $ 2,000,000 $21,858 13,266,591 $0.00# $ 1,888 8.50%
Emerging Markets Fund 20,000,000 95,628 73,216,149 0.00# 13,368 8.75
# Amount equals less than $0.01.
</TABLE>
93
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The Montgomery Funds
- -----------------------
Notes
- -----------------------
To Financial Statements
g. Under Option activity for Global Communications Fund for the year ended
June 30, 1996 was as follows:
<TABLE>
<CAPTION>
Number of
Premiums Contracts
---------- -----------
<S> <C> <C>
Options outstanding at June 30, 1995............... - -
Options written during the period.................. $ 119,849 2
Options canceled in closing purchase transactions.. (119,849) (2)
---------- -----------
Options outstanding at June 30, 1996............... $ - -
========== ===========
</TABLE>
6. FOREIGN SECURITIES:
Certain Funds may purchase securities on foreign securities exchanges.
Securities of foreign companies and foreign governments involve special risks
and considerations not typically associated with investing in U.S. companies and
the U.S. government. These risks include among others revaluation of
currencies, less reliable information about issuers, different securities
transactions clearance and settlement practices, and future adverse political
and economic developments. These risks are heightened for investments in
emerging market countries. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies and the U.S.
government. The Emerging Markets Fund invests at least 65% of its total assets
in the equity securities of companies in emerging market countries.
7. ILLIQUID AND SPECIAL SITUATION SECURITIES:
Each Fund may not invest more than 15% (10% for Government Reserve Fund) of its
net assets in illiquid securities. The securities shown in the table below have
been determined by the Manager to be illiquid because they are restricted or
because there is an exceptionally low trading volume in the primary trading
market for these securities at June 30, 1996. These securities are valued at
market price.
<TABLE>
<CAPTION>
International Small Cap Fund:
06/30/96 Market
Acquisition Market Value Per % of Total
Security Date Shares Value Share Cost Net Assets
-------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Electricidad de Caracas............. 04/22/96 87 $ 72 $ 0.83 $ 0 0.00%#
======== ====
</TABLE>
<TABLE>
<CAPTION>
Global Communications Fund:
06/30/96 Market
Acquisition Market Value Per % of Total
Security Date Shares Value Share Cost Net Assets
-------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Argentina Cellular Communications,
Ltd............................... 02/25/94 73,650 $ 941,674 $ 12.79 $ 761,153 0.46%
FGI Wireless........................ 12/21/95 168,500 2,134,681 12.67 2,198,925 1.03
Global Telesystems Group, Inc....... 04/22/94 450,987 7,337,709 16.27 3,881,177 3.55
Grupo Mexicano de Video............. 09/03/93 105,000 52,116 0.50 1,865,000 0.03
Ionica.............................. 02/23/95 11,100 4,744,651 427.45 4,319,610 2.29
Russian Telecommunications
Development Corporation............ 12/22/93 200,000 1,681,397 8.41 2,000,000 0.81
------------- ----
$ 16,892,228 8.17%
============= ====
</TABLE>
94
<PAGE>
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-----------------------
Notes
-----------------------
To Financial Statements
<TABLE>
<CAPTION>
Emerging Markets Fund:
06/30/96 Market
Acquisition Market Value Per % of Total
Security Date Shares Value Share Cost Net Assets
-------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASE, Ltd............................. 11/17/94 2,218,759 $3,660,307 $ 1.65 $2,314,111 0.37%
Cathay Life Insurance................ 06/07/94 885,840 6,244,657 7.05 3,793,398 0.63
China Steel Corporation.............. 06/28/95 9,336,000 9,770,233 1.05 8,260,186 0.98
Efes Sinai Yatrium ve Ticaret........ 07/12/94 4,602,600 316,443 0.07 344,989 0.03
Global Telesystems Group, Inc........ 06/17/94 46,389 754,765 16.27 497,627 0.07
Pacific Construction................. 07/21/95 6,254,600 6,181,872 0.99 4,735,432 0.62
Pepsi International Bottlers......... 12/27/95 32,000 3,250,589 101.58 3,200,000 0.33
Taiwan Mask.......................... 07/18/95 1,383,760 3,720,866 2.69 2,812,613 0.37
Taiwan Semiconductor Company......... 11/11/94 2,273,280 4,749,767 2.09 4,832,864 0.48
Yageo Corporation.................... 04/16/96 1,153,600 1,764,773 1.53 1,502,905 0.18
----------- ----
$40,414,272 4.06%
=========== ====
</TABLE>
# Amount represents less than 0.01%.
Certain of the Funds hold foreign currency at June 30, 1996, which may be
illiquid because conversion to U.S. dollars could take more than seven days.
The following securities held by the Funds on June 30, 1996 are unrestricted
securities for which reliable market prices can be established. These
securities are valued at their market prices. However, because the process of
re-registering the securities in the Fund's name can take more than seven days,
the following shares of each of these securities were deemed temporarily
restricted in the hands of the Fund at June 30, 1996. The Fund bears the cost
of re-registering these securities:
<TABLE>
<CAPTION>
Emerging Markets Fund:
06/30/96 Market
Acquisition Market Value Per % of Total
Security Date Shares Value Share Cost Net Assets
-------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Adamjee Insurance Company............ 06/18/96 56,237 $ 223,310 $ 3.97 $ 148,456 0.02%
Arvind Mills, Ltd.................... 08/16/95 533 2,118 3.97 2,294 0.00#
Business India Television
International, Ltd................. 04/06/94 211,493 210,112 0.99 1,212,415 0.02
Bajaj Auto, Ltd...................... 02/09/96 300 8,428 28.09 6,693 0.00#
Carrier Aircon, Ltd.................. 01/22/96 5,142 37,000 7.20 16,040 0.00#
Dankos Laboratories.................. 07/18/94 50 115 2.30 162 0.00#
DG Khan Cement....................... 12/26/95 508,000 201,720 0.40 669,546 0.02
Edaran Otomobil Nasional
Berhad............................. 05/16/96 100,000 958,108 9.58 912,994 0.10
Engro Chemical Pakistan.............. 04/03/96 57,558 266,373 4.63 261,832 0.03
Floatglass........................... 04/26/96 63,300 57,227 0.90 84,088 0.01
Grasim Industries, Ltd............... 02/15/96 593 9,632 16.24 11,897 0.00#
HDFC Bank, Ltd....................... 07/03/96 50 55 1.10 54 0.00#
Industrial Credit & Investment
Corporation........................ 02/09/96 29,008 74,105 2.55 78,880 0.01
Kotak Mahindra....................... 05/26/94 600 1,507 2.51 4,077 0.00#
</TABLE>
95
<PAGE>
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- -----------------------
Notes
- -----------------------
To Financial Statements
<TABLE>
<CAPTION>
Emerging Markets Fund (Continued):
06/30/96 Market
Acquisition Market Value Per % of Total
Security Date Shares Value Share Cost Net Assets
-------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lok Housing & Constructions, Ltd. ... 05/22/95 200 $ 257 $ 1.29 $ 772 0.00%#
Mahanoagar Telephone Nigam, Ltd. .... 03/25/96 576,000 4,148,737 7.20 2,965,403 0.42
Matahari Putra Prima (F)............. 06/05/96 248,000 452,846 1.83 518,958 0.04
Mulia Industrindo (F)................ 06/07/96 1,529,400 2,266,995 1.48 2,484,795 0.23
New Strait Times..................... 05/07/96 151,000 786,931 5.21 725,602 0.08
Nishat Textile Mills................. 09/12/95 28,410 11,362 0.40 28,621 0.00#
Pakistan State Oil................... 12/15/95 4,000 47,193 11.80 27,402 0.00#
Reliance Industries, Ltd. ........... 11/12/93 250 1,504 6.02 2,176 0.00#
State Bank of India.................. 03/26/96 91,049 775,971 8.52 625,238 0.08
Tata Engineering & Locomotive
Company, Ltd. ...................... 05/08/96 34,050 502,583 14.76 428,544 0.05
Tata Iron & Steel Company, Ltd. ..... 09/05/95 3,781 25,999 6.88 27,714 0.00#
The Indian Hotels Company, Ltd. ..... 04/22/96 7,220 169,280 23.45 77,436 0.02
Titan Industries..................... 04/26/95 1,056 3,897 3.69 4,589 0.00#
United Engineers Berhad.............. 03/30/95 700 4,855 6.94 4,165 0.00#
----------- ----
$11,248,220 1.13%
=========== ====
</TABLE>
# Amount represents less than 0.01%.
8. CAPITAL LOSS CARRYFORWARDS:
At June 30, 1996, the following funds had available for federal tax purposes
unused capital losses as follows:
<TABLE>
<CAPTION>
Fund Expiring in 2002 Expiring in 2003 Expiring in 2004
- ---- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Small Cap Opportunities Fund..................... - - $ 849,214
International Small Cap Fund..................... - $ 790,579 1,144,985
Emerging Markets Fund............................ - - 4,534,725
Short Government Bond Fund....................... - 374,263 -
California Tax-Free Intermediate Bond Fund....... - 80,892 64,724
Government Reserve Fund.......................... $ 12,270 20,906 5,378
California Tax-Free Money Fund................... - - 6,745
</TABLE>
Under current tax law, net capital and currency losses realized after October 31
may be deferred and treated as occurring on the first day of the following
fiscal year. In the fiscal year ended June 30, 1996 the following Funds elected
to defer losses occurring between November 1, 1995 and June 30, 1996 under these
rules as follows:
<TABLE>
<CAPTION>
Fund Amount
- ---- ------
<S> <C>
Global Opportunities Fund........................ $ 62,179
Global Communications Fund....................... 503,263
Emerging Markets Fund............................ 19,928,066
Select 50 Fund................................... 58,481
California Tax-Free Intermediate Bond Fund....... 12,322
Government Reserve Fund.......................... 4,341
</TABLE>
Such deferred losses will be treated as arising on the first day of the fiscal
year ending June 30, 1997.
96
<PAGE>
---------------------
The Montgomery Funds
---------------------
Independent Auditors'
---------------------
R E P O R T
TO THE BOARD OF TRUSTEES AND THE
SHAREHOLDERS OF THE MONTGOMERY
FUNDS AND THE MONTGOMERY FUNDS II:
We have audited the accompanying statements of assets and liabilities, including
the portfolio investments, of Montgomery Growth, Montgomery Micro Cap,
Montgomery Small Cap, Montgomery Small Cap Opportunities, (formerly Montgomery
Small Cap II), Montgomery Equity Income, Montgomery International Growth,
Montgomery International Small Cap, Montgomery Global Opportunities, Montgomery
Global Communications, Montgomery Emerging Markets, Montgomery Select 50,
Montgomery Asset Allocation, Montgomery Short Government Bond, Montgomery
California Tax-Free Intermediate Bond, Montgomery Government Reserve and
Montgomery California Tax-Free Money Funds (the Funds) (all portfolios of The
Montgomery Funds, except for the Asset Allocation Fund which is a portfolio of
The Montgomery Funds II) as of June 30, 1996, and the related statements of
operations for the period ended June 30, 1996, the statements of changes in net
assets and transactions in shares with a beneficial interest for the periods
ended June 30, 1996 and 1995, the statement of cash flows for the period ended
June 30, 1996 and financial highlights for each of the periods ended June 30,
1996, 1995, 1994, 1993 and 1992. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The Montgomery Small Cap Fund's financial highlights for
the year ended June 30, 1991 and for the period July 13, 1990 (effective date of
registration) to June 30, 1991 were audited by other auditors whose report dated
July 31, 1991, expressed an unqualified opinion on such financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
June 30, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Funds as of
June 30, 1996, the results of their operations, the changes in their net assets,
the transactions in shares with a beneficial interest, their cash flows, and
their financial highlights for the respective stated periods, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
August 16, 1996
[97]
<PAGE>
- --------------------------------
The Montgomery Funds
- --------------------------------
Tax Information
(Unaudited)
- --------------------------------
FISCAL YEAR ENDED JUNE 30, 1996
The amounts of long-term capital gains paid for the fiscal year ended June 30,
1996, were as follows:
Growth Fund................................................. $ 4,072,722
Small Cap Fund.............................................. 15,477,101
Equity Income Fund.......................................... 5,505
Global Opportunities Fund................................... 3
Asset Allocation Fund....................................... 119,904
Of the distributions made from investment income, the following percentages are
tax exempt for regular Federal income tax purposes:
California Tax-Free Intermediate Bond Fund.................. 99.98%
California Tax-Free Money Fund.............................. 99.93%
A portion of this income may be subject to the Alternative Minimum Tax.
Of the distributions made by the following Funds, the corresponding percentage
represents the amount of each distribution which will qualify for the dividends
received deduction available to corporate shareholders:
Growth Fund................................................. 6.87%
Micro Cap Fund.............................................. 8.18%
Small Cap Fund.............................................. 4.98%
Small Cap Opportunities Fund................................ 79.95%
Equity Income Fund.......................................... 32.95%
International Growth Fund................................... 0.03%
Select 50 Fund.............................................. 5.77%
Asset Allocation Fund....................................... 4.39%
Of the distributions made by the following Funds from investment income, the
corresponding percentage represents the portion of each distribution derived
from investments in U.S. Government and U.S. Government Agency obligations. All
or a portion of the distributions made from this income may be exempt from
taxation at the state level. Please consult your tax advisor for state specific
information:
Asset Allocation Fund....................................... 12.89%
Short Government Bond Fund.................................. 81.65%
Government Reserve Fund..................................... 53.63%
The percentages of total net assets invested in U.S. Government and U.S.
Government Agency obligations at June 30, 1996, were
as follows:
Asset Allocation Fund:
Federal Home Loan Bank.................................... 2.8%
Federal Home Loan Mortgage Corporation.................... 3.1%
Federal National Mortgage Association..................... 12.3%
U.S. Treasury Bonds....................................... 3.0%
U.S. Treasury Notes....................................... 9.5%
Short Government Bond Fund:
Federal Home Loan Bank.................................... 12.9%
Federal Home Loan Mortgage Corporation.................... 28.1%
Federal National Mortgage Association..................... 34.1%
Government National Mortgage Association.................. 1.7%
U.S. Treasury Notes....................................... 28.8%
98
<PAGE>
-------------------------------
The Montgomery Funds
-------------------------------
Tax Information
(Unaudited)
-------------------------------
FISCAL YEAR ENDED JUNE 30, 1996
Government Reserve Fund:
Federal Farm Credit Bank.................................. 7.6%
Federal Home Loan Bank.................................... 13.9%
Federal Home Loan Mortgage Corporation.................... 5.2%
Federal Landbank.......................................... 0.2%
Federal National Mortgage Association..................... 0.8%
Student Loan Marketing Association........................ 23.2%
Tennessee Valley Authority................................ 0.2%
U.S. Treasury Notes....................................... 8.0%
The percentages of total net assets invested in U.S. Government and U.S.
Government Agency obligations at March 31, 1996, were as follows:
Asset Allocation Fund:
Federal Home Loan Bank.................................... 3.9%
Federal Home Loan Mortgage Corporation.................... 2.2%
Federal National Mortgage Association..................... 13.5%
U.S. Treasury Bonds....................................... 3.1%
U.S. Treasury Notes....................................... 11.9%
Short Government Bond Fund:
Federal Home Loan Bank.................................... 10.1%
Federal Home Loan Mortgage Corporation.................... 21.5%
Federal National Mortgage Association..................... 38.7%
Government National Mortgage Association.................. 2.2%
U.S. Treasury Notes....................................... 35.4%
Government Reserve Fund:
Federal Farm Credit Bank.................................. 4.0%
Federal Home Loan Bank.................................... 12.6%
Federal Home Loan Mortgage Corporation.................... 5.3%
Federal National Mortgage Association..................... 0.3%
Student Loan Marketing Association........................ 24.2%
U.S. Treasury Notes....................................... 8.5%
U.S. Treasury Bills....................................... 1.5%
For the fiscal year ended June 30, 1996, foreign income and foreign taxes paid
relating to foreign sources and possessions in the United States on a per share
basis, were as follows:
<TABLE>
<CAPTION>
Foreign Foreign
Income Taxes
------- -------
<S> <C> <C>
International Growth Fund........................ $0.0756 $0.0092
International Small Cap Fund..................... 0.1674 0.0180
Global Opportunities Fund........................ 0.1304 0.0169
Global Communications Fund....................... 0.1768 0.0238
Emerging Markets Fund............................ 0.2366 0.0190
</TABLE>
The above figures may differ from tho se cited elsewhere in this report due to
differences in the calculation of inc ome and capital gains for Securities and
Exchange Commission (book) purposes and Internal Revenue Service (tax) purposes.
99
<PAGE>
This Page Intentionally Left Blank
100
<PAGE>
This report and the financial statements contained herein are provided for the
general information of the shareholders of The Montgomery Funds. This report is
not authorized for distribution to prospective investors in the funds unless
preceded or accompanied by an effective prospectus.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC or any other agency
and are subject to investment risk, including the possible loss of principal.
Neither The Montgomery Funds nor Montgomery Securities is a bank.
For more information on any Montgomery fund, including charges and expenses,
call (800) 572-3863 for a free prospectus. Read it carefully before you invest
or send money.
Montgomery Securities, Distributor, 8/96
<PAGE>
[LOGO OF THE MONTGOMERY -------------------
FUNDS APPEARS HERE] Bulk Rate
101 California Street U.S. POSTAGE
San Francisco, CA 94111 PAID
Lancaster, PA
800-572-3863 Permit No. 1349
-------------------
